What Is Value?

The value created by the firm equals the benefits the firms customers receive minus the costs the firms suppliers incur and minus the costs of using the firms own assets. To increase value created, the company increases benefits to its customers, lowers costs of its suppliers, uses its resources more effectively, or combines suppliers and customers in new or more efficient ways. The firms ability to create and capture value depends on the strength of competition and the characteristics of the firm. In markets where customer demand outruns industry capacity, many firms can add value. In markets where industry capacity outruns customer demand, a firm must have a competitive advantage to survive. The firm must share the value that it creates with its customers and suppliers. The share of the value that the firm is able to capture is the value of the firm. Value-driven strategy involves three basic rules. To attract customers away from competitors, the company must provide sufficient customer value as compared to rival firms. To attract key suppliers away from competitors, the company must offer sufficient supplier value. To attract investment capital in competition with other market investment opportunities, the company must increase the value of the firm for its investors. Understanding these three important rules provides managers with a consistent framework for designing and applying strategy. To obtain a competitive advantage, the company must create greater total value than its competitors and capture the incremental value that it brings to the market. The competitive advantage of a firm equals the difference between the overall value created by the industry when the firm is in the market and the overall value that would be created by the industry when the firm is not in the market. Thus, competitive advantage is the extra value created by the firm.

What Is Value Creation?

Value creation is a central concept in the management and organization literature for both micro level (individual, group) and macro level (organization theory, strategic management) research. To understand value creation, it is first important to define the concept. Bowman and Ambrosini (2000) introduce and differentiate two types of value at the organizational level of analysis: use value and exchange value. Use value refers to the specific quality of a new job, task, product, or service as perceived by users in relation to their needs, such as the speed or quality of performance on a new task or the aesthetics or performance features of a new product or service. As Bowman and Ambrosini (2000) note, such judgments are subjective and individual specific. They label the second type of value exchange value, which we define as either the monetary amount realized at a certain point in time, when the exchange of the new task, good, service, or product takes place, or the amount paid by the user to the seller for the use value of the focal task, job, product, or service. Viewed together, these definitions suggest that value creation depends on the relative amount of value that is subjectively realized by a target user (or buyer) who is the focus of value creationwhether individual, organization, or society and that this subjective value realization must at least translate into the users willingness

to exchange a monetary amount for the value received. Here we state two important economic conditions that may be necessary for value creation activities to endure. First, the monetary amount exchanged must exceed the producers costs (money, time, effort, joy, and the like) of creating the value in question, at least for the single point in time when the exchange occurs. Second, the monetary amount that a user will exchange is a function of the perceived performance difference between the new value that is created (from the new focal task, product, or service) and the target users closest alternative (current task, product, or service). In general, without these excesses, neither the user nor the creator of value would be willing to repeatedly engage in these activities over the long term.

Dimensions of Value Creation

Level of Analysis or Source of Value Creation Society Academic Lens Target of User of Value Correction Process Value Capture Process

Sociologists Economists Ecologists

Individuals Organizations Government

Organizations

Strategic management Organization theory Strategic HRM

Consumer Society

Individuals

Psychology Organizational behavior HRM

Consumers Client Organization

Innovation & new firm creation Competition Capital investment Incentives Laws & regulations Invention Innovation R&D Knowledge creation Structure & social conditions Incentives, selection, & training Knowledge creation Search Ability Motivation Training

Factor conditions Demand conditions Supporting industry infrastructure Firm strategy & rivalry Rare, inimitable, nonsubstitutable resources Intangible resources

Network position Unique experience Tacit knowledge

Note: Dashed arrow ( indicates value capture.

) indicates value slippage; solid arrow (

How Value Is Created?

Managers must pay close attention to value creation because it is the source of the companys potential profits. The company creates value by coordinating its purchases and sales transactions. The company generates value by providing products to customers, which it produces both by purchasing inputs from suppliers and supplying some of its own. The value the company creates is equal to the difference between the benefits the

companys customers receive and the cost to the companys input suppliers, including the cost of the companys self-supplied inputs. All value creation begins with the companys final customer. The customer receives some benefits from consuming a product provided by a company. The dollar measure of those benefits is the customers willingness to pay, which is defined as the maximum amount that the customer would pay for that product. Accordingly, the customers benefit is also referred to as the customers willingness to pay. For example, if a customer is willing to pay at most $200 for a particular product, then that is the customers benefit from consuming that product. The value created by the firm is necessarily limited by its customers willingness to pay. There is no free lunch. Providing a product that benefits customers necessarily requires costly inputs. The firm obtains various inputs from suppliers. The firm also supplies some of its own inputs, including information assets such as business methods, inventions, and market knowledge. For most productive inputs provided by the firm itself, the most accurate measure of cost is the market value of that input, which is simply the current market price of the input. For those inputs provided by the firm for which there is no readily available market price, it is necessary to estimate the market value. The best estimate of the market value of an input is based on the opportunity cost of the input. Recall that opportunity costs are what the inputs would earn in the best opportunity forgone; that is, the return from the best alternative employment of that input. For example, if a company owns a plot of land that it could sell to another company that is the opportunity cost of using the land. The cost of the entrepreneurs time and effort in starting a firm is what the entrepreneur could have earned in his or her best alternative occupation. The costs incurred by the firms suppliers are the purchase costs of all inputs including labor, natural resources, manufactured parts and components, technology, and capital equipment. Supplier costs further include the costs of all services obtained by the firm, including the costs associated with completing transactions, such as legal, accounting, marketing, and sales costs. The costs of the supplier also include the cost of capital whether that capital is obtained through debt or sale of equity. Therefore, the value created by the firm equals the benefits obtained by the firms customers minus the total costs of inputs provided by the firm and its suppliers. The principles of value creation can be illustrated with a basic example. A single customer representing a specific market segment is willing to pay a maximum of $200. Therefore, the most value that the company could create is $200. In serving the customer, the company employs some of its own assets that are valued at $80. The company also purchases inputs from a supplier which cost $50. The value created by the companys buy-and-sell transaction is the customers net benefit net of the cost of using the firms assets and the suppliers costs: $200 $80 $50 = $70.

The Process of Value Creation:

There are at least two possible ways to conceptualize the process of value creation: (1) a single universal conceptualization and (2) a contingency perspective that explicates how

value is created from the vantage point or perspective of a particular source. Answering the question of how value is created requires one to define the source and targets of value creation and the level of analysis. We posit that when the individual is the unit of analysis, the focal process is the creative acts displayed by individuals and a select set of individual attributes, such as ability, motivation, and intelligence, and their interactions with the environment. When the organization is the source of value creation, issues regarding innovation, knowledge creation, invention, and management gain prominence. Finally, at the societal level, the level of entrepreneurship and macroeconomic conditions in the external environment, including laws and regulations restricting or encouraging innovation and entrepreneurship, come into play.

The Organization as a Source of Value Creation:

Moving to the organizational level of analysis, in his book on competitive advantage, Porter (1985) contends that new value is created when firms develop/invent new ways of doing things using new methods, new technologies, and/or new forms of raw material. Thus, when the organization is the unit of analysis, innovation and invention activities impact the value creation process. Damanpour (1995) suggests that innovative organizations introduce new products or services or new management practices related to the products or services. The new products, services, or practices arise from the innovation process, which Van de Ven, Polley, Garud, and Venkataraman (1999) argue consists of an intentional effort to develop a novel idea, involving significant market, technical, and organizational ambiguity; regarding a commitment of collective effort over an extended period of time; and requiring more resources than are currently held by the parties involved. Further, the literature suggests that firms are more likely to innovate when they face uncertain environments (Brown & Eisenhardt, 1997), enjoy slack resources (Van de Ven, Venkataraman, Polley, & Garud, 1989), are managed by entrepreneurial managers (Brown & Eisenhardt, 1998), have large social networks (Smith, Collins, & Clark, 2005), and have the organizational capacity to combine and exchange knowledge into new knowledge (Nahapiet & Ghoshal, 1998; Smith et al., 2005). A second body of literature in the field of strategic managementdynamic capabilities also has examined how organizations create value by focusing on how firms can create new advantages as existing ones are worn away by environmental changes. For example, Teece, Pisano, and Shuen contend that firms build advantages by distinctive organizational processes, asset positions, and evolutionary paths that allow them to integrate, build, and reconfigure internal and external competencies (1997: 516). Conversely, Eisenhardt and Martin (2000) argue that dynamic capabilities are more commonplace and readily identifiable processes and routines that pertain to how resources are acquired, integrated, and reconfigured. Zollo and Winter (2002) and Winter (2003) further suggest that such capabilities are the activities that generate and modify operating routines to create new advantages. Dynamic capability scholars have also begun to empirically identify the factors that lead to the creation of new advantages, including product and process development (Helfat, 1997), organizational evolution (Brown & Eisenhardt, 1997; Rindova & Kotha, 2001), and managerial capabilities and

cognition (Adner & Helfat, 2003; Tripsas & Gavetti, 2000). Much of this literature is focused on factors internal to the firm and emphasizes knowledge creation, learning, and entrepreneurship in creating new advantages. Yet, in our view, the dynamic capabilities literature on creating new advantages A third stream of organizational-level literature has paid increased attention to the process through which new organizational knowledge is currently neglects the importance of the target users, their perceptions, desires, and alternatives, as well as the context in which users are embedded. A third stream of organizational-level literature has paid increased attention to the process through which new organizational knowledge is generated and, hence, value created. Presumably, such new knowledge can lead to greater value for target users. In particular, Nahapiet and Ghoshal (1998) suggest that the social connections of individuals within the firm will provide greater information and knowledge that can be used by organizational members to combine and exchange this information in a way that produces new organizational knowledge. Smith et al. (2005) found that social networks of organizational members were positively related to the knowledge creation capability and that this capability itself was an organizational level concept that was positively related to firm innovation. Thus, it may be that social networks that are externally directed to detect the needs of customers and product/service users have greater potential for novel and appropriate product/service innovations. A final body of literature that is also relevant to the organization as a source of value creation is strategic HRM research. Strategic HRM researchers have examined the role of management in the process of value creation quite extensively. Practices identified from this body of research have been found to both build employee skills and motivate them to work toward organizational value creation (Wright & McMahan, 1992). Strategic HRM research, for example, has demonstrated that use of high-investment HRM systems that include practices that develop employee skills, enhance the motivation to work toward organizational objectives, and provide the discretion needed to quickly take appropriate actions to achieve organizational goals is related to a variety of important outcomes, such as employee turnover (Guthrie, 2001; Huselid, 1995), organizational commitment (Whitener, 2001), operational performance (Youndt, Snell, Dean, & Lepak, 1996), and financial performance (Delery & Doty, 1996; Huselid, 1995). Extending this logic to a knowledge-based context, Kang et al. (this issue) suggest that firm success rests on the firms ability to offer new and superior customer value, which, in turn, depends on its ability to explore and exploit employee knowledge that can become the basis of important innovations that create value for targeted customers. Kang et al. recognize, however, that firms ability to leverage employee knowledge requires that they design HR systems that encourage entrepreneurial activity among employees resulting in exploratory innovation, as well as cooperative employee activities that exploit and extend existing knowledge for competitive advantage. To this point, our discussion has implied that the target or user of value is almost exclusively an internal or external customer of the organization. Yet we would be remiss if we allowed the reader to believe that the customer is the exclusive target or user of value creation. Rather, many potential targets for value creation exist at the

organizational level. For example, researchers focusing on corporate social responsibility examine the actions of organizations that are intended to further social good, beyond the interests of the firm and what is required by law (McWilliams & Siegel, 2001). Similarly, in their book on stakeholder analysis, Post et al. (2002) suggest that the purpose of the organization is to create value in many different ways for many different targets, including earnings for owners, pay for employees and benefits for customers, and taxes for society. Further, these authors send a strong message to organizations regarding their broad responsibilities in creating value and wealth, and they note that the corporation (organization) cannotand should notsurvive if it does not take responsibility for the welfare of all of its constituents and for the well-being of the larger society within which it operates (2002: 1617) By definition, various stakeholders have different views as to what is valuable because of unique knowledge, goals, and context conditions that affect how the novelty and appropriateness of the new value will be evaluated. Moreover, they may have competing interests and viewpoints on what is valuable. For example, investors may favor any value-creating activities that add to short-term profits, whereas environmentalists may prefer only those value creating activities that preserve the environment. Thus, a stakeholder approach requires that organizations take a broader and a longer term view regarding the targets of value creation. This perspective, in our opinion, is important because it suggests that there will be different and perhaps competing viewpoints among users on what is valuable and, thus, that organizations must direct time and effort toward recognizing and, to some degree, reconciling these differences.

Analyzing Value Creation: The Value Chain Analysis

Most mangers know that their organizations value chain represents the sequence of activities necessary to create a product or service, produce or deliver it, market and sell it to customers, distribute or provide it to those customers while ensuring necessary post sales service is completed. They also know that internal firm infrastructure activities such as human capital development or procurement support the main stages in the value chain. What managers sometimes arent as knowledgeable of is the fact that the value chain within a firm or industry is actually comprised of a very specific model of performance that depicts the discrete stages of organizational value creation. Further, they dont always use the model to compare and contract activities across firms for the purpose of determining where competitive advantages lie. Developed in the early 1980s by Harvard Business School Professor Michael Porter in his book Competitive Advantage, the value chain consists of two main components: primary activities and secondary activities. Value chain analysis is a method for decomposing the firm into strategically important activities and understanding their impact on cost and value. According to Porter (1985, 1990), the overall value-creating logic of the value chain with its generic categories of

activities is valid in all industries. What activities are vital to a given firms competitive advantage, however, is seen as industry dependent. The value chain configuration is a two-level generic taxonomy of value creation activities (Porter, 1985). Primary activities are directly involved in creating and bringing value to the customer, whereas support activities enable and improve the performance of the primary activities (for a similar twolevel activity categorization see also Kornai, 1971; de Chalvron and Curien, 1978; Stabell, 1982). The support label underlines that support activities only affect the value delivered to customers to the extent that they affect the performance of primary activities. Primary value chain activities deal with physical products (Porter, 1985: 38). Primary activities: The five generic primary activity categories of the value chain are (Porter, 1985: 3940): Inbound logistics: Activities associated with receiving, storing, and disseminating inputs to the product. Operations: Activities associated with transforming inputs into the final product form. Outbound logistics: Activities associated with collecting, storing, and physically distributing the product to buyers. Marketing and sales: Activities associated with providing a means by which buyers can purchase the product and inducing them to do so. Service: Activities associated with providing service to enhance or maintain the value of the product. The primary activity categoriesparticularly the inbound logisticsoperationoutbound logistics sequenceare well suited to characterizing the main value creation process of a generic manufacturing company. Casual empiricism suggests that manufacturing or process industry firms frequently use the value chain activity category vocabulary when defining and describing their operations. Marketing is included as a primary activity category as these activities inform the customer of the relevant product characteristics and ensure product availability on the market. Similarly, the inclusion of service as a primary activity category follows from the fact that service can be critical for the value realized by the customer. The set of generic activity categories is a template for identifying critical value activities that provide a basis for understanding and developing competitive advantage from the perspective of the firm as a whole. The value chain configuration is not meant to model the actual flow of production. The value chain activity focus can be used for identification of strategic improvement needs or opportunities, but is not necessarily useful for specifying a reengineering of business processes. Generic activity categories are not the same as organizational functions. Related activities from a competitive advantage perspective can span several organizational functions. A single function can similarly perform activities that need to be distinct from a competitive

advantage perspective. This is perhaps most apparent in the distinction between primary and support activities. A firms value chain is embedded in a system of interlinked value chains (Porter, 1985: 34). This value system includes the value chain of suppliers of raw materials and components. It also might include the value chain of distinct distribution channels before the product becomes part of the buyers value chain. The overall system is thus a chain of sequentially interlinked primary activity chains that gradually transform raw materials into the finished product valued by the buyer. Support activities: The generic support activity categories of the value chain are: Procurement: Activities performed in the purchasing of inputs used in the value chain. Technology development: Activities that can broadly be grouped into efforts to improve product and process. Human resource management: Activities of recruiting, hiring, training, developing, and compensating personnel. Firm infrastructure: Activities of general management, planning, finance, accounting, legal, government affairs, and quality management. The categories of support activities are not uniquely linked to the value creation logic of a long-linked technology. The same categories of support activities should therefore be relevant to other primary value creation logics. Porter does not argue explicitly for his categories of support activities, and the taxonomy appears to follow pragmatically the traditional functional organization of the firm, where support categories cover those functions not included in the primary activity categories of the value chain configuration. Value configuration diagram: Figure 1 shows the generic value chain diagram. The sequencing and arrow format of the diagram underlines the sequential nature of the primary value activities. The support activities in the upper half potentially apply to each and all of the categories of primary activities. The layered nature of the support activities are apparently meant to tell us that activities are performed in parallel with the primary activities. The margin at the end of the value chain arrow underlines that the chain activities are all cost elements that together produce the value delivered at the end of the chain. For the analysis and diagnosis of a particular firms competitive advantage, it is necessary to identify the firms individual value activities using the generic value activity categories. Figure 2 shows an example of the instantiated value chain diagram for a copier manufacturer with primary value activities (Porter, 1985).

Figure-1: The value chain diagram of The Free Press, a division of Simon & Schuster from Competitive Advantage; Creating and Sustaining Superior Performance by Michael E. Porter. Diagnosis of competitive advantage: Allocating individual activities to generic categories is an analytical choice with strategic implications. The same applies to the choice of activities that are considered for explicit enumeration. Value chain analysis is often limited to and summarized by the identification and discussion of strengths and weaknesses in terms of critical value activities (Hax and Majluf, 1992). A more detailed first-order analysis assigns costs and assets to the value activities. Second-order analysis requires a closer look at the structural drivers of activity cost and value behavior. The drivers are related to the scale and scope of the firm, linkages across activities, and environmental factors. Cost and value drivers are often analyzed separately. First-order analysis: The allocation of costs and assets to each activity can be used to assess the activities that are the most important determinants of overall product cost. Comparing differences relative to competitors or other relevant benchmarks provides an indicator of competitive advantage and improvement potential.

Figure-2: Value chain diagram for a copier manufacturer from The Free Press, a Division of Simon & Schuster from Competitive Advantage; Creating and Sustaining Superior Performance by Michael E. Porter Obtaining reliable and accurate cost and value data for value chain analysis is difficult (Hergert and Morris, 1989). Traditional accounting data are most often not collected and reported in a fashion consistent with the needs of value chain analysis. As noted above, effective analysis for diagnosis of competitive advantage requires not only obtaining historical data, but also projecting trends and comparing results with similar data from competitors. Despite the inherent difficulties often encountered, first-order analysis is useful for a number of reasons. First, value configuration analysis is useful because it promotes the right questions: what is the firms competitive position and how can it be sustained or improved? Second, the awareness and commitment promoted by the process of diagnosing competitive advantage is often just as important as obtaining accurate estimates of costs and value. Third, the difficulty of obtaining a good understanding of cost and value behavior for critical value activities is an indicator of causal ambiguity and barriers to imitation (cf. for example, Reed and De Fillipi, 1990). This difficulty underlines the potential competitive advantage that might be obtained from effective value configuration analysis. Drivers of cost and value: The cost behavior of value activities is determined by structural factors that are defined as cost drivers. Identification of structural factors provides a heuristic for assessing the cost behavior and cost economics of the value activities for a firm. The relative importance and absolute magnitude of cost drivers will vary from industry to industry and from firm to firm. Exploiting and shaping these structural factors is a main source of competitive advantage.

Drivers are partly related to internal relationships, partly related to external factors, and partly related to the relationship between internal and external factors. Porter (1985) identifies 10 generic drivers: scale, capacity utilization, linkages, interrelationships, vertical integration, location, timing, learning, policy decisions, and government regulations. All drivers of cost and value identified by Porter are potentially relevant. However, their relative importance and role might differ across firms and, as we shall show, systematically across the three alternative value creation logics. The value chain model promotes a heavy focus on costs and cost drivers (Porter, 1991). The main drivers of value are the policy decisions that are made by product and segment choices when the firm is established or is repositioned. For the generic value chain, the major driver of cost is scale. Associated with scale is the structural importance of capacity utilization. Internal scope relates to the degree of vertical integration forwards towards customers and backwards into suppliers. Thompson (1967) argues that vertical integration is the primary means for chains to reduce control costs due to supply and demand uncertainty. Traditional economics of scale relate to both economies of laborcapital substitution and learning. The other main drivers relate to the economics of both internal and external scope. Scope and scale have diseconomies that follow from the need for coordination due to non-perfect decomposition (Simon, 1982) of the activities of the firm. The primary activities of the long-linked technology have both pooled and sequential interdependence. There are, therefore, potentially significant cost and value drivers in the form of linkages across primary activities and with the primary activities of suppliers and customers. Strategic positioning options: The purpose of value configuration analysis is diagnosis and improvement of competitive advantage. Competitive advantage is relative to existing and potential competitors. Competitors are defined by product and market segment scope. A third dimension is scope in terms of value activities in the business value system of interlinked firms. This is often referred to as degree of vertical integration. Strategic positioning for competitive advantage is therefore an issue of choosing position in terms of product scope, market scope, and business value system scope. We suggest that the structure of the business system is a function of the underlying value configurations of the firm. Or stated differently, there are unique value system scope options relative to the different configurations. The appropriate choice of position depends on the drivers of cost and value. For firms with a long-linked technology, relationships between scale, capacity utilization, market scope, and uncertainty in input and output markets are the critical generic determinants of the appropriate strategic position. The drivers shape the business value system, the industry, and thereby also the competitive position. Competitive position will also be a function of where the industry is in the product life cycle. A position of competitive advantage cannot be chosen directly, but must rather be attained by appropriate actions in terms of scope and in terms of attempts to modify the drivers of cost and value.

Sustainable competitive advantage is determined by the nature of the sources of competitive advantage. These are in part captured by uniqueness and non-imitability of the drivers of cost and value that underlie a position. The logic of the value chain implies an analysis of competitive positioning based on variants of cost leadership. That is, the value chain framework has most to say about how to achieve a cost leadership position. The overall flow logic of the primary activities direct attention only to those Buyer Purchasing Criteria associated with improving the flow of the larger value system that includes buyers and suppliers.

Need For Value Creation Analysis:

Value creation provides an important linkage between the steps of the strategy process. The managers external analysis yields information about the companys customers and their willingness to pay for the companys products. The external analysis also gives the manager information about the companys suppliers and their costs. This information enters directly into the managers consideration of what value the company creates. The managers external analysis also provides information about the companys competitors: their costs, their prices, and the products that they provide. This information is very useful in determining whether the companys transactions with its customers and suppliers create value in competition with other firms in the industry. Do the companys customers derive greater or lesser benefits from purchasing the products of competitors? Do the companys suppliers incur greater or lesser costs in serving competitors? These considerations will be important to the manager in evaluating what value the company adds to the market. The managers internal analysis is useful in determining what assets the firm has to offer the market place. He or she uses the combination of internal and external analysis to determine the benefits the companys assets add in serving customers and the opportunity costs of using those assets. The internal analysis yields information about what types of products the firm can provide to its customers. In addition, the manager determines what activities should be performed within the organization and what types of inputs will be procured from suppliers. Together, this information helps the manager determine the potential value that the companys products will create. The concept of value extending from suppliers through the firm and on to its customers is related to but distinct from Michael Porters concept of the value chain. The value chain refers to the firms internal processes. As Porter observes, Every firm is a collection of activities that are performed to design, produce, and market, deliver and support its product. Porter emphasizes that each firms value chain is embedded in a value system of activities composed of supplier value chains upstream and channel and buyer value chains downstream. These external value chains complete the picture by including buyer benefits and supplier costs.

As part of the managers external analysis, it is useful to understand the manner in which customers derive benefits from their products. This will help managers tailor their product accordingly. Although it is difficult to measure precisely what an individual customer is willing to pay for a good or service, some inferences are possible. Customers reveal something about their willingness to pay by their purchasing decisions. If customers pay $150 for a product, their willingness to pay is at least that amount, but it might be $175 or it might be $300. Statistical techniques for estimating total market demand also provide information about the total willingness to pay of customers in the market. When market prices fluctuate and total customer purchases change, companies get some indication of price sensitivity and can estimate how much customers are willing to pay. Brokerage fees fell substantially after deregulation. Customers were willing to pay hundreds of dollars per trade before deregulation of brokerage fees in 1975, so it can be inferred that those customers viewed a trade as providing a benefit of at least that amount (at least when they made that trade). After deregulation, brokerage fees fell below that level but earlier rates provide some guide to customer benefits per trade. With the advent of Internet securities trading, many customers were willing to pay about $30 per trade. As competition intensified, Internet brokers began to charge $5 per trade or less. Those customers who traded online when fees were over $30 had benefits of at least that amount per trade. Customers attracted to online trading by the lower prices were likely to have benefits less than $30 and greater than $5. More complicated inferences can be made by comparing bundles of products. Some customers trade with full-service brokerages at up to $150 per trade rather than with discount brokerages at $50 per trade. Those customers must perceive that they obtain benefits of at least $100 from the services, over and above trade execution. In the same way, customers who trade with a discount broker at $50, rather than going online at $5, obtain benefits from personal interaction at least equal to $45. Also as part of the managers external analysis, it is useful to understand the costs of the companys suppliers. This understanding will help managers to determine the types of products they should obtain from suppliers and the types of activities that the company will perform itself. Managers are able to obtain information about the costs of their suppliers, especially if suppliers are willing to share cost information. Industry cost estimates may be available if the suppliers employ standard production techniques. In addition, market prices for the products suppliers use allow inferences about supplier costs. Managers can combine data on prices and standard industry markups to make informed estimates of supplier costs. Customer benefits and the costs of the firm and its suppliers are the building blocks of value.

An Exemplary Case of Value Creation:

KFC Corporation, based in Louisville, is the world's most popular chicken restaurant
chain, specializing in Original Recipe, Extra Crispy, Kentucky Grilled Chicken and Original Recipe Strips with home-style sides, Honey BBQ Wings, and freshly made chicken sandwiches. The company was founded as Kentucky Fried Chicken by Colonel Harland Sanders in 1952, though the idea of KFC's fried chicken actually goes back to 1930. Although Sanders died in 1980, he remains an important part of the company's branding and advertisements, and "Colonel Sanders" or "The Colonel" is a metonym for the company itself. The company adopted KFC, an abbreviated form of its name, in 1991. Newer and remodeled restaurants will have the new logo and name while older stores will continue to use the 1980s signage. Additionally, Yum! Continues to use the abbreviated name freely in its advertising. Every day, more than 12 million customers are served at KFC restaurants in 109 countries and territories around the world. KFC operates more than 5,200 restaurants in the United States and more than 15,000 units around the world. KFC is world famous for its Original Recipe fried chicken -- made with the same secret blend of 11 herbs and spices Colonel Harland Sanders perfected more than a half-century ago. Customers around the globe also enjoy more than 300 other products -- from Kentucky Grilled Chicken in the United States to a salmon sandwich in Japan. KFC stands for high quality fast food in a popular array of complete meals to enrich the consumers everyday life. KFC strives to serve great tasting, finger lickin good chicken meals that enable the whole family to share a fun. Uninhibited and thoroughly satisfying eating experience, with same convenience and affordability of ordinary Quick Service Restaurants. Transcom Foods Limited, a concern of Transcom Group is the franchisee of KFC in Bangladesh. The first ever KFC restaurant has been opened in September at Gulshan, Dhaka with a seating capacity of 178 persons. In the coming days, KFC plans roll out more restaurants in Bangladesh

Types of Restaurants
Most Kfc restaurants offer both counter service and drive-through service, with indoor outlet. All the restaurants are situated in the central areas of the country. In some countries, KFCs locations are near highways offer no counter service or seating. In contrast, locations in high-density city neighborhoods often omit drive-through service. There are also a few locations, located mostly in the long beaches abroad. To accommodate the current trend for high quality,KFC is offering a variety of food menu like special sandwitches,KFC special bowls, plated meals besides KFC special fried Chicken.operating segment.

HOW AN ORGANIZATION CREATES VALUE

Organizations Inputs
Organization obtains inputs from its environment Raw materials Money and capital Human resources Information and knowledge Customers of service organization

Organizations Conversion Process

Organization transforms inputs and adds value to them Machinery Computers Human skills and abilities

Organizations Environment
Sales of outputs allow organization to obtain new supplies of inputs Customers Shareholders Suppliers Distributors Government Competitors

Organizations Outputs
Organization releases outputs to its environments Finished goods Services Dividends Salaries Value for stakeholders

Organization input

Raw Materials: Fresh Chicken supplied by Aftab poulty. Human resources: Presently 30 students are working. Information and Knowledge: Collected locally. Organizations Conversion Process Machinery: All the machineries directly come from the USA. Human skills and abilities: Effective and efficient manpower is the strength of the
company.

Organizations Outputs Finished goods:

Wraps, salads. Chicken pieces Sandwiches. Grilled Chicken. Side Dishes. Deserts Premium Chicken Sandwiches Snack Wrap Chicken Fajita Chicken Selects The Happy Meal. Filet-O-Fish.

Organizations Environment Customers: Upper middle class Suppliers:Aftab poulty firm, The USA Competitors:Broast caf,Pitstop,Mfc,Afc.

Conclusion:

The path to value creation requires that economic profits be earned. In order to ensure that economic profits are being earned, the same type of capital budgeting analysis used to evaluate new investments must be applied to the existing assets and operations of the going concern business. This process is vital not only to forming a coherent strategy for the future, but to prioritizing management resources as well. Value creation is a never-ending cycle. It begins with modeling business operations, prioritizing areas for more detailed investigation, identifying opportunities for improvement, implementing the changes required to maximize success and the measurement and revision that starts the process over again and allows management to stay abreast of company and market changes. Value creation analysis is a critical but often overlooked component in the financial management of every company. Without this type of inspection, value will not be created at the maximum pace.