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Excerpt from:  Value Network Analysis
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December 17, 2008

Network Indicators for Valuing the Firm

Are there linkages between network metrics and market value?
ValueNetworks.com

This really excellent question was posed by Martin Dugage in a recent discussion in the Value Networks Google Group.

If we do believe that the value of a firm is highly dependent on the "quality" of its value networks, shouldn't we be able to establish some forms of correlation between network metrics and market value?

There are a number of people working on this question, including Mark Granovetter at Stanford. There have been a number of attempts to demonstrate that certain social network structures have a greater economic value than others. These methods are only recently being applied to firms as a consideration for valuation.

Without attempting to address all the work in this area it is certain that linkages between value network patterns and valuations or macroeconomic indicators are beginning to surface. In an evaluation of the impact of research network in Europe, specific value network patterns could be linked to specific patterns of intellectual capital formation at the regional level.

Many in the circle of value network practitioners are of the firm belief that research and practice will continue to bear out that certain value network patterns are indeed more financially successful than others. This is one of the reasons academics and scholars are interested in value networks and generating research projects.

It is too early to make sweeping statements or draw conclusions until analysts track certain value network patterns and performance indicators over time. ValueNet Works Professional Edition provides a capability to track generate and track value network patterns and indicators. The application generates a fully illustrated report of over fifty value network indicators that would support comparison of network patterns with business performance and valuation.

For example, centrality in degree shows the value a role gains from the network and out degree indicates the value a Role provides to the network. Overall centrality is about which roles have the most ties or connections. Unlike SNA where high centrality or betweeness shows a power position, a Role with very high betweeness is actually a risk factor in a value network. In combination with transaction speed (also calculated in the application) it can readily be determined whether a role is a bottleneck or an "accelerator" for the network.

Another determination of value that can easily be linked to financial indicators are the ratios of tangible to intangible deliverables generated by each role. Centrality indicators are essential to structure and value. There is an optimal ratio for specific types of value networks. It's one of the reasons to use VNA to analyze classic business activities like project management and industry specific activities like biotechnology research. This ratio is also manifest in phase changes in networks such as commercializing a scientific discovery.

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PermalinkMark Granovetter
.Joan Butler Ford Professor in the School of Humanities and Sciences
.http://en.wikipedia.org/wiki/Mark_Granovetter
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PermalinkValue Networks Google Group
.Open Value Networks Discussion
.http://groups.google.com/group/Value-Networks
Topic Tags:  golden ratio, Mark Granovetter, value networks, Valuing the Firm, VNA
by ValueNet Works (follow me) | ↑topPermalink: Network Indicators for Valuing the Firm
Comments
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More on Valuation

Intangibles and IC

Scholars like Baruch Lev have sought to extend traditional practices around intangible assets and there are also many practitioners in Europe such as Goran Roos who pursue various approaches for determining the financial value of intangible assets. Oliver Schwabe and I will be presenting a paper at Daniel Adriessen's academic intellectual conference in the Netherlands next April, which is largely populated with people pursuing the valuation question.

 

 

However, other pioneers in intellectual capital such as Karl-Erik Sveiby and Leif Edvinsson have been less concerned with the question of direction valuation of intangibles and focus more on understanding how intangibles function as strategic assets, not financial assets.

 

 

Baruch includes patents in his definition of intangible assets, while Karl-Erik, Leif (and I) would consider patents as tangible assets because they can be assigned a financial value, while other assets, such as business practices and ways of working cannot.

 

 

Further I believe the more interesting question is how we convert those assets into more negotiable forms of value. After all the real worth of an asset lies in what it enables you to do. Focusing on the value of a patent is like putting your attention on the wheel instead of the intelligence that created the wheel. The wheel may have a financial value becuase you can trade it for money and other things, but how do you value the human intelligence and creativity capacity that generated the wheel in the first place.

 

 

I believe we need to move beyond these traditional ways of only considering the financial aspects of our business ecosystems, but there is no reason to dismiss traditional methods or the reasonable extensions of those that have been proposed by Lev and others pursuing the valuation questions. However, there is a trap in the traditional ways of thinking about assets. The problem is the practice of assigning value to specific components of the business instead of considering the enterprise as an ecosystem - where the parts are interdependent and the whole of a healthy business ecosystem is greater than the sum of its parts.

 

 

Value Network Analysis (VNA) helps to avoid that trap. It is just a first step toward understanding economics as the true social science that it is supposed to be. Until we understand value as an emergent property of a complex value creating ecosystem we have not really moved beyond the rationalist perspective. What we also forget is that money has no "real" value in and of itself, it is just a unit of measure and a mechanism to make it more convenient for us to trade goods and services. It is only as valuable (literally!) as we believe it to be.

by Vena Allee (follow me) | December 21, 2008 | ↑topPermalink: More on Valuation
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