‘Value creation strategies by employers will spur organisations productivity’

The most successful organisations understand that 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 first focus should be on creating value for the customer, but this cannot be achieved unless the right employees are selected, developed, and rewarded, and unless investors receive consistently attractive returns.

Value creation for the customer for instance 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; excellent 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.

If the purpose of business is value creation, it follows that the mission of any company should be defined in terms of its primary value-adding activities. While this may seem obvious, many managers and strategists behave as though the day-to-day business of a firm is irrelevant.

Managers are expected to address shareholder wealth, earnings growth, and return on assets, but the most successful firms understand that those measures should not be the primary targets of strategic management. Achieving attractive financial performance is the reward for having aimed at (and hit) the real target; i.e., maximising the value created for the primary constituents of the firm.

Why do managers so often choose not to focus on value creation and instead make decisions that systematically decrease the long-term value of their businesses? One reason may be that their training and education lead them to define their organisations’ interests too narrowly.

It is important to however note that an organisation can take one of two broad approaches to doing business. It can embrace the idea of pragmatic idealism, challenging itself to create value for customers, employees, and shareholders in a positive, win/win cycle. Or it can pursue a more narrowly defined (and illusory) self-interest by attempting to exploit the lack of perfect information held by the firm’s constituencies or by taking advantage of other inefficiencies in the market that allow the company to temporarily benefit at the expense of other parties and the economy as a whole. The latter approach is increasingly unworkable, even in the short run, owing to the nature of the emerging information economy.

In an environment of accelerating change in which long-term partnerships and joint ventures must be built on mutual trust, in which employees must be committed to provide superior service and drive ongoing innovation, in which customers have access to more and more information a course of pragmatic idealism and value creation is not only possible, it is increasingly the only viable approach.

Excerpt from Paul O’Malley’s article on Value Creation and Business Success