Business Practices to Build Long-Term Value

A business’s primary purpose is to maximize profit. The key ingredient to maximize profit is value creation. Entrepreneurs driven to build businesses for lasting success and profitability know the importance of value creation.

Perception of value creation differs among stakeholders. Creating value for customers translates to higher sales of products and services, ergo, higher profit. Value creation for employees leads to improved efficiency and productivity. Value creation for shareholders and investors results in increased stock prices and guaranteed capital investment in the future. Since a company’s primary focus is to provide value to its customers, it’s also essential to support the right employees, shareholders, and investors by your side.

Four aspects of a business determine value creation:

  1. The products or services offered to customers
  2. Operational processes
  3. The capability to innovate (products, people, and processes) to keep up with changing times, and
  4. The ability to fulfill unique customer needs with speed and precision.

Value creation is more than simply selling or convincing customers to buy your product. It refers to creating a product or service that your customers will want to buy irrespective of the price.

Apple made history by becoming the first publicly traded US company to reach $2 trillion as measured by market capitalization. It has also been ranked as the most valuable brand for the last eight years by Forbes. Their success amounted to two key factors, product innovation and their business model with built-in barriers for customers to move elsewhere. Apple believed in creating state-of-the-art gadgets and understanding the importance of acquiring and retaining its customers. Brand loyalty toward Apple is at an all-time high of 92 percent.

While Apple is undoubtedly a significant market player for small and mid-sized businesses, value creation for customers establishes the brand and ultimately generates higher sales.

What Is Value Creation?

Value creation is the process of building a company’s value over a period of time through dedicated, strategic efforts to increase sales and expand its customer base. Customers, employees, vendors, and stakeholders define the company’s value through a business model that defines, creates, delivers, and sustains value.

Defining a company’s value involves prioritizing its stakeholders and establishing how they are essential for its motive, purpose, and business strategy. Stakeholders actively engaged in the business hold different perspectives on issues, improving understanding of the positive and negative aspects of a business. Moreover, their presence also helps assess material issues preventing the implementation of business strategies.

Let’s understand this a little better. For example, investors might prefer short-term capital allocation while allocating capital, but the company’s management team might prefer a long-term project. It is, therefore, necessary to understand how the short-term expectations of the stakeholders will impact long-term business prospects. Leveraging such information and data is essential to identify value-creation drivers.

3 Practices to Stay on Top of Your Value Creation Strategy

Keep Company Records in Order

Since businesses operate in an ever-changing, fast-paced environment, the task of keeping and updating business records may take a back seat to the day-to-day operation. However, sloppy recordkeeping may adversely affect a company’s long-term operation. Orderly recordkeeping maintains and organizes the data needed to understand the current situation, review trends, and accurately determine future losses or profits. When your company’s documents are in order, you can more readily identify what the business needs and the areas needing improvement or re-invention.

If your financial records are in order, you can identify tax obligations and potentially save time and money. Accurate documentation of business expenses makes analyzing tax deductions easier. Updated, clean records help you spot spending trends and information essential for cutting unnecessary expenses.

Invest in Training Employees

While accounting and financial documents are essential to valuing tangible assets, a successful business also depends on intangible, valuable components like employee satisfaction, training activities, the effectiveness of R&D initiatives, etc. Typically, companies emphasize product and process innovation and understanding customer needs. However, companies must tap into their employees’ commitment, accountability, drive, and energy to innovate and deliver outstanding products and services.

Value should be created for all employees to motivate them. This means treating them with respect and offering them opportunities for professional development. When employees receive meaningful work, better compensation opportunities, and more opportunities for training and development, they will be motivated to give their best.

The lack of an employee training program ultimately leads to low employee morale and diminished performance. Similarly, underfunded R&D can result in an obsolete product line leaving customers dissatisfied. When dissatisfied customers defect, profits dwindle. This tempts management to cut back even more on training, R&D, and employee compensation, thereby accelerating the loop of customer dissatisfaction and, ultimately defection.

Document Business Protocols

Documented standard operating protocols serve as your business’s building blocks and roadmap. They act as essential guides when creating new processes or improving existing ones. Codified protocols enable employees to understand the purpose of an operational strategy. Protocols and policies also help meet specific regulatory requirements, especially for acquiring a new license or applying for a product patent.

Why should you document policies, protocols, and procedures?

  • To deliver consistency across operations. There is no need to redesign repeatable processes since they have the same logic.
  • To provide clarity. There is no operational ambiguity. The document specifies the tasks to complete and how to complete them and identifies who is responsible for each task.
  • To archive knowledge. When employees leave the company, they take their process knowledge with them. Documentation facilitates knowledge retention, knowledge sharing, and knowledge transfer among employees, which helps build an empowered workforce that understands the company’s processes and systems.
  • To train employees. Process documentation acts as a best practice guide for new employees.
  • To support process improvement. Process documents help highlight potential bottlenecks and improve efficiency within a process.

Delivering and Sustaining Value

A successful business aims to create value for its clients, customers, employees, investors, and stakeholders. Since the interests of these three groups are linked, business owners need to understand that sustainable value cannot be created for just one group unless the same value is created for others. To create value for customers, a business must have the right team of motivated employees and ensure that the investors receive attractive returns consistently.

Connect with our experienced team at Quantive to evaluate existing processes, improve them, develop team skills, and build a more valuable business.

Dan is the Founder of Quantive and Value Scout. He has two decades of experience in leading M&A transactions. Additionally oversees Quantive's valuation practice and has performed thousands of business valuations.



© 2024 · Quantive.  >> Go Army, Beat Navy!