Sustainable Value Creation in an Enterprise

Jun 29, 2020

Ms. Chhaya Sehgal, Founder and CEO – The Winning Edge, conducted the Master Class on 'Sustainable Value Creation in an Enterprise during Pandemic' organised by MVIRDC World Trade Center Mumbai on June 29, 2020.

Ms. Sehgal suggested that a person is willing to spend or invest in something from which he can derive value. The COVID-19 crisis has brought demand to a standstill in the case of most products and services and cash flows have stagnated. The near future shows bleak prospects for improvement in the situation. We should, therefore, use this time productively for evaluation of our businesses and improvise our processes to create value for the future. We should leverage the current situation by keeping ourselves constructively occupied and we need to be patient in these testing times.

Quoting Euripides, Ms. Sehgal said, “Money is far more persuasive than logical arguments”. We need to maximise the value of money. Costs should be observed and tracked for their nature (whether direct or indirect), behaviour (whether fixed, variable or semi-variable) and origin/function (whether incurred towards production, admin-human resource, marketing or finance), and analysed for their controllability and reversibility.

Any object that we desire or activity that we do comes at a cost. Cost, therefore, entails a sacrifice. Thus, we need to ensure that we derive value out of the exercise. We need to receive value for money.

Elaborating on how to reduce costs, Ms. Sehgal said, ascertaining the cost by its nature is required to estimate how to minimise it. This is because only indirect costs can be minimised, and not the direct ones. Variable costs increase/decrease as per the activity level, whereas fixed costs are constant. Semi-variable costs are partly fixed and partly variable. One can minimise variables costs, not the fixed ones.

Costs incurred on manufacturing/production are called product costs. These costs are loaded onto the product. Period costs are those that are incurred periodically.

A product is the value that one has created. The first step towards value creation is understanding the various costs and their classification. There are two ways of maximising value: Reducing costs for the same value or increasing value for the same costs.

Highlighting the importance of creating financial statements, Ms. Sehgal said, we constantly plan how to minimise costs, but unless we quantify how much we have spent, we will not know how much value has been created. One reason for creating financial statements is to deliver value for money/time to stakeholders. Expenses depict the value created for stakeholders, without whom the business can not be carried out, whereas income depicts the value created for the businessman. Stakeholders include the government, suppliers and employees of the organisation, among others.

Talking of the circular flow of money in carrying out business activities, Ms. Sehgal said, investments are classified on the asset side of the balance sheet. These are used to undertake various operational expenses which are reflected in the income statement. The net profits generated are used for financing the business and these are transferred to the liability side of the balance sheet which are again used for investment, thus completing the virtuous circle of carrying out a business.

Of the many costs involved in a business activity, one needs to identify the relevant costs that form part of the decision-making process for creating value. Variable costs are tied to sales i.e. they increase/decrease with the amount of sales. Contribution is the difference between revenue and variable costs, whereas net income is the difference between contribution and fixed costs. Contribution margin is a marketers’ friend and marketing decision on prioritising depends on the contribution margin.

Explaining the importance of creating value, Ms. Sehgal said, the difference between total customer value and total customer cost is ‘Customer Delivered Value’ or Price. Costs that add value are those with good product quality, performance and perceived value. One needs to segregate costs in terms of value created rather than traditional accounting methods, and convert a supply chain into a value chain.

One needs to identify processes that can be merged, improved, simplified, eliminated or reduced. Optimal costs, best quality and uncompromising functionality can bring customer derived value. Maximum possible functionality in minimum feasible price and maximum feasible quality at minimum allowable cost will generate customer derived value as customer wants maximum value at minimum cost.

Ms. Sehgal summed up by suggesting that during this COVID-19 crisis, one needs to deliver maximum functionality at minimum cost. Companies such as HDFC focus on minimising costs and maximising quality, whereas those like ICICI believe in maximising value and functionality.