- Value creation is a flow – moving value from customers to the firm’s stakeholders.
- To begin with a firm must originate value – that is, it must create something that customers value sufficiently to pay for.
- Then it must capture as much of the value that it has originated. Here it must concentrate on securing market share from competitors and fair and sustainable deals from partners.
- Before the value that has been captured can be passed to stakeholders, it must be extracted. At this stage in the process it is the efficacy of the firm’s operations and processes that come into play.
- Each of these three stages is equally vital to a firm’s ability to create value. Incompetence at any stage will limit the value that is produced at the end.
- But they are not equal in their potential to deliver growth.
- A firm cannot extract more value than it captured, and cannot capture more value than it has originated.
- There is only one stage in the flow with unlimited potential to deliver growth: value origination.
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Obviously, value extraction is essential: An inefficient business can squander the value it creates. However, when a business has extracted every last cent through cost cutting, quality management, and other similar initiatives, there is no more to be found.
Likewise, value capture. A company must compete effectively and capture value from its competitors or it will disappear. Ultimately, however, as with value extraction, growth through value capture can go only so far, because traditional competition is a zero-sum game. Even if a company were not hindered by antitrust barriers and could secure a dominant market share, its potential would be limited by the size of the markets it serves.
Capturing and extracting value are fundamental to the way we do business today, but organizations have been striving to become more efficient and competitive for years and many still find delivering consistent profitable growth a challenge.
Why? Because the battles they are fighting blind them to the unlimited potential available at the very source of value creation.
To capture value, you must focus on your competitors and partners. To extract value, you must focus on your own internal processes. But these are not the source of the value-creation flow.
Where is that source? With the customers.
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