ONE: The business world will always be competitive when it comes to value.According to Hayes (2019), “A business valuation is a general process of determining the economic value of a whole business or company unit.”Two important factors that help determine the value of a firm is time and money.Discovering ways to make a profit will help to create the value of the firm.Four general ways a manager can create value is the following:
-Taking action to lower production cost or producer transaction cost, thus shifting the effective supply curve to the right (Brickley et al, 2016).
– Creating polices to reduce consumer transaction cost (Brickley et al, 2016).
– Take action other than reducing consumer transaction to increase demand (Brickley et al, 2016).
– Create new products or services (Brickley et al, 2016).
If a firm is able to reduce the production cost, then the product can be sold for less.When new products come out the price is usually high, however if a consumer is patient the price will eventually decrease.Flat screen televisions use to be a very expensive product.Now a consumer can get a 65 inch for 350.Another way to create the value is reduce the consumer transaction cost.If you notice more companies are using online as a way to sell their product.If a consumer does not have to travel to get the product they are saving on gas and time it takes to get to the store.Now since the consumer saved time they can do other activities that are more enjoyable.
Once a firm has created the value, they are able to capture that value. A business’s ability to capture value is most easily tested with one simple challenge: Can you raise prices without losing customers? (Jorgenson, 2015).A company can hold a value then lose that value if they do not keep up with every changing business world.
Grubhub is a company that will pick up food in a certain area and delivery to a customer’s door.This a great idea to create value in a firm.However, there is a new competitor in this business called Door Dash.This company is now work 1.7 billion (Carson, 2019).DoorDash is expanding into more cities and restaurants within the last year.This company now covers 80% of the U.S. (rivals Uber Eats and Grubhub cover over 70%) (Carson, 2019).This will lower the value of the competitors.If a company wants to hold its value, they will always need to be looking for new ideas to keep up with new and existing business.In today’s world, consumers are always looking to save time and money.The way business are going, a person will not have to leave the house unless its to go to work.
Carson, B. (2019). DoorDash Is Now Worth Nearly As Much As Grubhub After $400 Million Funding Infusion. Forbes.Referenced from https://www.forbes.com/sites/bizcarson/2019/02/21/doordash-funding-400-million-grubhub-7-billion-valuation/#248c701a7e10.
Hayes, A. (2019). Business Valuation. Investopedia.Referenced from https://www.investopedia.com/terms/b/business-valuation.asp.
Jorgenson, E. (2015). Why Value Capture is the Most Important Business Idea You Haven’t Read Enough About. Evergreen. Referenced from Brickley, J., Smith, C., & Zimmerman, J. (2016). Managerial Economics and Organizational Architecture, 6th Edition. New York, NY: McGraw-Hill.
TWO: A firm can spend time and resources creating value, but if they are unable to capture that value, they have wasted their efforts. If the competitor is able to swoop in and copy your firm’s changes and enter the market, this could eliminate profits (Brickley, Smith & Zimmerman, 2019).
Our text book discusses four ways firms create value. The firms can lower production costs, remove consumer transaction costs (increasing demand), increase demand in other ways, or to devise new products and services (Brickley, et al., 2019). These options do not have to be exclusionary, and firms should look create value in each of these areas. Lowering production costs should always be a goal for a firm. As technology advances, a more efficient way of completing tasks will be created, and firms need to take advantage of this to stay ahead of their competition. Additional ways firms can reduce production costs include cutting component costs, changing suppliers, tweaking the product design, and additional employee training (Markgraf, 2019).
To capture this created value, firms with market power have an advantage. It IS possible for firms that do not have market power to capture value, if they are able to use superior factors of production allowing them to be more efficient and productive than the competition (Brickley, et al., 2019). If a firm has market power, and there are barriers to entry, this cuts down on competition stealing your created value.
One of the biggest examples of this is the Ford Motor Company back in 1913. Ford was already a leader in the automobile industry (selling more than half the cars in the U.S.), but the creation of the assembly line that year solidified their market dominance for years (Ford Motor Car Company History, n.d.). The assembly line cut back production costs tremendously, allowing the company to produce more vehicles more efficiently. The barriers to entry were tremendous, as Ford controlled the specific assets, operated in a large-scale economy, already had licenses and patents, took advantage of the learning-curve effect, and had first-mover advantage (Brickley, et al., 2019). Henry Ford “sought low prices for his cars and high wages for his employees” (Ford, n.d.). The success of the assembly line allowed him to create this environment, preventing his rivals from competing. It was twenty years before Chevrolet was able to catch up and (temporarily) pass Ford’s sales. The reduction of production costs and barriers to entry allowed Ford to create value and capture it, increasing profits for years.
Brickley, J. A., Smith, C. W., & Zimmerman, J. L. (2019). Managerial economics and
organizational architecture (6/e). McGraw-Hill Education.
Ford Motor Car Company History. (n.d.). Retrieved from
Markgraf, B. (2019, February 11). How to Reduce Production Cost. Retrieved from
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