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Creating Value: The New Name of the Game Published: Sunday, February 22, 2009 By: Dr. Manuel Ángel (Coco) Morales

Strategic decisions are those that affect the long-term well being of the organization.  There will be a core number of decisions that shape the future of the business.  The question that was posed to me this week at a meeting, what make these decisions and actions strategic?  The answer is their likely future impact on the entire organization, and its ability to create value as well as the fact that these decisions are almost irrevocable, meaning that they are very difficult to reverse once implemented.   Some example are: moving all the production to some other place, developing another company in another market, reducing the size or scale of the organizational structure, and sub-contracting key services. 

In short, there are four characteristics of strategic decisions: 1) They should create value; 2) They commit major resources; 3) They are long-term, and 4) They are difficult to reverse.

The strategic decisions must be made with the goal of creating value for the business.  Of course, some decisions may not create value, while value in any case may not accrue until, sometime in the future.  However, value creation involves more than the generation of a competitive advantage, though the creation of a competitive advantage is a necessary condition.  A competitive advantage is an attribute posed by the business but not by its competitors, such a low cost structure or a benefit tacit or explicit for customers not offered by any other organization.  Nevertheless, organizations can have an advantage that does not translate into superior financial performance.  Industry structure may be such that suppliers or customers capture the benefit of the business’s competitive advantage.  In personal computers, for example, almost all industry profit goes to Intel and Microsoft, with relatively little for the computer manufactures.  For this reason, it is essential that strategic decisions are seen as those that create value for the company.

In these turbulent times the activities and tasks of employees, and the way they undertake those activities must create value.  A business is primarily an economic entity.  Of course, it has social responsibilities, but the reason for its existence is economic-it promises to deliver products and services to its chosen customers in such a way that its revenue is larger than its cost including capital costs.  (These days if any organization wishes to survive, it has to assure that this is the case of its operation.  As the distinguished James D. Thompson instructed, organizations have to create value or else…

If an organization does not generate value, it has no reason to exist.  It must meet the expectations of financial market (local and global).  This is the challenge of the 21st century.  It is easier to create business that destroy value rather than generate value.  As the great Shumpeter noted, creative destruction is an ongoing process, and business have to work very hard to claim that they were built last.  Thus, this is the working premise.  Organizations (business, firms and others) have no intrinsic right to exist, instead this right must be continually earned in the global market place against fierce competitors and heavy global and local forces.  This is the new name of the game.

Research indicates how difficult it is for companies to generate value over sustained periods of time.  A recent study of US firms over the period of 1917-2007 found that only a few of them over performed the overall share market (such as S & P 500), as measured by growth in market capitalization.  This metric of market capitalization is not the only indicator of success, but it is a strong shareholder perspective, measuring the returns they get from holding the stock.  Many people are aware of the mess we are experiencing these days while following this measurement in the markets.

One explanation for this finding is that companies cannot innovate and change as quickly as the economy; and it is the economy that is reflected in any index of overall share market.  As new industries grow and develop S&P, Nikkei, DAX and similar indices are updated to reflect this condition.

To conclude, organization design knowledge clearly states that value creation is how the company creates value, which in turn depends on WHAT ACTIVITIES IN THE VALUE CHAIN IT IS INVOLVED IN.   It includes customer selection, and how products or services create customer value as determined by the total life-cycle of the product, not just the initial purchase price, and this many provide opportunity for innovation.  Innovation is undertaken by raising, applying and disseminating usable knowledge.

Since a business model also encompasses which activities the company performs and which others perform, it always involves a value network of suppliers and partners.  The two key components of a business model are value creation and value capture, being the last how the company is rewarded for the value it creates, and this value capture is dependent on competitive differentiation.

The characteristics of a strategy process are the following: 1) It requires analysis, but most of all sound judgment. 2) There is an increased need for speed in decision-making. 3) Good decision processes should focus on problems and solutions, not on political dynamics of the company.  4) There is a need for genuine creativity, and developing original solutions, avoiding always premature over-reactions.

Copyright 2009 QBS, Inc.

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