GAITHERSBURG, MD (December 22, 1999) -- I'd like to change your viewpoint of economics for a moment. Forget about manufacturing, inventory, and supply and demand. Forget about balance sheets and the proper valuation of piles of things. Forget about everything else, and focus on people performing valuable services.
All economies are service economies.
All anyone ever pays for are services. People don't really pay for stuff, they pay for the services that went into producing it. There are plenty of things with intrinsic value that are available for free (at least right now), including sunlight and fresh air. Even gold and gemstones are free if you find them yourself. What people pay for is the service of finding, collecting, smelting, polishing, and arranging the gold into jewelry. If the final product has an intrinsic value greater than the original components, it's because of the services that went into making it that way. Even simple services, like turning water in a river into fresh water coming out of your tap, can increase values enough that we're willing to pay up for them.
The goal of services is to add value to things, or at least to preserve value. Destroying value is easy; we do that every day when we eat food, use electricity, or burn gasoline in our cars. Consumption -- the use and destruction of things -- is an inevitable part of living for every breathing creature. Often things will even consume themselves if no one takes advantage of them... the way food spoils if left uneaten, television and radio programs go by unwatched, paint peels, metal rusts, and entropy generally increases. (Judging by the state of my condo, I keep it as a pet.)
A business has to create a certain amount of value just to break even, to offset the value of what they consume. That's always been true. Originally, primitive people collected everything they needed to sustain themselves, hunting and gathering their own food for free, fashioning their own tools for free, perhaps trading a bit with their neighbors if they had a slow day. But the great expense of that model was TIME. Everyone was doing the same thing, over and again, and losing all their time. As society progressed, more complex projects required services to be performed by different people along the way to a final product -- like when three or more of them cooperated to slay a buffalo for many to eat.
In a healthy economy, value begins to accumulate exponentially. Value begets more value. That example of the buffalo is a fine one -- those who hunted fed the cooks who cooked the food and fed the potters who stored it. By trading their services to others, people could sustain a lifestyle separate from doing everything. And by building on previous gains, using one set of tools to make a better set, and constantly learning, is how society progressed to the point it's at today. The same thing is true of our public markets, in specific industries, and of individual companies.
Money was then invented as a way of keeping score using a common system of measurement. What's really being measured is the value of services rendered. The problem with measuring the value of services is that it's a lot less straightforward than measuring length. A service performed tomorrow might not produce as much as a service performed yesterday, as illustrated by the prospector who found gold yesterday but nothing today. The value generated by services depends on the nature of the service, the opportunities at a given time to perform the service, and the value created by the service. A doctor's services are extremely valuable -- as long as somebody is sick.
Today, using value to create more value still remains a service. And most goods we consider valuable remain only a few services away from their free, natural roots. Farming is a great example. Plants grow by themselves and were doing so long before anybody invented farming. The trick is persuading the right types of plants to grow in a given place and then to ensure they stay healthy long enough to yield a crop. People then pay for the crop, but it's really the farmer's services that require money. The plants don't seem to care one way or the other. Even the raw materials the farmer uses (which also contribute to the price of the final crop) only cost money because of the effort people put into obtaining them. Seeds, land, fertilizer, water... All of it ultimately traces back to things someone found lying around for free.
The crop isn't the end of the chain either. Farmers sell to packagers, packagers to transporters, transporters to distributors. It all starts with manufacturing. But then gradually moves over to distribution. And marketing (letting the people know where those green beans are and why they might need them) is another valuable service. All the way through the chain, different companies step in to play their part in getting products out to Americans and people across the world. In fact, the real problems in our world are the places that we can't easily get stuff to -- for any number of logistical or cultural reasons.
Our Rule Maker companies all have one thing in common: They want to produce the most value for the least effort. Read that sentence again, because it's true of the greatest businesses, greatest sports teams, greatest thinkers, over time they want to minimize the amount of effort they have to expend to succeed. For a business, it wants to reduce the material and labor costs of making, storing, transporting, and selling its products. It wants to design a system that makes its services produce an explosion of value.
Rule Makers generally go about it by looking for one-time services they can perform that will generate a continuing STREAM of value, a super-service that turns a mere twitch of effort into a shower of profit. To find these Rule Maker products, companies manufacture cheap and sell dearly, and they focus their efforts on performing the services of research, development, and marketing. Incessantly and efficiently -- in their search for the one thing they can sell over and over and over again to the entire world.
The Merchant-Kings -- that I wrote about last month operate a different model. It's one you'll want to think about as you search for more world-beating companies to own. If the mad search for one global repeatedly purchased product is the obsession of the Rule Maker... what's the Merchant-King up to? Drop a note in the Rule Maker Strategy folder, if you have ideas. And Fool on!
- Rob Landley (Oak)