IE 463

Lec 1. Value Creation

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ECONOMIC VALUEValue creation;is the main purpose and central prosess of economic exchange... ‘Economic value’ represents the benefit gained from a good or service.Q. How much is a consumer willing to pay for a good?Q. How is the market price related to the value of the good?

Ex: Purchasing drinking water; the actual (biological) value of water to the consumer is obviously higher than the price he paid for it! Ex: Hulusi giving a gift to his sweetheart Dürdane.

The ‘sentimental value’ of the gift to Dürdane is much greater than its price!

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1. Exchange value (Market value)Creation of value during an exchange involves a seller and a buyer.Buyer: reveals what he is willing to pay for the goodSeller: reveals what it costs him to give up that good

lf a ‘transaction’ takes place between the seller and the buyer, the value created during this exchange of a ‘commodity’ indicates ‘how much the exchanged object is worth relative to the possible exchanges of other goods’.

seller buyer

Commodity: a marketable item produced to satisfy wants or needs (it comprises goods and services). Transaction: i) a business deal (an occurrence in which goods, services, or money are passed from one person, account, etc., to another), ii) the act or process of doing business with another person, company, etc.

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2. Use valueUse value of a ‘commodity’ lies in its ‘intrinsic’ characteristics, which enable it to satisfy a human need or want. The use value of a product therefore exists as a material reality involving,• the satisfaction of a producer as well as• the satisfaction of social needs.The use value of a commodity in general, refers to the accepted use value for others in society, and not just for the producer.

societyproducer

Intrinsic: belonging to the essential nature of a thing, occurring as a natural part of something.

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Value in useNote that, only after put into use that the full costs and benefits of a product or service may be identified. The value from user’s point of view is important. To represent user’s perception of value, one can employ the “value in use” concept (which is partly covered by “use value” but not identical to it).A number of companies use the “value in use” concept to arrive at pricing decisions. The notion that the end-user should consider all aspects of a product-service purchase, not simply the price paid, enables both vendors and purchasers to identify all of the elements of the procurement – installation – operation – maintenance – replacement sequence.

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i. Economic ValueEconomic value can be calculated as

the net benefit = (percieved benefits of a product or service by consumer) - (associated costs of doing business)

ii. Social valueSocial value can be understood as the qualities which an individual considers to be of value in their social existence. It is a process whereby organizations meet their needs for goods, services, works and utilities in a way that generates benefits to society and the economy, whilst paying attention to the environment.

Percieve: i) to become aware of, know, or identify by means of the senses, ii) to recognize, discern, envision, or understand

TWO FOCUSES: ECONOMIC vs. SOCIAL

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As economic value is about wealth creation; social value has to do with the fulfilment of basic and long-standing needs such as providing food, water, shelter, education, and medical services to those members of society who are in need. Further, social value is among others explained as the creation of social wealth like education and economic development, socialjustice (e.g. reduction of gender inequalities)or the resolution ofsocial problems (e.g. reduction of poverty) .

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Creating value that can be captured is the essence of business.

i. In 1878, Thomas Edison developed the first ‘phonograph’- a device that recorded sound and replayed the recorded sound.His discovery gave birth to a vast and influential recording industry, from which Edison (an entrepreneur as well as an inventor) profited greatly.

Edison had created value and captured a large portion of that value for his company.

CAPTURING VALUE

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ii. John von Neumann and his team at the Institute for Advanced Studies at Princeton developed the fundamental architectural approach of modern computing (1945).They put their work - the Princeton computer architecture - into the public domain for common use. They created enormous value, yet they didn't capture very much of it for themselves. That was left for others who built on what they gave to the world for free.

Princeton architecture

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• The selling price determines the amount of value that is ‘captured’ by the firm—that contributes to the firm’s profits.

• The other value isn’t lost. It is retained by the consumer. It is the difference between what the consumer would have been willing to pay and the price.

producer consumergood’s value

price: value captured

remaining value

Value is captured when,i. the firm recieves consumer payments by preventing the competitor

attempts to ‘appropriate’ those payements (e.g. by imitation)

ii. The firm simultaneously retains those payments by denying claims on them from other actors in the same value system.

competitor firm

value capture

firmsupplier

Appropriate: to take possession of something or make use of exclusively for oneself, often without permission.Value system: the network of organizations and the value producing activities involved in the production and delivery of an offering.

CREATING VALUE - CAPTURING VALUE

• Value creation and capture processes don’t have to be related. One can create value without capturing any of it.

• You can’t capture value without creating it, but you can capture more value while creating less.

• Human nature often means that there is no incentive to create more value unless one can capture some of the value that is created. Or, people will create more value if they can capture more of the value they create.

VALUE - RELATIONSHIP

• Value is created within relationships between people, objects, and practices, and it can be defined in many ways. In other words, value depends on what is valued.Market exchanges take place because all parties involved expect to gain value in the exchange. Therefore, value has always been ‘‘the fundamental basis for all marketing activity’’ Value created within a community is shared by its member organizations. Here, community assists the organisation to achieve its objectives.Interactions between organizations are channels for value creation.

13interaction: exchange and adaptation

transforming process

A B

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• Competition occurs after businesses have created value in the market and seek to allocate (decide and obtain) market share, price, cost and other finite benefits.The ‘networked economy’ moves away from purely competitive plays to recognize cooperative relationships that leverage value created by those in the network. A very important business perspective, “co-opetition (competition plus cooperation)”, is a model in which a network of stakeholders cooperate and compete to create maximum value.

Allocate: i) to set aside for a purpose, ii) to distribute according to a plan.Network: a group or system of interconnected people or organizations.

network

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• Innovation is a driver for value creation.Innovation comes from a Latin word INNOVATIO meaning to RENEW or CHANGE.Creativity: the capabilities or act of conceiving something original or unusual,Invention: the creation of something that has never been made before and is recognized as the product of some unique insight,whereasInnovation is the implementation of something new.Innovation must produce social value and significant differention (in products and processes) in order to create additional economic value.Innovation’ is an interactive activity, ‘no entrepreneur innovates alone’.

Innovation: successful conversion of new concepts and knowledge into new products and processes that deliver new consumer value in the marketplace.

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REALIZATION of VALUE: GOODS or SERVICES ?

i. The traditional “exchange value” view is also referred to as goods-dominant (G-D) logic. In G-D logic, value is created (manufactured) by the firm and distributed in the market, usually through exchange of goods and money (the value of something in terms of the goods or services for which it can be exchanged). From this perspective the roles of ‘‘producers’’ and ‘‘consumers’’ are distinct, and value creation is often thought of as a series of activities performed by the firm.In the G-D logic view, the purpose of economic exchange is to make and distribute things to be sold. A firm’s production process, which may include resources from other firms, embeds value or utility into a good, and the value of the good is represented by the market price or what the consumer is willing to pay.

Embed: to cause to be an integral part of a surrounding whole

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ii. The alternative view, service-dominant (S-D) logic, is tied to the “value in use” perspective of value. In S-D logic, the roles of producers and consumers are not distinct, meaning that value is always co-created, jointly and reciprocally, in interactions among providers and beneficiaries through the integration of resources and application of competences.For S-D logic, value results from the beneficial application of effective resources; value is co-created through the combined efforts of firms, employees, customers, stockholders, government agencies, and other entities related to any given exchange, but is always determined by the beneficiary (e.g., customer). The S-D logic notion of value co-creation suggests that ‘‘there is no value until an offering is used – experience and perception are essential to value determination’’.

Competence: i) the ability to do something well; ii) a specific range of skill, knowledge, or ability

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That is, offerings must be integrated with other market-facing (i.e., from other firms) and non-market-facing (e.g., personal/private and public) resources (means, abilities, qualities or sources) for value to be created. Ex. A car gaining its value only through the combination of the manufacturer’s production processes (including its supply chain and other market-facing elements) and the customer’s private (e.g., driving skills) and public (e.g., roadways) resources.The firm’s roles in value creation, “the proposition of value and provision of service”are intermediary to the value co-creation process. Value propositions establish connections and relationships among service systems. In value co-creation, value is ultimately derived with the participation of, and determined by, the beneficiary (often, the customer) through use (often called ‘‘consumption’’) in the process of acquisition, usage, and disposal.

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Value in use was recognized as a collection of substances or things and the qualities associated with these collections. Ex. An automobile is a collection of qualities, both specific (e.g., red and fast) and general (e.g., transportation and status). The qualities related to value in use mean different things to different people and thus, are inherently differentiated and heterogeneous. Alternatively, exchange value was considered as the quantity of a substance that could be commensurable value of all things. Exchange-values are more complex. When one writes 1hamster = 20 pencils, it is not obvious what a useful measure to make a comparison of the two commodities would be. Such an equation is meaningless until one knows by which property they can be compared with. One can make the comparison of different commodities by the concept of exchange value.

STRATEGY for VALUE CREATION

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a business concept that identifies the,• intended consumers of the organization• product offers and key activities that the organization will

use to create value for those consumers

an organization concept that defines the, • resources the organization will use in its value creating

activities• organization design for coordinating its value creation

activities, the controls it will use to monitor its value creating activities, and the incentives that the organization will offer to attract and motivate resource providers in its value-creating process

the core processes of, • product creation, product realization, stakeholder

development, and organizational transformation through which an organization tries to create and distribute value on a sustainable basis

strategy components