Assignment
I need a 300 word response to the forum one (main class forum) and a 125 word response to each forums 2 and 3 (my classmates response to the main forum at forum 1) for a total of 550 words.
Forum #1 (Main forum)
1) Conservation of Economic Value
This is a modified circular flow diagram (like you might see in a macroeconomics course). For a brief introduction to (or review of) circular flow diagrams, (and/or google the phrase "circular flow diagram").
Firms engage in exchanges to secure labor inputs, to secure capital, and to sell their output (goods/services). Inter-firm transactions are ignored (because we're talking about firms in a collective sense), and there are a few other simplifications (e.g. the way government and the "rest of the world" are represented).
Think for a minute about what it means for economic value to be transferred in a voluntary exchange. For example, if I go to a store and buy a shirt that I feel is worth $30 (in other words, I am indifferent about whether or not I have the shirt or I have $30), and the shirt costs $20, then I come away feeling $10 richer (this is referred to as consumer surplus). In this exchange, $10 of economic value is transferred to me, the customer. The same principle can be applied to exchanges with labor and exchanges with capital.
The notion of conservation of economic value suggests that if a firm creates economic value, it must "go" somewhere (it doesn't just disappear), and there are only three places (or exchanges) where it can go. This implies that created economic value has to go to either labor (in the form of wages that are above the minimum value that labor would have accepted or that are considered to be "fair" based on norms or societal standards), to customers (in the form of consumer surplus, as illustrated by the shirt example above) or to those who have supplied capital (the "owners") in the form of return on investment above the minimum they would accept. It is assumed that the company receives collective inputs (or public goods, subsidies, etc.) that are equal to the value of any taxes paid, and any transactions with the "rest of the world" are ignored.
From your reading of the case materials (in the Getting Started thread), here are a few questions to get the discussion going:
• What is economic value?
• How is economic value created?
• Once economic value is created, who gets it?
• What does it mean for value to go to labor, customers, and/or investors? What would (or does) that "look like" in each case? How would you be able to tell if these groups were receiving economic value from the organization?
Forum #2 (Classmate responses to Main forum)
Economic value is the creation of income, wealth, and other economic outcomes for individuals and organizations. This is also the purpose of organizations...to create economic value. As the Objective Function article suggests, economic value is created when a consumer values an organization's outputs more than the value of the inputs. Similarly, it also explains that economic value is created producers combine inputs to make a produce whose perceived benefit is greater than the cost incurred in making the product. The notion of conservation of economic value reminds me of the law of conservation of energy in physics, which essentially states that the total amount of energy remains constant within an isolated system and can neither be created nor destroyed but only changed from one form to another. If this same law of conservation applies to economic value, then the question is whether economic value is in an isolated system. Which system would this apply? At a market level or a macro-level? Still, can economic value decrease just as a new car depreciates as it is driven off the dealer lot?
Forum #3 (Classmate responses to Main forum)
‘Value' can be measured in several ways, one of which is economic value. Economic value is useful when making financial decisions, often decisions involving allocation of resources and/or increasing profits. If you simply Google "Economic Value" you can find articles on everything from the economic value of biodiversity to the economic value education or of nursing or even the economic value of groundwater in Australia. I say this to highlight the idea that economic value is an allocation, or reallocation, of resources based on individual or organizational preferences. Thus, economic value is measured by what someone will give up (be it in trade, time, or money) to obtain a certain good or service; this is also known as a "willingness to pay."
Based on the above, the ability to create economic value goes beyond the lowest price or the highest value; it includes individual preferences for specific organizational attributes. Perhaps the attribute is the branding or image but for some it goes beyond this and includes aspects of social responsibility. Remember, "not all profit is equal... profits involving a higher purpose represent a higher form of capitalism (Kramer & Porter, 2011)." For example, an individual may go to a website to determine if a product is vegan, were the ingredients sourced in a manner promoting sustainability, or is the product cruelty free- they may be willing to utilize more of their personal resources to obtain such a product. These resources include time researching acceptable products, time locating these products and researching the distributor (store), gas to get to the store or other resources related to being able to purchase the product, and the financial resources used in the purchase. Value creation, therefore, is having something- be it a product, service, or social value important to the consumer.
I believe that when value creation occurs because of social responsibility the value is not transferred but shared. It is shared by the organization ‘selling' the good or service and by the consumer but also in a broader sense the community (community can be local or global, present or future depending on what it is) also gets to share in the value that was created. When socially responsible organizations increase their market share and the market share of other organizations begins to decrease the value is not dimensioning but being transferred from one organization to another by way of the consumer. Like Kramer and Porter (2011) said "business increasingly has been viewed as a major cause of social, environmental, and economic problems... A big part of the problem lies with companies themselves, which remain trapped in an outdated approach to value creation" and these businesses will find that the value they once created is now being passed to companies who have a more current and relevant (to their consumer) means of creating value.
Kramer, M.R. & Porter, M.E. (2011). Creating shared value. Harvard Business Review.