Capturing Value
One of the challenges I face with farming is that after creating a lot of value (such as starting with barren land and ending up with coffee beans), I cannot capture the full value involved when someone buys the ground coffee at the retail shop. At best, the product I sell for KShs 45 is processed and sold for KShs 100. Clearly, I am not the one making the most money here.
This example illustrates a common problem that businesses face. You can create a lot of value but fail to capture much of it. To explain what I mean by capturing value, imagine a firm that gets inputs, creates a product, and then customers are willing to pay for the end product at a cost higher than the cost of producing the product. The difference in cost of production and what customers are willing to pay represents some value that the firm captures.
This value may be low or high depending on many factors. There might be a middleman who buys the product from the firm and delivers it to the customers, thus ‘stealing’ part of the value. There might be a competitor who is producing the goods at a cost lower than you, thus pricing lower and forcing you to lower your price to retain your customers, and thus shrinking your value. They could even make the price so low that you run out of business. In some cases, you might be the only one producing the good that is in high demand, thus able to price your goods highly and thus capture more value. You might alter the production process and reduce your production cost (e.g. by automating a process), hence once again capturing more value.
The whole business process starts with creating value, and thereafter capturing the value. This is where every business needs to be keen to ensure that it captures as much value as possible. In my farming example, I think I would make more money if I roasted the coffee instead of selling it as cherry. I could go ahead and grind the roasted beans to fetch a higher price, and best, I could set up a coffee shop and ultimately capture the full value. That would mean more money, but do I have the resources to do that?
