Why Value Creation is the Foundation of Business: How to define it, measure it, and manage it

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.

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.

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.