Value is being added in inventive ways in the digital age, writes Phil Young
There are numerous meanings and usages of the term ‘value-added’ – depending on the context in which the term is being used, i.e. finance, accounting, microeconomics, macroeconomics, or marketing. But in finance and – in particular – accounting, the concept has its roots in the industrial age when labour and capital added value to raw materials and natural resources to produce goods and services.
Indeed, when I checked to see what a trusted source, the Merriam-Webster Dictionary, had to say, I found a definition that is most appropriate for the manufacturing sector: “Of, relating to, or being a product whose value has been increased especially by special manufacturing, marketing, or processing.”
Thus we can see that an auto manufacturer takes raw materials, ‘adds value’ with the use of labour and capital assets such as property, plant and equipment and, voilà, cars appear as finished products. But what kinds of value-added activities are there in the business of providing services?
To be sure, a service was long thought to be a way to add value to the physical product. For example, notice the difference in after-sale service provided by car dealers of luxury marques versus those who sell the more economical brands. But what kinds of value-adding activities are there in the service itself?
There are many examples of value added in retail merchandising and places that serve food and beverages. Some years back, Nordstrom, the US department store chain, hired piano players to provide live music as its customers were eyeing the latest fashions. Starbucks provides its customers with a comfortable place to meet or do some work while sipping their coffee. These customer experiences help to add value to the basic service provided. Nonetheless, I have observed over the years, that the inception and development of digital technology – which includes the internet – have led to innovative and amazing ways to add value to services.
Early innovators in the use of digital technology to add value to services were of course Amazon and other online shopping services. Shortly afterwards came priceline.com and other online aggregators that added the value of easily accessible price information in the travel and hospitality sector.
Going beyond this aggregation service, Airbnb showed how value can continue to be added in the hospitality industry by using digital technology to create a networked supply of rooms and homes for rent by individual property owners around the world. Just when we think we have seen it all, there is no doubt that applications of artificial intelligence (AI) will continue to keep the party going in the adding of value in service businesses.
In the meantime, I am still amazed at ways that innovative companies continue to add value in service businesses. We are all familiar with the way Uber has added value in the ride-for-hire business by providing passengers with a mobile phone app to hail and share rides. But have you heard about the latest wrinkle in ride-hailing services? On a recent trip to Shanghai, I took my first ride in a car using the network of Didi Chuxing, China’s leading ride-hailing service and Uber’s main global competitor. To my surprise, when I sat down in the Didi car, I thought I had just got into a mobile mini convenience store! Positioned between the driver and front passenger seats was a multi-tiered rack full of beverages and snacks for sale. I was told by my Chinese colleagues that this service had just been introduced a week or so before. On the lower left side of the rack was a QR code, which enabled passengers to pay for the items with their mobile phone.
From a financial perspective, the real question is whether this ‘value-added’ service will result in an adequate return for Didi, its drivers, and the companies that manufacture and distribute items for sale. But whether a value-added service is digital or traditional, the answer of course depends on the consumer demand.
By the way, if you’re wondering why anyone would want to buy an unchilled bottle of juice – then be reminded that the Chinese do not like to drink cold beverages. Value means something different depending on where you are.