Contents
Economics of Organisations and Strategy
Rationale
An Organization or Organisation (read more about -ize vs -ise) is a formal group of people with one or more shared goals. The word itself is derived from the Greek word ργανον (organon) meaning tool. The term is used in both daily and scientific English in multiple ways.
In the social sciences, organizations are studied by researchers from several disciplines. Most commonly in sociology, economics, political science, psychology, and management. The broad area is commonly referred to as organizational studies, organizational behaviour or organization analysis. Therefore, a number of different theories and perspectives exist , some of which are compatible, and others that are competing.
- Organization terms
- Organization in sociology
- Organization in management and organizational studies
- Organization theories
- Organizational structures
- Pyramids or hierarchies
- Committees or juries
- Staff organization or cross-functional team
- Matrix organization
- Ecologies
- "Chaordic" organizations
International Trade is the exchange of goods and services across international boundaries or territories. In most countries, it represents a significant share of GDP. While international trade has been present throughout much of history (see Silk Road, Amber Road), its economic, social, and political importance has been on the rise in recent centuries. Industrialization, advanced transportation, globalization, multinational corporations, and outsourcing are all having a major impact. Increasing international trade is the usually primary meaning of "globalization".
- Absolute advantage
- Balance of trade
- Borderless selling
- Columbian Exchange
- Commercial Revolution
- Commissions of the Danube River
- Comparative advantage
- Customs union
- Ecological Economics
- Economics
- Export
- Free trade
- Read More ...
Economics (from the Greek οκος [oikos], 'family, household, estate', and νμος [nomos], 'custom, law', hence "household management" and "management of the state") is a social science that typically studies the production, distribution, and consumption of goods and services. Since the early part of the 20th century, economics has focused largely on measurable variables, and employed both theoretical models and empirical analysis[1]. Economic logic is increasingly applied to any problem determining economic value (such as politics, religion, psychology, history and social interaction). A professional working in economics or having an academic degree in the subject is an economist.
The subject is broadly divided into two main branches: microeconomics, which deals with individual agents, such as households and businesses, and macroeconomics, which considers the economy as a whole. An alternate division of the subject distinguishes positive economics, which tries objectively to predict and explain economic phenomena, from normative economics, which recommends one choice over another—such recommendations often involve subjective value judgments.
The mainstream economic paradigm is a combination of neoclassical economics and Keynesian macroeconomics. Crucial assumptions of this paradigm include the idea that resources are scarce while wants are unlimited, which is sometimes characterized as the economic problem, and an understanding that the value of most goods can be represented in terms of their open-market price. Various schools of heterodox economics, for instance socialist economics, green economics and associative economics, seek to explain economic phenomena using different basic assumptions, for example by emphasising that economics is primarily concerned with exchanges of values, and that all value is created by labour.
- Definitions of economics
- Areas of study in economics
- Economic assumptions
- Economic language and reasoning
- Development of economic thought
- Schools of economic thought
- Economics and other disciplines
- Contrarian perspective
Learning Outcomes
Knowledge
After completing the course, student will
1. understand the international economics, organisational development, and management theories and their real world application topics such as production/cost analysis, demand and pricing decisions, market structures and strategic environment.
2. gain understanding of the economic and strategic planning/management techniques that are available to address business problems and the strengths and weaknesses of these techniques.
3. appreciate the role of professional economists and their contribution to international organisational development
4. appreciate the international economic environmental and organisational factors in the development of a corporate strategic plan
Skills
After completing the course, student will be able to
1. actively participate in any organizational and strategy planning and develop projects
2. have ability to apply economic theories to international strategic thinking
3. use their analytical, business communication and presentation skills
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Teaching and Learning Resources
International Economics, Organisations and Efficiency
- The Principle of Comparative and Absolute Advantage - Virtual Developing Country
- Principle of Comparative Advantage
The Dynamic Model of Strategy is a way of understanding how strategic actions occur. It recognizes that strategic planning is dynamic, that is, strategy involves a complex pattern of actions and reactions. It is partially planned and partially unplanned.
Activities
Steel is a product that is used in a wide variety of different industries for many different purposes.
Strategic
Approach to the Firm
Tutorials
Readings
The Theory
of the Firm consists of a number of economic
theories which describe the nature of the firm (company or corporation),
including its behaviour and its relationship with the market.
The
First World War period saw a change of emphasis in economic theory
away from industry-level analysis to analysis at the level of
the firm, as it became increasingly clear that perfect
competition was no longer an adequate model of how firms behaved.
The need for a revised theory of the firm was emphasised by empirical studies by Berle and Means (1932), which made it clear that ownership
of a typical US corporation is spread over a wide number of shareholders,
leaving control in the hands of managers who own very little equity themselves, and Hall and Hitch (1939) who found that businessmen
made decisions by rule
of thumb rather than in the marginalist way.
- Transaction cost theory
- Managerial and behavioural theories
- Williamson's approach
- Summary
- References
A Business Model (also called a business design) is the instrument by which a business intends to generate revenue and profits. It is a summary of how a company means to serve its employees and customers, and involves both strategy (what a business intends to do) as well as an implementation (how the business will carry out its plans).
A business model describes how a business:
- Selects its employees and customers,
- Defines and differentiates its product offerings,
- Creates utility for its employees and customers,
- Acquires and keeps employees and customers,
- Goes to the market (promotion strategy and distribution strategy),
- Defines the tasks to be performed,
- Develops a sustainable presence with respect to the environment and society,
- Configures its resources, and
- Captures profit.
Activities
Image: Hospitals and schools are good examples of public sector organisations. But what business services does each provide, and what are the objectives of these? Copyright: Zarko Kecman and Carlos Gustavo Curado
Vertical and Virtual Boundaries
Tutorials
Readings
Johnson and Scholes (Exploring Corporate Strategy) define strategy as follows:
"Strategy is the direction and scope of an organisation over the long-term: which achieves advantage for the organisation through its configuration of resources within a challenging environment, to meet the needs of markets and to fulfil stakeholder expectations".
Strategy at Different Levels of a Business
Strategies exist at several levels in any organisation - ranging from the overall business (or group of businesses) through to individuals working in it.
Corporate Strategy - is concerned with the overall purpose and scope of the business to meet stakeholder expectations. This is a crucial level since it is heavily influenced by investors in the business and acts to guide strategic decision-making throughout the business. Corporate strategy is often stated explicitly in a "mission statement".
Business Unit Strategy - is concerned more with how a business competes successfully in a particular market. It concerns strategic decisions about choice of products, meeting needs of customers, gaining advantage over competitors, exploiting or creating new opportunities etc.
Operational Strategy - is concerned with how each part of the business is organised to deliver the corporate and business-unit level strategic direction. Operational strategy therefore focuses on issues of resources, processes, people etc.
How Strategy is Managed - Strategic Management
In its broadest sense, strategic management is about taking "strategic decisions" - decisions that answer the questions above.
In practice, a thorough strategic management process has three main components, shown in the figure below:
Read More ...
In microeconomics and strategic
management, the term vertical
integration describes a style of ownership and control. Vertically integrated companies are united through
a hierarchy and share a common owner. Usually each member of the hierarchy
produces a different product or service, and the products combine to satisfy a common need.
It is contrasted with horizontal
integration. Vertical integration is one method of avoiding
the hold-up
.
One
of the earliest, largest and most famous examples of vertical
integration was the Carnegie
Steel company. The company controlled not only the mills where
the steel was manufactured, but the mines where the iron
ore was extracted, the coal mines that supplied the coal,
the ships that transported the iron ore and the railroads that
transported the coal to the factory, the coke ovens where the coal was coked, etc.
A monopoly produced through vertical
integration is called a vertical
monopoly, although it might be more appropriate to speak of
this as some form of cartel.
- Vertical market
- Exclusive dealing
- Strategic management
- Zaibatsu (the Japanese approach to vertical integration)
- Chaebol (the South Korean counterpart to Zaibatsu)
- Horizontal integration
- Economic calculation problem (although mostly discussed in relation to command economies, it equally applies to firms)
- Lists
Transaction Cost
In economics and related disciplines, a Transaction cost is a cost incurred in making an economic exchange. For example, most people, when buying or selling a stock, must pay a commission to their broker; that commission is a transaction cost of doing the stock deal. Or consider buying a banana from a store; to purchase the banana, your costs will be not only the price of the banana itself, but also the energy and effort it requires to find out which of the various banana products you prefer, where to get them and at what price, the cost of travelling from your house to the store and back, the time waiting in line, and the effort of the paying itself; the costs above and beyond the cost of the banana are the transaction costs. When rationally evaluating a potential transaction, it is important not to neglect transaction costs that might prove significant.
A number of kinds of transaction cost have come to be known by particular names.
1. Search and information costs are costs such as those incurred in determining that the required good is available on the market, who has the lowest price, etc.
2. Bargaining costs are the costs required to come to an acceptable agreement with the other party to the transaction, drawing up an appropriate contract and so on. In game theory this is analyzed for instance in the game of chicken.
3. Policing and enforcement costs are the costs of making sure the other party sticks to the terms of the contract, and taking appropriate action (often through the legal system) if this turns out not to be the case.
Activities
Image: Lunn Poly is a familiar face on the British high street.
Horizontal Boundaries and Diversification
Tutorials
Readings
Diversification is a form of corporate strategy for a company. It seeks to increase profitability through greater sales volume obtained from new products and new markets. Diversification can occur either at the business unit level or at the corporate level. At the business unit level, it is most likely to expand into a new segment of an industry that the business is already in. At the corporate level, it is generally very interesting entering a promising business outside of the scope of the existing business unit.
Diversification is part of the four main growth strategies defined by the Product/Market Ansoff matrix:
Ansoff pointed out that a diversification strategy stands apart from the other three strategies. The first three strategies are usually pursued with the same technical, financial, and merchandising resources used for the original product line, whereas diversification usually requires a company to acquire new skills, new techniques and new facilities.
Note: The notion of diversification depends on the subjective interpretation of “new” market and “new” product, which should reflect the perceptions of customers rather than managers. Indeed, products tend to create or stimulate new markets; new markets promote product innovation.
In economics, returns to scale and economies of scale are related terms that describe what happens as the scale of production increases. They are different terms and not to be used interchangeably.
The learning curve effect and the closely related Experience curve effect express the relationship between experience and efficiency. As individuals and/or organizations get more experienced at a task, they usually become more efficient at them. Both concepts originate in the old adage, "practice makes perfect".
- The learning curve effect
- The experience curve effect
- Reasons for the effect
- Experience curve discontinuities
- Strategic consequences of the effect
- Criticisms
- Books and articles
Activities
Image: Sony PlayStation controls - the company have shipped
60 million units since PlayStation 2 was released.
Copyright: Patricia Benitez
Image: Is the telecommunications industry set for revival with the development
of new technology? Is this an appropriate strategic move for eBay? Copyright: Dinos forDino
Growth and Entrepreneurship
Tutorials
Readings
In economics, Profit Maximization is the process by which a firm determines the price and output level that returns the greatest profit. There are several approaches to this problem. The total revenue - total cost method relies on the fact that profit equals revenue minus cost, and the marginal revenue - marginal cost method is based on the fact that total profit in a perfectly competitive market reaches its maximum point where marginal revenue equals marginal cost.
See also
Supply
and Demand
In microeconomic theory,
the partial equilibrium supply
and demand economic
model originally developed by Alfred
Marshall attempts to describe, explain, and predict changes in the price and quantity of goods sold in competitive markets.
The model is only a first approximation for describing an imperfectly
competitive market. It formalizes the theories used by some economists
before Marshall and is one of the most fundamental models of some
modern economic schools, widely used as a basic building block in
a wide range of more detailed economic models and theories. The theory of supply and demand is important for some economic schools' understanding of a market
economy in that it is an explanation of the mechanism by which
many resource
allocation decisions are made. However, unlike general
equilibrium models, supply schedules in this partial
equilibrium model are fixed by unexplained forces.
- Supply
- Special cases of a supply curve
- Demand
- Special cases of a demand curve
- Simple supply and demand curves
- Demand curve shifts
- Supply curve shifts
- Market "clearance"
- Elasticity
- Vertical supply curve
- Other market forms
- An example: Supply and demand in a 6-person economy
- History of supply and demand
- Criticism of Marshall's theory of supply and demand
- Empirical estimation
External link and references |
The theory of supply and demand describes how prices vary as a result of a balance between product availability at each price (supply) and the desires of those with purchasing power at each price (demand). The graph depicts an increase in demand from D1 to D2 along with the consequent increase in price and quantity required to reach a new market-clearing equilibrium point on the supply curve (S). |
Consumer Surplus or Consumer's Surplus (or in the plural Consumers' surplus) is the economic gain accruing to a consumer (or consumers) when they engage in trade. The gain is the difference between the price they are willing to pay (or reservation price) and the actual price. If someone is willing to pay more than the actual price, their benefit in a transaction is how much they saved when they didn't pay that price.
The aggregate consumers' surplus is the sum of the consumer's surplus for each individual consumer. This can be represented on a supply and demand figure. If demand is as given as the diagonal line from the price axis to the quantity axis, consumers' surplus in the case of a the initial supply curve (S0) is the triangle above the line formed by price P0 to the demand line (bounded on the left by the price axis and on the top by the demand line). If supply expands (to S1), the consumers' surplus expands, to the triangle above P1 and below the demand line (still bounded by the price axis). The change in consumer's surplus is difference in area between the two triangles, and that is the consumer welfare associated with expansion of supply.
Entrepreneurship is the practice of starting new organizations, particularly new businesses generally in response to identified opportunities. Entrepreneurship is often a difficult undertaking, as a majority of new businesses fail. Entrepreneurial activities are substantially different depending on the type of organization that is being started. Entrepreneurship may involve creating many job opportunities.
Many "high-profile" entrepreneurial ventures seek venture capital or angel funding in order to raise capital to build the business. Many kinds of organizations now exist to support would-be entrepreneurs, including specialized government agencies, business incubators, science parks, and some NGOs.
Our understanding of entrepreneurship owes a lot to the work of economist Joseph Schumpeter and the Austrian School of economics. For Schumpeter (1950), an entrepreneur is a person who is willing and able to convert a new idea or invention into a successful innovation. Entrepreneurship forces "creative destruction" across markets and industries, simultaneously creating new products and business models and eliminating others. In this way, creative destruction is largely responsible for the dynamism of industries and long-run economic growth. Despite Schumpeter's early 20th-century contributions, the traditional microeconomic theory of economics has had little room for entrepreneurs in their theories. (ref. The Economist Magazine, March 11, 2006, pp 67).
Activities
After receiving notice that her advertising medium at the side of the A1 near Newcastle had to be taken down because it was 'proving a distraction for drivers', entrepreneur Ling Valentine decided to put the rocket truck on which the mobile advert was placed on eBay - the item was sold for over £4,000 but for Ling, the publicity surrounding the whole thing meant it was worth very much more to her! Image source: eBay.
Corporate Control and Organisational Design
Tutorials
Readings
Corporate Governance is the set of processes, customs, policies, laws and institutions affecting the way a corporation is directed, administered or controlled. Corporate governance also includes the relationships among the many players involved (the stakeholders) and the goals for which the corporation is governed. The principal players are the shareholders, management and the board of directors. Other stakeholders include employees, suppliers, customers, banks and other lenders, regulators, the environment and the community at large.
- Definition
- History
- Organizations
- Parties to corporate governance
- Principles
- Mechanisms and controls
- Systemic problems of corporate governance
- Role of the accountant
- Regulation
- Corporate governance models around the world
- Codes and guidelines
- Corporate governance and firm performance
- Attention to corporate governance
- Agency Theory
- Business ethics
- Corporate behaviour
- Corporate crime
- Corporate Law Economic Reform Program
- Cadbury Report
- Corporate Social Responsibility
- Corporation
- Foreign Corrupt Practices Act
- Frequently Asked Questions in Corporate Governance
- Golden Parachute
- Governance
- King I
- King II
- Legal Origins Theory
- Sarbanes-Oxley Act
- Stakeholder concept
- Takeovers and poison pills
- References
Organization design can be defined narrowly, as the process of reshaping organization structure and roles, or it can more effectively be defined as the alignment of structure, process, rewards, metrics and talent with the strategy of the business. Jay Galbraith and Amy Kates have made the case persuasively (building on years of work by Galbraith) that attention to all of these organizational elements is necessary to create new capabilities to compete in a given market. This systemic view, often referred to as the "star model" approach, is more likely to lead to better performance. Organization design may involve strategic decisions, but is properly viewed as a path to effective strategy execution. The design process nearly always entails making trade-offs of one set of structural benefits against another. Many companies fall into the trap of making repeated changes in organization structure, with little benefit to the business. This often occurs because changes in structure are relatively easy to execute while creating the impression that something substantial is happening. This often leads to cynicism and confusion within the organization. More powerful change happens when there are clear design objectives driven by a new business strategy or forces in the market that require a different approach to organizing resources. The organization design process is often defined in phases. Phase one is the definition of a business case, including a clear picture of strategy and design objectives. This step is typically followed by "strategic grouping" decisions, which will define the fundamental architecture of the organization - essentially deciding which major roles will report at the top of the organization. |
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The classic options for strategic grouping are to organize by:
- Behavior
- Function
- Product or category
- Customer or market
- Geography
- Matrix
Each of the basic building block options for strategic grouping brings a set of benefits and drawbacks. Such generic pros and cons, however, are not the basis for choosing the best strategic grouping. An analysis must be done completed relative to a specific business strategy.
Subsequent phases of organization design include operational design of processes, roles, measures and reward systems, followed by staffing and other implementation tasks.
The field is somewhat specialized in nature and many large and small consulting firms offer organization design assistance to executives. Some companies attempt to establish internal staff resources aimed at supporting organization design initiatives. There is a substantial body of literature in the field, arguably starting with the work of Peter Drucker in his examination of General Motors decades ago. Other key thinkers built on Drucker's thinking, including Galbraith (1973), Nadler, et al. (1992) and Lawrence & Lorsch (1967).
Organization design can be considered a subset of the broader field of organization effectiveness and organization development, both of which may entail more behaviorally focused solutions to effectiveness, such as leadership behaviors, team effectiveness and the like. Many organizational experts argue for an integrated approach to these disciplines, including effective talent management practices.
In economics, the principal-agent problem treats the difficulties that arise under conditions of incomplete and asymmetric information when a principal hires an agent. Various mechanisms may be used to try to align the interests of the agent with those of the principal, such as piece rates/commissions, profit sharing, efficiency wages, the agent posting a bond, or fear of firing. The principal-agent problem is found in most employer/employee relationships, for example, when stockholders hire top executives of corporations.
Stakeholder Theory
As originally detailed by R. E. Freeman (1984), stakeholder theory attempts to ascertain which groups are stakeholders in a corporation and thus deserve management attention. In short, it attempts to address the "Principle of Who or What Really Counts."
In traditional input-output models of the corporation, the firm uses the inputs of investors, employees, and suppliers to convert inputs into usable (salable) outputs which customers and return to the firm some capital benefit. By this model, firms only address the needs and wishes of those four parties: investors, employees, suppliers, and customers.
Stakeholder theory recognizes that there are other parties involved, including governmental bodies, political groups, trade associations, trade unions, communities, associated corporations, etc. This view of the firm is used to define the specific stakeholders of a corporation (the normative theory of stakeholder identification) as well as examine the conditions under which these parties should be treated as stakeholders (the descriptive theory of stakeholder salience). These two questions make up the modern treatment of Stakeholder Theory.
- Stakeholder (corporate)
- Stakeholder analysis
- Stakeholder (law)
- Agency cost
- Principal-agent problem
- References
Performance improvement is the concept of measuring the output of a particular process or procedure then modifying the process or procedure in order to increase the output, increase efficiency, or increase the effectiveness of the process or procedure. The concept of performance improvement can be applied to either individual performance such as an athlete or organizational performance such as a racing team or a commercial enterprise.
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An employment contract is an agreement entered into between an employer and an employee at the commencement of the period of employment and stating the exact nature of their business relationship, specifically what compensation the employee will receive in exchange for specific work performed.
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Activity
The new Mini - a success story in British manufacturing.
Copyright: BMW World BMW World (http://www.bmwworld.com)
Wages,
Incentives and Human Resources
Tutorials
- The Labour Market: Supply and Demand
- Influences on the Labour Market
- Wages, Incentives and Human Resources
- Labour Markets, Wages and Industrial Relations
Readings
Labour economics seeks to understand the functioning of the market and dynamics for labour. Labour markets function through the interaction
of workers and employers. Labour economics looks at the suppliers
of labour services (workers), the demanders of labour services
(employers), and attempts to understand the resulting pattern
of wages, employment, and income.
It
is an important subject because unemployment is a problem that affects
the public most directly and severely. Full employment (or reduced
unemployment) is a goal of many modern governments.
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Construction workers generally work long hours for their pay |
Human resources is a term used to describe the individuals who make up the workforce of an organization, although it is also applied in labor economics to, for example, business sectors or even whole nations. Human resources is also the name of the function within an organization charged with the overall responsibility for implementing strategies and policies relating to the management of individuals (i.e. the human resources). This function title is often abbreviated to the initials "HR".
Human resources is a relatively modern management term, coined as late as the 1960s. [1] The origins of the function arose in organizations that introduced 'welfare management' practices and also in those that adopted the principles of 'scientific management'. From these terms emerged a largely administrative management activity, coordinating a range of worker related processes and becoming known, in time, as the 'personnel function'. Human resources progressively became the more usual name for this function, in the first instance in the United States as well as multinational or international corporations, reflecting the adoption of a more quantitative as well as strategic approach to workforce management, demanded by corporate management to gain a competitive advantage, utilizing limited skilled and highly skilled workers.
Activities
Image: Teaching is not a profession that attracts graduates in the way it
used to. Does the labour market work effectively for teachers?
Title: Classical School Is Educational Experiment.
Copyright: Getty Images, available from Education Image Gallery
Image: Concern about equal pay is
not new. Sybil Morrison, founder of
the Peace Pledge Union (PPU) speaking
on equal pay, 1947.
Title: Sybil Speaking. Copyright:
Getty Images, available from
Education Image Gallery
Market Structure and the Strategic Environment
Tutorials
Readings
In economics, Market Structure describes the state of a market with respect to competition.
There are two kinds of market structures that are usually discussed: perfectly competitive market structure and imperfectly competitive market structure. Perfectly competitive market structure is an ideal state of a market in which the competition amongst the buyers and sellers is likely to be perfectly balanced. The imperfectly competitive structure is quite identical to the realistic market conditions where some monopolists, oligopolists, and duopolists exist and dominate the market conditions.
Competition is the act of striving against another force for the purpose of achieving dominance or attaining a reward or goal, or out of a biological imperative such as survival. Competition is a term widely used in several fields, including biochemistry, ecology, economics, business, politics, and sports. Competition may be between two or more forces, life forms, agents, systems, individuals, or groups, depending on the context in which the term is used.
Competition may yield various results to the participants, including both intrinsic and extrinsic rewards. Some, such as survival advantages, including favorable territory, are intrinsic biological factors that occur as a result of ecological competition between organisms. Others, such as competition in business and politics, involve competition between humans. In addition, extrinsic symbols, such as trophies, plaques, ribbons, prizes, or laudations, may be given to the winner(s). Such symbolic rewards are commonly used wherever the rewards inherent in the competition are primarily intrinsic, such as at human sporting and academic competitions. In general, the rewards range widely but usually help reinforce the advantage that one participant has over the other participant(s).
Competitor analysis in marketing and strategic management is an assessment of the strengths and weaknesses of current and potential competitors.
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Business Performance Management (BPM) is a set of processes that help organizations optimize business performance. BPM is seen as the next generation of business intelligence (BI). BPM is focused on business processes such as planning and forecasting. It helps businesses discover efficient use of their business units, financial, human, and material resources.
A Strategic Group is a concept used in strategic management that groups companies within an industry that have similar business models or similar combinations of strategies. For example, the fast-food industry can be portrayed as consisting of several strategic groups. The number of groups within an industry and their composition depends on what dimensions you use to define the groups. Strategists often use a two dimensional grid to display the position of each company along to the two most important dimensions.
The term was coined by Hunt (1972) in his analysis of the appliance industry where he discovered less competitive rivalry than industry concentration ratios suggest there should be. He attributed this to the existence of subgroups within the industry that effectively reduce the number of competitors in each market.
Michael Porter (1980) developed the concept and applied it within his overall system of strategic analysis. He explained strategic groups in terms of what he called "mobility barriers". These are similar to the entry barriers that exist in industries, except they apply to groups within an industry. Because of these mobility barriers a company can get drawn into one strategic group or another. Strategic groups are not to be confused with Porter's generic strategies which are internal strategies and do not reflect the diversity of strategic styles within an industry.
See also
An Industry is generally any grouping of businesses that share a common method of generating profits, such as the "music industry", the "automobile industry", or the "cattle industry". It is also used specifically to refer to an area of economic production focused on manufacturing which involves large amounts of capital investment before any profit can be realized, also called "heavy industry.". As-of 2004, Financial services is the largest industry (or category of industries) in the world in terms of earnings.
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Activity
Image: An independent DIY store - can small DIY stores compete against the giants?
Image Title: Jamie Oliver Appears
On The Tonight Show With Jay Leno.
Copyright: Getty Images, available
from Education Image Gallery
Imperfect Competition and Government Intervention
Tutorials
- Imperfect Competition and Government Intervention
- Reasons for Government Intervention in the Market
- Supply and Demand and Government Intervention in the Market
- Government and the Market
- Government and the Firm
- Regulation and its Influence on Business Activity
Readings
In economic theory, Imperfect Competition, is the competitive situation in any market where the conditions necessary for perfect competition are not satisfied.
Forms of imperfect competition include:
- Monopoly, in which there is only one seller of a good.
- Oligopoly, in which there is a small number of sellers.
- Monopolistic competition, in which there are many sellers producing highly differentiated goods.
- Monopsony, in which there is only one buyer of a good.
- Oligopsony, in which there is a small number of buyers
There may also be imperfect competition in markets due to buyers or sellers lacking information about prices and the goods being traded.
There may also be imperfect competition due to a time lag in a market. For example, in the 1990s, there was a shortage of computer programmers, but becoming a skilled programmer requires several years of experience. This drove up salaries. Another example is the "jobless recovery". There are many growth opportunities available after a recession, but it takes time for employers to react, leading to high unemployment. High unemployment decreases wages, which makes hiring more attractive, but it takes time for new jobs to be created.
See also
- Game
Theory Approach
- In economics, the Bertrand paradox –so named for its creator, Joseph Bertrand
- Nash equilibrium in economic competition find themselves with no profits.
See also
There are many ways in which the price of a product can be determined, the following are the foremost strategies that business alike use.
Penetration pricing is the pricing technique of setting a relatively low initial entry price, a price that is often lower than the eventual market price. The expectation is that the initial low price will secure market acceptance by breaking down existing brand loyalties. Penetration pricing is most commonly associated with a marketing objective of increasing market share or sales volume, rather than short term profit maximization.
The advantages of penetration pricing to the firm are:
- It can result in fast diffusion and adoption.
- It can create goodwill among the all-important early adopter segment. This can create valuable word of mouth .
- It creates cost control and cost reduction pressures from the start, leading to greater efficiency.
- It discourages the entry of competitors. Low prices act as a barrier to entry (see: porter 5 forces analysis).
- It can create high stock turnover throughout the distribution channel.
- It can be based on marginal cost pricing, which is economically efficient.
See also
An Industrial Policy is any government regulation or law that encourages the ongoing operation of, or investment in, a particular industry. It is often related to, or wholly determinant of, investment policy for that industry.
An active intervention in industrial development is the policy of most if not all countries in the world. Even the United States, which prides itself as a "free-trading" nation, has implemented strong tax, tariff, and trade laws to protect itself from "dumping", the flooding of a market by a competing nation with goods or services below market prices in order to gain an advantage over domestic firms.
In Japan, the powerful MITI has often taken an active hand in development of major industries, particularly electronics and software. The impact of this intervention is disputed, as Japan is still not a power in software, and has lost much of its advanced electronics industry to Asian Tigers, especially South Korea and Taiwan. However, authors such as Robert Hunter Wade in 'Governing the Market', provide compelling arguments to support the link between government intervention and the successful industrial development of this whole region. Benefits from foreign investment such as the transfer of technology, skills and managerial techniques that could help infant industries become internationally competitive were captured using policies such as local content rules and joint-venture regulations. As such, the development of infant industries does not simply involve protectionism as the infant industry argument suggests, but is dependent on a country's ability to learn directly from foreign direct investment. Such policies have traditionally been central to the industrial policies of countries that are attempting to catch up with technologically and economically more advanced states. A good example is the US and European attempt to catch up with Great Britain during the 18th and 19th century (see Ha-Joon Chang's 'Kicking Away the Ladder'). Many of these domestic policy choices are now prohibited by the WTO Agreement on Trade Related Investment Measures.
Despite the claim that policy was aimed at developing world-class competitors, this is difficult to reconcile with the minimal impact that an active industrial policy has had on immigration policy. Presumably, the nation that seeks to become the global leader in a particular industry must attract many of the most qualified talents in that field, to apply and to improve their own particular individual capital to that problem in that country. Historically, this didn't happen, and the relationship between the immigration and industry-protection rules was at best ambiguous. This suggests strongly that the real purpose of industrial policy was always and only protectionism, the protection of existing jobs for political gain.
Today most industrial policy is subordinated to tax, tariff and trade rules of the General Agreement on Tariffs and Trade (GATT) and various trade pacts promising various degrees of "free trade", which in practice means limited subsidy and no protectionism of any one industry.
However, notable exceptions including agricultural subsidies in both Europe and the US, and cultural subsidies in Canada, prove that the principle of industrial policy is alive and well, and merely retreating into the shadows.
See also
- Investment policy
- Immigration policy
- Tax, tariff and trade
- Energy policy
- The Political Economy of Industrial Policy in the. Middle East and North Africa
A Cartel is a group of formally independent producers whose goal it is to fix prices, to limit supply and to limit competition. Cartels are prohibited by antitrust laws in most countries; however, they continue to exist nationally and internationally, formally and informally. Note that a single entity that holds a monopoly by this definition cannot be a cartel, though it may be guilty of abusing said monopoly in other ways. As such, it is inaccurate to describe (for example) Microsoft or AT&T as cartels. Cartels usually occur in oligopolies, where there are a small number of sellers.
Activities
Image: Price controls may be one method of making prescription
medicines available to all - but at what cost?
Manchester United's Alex Ferguson -
the club have been the subject of much takeover
speculation in recent weeks.
Title: A happy Alex Ferguson of Man Utd.
Copyright: Getty Images, available from
Education Image Gallery (http://edina.ac.uk/eig)
The Dominant Firm and Predation
Tutorials
Readings
Antitrust or Competition Laws are laws whose stated purpose is the promotion of economic and business competition by prohibiting anti-competitive behavior and unfair business practices. Government agencies known as competition regulators regulate antitrust laws, and may also be responsible for regulating related laws dealing with consumer protection.
The term "antitrust" derives from the U.S. law which was originally formulated to combat "business trusts", now more commonly known as cartels. Other countries use the term "competition law". Many countries including most of the Western world have antitrust laws of some form. For example the European Union has its own competition law.
Price Leadership is an observation made of oligopic business behavior in which one company, usually the dominant competitor among several leads the way in determining prices, the others soon following.
Classical economic theory holds that price stability is ideally attained at a price equal to the incremental cost of producing additional units. Monopolies are able to extract optimum revenue by offering fewer units at a higher cost.
An oligopoly where each firm acts independently tends toward equilibrium at the ideal, but such covert cooperation as price leadership tends toward higher profitability for all, though it is an unstable arrangement.
Predatory
Pricing is the practice of a dominant firm selling a product
at a loss in order to drive some or all competitors out of the market,
or create a barrier
to entry into the market for potential new competitors. The
other firms must lower their prices in order to compete with the
predatory pricer, which causes them to lose money, eventually
driving them from the market. The predatory pricer then has fewer
competitors or even a monopoly,
allowing it to raise prices above what the market would otherwise
bear.
In many countries, including the United States, predatory pricing is considered anti-competitive and is illegal under antitrust laws. However, it is usually difficult to prove that a drop in prices is due to predatory pricing rather than normal competition, and predatory pricing claims are now quite difficult to prove due to high legal hurdles designed to protect legitimate price competition.
Activities
Membership will increase the amount of foreign domestic investment (FDI)
to enable Poland to modernise its industry and infrastructure. Photo courtesy
of the European Commission - A copper foundry in Legnica.
(EPA PHOTO / PIOTR KRZYZANNOWSKY).
Image: the Stocks and Stripes flag, the united stockholders of Amercia.
This protest flag signifies corporate influence over America.
Copyright: Jason Cangialosi, stock.xchng.
Price Discrimination and Bundling
Tutorials
Readings
Price
Discrimination exists when sales of identical goods or services are transacted at different prices from the same provider. In a theoretical market with perfect
information, no transaction
costs and a prohibition on secondary exchange (or re-selling)
to prevent arbitrage,
price discrimination can only be a feature of monopoly markets.
Otherwise, the moment the seller tries to sell the same good at
different prices, the buyer at the lower price can arbitrage by
selling to the consumer buying at the higher price but with a
tiny discount. However, market frictions in oligopolies such as the airlines, and even in fully competitive retail or
industrial markets allows for a limited degree of differential
pricing to different consumers. Price discrimination also occurs
when it costs more to supply one customer than it does another,
and yet the supplier charges both the same price.
Competition Policy is an economics term referring to the body of laws of a state which govern the extent, and ability, to which bodies can economically compete. They hence attempt to restrict practices which remove competition from the market such as monopoly and cartel.
Most nations have their own competition laws, and there is a general agreement on what is and what is not acceptable behaviour. The degree to which countries enforce their competition policy does vary substantially, with The United States generally regarded as having the most strict competition laws and enforcement.
Activities
- Market Power and Regulation: The Problem: Setting up a business and securing long term business survival - can it be planned?
- Business Survival - References for Investigation
Bill Gates' lawyers will be putting their
case against the decision by the EU very strongly.
The decision could be vital but don't expect anything
to happen too quickly!Copyright: Getty Images, from Education Image Gallery.
Reputation and Vertical Restraints
Tutorials
Readings
In management, Business Value is an informal term that includes all forms of value that determine the health and well-being of the firm in the long-run. Business value expands concept of value of the firm beyond economic value (also known as economic profit, Economic value addedtm, and Shareholder value) to include other forms of value such as employee value, customer value, supplier value, channel partner value, alliance partner value, managerial value, and societal value. Many of these forms of value are not directly measured in monetary terms.
Business value often embraces intangible assets not necessarily attributable to any stakeholder group. Examples include intellectual capital and a firm's business model. The Balanced scorecard methodology is one of the most popular methods for measuring and managing business value.
In Economics, Price Stickiness is the phenomenon whereby prices do not change freely but instead "stick" in disequilibrium, often due to menu costs or imperfect information.
Perfect information is a term used in economics and game theory to describe a state of complete knowledge about the actions of other players that is instantaneously updated as new information arises.
Chess is the canonical example of a game with perfect information, in contrast to, for example, the prisoner's dilemma.
In some interpretations of free-market economic theory, a state of perfect information is required for a completely free market to function. That is, assuming that all factors are rational and have perfect information, they will choose the best products, and the market will reward those who make the best products with higher sales. Perfect information would practically mean that all consumers know all things, about all products, at all times, and therefore always make the best decision regarding purchase.
It is law of sociology that perfect information does not exist, and cannot totally exist, due to the presence of deception. For example, a crooked used-car salesman could sell a consumer a car that he knew was only going to last another 1000 miles, as a car that will last much longer. He as the seller has an advantage against the consumer. This knowledge of asymmetric information, as the consumer does not have as good information about the cars as the seller does, can also lead the consumer to assume that the cars are in general of poor quality. This will again give the seller an incentive not to sell high quality cars as the consumer will have no way of knowing that the car is of higher quality, and thus not be willing to pay a higher price for the car. Sellers can attempt to differentiate themselves from other providers by various guarantees, offers and independent assessments.
Advertising serves two roles. Firstly, it allows producers to increase the amount of available information by providing consumers with more information about their products. Furthermore, it allows producers to use a lack of perfect information to counter product deficiencies by way of advertisement. In theory, the more information that exists about products, the more "free" a market is. In practice, it is also the quality of the information that counts.
See also
Activity
Image copyright: Jelmer Rozendal, stock.xchng
Production Differentiation and Advertising
Tutorials
Readings
In marketing, Product Differentiation is the modification of a product to make it more attractive to the target market. This involves differentiating it from competitors' products as well as your own product offerings.
The changes are usually minor; they can be merely a change in packaging or also include a change in advertising theme. The physical product need not change, but it could. The major sources of product differentiation are follows.
1. Differences in quality or design among output (product)
2. Ignorance of buyers regarding the essential characteristics and qualities of goods they are purchasing
3. Pervasive sales promotion activities of sellers and , in particular, advertising
4. Possibility of developing significant product differentiation through advertising is greatly enhanced for so called “gift goods” or “prestige goods”
Differentiation in the locations of sellers of the same good. Where product fills no technical function, but rather, can satisfy many different sort of personal needs or uses, psychic or physical.
The objective of this strategy is to develop a position that potential customers will see as unique. If your target market sees your product as different from the competitors', you will have more flexibility in developing your marketing mix. A successful product differentiation strategy will move your product from competing based primarily on price to competing on non-price factors (such as product characteristics, distribution strategy, or promotional variables).
Differentiation has been shown to impact firm performance positively both theoretically and empirically. Differentiation primarily impacts performance through two mechanisms:
1. Reduced price sensitivity: Consumers may become willing to pay a premium price for the differentiating factor/s.
2. Reducing directness of competition: As the product becomes more different, Categorization becomes more difficult and hence draws fewer comparisons with its competition.
While most people would say that the implication of differentiation is the possibility of charging a price premium, this is a gross simplification. Customers, if they value the firms offer will be less sensitive to aspects of competing offers, and price may not be one of these aspects. Differentiation makes customers in a given segment have a lower sensitivity to other features (non price) of the product
The disadvantage of this repositioning is that it usually requires large advertising and production expenditures.
See also
- Non-price competition
- Marketing
- Market segment
- Product management
- Brand
- Country of origin
- Marketing plan
- Mass customization
- Positioning
Econometrics literally means 'economic measurement'. It is a combination of mathematical economics, statistics, economic statistics and economic theory. The two main purposes of econometrics are to give empirical content to economic theory and also to empirically verify economic theory. For example, econometrics could empirically verify if, indeed, a given demand curve slopes downward as economic theory would suggest. Empirical content is also applied, in that a numerical value would be given to this slope, while economic theory alone is usually mute on actual specific values. Arguably the most important tool of econometrics is regression analysis (for an overview of a linear implementation of this framework, see linear regression). |
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Econometric analysis can often be divided into time-series analysis and cross-sectional analysis. Time-series analysis examines variables over time, such as the effect of interest rates on national expenditure. Cross-sectional analysis studies relationship between different variables at a point in time. For instance, the relationship between income, locality, and personal expenditure. When time-series analysis and cross-sectional analysis are conducted simultaneously on the same sample, it is called panel analysis. If the sample is different each time, it is called pooled cross section data. Multi-dimensional panel data analysis is conducted on data sets that have more than two dimensions. For example, some forecast data sets provide forecasts for multiple target periods, conducted by multiple forecasters, and made at multiple horizons. The three dimensions provide more information than can be gleaned from two dimensional panel data sets.
Econometric analysis may also be classified on the basis of the number of relationships modelled. Single equation methods rely on the assumption of a causal relationship between the variable of interest (the dependent variable) and the explanatory or exogenous variables. If this assumption is not satisfied, the results may be subject to simultaneous equations bias. A variety of simultaneous equation methods have been developed to take account of the fact that economic variables such as prices and quantities are, in general, jointly determined in market equilibrium.
Much larger econometric models are used in an attempt to explain or predict the behavior of national economies.
A simple example of a relationship in econometrics is:
This statement asserts that the amount a person spends is dependent on his or her income and his or her willingness to spend money. If we can observe personal expenditure and income, techniques such as regression analysis can then be applied to find the value of the coefficients, here just the propensity to spend. The estimated coefficient can then be compared across samples (such as different countries or income brackets) and conclusions made.
The above example can also be used to illustrate the many difficulties facing the applied econometrician. For instance, do we really know that the above relationship is correct? Perhaps the true relationship between personal expenditure and income is non-linear. Even if we know the correct theory, it is not certain we can measure personal expenditure and income correctly. For instance, the value of work by homemakers is not recorded although it contributes to income. There are also a variety of statistical pitfalls that potentially lead to incorrect conclusions. Econometrics has dealt extensively with such issues. Often it turns out to be difficult to fully implement the resulting methods in practice.
See also
- Modeling and analysis of financial markets
- Important publications in econometrics
- Samuel Cameron, University of Bradford, Econometrics, McGraw-Hill, 2005
- Hayashi, Fumio. Econometrics. Princeton University Press, 2000.
- The long term effects of econometrics
- Econometric Links
Advertising, generally speaking, is the promotion of goods, services, companies and ideas, usually performed by an identified sponsor. Marketers see advertising as part of an overall promotional strategy. Other components of the promotional mix include publicity, public relations, personal selling, and sales promotion.
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Strategy:
Analysis and Practice
John McGee, Warwick Business School Howard Thomas, Warwick Business School David Wilson, Warwick Business School
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Competitive Advantage, Invention and Innovation
Tutorials
Readings
Sustainable Competitive Advantage
A company that is more profitable than its rivals is exploiting some form of competitive advantage. The benchmark for profitability is the company's cost of capital. To consistently make profits in excess of its cost of capital - economic rent - the company must possess some form of sustainable competitive advantage (SCA) to derive firm specific distinctive strategic positioning.
A firm possesses a SCA when it has value creating processes and positions that cannot be duplicated or imitated by other firms that lead to the production of above normal rents. A SCA is different from a competitive advantage (CA) in that it provides a long-term advantage that is not easily replicated. However, these above normal rents can attract new entrants who drive down economic rents. A CA is a position a firm attains that lead to above normal rents or a superior financial performance. The processes and positions that engender such a position (CA) is not necessarily non-duplicable or inimitable. It is possible for some companies to, temporarily, make profits above the cost of capital without sustainable competitive advantage.
A key difference between CA and SCA is that the processes and positions a firm may hold are non-duplicable and inimitable when a firm possesses a SCA. Hence a sustainable competitive advantage is one that can be maintained for a significant amount of time even in the presence of competition. This brings us to the question what is a "significant amount of time". A CA becomes SCA when all duplication and imitation efforts have ceased and the rival firms have not been able to create the same value that the said firm is creating.
Analysis of the factors of profitability is the subject of numerous theories of strategy including the five forces model pioneered by Michael Porter of the Harvard Business School.
The
classic definitions of innovation include:
- the process of making changes to something established by introducing something new
- the act of introducing something new: something newly introduced (The American Heritage Dictionary).
- the introduction of something new. (Merriam-Webster Online)
- a new idea, method or device. (Merriam-Webster Online)
- the successful exploitation of new ideas (Dept of Trade and Industry, UK).
- change that creates a new dimension of performance Peter Drucker (Hesselbein, 2002)
In economics, business and government policy,- something new - must be substantially different, not an insignificant change. In economics the change must increase value, customer value, or producer value. Innovations are intended to make someone better off, and the succession of many innovations grows the whole economy.
The term innovation may refer to both radical or incremental changes to products, processes or services. The often unspoken goal of innovation is to solve a problem. Innovation is an important topic in the study of economics, business, technology, sociology, and engineering. Since innovation is also considered a major driver of the economy, the factors that lead to innovation are also considered to be critical to policy makers.
In the organisational context, innovation may be linked to performance and growth through improvements in efficiency, productivity, quality, competitive positioning, market share, etc. All organisations can innovate, including for example hospitals, universities, and local governments.
While innovation typically adds value, innovation may also have a negative or destructive effect as new developments clear away or change old organizational forms and practices. Organisations that do not innovate effectively may be destroyed by those that do.
An invention is an object, process, or technique which displays an element of novelty. An invention may sometimes be based on earlier breakthroughs, collaborations or ideas, and the process of invention requires at least the awareness that an existing concept or method can be modified or transformed into a new invention. However, some inventions also represent a "quantum leap" in science or technology which extends the boundaries of human knowledge. Legal protection can sometimes be granted to an invention by way of a patent.
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