Creating value

Corporate pundits and management gurus offer detailed analysis and complex roadmaps for business value creation. In management literature most authors describe value creation for a business as an integral part of a business strategy covering both the customer and the market.

In most such literature the major emphasis is market focused. Business value is created when products or services are able to create a market. In summary, what is that people require and need or what should be created or pushed in the market which eventually becomes people’s desire to buy. According to an eminent management thinker Kufman, marketing and sales are two main key factors in value creation of a successful business. The introduction of focused marketing helps in bringing attention of masses towards a certain product, enables need generation and sales depends upon convincing the potential customers into one step further ie to become purchasing customers.

According to another management expert Cohen, business leaders are focused on value creation, looking for new and innovative ways to catch the eye of the market both in present need and future desire. Organisations are in constant search of keeping their profits increasing and ensuring its sustainability with competitive market tactics.

“Sustainable Value Creation” can be described as an effective business methodology concentrating on important communal and social problems by finding out different mountable areas of reasonable advantages that will produce sizable margins of profit and social benefits. (Cohen, 2011)

However, it is critical to understand that sustainability in profits is driven not just by looking for ways to enhance business margins but to also achieve brand recognition through social activities. For companies anywhere in the world, creating long-term and sustainable shareholder value requires managing other stakeholder needs as well. You can’t create long-term value for shareholders by ignoring the needs of your customers, suppliers and employees. Undoubtedly investing for sustainable growth should impact all the stakeholders and that is why such investments often result in stronger economies, higher living standards, and more opportunities for individuals. It should not be surprising then, that the race for creating business value is actually beneficial and has served to catalyze progress, whether by lifting millions of people out of poverty, contributing to higher literacy rates or fostering innovations that improve quality of life and lengthen life expectancy.

In developing economies like Pakistan, managing key stakeholders is challenging more particularly due to divergent short-term interests. Take for example employees. Most local companies are not known to be employers of choice with at times limited resource allocation towards salaries and benefits in the interest of higher profitability. However, this approach does not help in the long-term value creation for a business. Any company that tries to increase profits by providing a poor work environment, underpaying employees, or minimal benefits will have trouble attracting and retaining high quality employees. Lower quality employees can mean lower quality products, reduced demand and damage to the brand reputation. Higher employee turnover will inevitably increase training costs. Such a company will struggle in the long-term against competitors offering more attractive work environments. If the company has strong earnings and profitability, it might afford to pay higher than market salaries and still prosper, and treating employees well can be good business. However, most local companies are unable to understand this and fare poorly when compared to multinationals in terms of employee regulations, work environments and competitive salaries.

There really are no particular criteria of how well companies need to pay their employee to derive long-term benefit in terms of value creation; however, they should ensure that salaries are sufficient to attract quality employees and keep them happy and productive. There are a range of nonmonetary benefits and rewards recognising better performance.

Managing all stakeholder needs can be at times complex. Inevitably, there will also be times when the interests of certain stakeholders are not complementary with others. Strategic decisions involve complex and at times challenging trade-offs, and the reality is that the interests of different groups can be at odds with one another. However, when there are trade-offs to be made, long-term business value creation should be prioritised, given the advantages it holds for resource allocation and economic health.

Stakeholder interests and value creation may not always align. Long standing companies in mature industries, for example, despite stellar business performance over the years now face tough competition from new entrants and disruptive technologies. Many companies at times face the toughest of all challenges deciding whether they should keep high cost infrastructure or manufacturing plants that lose money, operational. Most also face other challenges like retaining senior employees that have limited or redundant skills - all just to keep such employees working. They have a choice to focus on profitability and take the tougher business decisions, though such decisions may be perceived as against certain stakeholder interests like employees.

In the longer term, it is business sustainability which needs to drive such decisions. Consumers benefit when goods are produced at the lowest possible cost and the economy benefits when operations that have become a drain on public resources are closed and employees move to new jobs with more competitive companies. And while it is true that employees often cannot just pick up and relocate, it is also true that value creating companies create more jobs. Companies that are trying to continue inefficient processes, operations or redundant employees are only delaying the inevitable and regardless of their brand or leadership are no longer creating any business value.

At times, governments are also a stakeholder and may play a divergent role instead. Most government legislation including labour laws are industry specific, which in the short-term seemingly offer employee security and protectionism, but hinder employee efficiency, management decision making and business value. Such legislation can also lead to divergence between shareholder value creation and the impact of externalities and thus misallocation of resources. Those effects can create new stresses and sometimes outright divisions between shareholders and other stakeholders, and result in business failures.

In broader terms, the sustainable value creation of an organisation needs to be an integral part of the business plan in which the main focus must be in managing stakeholder issues and growth in profits. Undoubtedly, value creation is not a one-path method and can be achieved in a number of ways. Every business has its own value creation process; however, such processes must be efficient. Sustainable value creation can only be achieved with the right balance between profitability of the business and the needs of its key stakeholders, including shareholders, customers, suppliers and employees.

However, every business is different from another. (Kaufman, 2012) in his book “The art of Business” sought, if there is any way to measure the value created for a business. Jorgenson shows measurement of value created through different process and parameters.

The writer is a staff member