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."
Although the intangible factors that drive value creation differ by industry, some of the major categories of intangible assets include technology, innovation, intellectual property, alliances, management capabilities, employee relations, customer relations, community relations, and brand value. According to Kaplan and Norton, the link between these intangible assets and value creation is corporate strategy. It is important to note that investments made to enhance intangible assets (research and development, employee training, and brand building, for example) usually provide indirect rather than direct benefits. In this way, focusing on value creation forces an organization to adopt a long-term perspective and align all of its resources toward future goals.
Laurie Collier Hillstrom
"Creating Value: Value Creation Index." ValueBasedManagement.net. Available from < http://www.valuebasedmanagement.net/methods_valuecreationindex.html >.
Favaro, Ken. "Put Value Creation First (If You Want to Grow Your Way to Greatness)." Marakon Commentary. 1998. Available from < http://www.favaro.net/publications/pvcf/ken_pvcf.html >.
Kaplan, Robert S., and David P. Norton. "How Strategy Maps Frame an Organization's Objectives." Financial Executive, March-April 2004.
——. Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Cambridge: Harvard Business School Press, 2004.
Kapoor, Amit. "Creating Value." Financial Times, 13 March 2003.
Madden, Jim. "Creating Corporate Value." Financial Executive, March-April 2004.
Perla, Michael L. "Financial Value Creation." CFO Refresher, 2003. Available from < http://www.refresher.com >.