People create the new in order to generate value.Whenever people create something such as a business, product, service, facility, way of working, piece of music or website, they do so in order to generate value. The three main kinds of value are economic value, conceptual value and experienced value.
Economic value means money, which comes in the form of revenue and profit for a business, and in the shape of donations for a charity. But we need to be aware of this:
“Prosperity in human societies can’t be properly understood by looking just at monetary measures, such as income or wealth. Prosperity in a society is the accumulation of solutions to human problems. These solutions run from the prosaic (crunchier potato chips) to the profound (cures for deadly diseases).”
Source: Redefining capitalism, by Eric Beinhocker and Nick Hanauer, in McKinsey Quarterly, September 2014.
Harvard Business School professor Michael Porter and Mark Kramer are leading proponents of a concept called shared value:
“No financial man will ever understand business because financial people think a company makes money. A company makes shoes, and no financial man understands that. They think money is real. Shoes are real. Money is an end result.”
Source: Peter Drucker, quoted in Mission Statement Definition: Linking Customer Mission and Social Mission, by Gideon Rosenblatt, on The Vital Edge website.
See also Statement on the Purpose of a Corporation, drafted by Business Roundtable and signed by 181 top-tier CEOs who made a commitment to leading their companies for the benefit of all stakeholders: customers, employees, suppliers, communities and shareholders (August 2019).
“Companies must take the lead in bringing business and society back together. The recognition is there among sophisticated business and thought leaders, and promising elements of a new model are emerging. Yet we still lack an overall framework for guiding these efforts, and most companies remain stuck in a ‘social responsibility’ mind-set in which societal issues are at the periphery, not the core.
The solution lies in the principle of shared value, which involves creating economic value in a way that also creates value for society by addressing its needs and challenges. Businesses must reconnect company success with social progress. Shared value is not social responsibility, philanthropy, or even sustainability, but a new way to achieve economic success. It is not on the margin of what companies do but at the center. We believe that it can give rise to the next major transformation of business thinking.”
Source: Creating Shared Value, by Michael E. Porter and Mark R. Kramer, in Harvard Business Review, January-February 2011.
Conceptual value is typically seen in value propositions and purpose statements, or scribbled on Post-it Notes during a workshop session. Examples include refreshment, comfort, safety, convenience, and ease of use. Linguists call this kind of a word a nominalisation: the verb ‘to feel comfortable’ has been converted into an abstract noun, ‘comfort’. Conceptual value is an abstraction — the menu, not the meal.
Experienced value is not something you can handle, like a dollar bill, nor is it an abstract concept such as refreshment. Imagine this scenario: It’s a hot day. You are thirsty. You buy a can of beer. You remove the ring-pull and take a swig. Whatever happens next in your sensory system is what I’m calling experienced value (if it’s a positive experience, otherwise you’re experiencing anti-value). It’s utterly subjective, and cannot be fully expressed through language.
How value is generated
Value is co-created through the interaction between the beneficiary (e.g. consumer, user) and the value generator: something tangible (product or other artefact) or intangible (service etc.) that produces experienced value when the user interacts with it.
A meta generator 1 is a producer of value generators (products, services etc.).
Example: an enterprise.
A meta generator 2 is a producer of meta generators.
Example: a team of entrepreneurs.
If you would like to know more about value co-creation, I strongly recommend Evolving to a New Dominant Logic for Marketing (pdf; 17pp), a groundbreaking paper written by Stephen Vargo and Robert Lusch, and published in Journal of Marketing, Vol. 68 (January 2004). The Wikipedia entry for Service-dominant logic is also very informative, and includes this useful summary of axioms and foundational premises:
Operant resources refer to skills and knowledge. They are invisible and intangible resources that act upon operand resources. Following service-dominant logic, knowledge and specialized skills are the core of a firm’s competitive advantage. Source: IGI Global.
Operand resources are tangible assets that are factors of production, such as raw materials or machinery. In a goods-centered logic, the operand resources are considered the primary source of a firm’s competitive advantage. Source: IGI Global.
Actors are individual and organisational participants in the value co-creation process. For an academic exposition of actor theory, see The Actor: The Key Determinator in Service Ecosystems, by Bård Tronvoll (pdf; 14pp).
“Management must think of itself not as producing products but as providing customer-creating value satisfactions.”
Source: Theodore Levitt, in Marketing Myopia, on Harvard Business Review website.
The converse of value is anti-value. Visualise this scenario:
It’s a hot day. You are thirsty. You buy a can of beer. You remove the ring-pull and take a swig. It tastes vile. You are now experiencing what I call anti-value.
Anti-value is more than dissatisfaction. It manifests as an experience of physical pain or emotional upset arising from a poorly designed or malfunctioning value generator (the can of beer, in our example), or from the denial of previously received and possibly taken for granted value.
Anti-value often spawns further anti-value. For example, a woman cuts herself when opening a packaged product. She feels physical pain, irritation and regret, and the emotions escalate into anger.
The inadequate packaging has now generated considerable anti-value and evoked a negative brand experience.
Fast forward to the next purchase occasion. The woman chooses a different brand, not because it promises greater value, but because she wants to avoid the anti-value she received from the first brand.
Increasingly, collective anti-value is being returned to the perpetrator in the form of badwill.
Further reading | When molehills are worse than mountains, by Matt Palmquist, on strategy+business website
What about the value derived from a functional product, service or other form of value generator that simply gets the job done?
Here is a real and very recent example. Under the hood of this website is a collection of programs called plugins that add functionality to the core WordPress software. One of them is called All In One SEO.
A little while ago, just before I started to create the page you’re reading now, I spotted this message:
Am I enjoying a bit of software that works behind the scenes, helping ensure that Prospero web pages appear in Google search results? That’s like asking me if I enjoy my toothpaste, my alarm clock or buying a ticket at Bath Spa train station.
No, I am not enjoying All In One SEO, good though it is. I would only give it my attention if it were to malfunction or stop working altogether.
Functional value mostly goes unnoticed. It’s the salt you forget to put in the pan with the potatoes, that you’re only aware of by its absence, when anti-value (disappointment, frustration, irritation, self-condemnation, anger etc.) takes its place.
There will always be exceptions. I notice and appreciate the value I experience when consulting Wikipedia and OpenStreetMap, when using the bottle opener attached to my key ring, and when calling into Tulsi, an Indian restaurant here in Bath, to order and subsequently collect my takeaway dinner. You will certainly have your own examples.
Net end-user value can be increased by halting the generation of anti-value.
Enterprises wishing to maximise downstream value generation must root out and eliminate anti-value generators such as the packaging described earlier.
In service businesses, anti-value is often generated by a badly designed or malfunctioning value creation system, although the source of the anti-value generation may be wrongly attributed to an individual or “the management”.
“Value creation is the foundation of business. Whether for shareholders, workers, families and communities, or myriad other stakeholders, the ability to identify the sources of value and create it is the leader’s enduring mark.”
Source: McKinsey & Company, email newsletter, 5 April 2021
“Price is what you pay. Value is what you get.”
Source: Warren Buffett, quoted in McKinsey & Company email newsletter, 5 April 2021
“We inevitably comes to the conclusion that a group of people get together and exist as an institution that we call a company so they are able to accomplish something collectively which they could not accomplish separately. They are able to do something worthwhile—they make a contribution to society (a phrase which sounds trite but is fundamental).”
Source: David Packard, co-founder of Hewlett Packard.
“In the end, an organization is nothing more than the collective capacity of its people to create value.”
Source: Lou Gerstner, former chairman and CEO of IBM, in his book Who Says Elephants Can’t Dance?