Economics paper


Question Two – Economic considerations for business start-ups

Entrepreneurship and self-employment has created approximately 20% of all the jobs in the US in the last 25 years. With the continued levels of unemployment, many youths opt for self-employment as a solution to the situation. Business start-up process, however, require an analysis of the environment, especially the economic environment, to enhance decision making, performance, stability and sustainability. Some of the factors that require a deep look include the country’s GDP levels, labour market, interest rates, inflation rates, business spending, corporate tax levels and industry turnover, including profit margins. For instance, the will grow at a 3.3% rate this year up from 2.4% in 2014, and is expected to expand in 2015 at better than 3%. This is attributed to reenergized consumer spending as well as an increase in home building to boost the county’s GDP. An improved GDP means a stronger economy, hence business sustainability is possible. Moreover, the Federal Reserve rate which is at 0% to 0.25% is expected to move up to 0.5% to 0.75% and the bank prime rate to 3.75% from 3.25%. The relative strength of the U.S. economy is nudging up the value of the U.S. dollar versus the euro and most other currencies, helping to hold down expectations of inflation and exerting downward pressure on rates. Inflation rates will stay below the Federal Reserve’s level of 2% as strong dollar causes prices of imported commodities to decline. Business will be able to keep the level of prices affordable to the customers due to manageable prices of raw materials.

Question Three – Strategic Management for value addition

The main reason why any firm exists in the market is to maximize profits. And the value that is created and captured by the firm is equal to the profit margin the firm enjoys. According to Michael Porters, the value created and captured less the cost of creating that value is equivalent to the margin the firm will enjoy. It therefore follows that, the more value a firm creates, the more profitable (the higher the profit margin) the firm becomes and the less value the firm creates, the less profitable (the lower the profit margin) the firm becomes. Therefore, the purpose of the strategic management process of the firm should be to add value to the firm. However, value means different things to different stakeholders of the firm. The different stakeholders to a firm include the firms’ employees, the firms’ competitors, the firms’ customers, the firms’ shareholders or investors and the community in which the firm is established.

Value creation for customers

Creating value for customers is probably one of the complex decisions companies have to make. In very simple language, value is what makes customers want to buy a firms’ product (or service). It is the value the customer will derive from the product that compels the customer to want to buy the company’s product. So how exactly can firms elicit this desire from customers? One, the firm should understand what drives value for their customers. Firms should take time to capture data that will help them understand what is important for their customers and what opportunities they have to help them. Two, the firms needs to understand its value-proposition, because the value customers receive from a firm’s product/service is equal to the benefits of the product/service less the cost of that product/service. Three the firm needs to focus more on the quality of its product/services than it does on quantity. Quality is conformance of the product to the specifications of the customer; it means that the product will meet the customers’ expectations and loyalty to the firm. Four, is about customer differentiation. Due to high levels of competition, firms need to identify and focus on customers and segments they can create more value. This is because different customers will have different perceptions relative to your competitors and based on geographic proximity. Lastly, price is everything. Firms should create a win-win price level, i.e. a price level that ensures customers are receiving value, but also ensuring the firm makes profits.

Creating value for shareholders/investors

Firms’ investors require a baseline or a benchmark for assessing a company’s cash flow prospects and a clear view of the firms’ potential in performance. They also require a system to evaluate the firms’ volatility in terms of its revenue performance and cost management. However, the firms’ competitive landscape should shape the firms strategies and not the shareholders demands. So what do firms have to do if they want to create value for their shareholders? One, the firm can make strategic decisions that focus on maximizing the expected value, which is the weighted average value for a range of plausible scenarios. Firms should not focus on strategic decisions in terms of impacts on reported earnings but rather focus on the expected incremental value of future cash flows. They can also invest in acquisitions that maximizes on the expected value even at the expense of lowering short-term earnings. This should be done with close considerations on the price/earnings and the impacts it will have on the earnings per –share (EPS). Valued can also be created for investors by investing only in Assets that maximize value. The firm can invest in business units, brands, real estate and other detachable assets or invest in high value-added activities research, design and marketing. Additionally, value-conscious companies with excess cash to invest with limited investment opportunities may opt to return the money to investors through dividends and share buybacks. This gives the shareholders a chance to earn better returns elsewhere while also reducing the risk that the management will use the excess cash to make value-destroying investments.

Creating value for employees

Employee productivity is important for the performance and competitiveness of an organization. To enhance a productive workforce culture in an organization, the organization requires a viable employee value proposition that all employees understand, and develop a culture that encompasses clear performance management, career development and manager effectiveness. One of the strategies that will help the organizations develop and maintain a competitive work force is viewing the human resource, not only as a resource, but as an asset because human assets are central to any business in any industry. Also, creating value for employees require that companies create value in terms of materials such as competitive salaries, bonuses, perks etc. It can also create value beyond compensation by including intangibles factors such as the company’s corporate culture, work-life balance, promotions, recognitions and career development. Lastly, companies can improve their work-force by enhancing shared value in the organization, i.e. ensuring their employees understand why they are in the business they are doing.

Creating value for competitors

There is no industry in the market that has no competition; the difference is pretty much the level. A firm’s competitive advantage exists when it is able to deliver the same benefits to its customers as its competitors, but at a lower cost (cost advantage) or deliver products that go beyond competing products (differentiation advantage).  Firms therefore need to develop and maintain competitive strategies that encompass a wide spectrum of techniques and advantages to gain advantage. According to porters, a firm strategically position itself by leveraging on its strengths. Porters divide the firm’s strengths into two; cost advantages and differentiation advantages because they express the firms position in the industry. The firm therefore should use its resources and abilities to generate a competitive advantage that will result in the creation of a superior value to the customers. Firms can also develop strategies that enhance competitive advantage in price, quality, image and reputation, value, innovation and technology and time and processes.

Creating value for the community

Business exist in the social world, there is therefore need for the integration of the business operations and values to the interests of all the stakeholders including investors, customers, employees and the community by being conscious of the in which the business operates. Firms require strategies that will ensure practices that involve participation in initiatives that benefit the society and ensuring sustainability are embedded into their core business operations to create shared value for business and the society. One of the strategies is creation of a corporate shared value (CSV), i.e. creating a link between corporate success and social-well being. Firms can also align with appropriate institutions in the society to create better environments to work and live e.g. engaging with foundations to assist in learning and education. Firms may also make monetary contributions that provide aid to local charitable, education and health-related organizations to assist the under-served or the impoverished communities.