How to Build a Business That Creates and Delivers Value
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How to Build a Business That Creates and Delivers Value
Zack Estes
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Publication Note: The Fire Time Magazine appreciates the opportunity to republish this article, which is an abridged version of a longer essay entitled “The 5 Functions of Business: An Easy-to-Understand Essay on How Businesses Work.” Click here to download the entire essay for free. Further use, duplication, or distribution is prohibited without the author’s written permission.
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Introduction: Identifying Opportunities
How does a business operate?
Business starts with opportunity.
An opportunity to create value for a customer. An opportunity to ensure that the created value is delivered to the customer.
Congratulations! The business has officially solved a problem for the market. But is it a market of one? Of 1,000? Of 1,000,000? Of even more?
Solving one problem for one customer one time is one thing. Solving many problems for many customers many times is another.
So, you begin your adventure by seeking new opportunities and acquiring new customers. All the while remembering that today’s customer isn’t tomorrow’s customer. The game of business resets with each sunrise. So that might mean acquiring yesterday’s customer. And it might mean acquiring a new customer.
At this point, you’re running out of a very important resource: time. You can’t keep doing it yourself, so you acquire talent for your business. You’re hiring so you can acquire more customers so you can create more value.
But those new hires need to be trained. And developed. And led. And managed. And held accountable. And everyone who’s participating in the business’s efforts need to be on the same page.
But wait: Were they hired too quickly? Were they hired too slowly? Are there better problems to solve for the market? Is there a more efficient way to utilize the time, money, and energy of the business?
The resources of the business need to be managed in such a way that their effectiveness and efficiency are being amplified.
The infrastructure used to sustainably create value comes at a cost.
The money needs to be managed. The time needs to be managed. The energy and efforts need to be managed. The commitments need to be managed. Resources need management.
And that’s about it. That is how a business operates.
It’s the constant tension between the five functions of business:
- Value creation
- Value delivery
- Customer acquisition
- Talent acquisition
- Resource management
But let’s not lose sight of what started it all. An opportunity to solve a problem. An opportunity to provide value.
Opportunity is the gap between someone’s problem and a solution to that problem.
Opportunity is the gap between someone’s problem and a solution to that problem.
Everyone is in competition. Business versus business. Every entity is communicating with the marketplace about the opportunity.
Now, if this is how business works, if this is how problems are solved, and if this is how businesses function, shouldn’t we do our best to understand it?
The purpose of this article is to do exactly that—to provide you with an understanding of how business works, starting with value creation and value delivery.
Value Creation
Value creation makes a solution to a problem available to the marketplace.
In restaurants, the value that is created is the food. In healthcare, the value that is created is the healing. In marketing agencies, the value that is created is the leads.
Your customers are starting here. You’re taking them there. The gap between here and there is the value that your solution offers.
There are two types of activities inside of a business: value and non-value. Value is what the customer pays for. Non-value is what the business pays for.
There are two types of activities inside of a business: value and non-value. Value is what the customer pays for. Non-value is what the business pays for.
Your customers aren’t paying you to build a business (unless they’re investors—but that’s a different business altogether). Instead, customers are paying you for solutions to their problems.
The value creation function of a business represents the only activities that customers are paying for.
Value Delivery
Value delivery ensures that customers receive your solutions to their problems.
How do you ensure that customers receive the value that they are paying for? It’s not a given. And it’s also not what customers are paying for. When people “pay for shipping,” they’re just attributing the cost of the shipment to the total value of the solution they’re going to receive. If people pay $100 for something that they value and another $40 for shipping, then what they’re communicating is that the thing that they value is worth $140 to them.
Value delivery is how the business ensures that customers effectively (and hopefully, efficiently) receive the created value.
The business may pass the cost on to customers (if they value that solution to their problem), but the cost originated as a cost of doing business.
Examples may include processing fees, shipping costs, delivery fees, installation fees, etc.
We can observe the exchange of value in the physical realm and extract the same principles for digital or virtual products and services.
What are the logistical and administrative (albeit necessary, but not what the customer is paying for) sequences that your business executes in an effort to ensure that the value is delivered to the customer?
The value delivery function of a business represents non-value activities that the business is paying for.
Conclusion: Enjoying a Life Well Lived
In summary, there are five functions of business:
- Value creation
- Value delivery
- Customer acquisition
- Talent acquisition
- Resource management
This article focuses on the first two functions: value creation and value delivery.
There are two types of activities inside a business: value and non-value. Value is what the customer pays for. Non-value is what the business pays for.
Value creation is the only function customers pay for. It’s the only thing they value.
If a business cannot find opportunity, then it simply means that there is not enough of a margin between the problem a marketplace is facing and the proposed solution that the business could go to market with.
Opportunity is a reflection of profit. If costs are the same, then profit is the difference. If there’s big opportunity, there may be big profit. If there’s little opportunity, there may be little profit.
If it costs the business more money than what customers are willing to exchange for the solution, then, by definition, there’s no opportunity—or at least, there’s not enough opportunity for the business to be profitable and sustain the creation of value for the market.
Business starts with opportunity. And it also ends when opportunity no longer exists.
As a result, businesses must continually seek innovative ways to improve in an effort to be of more and better service to the market.
The market is full of opportunities—some wider than others—but
those who ingeniously find ways to address opportunities that others find impossible (or unworthy) will enjoy a life well lived in service of others.
The market is full of opportunities—some wider than others—but those who ingeniously find ways to address opportunities that others find impossible (or unworthy) will enjoy a life well lived in service of others.
What makes you more profitable? Reducing non-value activities per dollar of revenue coming in.
If you want to learn more about doing just that, download the unabridged version of this essay at www.the5functions.com/subscribe, or click here to contact me.
Zack Estes
Zack Estes is the Founder of The 5 Functions,
an operations advisory company that helps businesses increase profits by systematically increasing productivity.
