Value creation in business: importance, concepts, & examples
When it comes to investing in the most valuable services, the customer is always right. After all, if customers spend their hard-earned income on a product or service, they want the best bang for their buck.
Like customer needs, those of stakeholders are equally important. Of course, you can’t forget to prioritize your company’s interests, as well. How does each value chain intersect to create profitable business initiatives?
The most successful businesses understand how to leverage value creation. Creating sustainable customer value, stakeholder value, and company value keeps you top-of-mind and gives you a competitive edge whether you’re a small business or corporation.
What is value creation in business
Value creation identifies the intersection between the overlapping interests of customers, stakeholders, and the organization itself. A successful business model leverages all of these values within company initiatives.
Value creation is offering products that meet and exceed customers’ expectations. When a company inspires customer loyalty, profits increase. When stakeholders receive high returns on their investments, they’re willing to contribute more capital. This capital sustains the company’s future initiatives, such as increased employee benefits and training. When employees are valued, productivity and product innovation increase.
Do you notice a trend? By focusing on value creation, the initial investment reinvests itself and is amplified.
Why is value creation important?
Investing in value creation sparks a cycle of sustained advantages for all aspects of your business. In other words, the value creation trade-offs keep your business profitable so you can continue doing what you’re doing – and do it even better. These are the key areas influenced by value creation:
1. Sustainable business success
Targeted value creation ensures long-term value for this quarter and for years to come. Without a clear vision of the company’s objectives, initiatives are unfocused. When resources aren’t sustainably allocated, cash flow halts, the bottom line decreases, and future endeavors are at a disadvantage.
2. Customer satisfaction
The customer relationship doesn’t end at the buying decision. In fact, it begins with the creation of value. Sustained customer satisfaction results in continued business with supportive consumers. These long-term customers inspire new purchases through word-of-mouth product recommendations to their friends and family.
3. Competitive advantage
When value creation informs your company’s initiatives, it keeps your offerings top-of-mind and your name at the top of the food chain. The shutdown of many businesses during the COVID-19 pandemic proves that having a competitive advantage does more than increase profits – it can keep your company alive during times of strained financial returns.
4. Stakeholder engagement
Within a company’s practices, value creation can take the form of transparent communication regarding goals, performance, and assets with stakeholders. This clarity sustains the balance between internal initiatives and stakeholder engagement. The decision-making process strengthens when these perspectives align.
5. Financial performance
Understanding the values and needs of customers, stakeholders, and the organization results in the most competitive pricing that both appeals to customers and optimizes profits. When the creation of value takes center stage in the decision-making process, financial returns are fully realized because of the precision of company initiatives.
6. Innovation and adaptability
Change is the only constant, and customer needs are no exception. Without refocusing efforts and innovating your offerings, your customers will find another company that can meet their evolving expectations. Innovating your products and services retains old customers and attracts new ones.
Enjoy the TED Talk about Value Creation by Bill Gross!
How is value creation achieved?
Although values are intangible, they need real metrics to have a real impact. Now that we’ve covered the foundations of value creation, let’s explore what they look like in practice.
- Customer needs: How do you meet and exceed customer needs? It all comes down to quality over quantity. When you understand what your customer wants, you create products that precisely meet their expectations. This precision requires understanding your targeted consumer’s specific market segments.
Consumers want to get their purchase decision right the first time, which means buying products that add the most value. Researching current, short-term customer needs and anticipating their future preferences results in high-value products.
- Innovation: Everyone would rather be a leader in their industry instead of scrambling to keep up. Fostering innovation in products and processes creates cutting-edge value within all aspects of your business model, from development to launch. Innovation creates financially sustainable practices and high-value customer offerings.
Without innovation, your products become relics (like the Blackberry phone, which recently became obsolete after being edged out by its more innovative competitors).
- Customer satisfaction: Creating value for your customers through high-value, innovative products increases customer satisfaction and loyalty. Satisfaction is a difficult metric to quantify, but tangible services like customer loyalty programs and responsive customer service departments enhance the customer experience.
- Efficiency: Targeted value creation improves operational efficiency and cost-effectiveness within your company’s processes. Understanding how each step fits together (and its impact) allows for optimization and the sustainable allocation of resources.
This value creation could look like implementing a new workflow software that automates paperwork. Employees are now free to refocus the time and energy they once spent on paperwork to larger company objectives.
- Differentiation: Having a strong company vision influenced by value-creation strategies ensures you and your employees stand out as business leaders. A unique value proposition differentiates your skills and offerings from competitors. Customers understand exactly how you meet their specific needs through the precise value of your company’s products and partnerships.
- Social and environmental responsibility: With the ever-increasing impact of climate change, consumers are asking for value in terms of sustainable business practices. Eco-consciousness is admirable, but exaggerating sustainable initiatives recycles the same problem. Companies that misrepresent their sustainable practices as a marketing ploy have been accused of greenwashing.
Fear of greenwashing backlash causes some companies to greenhush, or under-communicate their climate objectives. Meeting customer expectations for sustainability – and presenting your company’s practices honestly – balances these value-creating fundamentals.
What are some examples of companies leveraging value creation?
Companies that understand how to leverage value creation often become household names. Let’s take a look at how three companies became business leaders.
Apple Inc. was founded in 1976. Over 40 years later, its product launches still create a stir. Apple’s innovative products, namely the iPhone, iPad, and iMac, consistently meet customer needs through value creation that prioritizes quality and user experience.
The company has consistently innovated its business practices, such as creating seamless integration across all devices. Because Apple has found a balance between the interests of consumers, stakeholders, and company initiatives, the company consistently dominates market shares in the tech industry.
Airbnb disrupted the hospitality industry by directly connecting people needing a place to stay with people who had a room to spare. The company recognized the needs of both parties and launched a service that benefited everyone.
Airbnb added value through its online platform by providing affordable short-term housing and allowing homeowners to monetize their spaces. Additionally, by interrupting the supply chain and cutting out hotel operating costs, the company maximized its profits to create value for itself as an organization.
Patagonia is a brand with a cult following because of its high-quality outdoor clothing and commitment to sustainability and social responsibility. The company is known for sustainable manufacturing through transparent supply chains. Patagonia has established strong customer loyalty – which in turn has inspired counterfeit clothing.
Patagonia has launched a lawsuit against Nordstrom for selling knock-off products. This lawsuit reinforces the company’s value creation because it protects the quality of its products, reinforces its branding, and removes unsustainable clothing from the racks.
In a move that makes Patagonia’s stakeholders the largest of all, Patagonia founder Yvon Chouinard has declared that Earth is now Patagonia’s shareholder. The founder renounced his ownership, and the company’s profits now funnel toward fighting climate change.
How can you unlock business opportunities through skillful negotiation?
Value creation is an investment that has major returns for both large corporations and small businesses. At every level and department within a company, understanding how to leverage the value-creation process is a skill that establishes you as an integral team player.