Creating Value Requires a Balance with Value Destruction

We keep hearing about value creation and how it is good. We hear about the balance of power. It means more power here and less there, but how are they balanced by other factors. There is balance of convenience, balance of payment, balance of trade, and checks and balance!

We do not hear much about the balance of poverty (it all seems one-sided), the balance of love, or the balance of music, the balance of education.

If it is economic, like the balance of payment, it is easy to understand. Balance of power or convenience is more complex, and so more difficult to understand, though conceptually we have an idea what it means.

Balance of value is even more complex, it has to balance value creation and value destruction.

Diki from Karma gave me an example of birds being destroyed in China and resulting in insect and pest problems. The birds used to eat many of these, and of course eat some of the produce also. They were considered value destroying. However, their impact was value creating of eating pests but was not noticed. Wiki talks about the 4 Pest campaign started by the Mao Government around 1958, to eliminate:

the mosquitos responsible for malaria

the rodents that spread the plague

the pervasive airborne flies

the sparrows—specifically the Eurasian tree sparrow—which ate grain, seed, and fruit.

In 1960, they realised that even though sparrows ate about a kg of grain a year, the extermination of sparrows had upset the ecological balance, which subsequently resulted in surging locust and insect populations that destroyed crops, there was a lack of a natural predator and therefore led to famine. The Chinese later changed their policy on sparrows.

Think how often we punish someone, to improve performance without thinking of the consequences. Value Creation, for example, in driverless cars are many. For example, you get a car when needed without having many cars just standing as they do today. You do not need to worry about parking etc. But it destroys value for paid drivers, and other value destroying consequences such as reduction of accident repair centres.

The value creation for Ukrainians maybe freedom from Russia, but has come with huge value destruction, which may continue even after peace comes, because of fear of Russia in the future.

In business, I had written earlier in an article called: Transforming companies through Value Creation Not Value Destruction: The Balancing Act.

Understandably, no one will want to change unless he sees a value in the change. And the Value has to be tangible and worthwhile.

Value Creation is obviously a good idea for companies. Sometimes, evangelists like me forget that for most people the current situation is comfortable (they derive value from comfort). Many have bosses or Boards or company owners that demand profitability albeit short term. And if they do not deliver, they run the risk of being fired (a value destruction situation for them). So, there are many reasons for following the road well-travelled. My friend Jim Carras said to me:

“You seem to make a big point of stakeholder value not being a good objective for companies and I fully understand your concept. I believe you will need to accentuate the positive and not be too strong in changing what others believe to be important. I know it has a shock value for people to hear that shareholders should not be the vision but rather customers. It makes for good press. My first boss was Phil Crosby (ITT) and I can still hear him today preaching about customer satisfaction. You should take caution in how you sell the idea.”

Talk about putting me in my place, Jim! But Jim is absolutely right, and if companies do even bits and pieces of value creation like some innovation, like some social work, like some customer value creation. They will be ahead of the game. The CEO has a balancing act on being accepted by the customers and by the investors!

So, maybe we should start with what not to do. Avoid destroying Value. Keep looking over your shoulder and keep ahead of competition. Avoid becoming complacent, and continue to add value to your employees, customers and partners.

It is easy to be destroying value even when you are creating profits. You can be running your company into the ground, by not renewing assets. For example, the 16 oz. Plastishield glass bottle, selling 10 billion units for soft drinks and suddenly disappeared in the late 1980’s because new assets were not deployed.

You could like Enron destroy value for millions of shareholders. You could be like Blockbusters and Borders (my favourite bookstore), like Blackberry, letting go. Ambassador and Fiat India, RCA, Paine Webber, Drexel Burnham Lambert Beatrice foods, General Foods, Eastern Airlines, TWA and my old favourite Pan Am, Burger Chef, Compaq, Arthur Andersen, Standard Oil, American Motors etc. are examples that were successful but eventually died. Complacency, irrelevance, not reading the signs, destroying value to some stakeholders.

And don’t ignore countries that ruled the world or tried to, the British Empire, the French territories, the German war losses, Japan’s downhill ride. Ask what caused this?

So, what do we learn? Nothing is forever; you can’t take the future for granted.

Failure and success do not happen overnight. More often we fail to see the signs of failure. Balance thinking is needed.

Failure does not mean extinction; you can bounce back by adding value.

Never ignore anything that is negative, like customer complaints or a poor response to a product.

Add Customer Value, first by measuring it an understanding why customers but and by adding value. Karl Slym, President of Tata Motors got 357 ideas just by talking to TCS employees, many of whom were his customers. So, innovation is what you must do and it adds value. And talking of TCS, they were named among the most innovative companies, the most green company, the best CEO of the year, best mobile learning program etc…all indicators of value creation.

On the other hand, Stock Guru wrote:

-In the name of Power (a power company) one man made a sucker of the entire Indian population. A case study for future generations. Collected record amount of money from the public & the stock has become worthless. Marketing professionals & a greedy promoter made a sucker of the entire investor community. Destroyed Value!

Today the rules are changing, the customer economy is taking over and so should you.

So, what do we do? Gregg Gordon in The CEO’s Balancing act wrote:

The CEO, however, has the objective of balancing two goals. The first is success in their customer markets. The second is success in capital markets.

Two goals! What makes these two goals particularly difficult is that to be judged successful CEOs must achieve both goals simultaneously. To achieve the first goal, the CEO must deliver more customer value than their competitors through better products, services and effective use of their channels. As a measuring stick, most of us would gauge success in the customer market by a company’s revenue or profit. The capital market, on the other hand, comprises investors that make up hedge funds, pension funds, mutual funds, private equity and banks. These investors are only interested in determining the correct valuation of a company to ensure they make wise investment.

For the capital market, absolute profits are very important, but that’s not enough. Investors want to understand how a company earned that profit. That’s because the size of the profit doesn’t provide any indication about how much effort it took to earn it. For example, two companies may be generating the same amount of profit at the end of the year on the same revenue but are valued very differently. The reason for this may be that one is competing through low-cost production and has high levels of debt due to automated factories. The second may be competing on high levels of service. It may have no debt but high labour costs. Even though the revenues and profits are the same, investors will value these companies differently, which in turn influences the behaviour of their respective CEOs.

What’s surprising, though, is that with all the metrics a company puts in place to measure the fiscal and operational health, very few are able to overtly measure and improve their employees’ innovative ability, and the true customer value they are creating. They have to learn to balance these in business.

Balance is needed everywhere even while creating value.

Gautam Mahajan, President, Customer Value Foundation
Founder Editor, Journal of Creating Value jcv.sagepub.com
New Delhi 110065 +91 98100 60368
mahajan@customervaluefoundation.com
http://www.customervaluefoundation.com
Twitter @ValueCreationJ
Blogs: https://customervaluefoundation.wordpress.com/
Author of Value Creation, Total Customer Value Management, Customer Value Investment, How Creating Customer Value Makes you a Great Executive, The Value Imperative, Value Dominant Logic, Customer Value Starvation can Kill

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