What is Value in Business?
The concept of value in business is critical and yet remarkably elusive. As a business architect I'm very interested in the concept of 'value', as people's perception of value dramatically influences business design and decision making.
I’d like to share with you some quotes, including some of my own comments, from a (July 2009) discussion amongst a group of business architects from different parts of the world, where the question was posed: ‘What is ‘value’ in business?'
1. Alain - 'I believe value is always going to be money, sooner or later. '
2. Mike - 'In government settings Value is expressed in the form of ability to achieve a mandated outcome (e.g. better health for citizens, lower crime rate, ...). '
3. Tom - 'What I'm looking for is better ways to understand the 'performance paradox' - that to get the best performance as measured in terms of the end-point value (e.g. monetary return or 'service to citizens'), we need to pay attention to everything except that end-point. For example, to improve profit, we may need to focus on production-quality, service-delivery or customer-relations; to reduce security risks we may need to concentrate on morale or network integrity; and so on.'
'The reason for the paradox is that end-point value is a complex outcome of the interaction between the other enterprise values. Because it's a complex outcome - a 'lag-indicator' - the end-point doesn't tell us anything other than the overall aggregation of everything that's been achieved: we can't use it to guide constructive change. We can use the other values and principles to guide change..’
4. Joanne - '..using the Business Strategy, objectives, even mission statement as a starting point, specific values can be identified, which can then be used to improve the current situation. '
5. Sudhir - 'The starting point of value for an enterprise is its relevance to someone or something. it could be to a segment of a market, or to the public. This relevance is then manifested in the form of a purpose or mission for the enterprise. '
'Systemic health is the operative phrase in general in any discussion of value, and it comes from the notion of 'sustainably achieving purpose'. It can be expressed in customer relationship, quality, employee satisfaction. These can then be translated into other foundational capabilities - such as collaboration etc. All of these abilities should come together to create the complex of the system which can achieve the stated purpose.'
6. Patricia (Pat) - 'Does the value of the enterprise include all the assets value within the enterprise context? How does one define the knowledge within the employee's thoughts?'
'Is money as a descriptive of the value of an asset always a lag-indicator? I believe an asset has a value at a point in time. The point of time could be past, present or future time frames. Which brings up the point of an asset losing its value over time or gaining value (such as an antique)? '
7. Sudhir - 'I have a worn out car, which has a full tank of gas, and rather worn tires. My neighbor has a Rolls, in great condition, but I do not have its keys.
I have an urgent need to go to the hospital in an emergency! My car is any day better than the Rolls.
Money is social technology - it permits the simple expression of complex situations, and makes so much of our complex economy possible. You want it for sure - the problem is we are not very good in determining value, specially intangible value.
8. Ron (Segal) - 'I'd like to provide some further input. The idea that 'value' or worth is relative to viewpoint and can therefore never be absolute (relativity theory of value).
Example - companies producing whale products. (dead/extinct whales vs food delicacy profits)
Example - an ancient washing machine, advertised as the 'worlds noisiest' just sold on a web auction site here in New Zealand for $5,000.
Every good marketer and politician knows that value can be created almost from nothing (and likewise destroyed).
Generally then, we are better to think in terms of 'value' as 'perceived value'.
Money (hence profit and loss) is an ingenious technique for expressing (and normalising) 'perceived value' in a marketplace.
In my view enterprises are ultimately trying to maximise the perceived value by those understood to be its stakeholders ('understood to be' because this isn't always clear). Maximising value includes survival (or for this read the currently overused and abused term ‘sustainability’), hence characteristics such as adaptability and innovation as well as effectiveness and efficiency.
Since value is relative it has to be defined for each enterprise - what is value for us? (although there are useful existing models for particular industry types). It is also temporal (e.g. old things, antiques, can increase in value), so the definition needs refreshing at regular intervals, also in the case of major events (such as a global recession).
In summary, from these comments, value is:
- Relative to viewpoint
- May be expressed as money
- Related to the ability of an organisation to sustainably achieve its purpose
Not to be confused with the notion of 'good value', which is more to do with the perception that an acquisition of some kind is worth the cost.