Value Creation

Author: Marius Kahlert, UTwente

It is the the primary aim of a business to create value. From a financial standpoint, a company creates value if its revenues exceed the expenses to create these revenues. This is especially challenging for start-up companies. In the very early stages of a new venture (R&D, start-up and early growth) the cash flow is usually negative. In order to market its products or services and to guarantee a steady flow of revenue a company needs to create customer value. Cohan (2008) argues that superior firm performance develops in a cycle of three stages: (1) create value, (2) capture value, and (3) renew value. In the first stage the firm creates value by designing and marketing a product that consumers like and which meets their needs better than competing products. In the second stage the company captures the value by designing business activities which encourage customers to pay for a product at a rate above costs plus profit and return on shareholders’ investment. The third step - and probably most challenging one - is the continuous adaption of the product to the changing environment as a process to renew the value for the customers. There are various tools which help business owners to successfully run through the value creation cycle (e.g. business model canvas, blue ocean strategy etc.).

In the last years, there is an increasing emphasis put on non-financial, intangible value drivers such as innovation, technology, customer relations, brand value etc.

Sources: Baecker, C. (n.d.). Entrepreneurial Value Creation. Retrieved from http://merage.uci.edu/ResearchAndCenters/Beall/Resources/Documents/BPC%20%20VCR%20120306.pdf

Cohan, P. S. (2014, October 22). Entrepreneur - To Keep Your Startup Alive, Keep Creating Value. Retrieved from http://www.entrepreneur.com/article/238779

Hillstrom, L. C. (n.d.). Reference for Business - Value Creation. Retrieved from http://www.referenceforbusiness.com/management/Tr-Z/Value-Creation.html

Value Based Management.net. (n.d.). Summary of Value Creation. Retrieved from http://www.valuebasedmanagement.net/methods_valuecreationindex.html

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