Value creation: A commonly used term, but what does it mean?

Much has been written about the notion of value creation since the phrase became 'hot' in business circles several years ago. Today, one does not have to listen for long to hear questions such as "Does XYZ add value?' or "What's our value proposition?"The term is dropped into sentences hither and thither, flowing from the tongue freely, as if it were an old friend. This implies that 'value creation' is front-of-mind; something that is not only topical but also to be striven for. 

But what is 'value creation', and how is value created? Here's one view:

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 ValueBasedManagement.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."

This description, from Reference for Business, reveals that 'value' can mean different things to different people. As with many concepts within the social sciences and liberal arts (of which management and governance are expressions), context is crucial. Clarity of language is needed if leaders are to be effective and businesses are to prosper. Listeners and readers must be able to comprehend messages readily. The following questions provide a useful starting point for such an enquiry:

• Who is the recipient of the intended value?

• What is valuable to them, and why?
  
• Can this value be created cost-effectively?
• How will 'success' be measured?

Rather than make assumptions or assertions (think how often have you heard people claim a 'unique value proposition'), put these questions to the beneficiaries (because, rightly understood, the 'value' of anything is determined by the recipient not the creator). 

Start your enquiry at the 'top' of a company. Boards should sit with shareholders and ask (or propose, if the shareholder is unclear) what 'value' looks like to them. This is the 'core purpose' question. Responses might include increased share price; a long-term market position or business model; increased market share; a social priority; or some combination of these, or even something completely different. Senior managers and staff should meet with customers (or prospective customers) and ask the same question. Ask staff themselves as well: the motivations of employees are likely to be different from those of shareholders and customers. 'Great solutions' that 'add value' to are highly unlikely to hold any sway at all if the intended beneficiary does not recognise, or is not interested in, the 'value' that is supposedly being offered. As with strategy, boards need to take the high ground, by ensuring that value created for one recipient does not erode value elsewhere. Boards need to work with management and together become crystal clear about value in a holistic sense: what it is, who the recipient is, and how it is created. ​

Once the value matrix (what, to whom, how and why) is understood and agreed, the answers need to be communicated in a clear and concise manner, so that effort and expectations can be aligned accordingly.

​Finally, a note to boards: You have an ongoing responsibility to ensure that purpose, strategy and managerial and operational activity are not only aligned, but also the desired value (outcome, strategic goal) is actually being achieved and that it is recognised by the intended recipients. The importance of ask probing questions cannot be overstated.

An earlier version of this article first appeared in 2015.