Pick a product and identify four direct materials that are used to create the product, identify at least two types of labor, Identify at least three types of overhead costs, and discuss how the company should be able to do to lower each cost.
Identify a non-value-added activity at three different publicly traded organizations. Explain how each organization might be able to eliminate the non-value-added activity identified. Please make sure not to select organizations that are similar to prior posts.
If a firm has created value, is it also always able to capture that value? How does a firm create value and then what must it be able to do to capture that value? In your answer, provide an example of a firm that has been able to create value. Then discuss whether or not you believe it has captured that value and if so how it was captured and if not why it was not able to do so.
Identify an incentive conflict in your firm, or one you have read about, that reduced firm value. As part of your answer, discuss whether or not one or more of the legs of the organizational stool was unbalanced, and if so, how that contributed to the conflict.
Value Creation vs. Value Capture
Value creation refers to generating benefits for customers that exceed the costs incurred by the firm (i.e., the consumer surplus plus the producer surplus). A firm creates value when its Willingness-to-Pay (WTP) for the consumer is greater than the cost (C) of providing the good or service.
Value capture is the firm's ability to retain a portion of the value it created, typically measured by its profitability or producer surplus (Price - Cost).
No, a firm is not always able to capture the value it creates.
A firm may create enormous value (e.g., a groundbreaking technology that saves millions of lives), but if that technology is easily imitated, if competition is intense, or if the firm lacks effective intellectual property protection, it may be forced to lower its prices to marginal cost, giving nearly all the created value to the consumer.
Example: Netflix (Value Creation)
Value Creation: Netflix created value by transforming the home entertainment experience. It identified that traditional cable TV offered high cost and low choice, while video rental stores offered inconvenience. Netflix created value by offering a massive, on-demand library (lowering search costs and increasing choice) delivered instantly via streaming (increasing convenience). Its customer WTP significantly exceeded its marginal cost of content delivery.
Value Capture: Netflix has largely captured this value through two primary mechanisms:
Subscription Model: By charging a recurring monthly fee, it captures a stable, predictable stream of revenue.
Network and Data Effects: The sheer scale of its global subscriber base, combined with its proprietary data on viewing habits, allows it to make highly effective decisions on content licensing and, crucially, original content creation. This content acts as a differentiator and an entry barrier that competing platforms struggle to match, protecting its pricing power and customer retention (reducing churn). This virtuous cycle allows Netflix to maintain a high price relative to its marginal cost per stream.
IV. Incentive Conflict and Organizational Stool
An incentive conflict occurs when the goals, rewards, or interests of an individual or group within a firm are misaligned with the overall goal of maximizing firm value.
Example: Sales Team Compensation Conflict
Firm: A large financial services firm offering complex investment products. Incentive Conflict: The Sales Team is compensated primarily through high commissions based on the volume and gross value of new financial products sold (short-term, individual incentive)