"Let's start at the very beginning.
A very good place to start.
When you read you begin with ABC.
When you sing you begin with Do, Re, Mi... "
Rodgers & Hammerstein, "The Sound of Music - Do-Re-Mi"
There is great wisdom found in unlikely places, like in a simple song lyric. Applying the wisdom of Rodgers & Hammerstein to the free market / capitalistic system of human interactions, returning to the very beginning can be a very good place to start. Value. That's the very good place to start. The fundamental concept of a market is value. The fundamental activity of a market is to create value. Adam Smith in his treatise "An Inquiry into the Nature and Causes of the Wealth of Nations" summarized the process of creating value in market systems as an invisible hand, guiding the self-interest of participants to create value (wealth) and benefit for others. Whether or not the hand is invisible, the key activity of a market system is to create value for others. That's where all strategic thinking about business (and many other facets of human life) begins: create value.
Funny thing, value is a difficult idea to pin to the wall. In the research world, a construct is an abstract idea about a characteristic or quality of something that is inferred from measurements of simpler things. Value is a construct that is often measured by how much a person is willing to trade, willing to pay. Money is simply a measurement of the underlying, subjective value attached to a trade. Money is not value. The size of the house is not value. The speed of the car is not value. The taste of the coffee is not value. So, what is value? Value is what a person believes will make life better in some way. It varies from day to day, even within one person. It is different for you as compared to me. It is a moving target in the market. Still, it is at the very core of the market. It's the very beginning.
To create value means you must hit that moving target of value, that intangible moving target that is rolling around inside of other people's heads. Miss the target and your efforts to create a viable product or service are wasted. Poof... gone. You have consumed value in the process of trying to create value, and that consumed value has been wasted. Those expenses you incurred, that time you invested, the opportunities foregone as you tried to create value in the market... that was value that was consumed. You ate it. Now it's gone. You missed the target.
Even if you hit the target, if you used more value than you created, you are "upside down" with costs (a measure of value used) higher than revenues (a measure of value created). You won't be able to stay in business being upside down for very long. Once your store of value from which you are drawing is gone, then your business is gone.
Here's the nugget of truth and wisdom inside that confusing shell of all the ways things play out in the market: You must create more value than you consume. That's it. That's the Do-Re-Mi of the market. Do that and everything comes together in a wonderful, tuneful way. Or as the song says, "When you know the notes to sing, you can sing most anything."
Posted on Wed, December 6, 2017
by David Flint