The Connections and Interdependencies of Value Creation and Business Success

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The purpose of any business is to create value for customers, employees, and investors, and that the interests of these three groups are inextricably linked. Therefore, sustainable value cannot be created for one group unless it is created for all of them. The focus should be on employees committed to drive ongoing innovation and provide superior service and creating value for the customer, and shareholders.

Paul O’Malley: ‘Value Creation and Business Success’

 

Connections | Governance, Innovation and Stakeholder Engagement

Value is created from connections between business activities and the wider economic, environmental, social and financial operating context.

Value   is created from a wide range of interactions, activities, relationships, causes and effects. Those interactions take place in the market, regulatory, societal and natural/environmental context within which the organisation operates and on which it depends. Delivering against strategic objectives, and creating value businesses must measure and understand the context and environment in which they are operating.

The external context in which the organisation operates, the regulatory context, the opportunities and risks it faces and how it responds to the external context determines an organisation’s value creation mechanism resilience.

 

An organisation’s ability to innovate and create value is linked to the supply and partner chains, natural environment and consumers, and other stakeholders – competitors, regulators and local communities which may share or be affected  by value creation, and whose reactions, impact on sales, market share, reputation.

The interactions occur between the organisation and its consumers, employees, stakeholders, regulators, suppliers and others operating in the context within which an organisation conducts business activities.

The connections and interdependencies between the different factors that contribute to  the creation of value result in different outcomes for different stakeholders.

Value creation

Value creation for the customer, it entails making products and providing services that customers find consistently useful. In today’s economy, such value creation is based typically on product and process innovation and on understanding unique customer needs with ever-increasing speed and precision.

But companies can innovate and deliver outstanding service only if they tap the commitment, energy, and imagination of their employees. Value must therefore be created for those employees in order to motivate and enable them.

Value for employees includes being treated respectfully and being involved in decision-making. Employees also value meaningful work; fair compensation opportunities; and continued training and development.

Creating value for investors means delivering consistently high returns on their capital. This generally requires both strong revenue growth and attractive profit margins. These, in turn, can be achieved only if a company delivers sustained value for customers.

 

 

According to  McKinsey, companies create value by investing capital from investors to generate future cashflows at rates of return exceeding the cost of that capital (i.e., the rate investors require to be paid for the use of their capital).

Financial value may be manifested in various ways, including in an organisation’s stock price, profits, balance sheet and organisational growth, and it may change over different timeframes.

The faster  companies can grow their revenues and deploy more capital at attractive rates of return, the more value they create. It is the combination of growth and return on investment capital that drives value creation.

However, recent analyses challenge the narrow focus of value creation on financial value and contend that value creation extends beyond benefits directly associated with financial value, as expressed through accounting concepts in profit and loss statements, balance sheets and organisational growth.

In addition, since outcomes are not always stable and predictable, the assessment of value creation cannot be strictly confined to a particular (present) timeframe, but reflect the way in which value creating activities might affect future value creation potential.

Therefore, whilst business outcomes inform and contribute to it, value creation, for <IR> (Integrated Reporting) purposes, cannot be strictly assessed by reference to outcomes, such as an organisation’s performance, stock price, growth (in the form of return on investment capital) and profit, but also address the wider human capital reporting requirements.