Value Creation and Profit Optimization

The present paper develops a basic framework for evaluating and optimizing profits in a business operation. In developing a business we are often faced with an infinity of choices ranging from what products or services to sell and what customers to target to how to structure and manage the organization. To support the decision-making process a semi- quantitative dimension is here added to the traditional strategic scenario planning. It consists of a general-purpose seven-step evaluation process: (1) The starting point is a list of strategic options, as they may have been identified during conventional strategic planning. (2-3) The next steps are to identify who will influence the value creation process, and what value drivers each of them use to influence it. (4) For customers representative of different segments we can evaluate the value to the customer, the risk to the customer and the relative market power between buyer and seller. The paper explains how this can be related to the market price that each of these customers is likely to be willing to pay. (5) While the income is critical, so it the cost: the following step is to analyze the cost structure and understand how it scales with market size. (6) By combining the results from the two previous steps it is possible to find the optimal profit as a function of volume, value drivers and the other parameters. (7) In the final step the strategic implications of the various options are integrated with other knowledge to form the basis for selecting a winning business strategy. An example of a yet-to-be consumer product is used to illustrate the process.