27 May M1 (KJ) Response
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ORIGINAL TOPIC;
Assignment 2: Discussion—Differences between Value and Returns
Evaluating the benefit an opportunity can provide is complex. When measuring an economic benefit, you must look at the real return, the nominal return, and the overall value. In many cases, a project might generate a negative return in the short term but may be of value in the long term. You may take on a project for its business, knowing that the project is a losing proposition but will compensate for this loss by bringing in a new project later that will generate a positive return, or future value. This assignment will illustrate this concept. Firms need to distinguish between value creation and the returns they obtain from their investments.
Tasks:
Locate an article from the Internet or the Argosy University online library resources that deals with firms distinguishing between value creation and the returns they obtain from their investments. You can consult sources such as the Wall Street Journal, Financial Times, Bloomberg Markets, the Economist, US News and World Report, and other publications for conducting this research.On the basis of the selected article, address the following questions:
- What are some of the strategies that firms engage in to create value?
- What is the difference between adding value in the value chain and creating returns for shareholders?
- Why does adding value to the firm and creating returns for shareholders in the short run and long run matter?
STUDENT RESPONSE:
An article titled “Companies Are Racing to Add Value to Water” by the Economist, highlighted the added value that companies such as PepsiCo and Nestle are emphasizing to differentiate their brand from others on the market with their marketing brand and addition of flavored waters. “At the other end of the scale, convincing customers to pay a lot should be hard when your product doesn’t have a distinctive taste and an alternative is freely available from the tap in most rich countries. But “premiumisation” is working. Though still a small part of the American market, really high-cost bottled water has been one of its fastest-growing areas” (The Economist, 2017).
What are some of the strategies that firms engage in to create value?
One of the most important but yet misunderstood tool of innovation is “value”. Four ways to create intangible value is: keeping promises, articulating a compelling strategy, investing in core competencies and improving organization capabilities. As stated by Jackson (2004), seven strategies for creating value consist of harnessing innovation for the public good, putting people at the centre, spreading economic opportunity, engaging in new alliances, becoming performance-driven, practicing superior governance and pursuing purpose beyond profit. A company must engage and act with accountability, transparency and integrity in order to successfully deliver shareholder value while delivering societal value.
What is the difference between adding value in the value chain and creating returns for shareholders?
A value chain is used to describe the process by which businesses receive raw materials, add value to the raw materials through various processes to create a finished product, and then sell that end product to customers (Investopedia, 2018). Adding value in the value chain can come in many forms such as no cost options, loyalty programs, customer incentives and giveaways. The difference between the price of the finished product/service and the cost of the inputs involved in making it is added value. “Consider the examples of new cars rolling down the production line being assembled by robots. The final, completed and shiny new car that comes off the production line has a value (price) that is more than the cost of the sum of the parts. Value has been added. Exactly how much is determined by the price that a customer pay” (Tutor2u, 2017). In difference, creating returns for shareholders is delivering a solid process to increase unit price, sell more units, increase fixed cost utilization and decrease unit cost. The key difference between adding value in the value chain and creating returns for shareholders is the creation of brand differentiation within the competition.
Why does adding value to the firm and creating returns for shareholders in the short run and long run matter?
Unfortunately, no business small or large can survive long term without generating revenue, this is why adding value to the firm in the short run matters. The value that a company creates should be measured not just in terms of short-term profits or paychecks but also in terms of how it sustains the conditions that allow it to flourish over time. “Great companies work to make money, of course, but in their choices of how to do so, they think about building enduring institutions. They invest in the future while being aware of the need to build people and society” (Kanter, 2011). All companies require capital to carry out business activities and to sustain; by adding value in short run this ensures that the companies returns will continue. On the other hand, creating returns for shareholders in the short run not only secures investments and revenue in the long run by producing goods and services that improve the lives of customers. But also, by providing jobs and enhancing workers’ quality of life; by developing a strong network of suppliers and business partners; and by ensuring financial viability, which provides resources for improvements, innovations, and returns to investors.
References:
Investopedia. (2018). Value Chain. What is A Value Chain? Retrieved from, https://www.investopedia.com/terms/v/valuechain.asp#ixzz58kspvizb
Jackson, A. (2004). Values-Driven Performance: Seven Strategies For Delivering Profits with Principles. Ivy business Journal. Retrieved from, https://iveybusinessjournal.com/publication/values-driven-performance-seven-strategies-for-delivering-profits-with-principles/
Kanter, R. (2011). How Great Companies Think Differently. Harvard business Review. Retrieved from, https://hbr.org/2011/11/how-great-companies-think-differently
The Economist. (2017). Companies Are Racing to Add Value to Water. Liquid Gold. Retrieved from, https://www.economist.com/news/business/21719511-sales-bottled-water-overtook-those-soft-drinks-america-last-year-companies-are-racing
Tutor2u. (2017). Enterprise: Adding Value (GCSE). Study Notes. Retrieved from, https://www.tutor2u.net/business/reference/enterprise-adding-value
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