Metrics and Measurement

Value for Dummeze

5 Aug 2012  

There’s so much talk around here about value that I’ve been accused of being obsessed by it.  I plead no contest.

Bang buck CROPParticularly in these stressed economic times in which we seem mired for the foreseeable future, the quest for value is a search that most of us pursue, in both our personal and professional lives, almost continually.

But what is value?  Most of us realize it’s not the same as cost or price.  It’s what you get for that cost — the ‘bang for the buck’.  Economists would say it’s the benefit/cost ratio.

My two bucks not to Chuck

I like wine.  One of my hobbies is discovering really good wines that sell for less than $10 — but taste like they’re worth several times that.  To me, it wouldn’t be nearly as much fun discovering a great bottle for $100 — too easy — besides which my Scottish heritage would never stand for it.

I’ll never forget our trip to Languedoc-Roussillon in the south of France, where we got delicious local wines in the supermarket — for $2 a bottle. That cured me forever of wine price snobbery — but made me forever a wine value snob.

“Value” implies getting more (of something) for a given amount of money.  A value investor is one who likes to buy low, then sell high.  A value stock is one that seems underpriced relative to its fundamentals and earnings potential.

Thinking like an MBA

Value creation is the fundamental keystone of our competitive economy — and, for me, one of the genuine Mysteries of the Universe.  One of the best things about business school was the opportunity to think and talk about value for two intense years — both in an abstract theoretical sense, and in an applied sense as it relates to producing value in live enterprise situations.

As an MBA, you learn not only not to take value for granted, but even to have a certain reverence for it — that value is transient, not to be treated carelessly — it can come and go.  Much like other living organisms — products, business models, companies, even whole industries have life cycles — they are born, they grow, they thrive, they ebb, they die.  The value life-cycle is an entirely natural process — even predictable, once you understand it.

A lexicon of value

I’ve always been fascinated by the economics of information.  More than a decade ago, I created the KVC model as a framework to measure and improve the value of information.

But lately it’s led us into even larger questions of value that have direct application in solving the challenges faced by our clients.  For example, we’re now creating value proposition statements to be used in selling situations for a new service in the health care sector.

In the course of doing this kind of work, we’ve been forging a lexicon of value — much of which is scattered among our web sites and white papers.  I thought it time to put them in one place — a sort of glossary of “value-speak”:

Value Map

Value Map. Documents the connections between an entity’s financial statements (or other performance metrics) and the business environment factors that enhance or impede value creation.  (See figure.)

Value Metrics/Value Markers. Quantitative and qualitative indicators of value.  For example, in studying public health, we find that the number of people who smoke and who are obese are surveyed in each state by the US Centers for Disease Control and Prevention.  These are value-relevant metrics if, say, you’re a health insurance plan or government agency that will be paying the medical bills for these people.  (FYI there are states that have over 30 percent of their adult population in both metrics.)

Value Vector. Describes in what direction a value metric or marker is trending, and how fast.  I had a vivid personal illustration of this recently.  A young doctor who lives in our building found out I was studying value shifts in the health care field.  He knocked on my door with a paper and pencil in hand and said, “I have young kids, and I need to plan for their education and future.  I know I make a lot of money now in the specialty I’m in, and I know that will likely not last.  I want you to help me figure out how soon my income could fall, and how far, and how fast.”  That’s value vectoring at its most pragmatic.

Value-Based Competition. The observation and practice that a rival is not only a competitor who makes what you make, but could be a whole new technology that provides the same value or benefit that your product does.  If you’re a cigarette company, for instance, smokeless tobacco products, or even alternative nicotine delivery systems like e-cigarettes, are customer value-homologous substitutes for your product, and should be monitored as diligently as a direct competitor.

Value Dynamics. The whole study and science of how and why value changes; subsumes most of the other terms here.

Value Proposition or Model. A statement of what is ‘on offer’ and to whom, with particular attention to how value is created from the point of view of each target constituency.

Value Chains. We buy from suppliers, who buy from their suppliers, who buy from their suppliers…and so on throughout the input or supply chain.  We sell to our customers, who sell to their customers, who sell to their customers, throughout the output or demand chain.  At each stage, both value and cost are added.  Our goal is to add, at each stage, relatively greater value than cost.

Value Waves. Because the world’s collective economy is built on these input-output chains, a value shift in one inexorably causes ‘ripple’ shifts in all related others, both forward (customers), backward (suppliers), and sideways (competitors and ancillary products).  When horses-and-buggies went out of style, so did buggy-whip manufacturing.  When recorded media (records, tapes, and CDs) went out of style, so did record stores. ADDENDUM JANUARY 2016:  The widespread changes caused by the recent slide in the price of crude oil from more than $100 per barrel to about 25% of that provide a vivid, and quite painful, case example of this.

My thinking about value was initially inspired by the brilliant, pioneering work of Adrian Slywotsky.  “For Dummies” is a registered trademark of John Wiley & Sons, with which this article claims no affiliation.


1 Response

  1. Good definitions here, and they’ll be useful to knowledge professionals proposing and moving forward with their knowledge initiatives for the company or firm.

    In fact, have offered comment along these lines at http://smr-knowledge.com/knowledgeservices/managing-the-kdks-expert-blind-spot/, wherein a colleague responds to a recent blog post by asking questions about value. Take a look at the comments from Elizabeth Greenfield.

    Thanks for the good lexicon – helpful to have these in one place.

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