Creating, Recognizing & Measuring Value

To create value, we have to consider what's at stake, who cares about it and how much. We might be making a financial investment in a company with good prospects for improving its share price. Recognizing value is deep understanding of the needs and opportunities of beneficiaries or stakeholders. Measuring value is figuring out the size of the benefits for those groups and then comparing that to the cost or effort involved in delivering them.

Value creation is driven by insights into core human activities, which can be described as sources of meaning or happiness. Although we can't be certain about the relative importance of each pursuit, we can be reasonably confident about the number of people involved. In the developed world, for example, people spend roughly a third of their time working; another third with their families and friends; and most of the rest sleeping, eating and using some spare time for exercise or entertainment. Add in religious observance or altruism and you have a convincing argument that most of what drives value creation is much more than money.

The challenge is to create value in those activities where monetization or tradability are limited. That's where recognizing the difference between value and price might help. Prices are what buyers pay and sellers receive. That's it. The price of a newspaper, for example, is pretty straightforward. The value is what motivates us to read it in the first place, which has everything to do with the human activities described above.

Measuring value, in turn, requires methods that go beyond conventional accounting tools. When we use those tools to measure profits or returns on stockholders' equity (ROE), we tend to overlook the various ways that companies enrich their stakeholders and society at large —and miss important sources of competitive advantage.

In some cases, companies seek to create value by inspiring and influencing public opinion. The fact that newspapers are free says as much about the value people derive from reading the print version as does their price. Mobile messaging services provide value for users by providing a simple way for them to communicate with others in the local community, beyond mere communication of business or government information.

In some instances, companies create value by exchanging their products or services for something else of greater significance —for example, through payment in kind (cashing in a service), trade credit (buying something on account) or open-book accounting (making available the records upon which internal decisions are based).

Companies that create value by providing information beyond what's required for their accounting are opening an important opportunity for others to do the same. For example, Wikipedia uses only a fraction of the information that Google and other companies collect on us. Maybe it doesn't matter because Wikipedia is free as long as we're happy to read it. But perhaps the simple cost of providing a service makes it easy for Wikipedia to become a source for authoritative information about anything we care about.

There's no one-size-fits-all approach to creating value. Yet we seem to be driven to do things the same way round these days. In the short-term, however, there's little evidence that "it works."

What matters is whether we're willing to think differently. We're not just looking for ways to hedge risk, but looking for solutions that can make a difference to people's lives and relationships. Value creation doesn't have to mean a return on investment as such. It can come in many forms —from acting as a liaison with suppliers and customers (or even enemies!) to inspiring people around us to change the way they live their everyday lives in ways that matter more than money.

Creating value, recognizing it and measuring it interact in many ways. That's why the search for a globally consistent accounting framework to gauge value creation has been so difficult. Value creation is confined to each group of stakeholders and each activity in which they're involved. This can make calculating an overall ROI on a company's activities just about impossible.

What we need is a way of reflecting the full range of activities that generate value for stakeholders, including those where there are no prices or tradables at all. That would be a big step forward in making sense of the world around us —and not just by considering how we spend our time but how our lives and businesses make sense too.

(This article is based on an earlier column written for The Wall Street Journal.)

– George Day

Title: Unleashing Global Innovative Capacity

National Investment Management Company, Abu Dhabi Investment Authority, Fortis Bank Luxembourg, Henley Management College London and The Wharton School of the University of Pennsylvania. Formerly: Corporate Vice President, Research and Development Worldwide and Chief Technology Officer at Microsoft; founder & CEO at Advanced Strategy Institute; founder & Chair at Software Technology Lab; co-founder & CEO at General Magic Inc.; also PBS Television (The Computer Show), Datamation magazine columnist. Author of several books including Viewpoints (1980), Business @ the Speed of Thought (1999) and Growing a Business (2004). Current time: family and extended family; grandchildren.

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Creating, Recognizing & Measuring Value

Creating, Recognizing & Measuring Value

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