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Value Creation

VALUE CREATION

In order for customers to visit Web sites, make initial online purchases, and then develop into return customers, companies must provide them with good reasons for doing so. In general, value creation is the process companies use to make their Web sites destinations of choice, distinguished from and with advantages over other Web sites or retail channels. A company's ability to create value increases as its Web site evolves from static, advertising-focused Web pages to a site with more interactive capabilities, including online customer support or the ability to accept electronic orders for products and services.

The Association for Computing Machinery's journal, Communications of the ACM, revealed that as the World Wide Web becomes an increasingly important medium between producers and consumers, it affects many key channels in the supply chain, including order processing, advertising, and customer support. Therefore, from a big-picture standpoint, as products move along the many points between a manufacturer's assembly line and end-usersbe they individual consumers, other businesses or re-sellersthere are many opportunities to create value online. In order for this to occur, information must be gathered, organized, selected, synthesized, and then distributed, as Jeffrey F. Rayport and John J. Sviokla explained in Don Tapscott's book Creating Value in the Network Economy.

A report studying best practices in value creation among European companies, issued by 3i Venturelab and summarized in European Venture Capital Journal, identified three unique areas where value can be created during e-commerce: bringing many different groups or products together; delivering information to everyone involved in a way that is faster, richer or more meaningful than through other means; and creating alternatives to or simulations of the elements one would expect during an offline purchase, including the physical handling of products and the ability to talk to others.

Opportunities for creating value can be viewed from the standpoint of how companies interact with customers. According to Across the Board, Andersen Consulting identified that companies often attempt to create value by focusing on two specific kinds of interactions with customers: buyer-focused interactions and user-focused interactions. In a buyer-focused interaction, companies attempt to make the buying process more convenient or powerful for customers. On the other hand, user-focused interactions occur after a purchase takes place. Such interactions often involve things like online technical support, value-added information to enhance the use of a product or service, and notices about product updates.

In addition to buyer-and user-focused interactions, some companies create value based on the intentions of their customers. A company specializing in the sale of log homes could use this approach to make its Web site more meaningful for customers by listing current mortgage rates, providing links to different lenders, offering articles about choosing the right kind of log home, showcasing popular areas for building log homes, and so on. Thus, the site goes beyond mere details about a company's products or services and becomes a useful tool for customers who are seeking complementary information.

Another approach to creating value, called customer co-creation, involves customers contributing to the development or evolution of a company's product or service. According to a Planet IT article by C.K. Prahalad, Venkatram Ramaswamy, and M.S. Krishnan, "consumers are getting used to the idea of an active dialogue with providers of products and services. The emerging dialogue is not restricted to help-desk communication. Increasingly, the dialogue involves an active role in product design and testing." Microsoft used this approach by involving more than 500,000 software engineers in the testing process for Microsoft 2000 and using their feedback to make the final product better. Other examples of this type of interaction include the collaborative development of the Linux operating systema software program used to control the basic operating functions of many Web servers.

The potential for value creation also exists when companies assist customers in the disposal of unwanted goods. For example, a company selling new office equipment might directly buyor help a customer to selltheir old furnishings as an added service. In addition to benefiting consumers, this type of interaction also creates leasing, pricing, and promotion opportunities for companies on the sales side.

In the early 2000s, personalization and the formation of online communities were two other ways companies could create value on their Web sites, although the approaches had not been adopted on large scales. With personalization, customers' Web site experiences are customized, based on information the host company acquires about them. To accomplish this, some companies use software programs to conduct behavioral analyses of Web site visits, which reveal the most popular areas of their sites, such as pages with specific products or services. By keeping track of visitors' purchase histories, Web pages can be customized to include content or special offers that are more relevant to them. Companies also can go beyond basic personalization and engage in dynamic profiling, in which Web sites try to predict what a visitor is likely to buy. In this scenario, based on a visitor's history and the areas they are viewing during an actual visit, special software reconfigures Web pages to display items that visitor might purchase. Ultimately, the company's goal is to generate more return visits and purchases.

Finally, online communities were a channel through which value could be created. Online communities involve existing or potential users of a product or service providing support and information to one another, usually by posting messages, exchanging e-mail, or engaging in chat sessions. In addition to saving companies money in the area of customer service, online communities arguably provide a deeper, more insightful level of support to customers. A variety of different consumer experiences often result from one product or service. Online communities allow end-users to share them with one another and exchange perspectives. Because value is so important to a Web site's success, the topic likely will remain a major focus for online marketers and the customers they serve.

FURTHER READING:

Bushrod, Lisa. "Report on E-commerce Value Creation." European Venture Capital Journal, November 1, 2000.

Chaudhury, Abhijit, Debasish Mallick, N. Rao, and H. Raghav. "Web Channels in E-commerce." Communications of the ACM, January 2001.

Garvey, Robert A. "How E-commerce Will Add Value." Iron Age New Steel, November 2000.

Kambil, Ajit, and Erik Eselius. "Where the Interaction Is." Across the Board, November/December 2000.

Nemes, Judith. "Inspiring Surfers To Browse, Browsers To Buy, And Buyers To Return." Planet IT, April 27, 2000. Available from www.PlanetIT.com.

Prahalad, C.K., Venkatram Ramaswamy, and M.S. Krishnan. "Customer Centricity." Planet IT, April 10, 2000. Available from www.planetit.com.

Tapscott, Don. Creating Value in the Network Economy. Boston: Harvard Business Review Publishing, 1999.

SEE ALSO: Community Model; Mass Customization; Personalization; Profiling

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Value Creation

Value Creation

Value creation is the primary aim of any business entity. Creating value for customers helps sell products and services, while creating value for shareholders (in the form of increases in stock price) insures the future availability of investment capital to fund operations. From a financial perspective, value is said to be created when a business earns revenue (or a return on capital) that exceeds expenses (or the cost of capital). But some analysts insist on a broader definition of value creation that can be considered separate from traditional financial measures. Traditional methods of assessing organizational performance are no longer adequate in today's economy, according to Value Based Management.net. Stock price is less and less determined by earnings or asset base. Value creation in today's companies is increasingly represented in the intangible drivers like innovation, people, ideas, and brand.

When broadly defined, value creation is increasingly being recognized as a better management goal than strict financial measures of performance, many of which tend to place cost-cutting that produces short-term results ahead of investments that enhance long-term competitiveness and growth. As a result, some experts assert that value creation is a more fundamental way of understanding and planning for a firm's success. As the authors of Value Driven Product Planning and Systems Engineering (2007) put it, The

bottom-line metrics of cash flow, demand, price, and return on investment are driven by a second set of financial metrics represented by value to the customer, cost, and the pace of innovation. Get them right relative to competition and impressive bottom-line results should follow.

The first step in achieving an organization-wide focus on value creation, is to reach an understanding about the sources and drivers of value creation within the industry, company, and marketplace. Understanding what creates value will help managers focus capital and talent on the most profitable opportunities for growth. If customers value consistent quality and timely delivery, then the skills, systems, and processes that produce and deliver quality products and services are highly valuable to the organization, Robert S. Kaplan and David P. Norton wrote in their book Strategy Maps: Converting Intangible Assets into Tangible Outcomes (2004): If customers value innovation and high performance, then the skills, systems, and processes that create new products and services with superior functionality take on high value. Consistent alignment of actions and capabilities with the customer value proposition is the core of strategy execution.

Although the intangible factors that drive value creation differ by industry, some of the major categories of intangible assets include technology, innovation, intellectual property, alliances, management capabilities, employee relations, customer relations, community relations, and brand value. According to Kaplan and Norton, the link between these intangible assets and value creation is corporate strategy. It is important to note that investments made to enhance intangible assets (research and development, employee training, and brand building, for example) usually provide indirect rather than direct benefits. In this way, focusing on value creation forces an organization to adopt a long-term perspective and align all of its resources toward future goals. The underlying idea, as the authors of Value Creation (2008) note, is that value creation can be leveraged to drive sustainable competitive advantage and superior financial performance.

SEE ALSO Competitive Advantage; Entrepreneurship; Intrapreneurship; Value Analysis; Value-Chain Management

BIBLIOGRAPHY

Cook, H.E., and L.A. Wissmann. Value Driven Product Planning and Systems Engineering. London: Springer, 2007.

Creating Value: Value Creation Index. Value Based Management.net. Available from: http://www.valuebasedmanagement.net/methods_valuecreationindex.html.

Kaplan, Robert S., and David P. Norton. Strategy Maps: Converting Intangible Assets into Tangible Outcomes. Cambridge: Harvard Business School Press, 2004.

Kapoor, Amit. Creating Value. Financial Times, 13 March 2003.

Madden, Jim. Creating Corporate Value. Financial Executive, March-April 2004.

Perla, Michael L. Financial Value Creation. CFO Refresher, 2003. Available from: http://www.refresher.com/archives14.html.

Strauss, Ron, and William Neal. Value Creation. Mason, OH: South-Western Cengage Learning, 2008.

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