Abstract
Abstract
The purpose of this article is fourfold.
The first is to get practitioners and academics understand the value of a value destruction focus. How can it improve value creation? This is a brand new area that has not hitherto received much attention.
The second is to get practitioners to use this thinking more actively in building their strategy, operational thinking, compliance thought process and regulatory and political (environmental and external) thinking.
The third is to open up a new area of research for academics who work on various subjects where value creation is a goal or is important. Perhaps they can analyse past failures and come up with recipes for greater value creation and a process for analysis before committing to a path of action or they can find better processes for looking at, designing, developing or monitoring strategy, new products and services, new technologies and new operational thinking. What new tools can be developed to analyse or mitigate value destruction or simply foresee these? This should also open a debate and papers in Journal of Creating Value and perhaps lead to a special issue. What techniques can be used to change managerial mind-sets.
Finally and fourth, the aim is to get away from reactive and ‘after-the-fact’ analysis to proactive value creation and reduce value destruction and learn from value destruction potential.
The typical value destruction analysis if done is based on a cost-benefit analysis. No attempt is made to go beyond this into critically examining other possible value destruction potentials of the strategy or the new product or idea and thinking through how to innovate or strategize using this value destruction analysis to create more value.
Many companies analyse value destruction after the fact. Very few try to assess value destruction potential of a new strategy, a new product, a new technology or even a new hire, when they are looking at these. In the literature, the bulk of the papers are on analysing value destruction after the fact.
The exception is Dann, Merle, and Pencavel (2012) who discuss strategic risks to be studied upfront and Farquhar (2014) who suggests selective demarketing to get rid of non-attractive customers. Stokes, Mahajan, Lucas, and Hughes (2018) discuss value creation and destruction in general terms.
Were organizations and the managers within them to do so, they would be able to avoid or reduce the value destruction potential and in fact create much more value. Many companies learn their lessons or become smarter from analysing value destruction that has already happened. This is the normal way companies have viewed value destruction.
In this article, we suggest a hardly used technique: using, exploring, understanding and evaluating value destruction possibilities to create more value. What we suggest is that during and after a strategy session, or a review of a new project or a new product or service introduction, one should hold a session and ask: In what way will this strategy, project, product or service destroy value for me, my company, my customer, my employees, my partners, my society and so on or what is the potential for value destruction to be there.
The aim is to carry out an in-depth analysis of possible value destruction. Understanding the causes of value destruction or possible value destruction, one would then analyse how one could avoid such value destruction and actually create more value. Looking at solutions that are generally accepted and asking how they might destroy value can help us figure out better and more value-creating solutions. As an example, Sanghvi, Balaji, Wohner, Schupp, and Durach (2016) suggest that just reducing value by destroying waste is not enough.
An Example: Strategy
Shareholder value destruction over 10 years showed that strategic risks were major causes of shareholder value destruction. This is because the strategic team does not look at risk and relegates this task to a risk evaluation team that does not have the ‘clout’ to change thinking. We would like to expand this value destruction thinking beyond risk and shareholder loss but also to other potential problems. The example of smart lighting highlights this and is discussed later.
Fabode (2017) talks about how strategic digitization (his focus is on virtual energy companies) destroyed value for General Electric (GE).
Atasoy and Care (2017) state that strategically designed digital goods get lower prices than physical goods and warns about digitization.
Willgoose (1965) discusses value illness which prevents citizens from following the right things. Value starvation can also cause similar problems.
Liedtke and Young (2017) find that value can be destroyed in mergers and acquisitions, even though moves are strategically thought through.
Along with pure strategic thinking, we have to also look at operational risk, compliance risk, political and regulatory risk. We are suggesting that this should not be done in a cursory fashion and that these risks have been looked at; what the company’s leaders can do to mitigate these risks, reduce value destruction potential and increase value creation potential (Dann, Merle, & Pencavel, 2012).
The point is such value destruction should be foreseen and tackled in a serious manner.
One such thinking should be the impact of competitive disruptive moves. Companies should therefore embed value destruction and risk, operational and regulatory and political risk in their thinking. How could these happen? What can we do to prevent these from happening? In what way should our strategy change to reduce value destruction?
As an example, in earlier decades, we had business development people who were rewarded for bringing in new businesses. Many of them never worked on the new business they brought in but were rewarded and moved on. I asked CEOs whether they rewarded business development executives for keeping them out of bad businesses. Most had not thought of this value destruction potential.
An Example: Smart Cities
Smart lighting: It is vastly understood and appreciated that smart lighting is the accepted approach for smart cities. While we agree, we also wish to examine what this means in terms of physical infrastructure. The typical way of using smart lighting is to put poles on roads and have lights that turn on when needed. This is all value creating. What is potentially value destructing is the following.
Physical infrastructure is used less than 10 per cent of the time. The cost of poles and the space required can be high. This is value destroying. So if we assume there is potential value destruction what can we do? We could think of replacing pole based lights by light-mounted drones. Conceptually 50 poles could be replaced by a smaller number of drones.
The next thought is to look at using flying phones that can hover above the person walking, supplemented by fewer drones. Flying phones would belong to citizens and therefore a smaller drain on the exchequer.
Physical transportation: Smart cities imply improvement of the well-being of (or creating value for) citizens. Just giving sensor-based information is not enough. Value is destroyed because people have to live sometimes far from their place of work or schools or airports (and other transport hubs). One common example is moving from point A to point B in normal times and in times when tourists arrive in large numbers. The normal ride could be 20 minutes, but in the tourist season, it could take as long as 2 hours. Perhaps a system of driverless cars and networked transportation or a ropeway is the added value over just better information. For example, the use of tubular transport as suggested by Elon Musk is important.
People skilling: The next potential for value destruction in smart cities is that we do not have ‘smart’ workers. Most current workers are untrained for this. This is a form of value destruction for the smart cities programme and so these people should be skilled. For example, drone-handling skills, driverless car management skills and so on are needed. Next, sensor handling and sensor troubleshooting may be needed. Therefore, skilling academies are needed. Responsive urban governance should result in smarter value creation.
Self-healing and self-powering systems: Sensors and other devices can detect cracks or defects in concrete structures or in offices/homes. An analysis of this will reveal that this requires intervention by humans to repair these defects. Perhaps, if we could use bio-concrete to self-heal cracks in concrete, we could create even more value. Finally, biomaterials have a great future. These include self-healing polymer building materials, graphene and the like and buildings that can change with temperature or self-adjusting buildings.
Further analysis may show that energy loss or where energy is not easily available, self-powering systems use could add more value and reduce value destruction due to power loss. For example, solar power generation through solar layers on windows could add value.
Value destruction due to insolvency: The Indian Government brought in the Insolvency and Bankruptcy Code 2016 to make insolvency easier. An example of possible value destruction is given below. The potential for value destruction could occur if all the claimants were allowed to decide on the future of the company. Assured claimants would want their money fast and to not worry about value destruction to the company’s net value. To avoid value destruction of this sort, strategically only those claimants who have a significant stake and risk in the well-being of the company should then be allowed to decide the fate of the company. Thus people who design the law from a value creation (or least value destruction) point of view would have designed the law differently (Datta, 2016). Value destruction due to short-term focus: It is well known that short-term results and its reporting are causes for value destruction in firms. A look at the value destruction potential would point out that companies must adopt a long-term view of their business, but the focus on stock prices and investor short-term gains obviates that. CFOs are encouraged to gain or manipulate numbers through accounting practices allowed under Generally Accepted Accounting Principles (GAAP). Retail investors are more long-term investors, and they are short changed by this thinking (value is destroyed for them). A proper study of value destruction would reveal that this practice has to be changed. An example is what Paul Polman of Unilever did … he told his shareholders he would only concentrate of long-term results and not short-term gains, and the result was spectacular for Unilever. Value is destroyed in yet another way by short termism; lower returns mean lower investment which hits the entire society (Graham, Harvey, & Rajgopal, 2006) Value creation and destruction of society from technology and artificial intelligence (AI): While this is the topic of a Journal of Creating Value (JCV)-sponsored conference with University of Kobe and Japan Advanced Institute of Science and Technology in Kobe, Japan, 15–17 October 2019, it is germane to point out that technology development outpaces its absorption by society. Society is unable to adjust to technology quickly enough, causing short-term value destruction. In the long run, the danger of technology overtaking and controlling society is very real. Such value-destroying potential must be mitigated and reduced by strategic thinking by the owners and designers of technology and the designers of the recipient society and all of us, in general. Value creation/destruction of plastic bottles: Continental Group introduced the one-piece plastic bottle as a source of large packaging (1l, 2l) for beverages. When they started work on the smaller sizes (half litre or less), the can-making part of the business complained of value destruction for cans because plastics could possibly take over some of the market from cans. The corporate strategy team examined this and found that some minor cannibalization was possible and a risk to the growth rate of cans. On the other hand, they found that the company could not stop the proliferation of bottles, because this would happen due to competition. Maximum corporate value creation would come from aggressive plastic bottle introduction by the company and also by looking at upsizing cans to larger sizes and re-sealable metal bottles. Unfortunately, no one looked at the value destruction of the environment due to plastic waste. The risk analysis revealed that the risk would be minimal (meaning legislative and environmental) in the short term and would not act aggressively enough early on, till the problem became unavoidable. This is a classic case of value destruction. The only analysis done was to look at the current two-piece bottles suggested by competition. This is a PET (polyester) bottle with a round base, which is relatively easy to make but it cannot stand. A base cup made of polyethylene has to be adhesively attached to the round based bottom of the bottle to make it stand. This analysis suggested this two-piece bottle is difficult to recycle because of the adhesive and different plastics that are being used. The value creation aspect was to design a one-piece bottle, which was self-standing and required no base cup. Subsequently this one-piece bottle became the industry standard. The computer in the cockpit: The Economist (2019) and The Times of India (2019) based on the Boeing crash in Ethiopia in March 2019 talk about aeroplanes flying in autopilot and with automated systems. Humans struggle to cope when automation fails. What this means is that strategically and operationally we are working on automating transport systems and are training people in automation.
A study of this shows there is a value destruction potential. This can be reduced by thinking through the following.
What do pilots do when automation fails or plays up?
How do we train more manual controls in addition to the new training on computer control? Today pilots spend more time learning automated systems and less time on hands-on flying. Newer pilots who are more comfortable with automated systems cannot handle manual systems as effectively as older pilots.
What is the optimum manual-automated control? Which one should override the other and when?
The perils of the human-machine interface can then be reduced. Note that perhaps a cost-benefit analysis showed that the current system is acceptable. Studying the value destruction aspect would cause better training and operating techniques to emerge.
Discussion and Conclusion
From a reading of the foregoing, and the examples shown, it becomes abundantly clear that the design and a pursuit of a new strategy, process, product and service looks predominantly at the positive value creation for the company or the people in control. Most do not pay heed to the value destruction potential, or even ignore this or in their minds minimize its impact. Much of this impacts primarily third parties such as citizens, customers, employees (loss of jobs) and society.
However, from a corporate viewpoint, potential value destruction studies and analysis during the design process could have revealed better design, better processes, more effective services and more pervasive products. This includes risk analysis, compliance studies, operational analysis and environmental and societal thinking. This is a loss to the corporate entity. Companies can benefit themselves and their stakeholders including society from such analysis before the fact, rather than suffering after the fact or causing value loss to people and society and for the company itself.
In conclusion, this opens up the possibility of better value-creating strategies. This means a different way of thinking and a more reasoned solution. This has to be taught and embraced by practitioners. This becomes a fertile area of research for companies and academics to analyse value destruction potential to create more value.
Pablo Picasso said, ‘Every act of creation is at first an act of destruction’.
Declaration of Conflicting Interests
The authors declared no potential conflicts of interest with respect to the research, authorship and/or publication of this article.
Funding
The authors received no financial support for the research, authorship and/or publication of this article.