Added Value

The notion that the software business is unlike most other industries and offers unprecedented opportunities to those who grasp this fact pervades this book. In 1988's ``The New Technological Corporation'' (see page ) I tried to explain this in detail, but few people seemed to really ``get it.''

In September 1991, London-based The Economist published a striking confirmation of Autodesk's uniqueness, ranking it as the most successful company on Earth in terms of added value--the difference between the costs that go into a company's products and what customers pay for them. Autodesk's high added value is a result of technological leverage which adds intellectual content to its products.

The following is Autodesk's press release, issued a month after the issue of The Economist containing the study. Note the 1991 ``fear of greatness''--Autodesk came out Number One worldwide, but the release only mentions this in passing.

October 7, 1991
For Immediate Release

SAUSALITO, Calif. -- A recent article in The Economist magazine names software leader Autodesk as one of the world's most successful companies, Autodesk, Inc. announced today. See ``The Best Companies,'' The Economist, September 7, 1991.

According to a study conducted by the magazine in conjunction with the London Business School (LBS), Autodesk ranked number one in the world based on a new measure of corporate quality: added value as a percentage of sales during the period 1981/82-1990. Some 2,000 of the world's top publicly traded companies were included in the study. Autodesk's average added value during the period under review was 33.9% of sales. Added value ``was typically 5%'' for the rest of the field, the LBS/Economist team reported.

The study contends that the concept of ``added value'' is a better measure of corporate performance than other profitability indicators inasmuch as added value ``measures how much more a firm's output is worth than all its inputs of materials, labour and capital.'' As such, the measure provides a better guide for shareholders, states The Economist.

To arrive at a company's added value, the study took its operating profit, adjusted it for depreciation and subtracted its capital charge. According to the LBS/Economist team, added value as a percentage of sales is a measure that reconciles most of the difficulties encountered in company performance comparisons such as differences in the cost of capital and accounting practices.