Thoughts On the Nature of Value
After hearing the word “value” banded about and wanted to capture some of my personal thoughts on the nature of value, primarily in the context of the business-like organisation, but with reference to a wider social context (initially written Nov 2013)
Value could be said to represent the collection of attributes that make a product or service useful or attractive to a third party, notionally a customer, often for which that third party or recipient is willing to pay for (but not necessarily). Value is created within the business, organisation or process, by transforming the attributes of incoming goods and/or information, into a useful or attractive form from the customer’s perspective. For the moment I’ll use customer to denote the intended recipient of the value attributes or offering. This means that the customer could take different forms, for example, the next intended process in a chain of goods or service production, a school pupil or undergraduate being taught, a household recieving some council service or a recipient of emergency aid.
Value is usually said to flow “downstream”. In the business context, this value is paid for (in some form), and money flows back “upstream”. At each supplier-customer interaction there is a forward flow of value and a backward flow of money, which looks like a loop. The customers themselves may have further customers, and the suppliers, further suppliers, so these loops tend to link together to form a “chain”. Depending on your perspective you may call it a “supply chain” or a “value chain”. I’ve found that people tend to think of the supply chain as being only upstream from them, not that they are part of a larger supply chain, so I’ll stick with the term value chain or more specifically value stream.
Value itself is not money, but it is usually given some form of financial equivalence in the form of a currency. This is really how money works, so that we don’t have to endlessly barter goods and services directly with each other. Problems can start within any economical outcome driven organisation, when value is seen as equal to money, not for it’s own worth to the intended customers.
This is particularly difficult in the financial sector, where money itself is the product, but more generally in the non-product sectors, where there is not a transfer of tangible value in the form of goods. “I can see it, touch it, taste it or smell it”
Added Value is an accounting term to describe the amount of extra work and/or margin (in cash) put into producing the business’ offering. However, just because a firm spends extra money on an offering, it doesn’t mean that the customer is prepared to pay for that additonal cost or sees any value in the additional process incurred.
It could simply be an intermediary or agent adding a margin to a finished product to pay for their “services” – whereby said person has not actaully added any real value to the product, but may have made the product easier to sell.
(A couple of articles on 16th April 2014 prompted me to round this off with thoughts on GVA / GDP)
Gross Value Added (GVA), the precursor to GDP, is economic output minus intermediate consumption, within a well defined trading area, such as the UK. Amongst other things, what it (and GDP) fails to do is estimate a true measure of value, for instance some measure of innovation or benefits to society or the environment, and overestimate ‘false value’, for instance house price increases, which is mostly to do with a restriction of supply rather than the creation of any real value. It treats activity that does ‘harm’ (socially, economically, environmentally) equally with that which does ‘good’ – which maybe the response to having created harm in the past. Consequently, if any activity is deemed useful, encouragement and over-reliance on the key indicators GVA / GDP can drive destructive processes, storing trouble for the future, or we can become ‘busy fools’, producing stuff or services for their own sake, pushing goods and services into the market – whether we really wanted them or not – this is, of course, where marketing comes in.
GDP – John Kay 16th April 2014
GDP – Peter Day, BBC, 16th April 2014