What the ancients knew.
An enduring principle that can help rescue the economy.
From a distance it looked like an ordinary broken stone. But when farm manager, Adrian Sutton, got closer, he realised that the piece of rock surrounded by cobbles of different sizes, was not shaped by accident. Its symmetrical design formed an axe-head that could fit into a large hand. It was later identified by experts as having been made during the earlier Stone Age between about 400,000 and a million years ago. They are often found in old river gravels, in this case between the Breede River and the Langeberg Mountains to the north; where the cobbles that were rounded by the natural tumbling action of water over millions of years were left on terraces above the river as it cut deeper into the valley.
The prehistoric creature that shaped that axe-head so long ago was one of the earliest manifestations of a social principle that has endured for millennia – that of adding value. The difference between the original rounded stone and the axe-head, and the time, effort and purpose it took to make it, represents value added for his or her particular circumstance. That principle has shaped the destiny of our species and remains the key underlying force that accounts for progress and the difference we make to others lives. It was only a small, but highly significant leap for those ancient creatures to start making such implements for each other, creating a powerful force of social co-operation and cohesion. Exchange and barter was a natural consequence of that, and soon a means of exchange, or money, was developed to ensure smooth transaction.
And so we can draw a direct line between that axe head and everything that underpins all of the complexities of our modern co-existence.
It is no coincidence that the more we have moved away from adding value as the supreme principle of creating wealth and generating prosperity, the more we have created distortions and arguably many of the critical problems modern economies are facing. These include over-financialisation and the ability to accumulate wealth through rental income; contamination of price discovery through overwhelming speculative and derivative markets; critical levels of inequality and the growing displacement of labour as a significant contributor to and beneficiary of wealth distribution, which in turn feeds market demand.
The supremacy of the value-added driver over any other such as profit-maximisation; shareholder value or even standard productivity measurements is its three dimensional nature and broad inclusivity. These are: transformation; measurement and intent.
TRANSFORMATION: Common understanding of value-added is restricted largely to its physical transformative nature – in other words changing one item into another that is more useful – like a stone into an axe-head, or gold into jewelry. But of course it applies to changing situations or circumstances a well, such as retail, distribution and entertainment. What is mostly lost sight of is that value is always determined by the end user, and without a very determined focus on making that the purpose of transformation, value creation is restricted – in some cases even destroyed. One could apply the same argument to South Africa’s Radical Economic Transformation policy.
The transformation dimension of value-added is a far superior and robust productivity enhancement tool than the standard cost accounting approach. This is because it embraces not only scientific measurements but also subjective criteria that speak to meaning, or the meaningfulness of the transformation itself. Everything has to be tested against usefulness to the end-user, not merely to the agent or provider. That approach keenly questions much of wasteful assets and actions. A conservative and intense interrogation of any expenditure or action that asks “what difference will this make to our customers?” quickly shows red-flags of unnecessary and wasteful activities. The less clear the usefulness can be defined, the bigger and brighter the flag should be.
Long held assumptions, such as ostentatious head-offices, huge ad-spending, lavish executive benefits, and even many of the employee fringe benefits should not remain holy cows. I have for some time held a rather contentious view that the adage that “happy employees make for happy customers” is demonstrable nonsense. It should be reversed to say: “happy customers make for happy employees”, especially if customer satisfaction is linked to employee benefits triggered by improvements in the value-added measurement.
MEASUREMENT. I have dealt with this at length in previous articles covering the Contribution Account, which is a purified version of the value-added statement or cash-VAS, such as this one extrapolated for the mining industry.
It should be noted that benchmarks such as market pricing for labour and capital, or meeting the legitimate expectations of those constituents, are important in assessing the appropriateness of their share of wealth. This is especially useful in identifying trends over a certain time. What is perhaps less appreciated is the significance of using value-creation as a productivity test, especially in teams and divisions, sometimes even at individual level. This is becoming easier with enhanced data gathering and sensible norms of transferring costs. Techniques such as throughput accounting, are also useful.
Beyond measuring, the subjective assessment of usefulness to the end user should always be a key concern. This focus is by far the best method of engaging employees and other stakeholders in the destiny of the enterprise. It may be a useless exercise, but at every turn, companies should make this dimension of value added known to government, and perhaps do their own calculations on the bang for tax buck they are getting. It’s a good conversation to keep alive. Shareholders too, should become more acutely aware that profitability and sustainability go hand in hand with creating maximum value. This, and the role they can play, should be a key focus at shareholder meetings and in executive remits.
INTENT. The intention to create something useful for others is the whole purpose of adding value. Championing motives such as profit, wages, taxes, or any other self-gain as key drivers of wealth creation are counter-intuitive and detract from that essence. It’s an argument I have repeated many times over the years, and fits in with my understanding of humanity as being essentially empathetic creatures, and not the predatory cannibals often mistakenly attributed to Adam Smith’s view of humanity and depiction of the invisible hand.
Value-adding is at the heart of trade, innovation, evolution, competitiveness, social cohesion, progress and prosperity. It is powerful and simple. Adopting it in everything we do; as a life-style and purpose, is a near guarantee for success – at a personal, company and country level. If ancient creatures with limited cognitive capacity could understand that, then so can the modern child at a very early age.
And so they should. Because it is a principle that will add meaning to their adult lives.