Peter Thiel doesn’t think so. In his incredibly useful book, Zero to One, he talks about the conditions of a successful business. All businesses must create value, but some types of value (and methods of value creation) are more useful than others. His book is summarized in this talk at Stanford:Ĭreating value by producing a commoditized product is not a pathway to success. Think about the substitutability of your product or service: Do customers have a wide array of other options? Do they have to make a purchase at all? Are you meaningfully distinct from your competitors? Not All Value is Created EqualĪs there are an enormous (and ever-increasing) set of possible ways to create value, how do we decide which type to pursue? Is each way of creating value as useful to us as another? Under this definition, almost any activity can be value-producing, from opening a door for someone, to writing something, to turning the sun’s energy into power to run your ceiling fan. In his excellent book, The Origin of Wealth (graciously gifted to me by Nathan Bashaw), Eric Beinhocker offers a scientifically rigorous definition of the creation of economic value, based upon the work of the Economist Georgescu-Roegen:Ī pattern of matter, energy, and/or information has economic value if the following three conditions are jointly met:ġ) Irreversibility: All value-creating economic transformations and transactions are thermodynamically irreversible.Ģ) Entropy: All value-creating economic transformations and transactions reduce entropy locally within the economic system, while increasing entropy globally.ģ) Fitness: All value-creating economic transformations and transactions produce artifacts and/or actions that are fit for human purposes.įor those who didn’t take a Thermodynamics course in college (myself included), substitute entropy for ‘disorder’ for a decent approximation. So in more normal-human words: Value is created through an irreversible process which gives a resource’s ‘order’ greater usefulness to other humans. (Ok, Duh, yes, but we’re starting from the bottom here). The purpose of a business is to create value (through work), sell or trade it to customers, and capture some of that value as profit. In the broadest terms possible, value is created through work. This work could be mechanical (cutting a tree down and turning it into lumber) or creative (creating a logo or writing a paper). Of course, not all work is value-creating ( Sisyphean tasks like moving rocks from one place to another, then back). In the next Edition, we’ll pair this with research on Value Capture - join Evergreen to be sure you get the follow-up to this post. It is the purpose of the institution: to create and deliver value in an efficient enough way that it will generate profit after cost.īecause value creation is the starting point for all businesses, successful or not, it’s a fundamental concept to understand. Here’s what is to come in this collection of wisdom about value creation:ĭefinition of Value, and how it can be createdĮvolution of value creation through history, and in the future Value Creationīusiness begins with value creation.

This was originally written in September 2015. Note: Republishing this post I shared on the Medium paid subscription a few years ago.

Vexing notion definition