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Why Value Creation is more important than Profit generation for any organization


Value creation - Blog by Nilesh Limaye
Value creation - Blog by Nilesh Limaye

Profits are to business as breathing is to life. Breathing is essential to life, but is not the purpose for living. Similarly, Profits are essential for the existence of the organization, but they are not the reason for its existence.- Danis Bakke, Founder & Former CEO, AES Corporation.

There is more to business than making money. For the entrepreneurs who create business enterprises, personal wealth appears to be a less important motivation than the wish for autonomy, desire for achievement, and lust for excitement thats why value creation is important than profit generation.

Certainly, Making money was not the goal that inspired Henry Ford to build a business that precipitated a social revolution. Each entreprenuer is inspired by a goal that is personal and unique like Family Cars for Henry Ford, Bringing the power of personal computing to the individuals for Steve Jobs, reducing deaths from infections and surgeries for Johnson and Johnson or revolutionary vacuum cleaning by James Dyson.

As a Business Consultant, I would emphasis that a business purpose is a feature of established companies as well as entrepreneurials startups.

Twitter Mission is "To give everyone the power to create and share ideas and information instantly without barriers.

Nike's Mission is "To bring inspiration and motivation to every athelete in the world.

There is a common denominator within this multiplicity of organizational purposes - The desire, and the need to create Value. Value is a monetory worth of a product or service. Hence, we generalize by saying that the purpose of business is to create value for customers. However, if the firm is to survive and prosper, it is essential that it is able to appropriate some of this customer value in the form of profits.

Value can be created in two ways; by production and by commerce. Production creates value by physically transforming products that are less valued by customers into the products that are more valued by customers, turning Coffee beans and milk into Cappuccions for example. Commerce creates value not by physically transforming products but by respositioning them in space and time.

So how do we measure the value created by a firm? It is the value of the firm's output that is recieved by the customers in excess of the real cost of producing that output: Value Creation = Total Consumer Value - Real Cost of Production.

So, Ii the value creation is same as the profits where Profits = Revenue - Cost, NO, because the value received by the customers is typically greater than the amount they pay. Total Customer Value is measured by their willingness to pay not what they actually pay. The difference is called Consumer Surplus.

For any organization, it is imperative to establish its goals and mission based on a clear vision of the societal benefits derived from its products or services. Additionally, the organization should define the value it aims to create as an outcome, encompassing both profitability and consumer surplus. It is crucial to recognize that value creation holds greater significance for an organization than mere profit generation.

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