Ordering Principles. One's thinking through important courses of action is often guided by ordering principles – key ideas that hold together and shape the interrelated parts of the analysis in a way that gives it forward-moving energy. Trenchant ordering principles infuse actionable clarity because they capture the deepest logic of the matter at hand. Because ‘creating value’ is the most fundamental concept in business, we might expect value-creation to be the undisputed ordering principle of business thinking with a cogency long since internalized by corporate actors. But the ambiguities and inconsistent connotations of 'value-creation' have been obstacles to this.
In the grammar of business, for example, predicates such as 'maximizing shareholder value’ or ‘increasing market value’ - which often play the part of ordering principles - can cause firms to underrealize their prospects. The problem is not that the economic benefit these expressions mark should not be a key objective of firms. It’s that those benefits (among others) are effects of value-creation, not its illuminating logic.
Why is that distinction important? Value-creation requires transitions from existing to projected states of affairs. Projected states of affairs are imagined and sought-for because their realization will have enabling effects. In many cases this evolution of the firm - its instantiation within the projected sphere - will entail larger net cash flows, larger market share, higher valuations, and other economic enlargement. But this is because the transition has honored the underlying principles of causality that account for the greater efficacy offered by the aspirational sphere - the reason it is compelling in the first place. Mistaking a talisman like 'maximizing shareholder value' for the deep logic of that efficacy risks taking it out of play, leaving to chance the very transition-pattern maximally suited to generate the effect sought (for example, increase in a firm's share price for the benefit of stockholders).
First-Order Value. Value-creation should be the ordering principle of business planning and action, but to serve that purpose reliably under the stresses that complex environments impose, its logical form - which we term First-Order Value - needs to be made more explicit.
First-Order Value is manifested as firms consistently realize projected states of affairs in which they are more enabled to act in furtherance of their purpose. The implications of this are significant. Enablement of this quality means, among other things, that the firm enjoys a special kind of instantiation in commerce. It is relied-upon by consumers and other stakeholders as an important 'reality' in their world. This dimension - the firm's 'commercial jurisdiction' - is a signal indicator of firm value in contemporary commerce.
Accomplishing transitions of this quality depends on the extent of a firm's Explanatory Power - its ability to understand and manage causalities. Explanatory Power of high grade enables firms to generate exceptional clarity and intentionality - a kind of élan that impels inspired forward movement because transitions are ordered in ways that make the realization of enabling states of affairs more probable as transitions unfold. First-Order Value and Explanatory Power are thus strongly interdependent.
Expressions such as ‘maximizing shareholder value’ are misleading because they entangle business actors in frameworks of thought and action that undermine the strong clarity needed to instantiate their firm's deep commercial reality. Only the creation of First-Order Value can do that - and only when First-Order Value becomes the permeating intentionality of the organization can its economic fruits serve as authentic evidence of the firm's long-term health.