What Is Value Creation in Business? (With Methods and Tips)

By Indeed Editorial Team

Published 17 October 2022

The Indeed Editorial Team comprises a diverse and talented team of writers, researchers and subject matter experts equipped with Indeed's data and insights to deliver useful tips to help guide your career journey.

For a business to successfully thrive and make a profit, it first develops a unique product that adds value to the lives of customers. This process of creating value is a significant motivator in many businesses as it can guide management's methodology of making decisions. Learning more about this important business term can help you improve your understanding of modern business tactics. In this article, we discuss the concept of value creation and its relation to business, including tips to help create value in a company.

What is value creation?

Value creation refers to a process in which a person uses raw materials and labour to create a final product to satisfy a particular need. If the creator of this product is operating a business or aspires to do so, they may make a product that offers value to a particular kind of consumer. A business owner may also develop methods of creating value for their employees and investors. To optimise the company's ability to generate value, a business owner may design a product that simultaneously addresses the needs of all three of these parties.

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Importance of creating value

If a company offers a product or service that others consider valuable, the company could sell its products and services for profit. Creating value is generally a motivating force behind doing business. With the ability to create products or services of value, a company could then attract a customer base to generate more capital that the organisation's owner could reinvest to help it expand. Customers may also be more likely to want a valuable product organically, which can reduce the need for advertising. This can create an ecosystem of creation and consumption that benefits all parties involved.

Related: How to Add Value to a Company in 8 Steps (With Benefits)

Methods of creating value

To help you learn more about the ways you can apply this term, consider the following methods of creating value:

For customers

Businesses that create value for customers generally focus on the needs of a specific group of consumers. By selecting a consumer market, the company can create products and services that respond to the specific needs of the consumer, which can increase the likelihood that the product or service is genuinely valuable. Companies that are targeting the needs of the same customer group may compete with one another to attract more customers, which can organically necessitate innovation. This method of creating value promotes improvement within the company to increase the attractiveness of its goods to potential customers.

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For employees

In conjunction with creating value for new and existing customers, companies typically also provide progressively greater value to their employees. By providing high-value compensation for their employees, companies can ensure that they're attracting and retaining talent that can help the company create more value. Methods of creating value for employees include offering competitive compensation, providing continuing professional development and demonstrating respect for the employees' work. An employer may ensure that it listens to its employees' perspectives and involves them in the innovation process, which can also help employees to feel appreciated and heard.

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For investors

By developing the other two methods of creating value, a company may simultaneously generate value for its investors. A company can produce value for its investors by sustaining its ability to create value for customers, which can ensure consistent future profits. These profits can allow the company to expand, which could involve hiring more employees to produce more value. A company can focus on its strongest value-creating activities to generate value for investors in the form of returns on investment. Additionally, a company that nurtures innovation could also discover new value-creating activities to further benefit investors.

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Developing an optimal value creation model

To create the optimal amount of value for customers, employees and investors, companies typically want to develop scalable business models that address the needs of every party. This can involve developing a cycle of creating value. The cycle begins with developing a desirable product for customers, hiring more employees to create more of the product and enticing more investors into funding the company.

Then, the company reinvests those funds into developing a better product. The improved product can then attract more customers. This model of creating value could continually expand as the company earns more money and nurtures its own growth.

Related: Product Owner vs Product Manager: What's the Difference?

Factors that affect value creation models

The following are two of the major factors that can affect a company's model for creating value:

Product and process innovation

Product and process innovation can empower a company to develop an optimal business model for creating value. This form of innovation typically involves holistically reviewing the product development cycle from creation to customer reaction. With this knowledge, a strategist in the company could determine if the value that customers receive from the product justifies the cost of the company's development cycle. The company may modify its product creation cycle to respond to customer needs and preferences.

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Pragmatic idealism

Pragmatic idealism is a concept that defines customer satisfaction as the long-term motivator for the company's actions. Recognising and responding to customer needs can help to ensure the company receives consistent income and repeat customers. The alternative to this philosophy involves disregarding maximum customer satisfaction and instead choosing higher profits for the company. This philosophy may result in a lower-quality product, which can ultimately drive customers to the company's competitors for better alternative products. Pragmatic idealism helps the decision makers at a company centralise the customer, which may increase the customer's loyalty to the company.

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Tips for centralising value creation in a business

The following are some of the ways that a business owner could centralise creating value in a business model:

Build creation of value on customers' desires

To create a product with high value for all parties, consider the ways that a company can communicate with customers to learn more about their desires. The wishes of customers can help to define a company's trajectory by providing useful feedback on the quality of its product. By remaining responsive and curious about the preferences of customers, customers may better appreciate the next version of the product.

Related: What Does a Product Manager Do? Steps to Become One

Consider direct competitors

Due to modern innovation, customers have a wide variety of options when they want to purchase a certain product. Customers are commonly researching better alternatives to the products and services they use to receive the best value for their money. To improve a company's ability to retain its customer base, it can consider the ways that the company's offerings compare to the competitor's offerings. A company could use the competitor's successes and areas for improvement as guidance for creating a better product. This can help the company remain competitive in its industry and potentially increase its customer reach.

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Prioritise efficiency in a company's workflow

While innovation can improve the value that a company creates for its customers, efficiency in the development cycle can create more value for a company. It can consider the ways the development cycle could increase output, reduce waste and minimise mistakes and redundancies. By eliminating unnecessary steps and ensuring that a company is fully using its resources, the product creation process could cost less to perform. A company could gain more profit from each sale of that product. This could also allow a company to charge less for the product, which could increase its customer base.

Develop social proof from existing customers

Developing a history of positive customer interactions can potentially convince customers, employees and investors that the company has the potential to grow and become more successful. A company can develop this history by accommodating customer preferences. In return, customers may express their appreciation for a company to other potential customers, which can help to create a foundation of social proof that a company can then reference in its marketing material. This can help to convince new customers, employees and investors of the value that the company offers.

Optimise the value proposition

As customers interact with a company's product, the company could improve its ability to describe its product in an attractive way. Optimising a company's value proposition can include focusing on certain aspects of the product that customers appreciate in its marketing. For example, a company that makes waterproof shoes could advertise how long its shoes remain waterproof. Highlighting the most notable value of the product can help to reach more customers and create more revenue.

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