Normally we might combine time and money, calculate the returns of each of the two projects separately, and then choose the one with the higher return. But is this cost vs. benefit approach really the best choice?
In 2011, there was a PX project in Dalian, a chemical that pollutes the environment and needs to be built 100 kilometers away from the city, but the company in charge of the project built the PX just 21 kilometers away from Dalian based on cost and profitability considerations, and soon the project was ordered to move, which cost the company a lot of extra money and naturally reduced the overall profitability. This reduces the overall benefit. From a social impact point of view, this enterprise is because it did not take into account the environmental dimension, and from a decision-making point of view, the enterprise ignored the other two dimensions when it considered based on costs and benefits: spillover effects and the balance between long and short-term projects.
Spillover refers to the impact that a decision has on things outside the project.
Spillover effects are not only involved in business decisions, but also in our daily life.
The balance between short-term gains and long-term impacts of personal choices, such as distance when renting an apartment, may be better met in the suburbs if you consider cost and comfort, but in the long run, the consumption of commuting time, personal energy consumption is the spillover effect we have to consider. For example, when choosing between two companies, in the short term, we will look at the actual treatment that the two companies can give, and in the long term, we will look at the development of the company and their respective "spillover effects", such as future growth and opportunities.
Mr. Jia Ning pointed out that there are two kinds of spillover effects, one negative and one positive, which is the "synergy effect" between projects. What we need to calculate is not the absolute future revenue and cost of the new project, but the incremental revenue and cost after considering the spillover effect.
For example, the free opening of the West Lake in Hangzhou is not only conducive to the development of the local tourism industry, but also boosts the related industries in the surrounding area, which is a synergistic effect. For example, many online stores will do vertical categories, such as mouse and mouse pads with sales, so that on the one hand, customers can easily combine the purchase, on the other hand, so that the formation of synergies between the products, but also to facilitate the reduction of product dispersion of development costs and promotion costs. There is also a synergistic effect belonging to the competitors: McDonald's always open the door with KFC, crawfish catering street, flower market, etc., we are together, can produce aggregation effect, attracting more traffic, so that everyone can earn more money.
The above is mainly from the perspective of revenue and impact considerations, the actual we will also join the latitude of time to consider, such as the project's payback period, the balance of the long and short term. From the perspective of revenue, we naturally want to shorten the payback period as much as possible, the project's revenue period as long as possible, however, in reality there is no such thing as a good thing, and even need to be considered for the long term, the stage of giving up or even losing some of the project's revenue, so a lot of times can not be but from the point of view of revenue, as Mr. Jainin said, "the basis of financial thinking is accounting and quantitative, but the upper level is the strategic vision". the upper level is the strategic vision".
For example, eBay spent $1.5 billion in 2002 to buy PayPal, but before that, eBay actually has a payment system, and invested heavily in cultivating this project, attempting to compete with PayPal. But eBay eventually gave up their own incubation of the payment system, but instead of buying a competitor PayPal at a high price. eBay found that, at the time of eBay's revenue, there have been 70% of the auction has been in the PayPal payment. If bought by a competitor, the consequences were unimaginable. So the cost is great, and the financial accounts are not calculated, and the strategy must be done.
In summary, sometimes when doing project trade-offs, we not only need to consider the cost, revenue and payback period, but also need to take into account the effect of spillover, and long-term considerations, the block of money project may not be the first choice, the short-term and long-term need to be balanced, with short-term hedge against long-term risks, support long-term projects.
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