Why Value Creation is the Foundation of Business: How to define it, measure it, and manage itEric Jorgenson explains why value creation is the foundation of business and how to define and measure it. Evergreen is a collection of links to the best learning resources in business, collected by a group of managers, founders, and investors
Value Creation
Business begins with value creation
- The purpose of an institution is to create and deliver value in an efficient and sustainable way that generates profit after cost
- Value creation is the starting point for all businesses
- Definition of value
- Evolution of value creation through history and in the future
- How value can be measured and managed
Not All Value is Created Equal
Creating value by producing a commoditized product is not a pathway to success
- If you want to create the kind of value that builds a lasting and successful business, Thiel says you must be unique
- All happy companies are different: each one earns a monopoly by solving a unique problem
- To solve that unique problem, you must develop unique skills or processes
Historic Value Creation
An infographic from Funders and Founders summarizes the long history of a wide variety of human attempts at value creation.
Open Questions about Value Creation
Is it possible to create profit without creating value?
How Value is Created (Value Defined)
Value is created through work
- The purpose of a business is to create value (through work), sell or trade it to customers, and capture some of that value as profit
- Not all work is value-creating
- Some work is mechanical, some creative
Evergreen Lives on Donations
Creating Evergreen takes a lot of time and decent amount of money. If you find anything helpful and interesting here, please consider buying me some BBQ ($11 Z-Man & Fries at Joe’s KC), or really anything between a coffee and a good dinner.
A Precise Definition of Value Creation
A pattern of matter, energy, and/or information has economic value if the following three conditions are jointly met: Irreversibility, entropy, and fitness
- Value is created through an irreversible process which gives a resource’s order a greater usefulness to other humans
- Almost any activity can be value-producing
Exchange Value vs. Perceived Use Value
Perceived use value is subjective
- It is defined by customers based on their perceptions of the usefulness of the product on offer
- Exchange value is realized when the product is sold
- Revenue is a sufficient proxy for quickly evaluating value creation, but it isn’t a complete measure
Thank you
Massive appreciation for who suggested pieces of content (or wrote something new) for this Edition of Evergreen. Not every suggestion is able to make it to the final edit, but every single suggestion is read and appreciated.
- Many thanks for being a part of this project!
Never Enough
There’s always room for the best
- These collections can always get better
- Other Editions of Evergreen include: Building and Managing a Team
- How to Find and Recruit the Team you Need
- Not to Hire like a Clownshow
- Building the Business: How to get good business ideas
- Product/Market Fit: What it really means & How to Measure it
- Failure-proof your business with Customer Development
- Strategy and Psychology Work Together to Perfect Pricing
- The Secret Core of Every Successful Business–Distribution
- Why Value Creation is the Foundation of Business Why Value Capture is the most important idea you haven’t read about
- Being a Great Human: Handling Career Transitions like a Boss
- Mastering the Discipline of Product Management
- Prioritizing Using These 9 Mental Models
Value Creation Chain (through an Organization)
Porter’s Value Chain shows how each business contributes to the organizations goal to create value for customers
- Primary Activities: Inbound logistics, Operations, Operations Change, Outbound logistics
- Marketing and sales: Convince clients to buy from you
- Service: Maintain the value of your product or service
What Value Creation Looks Like in the Future
The value of products and services today is based on creativity – the innovative ways that they take advantage of new materials, technologies, and processes.
- In the future, value creation will be based on economies of creativity: mass customization, the high value of bringing a new product or service improvement to market, the ability to solve a vexing customer problem.
Value Creation as Revenue
Revenue ensures that the process of value undertaken wasn’t worthless, if someone is willing to pay for it.
- What Revenue really measures is a floor for value creation. The total value created cannot be LESS than the revenue generated.
- Revenue is the measure of value creation – not profit.
