The Value Theory :
tm
Leading and Managing
Copyright 1996, Randolph A. Pohlman, Ph.D.
Notice: This publication is protected by copyright law and may
not be reproduced without written permission of the author.
The Evolution of
The Value Theory
tm
Koch Industries
and the
influence of MBM
tm
Koch
Industries is the
second largest privately
held company in the United
States, just behind Cargill
Revenue:
$250,000,000 in 1967
$24,000,000,000 in 1995
13,000 employees
MBM takes market
principles and tries to
use them inside
the firm
tm
Foundations of a Free Society
Private
Property
Free Exchange
Individual Liberty
Judicial System
Culture
Other Dimensions of a Firm
Common
Purpose
Customers and other External
Constituents
Selections
Vision of MBM
tm
A market economy is a discovery process that
reveals changing needs and the availability and
utility of resources
 Success or failure is determined by the ability to
discover these needs and satisfy them by
substituting knowledge for resources
 Ideally, a business is a republic of explorers who
strive toward an unknown future through
mutually adjusting individual initiatives
 Maintain a long term perspective
 Consistently guided by values that build trust
 Profit by the economic rather than the political
means

Elements in Creating
Dispersed Discovery
 Education
 Vision
of the Business
 Culture
 Selection and Development
 Origination
 Discovery Measures
 Decision Making Process
 Motivation
Market Concepts
 Market:
Structure by which the
exchange of goods and services is brought
about in a society. The market process is
driven by voluntary exchange, prices, and
the consumer’s profit motive.
Continued on next slide
Market Concepts -
continued
 Voluntary
Exchange: Customers have
the choice to purchase only those goods
and services which are profitable.
 Price: The economic sacrifice to obtain a
product or service. Prices provide the
basis for the calculation of the
profitability of purchase decision.
Continued on next slide
Market Concepts -
continued
 Profit
motive: An incentive to achieve
profit. Customers expect to receive more
value from the purchase of the product or
service than what is given up in the
exchange.
 For
example, someone with 50 cents buys an
apple because he values the apple more than
the 50 cents. Conversely, the apple seller
values the 50 cents more than the apple. Both
people gained by giving the other something he
wanted more.
Continued on next slide
Market Concepts -
continued
Internal Market: The exchange of goods and
services within a firm.
 Market Transactions: In a market,
communication between the customer and
supplier is critical. The customer needs to have
a valid mission, understand it and what is
required to advance it, and be capable of
judging the value that products and services
add toward it. This requires an ongoing
sales/information sharing effort by suppliers so
that their customers know the type of quality of
products and services available and their price.

The further evolution . . .
Selecting and Developing People
Skills
Knowledge Experiences
Abilities
Traits
Interests
Values
Motivation
The Armchair Economist:
Economics of Everyday Life
“People respond to incentives,
the rest is commentary.”
Steven Landsburg
Bureaucracy stifles
success of organizations
People’s lives are
being disrupted
through layoffs.
We need a framework for
analysis:
 Students
cannot see the connection
among classes
 Creating customer value
 Economic Value Added (EVA)
 Shared Values
 Politicians and religious leaders talk
about values
Continued . . .
Framework for analysis . . .
 Employees
most valued asset
 Net present value
 Psychologists talk about values
 Ethicists talk about values
 American businesses are short term
oriented not long term value oriented
The Model
The
Model
The Purpose of
The Value Theory
tm
When considering actions to be
taken or decisions to be made, one
must do so in a manner that leads
to the maximization of
value over timetm.
The
Model
Short Term vs. Long Term
The
Model
Cut Cost and Quality:
 short
term: profits increase
 long term: profits decrease
The
Model
Micromanage Employees
 short
term: productivity increases
 long term: productivity decreases
The
Model
Speed
 short
term: get there faster
 long term: lose your license
The
Model
Dump Chemicals
 short
term: cheap solution
 long term: very expensive
The
Model
Develop Employees
 short
term: time consuming
 long term: time saver
The
Model
Invest in Productive Assets
 short
 long
term: expensive
term: production goes up
The
Model
The Purpose of
The Value Theory
tm
When considering actions to be
taken or decisions to be made, one
must do so in a manner that leads
to the maximization of
value over timetm.
The
Model
Our job as leaders and
managers is to maximize
Value Over Time
(VOT )
tm
tm
The
Model
What The Value Theory is:
tm
 an
integrated framework within which to
make decisions and take actions
 inclusive of, or complementary to, other
theories
 one that can use most existing tools,
theories and other fields
The
Model
Tools, Theories, Other Fields
•NPV
•Mathematical Programming
•Simulation Models
•Reengineering
•Decision Trees
•Scheduling Models
•The Theory of Constraints
•Cost Benefit Analysis
•Portfolio Theory
•Option Pricing
•Accounting Theory
•Arbitrage Pricing
•Segmentation Analysis
•TQM
•Consumer Behavior Theory
•Statistical Process Control
•Competitive Analysis
•Motivation Theory
•Information Theory
•Learning Theory
•Marketing Research
•Decision Theory
•Communication Theory
•Organizational Behavior
Theory
•Law
•Statistical Theory
•Market Based Management
•Econometrics
•Psychometrics
•Leadership Theories
•Logic
•Ethics
•Philosophy
•Quoing Theory
•Transportation models
The
Model
What The Value Theory is:
tm
 an
integrated framework within which to
make decisions and take actions
 inclusive of, or complementary to, other
theories
 one that can use most existing tools ,
theories and other fields
 one that can lead to superior decision
making
 one that requires dedication, discipline
and hard work
The
Model
What The Value Theory is not:
tm
a
formula for success
 a rigid system to be arbitrarily followed
 an ideology
 based on a specific set of values
 a replacement for all other theories
 a replacement for all other tools
The Assumptions











The
Model
Increase in value is good
What is valued drives action
Knowledge creation and use leads to value creation
Value is subjective
There are value adders and destroyers
Markets provide valuable information
Opportunity costs affect value
Order is spontaneous
Values can compete or be complimentary
For every action, there are externalities
It is the responsibility of organizational leaders to
maximize value over timetm.
The Eight Facets of
The Value Theory
tm
Facet 1
The Model
Cultures external
to the firm
World
culture

U.S. culture

U.S. sub-cultures
Facet 2
The Model
Organizational culture

Ben & Jerry’s
TM

Lincoln Electric TM
The Model
Facet 3
What employees value

examples . . .

Leisure

Technology

Money

Close Supervision

Self-Directed Work

Creativity

Precision

Religion

Politics
Facet 4
The Model
What suppliers value
(examples)
 to
be treated fairly
 not to be beaten into submission
 considered a partner
Facet 5
The Model
What customers value
(examples)
 quality
 reliability
Facet 6
The Model
What third parties
(government, unions,
accrediting agencies) value
(examples)
 authority
 rules
 compliance
Facet 7
The Model
What competitors value
(examples)
 market
share
 profitability
 prestige
 sheer size
 public image
Facet 8
The Model
What owners value
(examples)
 return
on assets
 return on equity
 rapid growth
 prestige of the firm
The
Model
The Purpose of
The Value Theory
tm
When considering actions to be
taken or decisions to be made, one
must do so in a manner that leads
to the maximization of
value over timetm.
Purpose of TVTtm: When considering actions to be taken
or decisions to be made, one must do so in a manner that
leads to the maximization of value over timetm.
Assumptions:
• Increase in value is good
• What is valued drives action
• Knowledge creation and use leads to value creation
• Value is subjective
• There are value adders and destroyers
• Markets provide valuable information
• Opportunity costs affect value
• Order is spontaneous
• Values can compete or be complimentary
• For every action, there are externalities
• It is the responsibility of organizational leaders to
maximize value over timetm
The Eight Facets of TVTtm
• Cultures external to the firm
• Organizational culture
• What employees value
• What suppliers value
• What customers value
• What third parties value
• What competitors value
• What owners value