Value is created when resources are diverted from less valuable to more valuable use. Uber created value by connecting otherwise idle resources (drivers and their automobiles) with other individuals in need of a ride. Innovation, the use of the before unimagined, is perhaps the most popularized source of value creation. Social networking, frozen yogurt, and online music streaming were all important innovations that created value for both consumers and their entrepreneurial founders.
But there are three other potential drivers of value generation that the entrepreneur might capitalize upon. Like innovation, the first two focus on generating more value with existing resources. The first is an improvement in product quality. Quality is the overall extent to which a product or service meets customer needs. For example, Fred Smith, the founder of FedEx, increased quality by reducing delivery time and increasing predictability of parcel deliveries. The second related driver of value is reach. Market reach is nothing more than the expansion of an existing value proposition to a new or wider market segment. The publishing platform Medium created value by expanding publishing opportunities to writers who might have otherwise had difficulty finding an outlet for their work.
The final driver is an improvement in process efficiency. Essentially efficiency is the process of accomplishing a given activity with the least possible use of resources. And so, any value created is done so indirectly. If the production of an automobile requires the use of 100 pounds of aluminum and this can be reduced to 80 pounds, these excess 20 pounds can be redirected to some other valued use. It is this alternate use that is the actual source of the generated value. But efficiency is controversial, particularly when it involves labor resources. While it may be possible to train a data entry clerk to enter 200 order per hour instead of 100, it may not be a socially responsible choice. Likewise, the shuttering of a factory in pursuit of lower wages might seem create value by diverting production from a more valuable resource to a less valuable resource. But inefficiency in labor markets doesn’t guarantee that this is necessarily the case.