The importance of having a value creation strategy
Business owners have material risk – there is no guarantee that a company will make money or that it will survive and grow.
It's worth remembering that, as per the Service Leadership Index®, in any given period, one quarter of IT solution providers (i.e., the bottom quartile by profitability) lose money. Meaning, unless something changes, they are going out of business.
Meanwhile, one quarter (the top quartile by profitability) make about 19% or more at the bottom line if they’re Services-Centric, or 11% or more if they’re Product-Resale-Centric. More here.
Many private company owners have most or all of their personal net worth tied up in the company. As a result, they not only have business risk but personal risk.
They incur this high risk – and the daily workload, leadership and worry that running a business requires – not just because of the wage they hope the company can pay them, and not just because of the additional profit they hope the company can make (if any) but also because of the long-term value they hope to create.
Meaning, they hope to create a company they can someday sell – to their children, to their management team, to another IT solution provider or to outside investors.
They hope the amount they can sell it for, combined with what portion of profit (if any) they have been able to make and save along the way, can amount to enough to provide them with a safe and comfortable lifestyle when they are too old to work as hard.
When assessing the Operational Maturity Level™ (OML™) of an IT solution provider company, part of the way we determine what the company must do to have the best chance of realizing this future value, is assess what we call their Value Creation Strategy.
Of all the aspects of measuring operational maturity, Value Creation Strategy is the easiest to measure; it requires answering only three simple questions:
- Do you know how much stock value you want to create? (Yes or No)
- Do you know by when you want to have created it? (Yes or No)
- Do you know how you will extract it (i.e., how you will sell the company)? (Yes or No)
If you answered “Yes” to all three, you are at OML 5, the highest maturity in this aspect of the business. As it happens, companies that can answer “Yes” to all three of these, are most often those who do attain material value, and most often attain the value the owner has determined they need. As evidenced by their answers, these companies have a Value Creation Strategy.
If you answered “No” to all three questions, you are at OML 1, the lowest maturity. You have answered the same way as do the companies who most often fail to create material value for their owners. These companies do not have an actionable Value Creation Strategy.
Good news is that they could have one.
This is an excerpt from a newsletter published by Service Leadership titled, “Value Creation Strategy Reboot - Revisiting and Recharging Your Value Creation Strategy. Read the full newsletter here.