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Part 2: Earning profits by creating value vs. by redistributing

This distinction is important to understand business operations, even if both types of activities produce the same amount of money in the short run.

A real estate example of profitable redistribution without creating value may offer insight.  In some cities (e.g. Vancouver, Guelph and other cities http://en.wikipedia.org/wiki/Protected_view), builders are not allowed to build high buildings in certain places because doing so would block a valuable view.  Still, there is an incentive: regardless of the cost of construction, any building with that view would have a higher selling price.

Although profit is an important goal, the idea of creating value may suggest reasons to focus on others first.  First, one of the lessons from marketing classes is that you need to understand consumers in order to know what tactics to use to attract them: many companies fail on the first step and, therefore, waste money on the second.  Second, the owner of the property now looking at a newly-built wall will be unhappy and can be expected to oppose such building.  That opposition adds to the cost of the new building.  (So, it is important to understand zoning rules, design and government policy.)  Third, profit tends to be a monetary measure even if value is measured in many ways (which we discuss in various classes, such as sustainability or service learning and may also be learned through extra-curricular activities).

Some people think that it is obviously true that the business world is a zero sum game (see Definition).  In such a situation, people may think that a business should try to become a winner and to avoid becoming a loser.  A deeper understanding or more experience reveals many examples where cooperation can produce a surplus (e.g. constructive discussions within a condominium board) or where competition destroys value (e.g. excessive competition or a price war which results in a lower quality of construction; see especially the Prisoner’s Dilemma game in http://www.gametheory.net/popular/film.html).  Therefore, we encourage people to think about creating value as part of a more realistic analysis.

airplane noise sign

Creating value may require some creativity and real insight, but that it not entirely a bad thing.  Consider the value of a new home.  Certainly, its value depends on the size of the home, the quality of its construction and so on.  But the value also depends on the neighbourhood: i.e. its restaurants, where the city decides to build its schools, roads and sewers; or the types of jobs nearby.  None of these things are controlled by the home builder but that builder would really like to know.  Similarly, in a mixed use facility, value is created by the synergy between the uses (e.g. residential and retail).  Sometimes, as in the picture above, the uses can conflict.  So, value is created by interaction within the system rather than only by a building’s design characteristics.  Studying such issues is complicated, challenging and is the subject of various courses in Economics, Political Science, and sustainability.

The interesting thing about this focus on creating value is that, with only a little bit of negotiating skill, creating value for consumers also increases a business’s profit.  A business which profits by taking from others would eventually find that its customers prefer a lower cost competitor.