Value creation is the process of a business creating products and services that its customers find consistently useful.
Understanding value creation
Value creation is a fundamental aspect of business success.
At the most basic level, value is created from work. This work may be mechanical, such as the example of a timber company that cuts down a tree and turns it into lumber.
Businesses may also create value from creative work like authoring a white paper or designing a logo.
Irrespective of the type of work, however, the purpose of a business (and the reason it exists) is to create this value, sell it to customers, and capture some of it back as profit.
In his book The Origin of Wealth, Eric Beinhocker defined value creation from a scientific perspective and claimed that it was produced via an irreversible process that gave a resource more usefulness to other people.
Under Beinhocker’s assumption, almost any activity could be used to create value such as opening a door for someone or turning solar energy into electricity.
This definition combined with the sheer diversity of modern business models may cause a problem for businesses.
How do they choose a value creation method among thousands of possible alternatives? Is one way necessarily better than another?
Value creation, according to Peter Thiel
In the 2014 book Zero to One, author Peter Thiel noted that some types of value creation were indeed more useful than others.
But most businesses, Thiel explained, sell commoditized products that are easily substituted with a competitor’s offering.
Therefore, to create the sort of value that results in consistent and sustainable success, businesses must possess unique skills and processes.
When Thiel said that “In the real world outside of economic theory, every business is successful exactly to the extent that it does something others cannot”, he was referencing competitive advantage and unique value proposition.
The primary activities in Porter’s Value Chain are those encompass the work that creates value for customers. These include inbound logistics, operations, outbound logistics, marketing and sales, and services.
Over the past 100 years or so, these activities have evolved from mechanical production in the industrial revolution to creative and customized production in the information age.
Today, software and its associated services are an increasingly important aspect of value creation for modern businesses.
Value creation examples
Let’s conclude by taking a look at some general examples of value creation in business:
A farmer creates value by using water, labor, equipment, seeds, and farmland to grow tomatoes for consumers.
A manufacturer takes inputs such as raw materials, labor, capital, and energy to produce vehicles on an assembly line.
Each car has a greater market value than the inputs used to construct it.
A customer support process that uses technology to swiftly answer questions or solve problems has value to the customer.
It also benefits the business such that the customer may purchase from them again in the future because of the value added to its customer service process.
Software that uses client input data such as resources used to create monthly invoices is another form of value creation.
The software has value to the firm selling its services because it needs to send invoices before it can earn revenue.
Photographer uses their labor and expertise to produce memorable wedding shots for a client.
A sculptor uses similar inputs to produce a bronze statue that commemorates a famous sportsperson.
Any value created by workers whose main asset is knowledge, such as scientists, design thinkers, lawyers, editors, pharmacists, architects, and engineers.
Architects who use their knowledge to design a new home using specialized software create value for the client.
- Value creation is the process of a business creating products and services that customers find consistently useful. At the most basic level, value is created from work that may be mechanical or creative.
- Author Peter Thiel noted that unique forms of value creation were more sustainable and thus sources of competitive advantage. Over the past century, the value creation activities espoused by Michael Porter have evolved from mechanical production to software and associated services.
- Value creation can be seen in a host of different contexts. These include processes, information technology, work, knowledge work, products, and commodities.
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