How does firms create value

For example, banks can invest in anything and still make a profit when they find cheap deposits. When they have expensive deposits, the only way to make a profit is by finding higher yields. That may cause them to make riskier loans with higher yields, which is dangerous. You can create profits by both lower costs and higher revenue. Selling communicates value to customers so they recognize it and are willing to pay for it.

Profits come from both the creation of value in production or service delivery and communication of value through your sales process. The sales function can be your biggest missed opportunity. You could create great value in the product or service but underinvest on marketing. Never underrate the power of building a brand.

Do the work to build the trust and knowledge customers need to be willing to buy. The opposite mistake is to waste dollars on a sales process that provides little value.

Driving blindly, they continue to pour money into sales staff and marketing to keep the sales going. Do you feel the same way? Sales staff are usually very highly compensated. This means there must be a large creation of value at the sales stage to justify the expense.

Incentive pay is popular for sales staff and managers. These incentives are sapping the productivity they were meant to promote. The London School of Economics did an analysis of 51 studies of financial incentives. Here are some quotes from their conclusions:. The sales and marketing process is when your customer first learns the value you can provide to them.

You may be creating or destroying value to the owners by how you invest in this area. I was the CFO of a bank and would get frequent calls from a bond broker. When we create value for our employees and customers, they provide value to us as owners. The Creating Value program is my comprehensive program for identifying what you value most and how to provide the greatest value to your customers and employees. For more info, check out the Strategic Planning topics page for free tools, articles, and services.

However, this type of uncertainty can be hedged and it cannot be refined through incisive strategic thinking. The buy and build source of value relates to synergies following from combining activities and assets.

Synergies can refer to expected additional revenues, although they tend to refer to expected cost savings. In both cases the benefits are non-autonomous, and therefore, different from the benefits of the similar autonomous revenue growth and cost reduction sources of value. In terms of mergers and acquisitions, value is created when the proceeds from synergies outweigh the one-off expenses incurred to realise mergers or takeovers.

Here too, the act of acquiring or merging is not dependent on a third party, but the result of a deliberate, explicit agreement. Why this source carries no inherent and unavoidable uncertainty is best explained by recognising it effectively amounts to managing multiple firms, where each firm carries a separate autonomous revenue growth uncertainty, but no obvious additional uncertainty as a result of the combination, other than the aforementioned cost overruns that result from bad planning or bad execution.

It relates to the use of a risk-free value creating option that simply arises or not. Based on the above it is concluded that all strategic thinking should be aimed at reducing the long-term uncertainty that is an inherent and unavoidable part of autonomous revenue growth.

This particular uncertainty is a composite of three identifiable uncertainties that — when combined — capture the overall uncertainty in future incoming cash flows that warrants strategic thinking efforts. All three of these uncertainties impact the overall future incoming cash flow stream as illustrated in Figure 2.

In this example, two investment years black columns precede incoming cash flows. The upper two graphs illustrate the cash flow estimates in the annual left graph and cumulative right graph terms. The lower graphs show the extent to which such estimates might turn out differently if they are negatively impacted in all three uncertainty respects.

The bottom right graph shows how the combined uncertainty would change the cumulative cash flow stream, and thus, change the extent to which value is actually created. Strategic decision making needs to go beyond the gathering of information and having a vague notion of value creation.

Demonstrating wisdom requires — as a minimum — thorough knowledge of how value creation works, how it is measured and what sources of value exist.

This article explores this by showing how decision making may take place at any of six different management levels. More sources of value become available at higher levels, but only one source of value demands true strategic thinking. This source of value is autonomous revenue growth and it can be tapped into at any decision making level. As such, demonstrating strategic wisdom is possible for anyone within a firm and ultimately, it resolves down to the thinking and decision making that increases the chances of generating higher, earlier and more future incoming cash flows.

In practical terms, this requires careful documentation and operationalisation of the roles and responsibilities of personnel within firms so that cash flows are appropriately understood and leveraged.

Bespoke management systems are key in this respect Perrott, There is ample scope for future research in this domain in terms of empirical applications and evaluations. This includes understanding how the framework can be incorporated in scenario planning exercises Hirsch et al. Creating value at different management levels: a novel framework. Uncertainty does not equal risk. They differ in terms of the extent to which the number, magnitude and likelihood of outcomes can be confidently quantified.

Risk is associated with chance and salient studies in this domain include Agarwal and Ansell , Beasley et al. Beyond chance, business decisions are characterised by a high degree of uniqueness. Accordingly, it is hard to identify every possible outcome and even harder to establish the likelihood of each outcome. This is uncertainty. The same cannot be said about incremental revenues as value can be destroyed even when revenues increase. This will always happen when products are sold below COGS.

Clearly, this would also result in a negative gross margin. Adams , T. Anbarci , N. Agarwal , R. Beasley , M. Bettis , R.

Boland , L. Cosenz , F. Doloriert , C. Durand , R. Elahi , E. Fowler , A. Hirsch , S. Jarzabkowski , P. Kempster , S. Kim , H. Kline , P. Kydland , F. Lah , M. Lather , P. Liedtka , J. Liu , W. Mantere , S.

Perrott , B. Automating various processes to help streamline customer service can also help you create value in your business. Collaborate with team members to determine which resources and tools can boost overall customer value.

For instance, customer surveys can give your organization important insight into purchasing behavior, product needs and improvement suggestions.

Tools like surveys and market analysis can help your business increase the value it offers to customers and create a lasting business that leads to growth and success. Make improvements in the product development processes of your company. Use data from market analysis and evaluating customer demographics to support designing and planning new products that meet demands.

Address customer concerns and input to find methods of development that produce high-quality offerings that customers are willing to purchase. By improving the product development cycle, you can create offerings that give more value to customers. Learn where to invest company funds to support growth and add value to the business. For instance, evaluate which marketing strategies are the most successful at providing substantial returns on investment ROI so you can understand what methods reach customers most effectively.

Similarly, investing in sales and customer service training for your teams can also add higher value to your organization. Perform market analysis and learn about what your organization's customers look for when making purchases. Find ways to meet unique customer needs and create lasting value with your business's offerings. With deeper understanding of what your organization's market needs, you're more likely to create value through product offerings and building customer relationships.

Additionally, businesses that strive to fulfill customer needs are better able to build trust and rapport within the market, leading to repeat business and increased revenue growth. Evaluate competing organizations to determine what methods and products provide the most value to customer markets.

Then, find ways to create similar offerings that are unique to your organization. Not right, there is third way: firms that reduce their cost of capital increase their value. I'm still simplifying here a bit and will clarify in later posts. Now, let's say we are on the second year of the same payment stream.

What is the affect:. These are very clean, made-up numbers. Obviously real life is more complex, with a lot more variance, but the math stands. So, how do firms create value?