Value is an impressive word. People talk about value creation, value propositions, customer value, value chains, enterprise value, shareholder value, value management, etc. It sounds like they know more than the rest of us. But, what is the value of all this value?
20th century management and accounting methods cannot manage value as links in a value chain and capture the costs of creating value to know the value-added at each link and across the chain. Result-performance Management (R-pM) defines the result value and performance costs at each link for business collaboration, within the business or across business partners.
Today value chains, value management, and value propositions are contrived and not related to the business
Many enterprises have a strategy to create value that defines some value to be there at end, but few actually build up managed value in the execution of the strategy. Some say they provide a good customer value proposition, which often seems to be sales hype, rather than a substantiated number. Others talk about value chains, without a specific definition of value and the links in the chain. Value-based management seems to be based on many contrived formulas for valuation. We hear of value creation, but nobody seems to know how and where value is created. We see how our many methods of business valuation, all give different numbers. We have confusion between stakeholder value and shareholder value. We hear of value-added. But, what value is added on what value?
So, again, what is the value of all this value? Is it possible to have one basic definition of value that we all can use to manage our enterprises?
20th century management methods prevent value management
The problem is that 20th century business, financial management, and accounting methods prevent us from really managing value. We can chase costs around and use the many definitions to calculate different numbers for value, but we cannot add value to value to make value really valuable. We need to re-evaluate value first.
R-pM provides the breakthrough for value management
Result-performance Management (R-pM) is a new breakthrough in enterprise business organization and management that enables us to manage value. Value is created and costs are incurred in the business. We cannot manage value and costs, if we do not organize and manage the business.
R-pM organizes and manages the three components that comprise the business:
- Capital Solution: Capital utilized in business performance
- Result: Output produced from business performance
- Performance: The utilization of a capital solution to produce a specific result
What contains our value; our capital, our performance, or the results of our performance? Capital embodies investments in the business and has commensurate worth. Performance produces only costs in the utilization of capital. The value is created in the result produced. Our internal and external customers purchase our results. Even for a service, they purchase the result in the benefit and appreciation of the service as their input result. Customers impart value on our results in their willingness to pay.
We purchase input results from our suppliers. We impart value on these results in our willingness to pay the supplier and incur costs to have the results ready to use. Some results we implement as capital solutions and the other results are inputs to products or services produced by the business. We add value to results as we transform input results to final results for our customer. So, if we are going to understand and manage value, we must understand and manage results.
Results contain corporate value and must be managed as the links in the chain
We say we have a strategy to create value. But the components of the strategy that contain value are results. We need to manage results to define each point that value is created across the whole enterprise business and plan and manage the strategic value from the bottom up. We can then have value chains where value is created at each link.
Costs are generated by utilizing capital as solutions to produce results
We all know that we incur costs in executing a strategy. The costs come from consuming or utilizing capital. But most capital is not defined as capital solutions for costing, so we have many “unknown costs”.
Much of our capital is labeled as “intangible assets” and the “tangible assets” are administered rather than managed to control costs and to create value. 20th century accounting and costing methods do not charge costs and expenditures against the value created. We must define our capital as specific solutions in order to relate the cost of capital we are consuming to the result value we are creating through our performance.
Value is then a manageable number that we can use in day-to-day enterprise management. The difference between result value created and the cost of creating result value, is result value-added. What does positive result value-added tell us? What does negative result value-added tell us?
Value is created across result chains from supplier inputs through the business to final customer results
R-pM enables us to define specific result value chains across the business to manage value added at each link in the chain, starting from input results through to final customer results. Each result in the chain has a customer that uses the result and must be willing to pay a value for the result. The total value of input results plus business results cannot exceed the value of the customer result. R-pM manages the end-results from business performance along the chain that produce the final customer set-result. The result chain typically includes such results as production planned, product produced, product placed for sale, order booked, invoice produced, product delivered, etc.
The enterprise invests in each capital solution utilized to produce results. These investments are charged as performance costs to results produced at cost for facility supply, over the planning period for human personnel costs, and over the useful life of developed solutions. The performance costs for each solution utilized totals the performance cost for the end-result produced. The result value less the performance cost for the volume of the result produced is the result value-added. The result value-added is managed to be positive over time for each result in the chain. If the result value-added is negative the result should not be produced. If the result is essential, the performance cost must be reduced or the value must be increased and the value of other results decreased to keep within the total chain value.
When we manage value and costs, we can optimize value-added and assess the worth of capital
So, by breaking down the value we are creating in a strategy, we can understand the value of what people produce in carrying out a strategy. We can understand the worth of new capital development embodied in the strategy. We can optimize the cost incurred in creating value against the value created to maximize value-added. Our stakeholders or shareholders can track their portion of that value. Our corporate governance, records management, internal evaluation, and management reporting can track everything the enterprise does to the strategic value being created.
When our business partners also track the value being created in their strategy, we can collaborate to build a value chain based on a common understanding of value and performance costs to truly maximize shared value and minimize shared costs.
R-pM principles for value management
R-pM organizes the business to make value really valuable through basic principles:
- Organize results produced to identify how and where value is created and measure value creation
- Organize capital consumed or utilized as solutions, including “intangible” capital, for management and costing against the value created
- Organize the business by deploying capital solutions to produce specific results to relate performance costs to the investment in the solution utilized and the value of results produced
- Become familiar with result value-added as a management metric for operations, development, and collaboration
- Develop strategies for producing results of value that add up to the strategic value created
- Manage strategic result and capital development to add value to results
- Set up professional financial and non-financial records management covering value and costs for the full business cycle
- Measure and report result value and value added by period and govern strategic result value creation
- Relate result value to the final result value perceived by customers and the value perceived in input results from suppliers and contractors
Once we organize the business for 21st Century Management; capital investment, result value, performance costs, and result value-added become familiar day-to-day business measures.
With R-pM we know and manage our real value
Visit Result-performance-Management.com to learn more about organizing your business with R-pM for 21st Century Management, and to subscribe to the R-pM Toolkit, your 21st Century Management Manual. The R-pM Management Guide “How to Build Result Value-quality Chains” provides more details to assist decisions on utilizing R-pM.
