Business Economy: Profitability, Value Creation & Value Chain

Economy and Business Objectives

Economy

1. Maximize Benefits: Quest for maximum return on investment.

Profitability = (profit realized / capital invested) * 100

2. Objective of Growth and Value Creation: As the business grows, it acquires more market value and becomes of greater value. Satisfy shareholders, managers ...
3. Objective: Social Responsibility: Companies are incorporating social objectives — profitability and ethics — for groups that are members, and for society and the environment.

Business Components

Human Group

Included are the workers or employees, shareholders or company owners, managers, and directors.

Real Estate or Joint Economic Enterprise

In this set we can distinguish between those that are linked to the business and represent lasting, permanent assets, and others that are linked to the production cycle of the company and are continually changing — temporary assets (e.g., raw materials, materia prima, etc.).

The Organization

Every company needs an organization that achieves goals efficiently. To accomplish this it is necessary to clearly establish the tasks to be developed, and to divide and distribute the work among the people who will perform it.

External Environment of the Company

Companies are influenced by the legal, economic, social, cultural, and technological environment in which they operate.

Functions of the Company in the Economy

The company is a basic unit of production whose function is to create or increase the value of property using a set of productive factors that are coordinated by the employer.

Features

Businesses coordinate inputs. The search for more efficient ways to use scarce resources has led to a sustained increase in division of labor and specialization, thus increasing productivity.

Value Creation

The company creates or increases the value of property. By transforming raw materials into products, companies create or increase the value of property, i.e., increase their ability to meet human needs.

Risk Assumption

The company assumes risks. Assigned to the factors of production, the company pays expenses in advance: workers' wages, bills to suppliers of raw materials, interest on loans — and it pays all of these before producing and selling products.

Wealth Creation and Employment

Companies create wealth and generate employment. They play an important social role in contributing to the economic development of society, creating jobs and generating income. Companies also develop R+D+I (research, development, and innovation) to increase the quality of goods and services.

The Process of Creating Value: The Value Chain

To understand the value creation process, it is necessary to clarify some terms:

• Occur (narrow sense): It consists of transforming raw materials into a finished product.
• Market: Bringing a produced good to where it is needed.
• Provide a Service: Meeting needs by providing general knowledge, aid, or comfort to someone in need.
• The value chain: The sequence of activities that add value to a product or service from conception to final delivery.