EXCERPTS

Reprinted with permission of John Wiley & Sons, 2007

Value Creation

Successful companies create value by providing products or services their customers value more highly than available alternatives. They do this while consuming fewer resources, leaving more resources available to satisfy other needs in society. Value creation involves making people’s lives better. It is contributing to prosperity in society.

Value creation is the role of business in a market economy. Businesses that don’t create value are not enhancing people’s lives. In fact, businesses that destroy value are detrimental to our lives. When businesses make unprofitable products, they are drawing resources away from higher-valued uses, and when businesses waste resources they prevent them from being beneficially used at all. In either case, a business with unattractive returns should be restructured, sold to a better owner or shut down.

The long-term success of a business is determined by how much it is contributing to improving people’s lives and prosperity through value creation.

In a true free market, with beneficial rules and property rights, the appropriate measure of the enterprise’s value creation is long-term profitability.