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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 [Ref]) 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

The Economist Magazine Names Autodesk
One of the World's Most Successful Companies

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.

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