Defining the Price of Everything

In March 2019 a business journalist for Inc. magazine questioned the value of a PhD degree.  In “Why PhDs don’t become billionaires,” Jim Schleckser laments the paltry earnings of doctorate holders.  I found the article to be highly illogical and nonsensical.  Most MBAs in the business world after all aren’t billionaires (but that doesn’t curtail ongoing applications to Business Schools).  Most PhDs aren’t even in business or management.  And becoming a billionaire is very unlikely the aim of most doctoral students anyway.  I chose to earn a PhD in Management because I wanted to learn how to think critically about business issues, how to ask the “right” questions about value chains, and how to research / answer fundamental problems concerning business value.  In today’s complex business environment, these skills are essential.  Therein lies the value of my PhD.

Value remains a popular subject in the business press (as it should be).  Writers describe the importance of monetizing information value (Gartner), identifying blockchain value (McKinsey), ranking customer value (Bain: B2B versus B2C), and capturing digital value (Harvard Business Review).  Now more than ever, it is essential to have a deep understanding of the concept of value.  More importantly, executives need simultaneously to manage multiple value perspectives across their organizations and value chains.

But whose definition of value  “wins”?  How is value best measured?  It’s revealing that Schleckser compared the “worth” of a PhD degree to its “price tag.”  In today’s hyper-competitive business world, we are pressured to quantify the price of everything so that we can justify the value of anything.  Price is now the most commonly used label for “worth.”  Market price has become the shorthand indicator of value.   Blind faith in market price, however, is unwise.

Value Considerations – Understanding Pricing Assumptions

Markets are useful indicators of price.  Financial markets though need to be continuously / actively traded and must reflect accurate information if price is to be a reliable indicator of value.  These two characteristics have sometimes been absent in financial exchanges.  Most financial markets now have “circuit-breakers” that shut down trading when excessive price declines occur.  These pauses were created to halt panic sell-offs and restore investor (buyer) confidence.  They were established in the 1990s because traders stopped trading – and markets became “thin” and illiquid – when large sales volumes from institutional traders flooded exchanges and caused huge price declines.  In the last decade, the financial crisis demonstrated the lack of compete and accurate information.  “Toxic” Mortgage Backed Securities ( MBSs ) and Collateralized Debt Obligations (CDOs) were not accurately priced to reflect the actual credit risk of mortgage holders and the rapidly declining market value of underlying residential real estate.  As investors / regulators recognized the mispricing of MBSs and CDOs, the worldwide banking crisis ensued which destabilized economies with enormous consequences.

“Imperfect” market prices, however, are not only the result of trading abnormalities.  They sometimes reflect information asymmetries – a divergence between “public” and “private” estimates of the “true” value of a company.  Management-led buyouts of companies generally occur whenever chief executives believe their “internal” estimates of the value of a company exceed (and are more accurate than) current stock market valuations, i.e. market prices.  Similarly, corporate take-overs (and value investing) are premised on the belief that current market prices underestimate the future earnings potential / sell-off value of a company / its assets.  A profit opportunity exists in the eyes of acquiring investors.

[Side note: The preceding examples presume no malfeasance.  After several corporate disclosure scandals required restating / reissuing multiple companies’ financial filings – the largest case being Enron whose executive had mislead shareholders using questionable financial practices — the US government enacted the Sarbanes-Oxley Act (SOX) in 2002.  SOX aims to prevent discrepancies between “public” and “private” estimates of a company’s true value.  SOX-type regulations were subsequently enacted in Canada (2002), Germany (2002), South Africa (2002), France (2003), Australia (2004), India (2005), Japan (2006), Italy (2006), Israel, and Turkey].  

In “The Nature of the Firm,” Ronald Coase asked why firms should even exist. If markets were efficient, as neoclassical economics posits, then an entrepreneur wouldn’t create a firm at all but would instead subcontract (outsource) all business activities.   This is clearly not the case: firms “internalize” certain activities while “externalizing” others.  Coase (1937) observed that it is extremely difficult / expensive to discover the “market price” for all goods and services.  It is also hard to write comprehensive enforceable contracts for many activities, so a company “internalizes” those costly activities to avoid incurring excessively large transaction expenses.

Coase received the Nobel Prize in Economics in 1991 for his groundbreaking work on Transaction Cost Economics (TCE).  According to TCE, firms internalize activities largely to eliminate the overhead of market price discovery.  Coase would therefore question the wisdom of writers, executives and consultants who advocate monetizing most, if not all, of a company’s internal activities.

Market price is not necessarily an easy nor an efficient indicator of value.  Market price can be based on multiple financial estimates.  Does it reflect the theoretical value of an asset (based on finance theory)?  Does it reflect investors’ (excessively exuberant) estimates of future earnings?  [Buyer beware — recall the “dot com” bubble!] Does it reflect economic value?  Pricing anything correctly is dependent upon a clear understanding of the concept of value.

Value Caveats – “Which value theory?  Whose perspective?”

I spent several years reading / thinking about economic, financial and accounting definitions of value for my PhD in Management.  Most references to “market value” are overly simplistic.  For example, there are multiple economic schools, each with its own value theory, i.e. definition of what constitutes value.  I summarized those schools for my PhD thesis as follows:


Which economic school of value theory is correct?  Which should executives follow?  Economists still debate this issue.

Even the accounting profession has multiple viewpoints on value.  Most financial statements are based on historical costs (i.e. purchase price).  Businesses, however, confront the limitations of historical cost accounting for management purposes, especially when “book cost” differs substantially from “market price.”  For this reason, companies have increasingly adopted Activity-Based Costing (ABC) to manage their internal operations more efficiently.  They are also using Total Cost of Ownership (TCO) to manage supplied inputs / purchasing decisions more effectively.

In an earlier article, I referenced Mazzucato (2018).  In her award-winning book The Value of Everything: Making and Taking in the Global Economy, she recounts the shifting boundaries of “value” in economics over the years. She describes the “fence problem”, i.e. the question concerning what is / should be included in / excluded from productive economic activity.  Cost accounting faces the same “fence problem” – what is / should be included in the definition of cost.  It is not a trivial issue, and one that is seldom addressed by most writers who advocate monetizing value.

The issue grows even more complex when executives include the customer’s definition of value and / or the definition of value used by their respective companies’ operations / manufacturing / production workers.   In another earlier article, I noted that Lean Thinking asserts that the ultimate customer determines whether a company’s activities have value.  All company processes /activities can thereby be classified as VA (value-adding), NVA (non-value-adding — to be eliminated immediately) or NNVA (necessary-but-non-value-adding  — to be eliminated when technically feasible).

This raises further questions.   How is customer value best measured?  How does a company “operationalize” customer value?  How does one align the customer’s definition of value with the internal value-adding activities of the company?  It is increasingly clear that executives must manage value holistically in order to achieve business success.  But how?

Value Complexity – “How to manage value across the value chain?”

In order to understand value deeply, one needs a robust theory of value (conceptual intelligence), a way of properly specifying value (encoded intelligence), an effective way to communicate value (socio-emotional intelligence), and a way to decide which actions / activities to undertake (experiential intelligence).  One needs to integrate or synthesize all four areas to be effective.   Moreover, individuals across the organization and the value stream need to do so simultaneously.

Lean management asserts that value flows from upstream suppliers to downstream customers.  In An Empirical Framework for Evaluating, Implementing and Managing a Value-based Supply Chain Strategy (my PhD thesis accepted by the University of Bath School of Management — ProQuest publication number 3121355) I document interruptions in value flows across UK / US value streams.  I label these blockages ‘value gaps’ — the result of alternative (and sometimes conflicting) definitions of value held by the firm’s stakeholders.  To avoid value gaps, I created the Integrated Value Process (IVP).   IVP consists of (1) a conceptual framework illustrating the intra- / inter-firm value management process, (2) a methodology to ‘decode’ the ‘value gaps’ occurring in the value chain, (3) five value ‘first principles’ underlying value chain activities, and (4) a ‘meta’ definition of value to communicate effectively across functions within the firm and with the firm’s customers / suppliers.

Using IVP, company executives can translate the multiple definitions of value used by the various stakeholders within their respective organizations.  They can also align the value-adding activities across their value chains.  Value blockages (i.e. value gaps) can thereby be detected, eliminated and prevented.  So that value flows across the value stream.

Monetizing value is important, but complicated.  It is subject to the above considerations and caveats.  It should also not be the end goal of business professionals.  Value should be!  Use the IVP framework to understand the concept of value, to manage value holistically, and to optimize value for your organization.

About the Author

Andrew Swan, PhD is a multidisciplinary and cross-functional integrator of strategy, processes, and information technology. His focus and expertise center on helping executives increase value creation and optimize value flows in business. Dr. Swan holds four degrees in Management, Accounting & Finance, Information & Knowledge Strategy, and Computer Science from the University of Chicago Booth School of Business,  the University of Bath School of Management, and Columbia University.

He frequently publishes articles on value chains, value streams / flows, and Integrative Value Management on his website Dr. Swan created the Integrated Value Process (IVP) Framework to help companies optimize the flow of goods & services, funds, and information across their respective value chains for multiple stakeholders. He can be reached at or at +1.773.633.7186.  He lives in Chicago.