It is all about Value Creation
How much value can your business create in a global context?
The term Value and Value Creation is frequently mentioned in the discussions of business strategy or when a potential investment opportunity is evaluated. But what is the exact meaning of value in a business context?
Our view is that value is created in a chain of players, extending from suppliers of resources to firms, through firms, to buyers of products and services from firms (see figure 1). Value is created by a business operating together with its customers and suppliers. The customers “Willingness-to-pay” is the highest price that a customer would be willing to pay for a firm’s product. The cost includes all the inputs required by a firm: raw material, capital and labor. The value created by a transaction is the difference between willingness to pay and the cost. Value Creation determines “the size of the pie” that the business manages to capture on a defined market and industry.
From the perspective of an individual player, such as a firm, the main question is: How much value can our business expect to capture and what is the potential in a global context? This is the central question in a Value Creating Strategy?
A Value Creating Strategy defines how the firm is operating the business today and the current competitive position. Most importantly, the Value Creating Strategy defines and prioritizes the potential for operational improvements. This is a strategic assessment on how the “customers willingness to pay” could be raised and how the costs of the internal operations and purchases from suppliers could be lowered, but also how the customer base could be increased.
The above strategic assessment is essential, but the most crucial and challenging part of the Value Creating Strategy is to discover new value curves that differentiate and moves the firm to a new competitive position. This is done by asking four main questions:
- What factors can be raised well beyond industry standards (more than we do today)?
- What factors can be created that the industry has never offered (reshape today’s offer)?
- What factors can be eliminated that the industry has taken for granted?
- What factors can be reduced well below the industry standard?
By discovering new value curves, the current operation and business is challenged to move towards to a new competitive position. The main objective is not only to identify areas for operational improvements. It is also to identify factors that will reshape today’s offer and the ultimate goal is to create uncontested market spaces ripe for growth.
The Value Creating Strategy ensures that we have a clear view of what should be done in order to improve the firms value during a given time period (see figure 2). The Value Creating Strategy defines how “the size of the pie” could be increased by the business.