The concept of value creation refers to creating products and services more worthy to customers.
We can say that the value creation is an activity or performance by the firm to create value that increases the worth of goods, services, business processes or even the whole business system.
Thus, many businesses now focus on value creation both in the context of creating better value for customers, purchasing its products and services, as well as for stakeholders in the business who want to see their investment in business appreciate in value. Ultimately, this concept gives business a competitive advantage in the industry and helps them earn above average profits/returns.
Further, the concept took respecting the business and organizationâ€™s started discussing about the value creation for stakeholders. Competitive advantage leads to superior profitability.
Three factors which decides how profitable a company becomes
The value customers place on a product reflects the utility they get from a productâ€”the happiness or satisfaction gained from consuming or owning the product. Utility must be distinguished from price. Utility is something that customers get from a product. It is a function of the attributes of the product, such as its performance, design, quality, and point-of-sale and after-sale service.
Companies are ultimately aiming to achieve sustainable competitive advantage, which enables them to succeed in the long run. Michael Porter argues that a company can generate competitive advantage in two different ways, either through differentiation or cost advantage. According to Porterâ€™s, differentiation means the capability to provide customers superior and special value in the form of productâ€™s special features and quality or in the form of after-sales customer service. As a result of differentiation, a company can demand higher price for its products or services. A company will earn higher profits due to different ratios, in case the expenses stay comparable to the costs of competitors.
The above-mentioned differentiation and cost advantage will affect a companyâ€™s ability to achieve competitive advantage, but there are many different organizational functions that will influence whether a company can achieve cost advantage or differentiation advantage. Michael Porter used the concept of value chain to explore closer different functions of the organizations and mutual interactions among those functions. Value chain analysis provides an excellent tool to examine the origin of competitive advantage. It divides the organizations into two different strategically important groups of activities, namely, primary activities and supporting activities, which can help to comprehend the potential sources for differentiation and to understand an organizationâ€™s costs behaviour.Â
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