"Value creation activities" is a fancy way of saying "operating a business." It is the process of running a business for the benefit of the business owner, the customers, and, in the case of publicly-traded companies, the stockholders. Managing the costs associated with a value-creation activity, therefore, requires the same basic, common-sense approach to operating a for-profit enterprise as one might logically assume.
Managing the costs associated with a value-creation activity entails the application of...
"Value creation activities" is a fancy way of saying "operating a business." It is the process of running a business for the benefit of the business owner, the customers, and, in the case of publicly-traded companies, the stockholders. Managing the costs associated with a value-creation activity, therefore, requires the same basic, common-sense approach to operating a for-profit enterprise as one might logically assume.
Managing the costs associated with a value-creation activity entails the application of fundamental business principles. That means, first and foremost, controlling the costs associated with operating a business while providing the customer the maximum value for his or her dollar. Again, in the case of a publicly-traded enterprise, the issuance of dividends to stockholders must also be calculated as part of the formula for operating the business. In order to calculate the costs associated with operating a business, then, one must determine the optimal number of employees required, the costs associated with those employees (i.e., salaries and benefits, as well as any relevant training costs), the costs of ordering and receiving materials required to produce a good or service; the costs of performing follow-on, post-sale maintenance or repair activities; and the cost of marketing to potential consumers. Against these anticipated expenditures, the business owner or manager must impose a cost for his or her products or services that guarantees, at a minimum, a full recoupment of expenditures, including for his or her own salary.
Where calculations of value-creation activities becomes more complicated is in the need to recapitalize manufacturing plants and/ or investing in innovations required to remain competitive. Again, in the case of publicly-traded companies, a balance must be determined between reinvesting in capital and issuing dividends to stockholders. If 100 percent of profits is distributed to stockholders, then nothing is left to ensure the business remains viable for the future. Recapitalization and expansion of the industrial base, or the simple hiring of additional personnel to maintain a growing customer base, such as in repair and maintenance employees (those who travel to the customer to service equipment) and the addition of sales or marketing personnel needed to keep pace with a growing market, constitute costs associated with "value creation," and need to be part of the calculations for amount of revenue required to sustain operations. Running a business, in other words, often entails the creation of a cycle of activity that can be difficult to sustain, but that is the fundamental purpose of most business activities.
Determining the costs of operations involves calculating the cost of doing business. How much can a business owner afford to pay employees? How much of a benefits package can the business owner afford to provide employees as part of a salary package? Are the returns on investments in marketing paying dividends (i.e., is marketing determined to be successful in attracting new customers)? Are expenditures associated with post-sales maintenance activities appropriate to the scale of operations? All of these, plus the need to issue dividends, are costs that are associated with "value creation activities." Basically, a company's balance sheet is what we are talking about here. All of this relates to the strategy of the organization with respect to its survival and prosperity.
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