- its ability to create value for its shareholders and
- the amount of total value it creates.
Corporations that create value in the long term tend to increase
- the welfare of shareholders and employees
- as well as customer satisfaction.
Value creation occurs when a company GENERATES CASH FLOWS AT RATES OF RETURN THAT EXCEED THE COST OF CAPITAL.
Accomplishing this goal usually requires that the company have a COMPETITIVE ADVANTAGE.
Strengthening its competitive advantage also creates value in the long run.
Activities that do not create value
Activities such as leverage and accounting changes do not create value.
Frequently, managers shortsightedly emphasise earnings per share (EPS).
- A poll of managers found that most managers would reduce discretionary value-creating activities such as research and development (R&D) in order to meet short-term earnings targets.
- One method to meet earnings targets is to cut costs, which may have short-term benefits but can have long-run detrimental effects.