Why Value Creation is the Foundation of Business: How to define it, measure it, and manage it - Deepstash
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A Precise Definition of Value Creation

A Precise Definition of Value Creation

Business begins with value creation. Because value creation is the starting point for all businesses, successful or not, it’s a fundamental concept to understand. Here’s what is to come in this collection of wisdom about value creation:

  • Definition of Value, and how it can be created
  • Evolution of value creation through history, and in the future
  • How value can be measured and managed

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How Value is Created (Value Defined)

Value is created through work. This work could be mechanical (cutting a tree down and turning it into lumber) or creative (creating a logo or writing a paper). Not all work is value-creating (sisyphysian tasks like moving rocks from one place to another, then back).

The purpose of a business is to create value (through work), sell or trade it to customers, and capture some of that value as profit.

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The Creation of Economic Value

A pattern of matter, energy, and/or information has economic value if the following three conditions are jointly met:

1) Irreversibility: All value-creating economic transformations and transactions are thermodynamically irreversible.

2) Entropy: All value-creating economic transformations and transactions reduce entropy locally within the economic system, while increasing entropy globally.

3) Fitness: All value-creating economic transformations and transactions produce artifacts and/or actions that are fit for human purposes.

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What Value Creation looks like in the Future

As we look at the changes in the way our economy has created value in the past 100 years, we’ve shifted from a focus on huge mechanical production during the industrial revolution to more creative and customized production through the information age. Software and related services dominate more and more of value creation.

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How Value Creation is Measured

The most simplistic way to measure value creation is through Revenue. This measure ensures that the process of value undertaken wasn’t worthless, if someone is willing to pay for it.

Revenue is the measure of value creation — not profit. A company can create value without creating a profit, and many do. But they don’t do it for long.

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CURATED BY

garywal

Biomedical Scientist

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