What is organisational value?
- Ade McCormack
- 3 days ago
- 4 min read
Value and values
Firstly organisational value is not the same as organisational values. But there is a link:
Values drive behaviour.
Behaviour determines outcomes.
Outcomes create value, ideally.
Organisational value is the net benefit an organisation creates by virtue of its existence.
In business, this value is most often measured in financial terms. Traditionally if the organisation was generating more revenue than the cost of the resources it consumes and the cost of keeping the organisational operational, then it was creating value.
Why it matters
As the world becomes more disruptive and everything increasingly impacts everything then looking at value in solely financial terms is not enough. Shareholders may well be delighted with the organisation’s profitability, but if the profits are generated at the expense of the employees’ / consumers’ health or at a cost to the planet then the organisation is destroying value in order to please shareholders.
Those responsible for global accounting standards are not particularly interested in value beyond profitability and saleable assets, eg. machinery, property, land. Shareholders care deeply about market capitalisation as that is a representation of what their shares are worth.
It is the value an organisation creates that leads people to believe it is worth more than the cost of building and operating it. The deeper question is this: once you subtract the assets recorded on the balance sheet, what invisible assets account for the remaining value?
The common misunderstanding
The general belief is that the organisation’s brand explains this difference. So a luxury brand can command a premium price by building factories staffed by low paid workers using materials that may or may not be of good quality. With enough lifestyle advertising some people will pay a premium for anything.
The luxury goods market is not exceptional so much as exceptionally adept at exploiting human behaviour. Yet, beneath its glossy veneer, it remains an industrial-era business model.
So whilst a large part of a luxury player’s value is in the brand, there are other important considerations:
Governance – Governance is becoming increasingly important as consumers pay closer attention to where raw materials come from and how products are made. Intelligent organisations turn provenance, transparency and thus responsible governance into distinguishing features of their brand. Internally, they also recognise that good governance is not synonymous with centralised control, giving front-line employees the autonomy to respond to opportunities and resolve issues without having to seek approval from headquarters.
Creativity – Luxury brands are known for their high standards in respect of creativity, whether that be flamboyance or elegance.
Stakeholder value – Like most industrial-era organisations, luxury brands have a sophisticated understanding of shareholder value and of how consumers perceive value. Many also create benefits for employees and the communities in which they operate. Even where wages are modest, providing stable employment can make them the employer of choice within a local community. Yet this value creation is often unevenly distributed. The use of environmentally damaging materials, such as precious metals and exotic animal skins, together with carbon-intensive global supply chains and excessive packaging, can impose significant costs on society and the natural environment.
I’ve used luxury goods purely as an example to highlight how value is created and destroyed. All organisations can be scrutinised through these lenses. These lenses do contribute to brand perception, but that is a by-product rather than their primary purpose. In any case, if they contribute to a favourable perception of the organisation, then for all intents and purposes they are assets.
The Intelligent Organisation perspective
Intelligent organisations behave like living systems, rather than factories. They are financially prudent but are less focused on profitability and more focused on growing assets, given that a focus on profitability tends to drive short-term thinking. Such thinking creates a pressure to ignore weak market signals in order to hit the quarterly / annually numbers. So the traditional organisation’s first response is often too little and too late.
A focus on growing assets requires longer term thinking but is more likely to enhance the organisation’s viability. Intelligent organisations focus on the following assets:
Financial – Surplus cash makes radical innovation possible.
Brand - Remains important, but it is recognised that throwing money at advertising is not the way forward.
They also focus on::
Governance capital – Being able to demonstrate that the organisation can operate responsibly and adapt in line with a volatile market. Leadership and risk management are key elements.
Stakeholder capital – Looking beyond shareholders to the wider ecosystem of suppliers, employees, regulators, professional bodies, communities and the planet. These relationships are also a source of innovative ideas for your organisation. Whether we like it or not, we are part of at least one ecosystem. An ecosystem that can sense, decide and respond to the environment in a manner that benefits all parties is more likely to thrive.
Cognitive capital – Cognition is the fuel the drives innovation. This cognition comes in two forms, people (natural intelligence) and technology (AI). There is great attention given to AI today. Intelligent organisations create environments in which their people can flourish using AI to augment their performance. Cognitive capital provides the creativity that makes innovation possible.
These three asset classes are generators of value. It will be some time before they show up on the balance sheet. Without getting into detail, it is less about your organisation’s unique relationship with a big client or the fact that you have a star player in your team. It is more about the systems you have in place to acquire and nurture these assets.
Whether you are a business, government or charity, your viability depends on the value you provide to others. As the world becomes more unknowable, your brand value will be determined by the extent to which you can demonstrate that your:
Governance model reflects reality
Stakeholders have your back
Core business is innovation.