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The Value Theorytm:The Value Theorytm:Leading and ManagingLeading and Managing
Copyright 1996, Randolph A. Pohlman, Ph.D.Notice: This publication is protected by copyright law and may not be reproduced without written permission of the author.
The Evolution of The Evolution of The Value TheoryThe Value Theoryttmm
The Evolution of The Evolution of The Value TheoryThe Value Theoryttmm
Koch Industriesand the
influence of MBMtm
Koch Industriesand the
influence of MBMtm
Koch Industries is the second largest Koch Industries is the second largest privately held company in the United privately held company in the United States, just behind Cargill States, just behind Cargill
Revenue:Revenue:$250,000,000 in 1967$250,000,000 in 1967$24,000,000,000 in 1995 $24,000,000,000 in 1995
13,000 employees13,000 employees
MBMtm takes market principles and tries to
use them inside the firm
MBMtm takes market principles and tries to
use them inside the firm
Private PropertyPrivate PropertyFree ExchangeFree ExchangeIndividual LibertyIndividual LibertyJudicial SystemJudicial SystemCultureCulture
Private PropertyPrivate PropertyFree ExchangeFree ExchangeIndividual LibertyIndividual LibertyJudicial SystemJudicial SystemCultureCulture
Foundations of a Free SocietyFoundations of a Free Society
Other Dimensions of a FirmOther Dimensions of a Firm
Common PurposeCommon PurposeCustomers and other External Customers and other External
ConstituentsConstituentsSelectionsSelections
Vision of MBMtm Vision of MBMtm
A market economy is a discovery process that reveals A market economy is a discovery process that reveals changing needs and the availability and utility of resourceschanging needs and the availability and utility of resources
Success or failure is determined by the ability to discover Success or failure is determined by the ability to discover these needs and satisfy them by substituting knowledge for these needs and satisfy them by substituting knowledge for resourcesresources
Ideally, a business is a republic of explorers who strive Ideally, a business is a republic of explorers who strive toward an unknown future through mutually adjusting toward an unknown future through mutually adjusting individual initiativesindividual initiatives
Maintain a long term perspectiveMaintain a long term perspective Consistently guided by values that build trustConsistently guided by values that build trust Profit by the economic rather than the political meansProfit by the economic rather than the political means
Elements in CreatingDispersed DiscoveryElements in CreatingDispersed DiscoveryEducationEducationVision of the BusinessVision of the BusinessCultureCulture Selection and DevelopmentSelection and DevelopmentOriginationOriginationDiscovery MeasuresDiscovery MeasuresDecision Making ProcessDecision Making ProcessMotivationMotivation
Market ConceptsMarket Concepts
Market: Structure by which the Market: Structure by which the exchange of goods and services is brought exchange of goods and services is brought about in a society. The market process is about in a society. The market process is driven by driven by voluntary exchange, prices,voluntary exchange, prices, and and the consumer’s the consumer’s profit motive.profit motive.
Continued on next slide
Market Concepts - continuedMarket Concepts - continued
Voluntary Exchange: Customers have Voluntary Exchange: Customers have the choice to purchase only those goods the choice to purchase only those goods and services which are profitable.and services which are profitable.
Price: The economic sacrifice to obtain a Price: The economic sacrifice to obtain a product or service. Prices provide the product or service. Prices provide the basis for the calculation of the basis for the calculation of the profitability of purchase decision.profitability of purchase decision.
Continued on next slide
Market Concepts - continuedMarket Concepts - continued
Profit motive: An incentive to achieve profit. Profit motive: An incentive to achieve profit. Customers expect to receive more value from Customers expect to receive more value from the purchase of the product or service than the purchase of the product or service than what is given up in the exchange. what is given up in the exchange. For example, someone with 50 cents buys an For example, someone with 50 cents buys an
apple because he values the apple more than the apple because he values the apple more than the 50 cents. Conversely, the apple seller values the 50 cents. Conversely, the apple seller values the 50 cents more than the apple. Both people gained 50 cents more than the apple. Both people gained by giving the other something he wanted more. by giving the other something he wanted more.
Continued on next slide
Market Concepts - continuedMarket Concepts - continued
Internal Market: The exchange of goods and Internal Market: The exchange of goods and services within a firm.services within a firm.
Market Transactions: In a market, communication Market Transactions: In a market, communication between the customer and supplier is critical. The between the customer and supplier is critical. The customer needs to have a valid mission, understand customer needs to have a valid mission, understand it and what is required to advance it, and be it and what is required to advance it, and be capable of judging the value that products and capable of judging the value that products and services add toward it. This requires an ongoing services add toward it. This requires an ongoing sales/information sharing effort by suppliers so sales/information sharing effort by suppliers so that their customers know the type of quality of that their customers know the type of quality of products and services available and their price.products and services available and their price.
The further evolution . . .The further evolution . . .
Abilities Traits
InterestsValues
Motivation
Selecting and Developing PeopleSelecting and Developing People
Knowledge Experiences
Skills
The Armchair Economist: Economics of Everyday LifeThe Armchair Economist:
Economics of Everyday Life
““People respond to incentives, People respond to incentives, the rest is commentary.”the rest is commentary.”
Steven LandsburgSteven Landsburg
Bureaucracy stifles Bureaucracy stifles success of organizationssuccess of organizations
Bureaucracy stifles Bureaucracy stifles success of organizationssuccess of organizations
People’s lives are People’s lives are being disrupted being disrupted through layoffs.through layoffs.
People’s lives are People’s lives are being disrupted being disrupted through layoffs.through layoffs.
We need a framework for analysis:We need a framework for analysis: Students cannot see the connection Students cannot see the connection
among classesamong classes Creating customer valueCreating customer value Economic Value Added (EVA)Economic Value Added (EVA) Shared ValuesShared Values Politicians and religious leaders talk Politicians and religious leaders talk
about valuesabout values
Continued . . .
Framework for analysis . . .Framework for analysis . . .
Employees most valued assetEmployees most valued asset Net present valueNet present value Psychologists talk about valuesPsychologists talk about values Ethicists talk about valuesEthicists talk about values American businesses are short term American businesses are short term
oriented not long term value orientedoriented not long term value oriented
The Model
The Purpose of The Value Theorytm
The Purpose of The Value Theorytm
When considering actions to be When considering actions to be taken or decisions to be made, one taken or decisions to be made, one must do so in a manner that leads must do so in a manner that leads
to the maximization of to the maximization of
value over timevalue over timetmtm..
The Model
Short Term vs. Long TermShort Term vs. Long Term
The Model
Cut Cost and Quality:Cut Cost and Quality:
short term: profits increaseshort term: profits increase long term: profits decreaselong term: profits decrease
The Model
Micromanage EmployeesMicromanage Employees short term: productivity increasesshort term: productivity increases long term: productivity decreaseslong term: productivity decreases
The Model
SpeedSpeed short term: get there fastershort term: get there faster long term: lose your licenselong term: lose your license
The Model
Dump ChemicalsDump Chemicals short term: cheap solutionshort term: cheap solution long term: very expensivelong term: very expensive
The Model
Develop EmployeesDevelop Employees short term: time consumingshort term: time consuming long term: time saverlong term: time saver
The Model
Invest in Productive AssetsInvest in Productive Assets
short term: expensiveshort term: expensive
long term:long term: production goes upproduction goes up
The Model
The Purpose of The Value Theorytm
The Purpose of The Value Theorytm
When considering actions to be When considering actions to be taken or decisions to be made, one taken or decisions to be made, one must do so in a manner that leads must do so in a manner that leads
to the maximization of to the maximization of
value over timevalue over timetmtm..
The Model
Our job as leaders and managers is to maximize
Value Over Timetm (VOTtm)
Our job as leaders and managers is to maximize
Value Over Timetm (VOTtm)
The Model
What The Value Theorytm is:What The Value Theorytm is: an integrated framework within which to an integrated framework within which to
make decisions and take actionsmake decisions and take actions inclusive of, or complementary to, other inclusive of, or complementary to, other
theoriestheories one that can use most existing tools, one that can use most existing tools,
theories and other fieldstheories and other fields
The Model
Tools, Theories, Other Fields•NPV
•Reengineering
•The Theory of Constraints
•Option Pricing
•Arbitrage Pricing
•TQM
•Statistical Process Control
•Motivation Theory
•Learning Theory
•Decision Theory
•Organizational Behavior Theory
•Statistical Theory
•Market Based Management
•Econometrics
•Psychometrics
•Leadership Theories
The Model
•Mathematical Programming
•Decision Trees
•Cost Benefit Analysis
•Accounting Theory
•Segmentation Analysis
•Consumer Behavior Theory
•Competitive Analysis
•Information Theory
•Marketing Research
•Communication Theory
•Law
•Logic
•Ethics
•Philosophy
•Quoing Theory
•Transportation models
•Simulation Models
•Scheduling Models
•Portfolio Theory
What The Value Theorytm is:What The Value Theorytm is: an integrated framework within which to an integrated framework within which to
make decisions and take actionsmake decisions and take actions inclusive of, or complementary to, other inclusive of, or complementary to, other
theoriestheories one that can use most existing tools , one that can use most existing tools ,
theories and other fieldstheories and other fields
The Model
one that can lead to superior decision one that can lead to superior decision makingmaking
one that requires dedication, discipline and one that requires dedication, discipline and hard workhard work
a formula for successa formula for success a rigid system to be arbitrarily followeda rigid system to be arbitrarily followed an ideologyan ideology based on a specific set of valuesbased on a specific set of values a replacement for all other theoriesa replacement for all other theories a replacement for all other toolsa replacement for all other tools
The Model
What The Value Theorytm is not:What The Value Theorytm is not:
The AssumptionsThe Assumptions Increase in value is goodIncrease in value is good What is valued drives actionWhat is valued drives action Knowledge creation and use leads to value creationKnowledge creation and use leads to value creation Value is subjectiveValue is subjective There are value adders and destroyersThere are value adders and destroyers Markets provide valuable informationMarkets provide valuable information Opportunity costs affect valueOpportunity costs affect value Order is spontaneousOrder is spontaneous Values can compete or be complimentaryValues can compete or be complimentary For every action, there are externalitiesFor every action, there are externalities It is the responsibility of organizational leaders to maximize value It is the responsibility of organizational leaders to maximize value
over timeover timetmtm..
The Model
The Eight Facets of The Value Theorytm
The Eight Facets of The Value Theorytm
Cultures external to the firm
Cultures external to the firm
Facet 1Facet 1 The Model
World cultureWorld culture
U.S. cultureU.S. culture
U.S. sub-culturesU.S. sub-cultures
Organizational cultureOrganizational culture
Facet 2Facet 2 The Model
Ben & Jerry’sBen & Jerry’s
TM
Lincoln ElectricLincoln ElectricTM
Facet 3Facet 3 The Model
examples . . .examples . . .
What employees valueWhat employees value
LeisureLeisure
TechnologyTechnology
MoneyMoney
Close SupervisionClose Supervision
Self-Directed WorkSelf-Directed Work
CreativityCreativity
PrecisionPrecision
ReligionReligion
PoliticsPolitics
What suppliers value (examples)What suppliers value (examples)
to be treated fairlyto be treated fairlynot to be beaten into submissionnot to be beaten into submission considered a partnerconsidered a partner
Facet 4Facet 4 The Model
What customers value(examples)What customers value(examples)
qualityquality reliabilityreliability
Facet 5Facet 5 The Model
What third parties (government, unions, accrediting agencies) value (examples)
What third parties (government, unions, accrediting agencies) value (examples) authorityauthority rulesrules compliancecompliance
Facet 6Facet 6 The Model
What competitors value(examples)What competitors value(examples)market sharemarket shareprofitabilityprofitabilityprestigeprestige sheer sizesheer sizepublic imagepublic image
Facet 7Facet 7 The Model
What owners value(examples)What owners value(examples) return on assetsreturn on assets return on equityreturn on equity rapid growthrapid growthprestige of the firmprestige of the firm
Facet 8Facet 8 The Model
The Purpose of The Value Theorytm
The Purpose of The Value Theorytm
When considering actions to be When considering actions to be taken or decisions to be made, one taken or decisions to be made, one must do so in a manner that leads must do so in a manner that leads
to the maximization of to the maximization of
value over timevalue over timetmtm..
The Model
Purpose of TVTPurpose of TVTtmtm: When considering actions to be taken When considering actions to be takenor decisions to be made, one must do so in a manner thator decisions to be made, one must do so in a manner thatleads to the maximization of value over timeleads to the maximization of value over timetmtm..
AssumptionsAssumptions::• Increase in value is goodIncrease in value is good• What is valued drives actionWhat is valued drives action• Knowledge creation and use leads to value creationKnowledge creation and use leads to value creation• Value is subjectiveValue is subjective• There are value adders and destroyersThere are value adders and destroyers• Markets provide valuable informationMarkets provide valuable information• Opportunity costs affect valueOpportunity costs affect value• Order is spontaneousOrder is spontaneous• Values can compete or be complimentaryValues can compete or be complimentary• For every action, there are externalitiesFor every action, there are externalities• It is the responsibility of organizational leaders toIt is the responsibility of organizational leaders to
maximize value over timemaximize value over timetmtm
The Eight Facets of TVTThe Eight Facets of TVTtmtm
• Cultures external to the firmCultures external to the firm• Organizational cultureOrganizational culture• What employees valueWhat employees value• What suppliers valueWhat suppliers value
• What customers valueWhat customers value• What third parties valueWhat third parties value• What competitors valueWhat competitors value• What owners valueWhat owners value