I use this worksheet with executives, founders and students to assess a firm, a business unit, or a person. It is a set of prompts for an argument; the numbers it asks for are positions to be defended and disputed, not measurements. Someone who fills it in already knowing how the story turned out will find alpha assets everywhere. So the habits from chapter 3 apply, and I have ordered the questions to enforce them.
Before the Assets
State the objective. For a firm, the usual answer is return on invested capital over a stated horizon; for a person, say what the advantage is for (the kind of work, the autonomy, the people, the problem, and the money, in whatever proportion you choose). If an asset would win a contest you do not want to enter, leave it off the list.
State the setting and the rivals: which job, for which customers, against whom? Because the same asset can pass the tests in one setting and fail them in another, name the setting before you score anything.
The Assets
For each candidate resource, record four things. First, what it is, in observable terms: a practice, a relationship, a stock of customers, a patent, a skill, a name (an adjective is not an asset). Second, the mechanism: how it raises willingness to pay or lowers cost, stated so that someone could check it without knowing the result. Third, an observation independent of the result that supports the mechanism, such as the sister division that could not copy the practice, the rival that tried to build the customer base and failed, or the price premium measured before the firm's success was known. Fourth, an alternative explanation for the firm's results that does not involve the asset.
Then score the asset on two scales, each from one to ten.
Rarity: how hard would it be for a rival in this setting to acquire the resource? One means a commodity available to all in an open market; ten means essentially immobile, obtainable only over many years or at a cost comparable to the value of the enterprise. Score by what the rival would have to spend to get it, not by your own history with it.
Necessity: how much does the resource improve results in this setting, and how few substitutes exist? One means many substitutes and a small effect; ten means a decisive effect with no substitute.
The product of the two is the alpha score. A resource that scores above about forty is a candidate alpha asset, and one below about fifteen is table stakes or decoration. These thresholds are my own rules of thumb.
The Categories
Most alpha assets fall into one of the following categories, which I offer as a menu of places to look rather than as a theory.
| Category | Examples |
|---|---|
| Solution | Product designs; patents, trade secrets and know-how; proprietary standards; regulatory approvals; a causal model of why the solution works |
| Process | Process designs; accumulated efficiency; metrics and information systems; a causal model of process performance |
| Brand | Trademarks, domains, app names; brand associations; awareness |
| Scale | Relative volume or share in the category |
| Customer network | Customer relationships and data; the size of the user network; network effects where they exist |
| Organizational processes and relationships | Talent acquisition and development; demand-generation know-how; supplier relationships; distribution relationships; relationships with regulators |
| Capability and culture | A named set of practices that the organization performs better than rivals and that reinforces one of the above |
| Other | Location, natural resources and access to inputs; balance sheet and access to capital; idiosyncratic endowments such as a founder |
For a person, the categories translate: the solution is a skill or a body of work; the process is a method; the brand is a reputation; scale is tenure and the volume of work done; the customer network is relationships. The organizational category becomes the platform the person stands on, which may belong to the person or to the employer.
After the Assets
People most often skip the three questions that complete the worksheet.
What would it cost to acquire or build this asset, and to maintain it? If you buy an asset at a price that reflects its value, you earn no return on the purchase. Some assets must also be fed, and the cost of feeding a brand, a culture or a learning curve belongs in the score.
Who holds the complements, and who captures the return? If the asset is valuable only in combination with something another party controls, the other party has a claim on the return, and so does a person who embodies the asset.
What would make this asset stop being alpha? Name the disequilibrium, the imitator, or the change in the job that would reduce its rarity or its necessity, and then name the signal you will watch for.
A Worked Example
For a management consulting firm of the first rank, with one person's opening scores, the worksheet might read as follows. Frameworks and tools: rarity three (they are published and leave with every departing consultant), necessity five, score fifteen: table stakes. Project workflow: rarity two, necessity five, score ten. The brand: rarity ten, necessity five, score fifty; the mechanism is that a buyer of advice cannot inspect its quality and pays for a name that has more to lose than the buyer does; the independent observation is the premium the firm commands on identical engagements. Scale, some fifty thousand professionals: rarity seven, necessity three, score twenty-one. Share of the largest companies as clients: rarity seven, necessity three, score twenty-one, with little network effect. Recruiting, development and mentoring: rarity seven, necessity seven, score forty-nine. Client relationships, actively cultivated through an alumni network and senior access: rarity eight, necessity eight, score sixty-four. Culture of work ethic and quality: rarity seven, necessity seven, score forty-nine. On this reading, the firm's alpha assets are its client relationships, its recruiting and development system, its culture and its brand; its frameworks are not among them. End conditions: a language model that reproduces the frameworks for nothing lowers their necessity (they were already table stakes) and raises the relative value of the client relationships, which the model cannot reproduce.
The Thesis
The worksheet so far describes assets a firm or a person already holds. A new venture, or a person at the start of something, holds almost none and needs the prospective version that chapter 7 calls an advantage thesis. Chapter 7 gives it three parts; here it has five questions, the last two about evidence.
What is the advantage now? Why would anyone pay today for what you offer, and how will you reach them before a rival does?
What will the advantage be in five years, if you survive? Name the flywheels that will have spun up by then and would be hard for a rival to acquire, along with the one capability the organization will be known for and the mechanistic flywheel it feeds.
What must happen in the next twelve to twenty-four months to get from the first answer to the second? Name the work, not the intention.
What observable evidence, within a year, would show that the assets are forming? Count repeat customers, cost per unit at volume, referral share, or a practice visible in the organization, but not revenue.
What would show that the thesis is wrong? Write it down before the result, and decide now what you will do if it appears.
Two More Examples
For a failed company, fill in the worksheet with only what was known before the failure. For the book retailer Borders around 2000, it might read as follows. Brand: rarity seven, necessity four, score twenty-eight. Retail locations: rarity eight, necessity three, score twenty-four. Capability in managing a temporary workforce: rarity five, necessity four, score twenty. High-variety inventory management: rarity six, necessity five, score thirty. Balance sheet: rarity five, necessity three, score fifteen. None scores above forty, and the scores would have been the same in 2000 as in 2011. Every one of these assets had the same end condition: as book buying moved online, the necessity of each fell toward one. Someone filling in the worksheet in 2000 would not have predicted bankruptcy. What they would have seen is that the firm's assets were worth most in jobs that did not involve competing with Amazon, the same jobs into which the surviving rival took its own similar assets.
Now consider a person: a (hypothetical) mid-career engineer at a large manufacturer who wants more autonomy and less travel. Their solution-level asset, deep knowledge of one product family's failure modes, scores rarity eight and necessity seven inside their firm, and rarity eight and necessity two at any other firm, since no other firm makes that product family. Their method, a way of running design reviews that their division has adopted, scores rarity five and necessity six wherever they work. Their reputation scores rarity six inside the firm and two outside it, where nobody has heard of them. Their relationships with the firm's suppliers score rarity seven and necessity six and would partly go with them, since the suppliers serve other customers. So their highest-scoring asset is the one they cannot take with them; what they would carry is their method and their supplier relationships. That combination is rare at a supplier, or at a rival that uses the same supply base, but not in a different industry. Their end condition is the product family's retirement, which they can see on the firm's roadmap. They still have to choose what to do, but they now know what they have, where it counts, and when the choice is due.