Value Creation Dark Side Value Destruction, Decay: Deliver Value-Prosper; Destroy Value-Doom…

‘Value’ lies at the heart of business– success, survival, failure… it’s the bloodline, and without it there is no business… Business begins with value creation– the purpose of any business is to create and deliver value in an efficient enough way so that it generates profit after cost…

According to Cliff Bowman and Véronique Ambrosini; despite its central role in establishing competitive advantage many business don’t understand ‘value creation’, in fact, most companies actually engage in ‘value destruction’…

According to Dr. Moshe Davidow; ‘value’ is a ratio between the benefits received (value creation) and the costs endured (value destruction). Any customer experience has elements of both value creation (positive value) and value destruction (negative value)…

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According to Seamus Gillen; all companies destroy value in one way or another when they engage in activities that don’t improve their competitive position, e.g.; they don’t grow revenues, or they don’t reduce costs, or they don’t take prudent risks, or they don’t hire competent management, or they don’t have effective leadership… these types of activities actually destroy value; they are liabilities in the true sense of the word…

Perhaps the largest destruction of value ever, was the consolidation of AOL Time Warner, back in 2001… This boom-time deal resulted in the destruction of more than $220 billion in shareholder value… But to be fair these figures are based on inflated 2001 valuations, though by any measure, Time Warner dearly overpaid for AOL… In fact, during the ‘dot-com bubble’ era, there was over $5 trillion in market value destruction of companies from March 2000 to October 2002…

In the article Destroying Value and the Misuse of Indicators by Kevin Kaiser and David Young write: Great swathes of wealth have been destroyed because of a common tendency among business executives who seek to achieve KPI (key performance indicators) as the mechanism for value creation… Differentiating between real long-term value creation and what managers often do instead, which is chase pre-defined indicators, and that ultimately destroy value…

The real value of a business is ‘the future free cash flows of the business discounted at the opportunity cost of capital’, which means that the money returned from business activities must be greater than the money invested, taking into consideration what other uses you could have made from that invested money…

… we (Kevin Kaiser, David Young) introduced concept called ‘blue-line management’, an approach in which all decisions of consequence are made with one aim; to create value. This approach stands in stark contrast to more common practice of ‘red-line management’ where ‘value creation’ is the stated goal, but the business is managed to deliver on specific ‘indicator’ targets, independent of whether these efforts are value creating or value destroying…

This is not anti-indicator and does accept the fact that organizations do require ‘Key Performance Indicators’ (KPIs) to enable them to assess how the business is progressing, but also adamant that;

… the primary function of KPIs is to promote organizational learning, a mission that will certainly be undermined when indicators are used for incentives… Indeed, much of the most useful organizational learning occurs through failure. When companies are managed on the ‘red-line’, extraordinary amounts of time and energy are devoted to hiding failure, enabling managers to avoid the consequences that can result…

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In the article Growth Can Destroy Corporate Value by Ed Hess writes: Companies can destroyed value by either taking excessive risks, or acting badly in the pursuit of growth… The culprit is a maniacal obsession with meeting the market’s insatiable hunger for more and more growth. When generating revenue or minimizing costs trumps– quality, safety, customers, reputation… eventually value is destroyed.

Most business executives accept, without question, the beliefs that growth is always good, bigger is always better… and that the healthy vital signs for a company, include; ever-increasing quarterly growth that is continuous and linear. The problem with those beliefs is that there is no scientific or business basis that supports it…

Companies are simply following a traditional business strategy: Grow or die… At the heart of bad decisions and self-inflicted wounds of companies, is the assumption that continuous growth is the most important goal of business. The reality is that sometimes the best business strategy is to say ‘no’…  Companies need to understand that growth creates risks that need to be aggressively managed. The market’s obsession with growth at all costs drives bad decisions. It’s time to acknowledge that the market operates under faulty growth assumptions and that many business leaders have ceded control of their companies to ‘the market’…

Leaders must be smart about growth by managing the risks of growth. Growth must not harm the essence of– brand, value proposition… they are the elements of sustainability. Being better/different is more important, in long run, than being bigger… Something is fundamentally wrong when pressures to grow causes ill-advised corporate decisions…

Balancing the demands of Wall Street and the hard realities of smart growth is not easy, to be sure: It requires courageous leaders, but that’s just part of the deal… with leadership comes an obligation to be good steward of public’s trust, and best interests of– shareholders, employees, customers, partners…

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In the article Destruction of Value by Dale Furtwengler writes: consider the hypothesis that value erodes over time, which stems from the fact that most people quickly take for granted things that once ‘delighted’ them… So no matter how big a splash your new product or service makes initially, it’s value declines as customers grow accustomed to that level of quality, service or combination of the two. Or, as a result of some disruptive competitive action… hence, inevitable, value erosion/decay occurs…

However, this whole idea of destroying value does raise one interesting question: Is there ever a time when a business should actually self-destroy value? Seems like an odd question, but the answer is ‘it depends’: most successful companies actually do destroy value with a strategy of planned obsolescence… whereas, as other companies try to develop a ‘cash cow’ strategy…

According to Erika Ginnis; you cannot really create without destroying and you cannot destroy without creating… Nothing is ever actually lost it’s only transformed, and one of the ways that change happens is through the process of ‘creating and destroying’, and ‘destroying and creating’… Destruction in and of itself is not a bad thing. Without it there can be no change, no transformation… In order to change one must be willing to let go; this letting go is a destruction of the old pattern of things, and when you destroy you create a space for new things to appear…

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This kind of creative destruction is admittedly difficult to achieve on long-term basis, but pursuit of this goal is one that even when a company falls short of the goal, it still allows it to maintain a high degree of customer loyalty and extended periods of highly-profitable growth… Don’t be preoccupied with competitors; focus on your company’s– strategy, decisions, execution, resources… and identify ways it’s destroying value and eliminate them… Your customers will pay for ‘superior value’ and become even more loyal in the process… Now that’s value creation!

It’s a tough world out there and only firms that succeed in creating value will survive in the long-term. The key is to focus on what your customers really want… That requires both an understanding of value, as well as, the skills and ability to deliver the value in a way that more than compensates for the price paid… According to Kevin Kaiser; focusing on the bottom line alone is another cause of value destruction. When boards of directors orient their company around short-term targets, that often require value destruction to deliver results, which means that they literally pay people to blow-up the company… 

Value destruction is certainly evident in most companies and many companies are  finding it more difficult to– sustain what is not sustainable… Many companies fall by the wayside, either; because they fail to adapt to changing circumstances, or because they follow misguided strategies that destroy value… The key to business sustainability is a proper understanding of value and how to create it, and the lesson is simple: Deliver value and prosper… Or, destroy value and be doomed…