This approach can yield some short-term profit increases, but it is not sustainable. You can only squeeze so hard for so long. A smaller number of forward thinking firms innovate their way out of this zero-sum dilemma. One example of this kind of value-chain innovation is the Custom Sterile program of Allegiance, Inc.
Under the Custom Sterile program, all of the supplies needed for a particular surgical procedure are collected, packaged together, and sterilized in advance at an Allegiance facility.
This helps hospitals to standardize and optimize their use of surgical supplies, and creates dramatic savings compared to the traditional process, in which expensive nursing labor locates the supplies from storage facilities within the hospital, collects them, and sterilizes them for each operation. The innovation is also good for Allegiance. Instead of having their margins relentlessly squeezed in a series of transaction-focused, commodity sales, the company has created a relationship-focused, high-value-added offering that justifies higher margins.
Competition and Customer Value Another fallacy that has cropped up in much of the literature on strategy is that the purpose of business is to beat the competition. There is no question that competition, like profit, is an important dimension that companies must be aware of and manage to successfully create value in the long run.
So competition is a key variable in determining whether a product or service provides a differentiated benefit to the customer, and one that she is willing to pay a premium for. Thus, we need to think of competition not as a goal, but as part of the business environment — a key element of the context in which a firm seeks to create value. What then become critical are the alternative responses to competition undertaken by different firms, some of which are more likely to succeed than others, given the nature of the business environment.
In the emerging information economy, the most successful responses to competition focus on two areas: 1 innovation that drives down the cost of products and services while increasing their quality and variety, and 2 building a deeper understanding of changing customer needs within increasingly specific market segments.
Many of them pit the interest of the company against the interest of the customer — a prescription for customer alienation and long-term disaster. At the same time, they are by far the resources that yield the highest returns. Real value creation and long-term growth and profitability occurs when companies develop a continuous stream of products and services that offer unique and compelling benefits to a chosen set of customers.
This means that to maintain industry leadership, a company must establish a sustainable process of value creation. When investors buy stock in Motorola, or when customers enter into a partnership with that company, they are not basing their relationships on a particular product or set of products.
Rather, both constituencies are expressing their belief that Motorola will continue to develop processes that allow it to take advantage of emerging technologies and changing market needs to create useful, profitable products and services.
Some of the major themes that underlie successful value creation strategies in the information economy are:. But as we have seen, the exact opposite is true. If value-focused behavior is idealistic, then the most pragmatic way to manage a company is with idealism. Here is a pair of principles for managing with this systems view of business:. A great irony hovers over managers who reject these two principles.
Thus, an organization can take one of two broad approaches to doing business. The latter approach is increasingly unworkable, even in the short run, owing to the nature of the emerging information economy.
It starts with how you structure your company. Value creation continues with how you build your product or provide your service. I talked earlier in this article about clarifying your personal aspirations and the purpose or aim of your company. The rubber meets the road of that purpose when you commit to it at the expense all else. Saying yes to everything means saying no to large amounts of what you value most. You must commit and be willing to make the tradeoffs. Clarity of purpose produces elegant simplicity.
Your company focuses on providing that profitable overlap of what you value and what your customer values. You need the support of mentors, contractors, and employees. All but the smallest companies rely heavily on the support of their employees. We must also provide value to our employees. Is this value just having a job and getting a good paycheck? Effective employees want purpose, not just paychecks.
You want employees that are internally motivated to provide value for your customers. That sense of purpose and accomplishment energizes them. Money is a weak motivator. You often create the bulk of your profits before you make a sale. This means there is more opportunity for profit by finding underpriced properties than the ability to sell at a premium. Many bankers, especially lenders, think loans provide the biggest profits for banks. Banks get most of their revenue from loans. The market values deposits more than loans.
In the banking example above, loan interest is income to the bank and deposit interest paid to depositors is an expense. How can something that causes expenses be more valuable than what creates income?
One way to think about it is to break the whole system into pieces by imagining each process being its own company. Which processes are more stable and profitable? 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. Laurie Collier Hillstrom. Favaro, Ken. Kaplan, Robert S. Cambridge: Harvard Business School Press, Kapoor, Amit. Madden, Jim. In Stock. Theory and Practice of Business Intelligence Business intelligence supports managers in enterpr Cloud Computing Systems and Applications in The implementation of cloud technologies in health Analyzing the Economics of Financial Market The prosperity and stability of any economic struc Handbook of Research on Computerized Occlusa Modern medicine is changing drastically as new tec A Systemic Perspective to Managing Complexit Organizational complexity is an unavoidable aspect Servant Leadership: Research and Practice.
Leaders represent a necessary part of any organiza Integrated Operations in the Oil and Gas Ind Gaze Interaction and Applications of Eye Tra Recent advances in eye tracking technology will al
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