Value creation, you might have often heard this word if you are working in any start-up organization.
If you have an idea and you are thinking of starting up a business, then hold on! You cannot move further before you validate it. Now, what do we mean by validating idea? The fundamental rule is that your idea is viable and your organisation is sustainable when it is creating some value on a continuous basis for your consumers, stakeholders, society in which it operates and for your organisation itself.
So first, we need to find out what we mean by creating value?
The process starts with identifying the consumer needs and putting your idea in such a way that bridges the gap between consumer’s need and how you are putting the effort into solving their problem. You just need to look around yourself, identify the problems around you, pick one simple problem and solve it differently, and do it on a continuous basis. Value creation is a continuous process, to maintain your position in the industry for the long term, you have to keep continuing to create value. The success of your business depends on three matrices?
How to create value?
How to capture it?
How to sustain it?
Value Creation Vs. Wealth creation
Wealth creation is an outcome of value creation. More than 50% of the start-ups fail because they shift their focus from value creation to wealth creation. People need to understand that earning money out of your business is only an outcome of creating good value for your consumer. The day you stop creating value for them and focus on money, they will stop using your product or services.
After understanding the importance of value creation in one’s business, let’s talk about the 3 golden logic of creating value as a whole.
3 Golden logic of Value Creation.
1st logic – Value creation through position.
So the idea is that you identify an attractive market, you stack out a position in the market and place high barriers to entry to keep your competitors out. The barriers to entry might be regulatory – like non-compete agreement or Patents.
The key idea is that those high barriers to entry keep your rivals out and allow you to create value on a continuous basis. And this is how you are going to achieve the solution of the third problem in our success metrics and you will be able to sustain the value that you have created for your consumer for a long time.
A good example of this type of value creation would be creating a different but exciting product that caters to the customer’s need and patenting it to put the barriers for your competitors.
2nd logic – Resource approach to value creation
Resource approach to value creation is often known as a resource-based view of the firm’s core resources.
Three important Characteristics of core resources are –
They are rare, and not everyone has them.
They are valuable, in the sense that they create value for your consumers.
They are difficult to imitate so your competitors won’t be quick to build a brand.
If you have these kind of resources, you are solving 2nd and 3rd questions of success metrics by capturing those value by these resources and it is very hard for your competitors to grab the value that you have created.
If your product depends on a rare resource that u have access to and it’s valuable to the customer then it will be easier for you to create better value for your product.
3rd Logic – Opportunity approach to value creation.
The third logic is what we call, opportunity logic of value creation, here it is about seeing a gap in the market place, identifying consumer’s need and then assembling those resources behind you that you need in pursuing this gap in the market place. So, you don’t own that position, you don’t own that resources but you create value to the extent that you are managing the uncertainty threat inherent in perusing a new opportunity and after you pay out for the resources you used, you get to keep whatever is leftover. And this is how you arrive at the solution of the first question of our success matrices on how you can create value for your consumers.
A fine example would be of xiaomi’s in India as they identified the market of affordable phones with features of high-end phones, they cut their margin as much as possible and now they are biggest smartphone manufacturer in the Indian market.
So now we know what value creation is, what the golden logic of value creation are and how they are important for any business but most importantly for a startup. Wealth creation is never a better option if u stick to the needs of your consumer and keep innovating and fending the competition. You will be one step closer to success.