by Value creation is the primary aim of any business entity. Creating value for customers helps sell products and services, while creating value for shareholders, in the form of increases in stock price, insures the future availability of investment capital to fund operations. From a financial perspective, value is said to be created when a business earns revenue (or a return on capital) that exceeds expenses (or the cost of capital). But some analysts insist on a broader definition of “value creation” that can be considered separate from traditional financial measures. “Traditional methods of assessing organizational performance are no longer adequate in today’s economy,” according to ValueBasedManagement.net. “Stock price is less and less determined by earnings or asset base. Value creation in today’s companies is increasingly represented in the intangible drivers like innovation, people, ideas, and brand.”
When broadly defined, value creation is increasingly being recognized as a better management goal than strict financial measures of performance, many of which tend to place cost-cutting that produces short-term results ahead of investments that enhance long-term competitiveness and growth. As a result, some experts recommend making value creation the first priority for all employees and all company decisions. “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,” Ken Favaro explained in Marakon Commentary. “This will give you an enormous advantage in building your company’s ability to achieve profitable and long-lasting growth.”
The first step in achieving an organization-wide focus on value creation is understanding the sources and drivers of value creation within the industry, company, and marketplace. Understanding what creates value will help managers focus capital and talent on the most profitable opportunities for growth. “If customers value consistent quality and timely delivery, then the skills, systems, and processes that produce and deliver quality products and services are highly valuable to the organization,” Robert S. Kaplan and David P. Norton wrote in their book Strategy Maps: Converting Intangible Assets into Tangible Outcomes. “If customers value innovation and high performance, then the skills, systems, and processes that create new products and services with superior functionality take on high value. Consistent alignment of actions and capabilities with the customer value proposition is the core of strategy execution.”
Steps:
Create A Company Succession Plan
Most companies do not have a formal company succession plan. Company succession planning differs from personal or family succession planning, as it focuses on forming the next generation team of key managers and employees in a company.
Don’t Forget Qualitative Factors
Quantitative factors such as changes in revenues, gross and net margins, operating cost, etc. are easy to identify and therefore easy for owners to focus their attention on. However, companies with above-average valuations excel in both quantitative and qualitative factors. Don’t overlook areas like:
- Planning
- Leadership
- Sales management
- Marketing management
- People management
- Operations management
- Financial management
- Legal management
Take a Retirement Account Perspective
Company value creation is an ongoing process, which includes:
- Creating or expand recurring revenue streams,
- Increasing expected future revenue growth rate,
- Increasing returns on existing assets,
- Discontinuing poor performing activities,
- Reducing non-cash excess working capital,
- Creating or expand barriers to entry,
- Reducing company specific risk
A value growth professional can help you think about your business as an investor as well as an owner.
Protect Existing Value
For most companies, 75% of company value is in its intangibles. Some of those intangibles are trade secrets, intellectual property, proprietary methods and/or software, customer relationships, etc. Business owners should identify key value drivers, then takes steps to protect those key value drivers, which will protect company value.
Most business owners limit their actions to protect company value to obtaining hazard insurance, worker’s compensation insurance, and liability insurance. There are other ways to protect company value, including:
- Obtaining patent protect
- Requiring employees sign intellectual property assignment agreements
- Requiring employees sign non-disclosure and non-compete agreements
- Executing buy-sell agreements will all company owners
- Acquiring life insurance to support buy-sell agreements
- Purchasing business interruption insurance
- Monitoring and taking actions to limit the loss of brand reputation
Create Customer Value
The traditional notion of customer value, where benefits minus cost equal customer value, may seem simple but can be much more complicated in practice. Customer benefits and cost can be both direct and indirect, as can be customer value. Moreover, the right set of customer benefits can create barriers to entry and/or competitive advantages.
Many business owners argue that customer value is created by providing consumers with the lowest price, highest quality, and best service. Unfortunately, those three factors are often at odds with one another. Instead, consider adopting a customer-centric approach, taking into account factors like:
- The value drivers of your customers and would-be customers
- What customers feel about your product or service offering/delivery
- The cultural landscape of your target customers
- Your customers’ value proposition determinants
- How you can create a value-added experience for your customers
- When to create value through a collaboration with customers
- Measurements of customer value creation include increasing customer acquisition, satisfaction, retention, and add-on selling. Additionally, companies that can enhance their customer’s perception of the value of their products or services are likely to enjoy higher margins.
Plan Ahead
Business owners who don’t plan often find that they spend most of their time putting out fires. Planning allows company owners and managers an opportunity to set proactive goals and objectives for the intermediate future, as well as identify solutions for key business issues. A great starting point for long-term planning is to conduct analyses around issues like:
Why your company is relevant to existing and future customers
- Current market trends in your industry
- Why customers buy from you or don’t
- Current competitors and their competitive advantages
- Your company’s competitive advantages and weaknesses
- How you can build or reinforce barriers to competitors
- Existing bench strength to ensure your company has the right talent to achieved desired results
Monetary, functional and psychological value
Value in marketing, also known as customer-perceived value, is the difference between a prospective customer’s evaluation of the benefits and costs of one product when compared with others. Value may also be expressed as a straightforward relationship between perceived benefits and perceived costs: Value = Benefits – Cost.
The basic underlying concept of value in marketing is human needs. The basic human needs may include food, shelter, belonging, love, and self expression. Both culture and individual personality shape human needs in what is known as wants. When wants are backed by buying power, they become demands.
With a consumers’ wants and resources (financial ability), they demand products and services with benefits that add up to the most value and satisfaction.
The four types of value include: functional value, monetary value, social value, and psychological value. The sources of value are not equally important to all consumers. How important a value is, depends on the consumer and the purchase. Values should always be defined through the “eyes” of the consumer.
Functional Value: This type of value is what an offer does, it’s the solution an offer provides to the customer.
Monetary Value: This is where the function of the price paid is relative to an offerings perceived worth. This value invites a trade-off between other values and monetary costs.
Social Value: The extent to which owning a product or engaging in a service allows the consumer to connect with others.
Psychological Value: The extent to which a product allows consumers to express themselves or feel better.
