VALUE CREATION IN ENTREPRENEURSHIP
Value creation refers to creating beneficial products from raw inputs that have
unique selling points and more worth than the inputs. Its purpose is to create
unique products with special features to attract more customers, build long-
lasting relationships, and ensure non-stop selling of the product to generate
revenue and profits for a firm.
SOAP PRODUCTION= RAW MATERIALS + QUALITY ADDITION (PROCESSING) =
PRODUCT
It depends on the understanding of one's business and potential customers and is
the backbone of every good sold in the market. The sales team provides valuable
insight into the development of the value of a product. It includes behaviors,
norms, raw materials, and the production efficiency of a firm. Finally, the end
product is more valuable than the inputs used for making it.
Value creation is the process of turning raw materials into unique and
useful goods with a higher value than the raw materials themselves.
The two main types of value creation are customer and shareholder value
creation.
The four main states of creating value are development, marketing,
manufacturing, and distribution.
Value creation aids in establishing long-lasting relationships with customers,
whereas value capture collects the value already generated in a product to
make it lucrative.
Value Creation Process Explained
Value creation is stated as creating or producing something of more value than
the inputs used so that it may attract customers. It also motivates customers to
pay more for the product. The value added gets calculated by subtracting the
amount spent on inputs purchased and the selling price of the product. Many
businesses do it to give value to the customer for their purchase of the product or
services.
In some cases, businesses undertake shared value creation for their stakeholders.
It is because if customers feel that a brand is highly valuable, then they are willing
to pay more for the product. It is essential for the success of a business or
entrepreneur. Value is determined by three factors, namely utility, egoism, and
rarity. Value creation is done by creating a product that is badly needed by
consumers is rare, or adds value to the buyers' social status.
It has three steps, namely:
1. Transformation - Here, the raw materials are converted into useful products
or services.
2. Distribution - It refers to converting a product into a product that the
customer easily buys.
3. Consumption - It entails the usage of the value-added product in the way
the product has been designed to be used by the consumers.
Value creation is quite important to all businesses as it helps increase the firms'
profits and customer satisfaction. It can be understood as a long-
term investment that yields long-term benefits.
Stages
One can divide the value creation model into four stages:
1. Development - This stage consists of the development of a product using
the input after careful deliberation of value addition of the newly created
product.
2. Marketing - Here, the firm producing the value-added product does the
marketing to take the best features and qualities of the product to the
masses and create a want to buy the product.
3. Manufacturing - After the marketing is over, the firm starts manufacturing
the product on a large scale to cater to the demands created by the
marketing of the product.
4. Distribution - Then, the firm prepares a comprehensive road map to take
the product to various markets to sell to customers.
Types
There are two main types of value creation:
#1 - Customer Value Creation
It means providing the customer with a valuable product that makes the
customers pay more for it. For it to happen, companies must add more value to
their product or services. It does not only add value to the basics of the product
like quality, features, customer service, timely resolution of complaints, good
interactive customer care, and branding of the product. The revenue generated
shows the value delivered to the customers.
#2 - Shareholder Value Creation
It means creating value for the shareholders of the company. It always forms the
focal point of all other business matrices. The net income of a company
represents shareholder value creation. It has the potential to become the soul of
overall strategic planning by a company. Since management has been an agent of
stakeholders, they accord higher priority to shareholder value creation.
Examples
Let us understand the topic using a few business examples.
Example 1
One example is that of ride-sharing service Uber. Uber created a unique platform
to connect drivers and passengers easily and quickly. The services of Uber made it
easier for passengers to book a cab and allowed drivers to get passengers without
waiting for them. It made it the leading cab rental service provider in the world.
Importance
The importance of value creation lies in the following aspects:
It helps one to gain customer affinity.
It creates trust between the brand and the customer.
It also builds a loyal customer base for the firm.
A strong bond is created between a product or service and the target
audience.
As a result, the sales of the product or services become quite fast and in
large numbers like Apple’s iPhone.
The company is assured of revenue generation without any losses.
Value Creation vs Value Capture
Let us understand the differences between value creation & value capture:
Value Creation Value Capture
It helps one to understand the It helps in setting and managing the value-based
customer levels of price.
It facilitates a firm to know the
It basically sells on product value
needs of a customer.
Here the word innovate is the It helps build a long-term relationship with the
pillar of the process customer.
The form offers beneficial It captures the existing value-created product to
offers to the customers turn it profitable
It deals with the monetization of a product by a
The product created is unique
firm successfully.
It relates to the effective pricing of a product or
It helps builds a long-term
goods appropriately to reap; profits on their
relationship with the customer.
sales.
Customers become loyal to the It also enables the monetization benefits as
brand liquidity to shareholders of the firm.
Frequently Asked Questions (FAQs)
1. How does value creation affect entrepreneurship?
Value creation provides the basic structural advantage to entrepreneurs as higher
levels of value creation aid in faster business growth, give more easy entry into
capital markets, offer better opportunities to staff, and allow them to have the
greater capability to funds on their own.
2. What are the key components of value creation?
Value creation simply means converting resources into a valuable product that can
be useful to everyone and is unique as well. Input or raw materials, infrastructure,
and innovation are the three main components of value creation.
3. What is value creation in marketing?
It can be understood as the creation of value from a product or service that is
liked and makes customers, clients, and management happy from the value
creation. Moreover, it helps in motivating customers to look for the benefits
offered by the product and the services.
4. What is value creation in entrepreneurship?
In entrepreneurship, the entrepreneur can create value from the existing product
in a manner that benefits the consumers and builds a long-term relationship with
them.
What is risk management?
Enterprise risk management is a strategy implemented to help prepare for any
potential harm that may interfere with your organization’s ability to effectively
operate.
What is the goal of risk management?
The goal of risk management is to ensure that your management team identifies,
analyzes, ranks and responds to risks that may adversely affect your organization.
What factors affect risk management?
There are a number of factors that influence how you respond to a risk, such as
the:
- likelihood of the event happening and the potential impact it would have on
your organization. –
-Assessing the risk can help you determine whether to accept,
mitigate, or transfer the risk to another party. This helps effectively and efficiently
prioritize and address issues.
What are common questions to address when first establishing a risk
management program?
How do I identify risk?
How can employees be encouraged to communicate risk they may uncover?
How can I effectively rank risk severity to prioritize mitigation efforts?
How do I set up a risk mitigation process?
Who should be responsible for risk mitigation?
How can the risk mitigation life cycle be tracked effectively?
How often should risks be reviewed?
How can risk be communicated to management?
What does the risk management process entail?
The risk management process includes identifying, assessing, ranking and
responding to risk and then monitoring risk through the mitigation life cycle.
Following this process allows you to convey risk and to drive visibility and
accountability up the management chain. We’ll dive in a little deeper to each step
in the process below.
1. Identifying and Assessing Risk
There are many different frameworks that can be used for risk management, but
the first step will always be documenting and then assessing your risks. The
repository of active risks is referred to as a “risk registry.” After completing your
risk registry, an assessment must be completed to determine how you will
mitigate each of your risks. Completing a risk assessment will help to highlight any
threats of vulnerabilities to your organization, the potential effect of the risk, and
the likelihood of it occurring. Understanding the potential impact of the threat as
well as how likely it is to occur can help prioritize next steps. Both internal and
external (third-party) risk assessments can be completed to determine your risk
mitigation. Risk assessment will be an ongoing process and is not meant to be a
one-time project. As your company evolves and your GRC program matures, you
will undoubtedly need to revisit your assessment and make appropriate updates.
2. Responding to Risk
After you have compiled your risk registry and assessed your risks, the next step is
to determine your risk response. The purpose of responding to risks is to ensure a
consistent, unified message throughout your organization by creating an action
plan. Evaluating risks should take into account what risks leadership is willing to
accept versus those that require mitigating action. The decision they make will
vary from one organization to another (this is referred to as “risk appetite”) and
from one risk to another. In Simple Risk, we represent this line of risk tolerance
with a configurable Risk Appetite slider. Defining your risk appetite can help you
determine which risks present the biggest risk for your organization and require
more immediate prioritization.
3. Monitoring your Risks
After responding to your risks and specifying whether you are approving or
rejecting the risk, you can define the next step (accept until the next review,
consider for a project, or submit as a production issue), and add any commentary
for the risk. Based on the risk severity, a next review date for that risk should be
established, ensuring the risk will be re-reviewed on a regular cadence. The
purpose for monitoring your risks over time is to measure their ongoing success,
ensure organization-wide compliance, and determine if any updates to risk
mitigation should be enforced.
Risk Reporting
To measure the effectiveness of your risk management program, you will need to
report on your data in a meaningful way. We recommend regular reporting and
analysis on the items below to be proactive in monitoring your risk management
program:
Risk Appetite - This will show you the risks that fall outside of your defined
"risk appetite" level. Risks inside of your appetite can likely be accepted
while risks outside of your appetite should be mitigated or transferred.
Risk Advice - This will show you the risks with the lowest level of effort and
the highest risk score. This is helpful in identifying opportunities for easily
addressing risks that will result in a high impact for your organization.
Risks Associated with Assets - This will show you all of the risks that are
associated with a specific asset. This is helpful in identifying which assets
are harboring an excessive amount of risk and should be patched or retired.
Assets Associated with Risks - This will show you all of the assets that are
associated with a specific risk. This is helpful in highlighting the risks with
significant impacts across your organization. If you have defined values for
your assets, then this can even help you advance your maturity from
qualitative to quantitative risk assessment.
Controls Associated with Risks - This will show you all of the controls that
are associated with a specific risk. This is helpful in determining all of the
mitigating controls that exist for a given risk and discovering where there
may be a lack of depth in your defenses.
Risks Associated with Controls - This will show you all of the risks that are
associated with a specific control. This is helpful in identifying the effects
that a control failure has for your environment.
In conclusion, risk assessment and management are part of an ongoing process
that requires significant tracking and analysis to be done efficiently. We hope this
high level explanation has helped provide some insight into the steps involved in
effectively managing risk for your organization. For more information about how
Simple Risk can help establish your risk management programme.
