Value is in The Eye of the Beholder…Who is Blind

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\"RRThere is a binary system governing value. The first “beholders”of value are its creators and sellers. The second are its consumers. Unfortunately,the first beholders have become blind to what their intrinsic value really is, or should be. As a result, they are blinding the second beholders by devaluing their products, leaving these consumers to conclude that the default “real value” is the lowest price.

No, I’m not getting all philosophical on you. Or maybe I am, if you’re able to fully understand the magnitude of what I’m about to serve up. It’s an enormous message for all businesses and, by extension, our economy as well.

It’s about the real, universal, global and all-encompassing definition of value, not just for the consumer, but also how you define it and hold it for your products, services, business and, indeed, your life.

For starters, before I take on the task of defining value and explaining why its creators and consumers are both blind to any common understanding of what it actually is, I submit that the collective “we” have been marking down value for a long time. The devaluation of value seems to be accelerating, particularly with the explosion of online businesses that don’t yet make a profit, relying on waves of funding and price promoting to stay afloat. This business model simply exacerbates the “marking down” syndrome. And this fragile model is also exacerbated by ongoing overcapacity throughout our economy, in which price promoting and endless methods of discounting become “weapons of necessity.” The end of this vicious cycle, of course, is worthlessness—AKA, zero value.

A snapshot of worthlessness is when a consumer sees a frock she likes at a 70% discount from a retailer she trusts, which might even be less when she “showrooms” the item among other retail outlets using her smartphone. But what is a bigger threat to this discounting-devaluing practice is that instead of scurrying to buy whichever is the lower-priced frock, she pauses to observe that her closet is full, actually overflowing. And she realizes that she doesn’t need yet another frock, and she cynically believes that the frock will be even lower priced tomorrow. So she passes on the purchase.

When this dynamic occurs in the aggregate among the majority of consumers (who drive 70% of our GDP) worthlessness turns into a deflationary economy. This, at best, would mimic Japan’s last two-decade no-growth conundrum. At its worst, it results in a total economic collapse or depression.

What is Value?

The technical definition of value is its cost of creation and its price for consumption, plus subjective/perceived measures. And value in its totality can be measured on a continuum from low to high.

The Value Race to the Bottom

En masse we have chosen the “low” value on the continuum, and I include the wealthy set as well. We are choosing low value and lots of it. Why? Because it’s all we have to choose from. Why? Because all consumer-facing industries have chosen to offer low value, and lots of it. Why? To drive the growth that is demanded by Wall Street and their shareholders. Or if it’s a private business, simply because they need to make a living.

What’s So Bad? These Dynamics Drive Healthy Capitalism and Free Markets

Of course the economic theories of these supply/demand dynamics, mostly created a long time ago and now assumed to be bedrock “truths,” say that these dynamics sustain the most efficient, effective, and productive system, which in turn keeps “cleaning” itself of unproductive, failing, and inefficient entities. (Note: Read Joseph Shumpeter’s theory on “creative destruction.”)

Do You Believe Our Kind of Capitalism Works Today?

I don’t believe so. I also don’t believe that those brilliant theorists and experts were able to anticipate the true impacts that globalization and the global movement of goods, services, and capital, would have on their “ideal” capitalistic system.

Why Doesn’t It Work In Today’s World?

Macro Economic Theory

I believe those classic economic theories counted on globalization being a more orderly and disciplined evolution than the “explosion” that is occurring, particularly with China as its ignition. And, of course, no one would have known of the impact of the Internet in its totality. In fact, how could these creators of economic truth have known how truly leveling globalization would really be, and how easily and quickly mass value creation and distribution could be dispersed throughout the world?

This, in part, leads to the second misunderstanding of “Econ 101” (and the emergence of creative destruction), which is that countries, just like companies, will move “up” the value creation ladder as the “lower” value creation is passed down to developing countries (e.g., textiles and apparel to Asia).

This ladder-value theory assumes a lot. First of all it assumes a given country desires to move up the value creation ladder. Without repeating myself and the myriad of articles and studies authored by much more intelligent people than me, it is well documented that a great majority of our own best and brightest young people are not seeking those higher value-creating science-based degrees and/or careers, such as technology, math, biochemistry, engineering, etc., to say nothing of the fact that our own educational system, grades K–12, is scraping the bottom among the industrialized countries. So I can safely say that the US is not poised, nor has it begun, to climb that ladder.

I have often wryly said our college graduates are interested in one of two places; Wall Street or Hollywood, and are now adding Silicon Valley to their list. This western outpost is a fantasyland where there is zero value (in fact negative) in nine out of ten startups, and most of them are driving further devaluation because they aren’t required to make a profit.

In my opinion, the kind of value those industries create is “poof poof” value. Here today, gone tomorrow, leaving its residue for the very few to profit from and start reinvesting in something else. Is it enough to sustain the present and future economic dominance of a nation?

The other thing the ladder theory assumes is that the developing countries do not have the same level of capability as the US to move up the value creation chain. Ho, ho!!! The same aforementioned studies and articles point to the fact that China and India, in particular, are turning out 10+ times the number of graduates in all of those higher value science-based and tech fields. And a good percentage of those numbers are graduating right here in the US. While those foreign graduates used to remain in the US and add their value here, they are now returning home, often because of our immigration laws, not to mention that, ironically, they see more opportunity in their homelands.

And guess what? All one needs is a little speculation to project what will happen when those best and brightest Chinese CEOs, possibly educated in the US, decide they want to move higher up the value chain. They will want to do so in the number-one consumer marketplace, the US. They will simply acquire our businesses here, and, if we’re lucky, keep us on as the third-world hired help.

Micro Economic Reality

While all of the macro-stuff doesn’t seem to be following the conventional economic rules, the micro rules govern even more poorly when it comes down to the level of an industry and specific company. Why? In a word, the combination of globalization with Alan Greenspan’s turn-of-the-century theory of the “miracle of productivity” is producing unexpected results.

First of all, globalization, in conjunction with our own obsession for growth at any cost, has resulted in over-capacity (read: excessive supply over demand levels) in almost every industry.

And if you believe Greenspan’s miracle theory, which envisions an infinitely growing and profitably balanced economy, then I have a bridge I’d like to sell you. I say that Greenspan’s “virtuous cycle of productivity” in our industry and economy becomes the “vicious cycle of productivity.”

The virtuous cycle assumes the ability to infinitely lower costs, driving ever-higher demand into infinity. Forget it. Forever is impossible in an over-competed and over-saturated world, where we don’t need more for less. Rather, we need less for more. Walmart is the perfect example for debunking the miracle theory. The virtuous cycle is indeed becoming the vicious cycle for Walmart, exacerbated by Amazon, as the “value vise” squeezes them both to death. Their margins continue to be dangerously squeezed because lowering costs forever is simply not possible.

And worse, even though we are perpetuating excess and turning the virtuous cycle into the vicious cycle, the creative destruction cavalry will not come charging to the economic and supply/demand rescue in time. Just as there is too much stuff, there is also too much liquidity/capital sloshing around the globe looking for something, anything, to invest in. These investors are going to two places: (1), either to what appears to be an opportunity to build more capacity; or (2), investing a lot of capital to prop up the losers, thus perpetuating the excess (read: Sears/Kmart, airlines, automobiles, and on and on).

For years the vicious cycle of bankruptcy has been used as a proactive strategy instead of a tactic for protective reorganization. Finally, there’s the China card. Barring an economic disaster, China will simply add exponentially to global over-capacity.

Another Perspective on The Downward Vortex of Value

Supply and demand, as manifested by producers and consumers,has a historical perspective on how value was defined… and how it has devolved.

A friend and colleague of mine, Doug Rossiter, described Great Britain as a potential precursor of where we are headed: “Remember those fine English woolens, bone china, Sheffield steel knives and other great British stuff? That’s the future for us when we’ll remember ’55 Chevys and Levi’s jeans” (no disrespect intended). But that sure is a stark comparison of two different benchmarks of value, and how consumers, over time, are lowering their expectations of value.

It was not that the taste, style or quality levels of those earlier consumers, AKA value measures, were higher. It’s that there was not as much choice. Consumers had to aspire to and wait until they could afford the best—if ever. Fortunately for those more needy folks, capitalism was in full swing and newly formed businesses fulfilled their needs with a much less valuable, but affordable copy of the Sheffield knife. This was the good news of capitalism.

So is it possible that consumers today actually prefer moving down the value chain rather than up? Inherent in that question, do they also prefer consuming value over producing it? Over 70% of our GDP, and rising, is consumption. It also begs the question: Do consumers really prefer quantity over quality?

Heavy questions, aren’t they? It becomes increasingly apparent that we continually seek the lowest common denominator, which is price and quantity over quality, style and taste. And if the over-competed supply side is perpetually driven to compete on that level, doesn’t this vicious cycle of productivity in fact drive a self-perpetuating, never-ending downward vortex?

This cycle feeds on itself. Consumers wanting more, more, more, and the economies of the entire world dependent on feeding the “beast,” drive volume output versus higher levels of value. Which in turn, drives lower costs of production and wages, and then drives the pursuit of cheaper, cheaper, cheaper, which then ultimately drives the whole standard of living lower and lower.

Our current form of capitalism “on steroids” intensifies in the race for profits over time on a global basis. Because there are many more needy consumers than well-off consumers, production of the less valuable copies of all goods and services becomes pervasive. Most consumers begin to view those copies as their gold standard.

On the supply side, with growing pressures from Wall Street for growth in a slow growth, over-competed economy, producers opt for the path of least resistance, which is a high volume/low cost value equation. This perpetuates the continual downward redefinition of what the gold standard is for all consumer groups. Downward examples proliferate. Designers including Lagerfeld, Stella McCartney, and Michael Kors have chosen down-tier distribution as their paths for growth. Luxury retailers are opening up more outlet stores than full-line stores; and well-heeled consumers are pragmatically seeking bargains across the discount sector of stores and websites.

And back to the supply side. What about the workers and producers of value? They seem to be willing to accept lowering their own value. A quick example: A few years ago, an article in The Wall Street Journal reported that Toyota, Nissan, and Kia Motors were actually recruiting engineers for their plants in Detroit.

What irony! GM was heading towards bankruptcy at the time,largely because it couldn’t compete on costs. And why is it that the Asian producers can operate on lower costs in this country?Because American engineers, either fresh out of an American school or freshly terminated at GM, will work for Toyota for lower wages and benefits than their predecessors. Thus another measure of self-value gets ratcheted down. A study cited in a Times editorial by Paul Krugman also confirmed much of the speculation that Walmart does, in fact, lower total wages in certain areas where it locates its stores. Settling for less is becoming the norm.

The Path to Recapturing Real Value

How do we escape this downward vortex? How does this nightmare of a perpetual downward-motion machine get turned around? After all, the dream of great value is never having to be “marked down.” It starts on the supply side, with your business. First, you must redefine your business and growth objectives based on the potential value desires of your consumers, not on the financial goals of your shareholders and Wall Street.

As I have so often repeated, when your business is held to a performance measure of double digit growth in an economy growing a mere 3%–6% at best (and currently at about 2%), don’t you honestly believe that you tend to over-obsess reaching those numbers? Don’t you really believe that you begin to make short-term decisions that enable you to make those numbers, rather than making the often tougher and less revenue-generating longer-term strategic decisions for sustaining competitive advantage?

If your answer is yes to those questions, then you’d better think about what you and your company are doing. You, and therefore your company, are actually reducing the value of your entire business proposition because you are not focusing on why your business exists. In truth, it exists to create value for consumers, who in this scenario are slammed into second place. They only have lower value to choose from, thereby perpetuating the downward cycle. So that’s what I mean about the fundamental and imperative first step of redefining your business and growth objectives. This translates to creating whatever higher value you are capable of providing for your consumers, even though it may be offering potentially fewer products. But this will inspire them to reach up and pay more for less, rather than reaching down and paying less for more. If you can do this, your higher margins can be used to reinvest in the business, including higher levels of innovation and all other value-creating functions, as well as hiring a higher caliber of employee, whose higher wages will allow them in turn as consumers to reach up and pay up.

Value First

Perhaps this is just one small step, but when aggregated can begin to reverse the perpetual-downward cycle of marking down the value of our lives. However, the real profound lesson for all who are not yet blind, is the incredibly difficult nuance of being able to fully comprehend the idea of redefining your business and growth objectives, not on the numbers, but on value creation itself.

Many years ago, my mentor, Rob Gregory, at the time President of the VF Corporation, asked the burning question: “Why do you think all annual reports begin with a review of the financials?” His response, and I may be paraphrasing after all these years: “In a perfect world the numbers would not be up front. We would all understand that we are in the business of creating superior value for our consumers first, and following the successful accomplishment of that, the numbers would follow and would be in the back of the report where they belong.” So, my friends, the dream that I’m hoping for is of a perfect world where great value will never be marked down; that your company will reach up instead of down; and finally that consumers will reach up instead of down.

This is an attainable dream, but we all have to make it come true together. Let us live long and prosper.



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