How Value Creation Resolves The Contradictions Of Running A Business

The value-creating enterprise was the theme of my last article “Millions of Managers Are Becoming Obsolete: Master Value Creation Now.” Ir articulated ten basic truths of the value-creating enterprise and the revolution it has launched. It showed how value-creating enterprises generally adapt more rapidly, move more decisively, and make more money than firms focused primarily on making money. Sustained value creation entails basic changes in how everyone in the firm thinks, speaks, feels, acts, and interacts. In effect, the very concept of management is morphing into a new discipline of entrepreneurial value creation.

One reason why the article elicited a strong response is that it is based on seven deeper reasons for the vast global change now taking place.

1. Value Creation Resolves The Inherent Business Conflict Between Self-interest And Altruism.

A business driven purely by self-interest and greed ignores everything that humanity has known for millennia about the need for collaboration and compassion in a healthy society. Equally, a business driven by altruism alone is unlikely to make enough money to survive for long. The value-creating enterprise resolves the conflict by showing that in the digital age, businesses aiming primarily to create value for customers (in effect, acting altruistically) make more money than businesses primarily focused on profits and making money for themselves (in effect, acting from self-interest). In value-creating enterprises, making money is a result, not the goal. They typically make much more of it.

2. Value Creation Flowed From A Change In Context, Not A Moral Epiphany Of Businessmen.

In the 20th century economy of physical things, businesses pursued efficiency with inward-looking mindsets, hierarchies, controls, frameworks, outputs and short-term profits. This created great benefits for society.

But with the possibilities created by the advent of digital technology, and now AI, businesses driven by externally focused mindsets aimed at creating value for customers, with knowledge workers, values, empathy, autonomy, networks, and outcomes make much more money. The shift was driven by pragmatism, not morality, although the net effect has been generally positive from a moral perspective.

3. Value Creation Was Chosen By Us As Customers, Not Something Thrust Upon Us.

The impact of value creation with the use of digital technology was like magic. As customers, we saw the possibilities being offered and we grabbed them. As Berkshire Hathaway CEO Warren Buffett has declared, “If I had to choose between my iPhone and my private plane, I would choose my iPhone.”

It all happened so rapidly it’s hard to recall all that we chose to live differently. Very quickly, with the help of value-creating businesses, we transformed how we work, how we communicate, how we get about, how we shop, how we manufacture things, how we bank, how we receive health care, how we get educated, how we raise our children, how we play and watch games, how we entertain ourselves, how we read, how we listen to music, how we watch theater and movies, how we engage with nature, how we understand history, how we worship; in short, how we live. And the transition continues apace, even as some look back wistfully on how we used to live.

4. The Emergence Of Value-Creating Enterprises Is A Matter Of Fact, Not A Theory Or A Hypothesis.

The emergence of value-creating enterprises of all sizes in many different countries is not something that might happen. It is something that has already happened and is continuing to happen. Yet still only a small proportion (perhaps 20%) have made the shift. Many business leaders are not even aware of the need to change. According to a recent study by PwC, 90% of business leaders believe they are trusted by their customers, when in fact only 30% of customers trust companies. Moreover, the gap is widening.

5. Value-Creating Enterprises Emerged First In Tech Firms But Now Operate In Every Sector.

Because the change was enabled by digital technology, tech firms were first to spot and take advantage of the opportunities. But today, digital technology is now being applied in every sector, as shown in the data in my last article.

The business landscape is chaotic. No firm is purely one thing or the other. Some firms are in transition from the traditional management to become value-creating enterprises. Almost all big public firms have some teams, parts, or units that are in transition. Other firms that have made the transition to a value-creating enterprise have regressed back in whole or in part towards value-extraction.

6. Methodology Is Available To Quantify The Value Created At The Level Of The Enterprise.

While much work had been done on quantifying value at the level of a team, a project, or a product, we can now quantify value created at the level of the enterprise. This is a crucial step forward, since in traditionally managed firms, gains made at lower levels, or in one part of the firm, are often undermined or destroyed by actions in other parts of the firm.

7. The Shift From Qualitative Discussion To Quantitative Analysis Of Value Creation Is A Game Change.

When the discussion of value created at the level of the enterprise was merely qualitative, there was no basis to measure progress or lack thereof. Some firms were cited as models because they talked a good game and seemed to implementing the necessary elements of value creation; but when the net value creation at the enterprise level could be measured, it became apparent that little real customer value was being created. Other firms that had been ignored turned out to have been quietly creating great value.

The Ten Basic Truths Of Value-Creating Enterprises

Here, once more, are the ten basic truths of value-creating enterprises from my last article. The first six truths describe the main elements of the value-creating enterprise. The final four truths concern cleaning up the debris generated by traditional management.

1. THE DYNAMIC: The primary dynamic of a business has changed from increasing efficiency by cutting costs to expanding demand by creating more value. This changes everything.
2. THE GOAL: As a result, the primary goal of a business has shifted from cost-cutting and profits to value creation.
3. THE MEASUREMENT: It is now possible to measure the pace of value creation in public companies at the level of the enterprise. The long-term total return of a public company thus provides a simple, reliable, and accessible way of measuring value creation in public companies at the level of the enterprise. It is not new. It is widely used in financial circles, but much less so in management writing.
4. THE MENTAL MODEL: The mental model of a business has shifted from that of a machine that is focused primarily on internal efficiency to an organism focused primarily on external value creation. In the value creating modality, everyone in the enterprise needs to be focused on the value they are creating.
5. DEEP BEHAVIORAL CHANGE: Sustained value creation entails changes in how everyone in the firm thinks, speaks, feels, acts, and interacts. A fundamental shift in corporate culture is required. The specific behavioral changes are described in detail in Appendix 3 of my last article.
6. FROM INTERNAL TO EXTERNAL FOCUS: The shifts required for sustained value creation amount to a Copernican revolution in management. The center of the business universe has shifted from corporation to the customer.
7. HOLISTIC PROBLEM SOLVING: Enterprise-level thinking is needed to achieve sustained rapid value creation. The traditional business is built on hierarchy that drives mechanistic systems and processes. It seeks to solve problems emerging at lower levels such as declining sales, lack of psychological safety, low staff engagement, or the slow pace of innovation, by devising new processes. Such efforts are likely to fail unless enterprise-wide issues of value creation are addressed It is like putting patches on a cancer.
8. REMOVING BULLSH*T JOBS: The insightful book, Bullshit Jobs: A Theory (2018) explained how many jobs in traditionally managed firms create no value. Such jobs can amount to 40% of a firm’s costs. These useless jobs in turn breed further useless work. In the value-creating enterprise, all work should primarily create value for customers and users.
9. ELIMINATING VALUE DESTRUCTION: Many aspects of traditional management systematically undermine and destroy value creation. Steep hierarchies tell staff what to do without understanding the implications. Staff lack the authority to contribute their expertise. Stultifying corporate processes destroy morale. And so on. These aspects have to be removed and activity redirected towards value creation.
10. ACQUIRING VALUE-CREATING MINDSETS AND SKILLS : Leaders, managers and staff who lack the skills and mindsets needed in the value creating enterprise needs are rapidly becoming obsolete, as value-creating enterprises increasingly dominate the business landscape.

    The age of value creation is already here. It is a matter of embracing it.

And read also

The Ten Basic Truths Of The Value Creating Enterprise

How Creating Value For Others Has Become The Key To Business Success