The Real Meaning of Value

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The real meaning of value intrading relationships

John RamsayThe Business School, Staffordshire University, Leek, UK

Abstract

Purpose – The paper aims to survey the main usages of the term “value” in the economics,marketing, strategy and operations fields.

Design/methodology/approach – The way in which all four fields adopt an unbalanced approach,concentrating exclusively on the customer’s perspective, is highlighted. A complete, balanced analysisincluding both the customer and supplier perspectives is outlined. The precise meaning of the termvalue is then explored in detail, revealing and exploring the difference between the potential andrealised versions.

Findings – These insights are applied to an analysis of the concept of the “value chain” leading to theconclusion that, given the ontology of value, much of the language used to describe value and chains isdeeply misleading.

Practical implications – The paper ends with a discussion of the possible effects of this ontologicaland linguistic sloppiness on practitioners and business practice. By bringing clarity to the realmeaning of value in trade it may be possible to improve the effectiveness of the use of the word bymanagement as a motivational tool for enhancing company performance.

Originality/value – The paper offers a clear, detailed explanation of the nature of value in tradingrelations.

Keywords Value chain, Buyer-seller relationships

Paper type Conceptual paper

IntroductionAt the time of writing, the phrase “value chain” produced more than half a million hitsin a search of the web. The concept, much like its precursors the supply chain andrelationship marketing in the operations and marketing fields, has become a hook uponwhich academics and consultants appear to be hanging any and everything fromincreased inter-company collaboration schemes, product differentiation efforts andcost reduction programmes through to strategic planning. When concepts become asubiquitous as this, the risk becoming worthless and meaningless. This paper is aserious, some might argue quixotic, attempt to unpick the meaning of the words“value” and “value chain” in order to determine their true worth to businesspractitioners.

The paper begins with a survey of the main usages of the term “value” in the

economics, marketing, strategy and operations fields. This highlights the way in whichall four fields adopt an unbalanced approach to the concept that concentratesexclusively on the customer’s perspective. It is suggested that a complete, balancedanalysis would include both customer and supplier perspectives. The precise meaningof the term value is then explored in detail, revealing and exploring the differencebetween the potential and realised versions. These insights are then applied to ananalysis of the concept of the “value chain” leading to the conclusion that, given theontology of value, it is impossible for a metaphysical idea to move along a chain within

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Meaning of valuein trading

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International Journal of Operations &

Production Management

Vol. 25 No. 6, 2005

pp. 549-565

q Emerald Group Publishing Limited

0144-3577

DOI 10.1108/01443570510599719



a company, far less between firms and their customers. Thus much of the languageused to describe value and chains is shown to be deeply misleading. The paper endswith a discussion of the possible effects of this ontological and linguistic sloppiness onpractitioners and business practice.

Existing definitions of valueAttitudes to the concept of value differ widely. On one hand, some writers argue thatits meaning is difficult to pin down. Payne and Holt in their recent extremely thoroughreview of the marketing value literature, for example, state:

. . . despite the increasing attention being focused on this concept there is still remarkablylittle in the way of agreement in the literature on what constitutes “value” and “customervalue”. . . (Payne and Holt, 2001, p. 159).

meanwhile in the purchasing field, those authors with the most sophisticated treatmentof the concept to date opine:

The supply literature whilst referring and using the concept of value fails to develop aframework for thinking about the concept of value itself (Cousins et al., 2002, p. 164).

On the other hand, some authors regard its meaning as self-evident. Thus in Dilworth(2000) the 762 page text includes the term in its very title, but nowhere defines what itmeans; similarly the term does not appear in the index of “Value Stream Management”(Hines et al., 2000), and its meaning is nowhere defined in the text. The followingreview provides an overview of the way value has been treated in the fields of economics, strategy, marketing and operations management. While not intended to becomprehensive, it is an attempt to identify what kind of “thing” the various fieldsconsider value to be.

EconomicsInterest in, and musings on, the subjective nature of our perceptions of the value of individual objects dates back to at least 400BC :

. . . what is beautiful for running is often ugly for wrestling, and what is beautiful forwrestling ugly for running. For all things are good and bad in relation to those purposes forwhich they are ill adapted (Xenophon, 1923, p. 8.6).

In the eighteenth century, the very early political philosophers and economistdiscussed the difference between use value and exchange value (Smith, 1776, p. 28).The former consists of the utility, benefit or pleasure individuals enjoy fromconsuming a product or service and the latter refers to the amount of revenue it willgenerate in exchange. Smith and some of the other early economists such as Cantillonand Nassau Senior were preoccupied, inter alia, with the curious phenomenon wherebyextraordinarily useful substances such as water have very low exchange values inmarkets. This paradox was eventually explained by Jevons using the concept of marginal utility. For a comprehensive treatment of the development of economicthought on value (Ekelund and Hebert, 1997). Economists also contributed the notionof “added value” which they define as increases in monetary value arising from theactions of the firm, and measure by calculating the value of the output of a firm andsubtracting the value of the inputs it buys from other firms. However, this usage of theterm refers to a purely monetary phenomenon and, as will become clear below, this is

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quite distinct from the more general notion of benefits to customers. The value in“added value” is quite different from that in “customer value”, and the two do notbelong in the same explanation. Added value serves only to confuse the discussion, andis best left in the accounting tool-bag where it belongs. For a detailed critique of the

rather peculiar, arbitrarily narrow definition of added value used by accountants, theinterested reader might try (Shank and Govindarajan, 1988). Thus, to economists,value is (primarily) the benefit customers obtain from consuming products andservices.

Marketing Interest in value in the marketing field did not ignite until the 1990s (probably sparkedby Porter’s work on value chains). Prior to that point, what little mention there was of the “worth” of products referred directly to economics. For example, in his text (Kotler,1976) the author does not use the word “value” in its modern sense, and the discussionis of primary and secondary “utilities”. The influence of economics remains explicit

and pronounced in more recent work dealing with the concept. Thus, a seminal text inthe pricing literature states:

The difference between the maximum amount consumers are willing to pay for a product andthe amount they actually pay is called consumer’s surplus . . . . This difference representswhat the consumers gain from the trade. The difference is the money amounts of value-in-useminus value-in-exchange; for voluntary exchanges this is always positive (Monroe, 1991,p. 38) (emphases in the original).

All three of the key terms used in this definition are lifted straight from standard,neo-classical, microeconomic analysis. Monroe also introduced what has become thedominant idea in the marketing and strategy fields with his definition involving thetrade-off of benefits and sacrifices:

. . .

buyers perceive value as a trade off between perceived quality and benefits in the productor service on the one hand and perceived cost on acquiring and using the product or serviceon the other (Monroe, 1991, p. 87).

This has been gradually refined by a variety of authors, viz. (Hanna and Dodge, 1995;Leszinski and Marn, 1997). Some authors add small modifications to the basic model,thus (Anderson and Narus, 1999; Anderson et al., 2000) both extract price from thecosts incurred by buyers in the benefit/cost trade-off formulation, but even these recentvariations retain the strong influence of economics with their use of utility andconsumer surplus. A recent publication (De Chernatony et al., 2000) provides awide-ranging overview of the marketing literature. For mainstream marketing, value isthus a benefit experienced by buyers or customers.

StrategyThe strategy literature also draws on neo-classical economics as its primary source of ideas. One may argue that the modern value hare was set running in (Porter, 1985):

. . . value is the amount buyers are willing to pay for what a firm provides them. Value ismeasured by total revenue, a reflection of the price a firm’s product commands and the unitsit can sell. A firm is profitable if the value it commands exceeds the costs involved in creatingthe product (Porter, 1985, p. 38).


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This definition combines the vague notion of “the amount buyers are willing to pay” – that might be the selling price of a product, or perhaps the buyer’s purchaseexpenditure, or conceivably consumer surplus, or all (or none) of the above, with anoblique reference to “added value”. In view of the extraordinary lack of clarity in

Porter’s treatment, it is perhaps not surprising that his definition has rarely beenreferred to since.

A definition emphasising quality is also widely and approvingly cited in themarketing literature, thus:

. . . value is simply quality, however the customer defines it, offered at the right price (Gale,1994, p. 26).

Some authors have argued that value has a number of “components”, namely, price,time, premium service and quality and suggest that successful companies focus on asingle component and do better than their competitors, while satisficing with the others

. . . all of these [successful] companies are thriving because they shine in a way their

customers care about. They have honed at least one component of value to a level of excellence that puts all competitors to shame (Treacy and Wiersema, 1995, p. 5).

By the late 1990s Marketing’s popular benefit/cost trade-off approach was wellestablished in the field (Hughes et al., 1998), and this continues to the date of publication (Santema and van de Rijt, 2003; Noonan and Vallace, 2003). Somestrategists seem unsatisfied with the dominant definition of value and insist on adding“refinements”:

“Creating value” is defined as achieving performance goals, which are above and beyond [emphasis in original] that which is expected;, e.g. achieving 99.99 percent fill-rates versus 5percent as agreed upon in the contract (Pappu and Mundy, 2002, p. 600).

Meanwhile Day et al. (2003) offer a variation on the customer orientation, basing the

definition on what the customer does with retained value:

The integration of strategy processes and content, when undertaken in an appropriatemanner and combined with superior executional capabilities generates [greater than averagereturns for shareholders] which we term “value”. . . (Day et al., 2003, p. 559).

However, these are peripheral enterprises, and the treatment of value in the strategyand fields is broadly the same as that in marketing.

Operations management In discussing value delivery systems (Yung and Chan, 2003) it is stated that:

Since VDS is a system that delivers value to customers, the system was designed to improvethe performance responsiveness, quality and cost to value ratio from the customer’sperspective (Yung and Chan, 2003, p. 302).

They see value as deriving from improved operational effectiveness and efficiency.The term itself is never defined. In an alternative approach (Bennett et al., 1999), theauthors discuss the problem of assigning value to technology transfers, and they adoptthe benefit/costs approach:

For the owner, the value of a technology is related to the “net benefits” which can be gainedby ensuring its best possible use (Bennett et al., 1999, p. 492).

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Performance measurement is stressed in Santos et al. (2002), and although value isintroduced (refer page 1262) its meaning is taken for granted and no formal definitionor even description is offered. One of the most developed treatments of the concept inthe field (Dumond, 2000) reviews a number of definitions before concluding that:

. . . customer value is linked to the use of a product or service thereby removing it frompersonal “values”;

. . .customer value is perceived by customers rather than objectively determined by the seller;and

. . . customer value typically involves a trade-off between what the customer receives (e.g.quality, benefits, worth) and what he or she gives up to acquire and use a product or service(e.g. price, sacrifices) (Dumond, 2000, p. 1,062).

Value in operations management is thus based on the marketing approach, with anemphasis on benefits for customers deriving from improvements in process and costreductions.

The overview of the literatures reveals that all four fields, whilst displaying somedifferences in detailed description, share a focus on the benefits or advantages accruingto buyers or customers as a result of receiving or consuming products and services,and thus approach the concept of value from the customer’s perspective. It will beargued that this analysis of the concept is incomplete, and that as a result of ontologicalconfusions, the language used to describe value tends to be misleading.

In the discussion that follows, the term resource will be used to refer to anythingthat one company might offer in exchange with others. The emphasis is onbusiness-to-business trading in industrial rather than consumer markets, consequentlywhere references are made to “the supplier”, “the firm” and “the customer”, the supplieris a source of resources for the firm, and the customer is the buyer of the firm’s output.The customer is another business that purchases the firm’s output, and not an

individual consumer.

Types of valueThe most obvious shortcoming of the conventional analyses is their one-sided focus onthe benefits buyers or customers enjoy from consuming products and servicesprovided by suppliers. Trade involves the exchange of resources from buyers tosuppliers as well as from suppliers to buyers. Suppliers need to obtain monetaryresources, including money and forward order cover, in return for the non-monetaryresources such as products and services that they have on offer. Hence, during trade,both parties are simultaneously resource providers and recipients, and through aprocess of negotiation they arrive at a mutually acceptable set of terms and conditionsto delineate the trade and match their respective resource offerings and needs, andagree to exchange, thus:

Resource exchange in trading relationshipsUnlike the conventional input-process-output model of the firm with its one-way flowof resources via an input at one end of the organisation and an output of products andservices at the other, this new analysis requires a more complete model in which eachfirm has two inputs – one of non-monetary resources such as raw materials orproducts and services coming from supply markets and one of monetary resources


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coming from sales markets, and two outputs – one of non-monetary resources going tocustomers and one of monetary resources going to suppliers (Figure 1), thus:

Two-way input-output model of the firm

Since, resources flow in both directions, and suppliers as well as customers benefitfrom the exchange, there is no logical reason for stating that value is only defined orenjoyed by customers. The benefits enjoyed by firms as customers have been labelled“customer value” in the marketing and strategic texts, and it seems reasonabletherefore to give the title “supplier value” to benefits accruing to firms in their role assuppliers.

All four of the fields surveyed above focus on “customer value”. Whenever the term“value” is employed hereafter, unless otherwise specified, it will refer to both customerand supplier value (Figure 2).

One might question the need to examine supplier value. From a marketing orstrategic perspective the customer’s perceptions of the benefits a firm can offer throughtrade are obviously paramount, and in terms of improved operational effectivenessmany of the benefits of exploring supplier value will only accrue in the first instance towhat has traditionally been regarded as the low-status, peripheral function of purchasing. However, in recent years the value chain idea has been harnessed to callsfor the adoption of a broader approach to business, involving thinking of organisationsas extended collaborations of groups of firms from suppliers through to final

Figure 1.Resource exchange intrading relationships

Figure 2.Two-way input-outputmodel of the firm

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customers. In such a more functionally balanced and egalitarian world, supplier valuehas an obvious claim to attention.

Value creation and conversionValue in trading relationships is a positive effect, advantage or benefit that isassociated with the exchange of resources, and perceived or enjoyed by the recipientbuyers and sellers of those resources. Before exchange takes place, the benefits arenotional or potential in nature, and it is only after exchange has occurred thatcompanies and their staff actually enjoy benefits. Thus, potential value in tradingrelationships is the benefit or advantage a company expects to enjoy after the receipt of resources, and realised value is the benefit or advantage a company enjoys after thoseresources have been exchanged. These definitions are an improvement in terms of balance and completeness over the existing treatments; however, they still fail to giveany detail of the kind of benefits that companies enjoy. The same criticism is true of most of the existing analyses of the concept, which tend either to make no effort to

describe the nature of the benefits, or focus on a handful only such as price, time andquality, and then construct a theory around their limited selection (Treacy andWiersema, 1995). This paper seeks to provide a more generalised description of thenature of value. With the exception of a handful of papers – Brandenburger and Stuart(1996), Walter et al. (2001) and Moller and Torronen (2003) – the existing academicliteratures fail to consider what suppliers need and enjoy, consequently most of theillustrative examples in the analysis that follows will refer to supplier value.

Value before exchange

The word value . . . has two different meanings, and sometimes expresses the utility of some

particular object, and sometimes the power of purchasing other goods which the possessionof that object conveys. The one may be called “value in use”; the other, “value in exchange”(Smith, 1776, p. 28).

This ancient definition of use and exchange value from Adam Smith may help todescribe what happens to the value that companies experience as resources move fromsupplier to firm to customer, or back along the reverse path. When considering a futureexchange of resources, buyers and sellers with needs may search the market lookingfor companies with resources to offer. Both buyers and sellers have monetary andnon-monetary specifications that define a variety of characteristics of the resourcesthat make up those needs, and thus the resource characteristics that they seek in otherorganisations’ offerings. Offerings that appear to match a firm’s resource needs displaypotential value and thus appear attractive. If the recipient firm intends to consume the

resources entirely itself, as happens with such items as food supplies for companycanteens, then they represent potential use value for the firm. If the consumptionresults in their being incorporated into the firm’s output, components andsub-assemblies for example in a manufacturing environment that are employed inthe construction of finished products for onward selling to customers, then theresources represent a contribution to the potential exchange value of that output.Exchange takes place if the specifications of buyer and supplier match in a mannerthat both find satisfactory. Value in trading relationships is thus partly defined by the


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quality of the match between the buyers’ and sellers’ resource specifications. If thespecifications do not match at all, then each will perceive the other’s offerings asworthless or without potential value. The better the match, the more benefit orpotential value both sides will perceive in the offerings of the other. One recent

marketing application of this idea is the suggestion that suppliers should seek toexceed the specification of the buyers’ resource needs in an attempt to “delight” them(Estelami, 2000; Keiningham and Vavra, 2001). To understand what is happening indetail, one may usefully break the buyers’ and sellers’ resource specifications downinto three constituent elements – technical, organisational and personal needs andofferings (refer Ramsay, 1991 for a detailed discussion of buyer specifications).

Technical elements. Both buyer and seller specifications refer to characteristics of the resources themselves – these will be called technical needs and offerings. Thus thebuyer’s specification of non-monetary needs and the equivalent supplier’s offering mayinclude details such as the physical capabilities and qualities of the resources, targetprices, delivery quantities and dates and so on. Supplier value meanwhile is related tosuch details of the buyer’s monetary offering as the quantity of money on offer, thecredit terms and future order cover available. Suppliers may, for example, seekcustomers offering high degrees of certainty – for such companies, customers withgood planning systems and stable demands will be preferred over those withcontinually changing requirements. Companies with a reputation for prompt paymentwill also appear attractive, and customers who display generosity and/or wealth and/orincompetence, and are thus prepared to offer suppliers unusually large profit marginswill be particularly attractive. Walter et al. (2001), in a paper exploring the contributionthat relationships with suppliers can make to the creation of customer value, provide amore detailed listing of some of the benefits that accrue to suppliers. For resourceexchange to occur, in normal circumstances, the technical characteristics of the buyer’sand sellers offerings and needs must match to an acceptable degree.

Organisational elements. The technical needs and offerings of the two parties arecouched within an institutional framework of company procedures and practices.Mismatches between the organisational elements of needs and offerings may reducethe perceived potential value in resources and prevent exchange even if a perfecttechnical match exists. For example, a buyer’s company may have rules preventingtrade with companies in specific countries. Local content rules designed to protect andfavour local companies may give preference to some suppliers over others, and so on.Similarly, suppliers may have a range of organisational requirements that affect thechoice of customers. They may, for example, prefer to deal with organisations thatadopt integrative bargaining postures in preference to those employing aggressive,distributive negotiating techniques. Some may have ethical standards that preventthem from choosing certain customers. Some companies might, for example, refuse to

deal with Nestle as a result of that company’s Third World infant milk promotionpolicies. They may also have agreements preventing exchange with customers who aredirect competitors with other major customers, and so on. Where an imperfect technicalmatch between resource needs and offerings exists, positive organisational factorsmay still make exchange possible. Thus suppliers may regard the status that istransferred to their company from the supply of resources to highly prestigiouscompanies such as Rolls Royce as an adequate reward, even if the quantities of moneythey receive in exchange would be unacceptably small if offered by another customer.

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Personal elements. The technical and organisational elements of specifications refer toresource characteristics that affect the organisations engaged in trade, but the process of exchanging resources between companies also generates benefits and costs for theindividuals involved in managing the process. Staffs have their own personal criteria,

deriving from the personal benefits they expect to gain from the process, and these canaffect the amount of potential value perceived in any given exchange. Space prevents adetailed exploration of managerial motivation – (Bartol and Durham, 2000; Boxall, 1998)are useful starting points in that subject area – but managers are motivated, inter alia,by salary, security, status, power, prestige and professional excellence. Thus, we maypredict that staff involved in managing or influencing the process of exchange will preferdeals that enhance those aspects of their working lives. Moreover, they may havepreferences based on prejudices concerning race, gender, religion or past experiencesconcerning the kind of staff that they like to deal with. Both buyers and sellers will alsobe interested in the personal trustworthiness of their sales or buying counterparts, andwill like to know if the people they are dealing with will be able to persuade the rest of their organisation to do what they say they will do. Their assessment of the potentialvalue arising from an exchange will also be affected by other more basic, emotionalresponses. Do they like the individuals concerned? Do they have similar views aboutbusiness and life? Suppliers may be keen to identify courteous and considerate buyers.Powerful arrogant customers who treat salesmen poorly are unlikely to be favoured.Subjective, non-quantifiable, factors of this kind may be extremely influential, and arelikely to be particularly important in SMEs where low staff numbers mean that there islittle supervision of decision making. Hence, even in circumstances where there are goodmatches between the technical and organisational elements of specifications,unsatisfactory personal elements may prevent successful exchange. Conversely,corrupt buyers may make decisions based on the degree to which suppliers satisfytheir personal financial or material requirements and preferences, regardless of their

ability or inability to match the firm’s technical and organisational requirements. Market elements. Finally, the estimated potential value in any exchange of resourcesmay be compared with the offerings available from competing buyers and suppliers inthe relevant market. Thus, a resource offering containing highly attractive technical,organisational and personal elements may lose all value and attraction for the would-berecipients the instant a competing offering with a more attractive specification appearson the market. Before exchange takes place, would-be recipients who are searching themarket, base their estimates of the value offered on an amalgam of the three elements of their needs specification, assessed against the backdrop of competitors’ offerings. If anacceptable match of specifications is found that is more attractive than any otherofferings the companies are aware of, then each party to the potential exchange regardsthe other’s offering as possessing value and an exchange of resources can take place.

Thus, before the exchange of resources occurs, potential customer and suppliervalue are both defined by the combined influences of a nexus of technical, personal,organisational and market elements. After exchange, however, the form that valuetakes within each company changes.

Value after exchange Non-monetary resources. Prior to their delivery, incoming non-monetary resourcesrepresent potential use and/or exchange value for the firm. After they have been


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received by the firm those resources serve three possible functions. First, they may bedirectly consumed in the everyday processes of work. This happens, for example, withcleaning materials, fuels, food and the like. The firm realises use value in the process of their consumption. Second, they may be combined with components, assemblies or raw

materials, and the firm’s organisational and personal characteristics, in the creation of the firm’s product or service offerings to sales markets, in which case the firm enjoysuse value in the process of their combination and the output of that process thenrepresents potential exchange value that will be converted into realised exchange valueif the firm succeeds in exchanging them for monetary resources with a customer.Finally, they may be sold on in a physically unaltered state, as for example happensthrough stockists of a variety of products such as metals and bearings. In such casesthe firm enjoys use value as they go into stock and the stock represents potentialexchange value. If a firm can find no buyers for its output, then the resources neverprogress beyond the stage of representing potential exchange value.

Monetary resources. Prior to their delivery, incoming monetary resources fromcustomers represent potential use and/or exchange value for the firm. After they have

been received, resources serve three possible functions. First, they may be directlyconsumed in the everyday processes of work. This happens, for example, to the fundsdevoted to paying staff, buying machinery and essential materials, paying variousutility bills and so on. The firm thus realises use value in their consumption. Second,they may be combined not only with resources from other customers but also the firm’sorganisational and human characteristics in the creation of the firm’s monetaryofferings to supply markets. The firm thus enjoys use value in that process of incorporation, and the output of the process then represents potential exchange valuethat will be converted into realised exchange value if the firm succeeds in exchangingwith a supplier.

Although some products and services never find a buyer and their potential is never

realised, but it is hard to imagine circumstances in which money could be regarded asoffering no benefit. However, whilst it is true that money in isolation always hasbenefit in business, money from a specific company in exchange for specific resourcesunder specific circumstances may not. For example, money may be most unwelcome if it comes from a company with a bad reputation, or that demands changes to asupplier’s operations that would disrupt and upset other valuable customers, or thatwould result in the supplier becoming dependent on the customer. In other words, thetechnical characteristics of money are universally attractive, but when combined witha specific company’s organisational and personal requirements, even money itself mayincapable of generating perceptions of value.

The ontology of value

Before exchangeThe preceding analysis has given increased insight into the process of value creation andconversion, but it still skirts around the fundamental ontological question of preciselywhat kind of thing value is. Is it physical or mental, abstract or concrete, monetary orpsychic? What forms do these “benefits” that companies enjoy actually take?

Potential value arising from any resource-company combination can exist at onemoment in time, and cease to exist in the next. Imagine a firm with a warehouse full of a product that enjoys high sales demand. Now suppose that one of the company’s

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competitors launches a clearly superior and cheaper alternative on the market. Thevalue that the firm and its stored product previously appeared to “possess”, evaporatesor “moves” to the competitor in an instant. Moreover, precisely the same combinationof resource and company can represent potential value to one individual and none to

another within the same would-be recipient organisation. Picture two buyers in thesame purchasing department, both considering changing sources of a product fromcompany X to company Y. One of the buyers, while working for another company,experienced a long run of quality problems when dealing with company Y. Herestimate of the potential value of resources offered by Y may amount to zero, while hercolleague may perceive considerable value in the potential trade. This particularcontingent nature of value has been mentioned elsewhere without explication:

There is . . . a contingent nature to value – its identification must make sense in the context of a specific relationship – or part of a relationship – and to the managers who are addressing it(Lamming et al., 2003, p. 854).

Potential value is thus a curiously unstable, evanescent phenomenon. The discussionof resource requirements above may have created the impression that the involvementof humans in the definition or generation of value is limited to their obvious concernwith the personal elements of resource offerings and needs. However, before exchangetakes place, value is exclusively a product of human perceptions. Only humans canassess in advance the quality of the match between a resource offering and theorganisation’s needs, and decide if receipt of the resource might generate benefits.Potential value only comes into existence as a result of human comparisons andchoices; it is a human response to the anticipated or expected effects of the receipt of resources. This conclusion explains both how value can appear to vanish while theresources remain unchanged, and how the same combination of company andresources can have radically different potential values to different individuals.

Potential value is an estimate based on an opinion resting on expectations. It is difficultto imagine a phenomenon more dependent upon human perceptions andinterpretations and less susceptible to ready quantification.

Sceptics may protest that many purchase decisions, for example, are simply repeatpurchases that occur automatically without human intervention. Orders are sent to theexisting, or “preferred” supplier without reference to competitors’ offerings, and theresult may still be an acceptable match with the buying company’s requirements.Thus, benefits and value appear to be generated without human intervention.However, even in such cases, the choice of the preferred supplier would originally havebeen made by humans. “Automatic” resource choices are no more than fossilisedhuman decisions.

Hence, the value present in a potential exchange of resources is calculated or

estimated by humans in the light of their technical, organisational and personalresource needs, and in comparison (where data is available and sought) with theofferings of competitor organisations.

One corollary of this conclusion is that potential value is not an intrinsic characteristicof any given company or resource. Companies and their products or services do notpossess potential value. Indeed, as we have seen above, not even money has any intrinsicability to generate advantages for suppliers. This claim is challenged, however, by thephenomenon of brand loyalty which appears to offer evidence that value is an intrinsic


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characteristic of at least some products or services. It might be argued, for example, thatproducts produced by the Virgin organisation clearly have intrinsic value. That is whatthe brand does; it bestows value upon the products it touches. However, this claim isfallacious. Would-be recipients of a branded product may anticipate certain beneficial

effects as a result of the presence of the brand image, but potential value is still beingcreated inside their minds not inside the product. The brand name is merely one of theelements of the resource offering, along with the price, the quality and so on, that has amediating effect on the potential buyer’s mental responses. The brand may be affectingthe would-be recipient’s perceptions of all the elements of the resource specification, butthat does not alter the fundamental nature of value.

Potential value is thus a purely metaphysical or mental phenomenon arising for thestimulus of the nexus of technical, personal, organisational and market elements of resources offered by buyers or suppliers.

After exchange

After resources have been exchanged, the ontology of value changes radically. Asresources are consumed, with the exception of the personal elements of value, whichalways demand the presence of humans, the existence of any associated benefits nolonger depends upon human perceptions, interpretations or decisions. The benefitsarising from technical and organisational elements self-evidently have an independentexistence. The company’s requirements are satisfied; or they are not. The resourcesprove valuable; or they do not. Thus, during consumption, value takes on a moreconcrete form. Companies take resources from suppliers and combine them with theirown internal resources to create value or benefits for themselves. Thus, like itspotential precursor, realised value is created within the company and is not intrinsic tothe supplied resources alone. Moreover, since the benefits possess a mixture of technical, organisational and personal characteristics, some, such as the technical

elements may be physical, others such as the organisational may be abstract, while thepersonal elements, such as the pleasure of dealing with people you like, remainpsychological in nature. Moreover, although value may take on a more concrete formfor the firm after receipt of the relevant resources, value for would-be recipients of thefirm’s output remains entirely mental. These conclusions have implications for thekind of language and metaphors that we use to describe and explain value.

Value, language and meaningsIn the literatures surveyed earlier, some of the language used gives the impression thatvalue is a concrete thing that can be passed from suppliers to firms to customers. Thus,many authors suggest that value can be “delivered” (Plank and Ferrin, 2002, p. 457;

Treacy and Wiersema, 1993, p. 84; Naumann, 1995, p. 17; Ulaga and Chacour, 2001, p.525; Gattorna and Walters, 1996, p. 47). Value “provision” meanwhile appears in,amongst others, the work of Moller and Torronen (2003, p. 110) and Anderson andNarus (1999, p. 3). It is clear from the earlier analysis that the impression created by theuse of these particular verbs is misleading. Some authors also use language, whicherroneously implies that value is a characteristic of a product, thus:

. . . it is highly questionable whether the core product. . .has any value at all (Gronroos, 1997,p. 412).

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The supplier value chainMoreover, the use of the chain metaphor in common with the use of the verbs to“provide”, “deliver” and “have”, creates the impression that customer value eitherexists within an organisation’s resources in some manner, and moves along with them

from function to function before finally being “delivered” or “provided” to thecustomer, or else has some independent existence that allows it to be passed fromdepartment to department. However, the analysis above has shown that potential valueis a purely metaphysical concept. Realised value only comes into existence afterresources have changed hands and the recipient organisation uses them or combinesthem with its own internal resources in some manner that transforms the potential intoactual benefits. Hence, the conclusion that if value is not an intrinsic characteristic of aproduct or company, then it cannot flow along a chain or down a stream, and a pedantmight argue that Porter’s original diagram should have been called “a non-monetaryresource chain”. Some may protest that the concept of a value chain was never intendto imply that value itself moved from function to function or from firm to firm. But if that is true, then why use the chain metaphor at all? There is much less ambiguity with

a “supply chain”. Although there are no physical “chains”, it is at least true thatmonetary and non-monetary resources move from function to function within thecompany and among trading companies as though being passed along a bucket chain.Taking this metaphor and applying it to a phenomenon that does not move at all isdeeply confusing. (Refer Ramsay and Caldwell (2002) for a detailed discussion of theway metaphors in this particular area of business writings control the way we think).

These criticisms may seem to spring from a trivial point of semantics, but thecareless use of inappropriate language and metaphors may generatemisunderstandings and encourage inappropriate company behaviour. If academicsand managements persist in the use of the term “value” and “value chains”, then sincepotential value is a metaphysical, mental state, it may only be “stimulated”,

“prompted”, “influenced” and so on. Realised and potential value meanwhile cannot be“passed”, “delivered” or “provided”, but might be “generated” or “created”. Finally,although it is not possible “add value” to a product or a process, it may be possible toimprove customer perceptions of the value of such objects.

ConclusionsCreating the impression that value is itself moving, prevents both practitioners andacademics from understanding clearly what kind of a thing value actually is, and lendsthe “value chain” a completely spurious air of accuracy and validity. Revealing the realnature of value and the movement of resources rather than value up and down supplychains may help to de-mystify the whole concept and make it easier to explain topotentially perplexed practitioners. Moreover, although marketing has a legitimate

need to focus on the fluctuating, ephemeral, largely abstract mental states in the mindsof customers that we call “customer value”, other functions might more usefully payattention to the resources and processes that they can most directly influence andcontrol. Thus Purchasing can focus directly on supplier value, and operations on costreductions and product improvements. In a business world that increasingly favoursoutsourcing, it is not at all clear that giving primacy of attention to customer valuealone will necessarily assist companies in the achievement of their objectives.Moreover, it is only to be expected that departments with very limited or no direct

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contact with customers or product design issues will find a constant emphasis oncustomer value a very weak form of motivation. Acknowledging this truth and findingways of persuading them to improve their performance is unlikely to be helped byreferences to ontologically confused metaphors built upon abstract, metaphysical

phenomena. By all means draw attention to the existence and nature of resource flowsalong supply chains, but it might be helpful to remember that value chains do not existbeyond the pages of text books.

This is not to suggest that companies can safely forget about what customers want.Clearly there is no point in developing outstandingly high quality, low cost, potentiallyuseful products that nobody wants to buy. But the task of understanding whatcustomers want may safely be left to the marketing function, which can thencommunicate its findings and insights via strategic planning efforts to the rest of theorganisation. One of the most popular uses of the value chain concept in the earlytwenty-first century is as means of justifying and encouraging increased collaborationamong companies. “We are all part of the same value chain, and if we cooperate and allpull in the same direction, then we will all benefit” the argument goes. Attacks on theconcept may threaten any performance improvements that may have been achievedthrough the use of the metaphor as a rallying cry and organising concept. This is avalid concern. However, precisely the same result could be achieved without referenceto a vague, static ghostly, concept like potential customer value. There is a resourcethat actually “flows” out of the firm’s customers and then back along the “chain” of suppliers. That resource is money in the form of sales revenue. Increased collaborationcan therefore be driven by the cry: “There is only one revenue stream and that comesfrom the final customers. We all share that same stream, and if we cooperate and pullin the same direction, then we will all benefit”.

Pessimists may argue that the value horse bolted back in 1985 when Porter openedthe stable door, and it is too late to get its meaning back under control, but such

thinking is unnecessarily defeatist. It is undoubtedly true the words “value” and “valuechain” are currently used with a bewildering variety of disparate meanings, and givenan emphasis that is unwarranted. Indeed, by diffusing and confusing the efforts of individual functions within the firm, the current semantic smorgasbrod may even beimpairing the performance of some companies. Nevertheless, the uncovering of theexistence of supplier value and the exploration of the ontology of value above offer away of bringing clarity to the existing confusion.

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Documents

The Real Meaning of Value