Posted by: nuleadership | November 15, 2010

The Value Creation Machine

On Tuesday (November 4, 2010), political chatter was all the rage as Republicans gained control over the House, sending a clear message to President Obama that the political landscape had shifted.  The Democrats now occupy the US Presidency and Senate while the Republicans dominate the House of Republications. 

Most experts wonder if Congress will ever get anything done.  As a result of not passing a budget bill in 1995, the federal government was shutdown.  With President Bill Clinton and Speaker Newt Gingrich at the helm, the shutdown was fueled by political fighting.  Sadly, many people look to the government for all of the answers when their own ingenuity would work. 

Yes, the government has an important role to play. I don’t believe that market forces are always the answer to societal problems…the market is not driven by morals or ethics.  In fact, find a cheap labor force across the globe and some businesses will abandon their own creed of “America First.” 

Individuals need to take control of their lives by developing strategies to produce results.  If we are to equip people for the future as scholars, we need to make sure they understand that the future will belong to the aggressor, not the passive in the new economy. During this discussion, we will explore how companies develop value for their customers and how it contributes toward wealth building.

 In uncertain times, it’s virtually impossible to navigate the market without fully engaging customers.  Any operations that fail that economic maxim of the 21st century will fail. Management guru Brian Tracy argues that the duty of businesses is to create and keep customers: “The two most important words to keep in mind in developing a successful customer base are positioning and differentiation.”

Of course, it was possible several decades ago to create products and services without knowing the customer and later convince them to buy.  Many companies during the Industrial Revolution built their success due to scarcity of commodity, limited competition, and uneducated buyers. This is not the case today.

Today’s operations must be value conscious as it relates to the market. Alvin Toffler and Heidi Toffler, authors of Revolutionary Wealth,  research how tomorrow’s wealth will be created, and who will get it and the wealth method. Customer value is defined as the ‘difference between what a customer gets from a product, and what he or she has to give in order to get it.’  They argue, “Today’s wealth revolution will unlock countless opportunities and new life trajectories, not only for creative business entrepreneurs but for social, cultural and educational entrepreneurs as well.”

Daniel Spulber, author of Economics and Management of Competitive Strategy, further suggests that value creation is strategic:  “Managers must pay close attention to value creation because it is the source of the company’s potential profits. The company generates value by providing products to customers, which it produces both by purchasing inputs from suppliers and supplying some of its own.” 

Spulber further outlines a value-driven strategy in three ways:  (a) to attract customers away from competitors, the company must provide sufficient customer value as compared to rival companies, (b) to attract key suppliers away from competitors, the company must offer sufficient supplier value, and (c) to attract investment capital in competition with other market investment opportunities, the company must increase the value of the firm for its investors.

Therefore, effectively managing the attribute of value creation will provide businesses with a competitive advantage.

Briefly explain how value creation has shifted from the Industrial Revolution to the Knowledge Economy and what attributes will be associated with wealth creation in the distant future?

© 2010 by Daryl D. Green

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Responses

  1. The attributes of wealth creation include collaboration, co-creation, customer attribution, complete integration, transparency, open source and connectivity. All the attributes that the industrial age fought against. check out “Value Creation in Enterprise 2.0″ by Todd Stephens at http://www.slideshare.net/rtodd/value-creation-in-enterprise-20 . In the knowledge economy we have new value chains as well. interesting description of the new value chains are presented in the presentation “NEW VALUE CHAIN MODELS” http://www.slideshare.net/rvandenhoffcdefholding.nl/new-values-models?src=related_normal&rel=4486506

    • Lonnell, thanks for joining us! An excellent resource!

      Yet, what would it be like if everything was free outside of the website? Could there be a model where free will work in a capitalistic society?

      • In a theoretical situation where everything is free or the opposite, very scarce, the model of business shifts toward cooperation and collaboration to prevent war as we have seen in some Asian economies. Investment Optimization becomes the goal verses maximized ROI. It is the very extremes in market conditions and investment goals that create the opportunities for the capitalist to exploit. Traditionally the capitalist sought to control the means of production through the use of land, labor and capital. Conversely, todays infoprenuer seeks to take advantage of opportunities in the abundance of information, technology and people to deliver scarce knowledge and critical decisions to society. Decisions that allow both individuals and institutions to exploit market opportunities such as job hunting on the internet or co-creation of new products with customers and suppliers around the globe. In the world of free, social connectivity becomes the key to delivering to the market effectively. In crafting the right message to the consumer or the right cover letter for a job interview it is the nuances found in the system/social network that provides insight into the real opportunity. Capitalist of old sought to control through patents and restrictive use license. Infoprenuers today seek to create and engage the collaboration of open source thinking, products and services. Leveraging speed of change and thought as a defense and an offense. In the world of free even the capitalist begins to evolve, after being battered by global forces, from being exploitation driven to innovation driven.

  2. Developing invisible assets and knowledge in particular, is crucial in creating advantages. First develop a framework that is presented for process organizing which focuses on the relationship between company vision, the creation of multifunctional teams and the complementary relationship between team members. Take this information and connect it with yout customer base for a successful relationship. According to Jon-Arild Johannessen and Bjørn Olsenm, “leaders need to move away from focusing on developing innovations and value within the mental models, systems, and organizational solutions of the old industrial economy, with its firm- and product-centric view of value. Instead, they need to focus on providing tailor-made products and services to the newly connected and interconnected customer. They can do this with individualized immediate feedback, a new organizational logic, and new cooperating structures”. This relationship can be bridged through the technological advances in the information technology. With constant updates in the computer data bases, companies can compete globally.

    Jon-Arild Johannessen, Johan Olaisen, & Bjorn Olsen. (1999). Strategic use of information technology for increased innovation and performance. Information Management & Computer Security, 7(1), 5-22. Retrieved November 16, 2010, from ABI/INFORM Global. (Document ID: 115724539).

    • Derrick, outstanding observation!

    • Derrick, excellent! Looking at value creation in terms of processes is a dynamic concept!

  3. A strong and through self-assessment is a key attribute to creating wealth. On a company level or an individual level, we must understand what we can offer better than our competitors to create wealth. According to MyWealthCreationStrategy.com, companies (or individuals) need know what their true competencies are and what their vision is in order to create an effective strategy to create wealth. Wallace Wattles argues in “The Science of Getting Rich” that if you have a well defined vision that you understand, then the path to success is laid out. You just need to determine the vehicle to follow the journey. He further argues that as there is a science to getting rich, if you know what your true competencies are, and not your perceived competencies, then you’ve already established the key factor to the equation.

    Therefore, attributes for wealth creation in the distant future are 1) knowing your current assessment; 2) knowing your true competencies and competitive advantages, and 3) clearly define your vision.

    Resources:
    Wattles, Wallace. “The Science of Getting Rich”

    http://mywealthcreationstrategy.com/

    • I agree with Landon about better understadning our customers to create wealth. During the industrial revolution, the mental health industry was focused on asylum and instructive care. Today, it is focused on community based, consumer directed treatment. For value creation in this service industry it is absolutely paramount that the design of the delivery system adjust to evidenced-based interventions and engagement focused relationships (McKay, Hibbert, Hoagwood, Rodriguez, & Murray, 2004) that keeps customers utilizing your service and in turn, keeps funder paying for your service. The attributes that will be associated with wealth creation, especially in the mental health field, is to not hold tight to the values of an earlier time and to embrace the new technologies and service systmes of a new era.

      McKay, M, Hibbert, R, Hoagwood, K, Rodriguez, J, & Murray, L. (2004). Integrating evidenced based engagement interventions into real world child mental health settings. Brief Treatment and Crisis Intervention, 4(2), Retrieved from http://btci.stanford.clockss.org/cgi/reprint/4/2/177

      • Less favored regions face a series of problems in adapting and restructuring to the demands of the new knowledge economy. Central amongst these problems is that they have ceased to be attractive sites for investment by external capital, which is increasingly drawn to mega-cities and core scientific regions such as Cambridge UK or Sophia-Ant polis. But such regions can conceivably become attractive to external investment if they can create unique knowledge assets, which can stimulate growth by providing resources for local network-building. Unique and valuable assets can be produced by novel combinations of local partners – each facing their own external demands and networks. Less favored regions face a number of barriers to initiating these local combinations, such as lock-in to old ways of thinking, the absence of world-class partners stimulating activity, or fragmentation between leading partners. This suggests that improving the governance of such places can improve their economic prospects in the knowledge economy. In this monograph, we look at the role of universities, as large, globally-networked, but locally situated actors, in addressing particular problems faced.

        Reference: http://www.ses.unam.mx/curso2008/pdf/Peters.pdf

  4. Value creation has shifted from a quantity focused attribute during the Industrial Revolution to a quality minded, diversified approach in the current Knowledge Economy. During the Industrial Revolution, in order to add value to an organization, mass production and high volume were key. In the ever changing Knowledge Economy where disruptive changes are always looming, an organization must remain adaptive to change and rely on strong knowledge workers and quality managers to add value and remain successful.

    Therefore the attributes I would associate with wealth creation are good knowledge worker base, managers trained to identify and navigate disruptive change, and an organizational structure that acknowledges employee wants and needs.

  5. In most businesses, maximizing shareholders profitability is the key to success. However, maintaining and growing that success depends highly on value creation. In the past few decades, the rules of the game have changed tremendously. We have seen a significant shift in value away from manufacturing toward design, marketing, and customer service. As high quality products can now be produced anywhere, manufacturing has increasingly been re-located to emerging markets with low labor costs. Defining the offering becomes a key priority in value creation. This includes specifying the products and services that the company seeks to offer its target segments. It takes the perspective of the prospective customer, and follows how the customer will interact with the company at all stages. Cross-functional collaboration is critical to developing and delivering the offering. “The man who will use his skill and constructive imagination to see how much he can give for a dollar, instead of how little he can give for a dollar, is bound to succeed.” ~ Henry Ford …
    As machines replaces human labor, workers need to focus harder on creating value for the business or you may get replaced.

    References:

    http://www.globalpost.com/webblog/commerce/why-arent-there-famous-chinese-indian-brands

  6. The shift in value creation for firms in the near future stems from numerous outsourcing initiatives and the way consumers view products or services since the time of the Industiral Revolution. When calculating the wealth management of a firm from a financial perspective you would have to look at how high the growth rate of the company is. In todays economy company value is created by your consumers, So in order for the firm to create value, management has to make sure all attributes of quality and service are fully focused on. In the media industry with the arrival of the internet and the move away from traditional media many Journalist are also finding it hard to create value, Robert B. Pictard tells of the change in his new book,”Value Creation and the future of news organizations”.”Consumers perceive the value of news and information as low and are unwilling to make significant temporal or monetary expenditures for the
    content”. The author argues that merely trying to get consumers to
    pay more for news and information is not the solution, but that the entire
    content and provision must be reconsidered to address the challenges.

    References:
    ECREA Young Scholars Network

    http://www.comsummerschool.org/node/1751

  7. In today’s economy, the interaction between a company and its stakeholders is vital to its future success. Companies’ stakeholder interaction did not play an important role during the Industrial Revolution, but today, companies would not survive without it. Through engaging its stakeholders, this co-creation of value will help ensure a company’s productivity and success (Frigo, 2010). Building positive interaction with its stakeholders will create and increase the value and wealth of the company. Through co-creation, a company can generate new insights helping the organization “reduce risks, increase productivity, generate growth, and increase returns” (Frigo, 2010). The implementation of experiences and ideas of both, a company and its stakeholders, creates value and wealth for the company and allows it to successfully satisfy its customers. The companies that are open to their stakeholders’ opinions and ideas are the companies that will be successful in the future.

    Frigo, M. (2010). How enterprises can drive new value creation. Strategic Finance, 92(4), 17-69.

  8. I think that it is important for the company to know its core competencies and to provide something special to draw both customers and suppliers. But in today’s fast paced technology world, I think they have moved toward an even more clever strategy. The strategy is personalization. The video speaks of Smartphones making decisions for you on which calls to receive, but I do not think that it is farfetched. There are hundreds of thousands of apps that can be downloaded to phones, laptops, and tablets. A person now has the choice on how they want their product to service them.
    More industries are moving in that direction. Insurance companies are ever increasing their options to customers so that clients can make a service that best serves them. Cable companies are another example with the increasing pressure to allow customers to make their own packages. Clients would enjoy the freedom and the control that would be afforded to them. Parents would also gain an advantage to remove crude programming. It is situations like this will lead companies into the future. Let the consumers pick their own services.

    http://www.foxnews.com/story/0,2933,184374,00.html

  9. I agree with Landon’s post. In the Knowledge Economy with highly educated consumers and increased competition, an effective entrepreneur must rely his/her core competencies in order to gain a competitive advantage, create value, and wealth. George Por, founder of Community Intelligence Labs, illustrates the drivers of value creation line within a cycle of unleashing creativity and distributing intelligence, organizing work and commerce, the new use of technology, and the coordination of new forms of social interactions. In the age of “information overload,” a company must know their customer well and build a product tailored to their needs. I believe Henry Ford said it best.

    “If I’d asked my customers what they wanted, they’d have said a faster horse.” – Henry Ford

    Reference:
    Por, G. (2001, August 08). Designing for the Emergence of a Global-scale Collective Intelligence: Invitation to a Research Collaboration. Knowledge Ecology Resources. Retrieved from http://www.co-i-l.com/coil/knowledge-garden/kd/vcmodels.shtml#drivers

  10. A recent article in Accounting Today Philip Howe and Martin Levin discuss the shift from the industrial age to the knowledge management age. The industrial age brought the concept of management through, control, order and prediction. During the industrial age, the work place may have been able to accept a high level of disengagement as long as the manufacturing process produced the finished product.

    In the knowledge age where creativity and thinking are critical to success a disengaged workforce becomes a toxic work environment and creativity is crushed. In an idea age management must think differently, management must foster the work force with connection and openness.

    In order for wealth to be created in our knowledge based work environment employers must learn to engage their employees and encourage knowledge sharing. It is estimated that approximately 70% of workplace learning occurs informally.

    References:
    Howe, P., & Levin, M. (2007, August 6). Succeeding in the Idea Age. Accounting Today, pp. 6-9. Retrieved from Business Source Premier database.

  11. In the past, industrial economy was based more on tangible assets and a company’s value was reflected on future cash flow that could be generated. However, today intangible assets are as much part of a company’s market value as tangibles do. The value of companies has shifted from past performance to future performance. The focus has also shifted from being exclusively concerned with the past financial performance to the value of future options which requires the creation of intangible assets and growing them. Companies’ growth options have become the most important indicator for value and significant premium has been placed on companies that have flexibility, management and employee talent, and innovation. Managing future expectations will create powerful financial brands that will attract talents, capital and alliance partners. In the future in order to build a wealthy company, management must understand how to approach valuation and management and a wealthy company will mean managing the balance between the need to maximize the value of current business and the value of future growth options.

    Reference:
    Ollila, Carl. (2007) Value creation – wealth of a future company.

    http://www.eurotradeforum.com/Articles/value_creation.html

  12. It’s a universal law that “wealth follows value creation.” Value creation in the industrial revolution was very different than it is today among the Knowledge economy. In those days, things were seen as assets. Today, that is still happening but it is changing as people are now being viewed as assets. For example, workers in sales usually see a potential customer in everyone they meet but if they were to see them as an asset, you are able to create value in their life. Another way to create value is to find a unique skill that you excel in and see how you can apply it to someone else is life to add value. Even if some of us do the same things, none of us do it the same so that is a value add opportunity. “Everyone has great potential to create value and to receive the wealth they want. They just need to focus on what others need, not what they feel they are entitled to.”

    Reference

    http://financearea.net/finance/Wealth-Building/3002/Value-Creation-Creates-Wealth.html

    • Adrian has hit the nail on the head. The recognition of people as the critical asset is the most important attribute of creating and sustaining value. People are the catalyst for delivering on key enterprise capabilities. Goals without committed investors, leaders and management are just great ideas. Value creation is about changing the human condition. One customer and many small changes at a given time.

  13. As many have stated quality products can be produced anywhere in the world at a reasonable cost. Value is at the front minds of many businesses as well as customers. In my daily routine as a marketer I am constantly trying to create new value or expanding on existing value for my company. Value creation for a company is utilizing core competencies from its business domain and selecting and managing business partners from its collaborative networks. A company can say they have value but the way they deliver their value is what is important. Delivering value often means making substantial investments in infrastructure and capabilities. The company must become proficient at customer relationship management, internal resource management, and business partnership management.

    Kotler, Phillip & Keller, Kevin Lane (2009) Marketing Management (13th ed.) New Jersey: Pearson Prentice Hall.

  14. During the industrial revolution, value was measured by how products made our work easier and by decreased prices on previously costly goods due to mass production. Where today, those simple value attributes are insufficient. We now require personalized value, not value for the masses. Today, we can quickly classify the value of what is available and make educated decisions on what fits our needs.

    Wealth creation will come easily for those firms that utilize the wealth of information that is becoming available to those willing to invest in capturing it. Knowing what your customers needs are and being able to show that your firms can fulfill these needs will be crucial to aligning your product with customer value. “The market has become a forum in which consumers play an active role in creating and competing for value.”(Fang 2008) Therefore, being advanced in IT utilization and innovation, and product innovation will lead to accurate product development for value building in a rapidly changing market.

    Fang, E., Palmatier, R., & Evans, K. (2008). Influence of customer participation on creating and sharing of new product value. Journal of the Academy of Marketing Science, 36(3), 322-336.

  15. Creating value during the Industrial Revolution involved adding an additional feature to the product that was being produced. Today in the knowledge economy value is created usually by improving a service that is associated with the product. Examples of this would be making the product easier to use or purchase.

    In the future, attributes that will be associated with wealth creation will revolve around the aspect of making the customers lives easier. As technology continues to change the companies that are leading the change the being the first to market with products will be the ones that create the most wealth.

  16. There’s a saying that “what gets measured gets managed” which suggests that products, sales, operations and all things measurable are easily managed, but what does that mean for human capital? You cannot measure human capital so how are we to manage it? Human Capital is the fundamental source of wealth creation in the knowledge economy and is being undermanaged in most companies because organization systems of measurements date back to the industrial era when physical capital was the primary source of wealth creation. Instead, companies should look at their “human capital value chain” which is made up of:

    1. In addition to being fairly compensated, people place high value on:
    – Being in an environment where they can grow, learn, and advance
    – The managerial skills/abilities of their immediate supervisor
    – Being treated fairly, appreciated and acknowledged
    – Doing work that makes a contribution
    2. These determinants of employee satisfaction drive employee retention
    3. The retention rate among key employees drives customer satisfaction
    4. Customer satisfaction drives customer retention
    5. Customer retention drives profitability and other measures of financial performance including total stockholder return.

    Therefore, creating wealth can directly be attributed to a companies human capital measurement systems.

    Reference: http://www.linezine.com/7.2/articles/lbhca.htm

  17. During the industrial revolution it was all about creating products and putting them out there in the market. Just like the article states that several decades ago the focus was on “creating products and services without knowing the customer and later convince them to buy”. An example of this was a famous quote from Henry Ford you can get a car painted in any color as long as it’s black. However today customers have the option to get a car with almost any color they can think off, and also include several different features like heated seats, navigation, v6 or v8, and others. Another example of how personalization has changed value creation today is the personalized packages that cable companies are offering. At&t for example has been advertising a lot these days of how its customers can now select multiple services (one, two or more), all of which can be added together and create a personalized bundle service, this includes wireless, TV, home phone, and internet services. These comparisons show the difference of how value creation has shifted from the Industrial Revolution to the Knowledge Economy.

    Spence, Martine. (2004) Efficiency and Personalization as Value Creation in Internationalizing High-Technology SMEs

    http://www.brainyquote.com/quotes/quotes/h/henryford109833.html

    http://www.att.com/gen/general?pid=9147

  18. Value creation has greatly shifted from the industrial revolution to the present knowledge value creation today. Since the industrial revolution and the computer revolution, value creation moves towards the human brain and knowledge workers. The industrial revolution first introduced assembly lines and linear processes. With the introduction of computers, automated machines can now take over the role of the workers while the workers will be in more value added roles. The knowledge and technology the work force has gained through the years will allows the introduction of wealth creation in years to come. This will be through the networking and sharing of knowledge to identify new areas of value creation in the world.
    (1) Strong, M. (2010). Entrepreneurial Value Creation and the Professors Who Can’t Understand It. The American Thinker.

  19. At its core a company creates value from developing solutions to fill a need. Firms used to have the luxury to design products without a clear understanding of its customers or their needs. However today, in an environment of heightened competition, speed of innovation, and ability to purchase from around the world, customers have changed and now understand that if a firm is unwilling to meet their need, another firm can and will. The future will only exacerbate these forces, increasing consumer’s power. Firms are responding by making steps to better understand their customer’s needs. Kroger saw the need to understand its customer better and decided to partner with Dunnhumby Limited, a leader in data management (Kroger Partners, 2003). It recognized that the in the future maintaining valuable customers will require meeting their customers’ needs in as complete a way as possible.

    Kroger Partners with UK’s dunnhumby To Better Understand Customers Needs. (May 13, 2003). Retrieved November 26, 2010 from All Business: http://www.allbusiness.com/retail-trade/food-stores/4254506-1.html.


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