Value creation begins with a proactive mindset and is driven by the business owner’s awareness of the market and commitment to action. It focuses on the execution of proactive endeavors to help increase the net worth of the products and/or services the business offers, realize better returns, and increase value for customers, shareholders, and stakeholders.
What Drives Value?
Economic value and the value of intangible assets drive a company’s overall value. Every business owner should consider the following factors to build the value of their company’s intangible assets:
- The company’s credibility in the market. Has your company kept its promise to its customers and stakeholders? If yes, you are on the right path to value creation; if not, you must examine the reasons and take corrective action.
- Your vision. Are you on track with your plans for growth? When you share your vision with your employees, you should instill confidence. Stakeholders like to see and identify with how the company will fare both in the short and long term.
- Capital investment. One of the best ways to boost goodwill among customers is by investing capital into well-thought-out strategies for growth.
- Investing in people. Employees are any business’s primary asset. When you invest in their professional development, you are on track to building the future value of the company.
Value creation is an essential management skill, so why do so many companies struggle? Why are your value creation efforts not delivering the desired results? What’s holding your company back from executing successful value creation strategies?
Let’s discuss some of the top reasons your value creation efforts get blocked.
An Entrenched Mindset
Are you are unable to let go of your old mindset and adopt a newer, proactive approach?
A business creates value through a range of activities, relationships, and cause-and-effect scenarios facilitated and affected by regulatory measures and environmental contexts. Interactions between the company and its customers, stakeholders, employees, suppliers, and regulators are linked and provide meaningful context as to how the company manages business activities.
As a business owner, you must understand how all these elements interact with each other. You also need to develop viable solutions and move beyond your comfort zone. It’s vital to recognize self-limiting beliefs and work on them. Challenge your beliefs and experience-based assumptions. If you fail to do so, you limit your ability to see potential opportunities, which could lead to missing growth opportunities, sales prospects, and new niches.
iPhone’s Revolutionary Act
Apple asked customers what they wanted in their cellphones. They expressed a desire for more physical keys. Steve Jobs delved deeper into the core of the issue and discovered the actual customer need: they wanted their phones to have greater functionality. The result was the first smartphone with a touchscreen keypad and zero physical keys.
Lack of Academic Knowledge
Are you taking advantage of opportunities? Most owners of small- and medium-sized businesses have excellent practical knowledge of the industries in which they operate. However, they lag in applying academic knowledge, like management, finance, marketing, organizational behaviou, and human psychology. This lack often leads to missed business opportunities, faulty decision-making, and, sometimes, confirmation bias. They fail to look at their business holistically and fail to recognize future economic trends and changing customer needs.
Avoiding Risk in Lieu of Managing Risk
According to an article published by Forbes, “Nearly nine out of 10 managers recognize that risk management should focus on value creationâ€”not mere risk avoidance. But fewer than one in five are taking sufficient action in this regard.”
Most owners recognize longstanding, emerging physical and strategic risks and have forged their responses to them. But they need to delve a little deeper: are these the only issues? Are they the right issues for their company? Are they overlooking issues such as cybersecurity, technology disruption, and political risks?
So, it’s surprising that even though 87% recognize the importance of emphasizing risk managementâ€™s role in value creation, Nonetheless, only 18% cite value creation as a conscious goal of their risk management strategies.
Risk avoidance refers to not performing any activity that may have the possibility of carrying risk. For instance, a risk-avoidant investor may not invest in oil stocks because of the political and credit risks associated with oil.
On the other hand, in risk management, you mitigate potential loss by applying a staggered approach. For example, an investor who already owns oil stocks can reduce the associated risks by diversifying his portfolio and investing in stocks of other companies that tend to move in the opposite direction of oil equity. Thus, they are able to understand and quantify their liabilities by balancing the risk and reducing it through hedges.
If we compare the two, an investor who avoids the risk relinquishes all chances of potential gains through oil stocks, as opposed to an investor who manages the risk. If the market condition is favorable, then his stocks will appreciate in value; but if the stock position falls, his investment is protected by the other options.
Risk management begins with identifying and assessing risks. To identify the risks, the business owner first needs to understand theÂ amount of risk they want to pursue value creation.Â They should identify whether the risk is a strategic risk, a preventable risk, or an external risk. This distinction allows the business owner to identify both negative andÂ positive outcomes of the risk for any given value creation strategy.Â The next step is to design a planned response for the risks.
When owners fail to understand the relationship between value creation and risk, they fail to grow beyond a certain level.
Excessive Executive Compensation
Published in 1977, Peter Drucker wrote that the correct ratio between the CEO’s salary and that of the average worker is 20 to 1. Per the Economic Policy Institute, CEO pay in the US peaked in 2000 at $20.7 million (in 2016 dollars), 376 times the pay of the typical worker. In 1995, the CEO-to-worker pay ratio was 123 to 1; in 1989, it was 59 to 1; in 1978, it was 30 to 1; and in 1965, it was, as Drucker’s ratio would have it, 20 to 1.
According to Institute for Policy Studies, rapid escalation of executive wages certainly has its consequences: when the pay gap widens to such an extent, it is difficult to foster the right ambiance for teamwork, camaraderie, and trust in a business needs to succeed.
Business owners often believe that CEOs need the motivation of higher pay for better performance and that higher salaries represent the higher demands of executive skill in the corporate world.
Manfred Kets de Vries, Distinguished Clinical Professor of Leadership Development & Organizational Change, opines both these arguments fail when we look at reality and take human motivation into account. Linking high salaries to high-performance expectations is not a parameter of excellence and commitment to work. A self-motivated CEO driven to deliver results will work hard, whatever the wage.
Misplaced Priority of Correction Over Prevention
“The true purpose of business is to create a customer.” – Peter Drucker.
Creating brand value refers to creating a brand that upholds its promise of delivering a valuable, consistent, meaningful product or service. This is the true source of sustainable value creation. The value of a product or service lies in how well it solves and satisfies customer demands.
Whenever there is a complaint about your product/service, the value that you provide decreases. Preventing complaints arising from poor performance or poor quality requires a mindset that works efficiently to prevent those complaints rather than merely correcting problems revealed by those complaints. Over time, the mindset of continuous improvement will drive the business to a state of operational excellence.
Prioritizing Process Over Customer Experience
An overemphasis on process-based phrases such as CRM, customer management, customer delight, etc. ignores customer satisfaction being an experience, not a process. Supporting this declaration, a Segment Today survey reported: “49 percent of shoppers made impulse buys after receiving a personalized recommendation; 44 percent will become repeat buyers after personalized experiences.”
Companies that successfully handle the customer journey and customer experience with their products enjoy better returns like increased sales, higher revenue, decreased churn rate, better customer feedback, and increased employee satisfaction. When all the people within a company work toward a common customer satisfaction goal, it results in better collaboration across departments, functions, and levels.
Understanding the customer journey and figuring out how to begin the change needs two things: 1) top-down, experience-based, and judgment-based evaluations and 2) a data-driven approach from the bottom-up. When these efforts work parallel to each other, you can transform the customer experience and reap the rewards.
Lack of Synergy Between Departments
Sony’s Missed Opportunity
Sony has always been a leader in portable music, from the Walkman to portable CD players and mini-disc. No other company matched their ability to cater to the music industry to such an extent. In 1999, they introduced two digital music players: one was a memory stick Walkman with an internal storage option developed by Sony Personal Audio Company and the other was Vaio Music Clip developed by Vaio Company. The Vaio Music Clip also had an internal storage option; but instead of a memory stick, it resembled a fountain pen. Each product had 64 megabytes of memory, could store approximately 20 songs, and was priced on a higher side.
Since Sony promoted two different devices at the same time, it created two silos that competed internally while confusing buyers. Sony complicated the situation further by creating a third silo, Sony Music, to protect against issues like piracy and freeloading. This acted as an additional handicap as it prohibited access to an array of music.
Sony lost out to Apple’s iPod, in spite of spending more time on these products because the three silos worked independently without sharing resources, knowledge, or customer feedback.
In the same manner, a lack of synergy between departments like HR and IT can also destroy a company’s value. For the longest time, HR was known as the paper department with heaps of paper records. It is only in the past decade that HR processes have been streamlined with digitization. Now that most of their internal functions are digitized, the HR teams can work more proactively towards their other key function, organizational development.
Value creation happens when owners address and resolve complex issues and adapt to fast-changing market conditions. The journey toward value creation leads to significant changes while challenging leaders and teams. To manage issues, business owners and their leadership teams must lead with values that reflect the company culture. They should also ensure that all the teams are aligned with their vision and goals. This will gradually drive value creation efforts in the right direction.