Value is not always the same

(light music) - So in this situation as described, is the decision to increase prices by 20% justified? Should the company make the decision to do so? What's your opinion? On the face of it and looking just at the financial information alone, the obvious answer would be yes, since of course the company will gain additional annual profits of 1.5 million, and who wouldn't want an extra 1.5 million in profits every year? However, there may be reasons why a company's senior decision makers, in other words the top-level managers who are setting the overall long-term strategic direction for the entire business, as described in module two where we looked at business fundamentals, might decide not to raise the retail price by 20% and instead either raise it by a lower amount or simply not increase the retail price at all in order to keep the number of units sold at its current level. Why would they do this? Here are two very different corporate strategies that might have been set by the senior management team. Scenario A, sell the company to a larger competitor. In this scenario, the company is preparing itself for an acquisition by a larger competitor, which it aims to do within the next five years. Currently, it is growing fast, but it's not yet profitable, only just barely breaking even each year. In order to be attractive as a potential acquisition, it needs to start turning a healthy profit each year so that they can prove the potential value of being acquired in its annual financial reports. Scenario B, become the number one vendor. In this scenario, the company wants to become the dominant player in its market and be the number one vendor for the product within their region Currently, they are, let's say, fifth-largest by revenue, and they want to become the largest. This market-dominating position will provide them with a strong base of customers from which they can then grow by expanding their product range. Both of the above high-level strategic desires are perfectly normal and healthy, and many company senior managers might have something similar to one or the other as their actual long-term objective. Of course, they may not necessarily say to the outside world either that they want to be acquired in a few years' time or that they want to become the dominant player in a particular market, or indeed, they may not even tell this to their more junior management team, but that doesn't mean that those strategies don't exist or aren't being worked towards. Instead of releasing the reasons behind their long-term strategy, company A might, for example, release a mission statement about consolidating their position and increasing their profits, and company B might, for example, release their own mission statement about growing revenues and increasing numbers of customers. In each case, they've set the overall direction for shareholders to understand and for more junior managers to follow but without necessarily giving away more information than they wish to at this point in time. If we now turn back to our strategic decision as to whether or not to increase the retail price of the product, it is clear that for scenario A, it might make most sense to increase the retail price in order to gain the additional profits at the cost of losing some customers. It's also clear that for scenario B it might make most sense to keep the prices as they are or increase them by a lesser amount or even potentially to reduce the price in order to continue to grow revenues and expand their customer base. To be clear, neither of the above strategies can be said to be right or wrong. They're just different. Each senior management team is paid and paid extremely well usually to come up with the right strategy for the unique and specific situation their company is in. As we have seen, the decisions of the senior managers of two companies that, on the face of things may seem very similar, may actually vary wildly based upon very different corporate objectives. Hopefully what you've understood from this section is that, before we can start to help calculate the value from an initiative, it's very helpful to have an understanding of the overall corporate vision and/or mission of our customers' company since this helps to provide context for what the word value might mean. For example, for company A, you might lead your report on the value attained by the initiative by describing the additional profits that are being generated, whereas for company B you might focus more on the additional numbers of products that have been sold or the numbers of new customers that have been acquired. The rule, therefore, is that, whilst it is a great starting point to know the data, it is much better to also understand the customer's strategic outcome requirements so that the data can be interpreted and reported in a way that shows how these strategic outcome requirements are being supported by the initiative. (light music)