When a business engages in a value-generating activity it uses existing resources (e.g. labor, capital, or materials) – resources that would otherwise be used in some alternate activity. This alternative also has market value. And so, to hire these resources away from that use, the business must be able to pay a premium above their value in that alternate activity.
Imagine that an old building is being used as a warehouse. It has value in that use. But now a real estate developer sees the opportunity to repurpose this building as loft apartments. If the building is worth more to the developer’s loft tenants than it was to the tenants using it as a warehouse, the developer has the opportunity to create “value”. She or he can charge the new tenants enough to compensate the building owner for the lost income as a warehouse and still potentially net some profit for her or his self.
This is fundamentally important concept to master. A business enterprise can only be successful if it is able to identify opportunities to generate an increase in market value. In the absence of this, pricing, promotion, and business activity is pointless. And so, the essence of entrepreneurship is the search for value generating opportunities.