Value Defined

Fotolia_20726883_XSValue and value creation. When I poll a room of executives for their definition of “value”, we quickly observe that there are approximately as many definitions for “value” as there are people in the room. But if we can’t agree on what “value” is, how can we possibly manage for it, or organize ourselves along the objective of delivering value creation? Therefore, before we are able to means to “manage for value creation” we first need to agree a definition of value.

When we ask how you might define “value” when trying to explain it to, say, an 11 year old, this helps to focus the objective. It quickly becomes clear that value is not cash. Indeed, cash is what we give up to obtain the things we value. Moreover, many of the things which bring us the most value (relationships with our family and friends, satisfaction with a sense of accomplishment, overcoming a challenge, knowing we did something which was much appreciated by others we care for, etc.) cannot be interpreted or measured by cash paid or generated. We can see that a “measure” of the value of an item may include how much cash we are willing to give up to obtain this particular item, but we must be careful to not confuse measures of value with a definition of value. If I ask for a definition of distance, and you answer by saying “two kilometers,” this is not at all helpful. A measure of a distance is not in any way a definition of distance. Similarly, the price someone is willing to pay for an item is only a measure of the value to that person, it is not in any sense a definition of value.
We know that individuals are unique in countless ways, and one of these includes the extent to which they value anything (material item, experience, relationship, etc.). In other words, we can see that no two people ever value anything the exact same amount. In this sense, it is clear that value from the perspective of any individual is an extremely subjective and unique concept and it has to do with the extent to which something brings happiness or misery. Economists refer to this as “utility,” but it is clear that this word has its roots in a time period when the luxury of the modern world was not what it is today. There is no need for something to be of “use” in order for humans to value it. Indeed, many of the things we value the most are of decidedly questionable use, if not being downright dangerous for our existence. Ask yourself, how many things you do each day which raise the probability of you dying. Start with getting out of bed (moderate risk of death). Then taking a shower (significant risk of death from slipping in the bathtub). Then going down the stairs (significant risk of death from catching a heel and falling). Then eating breakfast (moderate risk of death from tainted food). Then getting in your car and driving to work (extremely high probability of risk from traffic accident). Etc. Why do we do these things, which cause the probability of our death to rise, potentially dramatically (motorcycles, bungee jumping, etc.)? It is called living.

We therefore do not use the word “utility” but instead prefer the word “happiness”:

Value=Happiness

While this is helpful to understand the subjectivity of the concept from an individual perspective, it fails to address the perspective from a legal entity which delivers the products and services to the myriad human consumers which justifies its existence.

In the context of legal entity, the need for cash is as acute as the need for energy for a living organism. Whether a for-profit, not-for-profit, family business, or government, all legal entities face the harsh reality that when they run out of cash, and if no one is prepared to put in new cash to keep them operating, they are quickly shut down. This introduces a completely different definition of value. For these entities, they exist only to help transform the raw materials (the elementary particles of the universe as found on our planet) into the goods and services which deliver the happiness to the world’s consumers. Whether they receive their cash directly from the end-users of the goods and services (Business-to-Consumer businesses) or indirectly after several steps (Business-to-Business businesses), or from a different set of people than the recipients of the goods and services (governments or charities), all face the challenge of engaging resources and using energy to develop and deliver goods and services to the consuming humans. If they do this sufficiently well – delivering sufficient value to ensure consumers willingly hand over their scarce cash, and use the needed resources and energy sufficiently efficiently (not employing ten people to do the job one person could have done perfectly well), then this success will be evident in the fact they will find themselves cumulating cash over time. If they do not do this well enough – failing to deliver sufficient happiness to ensure sufficient numbers of consumers hand over sufficient amounts of their scarce cash, and fail to use the needed resources and energy sufficiently efficiently, causing the cash to leave faster than is really necessary, then this failure will be evident in the fact they will find themselves running out of cash over time. Therefore, for these entities, the definition of value will take into account that which is required for their ongoing survival:

Value=CashFlow

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