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COMM1180: Value Creation Week 1 Pre-Lecture 

Something of value provides us a financial or non-financial benefit

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The CFO uses both accounting and financial info to make value-enhancing decisions

How does a CFO create value?

What is accounting info used for?

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What is management accounting used for? 1. Decision facilitating: gives decision makers optimal info to make decisions regarding value creation and capture 2. Decision influencing: measures and assesses the ability of decision makers to create value, thereby motivating them to improve their performance and make the best decisions How does a company manage the tension between stakeholders’ and management’s interests? 1. Determine the appropriate measures of value and balancing the company’s pursuit of each  Financial measures focus on financial outcomes of the org’s actions e.g. sales revenue, costs, profits  Non-financial measures focus on inputs, processes and outcomes of orgs’ actions e.g. customer retention rate, employee turnover rate 2. Have a balanced set of stakeholder value measures  Stakeholder expectations are diverse and often conflicting so focusing on value creation for only particular stakeholders leads to tension

What is financial info used for? 

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Within the firm: o Estimate value of future, potential projects o Make optimal investment decisions o Choose the best K structure o Optimise the return of K to investors Outside the firm: o Correctly measure fair value of financial assets  Makes markets more efficient  Improves K allocation across the economy

How does a CMO create value? 

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Marketing is the process by which orgs engage and build strong relationships with customers  create value for customers in order to capture value from customers in return o Links orgs to its stakeholders + generates revenue for org How does marketing create value? o When marketers create value for customers, they gain value in exchange in the form of revenue and info  creates value for other stakeholders of the org

How does a CIO create value?   

Information technology (IT): hardware, software, telecommunications o Used to support (and sometimes automate) IS Information systems (IS): the means by which people and orgs gather, process, store, use and disseminate info o IS is concerned with the purposeful utilisation of IT rather than the tech itself What is the business value of IS/IT? o How: CIOs leverage IS knowledge o Why: educate stakeholders on how IS/IT helps achieve the org’s strategic goals o Where: identify where IS/IT can create value i.e. where it can optimise business processes o When: focuses on conditions in which IS/IT can create value and gain CA

What is the purpose of business? 

According to capitalism (Friedman), to maximise shareholder profits o Friedman espoused neo-liberalism:  Free markets provide the most efficient solutions to society’s problems  Governments should intervene minimally

A Friedman Doctrine: The Social Responsibility Of Business Is to Increase Its Profits 

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In a capitalist society, businesses have no “social responsibilities”  such duties only exist in a socialist society o Management are agents acting on behalf of shareholders  owe a responsibility to serve their interests o If management uses K accrued from shareholders to exercise SR rather than for the interest of shareholders  in effect imposing T on shareholders and deciding how that T is spent  They effectively become civil servants  people should only be able to attain such status through political process One of the merits of capitalism is that it makes it difficult for people to “exploit” others, whether for good or bad  you can do good, but only at your own expense  it is equally difficult to do bad If the pursuit of SR is to be mandated, it will ultimately be controlled by the govt o Under the market mechanism, all cooperation is voluntary  cooperation either benefits you or you don’t need to participate o Under the political mechanism, individuals may vote on what is to be done, but they must conform if they lose, even if against their wishes Therefore, the sole SR of businesses are to maximise its profits within legal bounds, lest individuals are forced to conform to the will of the collective

Questions 1. Which parts of Friedman’s doctrine do you agree with? Which ones, not?  Agree o Management should serve the interests of shareholders before any other party, so long as it is legal to do so  Disagree o Profit should be the sole motive of business 2. What about the purpose of business might Friedman be missing?  Can be argued that the purpose of business is to improve the QoL of society as a whole  businesses serving only shareholder interests doesn’t achieve that (e.g. negative externalities)  Businesses have many stakeholders besides shareholders  chasing only profits neglects their needs

Business Roundtable Statement 

Shareholder primacy should be abandoned for an approach which meets the needs of all stakeholders  doing so creates the most LT value and results in shared prosperity and sustainability for both business and society. This approach involves: o Delivering value to customers o Investing in employees o Dealing ethically with suppliers o Supporting communities in which businesses operate + protect the enviro through sustainable practices o Generating LT value for and being transparent to shareholders

Questions How serious do think the 180+ signatories (e.g., JPMorgan’s Jamie Dimon) are about this “stakeholder view” of the firm? Does this replace shareholder first thinking? 

Quite serious because adopting this view improves business relations and public image  ultimately improves bottom line  also means that shareholder first thinking isn’t necessarily replaced but rather, is facilitated by adopting the stakeholder view

Week 1 Live Lecture 

Businesses create value specifically to fulfil the needs of individuals o E.g. Alipay to save time, KFC to enjoy with family, Blackmores for health

Example: does Apple create value?  

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Who does Apple create value for? o Stakeholders, including: customers, business partners, shareholders, societal stakeholders, employees What kind of value? Financial or non-financial? o Financial: 54% increase in revenue  Internal value creation using cost-benefit analysis (e.g. tech innovation, savvy marketing) leads to external measures of value (shareholders receive return on their investments) o Non-financial: partnering with WWF to help improve management of +1 million acres of forest in China, launching volunteer program for employees to help local communities How is value measured by different stakeholders? o Value Chain Analysis (VCA) frames an organisation as a series of processes, each of which adds value to the product or service for customer o Differentiates between primary and support value adding activities o Evaluates activities and measures how much value they add to a product or service o Services (e.g. warranty return, trade in program)

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How does Apple create value? o Design/development of innovative tech o Outsource manufacturing of its hardware (why?) o Supply chain management and warehousing o Distribution via retail and online stores Value creation from an IS/IT perspective o Apples develops hardware/software through operations and marketing (value chain primary activities) o IS/IT is about technology development (value chain support activities) and helps Apple do the following:  Manage and process info  Cyber security  Workflow and knowledge base around the world  R&D/design for new products o IS/IT gives CA by giving new ways to outperform rivals Value creation from an accounting perspective o Provides info to facilitate and influence org strategy and value creation o Traditional financial accounting info (e.g. revenue, costs, profits) focuses on shareholder value creation o Contemporary accounting info provides both financial and non-financial info that measures stakeholder value rather than just shareholder value

Shareholders and stakeholders 

Shareholder value maximisation (SVM): traditionally, shareholders have been prioritised by orgs in creating value o Why? Net income accrues to shareholders only because they are owners of the org  dividends are paid from it

Marketing and value creation

State of modern capitalism  

Historically, firms have been profit driven who only engage in PR to improve its public image Realisation that LT, stakeholders other than shareholders affect profit

Corporate Social Responsibility: an alternative to the shareholder value economy 

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CSR o Guiding principle is a very vague and unfocused: “Do no harm” o Defined broadly as: “private business self-regulation of harms and public good” Why engage in CSR? (Porter and Kramer) o Intrinsic motivation  Moral and ethical obligation to do the right thing  Environmental sustainability o Extrinsic motivation  License to operate: corporations rely on laws and regulations which can be changed to work against them if they do not operate desirably  Reputation affects profits Criteria to assess CSR 1. Intent 2. Motivation: extrinsic vs intrinsic 3. Relevance: do the actions relate closely to the businesses operations? 4. Reactive or proactive 5. Origin: top down vs bottom up 6. Value proposition: redistributing value or actually creating it?

CSR as an accounting framework  

To be used in accounting, CSR needs to be measurable Examples of attempts to do so: 1. Triple bottom line  Measures social, environmental and financial results  Understood as a balancing act of the 3 goals 2. Integrated reporting  Communicates how an org’s operation leads to the creation, preservation or erosion of value over time  In the course of business, orgs increase or decrease various forms of K including: financial, manufactured, intellectual, human, social and relational, natural

A modern multi-stakeholder approach  

Porter and Kramer: Purpose of business is shared value, not profits  expanding total pool of eco and social value rather than redistributing it Guiding principles: o Reconceiving products and markets (is our product good for customers?) o Redefining productivity in the value chain o Building supportive industry clusters on location

Grow the pie or ‘pieconomics’ – Alex Edmans  

Aim to create value for society first then profits will naturally follow Company must have a meaningful purpose for operating that is communicated externally and embodied internally

Pieconomics vs Profits  

Profit-driven firms have the sole purpose of multiplying profits: does $1 spent create >$1 in future profits? Pieconomics requires 3 principles to be fulfilled: 1. Multiplication of social benefits: does $1 spent by the firm (private cost) create >$1 in future social benefits? 2. Comparative advantage: does $1 spent by the firm create more future social benefits than $1 spent by another firm/person? 3. Materiality: does the activity benefit a material group of stakeholders

Week 1 Pre-Tutorial  

To create value for stakeholders, orgs must identify which activities create value  value chain framework (VCF) helps them do that VCF splits activities into 2 categories: 1. Primary: directly associated with production and delivery of g/s 2. Support: facilitates the carrying out of primary activities

Porter’s value-chain framework 

VCF views the org as a sequence of value-creating activities  helps orgs understand: o How a product moves from raw material state to end customer o Total costs involved in creating g/s o Which activities create value and which do not

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Orgs earn a margin customer exceeds the cost of undertaking the above value-creating activities

when the price paid by the

Primary activities 

Activities directly associated with production and delivery of g/s

Primary activity What is it?

Inbound logistics

Operations

Outbound logistics

Marketing and sales

Service

Receiving, storing and distributing raw materials or inputs

Transformation of inputs into final g/s

Collection, storage and distribution of final g/s to customers

Makes consumers aware of the g/s and induces them to make a purchase

How do we know if it is creating value or not?

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Providing aftersale services to enhance or maintain the value of g/s provided to customers  Efficiency of response to customer help requests  Effective management of parts and equipment inventory

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Example (Apple)

How efficient are IL activities? Proximity of distribution facilities to minimise shipping costs Warehouse layout to ensure distribution efficiency

Distribution of iPhones from warehouses to Apple stores (note: Apple doesn’t manufacture anything so their inputs are iPhones; their final product is their service of selling them in store or online)

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Efficiency of operations to minimise costs Do operation activities increase the quality of g/s?

Providing online one-stop shop for all Apple products and access to specialist assistance

Efficiency and effectiveness of shipping processes to minimise transport costs o Delivered on time o Correct location o In good condition

Shipping iPhones to online customers

Innovative approaches to promotion o Visible placement of billboards o Engaging commercials  Selection of the most appropriate distribution channels  Proper identification of customer segment and needs o What features do customers want and how much are they willing to pay for them? Designing iPhone TV advertisements

AppleCare: provides one stop for technical support, hardware service and software support

Support activities  

Activities which are necessary for primary activities and other support activities to take place  not directly involved in producing g/s Alternatively, used to increase efficiency of primary activities

Support activity What is it?

Procurement

How do we know if it is creating value or not?

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Example (Apple)

Purchasing inputs used by the org in its primary activities to create value

Selecting correct suppliers  Quality of inputs purchased  Development of collaborative relationships with suppliers Managing iPhone manufacturing outsource partners

Technological development Development of new knowledge that enables product or process innovation

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Human resource management Recruiting, hiring, training, development and compensating of all types of personnel

Effectiveness of R&D  activities for product and process innovation initiatives  Ensuring positive collaborative relationships between R&D and other  departments

Inhouse development of wireless Bluetooth chip for Airpods by R&D department while consulting with the marketing department

Effective recruiting, development and retention of employees Quality of work environment to maximise overall employee performance and minimise absenteeism Rewards and incentives to motivate employees

Recruitment and retention of Bluetooth technology developers

Firm infrastructure (administration or culture) Support the coordination of the entire value chain o Consists of the formal systems of planning, finance, quality control, information, management, and the structure of the org  Effective planning systems to attain overall goals and objectives  Manage relationships with diverse stakeholders  Effective integration of value-creating activities (coordination between departments) Planning and managing a multi-channel platform that integrates contents (software, media and apps) and hardware (MacBooks, iPhones and iPads)

Managing value-chain activities within and across organisations 

Value chain activities are not independent  must consider the following implications in order to be able to determine if an activity is creating value with the VCF: o Interrelationship among activities within the firm  Development of new iPhone models  interactions between marketing, R&D, procurement, HR, and firm infrastructure o Impact of activities within the firm on stakeholders  R&D of iPhone models impacts customers, employees, suppliers and the environment o Resource implication of activities  Does the value created for customers exceed the cost of production (i.e. is the firm making a profit?)  Can we reduce costs without affecting the value created for customers?

Exploring Strategy Textbook p108-111 file:///C:/Users/Aaron/Desktop/random%20downloads/VBO%20Extract%20(1).pdf

Questions Required readings  https://www.lendlease.com/au/company/about-us/  https://www.lendlease.com/-/media/llcom/investor-relations/asx-announcements/2020/2020-annualreport.pdf (section 2 and 4) Questions LendLease is a development, construction, and investment company in Australia. Conduct a value chain analysis for LendLease Ltd to identify and understand the activities performed to create value for its stakeholders. In your analysis: (a) Identify and describe at least one activity within each category of the value chain. Primary  Inbound logistics o Distributing construction material to different construction sites  Operations o Designing building projects o Managing and utilise raw materials to construct buildings and infrastructure  Outbound logistics o Transferring ownership to customers/clients through sales contracts  Marketing and sales o Consulting with prospective residents when designing and developing projects  Service: Support  Procurement o Public Private Partnerships help Lendlease secure contracts to obtain the assets/inputs needed for projects o Raising K through an institutional placement and Security Purchase Plan  Technological development o R&D into engineered timber which both saves on costs and is more environmentally sustainable  Human resource management o Global Graduate Program offers valuable work experience to attract talent o Impose Global Minimum Requirements to maintain the health and wellbeing of employees  employees feel cared for and safe  work more reliably and efficiently  Firm infrastructure: (b) Discuss the linkages between the support and primary activities and give one specific example that illustrate such interactions. Procurement, technological development and HRM provide Lendlease with the inputs, innovative designs and skilled labour respectively, needed to carry out its projects.  E.g. Lendlease’s Global Graduate Program attracts skilled labour by offering valuable work experience. Lendlease is then able to harness the knowledge and expertise of these people to allow it to design and construct its projects (c) Choose two stakeholders and identify one value chain activity that will impact value created for each of the stakeholders. Explain. HRM positively impacts upon employees by increasing the safety standards at construction sites. This increases the value created for employees because on top of receiving remuneration for their labour, they have peace of mind knowing that they are working in a safe environment. Marketing and sales creates increased value for prospective customers and residents. In consulting these stakeholders for feedback while still in the design phase of projects, ...