Value Creation and Profit Optimization

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Value Creation and Profit Optimization

Author Info

K. Tobias Winther (Agityne)

Abstract

The present paper develops a basic framework for evaluating and optimizing profits in a business operation. In developing a business we are often faced with an infinity of choices ranging from what products or services to sell and what customers to target to how to structure and manage the organization. To support the decision-making process a semi- quantitative dimension is here added to the traditional strategic scenario planning. It consists of a general-purpose seven-step evaluation process: (1) The starting point is a list of strategic options, as they may have been identified during conventional strategic planning. (2-3) The next steps are to identify who will influence the value creation process, and what value drivers each of them use to influence it. (4) For customers representative of different segments we can evaluate the value to the customer, the risk to the customer and the relative market power between buyer and seller. The paper explains how this can be related to the market price that each of these customers is likely to be willing to pay. (5) While the income is critical, so it the cost: the following step is to analyze the cost structure and understand how it scales with market size. (6) By combining the results from the two previous steps it is possible to find the optimal profit as a function of volume, value drivers and the other parameters. (7) In the final step the strategic implications of the various options are integrated with other knowledge to form the basis for selecting a winning business strategy. An example of a yet-to-be consumer product is used to illustrate the process.

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Publisher Info
Paper provided by EconWPA in its series Microeconomics with number 0206001.

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Length: 12 pages
Date of creation: 07 Jun 2002
Date of revision: 08 Dec 2003
Handle: RePEc:wpa:wuwpmi:0206001

Note: Type of Document - Acrobat PDF; prepared on IBM PC; to print on Formatted for 8.5" x 11" paper; pages: 12; figures: included
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M19 - Business Administration and Business Economics; Marketing; Accounting - - Business Administration - - - Other
M30 - Business Administration and Business Economics; Marketing; Accounting - - Marketing and Advertising - - - General
O14 - Economic Development, Technological Change, and Growth - - Economic Development - - - Industrialization; Manufacturing and Service Industries; Choice of Technology
O32 - Economic Development, Technological Change, and Growth - - Technological Change - - - Management of Technological Innovation and R&D

This paper has been announced in the following NEP Reports:

NEP-ALL-2002-07-31 (All new papers)
NEP-ENT-2002-07-04 (Entrepreneurship)

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