The Progress Economy

If value is so important, why can’t anyone agree what it is?

The reality is less clear.

One of the earliest and most influential discussions of value comes from Adam Smith. In The Wealth of Nations (1776), Smith distinguished between two forms of value: value-in-exchange for(power of purchasing) and value-in-use (the utility of an object).

The word value, it is to be observed, has two different meanings, and sometimes expresses the utility of some particular object, and sometimes the power of purchasing other goods which the possession of that object conveys. The one may be called ‘value in use’ the other, ‘value in exchange’.

Adam Smith (1776) “Wealth of Nations”

Smith famously illustrated the distinction through what later became known as the diamond-water paradox.

The things which have the greatest value in use have frequently little or no value in exchange; and, on the contrary, those which have the greatest value in exchange have frequently little or no value in use.

Nothing is more useful that water: but it will purchase scarce anything; scarce anything can be had in exchange for it.

A diamond, on the contrary, has scarce any value in use; but a great quantity of other goods may frequently be had in exchange for it.

Adam Smith (1776) “Wealth of Nations”

The paradox highlights an important observation. Utility and exchange are not the same thing. What is most useful is not necessarily what commands the highest price.

Karl Marx later built upon this distinction, separating worth from exchange value:

in English writers of the 17th century we frequently find worth in the sense of value in use, and value in the sense of exchange-value.

K Marx (1886) “Capital: Vol 1“

Even today, this duality remains visible.

The Oxford English Dictionary defines value as both the monetary worth of something and its usefulness, importance, or desirability. The definition quietly combines both traditions into a single concept.

the material or monetary worth of something, or its general usefulness, importance, and desirability

Oxford English Dictionary

Much of modern management thinking, however, has gravitated towards the exchange side of the equation. In practice, value is often treated as a monetary construct.

McKinsey’s Golub and Henry capture this view succinctly:

A product’s value to customers is, simply, the greatest amount of money they would pay for it.

Golub, H., and Henry, J. (1981) “Market strategy and the price-value model” via “Delivering value to customers”, McKinsey (2000)

This definition has an obvious attraction. It:

• is measurable
• allows managers to connect value directly to price, demand, profit, and growth, and
• aligns naturally with the industrial economy that shaped much of modern management thinking.

Yet beneath this apparent simplicity lies a problem.

Once we move beyond price, value fragments into a remarkable number of competing interpretations. Marketing and consumer research alone discusses:

use value, exchange value, aesthetic value, identity value, instrumental value, economic value, social values, shareholder value, symbolic value, functional value, utilitarian value, hedonic value, perceived value, community values, emotional value, expected value, and brand value

…are examples of different notions of value

Karababa, E. & Kjeldgaard, D. (2013). Value in marketing: Toward sociocultural perspectives. Marketing Theory. 14. pp 119-127.

As Karababa and Kjeldgaard further observe, these concepts are “frequently used without having an explicit conceptual understanding in marketing and consumer research”.

The result is that value becomes simultaneously important and ambiguous.

Researchers have struggled with this problem for decades. Woodall describes value as “elusive”. Grönroos refers to it as “a concept that is difficult to define”:

Anderson and Narus found that many suppliers were unable to answer even basic questions such as:

remarkably few suppliers in business markets are able to answer…[questions like]…’How do you define value? Can you measure it?’

Anderson, J. C., & Narus, J. A. (1998). “Business marketing: Understand what customers value.” Harvard Business Review, 76(6), 53–65.

Across strategy, marketing and customer-value research, value is variously discussed in terms of creation, capture, stakeholder perception, customer judgement and many other interpretations. 

Perhaps the strongest criticism comes from Grönroos, who concludes that value creation is probably among the most ill-defined concepts in management.

Although value creation probably is among the most ill-defined and elusively used concepts in service marketing, and in management in general…the expressions value creation and create value are frequently used in the literature.

Grönroos, C. (2011). Value Co-creation in Service Logic: A Critical Analysis, Marketing Theory 11(3), pp 279.301

The (concerning) implication

This creates a curious situation.

Strategy, innovation, marketing, sales, customer experience, and service management all place value at the centre of their thinking. Yet there is little agreement about what value actually is.

The challenge is not that value is wrong. Clearly it has been enormously useful. Value-in-exchange thinking helped underpin centuries of economic growth and remains one of the most powerful ideas in management.

The challenge is that value often functions as a label rather than an explanation.

When managers say they want to create value, improve value, capture value, deliver value, or co-create value, they frequently mean very different things. The language creates an impression of agreement while masking substantial differences in interpretation.

If the central concept guiding strategy is difficult to define, difficult to measure, and interpreted in multiple ways, then strategies built around that concept risk inheriting the same ambiguity.