VA Activities
Value-adding activities are those undertaken to increase the usefulness of Something; e.g. cooking (adding value to raw ingredients), farming (adding value to seeds), transporting (adding value by bringing goods closer to consumer), product marketing (adding value to products by raising consumer awareness of benefits). To differentiate the various types of value-add (or minus), I would call the above as Product Value-Add activities, because value is added to Something.
VA Activities Can Destroy Value
Another form of value-add is Process Value-Add, which is whether there is net value gain or loss in the VA activity.
Process Value-Add occurs when New Value (NV) > Original Value (OV) + Cost (C). On the flip side, Process Value-Minus means that the NV is less than the C (direct cost + an individual's effort) and OV combined (i.e. output less than inputs). When this happens, value is destroyed on a net or process basis. If, concurrently, NV > OV, then there is both Product Value-Add and Process Value-Minus. This can be liken to revenue increase (gross basis) and profit decrease (net basis) happening at same time.
Examples:
A - Peter is to deliver a parcel worth $10 to a recipient. His delivery costs (including gas and personal time cost) is $5. The recipient, who is also the consumer, only perceives the value of the parcel as $12. Hence, this delivery is a Process Value-Minus activity (-$3), even if Peter added $2 value to parcel (Product Value-Add). In this case, NV > OV.
B - Jessica bought a beautiful necklace for $200 as a birthday gift to Vanessa. Vanessa already has a similar looking necklace and has too many necklaces anyway. Therefore, she only values it at $150. Hence, Jessica's act of giving destroys value of $50. NV < OV applies. Both Process and Product Value-Minus occur.
In daily or business life, it is useful to analyze whether an activity is Value-added or Value-minus, process and product-wise, so that we can consciously decide whether to do it or which activity to prioritize. A lot of what we do are actually Process Value-Minus (Example A) or worse, Product Value-Minus (Example B), after factoring in our time/opportunity cost. Consideration has to be given to hidden variables such as NV and C to get the true picture. In business, if there are too many activities which are value-minus or if the collective process is value-minus, a firm with limited resources will struggle to turn a profit and survive in the long run. That's why the last decades of process improvement, applying lean and six sigma techniques, have been about removing non-value adding steps, such as waiting, rework, errors and eliminating excesses.
VC Activities
VC activities consummates the output of the value creation process. Both (VA and VC) hands are required for clapping to take place. They are the opposite ends of an equation. VC is the step to realise or "encash" the value, which should not be confused with destroying value. There is no meaning in any VA activities if there is no VC at the end. Unused waste happens when there is no VC.
Examples:
A - Jenny cooks dinner for her son, Bill everyday. Unfortunately, Bill skips home cooked dinner frequently to dine with his friends outside. Unused waste happens as the excess food is thrown away.
B - In business, products are designed, produced and marketed before any consumers buys it. If some goods remained unsold and are throw away then unused waste happens. Zero value realized.
In theory, all VA activities should start with analyzing and measuring VC, from the consumer's point of view, rather than the producer's. This process, known as market research or testing, can be done at the aggregate level at a large scale or individual level at a smaller scale. Although easy said than done, we should always start with an end in mind and try to at least minmize unused waste, from an environment and economic point of view. Creating unused waste is worse than VA activities that destroys value, as some value is at least consumed in the latter.
VC Activities that Maximize Value
While VC activities do not create value in itself, the right consumer and right application can maximise its value. For the value producer, whether business or individual, the key to maximizing utility is to deliver the products / services with right attributes to different consumers (customizable products), or with the fixed attributes (standard products) to the right consumers. Fundamentally, it means to serve someone in the right way or to serve the one way to the right someone.Examples:
- Thomas sells ice-cream in a park all year round. During summer, sales are top-notched and queues are long. However, during winter, customers were few and far between. Across the year, he struggles to breakeven. Theoretically, in order to succeed, he has two choices. First, to make his products customizable by selling ice-cream during hot seasons and hot soup during cold ones (customizable products). Alternatively, during cold seasons, he could shift his ice-cream business (standard product) to the opposite hemisphere, which would then be summer. Either way, more customers will pay for his products which are delivered in a format that enables value maximization of the consumer.
While the ideas presented above are not rocket science, I believe these notions that are fundamentally programmed in our brains to help our decision-making, usually unconsciously. It is merely that we have not yet developed the language and semantics to articulate these ideas in a layman form. For instance, I have not come across the term "value-minus", although it is a crucial part in analyzing our daily and economic behavior. Let's get started.
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