Question

Explain the difference between maximizing profit and adding value using an example and explain why adding value is so critical to an organization.

Answer 1

The difference between maximizng profit and adding value is crucial to the shareholders of a firm. It has to do with the mindset required to run a company in a manner favorable to the shareholders. Maximizing profits can be sometimes short sighted so that in one period, the firm makes good money without thinking of thw future. For e.g. if suppose a firm doesn't pay heed to the environment factors, it will make profits in the short-term but in the long run, the value wouldn't be maximized. Adding value is critical to an organization because of sustainability. Only if the firm operates with this sustainability in mind can they run the firm efficiently and please the shareholders.