Value Creation

MPE 15
Feb 22, 2015

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Value Creation - Two ends of managing

Input Output
Resources performance
The entire process of management of value creation

lies within this boundary

R1
R2
R3

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Input Output Performance Value

Ontimeauditor.com
Tracking late shipments for frustrated consumers
Potential refund
Enrolling FedEx and UPS are its partners

Clear savings
For $120 a year, customer could save $1000, thus
creating value of $ 880
How much value gets created in the lifetime? LTV

equation

Today a standard across all the logistics firms

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Value creation in B2B vs. B2C

Onetimeauditer.com B2B;

Apple - B2C

The value in B2B is more measurable; in B2C it may be

expresses in highly intangible terms.

Hope in a jar for a cream;

Your beauty is skin deep - Imedeen (Health Supplement)
Tends be more nostalgic, emotional, which acts as

powerful hook

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Value creation the Kodak way

Kodak ease of use, affordability, built on family

photo an emotional bonding,

Reached millions with its product for $1

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CREATING VALUE
Value Creation (also called Value Added)
Value is created anytime an action is taken for which

the benefits exceed the costs, or anytime an action is

prevented for which the costs exceed the benefits

This applies to production: quantity, quality,

innovation, method of production. Also applies to

relationships between the firm and its employees, e.g.,
job safety.

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CAPTURING VALUE
The concept of value creation says nothing about

profit.

The benefits are measured to the consumer;

the costs to the firmyou cant determine profit just
from that.

The selling price determines the amount of value that

is captured by the firmthat contributes to the

firms profits. (Producer Surplus)

The other value is retained by the consumer. It is the

difference between what the consumer would have been

willing to pay and the price. (Consumer Surplus)

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RELATIONSHIP BETWEEN CREATING

VALUE AND CAPTURING VALUE
CREATING / NOT CAPTURING
When a monopoly lowers prices too much, it creates more
value (since the benefits of the extra units > the costs), but
captures less (since the price has gone below the profit
maximizing level).

CAPTURING / NOT CREATING

Whenever two firms conspire to raise prices, together they
create less value, since less people are buying units for which
benefits > costs, but they are capturing more of the value they
create

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Value comes in many forms

Product - LOreal, Symphony (superior performance)
Utility phone companies, assigned value vs. derived

value

Image association (luxury goods) - Omega (Sports)

Availability - Mass retailing (Lifebuoy); Dell
Intangible values can be a source of great strength since

they are defined by customers

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Fundamentals of value creation

Society, social clubs - serving its members only
Firms - need that is outside of the system. Externalities

= complexity in managing the system

Changes brought by industrial organizations build
value for external members
People inside the organizations wrapped in what they
do / make / believe.
Hence natural to focus on inputs (job well done) rather
than output (Performance).
This creates gap in performance of the organizations

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Why value creation is difficult?

There is only one criteria to judge value willingness

of the customer to pay for it which should be greater

than the input cost.
Customer is not interested in what goes into making a
product. They value about what they get out of it and
they have a price for it.
SGIs ITV, a breakthrough technology in search of a customer
1990s
Kinetic Merlyn in 1993
Iridium in 1998

It is this level of difficulty that keeps organizations

away from building any true value

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When Supply exceeds Demand, values

change
Customer dont buy products, they buy the satisfaction

of a particular need - Peter Drucker

From manufacturers mindset to marketing mindset;

Drucker Efficiency necessary but not sufficient

Which also meant that what customer tends to buy is

often different than what manufacturers sell. (one of

the biggest issue facing the business world)
Ford Model T;

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Metal Box;

New Management Thinking

Revolutionary management thinking of 20th / 21st

century managing more unpredictable nature of markets and

customers

What is our business?

Who is our customer?
What does our customer value?

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Much of the value is derived the way you

define your business
McDonalds hamburger Quick affordable meal,

speedy service (not better hamburgers)

What customer finally gets delivered is value that he

needs most. Product continues to be central to the theme

and the surface is built around the need that that
product aims to satisfy.

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What value does Eastman Kodak

provide?
Time consuming process for professional

photographers
Innovation in coated paper mounted on a roll
Failed quality of image not professional
A potential failure looked at a different way.
Right product for a wrong segment.
From professional photographers to ordinary people
a tectonic shift in mindset. you push the button, we
do the rest
3M post it a near similar case

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Automobile industry in the US

Doing things right, but not the right things)

Fast losing to what people wanted post 73 oil crisis.

Fuel efficient cars. False belief that Americans were rich

and wanted fast, big fuel guzzlers, befitting their
lifestyle.
The true meaning of marketing from sales optimization to
need satisfying was still being rediscovered.
While a large workforce of auto was going jobless, resultant
impact felt in the steel industry supplying to auto cos.

Onslaught of Japanese cars. US industry destroyed

trillions of $ worth of value created over 70 years.

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Value Destruction Where does value

reside?
Sum of the parts greater than the whole seems to be

the order of the day since whole was not performing or

understood well enough.

Corporate raiders could buy up the whole company

and break it up in pieces and sell it.

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This emergence of takeover companies.

Unlocking the value in the pieces as against the whole

company

Shareholders setting the bar and the streets judging

the performance

Milton Freidmans Free market economy

Discipline of the capital market

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Value creation and outsourcing

McDonalds organisation as whole regardless of who

performs the activities. Can you shift the blame of bad

service to the call center operated by a third party? Or
bad taste of potato in the hamburger to potato farmers.

Interdependence of partners and vendors

Fiasco at Firestone and its impact on Ford.

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What drives value?

Managers Perspective vs. Forbes Finding
1. CUSTOMER SATISFACTION
2.
3.
4.
5.
6.
7.

8.

1. INNOVATION
ABILITY TO ATTRACT
2. ABILITY TO ATTRACT
TALENTED EMPLOYEES
TALENTED EMPLOYEES
3. ALLIANCES
INNOVATION
4. QUALITY OF MAJOR
BRAND INVESTMENT
PROCESSES, PRODUCTS, OR
TECHNOLOGY
SERVICES
ALLIANCES
5. ENVIRONMENTAL
QUALITY OF MAJOR
PERFORMANCE
PROCESSES, PRODUCTS, OR 6. BRAND INVESTMENT
SERVICES
7. TECHNOLOGY
ENVIRONMENTAL
8. CUSTOMER SATISFACTION
PERFORMANCE

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