Business value: Being good enough, is not good enough –give customers, employees, and investors a reason to be faithful. ~ Graham Roberts-Phelps
The fundamental principle of business value is to ‘create value’ for all stakeholders, primarily; ‘customers’, ‘employees’ and ‘investors’. The most successful organizations understand that ‘sustainable value’ cannot be created for one group unless it is created for all. Initially, focus should be on ‘creating value’ for ‘customers’ but, this cannot be achieved unless ‘employees’ are carefully selected, developed and rewarded, however, unless ‘investors’ receive consistently attractive financial returns, resources and support won’t be available:
These are symbiotic relationships. Increasingly, businesses view their fundamental purpose as innovators and creators of a continuous stream of added-value; for customers, employees and investors, in ways that integrate the interests of all three groups. Not the traditional maximize short-term earnings or beat the competition. The ultimate goal is long-term growth and consistent profitability, and ‘value creation’ is the optimal business strategy.
In the article “Model of Corporate Value Creation” by Cengiz Haksever, Radha Chaganti, and Ronald G. Cook write: ‘Value’ is a central concept in economic theory; theories of different schools of thought have been developed around different definitions of ‘value’. However, unlike ethicists, economists are interested in the value of ‘things’. Adam Smith in his book ‘Wealth of Nations’ formalized the concept of ‘value’. More recently, in addition to economists, scholars in various fields of management and engineering paid increased attention to the concept and measurement of value and inevitably have come up with different definitions.
These range from ‘value’ being simply equal to ‘price’ to more elaborate definitions. For example, Michael Porter defines value as “what buyers are willing to pay” and “superior value results when a firm offers lower prices than competitors for equivalent benefits or when it provides unique benefits that more than offset a higher price”. Most economists, however, make a clear distinction between ‘value’ and ‘price’ for goods/services. Then, our definition of value: “Value is the capacity of a good, service, or an activity, or activities of an organization to satisfy a need, or provide a benefit to a person or legal entity”.
This definition of value is clearly broader than the traditional definition used in economics. It includes any type of good, service, or act that satisfies a need or provides a benefit, tangible or intangible, including those that positively contribute to; the quality of life, knowledge, prestige, safety, physical and financial security, as well as providing nutrition, shelter, transportation, income…
In an article by Paul O’Malley; the most successful organizations understand that the purpose of any business is to create value for customers, employees, and investors and that all their interests are inextricably linked. In today’s economy, value creation is based typically on innovation and on understanding unique customer needs. But companies can innovate and deliver outstanding service only if they tap the commitment, energy, and imagination of their employees.
‘Value’ must therefore be created for ‘employees’ in order to motivate and enable them. Employees value meaningful work, excellent compensation opportunities, and continued training and development. ‘Real’ value creation– and long-term growth and profitability– occur when companies develop a continuous stream of ‘innovation’ that offer unique and compelling benefits to a set of target customers. This means that to maintain industry leadership, a company must establish a sustainable process of ‘value creation’…
In the article “Build Culture of Value Creation–Value-Management” by Steve Chopp and John K. Paglia write: ‘Value management’(VBM) is the alignment of key organizational processes; such as, strategic planning, budgeting, compensation, performance measurement, training, and communication centered around ‘value creation’. The organization needs this alignment and consistency to develop a culture whereby individuals, at all levels, will make decisions focused on sustainable long-term ‘value creation’.
A study by ‘Haspeslagh, Noda, and Boulos’ reports that the difference between successful and unsuccessful companies is that successful companies realize that VBM is not simply about the numbers; it is about building a culture around ‘value creation’. In other words, VBM has to become a way of life, and anything less will lead to the creation of another tombstone in your company’s junkyard of failed initiatives.
A Harvard Business Review (HBR) Study highlights this importance: 62% of the successful VBM companies reported training more than 75% of their managers in VBM concepts, whereas only 27% of the unsuccessful companies trained their management staffs. Realizing that VBM is a cultural change is the key to lasting change that will create sustainable improvements in shareholder value.
As a company implements VBM, it will need to accomplish three steps: gain senior team commitment; customize the VBM framework; make VBM a way of life in the organization. VBM provides an organization the opportunity to significantly improve performance by aligning the entire organization around ‘value creation’…
In the article “Introducing the New Value Creation Index” by Geoff Baum, Chris Ittner, David Larcker, Jonathan Low, Tony Siesfeld, and Michael S. Malone write: No one has yet developed a systematic means to tell us how much; say, ‘Amazon.com’ is really worth; we have no accounting system that captures all the hidden values– brand, human capital, partnerships, intellectual property— embedded within the total market valuation of a company in the new economy.
When intangible assets make-up a huge portion of a company’s value, and when that value is re-measured every business day by stock market analysts and traders, the current system of financial measurement has become increasingly disconnected from what appears to be, truly valuable in the new economy.
In the current economy, not only do intangible assets make up nearly all of the value of the hottest companies but they now may represent as much as half the value of the entire U.S. economy. What are the key non-financial factors in creating value for the modern corporation? The answers ranged from ‘employees’ to ‘products’ to ‘company image’.
Historically, most intangible asset measurements have been top-down: Investors theorize a contributing factor and then try to figure out how to measure it. Our approach was different. What we found was surprising. Some perceived value drivers translate into market value; others do not.
Our research found that the important drives for corporate value (in rank order) were: (1) Innovation; (2) ability to attract talented employees; (3) alliances; (4) quality of major processes and products; (5) environmental performance; (6) brand investment; (7) technology; (8) customer satisfaction. Surprisingly, for all the blather over the past 10 years about the importance of customer satisfaction, it apparently has no major effect on corporate value. Why?
It may be that real customer satisfaction is now inextricably tied to innovation. If your product line is at the cutting edge of technology, your customers probably are happy; if your products aren’t state-of-the-art, then no amount of call centers and training videos is going to help.
For Internet companies, the value drivers were different (in rank order of importance): (1) alliances, (2) innovation, (3) eyeballs (usage traffic), (4) brand investment, (5) stickiness (minutes spent on Web pages). Here, the most important value driver was the number of ‘alliances and alliance partners’ and ranked close behind was investments in ‘innovation’…
In the article “Put Value Creation First” by Ken Favaro writes: Understanding where, how, and why ‘value is created’ within your company and your markets is the best, most objective way to identify which of your activities and assets are distinctive enough to provide a platform for sustainable and profitable growth. Putting ‘value creation’ first gives companies two advantages over their competitors in driving for profitable and sustainable growth: First is ‘capital’, second is ‘talent’.
In a world where nearly everyone faces abundant choices, the challenge for all businesses is to develop and sustain a uniquely attractive proposition for both customers and employees. To consistently put ‘value creation; first requires leadership skills, discipline, and perseverance.
If you put ‘value creation’ first in the right way, your managers will know where and how to grow, they will deploy capital better than your competitors, and they will develop more talent than your competition. This will give an enormous advantage in building the company’s ability to achieve profitable and long-lasting growth…
In financial terms, ‘creating value’ means earning a return-on-capital that exceeds the cost-of-capital over time; or alternatively, it means earning a positive economic profit. The term ‘value creation’ can be a misnomer, but it’s simply: delivering additional value to the bottom line. However, the difficulty lies in identifying the particular ‘value(s)’ out of the plethora of intangible drivers that you have to deal with.
Non-financial factors like; innovation, people and ideas are difficult to quantify, and rarely acknowledged in accounting methods— and not adequately measured, managed or reported by organisations. According to ‘Juergen Daum and Karl Gruber’, traditionally it was sufficient to bring the ‘right product’ onto the ‘right market’ at the ‘right time’; however, the pace of technological development and the hyper-competition brought on by globalization have changed the very foundation of the formula for business success.
It’s not really, what a company produces and offers on the market that determines success anymore, but rather how it goes about it. That is, how creative the company is in shaping its value-added offering, value creation model and profit model in a way that will result in an effective business model.
Enabling the company to stay ahead of the competition by continually ‘creating-added-value’ for customers, employees, and shareholders… In other words, instead of placing the ‘right product’ on the ‘right market’; it is essential for a company to have the ‘right business model’ for the ‘right target group’ at the ‘right time’.
A business model is the ‘right’ one as long as its; value-added offering, value creation model, and profit model fit-in with the target market conditions and provides a unique competitive advantage and relevance to its core target groups; customers, employees, investors..
“Price is what you pay, value is what you get” ~Warren Buffett