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What’s it: Value creation is about producing something or making something more valuable. We can use it to refer to many meanings.
For example, creating value could be done by adding value. Businesses create value by turning inputs into more valuable outputs. It makes consumers willing to pay more. And, the difference between the selling price and the dollars spent buying the inputs is the value they add. In this case, the business creates value for the customer.
In other cases, the business creates value for shareholders by generating more wealth. For example, suppose the company is public. In that case, it is reflected in the dividends distributed and the increase in its stock price. To do so, the company must have a sustainable competitive advantage to generate returns above the average competitor.
In today’s competitive business landscape, creating value is no longer optional; it’s fundamental for survival and long-term success. By focusing on value creation, businesses can cultivate a win-win proposition for both themselves and their stakeholders.
For customers, value creation translates into products and services that address their needs and wants, justifying their spending and fostering loyalty. For shareholders, value creation translates into increased profitability, rising stock prices, and potentially higher dividends. Ultimately, a company’s ability to consistently create value is a key driver of its sustainability and growth.
Creating value for customers
Customer value creation is the cornerstone of any successful business. It’s about going beyond simply offering a product or service and crafting a compelling value proposition that resonates with your target audience and justifies their spending. This requires companies to not only focus on the inherent features and quality of their offerings but also strategically add value across various touchpoints.
Expanding the value equation
Traditionally, customer value might have been equated with aspects like product functionality or durability. However, in today’s experience-driven economy, customer value creation encompasses a broader spectrum. Here’s why:
- Customer convenience: In today’s fast-paced world, convenience is king. Think about features that simplify the customer journey, such as easy-to-navigate websites, user-friendly apps, or efficient customer service channels. All these contribute to a more positive customer experience and, ultimately, perceived value.
- Branding: A strong brand identity goes beyond just a logo or tagline. It’s about the emotions, experiences, and values associated with your company. Building a brand that resonates with your target audience and aligns with their values creates a sense of connection and loyalty, further enhancing customer value perception.
It’s important to remember that customer value creation and employee value creation are often intertwined. A company with a culture that prioritizes employee well-being and development is more likely to have a workforce that is engaged, motivated, and dedicated to delivering exceptional customer service. This, in turn, translates into a more positive customer experience and, ultimately, higher perceived customer value.
By focusing on these broader aspects of customer value creation, businesses can move beyond simply offering a product and, instead, craft a compelling experience that justifies customer spending, fosters long-term brand loyalty, and ultimately maximizes lifetime customer value. Lifetime customer value refers to the total amount of business a customer generates throughout their relationship with the company. By creating a loyal customer base, businesses can ensure recurring revenue and a more predictable revenue stream.
The importance of creating customer value
Businesses produce goods and services by adding value to the inputs they use. For example, a tire manufacturer converts cheap rubber latex into tires and sells it many times.
Creating value allows companies to differentiate their products from those of competitors. By doing so, they can secure their customers in the long run, allowing the money to continue to flow to them.
Three reasons why creating value for customers is essential for companies.
First, the company makes a profit with it. By adding value, they can charge a price higher than the dollar they pay suppliers. The higher the positive difference between the selling price and the unit cost, the greater the company’s profit for each product sold.
Second, the company differentiates its products from competitors’ products. Added value does allow businesses to generate profits. However, adding value alone is not enough. They must differentiate their products by which customers have reasons to prefer their products over competitors’ products.
Third, value creation encourages loyalty and strong long-term relationships. When customers are loyal, they continue to buy products from the same company. So, it keeps the customer’s money flowing to the company.
In addition, loyal customers are usually also willing to recommend products to others. So, the company can save its promotion costs.
Examples of customer value creation
To create value, companies must know who their customers are and understand what they want. It usually requires market segmentation to define the targeted market.
The company then develops a customer profile in which information about the target consumer is clearly defined. It then develops the appropriate marketing mix. Finally, it has to decide what products to sell, at what price, and how to promote and distribute them to consumers.
Another key aspect is developing a unique selling proposition. Companies must compete with competitors in the market to sell goods. So, they must attract customers and encourage them to continue buying their products over competitors’ products.
Companies must build differentiation by which consumers have reasons to choose the company’s products over competitors. And if their differentiation is successful, competitors’ customers may also switch to the company’s products.
There are several ways to create value for customers. They will vary between businesses. Here are some examples:
- Additional features or functions. For example, smartphone manufacturers are embedding high-resolution cameras to create value.
- Quality. Customers prefer quality products over those that are not because, for example, they are more durable.
- Design. When people buy furniture or wooden furniture, design aspects are considered in addition to, for example, the quality of the wood used.
- Convenience. For example, a company saves customers time through its products as fast-food restaurants do.
- Ease of use. For example, consumers like easy-to-use software rather than having to write programs to execute commands.
- Customer service. For example, companies provide a delivery service or offer product installation in the customer’s home.
- Branding. It is about influencing consumers to perceive the company’s products to create strong brand equity.
Creating value along the value chain
Value creation isn’t just about the final product; it’s a continuous process throughout a company’s value chain. Imagine an assembly line – each step adds value to the raw materials. Businesses create value at every stage, from research and development (R&D) to customer service.
In R&D, value creation involves market research to understand customer needs and develop innovative products. Procurement focuses on getting high-quality materials at competitive prices. Production optimizes processes to ensure efficiency and quality.
Marketing & sales get the product in front of customers through effective communication and distribution channels. Finally, customer service builds loyalty by providing excellent service and addressing customer feedback. By focusing on value creation at each stage, businesses ensure their offerings meet customer needs, justify their price, and drive long-term success.
Creating value for employees
In today’s competitive talent market, attracting and retaining top talent is crucial for business success. But simply offering a paycheck isn’t enough. Companies that prioritize creating value for their employees unlock a multitude of benefits, fostering a more engaged, productive, and loyal workforce.
Why creating value for employees matters
When employees feel valued and appreciated, they are more likely to be invested in their work and contribute their skills, talents, and ideas to the organization’s success. Let’s explore the key reasons why creating value for employees is no longer optional but a strategic imperative for businesses seeking long-term sustainability and growth.
- Enhanced employee engagement: When employees feel valued, they’re more likely to be invested in their work and go the extra mile. This translates into increased productivity, innovation, and a higher quality of work.
- Reduced turnover: Employees who feel valued are less likely to seek opportunities elsewhere. Reduced turnover saves companies significant time and resources associated with recruitment and training.
- Improved employer brand: A company known for valuing its employees attracts top talent more easily. A positive employer brand reputation fosters a competitive edge in the recruitment landscape.
- Increased customer satisfaction: Engaged and motivated employees often provide superior customer service, leading to higher customer satisfaction and loyalty.
How to create value for employees
While competitive compensation is certainly important, creating value for employees goes beyond just a paycheck. It’s about fostering a work environment that recognizes and appreciates their contributions, provides opportunities for growth, and promotes a healthy work-life balance. Here are some key strategies companies can implement to create a workplace where employees feel valued and empowered to excel.
- Professional development opportunities: Investing in employee training and development programs demonstrates a commitment to their growth and future within the company. This can include skills training, leadership development programs, or tuition reimbursement for relevant courses.
- Competitive compensation and benefits: Offering competitive salaries, benefits packages (health insurance, paid time off), and potential bonuses demonstrates that the company values their contributions.
- Positive work environment: Fostering a culture of respect, collaboration, and open communication creates a workplace where employees feel valued, supported, and empowered to do their best work.
- Work-life balance: Implementing flexible work arrangements, remote work options, or generous paid leave policies demonstrates a company’s understanding of employees’ need for balance between work and personal life.
- Recognition and appreciation: Recognizing and appreciating employee achievements, both big and small, reinforces a positive work environment and motivates employees to continue exceeding expectations.
By implementing these strategies, companies can create a work environment where employees feel valued and appreciated. This, in turn, fuels a cycle of employee engagement, productivity, and, ultimately, business success.
Creating value for shareholders and investors
Creating shareholder value is identified with increasing shareholder wealth. How is it done? When investing in a publicly traded company, shareholders have the potential to earn money from two sources:
- Dividend
- Capital gain
Dividends are the portion of net income distributed by companies to their shareholders. Some companies usually routinely pay dividends. Others may not hold it as retained earnings to strengthen internal capital.
Capital gain is the shareholder’s gain when selling the stock price higher than the purchase price. Thus, the higher the stock price rises after they buy, the bigger their profit.
Value creation is usually associated with a sustainable competitive advantage. If successful, the company provides higher returns to shareholders than the industry average. Experts measure it using return on invested capital (ROIC).
The importance of creating shareholder value
Shareholders supply equity capital to the company. It becomes one of the sources of funding to grow the company’s business in the long term. Thus, the company must create value for shareholders to ensure investment capital is available in the future. Happy shareholders are also willing to inject new capital when company management needs it.
Take public companies as a case. By creating value, the company’s share price eventually follows. An increase in the share price allows the company to raise more funding in the future. For example, when they need additional capital, they can issue new shares. Because the stock price is high, the company can raise large funds.
Linking shareholder value with ROIC and competitive advantage
Return on invested capital (ROIC) is often used to measure a company’s ability to create value. It tells us how much return the company makes for every capital invested in the company.
When posting a higher ROIC than the cost of capital – measured by the weighted average cost of capital (WACC), the company creates shareholder value. Therefore, the company invested money optimally from a management perspective because it generated a higher return than the costs incurred to raise capital.
On the other hand, shareholders—stock investors—view the cost of capital as the risk they are willing to tolerate to invest money in the company. Because of the higher ROIC, they get a higher return than the risk they take.
Then, before investing in a company, shareholders have several alternative companies to choose from. Depending on the potential returns offered, they can choose a company or its competitors. And, of course, they will choose the company with the highest ROIC.
The highest ROIC is usually associated with the company’s success in gaining and maintaining a competitive advantage. To this end, the company can choose two alternative competitive strategies: cost leadership and differentiation, as Porter suggests in his generic strategy.
In the resource-based theory, competitive advantage is supported by the company’s core competencies. It is formed from the company’s resources and capabilities in using them to create value. Besides being valuable, core competencies must be rare, difficult to imitate, and non-substitutable.
Finally, competitive advantage can come from many aspects of a business. For example, it could be the cost advantage of having an efficient logistics system. Technological capabilities can be another source. Another example is providing superior value to customers by offering uniqueness.
