Value Creation is Output / Input

Recently I was discussing setting up Value Creation Centres with Dr Jagdish Sheth of Emory Institute.

We discussed Value Creation for companies.  Dr Sheth reminded me that Value was a term popularised by the investment community, where they talked about improving the value of the companies they bought. Generally, value was created by cutting costs and improving the bottom line.

Value Creation, as we define it, impacts the bottom line and the top line. By creating value for employees, customers and partners we reduce costs because we are more efficient, because we make fewer mistakes, decrease repeat and unnecessary work, have better team work and focus.

By focusing on customers, we are able to increase loyalty and market share by using customer value management techniques and therefore, we improve the top line.

The improvement in top line and bottom line increases profits and the value of the company more dramatically, than by “cost cutting” alone.

To see the impact in Value creation, we should look at the effort, cost and time in doing a particular activity, and see what output we get. As the output/input ratio increases value is created.

Thus Indian companies can look at their CSR activities as being something essential because the government in India mandates CSR expenditure. It is viewed as a cost centre. But if designed and implemented properly, where your customers start to prefer you for your CSR activities, then increased value will be created. It is an output/input thing.

That is why we have terms such as return on marketing investment, return on assets, return on investments; all can be viewed from an increasing value viewpoint.

Study after study has shown that increasing customer value increases the profits companies make. Part of this is preference for the company; part is because of higher prices you can charge when you increase value.

If you are looking at transformation in your company, you can also look at it as an output/input system. You put in an investment of time, people and energy and maybe money. What do you get?  And if the output is greater than the input cost, then value is created.

Value is also created when you do things right for the customer. Generally, the cost of doing things right is minimal. So returns are high and the value created is high.

Social media and public relations programs create value and in some cases generate demonstrable ROI.  The two concepts are different in important ways.  They are related like the ellipse and the circle.  Remember that silly distinctions you learned in elementary school?  A circle is a ellipse, but a ellipse is not a circle.  ROI is a form of value, but not all value takes the form of ROI.

Don Bartholomew, SVP Digital and Social Media Research at Ketchum warns, however, that ROI is a financial metric – percentage of dollars returned for a given investment/cost.  The dollars may be revenue generated, dollars saved or spending avoided.  ROI is transactional.  ROI lives on the income statement in business terms.

Value is created when people become aware of us, engage with our content or brand ambassadors, are influenced by this engagement, and take some action like recommending to a friend or buying our product.  Value creation occurs over time, not at a point in time. Value lives on the balance sheet.

He defines value as increasing the number of people who are likely to buy our products and services.  Other programs may be designed to improve or protect corporate reputation or to build and enhance brands.  Much of this value is said to be intangible.  It is goodwill that becomes tangible at the point in time a transaction occurs.   When buying decisions happen, your investments in marketing, brand and reputation work together.  They become tangible.  You can measure the ROI.

The point is that value can be created in many different ways and measured by different metrics. The best metrics is Ray Kordupleski’s Customer Value Added, the Value you add to your customers divided by the value your competition adds to its customers and is measured through customer’s perceptions using market research.

Your comments are welcome.

 

Call at (+91) 9971288580

Gautam Mahajan, President-Customer Value Foundation
M: +91 9810060368
Tel: 11-26831226, Fax: 11-26929055
email: mahajan@customervaluefoundation.com                                  website: http://www.customervaluefoundation.com

Customer Value foundation (CVF) helps companies to Create Value and profit by Creating Value for the customers, employee and for each person working with the companies.

Total Customer Value Management (Total CVM) transform the entire company to focus on Creating Value for the customer by aligning each person’s role in Creating Customer Value and getting shareholder wealth and Value.

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3 Comments on “Value Creation is Output / Input”


  1. Very well said.

    I remember reading articles by Sumatra Ghosal wherein he had given examples of companies who have worked only on cost reduction of products but had actually reduced its value dramatically by reducing life /reliability and so on, Taking your eyes of the customer is something we cannot afford in any kind of business.

    Another way to look at would be – Understand the value customer is willing to pay for certain additional features or new product and deliver the same at lower price.

    One more way could be to take a “life cycle cost” approach and make sure that aspects like service /reliability /long term warranty etc. are focused and built in the product .
    These issues are critical but unfortunately get ignored many time when we chase only ROI

    Mr Anil Sathe
    Sr. GM – Supply Chain (products business)
    Blue Star limited


  2. Thanks very interesting….

    Andes Trust
    Mr Martin Pablo Leon O´Farrell


  3. An excellent analytical and thought provoking article.

    Thanks for sending to me.

    Mr C PalSingh
    Managing Director
    Brand Protection Associates


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