Added value, enterprise value and competitive

advantage

David Walters
Department of Business, Division of Economic and Financial Studies, Macquarie
University, Sydney, Australia
Michael Halliday
Macquarie Graduate School of Management, Macquarie University, Sydney,
Australia
Stan Glaser
Independent Scholar, Sydney, Australia

Keywords corporate activity and the measurement of its

Globalization, Business strategy, A new role for marketing: a new achievement.
Value analysis, perspective of added value
Competitive advantage, Kay (1993) calculates added value by
Marketing management What is the role of marketing in the age of the
subtracting from the market value of an
virtual organization? Pine (1993) and Day
organisation's output the cost of its inputs:
Abstract (1999) both infer the need for collaboration
This paper attempts to answer the
Revenues
questions raised in a previous
and cooperation (even competition) in the Less (wages and salaries, materials, capital costs)
paper by the authors (``Creating new economy market place. If marketing is to Equals
value in the `new economy''', play a major role in the strategic direction of Added value
Management Decision, Vol. 40 the organisation it should consider where best
No. 8) which dealt with how He suggests that added value is a measure of
business has had to reevaluate the the company can maximise its returns. The the loss that would result to national income
importance of its assets in the first is to understand the key characteristics and to the international economy if the
``new economy''. The present of relationships within an industry, market or organisation ceased to exist:
paper now addresses the
market segment. A useful method for Adding value in this sense, is the central
questions of how these changes
affect traditional marketing achieving this is to identify the profit pools purpose of business activity. A commercial
delivery structures and within the value creation system and then to organisation which adds no value ± whose
mechanisms and, more explore the characteristics of the ``actors and output is worth no more than the value of its
importantly, how these changes
the processes'' involved. Gadiesh and Gilbert inputs in alternative uses ± has no long-term
affect the cost of marketing and rationale for its existence (Kay, 1993).
the estimation of value that (1998) offer a model based upon the notion
marketing delivers. The disciplines that: ``Successful companies understand that Figure 1 illustrates the concept. In Figure 1a
of marketing are such that a major profit share is more important than market input costs exceed output costs and no added
role can be played in exploring the
likely scenarios that will optimise
share''. A profit pool is defined as the total value is generated. By contrast in Figure 1b,
competitive advantage. profits earned in an industry at all points output revenues exceed the input costs and
along the industry's value chain. The pool added value is generated.
may be ``deeper'' in some segments of the Added value in this context includes
value chain than in others and variations may depreciation of capital assets and also
be due to customer, product, and distribution provides for a ``reasonable'' return on
channel differences, or perhaps there may be invested capital. Calculated this way added
geographical reasons. Often the pattern of value is less than operating profit, the
profit concentration differs markedly from difference between the value of the output
revenue concentration. Gadiesh and Gilbert and the value of materials and labour inputs
and capital costs. It also differs from the net
(1998) use the US automotive industry to
output of the firm: the difference between the
demonstrate the variations of revenue and
value of its sales and material costs (not
profit distribution. They use it to provide an
labour or capital costs). Kay's (1993) measure
approach to mapping profit pools.
of competitive advantage is the ratio of added
Kay (1993) introduces the concept of added
value to the organisation's gross or net
value as ``the key measure of corporate
output (see Figure 2).
success'' and defines this as:
The usefulness of the relationship is that it
Added value is the difference between the
enables management to explore options. A
(comprehensively accounted) value of a firm's
output and the (comprehensively accounted)
dominant feature of the new economy is
cost of the firm's inputs. In this specific sense, preference shared by many organisations to opt
Management Decision adding value is both proper motivation of for flexibility and, therefore, to prefer strategies
40/9 [2002] 823±833 that are less capital intensive. It follows that if
# MCB UP Limited the competitive advantage ``index or return''
The current issue and full text archive of this journal is available at
[ISSN 0025-1747] can be improved by converting fixed costs into
[DOI 10.1108/00251740210441045] http://www.emeraldinsight.com/0025-1747.htm
variable costs without untenable implications
[ 823 ]
David Walters, Figure 1
Michael Halliday and Kay's added value perspective
Stan Glaser
Added value, enterprise value
and competitive advantage
Management Decision
40/9 [2002] 823±833

Figure 2 value, i.e. the difference between the

Kay's (1993) measure of competitive advantage (comprehensively accounted) value of a
firm's output and the (comprehensively
accounted) cost of the firm's inputs.
An alternative measure of performance,
and one that measures competitive advantage
for upstream or downstream control then this from a perspective of the future value of free
becomes the preferred strategy. An index offers cash flow is the Enterprise Value Model.
a ``longitudinal'' time based measure, whereas Knight and Pretty (2000) discuss ``the
an index offers the facility to compare philosophies of risk, shareholder value and
alternative organisational structures of the CEO'' and offer an interesting model of the
activities within processes and of sequential business. Their interests were more on its
processes. The ``classic'' examples of Dell and valuation than its structure but it is a relevant
Nike demonstrate the efficacy of such an option. and valuable contribution to this discussion.
Kay (1993) uses the model to explore Knight and Pretty's (2000) contribution
corporate strategy issues on the basis that: represents a view of the business structure
Corporate success derives from a competitive adopted by many of the leading multi-
advantage which is based on distinctive
national companies:
capabilities, which is most often derived from
The core value of a quoted company has three
the unique character of a firm's relationships
components: tangible value, premium value, and
with its suppliers, customers, or employees
latent value. Tangible value reflects the bedrock
and which is precisely identified and applied
of the real and tangible assets which will sustain
to relevant markets.
the company's value in times of crisis. It is
He also questions the measurement of usually measured as book value . . . Premium
success and performance, suggesting size, a value represents the value in excess of book
firm's sales, its market share, and its value value at which the company trades in the open
on the stock market as options typically used market. This element is the source of a
company's competitive advantage . . . Latent
together with rate of return. This can be
value represents the potential value within a
measured as return on equity, on investment
company. Sources of hidden value might include
or on sales. Other measures commonly used
operating efficiencies yet to be realised . . .
include growth, productivity, increased
earnings per share or the price earnings The authors argue that tangible value has
ratio. Kay argues that while these measures been downgraded as the market valuation of
are aspects of successful performance the key Internet based companies: `` . . . with little or
measure of corporate performance is added no book value but promises of great wealth
[ 824 ]
David Walters, outshone their traditional competitors''. The the increasing importance of intangible assets
Michael Halliday and ``dot.com'' events of June 2000 suggest this not (such as brand values and innovative RD&D)
Stan Glaser to be the case but it is interesting to note that or clearly the two together.
Added value, enterprise value
and competitive advantage the emphasis on intangible assets persists In Figure 4 examples of the business
Management Decision and is a major contribution to the growth of growth alternatives available to a virtual
40/9 [2002] 823±833 virtual enterprises. The enterprise value community are suggested. Knight and
model described by the authors has a simple Pretty's interest was based upon the
structure as shown in Figure 3. alternative risk profiles that are attached to
The enterprise value model has obvious each. Their thesis is that risk differs for each
attractions. It offers not only the facility to of the options, and consequently they should
consider the enterprise as a number of be appraised in such a way that the risk
individual (but related) components but also differences are reflected by discount rates
the facility to explore strategic growth that represent more or less risk. For example,
alternatives. The investment market view, a premium growth strategy, such as an
suggested by Rappaport (1983), Reimann (1988) innovatory product or distribution approach,
and Copeland et al. (1994), considers that a is likely to be considered to have more risk
business is worth (i.e. the enterprise value) the than an efficiency improvement, a latent
net present value of its future cash flows growth strategy. Furthermore, as Figure 5
discounted at an appropriate cost of capital. suggests, there is the question of resource
This approach avoids the inadequacies of allocation to consider. For each of the growth
traditional financial measurements and options expenditure on resources is required.
recognises the time preference for money and Given that these are limited it follows that for
the risk of an investment. This method is also an ``organisation'', be it one company or a
suggested by Knight and Pretty (2000) as a member of a virtual community, the question
means for measuring tangible value where of resource allocation is fundamental,
future cash flows are discounted at a relevant requiring the ``organisation'' to optimise its
cost of capital. No proposals were made for allocation of resources in an attempt at
either premium or latent value but these too maximising stakeholder value as well as
can be dealt with using DCF techniques. The delivered customer value.
increasing significance of intangible assets is The scope of marketing within the context of
emphasised by findings from the Brookings the new economy and the virtual organisation
Institution. Brookings have been monitoring is of particular interest. As many
the changes in the financial structures of large organisations question their future structure
US mining and manufacturing companies. and begin to review competencies within the
Such an approach is very useful. Since 1982 context of the virtual operations model there is
fixed tangible assets as a proportion of total a vital need for the organisation to map the
assets has declined steadily. In 1982 fixed input/output profiles of its value chain
tangible assets, as a proportion of total assets, partners and to engage at a point where its
were some 67 percent. By 1992 this was 38 strengths and weaknesses can be matched
percent and by 2000 the figure was reported to with opportunities and threats so that
be less than 30 percent. Given the Brookings stakeholder value (i.e. the value accruing to
Institution findings this is clearly an shareholders, customers, suppliers, employees
important consideration, one requiring and the community) is optimised. Increasingly
attention due either to the increasing leverage as the virtual organisation model is
of partners' fixed assets (the Dell approach) or experimented with and expanded it becomes

Figure 3
The enterprise value model

[ 825 ]
David Walters, Figure 4
Michael Halliday and Managing the growth of enterprise value: the current perspective
Stan Glaser
Added value, enterprise value
and competitive advantage
Management Decision
40/9 [2002] 823±833

increasingly likely that marketing offers the costs and benefits of outsourcing or
means by which answers to many of the insourcing the item and the impact on added
emerging questions concerning the available value. From this analysis it follows that
options may be obtained. Increasingly the alternatives may be sought and evaluated.
analytical, communication and conduit A similar argument may be made with
characteristics of marketing are becoming regard to wages and salaries. Here the
important. Kay's (1993) model, modified a little concern is that knowledge (management
to explore the concept within the context of expertise and specialist labour skills) may
marketing, is illustrated as Table I. not be available ``in-house''. The reality is
Figure 6 explores the role of marketing in that with a virtual organisation it is of no
exploring the response options to Added consequence because the virtual
Value Drivers. For example, a number of organisation structure encourages the
questions should be raised concerning the leverage of both management expertise and
procurement and or manufacture of specialist labour. The concept of the
materials and components. The ownership economics of integration is one that utilises
structure of materials or component knowledge management to identify the
manufacturing may be concentrated, in precise combination of technology that will
which case the ability to differentiate a provide competitive advantage, together with
product by incorporating an outsourced the necessary relationship management
component will be limited. Marketing, by expertise to coordinate the extensive
maintaining an ongoing ``dialogue'' with cooperation and co-productivity among value
customers, is in a position to identify the organisation partnerships. Distance is no
[ 826 ]
David Walters, Figure 5
Michael Halliday and Enterprise value growth alternatives compete for resources
Stan Glaser
Added value, enterprise value
and competitive advantage
Management Decision
40/9 [2002] 823±833

Table I
Added value drivers and their marketing considerations
Added value ``drivers'' Marketing considerations
Materials and Ownership of materials and structure of Identify customers(s) product applications
components sector and derive price/performance expectations
Cost of quality of materials Provide design with competitive
Availability comparisons
Distance costs Identify alternative procurement,
Impact of quality on finished product manufacturing and logistics alternatives and
their cost/benefit implications using
alternative materials and manufacturing and
customer locations
Wages and salaries Importance of labour skills as element of Establish impact/issues using customer
cost expectations and price/performance/cost
Availability and location of labour profiles
Control issues Explore the options/implications with
selected customers
Services Importance of services in ``value'' delivery Establish customer product-service
Services required: insource or outsource expectations
Evaluate the implications on manufacturing
options
Explore availability of insource/outsource
options
Explore implications for customer response
Capital costs Capability and capacity requirements Identify the ``suppliers'' and the
Extent of specialisation ``competitors''
Cost of investment Explore competitive ``scenarios''
Currency/depreciation factor With finance explore risk/return profiles of
Availability of existing capital: utilisation? capital ownership options
Added value ``Value'' of added value: ROI, ROCE, Project alternative market scenarios
continuity, risk Project gross input/gross output profiles for
Barriers to entry each scenario using expected customer
Barriers to exist responses and capital and operating costs
``Change'' Project profitability/productivity and cash
flow options

[ 827 ]
David Walters, Figure 6
Michael Halliday and The virtual enterprise: policies, objectives and strategies ± a difference of emphasis
Stan Glaser
Added value, enterprise value
and competitive advantage
Management Decision
40/9 [2002] 823±833

longer a constraint. The example given by Li providers. Marketing is well placed to extend
and Fung, who act for major brand owners the customer dialogue to ascertain the
from their Hong Kong base providing a range importance of service to the customer and to
of service processes for their global interpret this into cost and benefit
principals, is one of an increasing number of implications for the organisation.
such partnerships. Li and Fung provide an The point that flexibility is an issue in
extensive range of processes, from developing competitive advantage was made
developing product prototypes from their earlier. When the advantages of
principal's specifications to managing the specialisation are added, the emphasis on
logistics of delivering specific consignments managing capability and capacity through
to designated locations throughout the world. leveraged assets rather than ownership
Meanwhile the brand owners continue with becomes a significant decision issue. The
what they are particularly good at (their success of the computer company Dell is an
distinctive capabilities) such as managing excellent example of managing through
the marketing of their brand portfolio. But leveraging suppliers' assets. Michael Dell
the basic issue is one of understanding the made very clear the decision that faced his
market place, of understanding customer organisation from the very beginning: there
expectations and deriving specifications of can be little or no advantage to anyone in the
the product and service that will deliver the sector if large capital sums are competing
customer value specifications. with each other. The perceptive solution is
In a time in which almost any one that identifies where the maximum
manufacturing advantage can be imitated advantage can be obtained; the investment
quickly, and at low cost, it often falls to the that offers greatest return. This raises the
use of customised service packages to issue of tangible and intangible assets and
provide the differentiation sought in the their role in creating competitive advantage.
marketplace. Once again the decision issue The examples set by Dell, Nike Coca-Cola and
concerns the extent to which insourced others suggest that investment in intangible
services are preferable to outsourced service assets such as R&D and the brand and
[ 828 ]
David Walters, developing management is capable of more effectively becomes a mandatory skill
Michael Halliday and realising major returns on capital costs. for managements (Normann, 2001).
Stan Glaser If the purpose of the analysis is to identify
Added value, enterprise value Drucker (2001) suggests that even more
and competitive advantage and to evaluate the alternative structures by
fundamental changes are occurring. He refers
Management Decision which added value may be generated, then
to the increasing influence of knowledge
40/9 [2002] 823±833 some constraints should be established. The
management, technology management and
virtual organisation implies that any added
relationship management and to the view of
value generated is likely to be an optimum
business organisation that is process
value rather than a maximum value based
management oriented rather than organised
upon the objectives of any one individual
around traditional functions. A number of
company. It follows that some additional topics
authors have taken this view. For example,
of risk should be explored. One such topic
Hagel and Singer (1999) argue that the
concerns the distribution of assets and the risk
traditional organisation comprises three basic
of reduced access that any concentrated
types of business: a customer relationship
distribution of assets introduces. It also
business, a product innovation business and
follows that disproportionate risk requires
an infrastructure business. They suggest each
adequate compensation and therefore margins
of these differ concerning the economic,
or returns be structured to recognise the risk
competitive and cultural dimensions. They
being undertaken. There is a task here that
argue that as the exchange of information and
possibly can only be undertaken by marketing,
``digestion'' increases through electronic
involving the identification of roles and tasks
networks the traditional organisation
being undertaken within the value chain and
structures will become ``unbundled'' as the
structuring the returns accordingly. The
need for flexible structures becomes an
channel management literature deals with this
imperative and `'specialists'' offer cost-
concern in its value based compensation
effective strategy options in each of these
models. There are other aspects of risk. For
basic businesses. Figure 6 suggests that the
example barriers to entry and to exit may be
new economy requires an holistic approach to
such that entry into the sector is relatively
both objectives and strategy.
easy but once established the capital
commitment makes exit difficult. Furthermore
in a dynamic market the rate of change within
processes may be accompanied with major Putting the model to work
write-off problems. The pharmaceutical and The ``new economy'' and the ``virtual
high technology based industries are examples approaches'' it has spawned suggest that four
of such problems. The disciplines of marketing characteristics comprise the basis of the
are such that a major role can be played in model; process management, knowledge
exploring the likely scenarios that will management, technology management and
optimise competitive advantage. relationship management. Figure 7 expands
However, for this to be effective, it is the virtual organisation model and offers
necessary for marketing to operate within examples of a number of interfaces. The
the ``structure'' of the new economy virtual organisation characteristics are
organisation. Normann (2001) considers the shown in bold fonts. They were discussed in
new economy to be an opportunity to create detail in our previous article ``Creating value
more value and wealth. He adopts economic in the `new economy''' which appeared in
productivity as a measure of value, arguing Management Decision, Vol. 40 No. 8.
that increases in productivity and wealth These are assumed to be integrated and
creation are positively correlated. He also interrelated if the virtual organisation is to
argues that traditional ``value creating'' be successful in creating mutual competitive
institutions have been replaced by new advantage. Beech (1998) argues that the
structures that use technology and new departmental silos built into the traditional
practices such as outsourcing in creating functional business organisation structure
value. This he contends resulted in a only serve to inhibit customer satisfaction
temporary focus on shareholder value, but and, therefore, added value. He discusses
argues that in the long term, shareholder
planning process within the context of
value is generated by the creation of
demand and supply chains. Demand chain
customer value. Normann discusses ``a new
processes include product development,
strategic logic''. He suggests that:
``trade marketing'' selling, ``customer
. . . managers need to be good at mobilizing,
managing, and using resources rather than at
services'' management, category
formally acquiring and necessarily owning management and ``consumer marketing''.
resources. The ability to reconfigure, to use Supply chain processes include raw
resources inside and particularly outside the materials procurement and management,
boundaries of the traditional corporation manufacturing, ``logistics'', finished goods
[ 829 ]
David Walters,
Michael Halliday and
Stan Glaser
Added value, enterprise value
and competitive advantage
Management Decision
40/9 [2002] 823±833 Characteristics of the virtual organisation model
Figure 7

[ 830 ]
David Walters, procurement and ``retail operations''. Note The involvement of marketing in creating
Michael Halliday and that the quotation marks suggest the extent competitive advantage becomes quite clear.
Stan Glaser
Added value, enterprise value to which these processes have become The relationship/knowledge management
and competitive advantage influenced by e-business applications and are interface requires robust strategic marketing
Management Decision the views of the authors, not of Beech. In partnerships with a range of characteristics
40/9 [2002] 823±833 Beech's (1998) model demand chain and that will ensure their effectiveness.
supply chain are integrated; the result is an Relationship/technology management
optimised value chain delivery model (for a requires direct marketing involvement if IT
detailed review of the development of value driven product development and management
chain management see Walters, forthcoming) and product support systems are to be
Figure 7 addresses the same issues but starts developed and possibly a large involvement in
with the three foundation concepts i.e. the development of joint procurement and
process, knowledge, technology and logistics programs. To a similar extent the
relationship management and uses these to marketing influence can be seen in the
establish ``benchmarks'' for the structure of a knowledge/technology management interface
virtual organisation. From the benchmarks where product development processes are an
emerge a number of interface relationships important feature. The technology/process
between each of the foundation concepts. management interface requires the
Figure 7's treatment of these is, of necessity, development of economically viable
generic. It is intuitively obvious that if production processes that not only deliver
sustainable competitive advantage is sought customer satisfaction but do so cost
then the structure of the virtual organisation efficiently. In this way stakeholder objectives
should reflect the dominant competitive are also met. The relationship/process
feature of the sector example (based upon management interface reflects the
ongoing in-company research) for a interorganisational aspect of the virtual
relationship management-led virtual organisation in which the output of the
organisation shown as Figure 8. virtual organisation is coordinated to

Figure 8
A relationship management led organisation

[ 831 ]
David Walters, maximise the benefits of the ``new economies both strategy and structure. The current
Michael Halliday and of production'' such as economies of approach to both process and capability
Stan Glaser integration (asset leverage), specialisation
Added value, enterprise value management offers marketing management
and competitive advantage and location (clusters). The contribution made an opportunity to take advantage of new
Management Decision to enhance added value and competitive business models in which competitive
40/9 [2002] 823±833 advantage by marketing can be illustrated by advantage is based upon managing
the model presented in Figure 9. processes, knowledge, technology and
relationships that facilitate rapid and flexible
responses to ``market'' change, and in which
Concluding comments new capabilities are based upon developing
It could be argued that the initial work in the unique relationships with partners
area of business process reengineering and (suppliers, customers, employees,
organisational competencies identified shareholders, government and, often, with
opportunities for new organisational competitors), an understanding of, and the
structures. This work together with the ability to use and to manage the new
global expansion of consumer and supply technology and to understand the impact of
markets has led to the hollonic approach to knowledge creation and its distribution

Figure 9
Using the added value model to review options for improving competitive advantage

[ 832 ]
David Walters, among partner organisations within the Copeland, T., Koller, T. and Murrin, J. (1994),
Michael Halliday and virtual organisation. Valuation: Measuring and Managing the
Stan Glaser Value of Companies, Wiley, New York, NY.
Added value, enterprise value The marketplace has moved towards a
and competitive advantage marketspace concept in which the Day, G. (1999), The Market Driven Organisation,
``informational'' aspects of product-services The Free Press, New York, NY.
Management Decision
40/9 [2002] 823±833 Drucker, P. (2001), ``Will the corporation
become more important (Rayport and
survive?'' The Economist, 1 November.
Sviokla, 1995). It is arguable that marketing,
Gadiesh, O. and Gilbert, J.L. (1998), ``How to map
as it is conventionally construed, can play a
your industry's profit pool'', Harvard
major role in the prosperity of the Business Review, May/June.
organisation. Indeed the concept of the Hagel, J. III and Singer, M. (1999), ``Unbundling
organisation itself is debatable as the number the corporation'', Harvard Business Review,
of intra-organisational alliances and March/April.
partnerships expand. A moment's reflection Kay, J. (1993), Foundation of Corporate Success,
within any industry will identify numerous Oxford University Press, Oxford.
networks and intra-related organisations. It Knight, R. and Pretty, D. (2000), ``Philosophies of
follows that the roles of traditional functions risk, shareholder value and the CEO'',
(in this instance marketing) should be Financial Times, 27 June.
critically reviewed and questions asked Normann, R. (2001), Reframing Business, Wiley,
concerning the viability of departments and Chichester.
Pine, B.J. II (1993), Mass Customisation: The New
functions that continue to operate
Frontier in Business Competition, Harvard
individually rather than being integrated
Business School Press, Boston, MA.
and operating across a coordinated business
Rappaport, A. (1983), ``Corporate performance
structure. It is equally clear that no one standards and shareholder value'', The
function can operate in isolation and that Journal of Business Strategy, Spring.
intra-, inter- and extra-organisational Rayport, J.F. and Sviokla, I.T. (1995), ``Managing
cooperation is essential. in the marketspace'', Harvard Business
Review, November/December.
References Reimann, B. (1988), Managing for Value: a Guide
Beech, J. (1998), ``The supply-demand nexus: from to Value Based Strategic Management,
integration to synchronization'', in Gattorna, Blackwell, Oxford.
J. (Ed.), Strategic Supply Chain Alignment, Walters, D. (forthcoming), Strategic Operations
Gower, Aldershot. Management: A Value Chain Approach.

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