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I like the term "market destruction".

I'm sure there's a name for that somewhere on The Innovator Dilemma, and if somebody finds it I'll gladly change my usage. But yes, calling it "value destruction" is stupid.

Anyway, It does not change anything on the overall idea, but your last paragraph is not really correct. If the company added no value at all, it wouldn't be able to sell the product. It may add value in distribution (yes, there is such a thing), or even just branding, but it better add more value than the price of the product, otherwise, people just won't pay.

"Market Destruction" is so much more accurate, yes. I suppose though, that in the sense of there being value in a company that Does 'X' for a high premium is lost when another company does 'X' without that high premium.

Still, that's a secondary effect brought on by the "Market Destruction" as you say.

If you can create "value" by creating a market, what happens to that "value" when that market is destroyed?

When trepanation went out of style, it destroyed the market for skull-drills, and destroyed the market for hole-in-skill-drilling service providers. While you can argue that there was value to the consumer in not having a hold drilled in their head, it was still a net loss to any shareholders in companies that provided trepanation products and services.

You create value by creating something people want.

If doing something people want creates a market, value went up. If doing something people want destroyed a market, value went up.

If you destroy a market by bribing a government and prohibiting a product people want, value went down.

> I like the term "market destruction".

You're not destroying the market either. You're making the market bigger, because at lower prices there is usually more volume. What you're destroying is margins, but that's generally considered good by anyone other than the party whose margins they are.

> If the company added no value at all, it wouldn't be able to sell the product.

It depends how far you're willing to stretch the notion of value. It's possible that you can sell $1 items for $10 because you've paid off the government or are in bed with the Mafia and anyone who tries to compete with you gets thrown in jail or has their shop burned down, but it requires a strange notion of value creation to call it that.

And this happens to a lesser or greater degree every time a corporation buys a law.

I don't think the razor market grew at all. Or, at least not enough to compensate the prices reduction. How could it? It's pretty much bounded.

Making a market bigger by reducing prices is something completely different. It also goes by the same "disruption" name. That's why I started using that term.

About that second line, yes, any kind of coercion is an exception.

> I don't think the razor market grew at all. Or, at least not enough to compensate the prices reduction. How could it? It's pretty much bounded.

Sure, it probably only grew a little, e.g. because of a few people who used to use blades past when they were dull and now replace them sooner. But not growing very much (or even not at all) is not being destroyed. It's the margins that are destroyed, not the market.

> About that second line, yes, any kind of coercion is an exception.

The trouble is, for high margin businesses, it's the rule rather than the exception.

Without some statistics to back it up and a solid definition of "razor market" it's hard to determine.

For example, we could consider electric razors, disposable razors, and replaceable head razors as three separate markets. They are substitute goods, so as the price for replaceable head razors fall that market grows. In response the market for electric razors and and disposable razors contract.

Actually, there's not the same amount of value in existence, there's most likely more value!

When prices go down, people buy more razors. What does this mean? It most likely means that people get to shave with sharper blades, as it's now worth it for them to buy fresh ones and not use an old one.

Well its a matter of prospective. Value for a shareholder is usually the opposite of value as a consumer.

You also have to remember the subscription model that these razors run under. Gillette will happily give you a shaving handle + 1-2 cartridges for free, the theory being you are then locked into their system. Thus "value" is created for them, on expectations of future revenue.

I think that we are confusing two different things here—the creation of new value (making a razor) and the transfer of value from one person to another (paying money). Both are value, but only one is the creation of value. Gillette creates value by making razor blades, their lock-in is a technique to ensure that more value (in cash) is transferred to them in exchange for the value that they have (razors). So value is not created for Gillette, but existing value is transferred to them.

Another way to look at it is that the razor blades are not valuable in and of themselves, only when they are put in the hands of the consumer and used.

Gillette has not 'created value' when it made a razor blade, only created the potential for value which is then crystallized when a consumer buys the item with the intent to use it.

Similarly, a consumer who buys a razor blade has not created value at the time of transaction, but actually accrues value over time as it is used.

The other amazing thing that may be obvious but is striking to me when I think about it: that all B2B spending must eventually be covered by a consumer buying a product or service.

Only in a world where banks and governments aren't involved. Otherwise the game can be extracted ad infinitum.

You can have a similar epiphany with regard to corporate taxes, which are ultimately paid by the consumer.

It's a mix. Corporate taxes end up affecting the customer, employee, supplier and shareholder.

Think about the two extremes: If taxes are 100% - the business goes under and everyone loses their jobs, suppliers lose a customer, customers lose a product they liked and shareholders lose everything.

If taxes are 0%, the business grows - shares become more valuable, the demand (and therefore price) for employees and suppliers increases, and customers will pay less.

And there will be no police, contract enforcement, roads, etc.

It sounds like you found out costs exceeding cash flow is bad, not that taxes are bad. Anything taking 100% cash flow from the business is likely detrimental.

The naivety of your second paragraph suggests you think business is not operating in its own best interest. How does employee and supplier costs going up = consumer cost going down? There seem to be huge leaps being made here.

Corporate tax policy and supply/demand economics is probably too complex to try to boil down to a a short paragraph each.

It sounds like the concepts you're describing here are producer and consumer surplus. Is that right?

That's what it sounds like to me. The author is writing from the perspective of P&G (though he never makes that explicit) so of course there is tremendous value destruction from that point of view.

As you imply, it might be better to think of it as a shift of value from the producer to the consumer.

The internet is doing this all over the place (just ask the newspapers--plenty of the value they captured before the 1990s shifted to other outlets, and eventually into the consumer's pockets). The auto did this, every important technology does this.

I see it more as the value publication companies captured from entities advertising through them is now shifted to different advertising media such as facebook and google. The value the consumer derives from published content has stayed the same, or arguably declined in the case of printed news due to reduction in spending on content. Though the internet has lowered the barrier to disseminating content, eg blogging, which has put previously unpublished ideas out there.

> Value is the thing the shaver gets from having a razor.

No, value is the $35 that P&G gets for selling a $5 razor blade pack for $40. It's the difference between perceived value vs. commodity value.

By milking the Gilette cow a little too much, P&G created an absurd situation where razors were just ridiculous. That made the market ripe for new entrants who used marketing efficiencies to hock a similar, though inferior product at a "really high" vs "ridiculously high" margin.

The confusion around the word "value" here is unfortunate but hilarious. Marx distinguished between "use value" (the value you get from using the razor) and "exchange value" (the money you are willing to pay for the razor). Those terms would help a lot to put this discussion on a coherent footing.

Economists have tended to shy away from trying to measure use value. However they are forced by actual events to talk about increases in "consumer surplus" which is effectively defined by the increase in use value per dollar, or alternative decline in dollars per unit of use value.

More generally the problem isn't just that "we have become used to measuring the economy by stock prices." The problem is that we've only ever agreed on ways to measure the economy that depend on money.

However money as a measure of the economy becomes less and less useful. Productivity increases are measured in % per year -- which implies productivity is on an exponential curve. And as productivity tends toward infinity, exchange value and profit tend toward zero. We'd better get a handle on use value, otherwise we won't be able to measure much at all.

>A company that makes products for $5 and sells them for $5 may have a negligible stock price while creating an enormous amount of value. A company that buys products for $1 and sells them unchanged for $10 may have a high stock price while creating no value at all.

A company that comes in and produces that same $5 product for $1 and sells it for $4 is creating far more value, both for its owners and its customers.

Economic profit is not inefficiency, it doesn't matter regardless of whether the consumer or producer gets the surplus. Inefficiency is excess work that people do in service of their goals.

The high cost that is not profit, is inefficiency: Paying someone to do work is inefficient not because it costs money, but because the person had to do the work -- it would be more efficient if the work product could be created with less work.

(Compare cost of labor to cost of scarcity: It's not efficient to buy/sell a diamond -- diamond seller is very happy to sell their scarce good for very little work. The coal seller is less happy -- they have to do a lot more work to earn their revenue.)

> Economic profit is not inefficiency, it doesn't matter regardless of whether the consumer or producer gets the surplus.

Economic profit is friction. If you replaced the profit-taking entity with one that performed the same function but took half as much profit then more surplus-generating transactions would take place.

Which means there is more work being done for the same result, because e.g. the higher price causes the customer to spend twelve hours fixing his own car instead of paying an experienced mechanic who could have done it in six.

"A company that makes products for $5 and sells them for $5 may have a negligible stock price while creating an enormous amount of value" No profit means no value creation, the company is doing nothing. Profit isn't inefficiency, it is the incentive to remove inefficiency.

This is nonsense. I can make a lot of profit by mugging people - does that mean I've created value?

Likewise, I can volunteer my labour to build houses for the homeless, clean up a park... Since I wasn't remunerated for it, does that mean I didn't create any value?

Thanks for the response, vkou.

Since the article was discussing a specific industry and company, and the OP responded by the incentives of companies, I figured it was safe to assume that the discussion did not involve coercion or charitable actions as they are very different actions with different reward structures. Within a marketplace for commodities, an actor is rewarded with profits for providing goods or services.

Mugging would be coercion, and doesn't seem to fit within the context. Charitable actions can obviously create and transfer value, but it also seems outside the scope of a discussion of commoditization of goods.

No profit means no value creation, the company is doing nothing.

This part isn't true. If you take inputs and combine them into something the market values more than the uncombined inputs, the process of combining them creates value, regardless of what price tag you put on the end product. The question then is who gets the value you created. If there is very little competition among producers, you might be able to charge a price well above your cost and keep most of the value for yourself in the form of profit (the buyers will still get some of it or they won't buy). If there is brutal competition, you might have to sell at cost just to avoid losing money from fixed costs (ex: property tax) that would have to be paid even if you sold nothing. If you combine the inputs into something the consumer values more than those inputs but charge the consumer the cost of the inputs, you DO create value by combining the inputs and ALL of the value you create goes to the consumer.

Profit isn't inefficiency, it is the incentive to remove inefficiency.

This part IS true. Profit is an (if not "the") incentive to remove inefficiency, though profit is not an inevitable consequence of removing inefficiency. If your competitors also remove the inefficiency, the extra value may not stay with the producers in the form of profit but go to the buyers.

Great points, thanks for bringing clarity to a rushed comment.

You're very right that increased competition could lead to losses. However, this is a short term destabilization with a maximum duration of capital reserves. It is the net profit of the firm that determines it's long term viability.

Would you also say that less profit is less value creation? I think that is almost self-refuting.

What about for-profit companies that convert some of their software over to open source? Does that stop generating value when it goes free?

And what about Comcast? They "earn" great profits, and they aren't dependent on state granted monopoly, regulated as a common carrier etc. But they'd create a lot more value as a utility with much lower profits.

Great questions!

Let's see if I can rephrase this: A company that is unable to generate a profit long-term has proven incapable of creating value for all stakeholders. So a company may be able to sell a product with a margin, but if that margin is not enough to compensate labor, landlords, supply chain, shareholders, etc; the the net value creation is negative. So a company that is not generating a profit is not creating value, but one cannot measure the amount of value created by just measuring profit.

Open Source: I think that the incentives and economics of open source get pretty complex. There are multiple reasons for a company to open source their code, but I think it's pretty safe to say that companies are not in the habit of open sourcing valuable trade secrets. Two ways a company can realize more value by open sourcing are 1) utilize "unpaid" labor (contributors are not paid by the company, but presumably are compensated through some other means) and 2) recruitment and PR boost (by open sourcing projects, the company has improved reputation giving it leverage in hiring and other practices). So, to answer your question, open sourcing code restructures the value calculation. Presumably, an open source project that provides no value is an orphaned project.

Comcast is a beneficiary of monopoly provisions. In order to incentivize the creation of infrastructure, telecoms were granted monopolies. For example, I can only purchase Comcast cable, not TimeWarner or any other provider. I suspect that your point is correct as regulating ISPs like utilities could decrease rent-seeking actions by the ISP. In this scenario, lower margins would generate more value (shareholders realize lower value but consumers realize greater value in the form of decreased prices). Rent seeking, like coercion, is a sign of a market failure.

Thanks for the response!