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