What is the ultimate goal of any business? What is its purpose? Simple questions, right? To make money. Wrong answer. To be profitable? Wrong again. The goal of any business should be to create value. Making money is a short-sighted answer. Focusing on profits also take a short-sighted approach to long term success. So what does “create value” even mean, and for whom are we creating this value?
A successful, sustainable business will create value for all of the stakeholders involved—owners, employees, customers, and the environment. Value takes various forms based on the stakeholder. For owners, value is represented by profits, and for employees value is realized in the form of wages and benefits. Can a business thrive creating value for one stakeholder, but not the sum of all stakeholders? Yes, it can, but not for long-term, sustained periods of time. Say for instance a company is profitable and creating value for its owner, but employees are miserable and are not realizing value in working for the company, so they leave. The firm can’t maintain long-term success with no workforce supporting it. The converse argument leads to an even quicker conclusion, if owners are not realizing value in the form of profits, the whole idea of a business collapses rapidly.
Creating value for customers is slightly more complicated to theorize. There are three main components to creating value for customers: use value, exchange value, and consumer surplus. Use value is the value the consumer or client derives from your product or service. It’s what makes what you’re selling desirable. Exchange value is the monetary value a company receives in exchange for their product or service. It’s the price the customer pays for the privilege of realizing the use value. The difference between the use value for the customer and the exchange value paid is called consumer surplus. Small businesses would do well to consider how all of their products or services relate to not only use value and exchange value, but most critically to consumer surplus. The key to repeat business, rave reviews and referrals is found in the consumer surplus realized by your customers.
Firms focusing on value creation in their environments are becoming more commonplace than ever. Social responsibility campaigns are now the norm, as many businesses have realized the value of promoting socially responsible behaviors in their communities.
Of course money is important and profits are vital, but those are short-sighted goals and don’t realize the long-term and sustainable ideals that a singular focus on creating value can offer. Evaluating business strategies and goals for business through the lens of creating value will help set up your business for long-term success and short-term competitive advantage.
short url:
