Why So Many Companies Fail at Creating Value
April 27, 2016
The concept of creating value is often one of the most misunderstood ideals in business. But it also one of the most essential.
Why? Because of all the ways that “value” can affect your company. After all, it is due to a brand’s perceived value that makes individuals want to do business with you. It’s what separates your brand from the countless others out there.
So What is Value and How Do We Measure It?
When most people think of a company’s value, they are actually referencing economic value. This means a measure of a company’s financial performance that is calculated by deducting cost of capital from its operating profit.
However, a business can also have what is known as intangible value. This are the assets that are not physical in nature. So things such as intellectual property, goodwill and brand recognition all play a factor.
How do the most successful companies identify value and how do they create it when others fail?
And while these intangibles may be hard to measure in terms of actual dollars, we can calculate their value best on consumer feedback and how the company’s bottom line compare to others within the industry.
One of the best examples that I’ve heard of this was a speech made several years ago by Aswath Damodaran, who is a professor of Finance at NYU’s Stern School of Business. He was speaking at the L2 Innovation Forum and gave a great example of a how soda’s brand name can be considered a key intangible value.
In terms of soft drinks, there are thousands of different types of colas. And yet in terms of market share, there is a huge different between Coca Cola and RC cola. The basic formula for both sodas are virtually the same. And yet, Coke was recently estimated to have assets totaling $ 90.9 billion compared to Cott Beverages (who is the parent company of RC) having assets worth at $ 1.6 billion.
You may be able to contribute the differences to both higher marketing budgets and smart overall business practices. But Damodaran discussed how people perceive the two brands – with Coke consistently ranking higher in term of customer-added value. So, given the choice of drinking both a RC and a Coke, more consumers reach for the recognized brand name because of the personal association.
How Value is Created at Different Levels
Although there are many ways that intangible values can be created, there are four main ideals that every good brand manager must consider:
- Creating value through perceived credibility: Does your business keeps it word when it comes to promises made to both consumers and board members? If so, this goes a long way in maintain a healthy brand value.
- Creating value through vision: This refers to how your company has a demonstrated path forward in terms of company growth. Communicating growth instills confidence as people like to see how their favorite brand plans for the future of both the business and the communities that they serve.
- Creating value through investment of capital: The best brands know that putting your money where your strategy is one of the best ways to build customer goodwill.
- Creating value through people: Remember your employees are your best assets. So investing in good people makes a big difference in your brand valuation.
Creating Intangible Value: Starbucks and Howard Schultz
One prominent example of a company creating extraordinary intangible value is Starbucks. Since being founded in 1971, Starbucks has grown to one of the world’s largest chain of coffeehouses. Currently in 67 countries, their revenues topped $ 16.45 billion in 2014.
Initially, Starbucks managed to differentiate from their competitors by creating a unique atmosphere that they call “third place” for customers, after home and the workplace. This meant that customers could indulge in both a cup of coffee while relaxing in an upscale environment.
However, as some other chains have sought to copy Starbucks business model, the company made several changes designed to strength the brand and deepen customer loyalty under the guidance of their CEO Howard Schultz. These moves included the creation of a robust rewards program, developing an innovative mobile app that allowed customers to place orders as well as pay for them and a new benefit for employees that funded their education through a partnership with Arizona State University.
As a result of their changes, Starbucks has maintained their place as a category leader in their industry. Even during the last economic downturn where trips to such places could be viewed as an affordable luxury. And for his efforts, Schultz has been lauded as one of the most groundbreaking CEOs in business.
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