Thursday, August 19, 2010

The Relationship Economy: Value Creation Factors

Most intangible asset measurements have been top-down: Investors theorize a contributing factor and then try to figure out how to measure it. Studies have been performed using different approaches to determine such value.

What has been developed  is now known as EVA, or economic value added.

Some perceived value drivers translate into market value; others do not.

It suggests that in the connected economy, connections matter. Alliances are incredibly, even decisively, important.


Studies have shown a set of value drivers for Internet companies, because in no other industry are accounting values less relevant in explaining market capitalization. These drivers were culled from a stand-alone studies Forbes did on e-commerce firms. Here’s their list, in order of importance:

(1) alliances, (2) innovation, (3) eyeballs (usage traffic), (4) brand investment, (5) stickiness (minutes spent on Web pages).

Three categories had substantial effects on e-commerce market values. The most important was the number of alliances and alliance partners. Investments in innovation (captured by research and development and capital expenditures) ranked close behind. Perhaps the most widely discussed driver of e-commerce value—the number of “eyeballs” viewing a Web site—was measured by using data on a site’s visitors, reach, or market share, and the number of hyperlinks to other sites.

Forbes found that a high visitor count also was strongly associated with market values, supporting the push by e-commerce companies to drive traffic through their sites at almost any cost. Taken together, these three category relations indicate that the strength of an e-commerce company’s network—both in connections to its customers and alliances within its economic web of suppliers and other partners—has a profound effect on a firm’s value.

By contrast, investment in building brand awareness has no statistical association with market values. So much for those millions spent on Super Bowl ads. Big marketing campaigns may boost the egos of company executives, but the research suggests they do little to raise a firm’s value. Equally surprising, “stickiness”—vaunted as the next competitive step after eyeballs—proved only a minor contributor to value. This analysis was completed in the year 2000[i]

So what does this all mean to us as individuals?  For individuals involved in the networked economy, it provides a set of levers that, if effectively applied, can prepare you for individual performance and increase in market value.Consider what we do with the medium of social networking and the related emergence of adoption.  What are the attributes of participation within adult and business communities leveraging social networks as the medium? It appears obvious that the attributes closely match the drivers of value defined in the older study by Forbes.  These include: 

    alliances with others for both personal and professional gains
    innovation, our collective communities repeatedly fine news ways to leverage the medium
    eyeballs, Have you noticed the craze for expanding ones quantity and quality of connections and viewers to your blog post?
    brand investment, whether our businesses or us as individuals we investing time to build our brand for future opportunities
    stickiness- time spent on our profiles and in our communities reviewing our content

 As time goes by, a model will evolve to identify new value-creation drivers, while maintaining enough flexibility to adapt to the constantly changing nature of the companies and individuals that are producing value in the connected economy, The Relationship Economy.  Our individual strategies should be aimed at thinking through what value we can create and exchange with other individuals and communities as a whole.

The definition of ones value is the critical answer which facilitates the five drivers of value previously mentioned. When you define your value offering and how it can be leveraged through the medium of social networks you have defined a new means for wealth creation.

Today developers and networking platform operators are capturing the economic values. Tomorrow, when individuals define their value and unite with a purpose, the economic gains will be afforded to the users who leverage the five drivers of value creation.  The shift will create The Relationship Economy and it will disrupt markets globally.

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