Tuesday, June 25, 2013

Adding value versus creating value

We talk a lot about “adding value” but infrequently about “creating value”. For far too many people think of them as interchangeable terms. 

They are not!

If I take a raw material (wood) and make a chair, I have created value, by taking raw materials (wood) and by converting that raw material I create a more valuable product, a chair you can sit on. If I buy a chair from the furniture maker, transport it to my store and sell it to you, I have added value, the value of convenience.

You don’t have to search out different furniture makers to find a chair, you can go to my store when you are ready and select from the chairs I keep on hand. You don’t have to travel as far or wait for the manufacturer to build what you want.

People who refer converting raw materials as “adding” value are blurring the distinction. While that may be convenient on a balance sheet, it does cause loss of focus on what creating value really is.

I built an 18-foot wooden sailboat. I am created something that did not exist before I started, a recreational sailboat. That sailboat has value to a recreational sailor but no value to a building contractor. While the wood may have certain potential values to various users, once it’s been converted from raw materials to a product it has high value to specific users and zero (or very low) value to others.

The only thing I can add to the value someone else created is convenience.

Convenience of

            Time – it’s ready now
            Place – it’s right here
            Finance – you don’t have to pay cash

While each is valuable and may command a higher price than if I didn’t add any of those elements, I can’t add that value until someone else creates the basic product.

What’s my point?

The point is to make sure you remember that you can’t add value unless and until someone else creates the basic value first. The other point is that an economy is in serious trouble when adding value costs more than creating it.

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