Abstract
Firms approach creating products from different perspectives. Some seek to focus on customer pain and dedicate themselves in solving their problems. Others are simply trying to find a way to make some money so that they can sustain their business. A firm needs to capture as well as create value in order to sustain in this competitive business environment. However, it is important for a business firm to understand the consequences of both factors and evaluate which one of them is of top priority.
An executive cannot be an effective manager without a clear understanding of the principles and practices of modern finance. The good news is that these principles and practices can be communicated simply without sacrificing thoroughness or rigor. An executive requires the determination and the discipline to manage a business according to the precepts of modern finance. Consider, for example, one of financial management’s most useful guiding principle: Managers should manage their firm’s resources with the objective of increasing the firm’s value.
Every business must capture some percentage of the value it creates in the form of revenue as Profit. This is known as Value capture. In other words, value capture is the process of retaining some percentage of the value provided by the business firm in every transaction. If it doesn’t do so, the business will have a difficult time generating enough resources over time to continue its operation. This will ultimately create problems for business firms to sustain in the market. Thus, the question that arises here is -Is business only about taking values?
However, value capture is tricky. A business firm, in order to be successful needs to capture enough value to make its investment of time and energy worthwhile, but not so much that the customers will have no reason to do business with you. People will only buy your product if they are getting more value in the transaction than they are spending. With the rise in customer awareness, it is importance for a firm to provide more value to its concerned stakeholders than its competitors. So, value creation is the foundation for any type of business firm. In this context, the next question that arises here is -Is business only about giving values?
Value creation and value capture are two conflicting but yet important factors without which a business cannot survive. However, each one of them has a different impact on the sales of your product, or the service you have provided. For example, the more value you capture, the less attractive your offer becomes. Movies are great, but would you pay $3000 for two hours of entertainment? On the other hand, the more value you create, the more attractive your offer becomes. However, value is not created in vacuum. It involves its own direct and indirect cost. This makes the overall business scenario complicated as a business needs to capture as well as create value.
A business firm faces dilemma on whether it should capture maximum value or minimum value. The maximization principle states that business should capture as much value as possible from the market. This principle may seem as an appealing one in the short run, but in long run, such principle may not work. Such principle tends to erode the reason customers purchase from a business in the first place. Customers purchase a certain product or service hoping that they will receive more value than they are giving up in the purchase. The less they receive, the less they will want to buy from you.
On the other hand, the minimization principle states that a firm should capture as little value as possible. The value must be sufficient for the business firm to sustain and to carry out its operations. This strategy may seem as an unprofitable one in the short run, but it is essential if the business wants to survive in the long run. So, value creation seems as a better option for a firm if it wants to achieve long term success. In fact, if a business creates valuable products for customers, then it can extract more value from the market as well.
There are two conditions for value capture: (1) acquiring sustainable differentiation and originality, and (2) matching originality with customer value. To fulfill these conditions, it is necessary to pursue ‘deep value creation.’ For sustainable differentiation and originality, firms must focus on building up organizational capabilities from a long-term perspective, instead of focusing only on the management of individual products. Similarly, for high customer value creation, both functional and non-functional value must be created. The functional value of a product is determined by the evaluation of product functions according to objectively fixed criteria, whereas non-functional value is created when customers attach subjective significance to a product. Deep value creation aims at cultivating originality through organizational capabilities and creating non-functional value.
Unfortunately, many market leaders think their job is not to create value, but rather, to capture or extract value. Ironically, when you focus so much of your time on value capture, you significantly reduce the value capture potentials from your products. What would you rather do? Optimize the lifetime customer value from $100 to $115 by extracting another $15, or double the value from $100 to $200 in order to encourage customers to purchase your products more frequently. Having long term customers is more worthwhile than having one time customers.
The key to keep in mind is that the very best thing the product team can possibly do to facilitate capturing value is to create value as much as possible. Create products that are compelling, sticky, and engaging – the kind of products that your customers cannot live without. Make the job easy for your pricing specialists and your sales people.
References
Cagan, M. (2013, 4 21).Value Creation vs. Value Capture.
Khanal, K. (2016).Business Ethics And Social Responsibility. Kathmandu: ABC Book's Publishers & Distributors House P.Ltd.
Nickerson, J., Silverman, B., & Zenger, T. (2015).The "problem" of creating and capturing value.1-23.
Nobeoka, K. (2010, 4). Value Creation and Value Capture at Manufacturing Firms: Importance of Non-functional Value. 1-39.
Ryall, M. (2013, 6 6). Don't Just Create Value; Capture It.
Writer: Rebika Bhandari
Note: This article originally appeared in the print magazine, Management Vision-an opinion based magazine of business and entrepreneurship prepared by the BBA students of People’s Campus.
Comments
Post a Comment