Honda and Toyota are attempting to expand their already substantial assembly operations in North America. Both companies face increasing demand for their U.S.-manufactured vehicles, especially Toyota Camrys and Honda Accords. Camrys and Accords rate extremely highly in consumer reports of durability and reliability. The demand for used Accords is so strong that they depreciate only 45 percent in their first four years. Other competing vehicles may depreciate as much as 65 percent in the same period. Toyota and Honda have identified two possible strategies (S1NEW and S2USED) to meet the growing demand for Camrys and Accords. Strategy S1NEW involves an internal expansion of capacity at Toyota’s $700 million Princeton, Indiana, plant and Honda’s Marysville, Ohio, plant. Strategy S2USED involves the purchase and renovation of assembly plants now owned by General Motors. The new plants will likely receive substantial public subsidies through reduced property taxes. The older plants already possess an enormous infrastructure of local suppliers and regulatory relief.
“The objective of Toyota’s managers is to maximize the value today (present value) of the expected future profit from the expansion. This problem can be summarized as follows:
“Objective function:
“Maximize the present value (P.V.) of profit (S1NEW, S2USED)
“Decision rule:
“Choose strategy S1NEW if P.V. (Profit S1NEW) > P.V. (Profit S2USED)
“Choose strategy S2USED if the reverse.
“This simple illustration shows how resource-allocation decisions of managers attempt to maximize the value of their firms across forward-looking dynamic strategies for growth while respecting all ethical, legal, and regulatory constraints.”
The final sentence suggests a complication beyond the simple formula of picking the strategy with the highest profits “respecting all ethical, legal, and regulatory constraints.” There are monetary values to ethical, legal, and regulatory constraints such as fines and lawsuits. It is also possible to estimate the value of goodwill in some areas like marketing, sales, and even cooperation from government, clients, and suppliers that vary by industry and product. Other values are less easy to define but are part of the economics.
PROMPT:
As we begin to examine managerial economics in depth, let’s consider the other values that should be considered and how to weigh them. What are the challenges across cultures, generations, socioeconomic backgrounds, and other categories that affect how we integrate concerns like climate change, social justice, employee well-being, and sustainability? What values and goals should we seek? How do we balance them, particularly if they are in opposition?