Value Creation

Creating value for customers will inevitably translate to value at the bottom line.

By Greg Kitzmiller

The primary purpose of any organization is value creation. Businesses create value for customers and for owners, but how much value is enough? The world changes every minute, so value that was created at one point in time may be worth more or less in a very short time period.

According to Business Week magazine, the most valuable brand in the world is Coca-Cola (Business Week, Aug. 7, 2006). Yet even this great brand has lost some value in the U.S., especially since its stock price started to waver during the past year. On the other hand, a newer brand, Starbucks, is creating global value, while also becoming a formidable competitor to Coke. But even Starbucks’ stock dipped recently due to the fact that during the summer more people order cold drinks, which are complicated to make, thus lengthening lines in stores and causing some customers to leave due to potential slow service, according to the company.

Speaking of slow service, this impacts customer value. No firm is immune to having their value changed by their own actions, competitive actions, or other factors such as changes in customer desires.

In the late 1990s, dietary supplement firms became so accustomed to market growth rates of 20% or more that when the market slowed down executives and stakeholders panicked, even though the lower growth rate would have been welcomed in industries like mainstream food.

Key Factors in Value Creation

One key factor in value creation is innovation. Simply put, if businesses do not provide true innovation they lose value. Part of the time, customers don’t realize that they need certain benefits. For example, it is doubtful that 15 years ago a large number of consumers would have said they would like to spend more time on the phone. But in the age of wireless cellular service, a majority of consumers are now always connected and spend far more minutes talking via phone than ever before.

Innovate or die. The Coca-Cola Company for a number of years focused on its core business—Coke. While Coke may be highly profitable and exceed profit per unit sold versus other items, as the traditional cola market has waned in the U.S. and as competition has come from every direction, it is very clear that a long-term focus only on Coke is stunting Coca-Cola’s growth. The company is now shaking things up with a long list of new products for the U.S. market.

But is this true in the nutraceuticals industry? Aren’t we forward thinking? That depends on the firm and the firm’s culture. Current reports from the California research firm Packaged Facts claim the U.S. “wellness market” is growing because of omega 3s, fiber and dark chocolate. Just-Food.com reports the Spanish functional foods cookie market is expanding based on those same ingredients. None of those items, however, is new to the market.

Often innovation to consumers means having the right product with the right communication, just as the consumer begins to accept the product. Fiber or omega 3s delivered in cookies or pasta might be much preferred over pills containing the same ingredients, particularly for mainstream consumers. Thus, innovation does not necessarily need Nobel prize-winning science, but it DOES need to provide clear, meaningful new benefits to consumers.

Another issue with value creation is communication. Datamonitor reports 45% of Americans say they largely or entirely disbelieve food and drink manufacturers’ health claims, a similar figure to France. Datamonitor spokesperson John Band was quoted as saying, “All too often, functional products make wide-ranging claims using complicated scientific language—and people just don’t think the claims will be true. Companies need to educate consumers on how nutraceuticals work, and at the same time promote realistic expectations.”

Firms that seem to win with true value creation communicate the benefits of their product clearly and in a way that links to what consumers already know and believe. There is plenty of evidence that global consumers are interested in health and are ready to adopt wellness products. The issue becomes do they first understand a realistic benefit and then do they believe the claims? Clear communication of benefits that are easily understood and can be accepted based on knowledge the consumer previously had usually results in the purchase of new products.

Just recently, National Public Radio (NPR) carried story on dietary supplements. This story was on cholesterol-reducing supplements. The good news was the NPR story reported evidence that plant sterols lower cholesterol. The bad news was that the story also related that too many supplement products do not deliver what they claim. Once again, a well known testing service showed lack of delivery of stated ingredients in certain supplements. This has been a longstanding issue in the supplement industry. Consumers won’t believe claims if we, as an industry, give them reasons not to and continue to provide the media with information to fan the flames of doubt.

Another way to create value is through branding. Consumers have been accustomed to product branding for over 100 years (think Coke or Pepsi), but some of the most powerful brands are still relatively new (think Starbucks or Microsoft). Value-creating branding does not mean putting one name on a number of products. Branding is complicated. It involves building trust for a particular brand image with customers. When true trust is built, it can be one of the most powerful sources of value a firm has. Why would Germans or Austrians visit Starbuck’s when they have wonderful coffee houses? The brand embodies a modern, trendy place to be seen, while the branded products provide taste benefits. Starbucks was a brand born at the right time in many countries.

Brands, too, change or die. Mourn the loss of Plymouth of Oldsmobile but don’t say there were too many auto brands because as those brands died others like Hyundai and Mitsubishi entered and flourished.

The connection with the customer must be formed on a solid product platform. Ultimately that well established brand platform can carry a limping brand. Coke is still strong globally and the Coke name is being extended to caffeinated and other drink products in the U.S., while the flagship soft drink wanes.

Value creation for customers leads to value creation for owners. Stock markets often react to other factors, such as economic and competitive news. But ultimately the market cannot and does not ignore solid creation of value. This is, after all, the definition of business success.NW