How is value creation observed in a firm?

Value creation in a firm is primarily observed by measuring the difference between production costs and perceived product quality. This approach emphasizes the relationship between what it costs to produce a good or service and how much value customers perceive in that offering. When a firm manages to produce high-quality products at a lower cost, it can enhance customer satisfaction and loyalty, thus creating higher perceived value in the eyes of consumers.

Perceived product quality plays a critical role because it influences customers' willingness to pay higher prices. Therefore, when the gap between production costs and the value assigned by customers increases, it reflects effective value creation, allowing the firm to operate more profitably and maintain a competitive advantage in the marketplace.