Value creation v/s redistribution

Why do firms exist? There are two broad views. The capitalistic view pushed by the US until recently insists that a firm must create value to its shareholders. The European view, however, is that a firm must create value to its stakeholders, which includes employees, investors, customers, society etc. The difference between the two shows up when value is not “created” but simply “redistributed”. Typically, value creation, implies an improvement in status quo. Where such value is tangible, its creation is by way of making things or processes faster, better or cheaper. But where the said value is intangible, its creation is determined by the perception of customers or consumers.

When a bank implements an IT system that speeds up its processes, it definitely creates value. Employees work better, customers transact faster, and risks of improper or fraudulent transactions are reduced. Or a power plant for that matter so long as it does not disturb the natural ecosystem.

On the other hand, let’s take expressways, which reduce travel time, thus creating value for commuters. But we overlook the loss incurred by fuel pumps because of increased fuel efficiency, auto mechanics because cars are on the road for fewer hours, hotels because people reach their destination much faster and need to stop for the night, roadside eateries, which are not allowed on expressways, and even if there is one, commuters might give it a skip and so on. This is a case of value redistribution – from fuel pumps, hotels, restaurants, to commuters. This is also the case with IT outsourcing. In these cases, the first definition comes up as myopic, focusing solely on the firm and its shareholders with total disregard to other players. And sooner or later, such cases will inevitably lead to agitation and outcry.

Recently, the WSJ reported how Mumbai’s black-and-yellow cabbies resorted to physical protests and violence against fleet operators such as Meru. Meru offers incredible value to a certain class of commuters, by simply not screwing up. People don’t pay more for the air-conditioning, but for such basic manners as courtesy and promptness. Nonetheless, it is a case of value redistribution, and is bound to rankle the sentiments of certain groups. Not that I support the case of taximen. Rather, I am appalled at their stupidity for I don’t know what else it can be. The unique prepaid system in our country doesn’t benefit anyone. Passengers pay nearly 50% more than the normal rate and I am quite certain the cabbies get paid less than the regular fare. It is only the middlemen who make money. But how did we get here? Simply because our cabbies refused to be honest. I can pardon them for lack of polish and manners for it is a matter of upbringing, and even the burgeoning middle class is woefully short on this. But there can be no excuses for dishonesty, and unless they are willing to see this, no amount of agitations and protests will help.