Tuesday, December 23, 2008

The diverse sources of value

Value sources exist in multiple places within an organization, many times by design and many other times, simply by chance. These value sources can broadly be classified as

• Localized value source – a competency that exists entirely within a single department e.g. the paint shop inside an automobile plant. A high quality paint shop would have the latest painting equipment, workers highly trained in the use of such equipment and relationships with suppliers of high quality automobile paint among other things. This paint shop is equipped to undertake high quality paint jobs within six sigma levels of quality tolerance norms, each and every time.
• Centralized value source – a competency that is located centrally by design and serves the needs of multiple departments in the company e.g. the purchasing department of a retail chain. Such a department will be staffed with personnel who are experts at designing tenders, have acceptable selection and rejection processes as well as long term relationships with suppliers of repute. This department is equipped to create value to the organization and the customer by buying the best quality products at the lowest price.
• Scattered value source - a competency that exists in various pockets of the company and is brought to bear during times of need by those who are aware of its existence e.g. the presence of creative personnel with movie making skills in an advertising agency that specializes in outdoor print media. Such personnel may be over qualified for the job; nonetheless they possess value that can be leveraged during times of need by people in the company who are aware of their special skills.
• External sources of the first order – External competencies reside outside the organization and are activated due to networking effects. First order sources are those where the company is in a position to say ‘We don’t do this job but know someone who does it very well’.
• External sources of the second order – These are external sources of value where the company knows someone who knows someone else who can get the job done. In a world that is enamored with outsourcing low value-add activities, the ability to nurture and activate external sources of value is a highly critical competency.

Understanding the diverse sources of value enumerated above is simple enough. The challenge lies in identifying, measuring, valuating and reporting such value sources to stakeholders. Traditional means of reporting such as the Balance Sheet and the Income statement are designed for reporting financial value only and are woefully inadequate and lacking when it comes to reporting intangible value. This situation calls for the use of an IC Report.

An IC Report is a statement of the change in intangible assets of the company linked to the core competencies that create value for the company. Not only does the IC Report highlight the strategic core competencies of the company but it also valuates the same in monetary terms. This enables investors, especially long term investors, to determine the sustainability and future potential of the company. It also enables the Company’s management to stay focused on the areas of its strength and to take such actions that consolidate and grow such competencies.

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