Business successes - more in the long term than in the short run - flows inexorably from various value drivers. (see, Samuel Di Piazza and Robert Eccles, Building Public Trust) The totality of value drivers for a firm includes more than the pricing considerations of micro-economic calculations.
The intangibles of changing consumer preferences, labour productivity, employee loyalty, brand reputation, social capital environments, to name only a few, will play more to enhance sustained profitability than will marginal and average costs of production alone. The capacity, for example, of brand distinction to lift a product out of the inevitable descent into commodity pricing can have a great impact - one way or the other - on the long-term revenues of a firm.
In my recent book, Moral Capitalism, I suggest that every firm has eight arenas of value drivers.
A firm relies on five forms of capital: social, reputational, finance, physical and human.
A firm must convert capital into a product or a service in its core business operations A firm must have output - a good or a service A firm must have customers A failure in any one of these arenas will lead to the failure of the firm. The totality of value drivers determines the capital value of the firm. Consideration of all value drivers is the Holy Grail of enterprise valuation.
Certain value drivers in particular make reference to external concerns. Incorporation of these value drivers into the firm's internal calculations imports public goods into the dynamics of firm self-interest. For example, social capital accounts look to the levels of education and trust in a society, and to that society's quality of contract enforcement and rule of law. These are factors external to a firm, but determinative of its commercial success. As one of my friends once said: "We will do business in Singapore but not in Sierra Leone." The government of Singapore under Lee Kwan Yew's leadership has been working diligently to improve Singapore's social capital for 40 years. As a result, Singaporeans enjoy one of the highest standards of living in the world.
Reputational capital measures a firm's market power in an important way. How strong is the pull of its good will? How loyal are its customers? What pricing premium does its brand support? Concern for reputation is indeed a concern for the values of customers, but simultaneously shows a concern for the firm's profitability. A firm's human capital accounts look to the intangibles of employee loyalty and productivity, creativity and expertise. With low human capital accounts, a firm is not well positioned to survive market upheavals. Taking into account the preferences and needs of employees and treating them with respect and not as a cost only will improve a firm's capacity for long-run success. The self-interest of its owners converges with the virtue of doing right by its employees.
The quality of a firm's output also embraces external variables. If the product or service is defective or leads to serious consequences (tobacco to death from lung cancer, or dumping pollutants to legal restrictions on manufacturing, for example), those further consequences can increase a firm's costs or cost it market share.
