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Successful strategies are always the result of retail analysis and
careful planning.
Value creation has long been stressed in the business literature as the main objective of organizations.
Some authors state that an organization must create value for its owners whereas others insist that value must be created not just for shareholders, but also for all stakeholders.
While some management researchers insist that value must be created for all stakeholders because it is morally the right thing to do, others insist that a corporation’s only moral obligation is to make a profit.
In addition to economists, scholars in various fields of management and engineering offer different definitions. These range from value being simply equal to “price” to more elaborate definitions.
"Value" is the capacity of a good, service, or activity to satisfy a need or provide a benefit to a person or legal entity.
In the 1980s, Michael Porter defines value as “what buyers are willing to pay” and adds that superior value results when a firm offers lower prices than competitors for equivalent benefits or when it provides unique benefits that more than offset a higher price.
Most economists, however, make a clear distinction between value and price of a good or service.
It includes any type of good, service, or act that satisfies a need or provides a benefit, which may be tangible or intangible, including those that positively contribute to the quality of life, knowledge, prestige, safety, physical and financial security, as well as providing nutrition, shelter, transportation, income, etc.
Mr. Porter derived the framework to explain value creation.
At the end of the day, he identified three major strategies.
The first strategy is price leadership or cost leadership. This based on the ability to sell a product at a low price. This operators on the denominator of the whole equation.
The second strategy is differentiation, which means selling a high-quality product. As we know, this relates to the level of attributes in a product. Differentiation strategies act on the numerator of the value equation.
The third option is niche strategy. A niche strategy is a strategy where the firm focuses on a specific market segment. Price and attributes are selected according to the needs of a specific and well-defined group of homogeneous consumers.
On the other side, the consumer often can or cannot fully evaluate the quantity of
attribute in a product at least not before buying or testing it.
For example, we cannot really evaluate the quantity of sugar in a specific orange. We just know the average sugar content, which is a very impressive indicator.
From Suppliers point of view the value of destruction for a firm or company -Price concessions given under pressure, such as the threat of cancellation of a contract, imply loss of value for the supplier. Also, ending a long-term relationship may be financially devastating to the supplier.
Value created for both suppliers and firms or company-The most important financial benefit a firm creates for its suppliers is the gross profit it provides by doing business with them. If the gross profit is more than their overhead costs, then they also make a profit.
From customer's, Value of product is created by -A well designed and manufactured good that does not require frequent repairs or maintenance reduces operating costs, which creates value for the customer. Superior quality exists in a product when it meets or exceeds customer’s needs and expectations. Financial value is created for customers when the firm provides them with superior quality products at competitive prices.
An example for value destruction from customers- Price paid for a product is probably the most significant financial cost to a customer, in that he/she gives up financial resources to obtain the benefits of the product.
Additional costs incurred by the customer for travel (e.g., picking up a new product or returning a defective product), repair expenses of a product that fails after its warranty has expired, expenses for regular maintenance, etc., are all additional costs to the customer and, therefore, represent destruction of value for him/her.
Consequently, when a company fails to provide the necessary instructions and information about the product, it destroys value for the customer.
Price leadership, for example is easy to implement, reversible and flexible.
Changing sale price is an immediate decision of management, but
the strategy is costly.
Because lower sale price might result in profit loss.
Also, a competitor can react to this strategy by lowering their prices too.
Differentiation strategies that usually yield to high margin in increasing market share. This characteristic highly appealing to firms, but the downside is that differentiating strategies are challenging. They require investment in research and
development such investment can be large and risky.
Such as for example, in the case of the seed industry. Also, differentiation requires a complexity and organization not a coordination among many firms.
Niche strategy strengths are the high margin and the strong focus on consumer, but much limiting the firm to a specific segment can restrict operation to a narrow market. To sum up, each strategy has its own strengths and weaknesses, and no one dominates the other.
When planning this theory, please remember that it's no silver bullet that is perfect for all situations.
We can identify five possible scenarios for the impact of managerial decisions:
They create value for one or more stakeholder groups with no adverse effect on any other group.
They create value for one or more but destroy value for one or more of the others.
They destroy value for one or more stakeholder groups with no positive effects on the others.
They destroy value for all groups.
They create value for all.
Environmental pollution created by a business is usually the most significant form of value destruction for a community.
Pollution in any form means a reduction in the quality of life for the local community and may also create health problems for some of the residents.
Growth of a company may lead to an increase in traffic volume, which may lead to a reduction in quality of life.
In addition to financial risks, a poorly managed company often creates social problems and risks for the community; layoffs, plant closings or relocations are usually traumatic events for a community.
Downsizing often reduces the pool of volunteers for charity/community projects.
Pollution problems (hidden or obvious) destroy value for the local community in the long run. A company responsible for pollution may turn a short-term problem into a long-term disaster by dragging its feet and refusing to accept responsibility and take action.
BY KHAS
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