Value Innovation Model for Economic Value Creation EVA?

Value Innovation is the simultaneous pursuit of differentiation and low cost, creating a leap in value for both stakeholders, shareholders, buyers and the company.

The concept of value innovation is developed by Chan Kim and Renée Mauborgne and is the cornerstone of market-creating strategy. Because value to buyers comes from the offering’s utility minus its price, and because value to the company is generated from the offering’s price minus its cost, value innovation is achieved only when the whole system of utility, price, and cost is aligned.

The values-based view on innovation focuses on the role of values and normative orientations in triggering and directing innovation within and beyond organisations.

The Four Key Elements of Innovation: Collaboration, Ideation, Implementation and Value Creation. Innovation requires collaboration, ideation, implementation and value creation. Community developers actively engaged in innovation illustrated each of these elements during breakout sessions.

Explanation

• Ideation: The process of generating ideas to compete in the market.?
• Collaboration: The process of working together to develop and implement ideas.?
• Implementation: The process of putting ideas into action.?
• Value creation: The process of creating value for the business through the innovation.

Innovation is an essential core value for any business that wants to stay ahead of the competition. Constantly striving to improve products, services or processes through new ideas and technologies will ensure that the business stays relevant and competitive in today's ever-changing marketplace.

How does innovation create value? Many organizations have invested heavily in innovative projects and initiatives to create new sources of revenue or cost savings. However, it can be difficult to measure the actual impact these investments have on organizational performance.

This article will answer: how does innovation create value? We will look at strategies for maximizing returns on investment from innovative projects and the challenges faced when implementing them.

But before delving fully into explaining how Value Innovation is capable of creating Real and Tangible Economic Value, I first want to break down each and every one of the components and elements that make up our model.

Value Innovation Framework

The Value Innovation Model for Economic Value Creation EVA?, developed by Adolfo Huamán from AMBE Alliance Groups, integrates multiple components and principles designed to achieve a strategic balance between differentiation and cost efficiency.

Here’s a breakdown of the elements based on the above framework:

Key Components:

1. Expense, Cost, and Value at Risk:

? The top inverted triangle represents the expenses and costs boundaries that organizations face when operationalizing your Economy, Structure, Economic System, Enterprise Total Expenditure, Strategic Management Cost, Monitoring and Improvement of your respective results in the coherent execution as part of business plans. Managing and minimizing these while ensuring the economic value creation is crucial for profitability.

? The bottom triangle highlights the economic threshold and value at risk, which refers to potential losses or inefficiencies if the value innovation is not pursued. In most of the cases that we have addressed and resolved, the value at risk (VaR) has intensified due in large part to the origin of the diseconomies. Diseconomies of scale (enterprise- product-market) come about when a business or organization becomes so big, or so inefficient, that the cost-per-unit of its products and services starts to rise. A business can only grow so much before the benefits of growth begin to create additional costs and resources. Additional output becomes more expensive. The term "diseconomies of scope" is used to describe the added expenses and decreased productivity that can arise when a company offers too many products. This can occur when a company has too many product lines and the overhead associated with managing their production, marketing, and distribution becomes too great.

An empirical, but useful method that we have recommended to reduce the value at risk, is by disincorporating or uprooting all the all diseconomies that currently exist in the business management. As shown below, in our infographic:

2. Value Innovation:

? Positioned at the intersection of the two triangles, it signifies the strategic shift towards creating both economic value and reducing risks. It emphasizes the simultaneous pursuit of:

Profitability

? Profitability, in economics is a measure of how well a business can generate profit relative to its expenses. It's a key metric for understanding a business's financial health and ability to grow. Profit is the amount of money left over after a business pays all its expenses.

How is Profitability Measured?

• Profitability ratios, these metrics compare a business's profitability relative to other businesses. Common ratios include net profit margin, gross profit margin, and return on equity.
• Economic profitability, this metric measures a business's ability to generate profits relative to the assets it uses. It's a key indicator of a business's long-term viability.?

Why is Profitability Important?

• Profitability, helps businesses understand how efficiently they're using their resources.?
• It helps investors and business owners understand if a company is using its resources optimally.
• It helps businesses make strategic decisions about how to price their products and services.?

Finally the Profitability is the ability of a business to earn a profit. In this sense Profit: A profit is the revenue earned after all expenses have been paid. Profitability ratios: Profitability ratios are a measure of the business's ability to generate revenue compared to the amounts of expenses it incurs.

The Management Operating System MOS? framework and its TECH EVA? Technology Economic Value Added developed by Adolfo Huamán operate as a strategic model to accelerate profitability by integrating economic, operational, and customer-focused dimensions. Here’s how each component works within the framework:

1. Financial Leadership “Best Total Economy”

? Objective: Drive profitability by optimizing economic value creation or EVA?.

? Key Elements:

? Profit Differentiation: Focuses on maximizing profit margins through value-added strategies like cost control, pricing power, and innovation.

? Strategic Investment Decisions: Allocates resources to high-yield areas and minimizes financial waste.

? How It Accelerates Profitability:

? Strengthens financial agility, ensuring sustainable economic growth while maintaining profitability margins.

2. Operational Excellence “Best Total Cost”

? Objective: Achieve cost leadership through operational efficiency and effectiveness. The main objectives of Digital Operational Excellence DOE? are to improve business processes and systems, increase efficiency, and reduce diseconomies optimizing the total costs. Through and in each of the elements of its three main components: operational planning, the management of individual activities (work) and the analysis and improvement of results through the analysis of performance in real time, online and even remotely.

? Key Elements:

? Operational Competence: Focuses on improving processes, reducing the all diseconomies, and implementing: "A sustained culture of inquiry, accountability, action and innovation that continuously and responsibly challenges our current levels of performance"

We will achieve this by:

• ?? ?A fundamental belief that opportunities for improvement will always exist within our business.
• ?? ?Embedding the Plan-Do-Check-Act for economic value creation (PDCA-E) cycle deeply into our business with a MOS? that:

o Transparently identifies these opportunities and their causes o Builds on our collective expertise and innovation capability o Encourages a focus on defining and deploying proactive, long-standing solutions - ‘do it once and do it right’.

• ?? ?Understanding that change must be owned and driven by leadership, owned through active stakeholder engagement and result in workable economic outcomes.
• ?? ?Integrating with other global initiatives and programs to limit negative operational impact and leverage the synergies that exist.
• ?? ?Rewarding behaviors that focus on prevention of unplanned events as well as effective recovery.

? Standardization and Automation: Enhances productivity and consistency across operations.

? How It Accelerates Profitability:

? Reduces unnecessary costs, increases efficiency, and ensures a competitive edge in pricing without compromising quality and velocity.

3. Value Intimacy “Best Total Solution”

? Objective: Build deeper customer relationships by providing customized, comprehensive solutions. The main objectives of value intimacy are to build value-truth, strengthen social performance, and increase relationship satisfaction from using all the possibilities of emerging technologies and their capabilities to boost the value of the company. Intimacy is a key part of healthy relationships and is associated with integration, visualization, and anticipated scenaries.

Visualization

Visualization's allow different lenses to be applied to the planning data providing for deeper insights and faster decision-making.

Integration

Integration of business information and data unlocks the efficiency that allows our descriptive reporting to be more predictive.

Simulation

Simulations allow us to explore ‘what if’ questions and scenarios, which provide insights into market uncertainty, allowing us to make the best planning decisions.

? Key Elements:

? Technology Responsiveness: Leverages digital tools and innovations to tailor solutions that meet customer needs effectively.

? Customer-Centric Approach: Prioritizes understanding client pain points and delivering superior value.

? How It Accelerates Profitability:

? Increases customer retention and loyalty, driving revenue through long-term partnerships and repeat business.

Threshold Economic Value (TECH EVA) as the Central Framework

? Role: Acts as the central mechanism that balances and integrates the three pillars through the Big Data Analytics using the Big Data Liquidity Model developed by Adolfo Huaman and that is designed to identify and extract the potential economic value (data liquidity) found in the data or characteristics of the data or simply called metadata.

? Components:

? Threshold Value: Establishes key economic performance indicators (KPIs, OKRs, KRA's) such as ROI, EBITDA, NOPAT, AISC, FCF and economic value added EVA? and its respective thresholds that have been the result of actual and/or emerging patterns, as a result of the exploratory EDA?, recursive RDA? and improvement process IDA?, to which the metadata has been subjected.

? Behavioral Value: Drives a culture of leadership, agility, and alignment among teams to achieve shared economic value goals.

Success will be defined as:

• ?? ?Reliably and consistently meeting and/or exceeding budget deliverables.
• ?? ?The efficient flow of accurate and timely information for planning, reporting, variance analysis and action management. A consistent ‘look and feel’ within our operations in respect to how we measure and act on variance to plan.
• ?? ?A level of business process standardization that provides the ‘freedom to think and act’ through cohesive teamwork, rather than constraining our creativity and working in isolation – the essence of the ’One Economy’ concept.
• ?? ?Our business and operations fully leveraging the MOS? framework to ‘de-clutter’ commissioning and start- up by focusing on accelerated production ramp-up and optimization rather than ‘building a MOS? from scratch’ (Business Readiness).

? How It Accelerates Profitability:

? Aligns all organizational efforts towards measurable economic outcomes.

? Promotes cross-functional collaboration, ensuring seamless execution of strategies across finance, operations, and customer management.

Integration of the Components

? The framework works by aligning profitability drivers (Financial Leadership), efficiency enhancers (Operational Excellence), and customer intimacy strategies (Value Intimacy) under the TECH EVA? framework.

? Real-time tracking of performance metrics ensures consistent decision-making and alignment with profitability goals.

? Technology and innovation serve as enablers for responsiveness and scalability.

By implementing this model, businesses can systematically accelerate profitability through strategic alignment, operational efficiency, and customer-centric innovation, ensuring long-term competitive advantage.

Accelerated Profitability?

Accelerated profitability in economics is when a company's profits increase faster than normal and also in advance (also called ahead of time). This can happen during a favored economic boom or due to the positive influence of the market and its conditions or when a company acts quickly to take advantage of all opportunities, to maximize the increase in profits, or its incremental margin.

Explanation

The Accelerated Profitability model developed by Adolfo Huaman is a strategic framework designed to maximize Economic Value Creation EVA? by integrating key financial metrics like TOC (Total Operational Cost), NOPAT (Net Operating Profit After Taxes), AISC (All-In Sustaining Costs), EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization), and FCF (Free Cash Flow).

Here’s how it works based on the framework and concepts provided:

1. Profitability Curve Analysis:

? The model identifies different phases of profitability, including inflection points (A), break-even points, and the optimization point (D). These stages are crucial for understanding when operational costs are fully covered and profitability begins to accelerate.

2. Key Metrics and Phases:

? Fixed Costs (FC) and Variable Costs (VAR) are clearly separated (A)(C), helping organizations identify cost behaviors as production or activity levels increase.

? Inflection Point: Marks the transition from losses to covering fixed costs (A).

? Break-even Point (Q): The level at which total revenues equal total costs.

? Profitability Margin Growth (PMG): Highlights accelerated profitability once operational efficiency is achieved.

3. Economic Value Creation:

? By achieving optimal sales levels (P) and reducing costs (via Root Cause Analysis, ANOVA?, Problem Solving and Decision Making or similar tools), businesses can maximize their EVA?.

? EVA? is generated when the return on investment exceeds the cost of capital, emphasizing efficiency in resource utilization.

4. Optimization of Productivity:

? The framework incorporates a Profitability Margin Growth (PMG) function that ensures businesses not only achieve profitability but also optimize their margins [(D,B)]. This involves identifying a balance between minimizing costs (D) and maximizing output (B).

5. Free Cash Flow (FCF):

? Free Cash Flow is central to this model, representing the financial health and capability to reinvest, pay dividends, or reduce debt. Adolfo Huaman’s methodology ensures businesses operate in a way that maximizes FCF, reinforcing long-term sustainability and growth.

In summary, the Accelerated Profitability approach works by systematically analyzing and improving cost structures, revenue streams, and operational efficiency to drive sustained economic value creation. It is a data-driven model integrating advanced economic and operational insights for optimized business outcomes.

Accelerator effect (B)

The accelerator effect is the approach that businesses invest more when the economy is growing. This is because businesses see increased profits, sales, and cash flow. However, in business economic practice, this is not so simple, because there are also two challenge factors to incorporate: Time Horizon, and Anticipation Scenarios.

Profitable growth

Profitable growth is when a company's profits increase year over year. This can be achieved by expanding the customer base, entering new markets, or developing new products.

Profitability Accelerator Companies

Winning companies act quickly and decisively during economic downturns and early upturns. They are able to invest because they have already created the "currency" to do so.

The accelerator effect works in reverse as well, where businesses invest less when the economy is in recession.

? Differentiation

? Low costs

3. Economic Value:

? Focused on generating measurable financial benefits for stakeholders (e.g., shareholders, buyers, employees, etc.).

? Ensures that the value created results in incremental positive effects over time.

Underlying Concepts:

? Behavioral Economics Embedment (BEE?):

? Incorporates behavioral economics principles into decision-making processes, recognizing the psychological and social factors influencing stakeholder actions.

? Big Data Liquidity (BDL - MOS?):

? Utilizes advanced data analytics and liquidity of information to ensure decisions are data-driven, enhancing value generation.

? Beyonce Finance?:

? Focuses on financial leadership that aligns with innovative strategies, ensuring stability and sustainable growth.

Strategic Principles:

1. Leap in Value:

? The model aims to produce a quantum leap in value creation, benefiting all stakeholders involved, from buyers to shareholders.

2. Beyond Technology:

? Although technology is an enabler, value innovation transcends tech-centric strategies, focusing on aligning the entire system of a company’s activities.

3. Positive Incremental Effects:

? Every innovation and strategic shift should lead to measurable and sustainable improvements in both cost efficiency and market differentiation.

Supportive Elements:

? Tech EVA (The Economy of the Future):

? Positions technology as an essential tool in driving innovation, efficiency, and future-ready solutions.

? Icons at the bottom (representing various digital and operational tools):

? These likely refer to core technologies (AI, IoT, Blockchain, etc.) and methodologies supporting data liquidity and operational excellence.

How the Model Functions in Business:

1. Strategic Alignment:

? The model integrates operational, financial, and innovation strategies to ensure a holistic approach to value creation.

2. Stakeholder Focus:

? All components are geared towards maximizing stakeholder value while minimizing risks and inefficiencies.

3. Systemic Execution:

? It requires organizations to evaluate their entire ecosystem, ensuring every activity contributes to profitability, differentiation, and cost reduction.

This model showcases a sophisticated, multi-disciplinary approach to economic value creation, leveraging behavioral economics, technology, and strategic finance to drive sustained growth.