I’ve previously written about emergent phenomena as they relate to science. It’s the idea that reductionism can only take us so far, because when you put smaller units together, you often get properties that are impossible to describe without referring to the whole unit.

There is a similar phenomenon in business.

A company is often valued more than the sum of its parts. There’s the book value, which is the value of the assets added

up. Then there is the market cap of the company, which is typically higher than the book value. The difference between the two is called goodwill, and can include brand name (think Apple or Starbucks), value of its workforce experience, business reputation, relationships the company has built with its suppliers, and so forth.

In some cases, book value may be zero–all of the value of the business may be in the employees or its processes. I have always been amazed at how Dell operated at its prime. It basically had negative working capital becauseits customers would pay for the computer before Dell paid its suppliers for the computer parts.

The reason I bring this up is because many people ignore the non-financial part of building a successful business. For example, when deciding whether to invest in a project, or in buying another company, people run the numbers and follow only the numbers. For example, if one project has higher risk-adjusted NPV, they may always select that project.

In my experience, companies that are steered purely by the numbers are not the ones that become the most successful. “Built to Last” goes into this in more detail, but the path to success is to be driven by value.

When people talk about branding, especially corporate branding, it’s not just about PR. An important lesson I learned at P&G (the company that invented branding) was that you can’t build a great brand unless there is an inherent value you can build the brand on. I was sitting at lunch with a brand manager (a marketer) soon after I started at P&G. He was complaining that the soap that he was assigned to was not a good product, that it had nothing to offer that was better than the competition. I said to him, “but isn’t that your job?” And he was highly offended. He said, “wait, do you think my job is to trick people into buying an inferior product by lying to them?” I kind of nodded, because well, actually, I thought that’s what marketers did. He proceeded to tell me how P&G builds brands on products that are superior. “You can’t build a brand unless you have something that offers consumers more than other products.” And he started telling me stories about brand managers who were fired because they tried to sell products on basis of better packaging or ad campaigns instead of on basis of product superiority.

I learned an important lesson at P&G. That building value comes first, and after that and only after does the PR and spin come.

I saw this in action at Genentech. Once, we were proposing a project for osteoporosis. It was a small molecule with an enormous commercial potential. We are talking peak sales of several billion dollars.

After the dog and pony show, Sue Hellman, who was at the time Head of Development and is now the head of the Gates Foundation, said, “I just have two questions. Will this drug save lives? Can we develop this drug better than any other company, or can someone else do a better job with it?”

We had to admit that the drug wouldn’t save lives and that there were other companies much better at developing small molecules.

She replied, “then we will license this out and we are going to spend our money on a cancer antibody and save lives. That’s what we do here.”

And you know what? Even though the team had spent six months building the case for the drug, we walked out of that meeting proud that we worked at Genentech. And people like Sue was the reason why Genentech attracted the best people and why its drug development success rate was in the 80% when everyone else was below 10%.

I have taken that lesson to heart. At our company, rather than working only on projects that have the highest risk-adjusted net present value, we try to work on the drugs that are the most important. This raises morale, and attracts the most talented people. The value of being able to attract the most talented people – it’s priceless.

Drug development is an innovation-based business. We don’t dig minerals out of the ground. We don’t collect rent on properties. All the value comes from people. The discretionary effort that people put forth, that is what makes a drug company great. And really talented people don’t want to just make as much money as possible, and they certainly don’t want to make as money as possible for the company. They want to do something great, something important, something that creates value and meaning. And the path building a great company is to hire great people and let them do exactly that.