More on value and efficiency (and Picasso)

Apropos my comments on value. Particularly the notion that value of input does not necessarily equal value of output. In actual fact powerful and profitable businesses are obviously those where the value of the output is significantly more than the value of the input - these businesses are highly and effectively leveraging their inputs.

Putting some numbers around this might help to illustrate this.

The traditional services business model works like my painter in the previous post.

Let's say he takes 100 hours to do something and he charges out at $60 an hour. This means the job is invoiced at $6,000. But if my perception of the value of the finished product is only $4,000, the business has problems. There is a $2,000 value deficit. It may be an inefficient business and, because of the perceived value deficit, it is producing frustrated and unhappy customers. This is unlikely to be a high growth business.

What if there was a business which took 40 hours at $60 an hour to produce an outcome that was perceived to be worth $4,000 to the customer. Instead of $4,000 or $2,400 the business invoices $3,500. In this case there is a value increment of $500 perceived by the customer. This business has a highly leveraged value creation process and can effectively make what economists would call a 'super profit'. It is also creating happy customers. This is very likely to be a high growth business.

It reminds me of a story, supposedly true, I heard some time ago about Picasso, whose reputation was already secure at the time.

Picasso was apparently meeting someone for a drink in a tapas bar in Barcelona. His companion was running late and whilst he was waiting for him to arrive Picasso began doodling on his napkin. As he put his pen down one of the other patrons in the bar, who had recognised Picasso, boldly approached and proffered - "Maestro, I couldn't help but notice your doodling on the napkin. I would be very happy to purchase the napkin from you". "Certainly", replied Picasso, "the price will be US$10,000".

"How could you possibly charge $10,000?", blustered the would-be buyer, "I watched you and it took but a few minutes of your time to create".

"Yes", said Picasso, "But I AM Picasso and it has taken me 40 years to arrive at the point where I can create a work of art, worthy of bearing my name, in a matter of minutes".

Whereupon one of the other patrons in the bar who had been observing the exchange leapt to his feet and said "Picasso, I'll give you $12,000 for the napkin if you'll just sign it".

This story illustrates a number of points including the power of brand (in this case Picasso); the apparent disconnect between effort (input) and value creation (output); the customer perception of value; and the value of wisdom and experience.

Clearly by the time of this story Picasso was already a very effective, efficient and valuable business.