Value Drivers

What Are Value Drivers? 

Value drivers are the essential factors in the business environment that enhance the worth of organizational operations and processes, thereby increasing the overall value of the brand. They differentiate a business and its offerings in the market. It can help create and sustain long-term relationships with the stakeholders – employees, investors, and, most importantly, customers.

The role of value drivers can be seen in many aspects of the organizational function – marketing, finance, production management, research and development, and human resources. These drivers can increase efficiency, optimize resource utilization, increase the firm's profitability, enhance brand reputation, and improve relationships by building loyalty.

• Value drivers refer to those traits of a business organization that differentiate it from other companies and set it apart.
• It gives a competitive edge to the company, builds stakeholder loyalty, increases profitability, enhances brand value and reputation, and reduces wastage. 
• These drivers are of three essential categories – those that drive growth, operational efficiency, and financial efficiency. If any process, activity, or organizational component adds value to these three categories, companies should develop them and integrate them into their organizational culture.

Value Drivers Explained 

Value drivers can be an activity or a trait that business organizations adopt to differentiate themselves in the market. Over the years since the first industrial revolution, value has become highly crucial for an organization, and many have promoted it as their unique selling proposition.

Companies can look to create value in each of their processes and key units, be it manufacturing, accounting, marketing, procurement, sales, customer relationships, etc. However, it is up to them how they seek to do it. Especially with customers, adding value can be tricky. What differentiates a company is how different and undeniable they are in the customers' lives.

For example, consider Google. It is almost everywhere – search engines, e-mail, maps, online payment services, video communication, cloud services, etc. The versatility of Google is one of its company value drivers. Apart from customers, shareholders are the ones who demand value.

Companies have to build value as the building blocks of business. First, they have to plan their value drivers consciously. They have to decide what will set them apart. Once it becomes unique to the company, the company must adopt other values they want to add to its business. Thus, as long as the organization runs, it has to develop new drivers and make them a part of the company to achieve long-term success.

Types 

Though there is little consensus on the types of value drivers, here's one of the most important classifications.

1. Growth drivers

The ultimate goal of any business is growth. Profits, valuation, expansion, etc., are all forms of growth. Companies should identify growth opportunities and invest in them. However, considerable market research and studies are required before making impactful decisions.

Example: A company looking to expand its market should evaluate the options – export, licensing, or joint ventures – and select the most profitable alternative.

2. Efficiency drivers

Efficiency is an essential part of business operations. Especially in manufacturing industries and capital-intensive firms, higher efficiency is required to reduce wastage, maximize resource utilization, and make returns from every penny invested. For this, a step-by-step examination of all the processes should be carried out to see if there is any scope for increasing efficiency.

Example: If a company's manufacturing unit realizes that switching to green fuel will decrease their wastage and that they will be able to recover the investment costs within a year, they should make the switch for efficiency-sake.

3. Financial drivers

Businesses are almost always about money. Managing income and expenses can be tedious, especially when companies are looking to invest in new opportunities. Apart from this, it is also essential to provide shareholders with financial value.

Example: A new business has to choose between launching an app or website to offer its services. But given the tiny investment, they decided to launch the website first and gather enough customers ready to use the app before launching it.

How To Identify? 

Identifying value drivers in businesses is essential for companies as it is the first step toward implementing them. There are a few methods to do so.

The simplest method is to look for factors that contribute significantly to the business. It can be a new policy the company introduced a couple of years ago or a feature on its website or app. 

A SWOT analysis is the best option for companies yet to identify drivers. Most businesses conduct an occasional SWOT analysis anyway. The strengths are the existing drivers the company has already put into good use, while the opportunities are those factors with great potential to add value. The weaknesses are those traits the company should turn into value additions. Finally, the threats are those factors the company should keep in regular check to prevent them from affecting the overall value generation.

Examples 

Let us understand value drivers through some examples. 

Example #1

Suppose an entertainment company offers its customers gaming, online video, and audio content services. The firm also provides e-books and other text content online. However, it notices that online readers fell by 70% from 2015 to 2022. The company partnered with a metaverse firm to expand its services by offering book adaptations to its customers in the metaverse platform. The company hopes to add value and increase its revenue by 30%.

Example #2

Let's study the example of one of the most profitable companies in the world – Apple. Almost half a decade since its inception, Apple has become one of the top business performers, topping nearly every global chart. In 2022, Apple was the most valuable brand in the world, with a 55% increase in brand value. 

Let us check out the value drivers of Apple in this case. Product differentiation is the most essential factor. Apple presents its users with a never-before-seen experience with hundreds of features unique to the brand. Another reason is the multiple dimensions, such as podcasts, music, books, video content, etc. The premium pricing is yet another reason. What drives Apple is that they add value to their customers.

Value Drivers And Cost Drivers

Understanding the differences and similarities between value and cost drivers is essential for organizations to manage their operations and optimize their performance strategically.

Let us find the differences.

• Value drivers enhance the worth of organizational operations and processes, differentiating a business and its offerings in the market. On the other hand, cost drivers directly impact the cost of business processes and operations, influencing the expenditure and profitability of the organization.
• Value drivers focus on increasing efficiency, optimizing resource utilization, improving profitability, enhancing brand reputation, and building customer loyalty. Cost drivers encompass various factors such as machine hours, labor hours, raw material expenses, and administrative costs, which can drive the net expenditure up or down.

Let us take examples to understand how they are interconnected. Suppose a new manufacturing process reduces the production cost; it is a cost driver that adds value to the business operations. More specifically, it adds financial worth and also increases operational efficiency. Thus, it is a value driver. Nevertheless, if a process increases the cost of an activity, it is still a cost driver but not one that adds value. Therefore, not all cost drivers are value drivers.

Similarly, value drivers that decrease costs are cost drivers. Further, those factors that add value in the form of growth are also cost drivers. It is because growth demands investment and shoots up capital. Thus, a value driver either increases or decreases cost. Either way, it is a cost driver.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to What Are Value Drivers. We explain the concept along with its examples, types, how to identify it, and comparison with cost driver. You can learn more about it from the following articles –

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