How Organizations Create Value ?

An organization creates value by converting inputs into outputs. It takes several resources such as raw materials, machinery, information, knowledge, human resources, money and capital as inputs and applies appropriate production and transformation processes at the conversion stage to produce finished goods and services. Consumers purchase these goods and services to satisfy their needs. The environment, in which an organization operates, affects stages in the value-creation process. According to Jones (2012), “The organizational environment is the set of forces and conditions that operate beyond an organization’s boundaries but affect its ability to acquire and use resources to create value” (p. 2). The choice of resources at the input stage determines the amount of value created at this stage. An organization can create more value if it can obtain good quality inputs at low prices from its environment. For example, Wal-Mart can obtain its merchandise at very low prices from its suppliers and this creates value as Wal-Mart passes these savings to its customers by offering them “everyday low prices”. Similarly, the way the organization uses human resources and technology to transform inputs into outputs determines the amount of value created at the conversion stage. The ability of an organization to learn from its environment, its knowledge and skills also affects the value-creation process. Toyota is famous for having an excellent production process, which minimizes wastage and makes efficient use of resources. It pioneered the “Just In time” model for inventory management, which leads to highly efficient production processes. The result of conversion process is goods and services, which customers purchase to satisfy their needs. The money earned from the sale of these goods and services is used to purchase new inputs, which are again run through the conversion process to produce finished products and the cycle continues. An organization that

References: Jones, G. R. (2012). Organizational theory, design and change (6th edition). Upper Saddle River: Pearson.