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 Dunn et al who discusses strategic risk to be studied up front. Furquhar suggests selective demarketing to get rid of non-attractive customers. Stokes and Mahajan discuss value creation and destruction in general terms. Were organizations and the managers within them 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 are suggesting 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 asking: In what way will this strategy, project or product or service destroy value for me, my company, my customer, my employees, my partners, my society etc. or what is the potential for value destruction to be there, even if the destruction is a non-optimal solution.
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 et al, 2107 suggests that just reducing value destructing waste is not enough.
An Example: Strategy
Shareholder value destruction over 10 years showed that strategic risks were a major cause 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 to beyond risk and shareholder loss, but also to other potential problems. The example of smart lighting highlights this and is discussed later.
Fabode shows how strategic digitisation (his focus is on virtual energy companies) destroyed value for GE, as virtual companies reduced demand for GE’s generating equipment.
Atasoy found that strategically designed digital goods get lower price than physical goods, and warns about digitisation.
Willigoose discusses Value Illness which prevents citizens from following the right things. Value starvation can also cause similar problems.
Liedtke states that value can be destroyed in mergers and acquisitions, even though moves are strategically thought through.
Along with pure strategic thinking, we have also to look at operational risk, compliance risk, political, operational and regulatory risk. We are suggesting that this should not be done in a cursory fashion and just stating these risks have been looked at is not good enough, but to see what the company’s leaders can do to mitigate these risks, reduce value destruction potential and increase value creation potential. Chris Dann of Price Waterhouse uses strategic risk to reduce strategic value destruction and create better value
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
1. 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:
a. Physical infrastructure is used less than 10% of the time. The cost of poles and the space required can be high. This is value destruction. So if we assume there is potential value destruction what can we do? We could think of replacing pole base lights by 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.
2. Physical transportation: Smart cities imply improvement of wellbeing 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.
3. 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 program and so these people should be skilled. For example drone handling skills, driverless car management skills etc. are needed. Next sensor handling, sensor troubleshooting may be needed. Therefore skilling academies are needed. Responsive urban governance should result in smarter value creation.
4. 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 of bio-concrete to selfheal cracks in concrete we could create even more value. Lastly, 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.
There are other examples we can focus on:
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 not worry about the 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 is a cause 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 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.
Value creation and destruction of society from technology and artificial intelligence (AI): While this is the topic of a conference with University of Kobe and Japan Institute of Science and Technology in Kobe, Japan, October 14-16, 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 are 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.
Lastly, one value destruction potential of AI systems is when they do not respond to human commands. It might be possible to install a self-destruct system to circumvent such value destruction possibilities.
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 some minor cannibalisation was possible, and a risk to 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 looking at upsizing cans to larger sizes and 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 would not act aggressively enough early on, till the problem became unavoidable. This is a classic case of value destruction.
The computer in the cockpit: The Economist and the Times of India 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 show there is value destruction potential. This can be reduced by thinking through:
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 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, 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 minimise 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 service and more pervasive products. This includes risk analysis, compliance studies, operational analysis, 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. We must get away from reactive and ‘after the fact’ analysis to pro-active value creation and reducing value destruction, and learning from value destruction potential.
1. The author acknowledge that Shep Hyken gave permission to use this cartoon from his article: LOOK PAST THE OBVIOUS FOR A BETTER SOLUTION