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Strategy can be thought of as the
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big decisions revolving around markets, competitors and competitive advantage; focusing on what to do and what not to do to ensure short term and long term success
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Economic models must carefully identify 4 things
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Decision makers
Goals
Choices
Relationship between choices and outcomes
Goals
Choices
Relationship between choices and outcomes
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Questions about decision makers
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Who are the active players?
Whose decisions are "fixed" in the situation at hand?
Whose decisions are "fixed" in the situation at hand?
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Questions about goals
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What are the decision makers trying to accomplish?
Are they profit maximizing or do they have other interests?
Are they profit maximizing or do they have other interests?
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Questions about choices
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What actions are under consideration?
What are the strategic variables?
What is the time horizon over which the decisions can be made?
What are the strategic variables?
What is the time horizon over which the decisions can be made?
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Questions about the relationship between choices and outcomes
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What is the mechanism by which specific decisions translate into specific outcomes?
Is the mechanism complicated by uncertainty? or the choices or other decision makers?
Is the mechanism complicated by uncertainty? or the choices or other decision makers?
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Four broad classes of issues around formulating and implementing strategy
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Boundaries of the firm
Market and competitive analysis
Positioning and dynamics
Internal organization
Market and competitive analysis
Positioning and dynamics
Internal organization
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Questions on boundaries of the firm
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What should the firm do?
How large should it be?
What businesses should it be in?
How large should it be?
What businesses should it be in?
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Questions on the market and competitive analysis
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What is the nature of the market in which the firm competes and the nature of competitive interactions among firms in these markets?
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Questions about positioning and dynamics
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How should the firm position itself to compete?
What should be the basis of competitive advantage?
How should the basis of competitive advantage change over time?
What should be the basis of competitive advantage?
How should the basis of competitive advantage change over time?
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Questions on internal organization
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How should the firm organize its structure and systems internally?
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The firms boundaries defines...
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What the firm does
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3 types of boundaries
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Horizontal boundaries ~ how much of the product market the firm services/how big is the firm?
Vertical boundaries ~ The set of activities that the firm performs itself and those that it purchases from market specialty firms
Corporate boundaries ~ The set of distinct business processes the firm competes in
Vertical boundaries ~ The set of activities that the firm performs itself and those that it purchases from market specialty firms
Corporate boundaries ~ The set of distinct business processes the firm competes in
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To formulate and execute successful strategies, firms must...
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understand the nature of the markets in which they compete
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Positioning asks (2)
Dynamics refers to
Dynamics refers to
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How is the firm competing against competitive (low cost/differentiated product? What resources and capabilities differentiate this firm from its competitors?
How well a firm accumulates resources and capabilities as well as how it adjusts over time to changing circumstances
How well a firm accumulates resources and capabilities as well as how it adjusts over time to changing circumstances
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T/F How a firm organizes itself internally is of little value to competition
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False. How a firm organizes itself embodies a key set of strategic decisions
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Law of demand
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All else equal, the lower the price of a product, the more of it customers are willing to buy
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Price elasticity of demand
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A measure of the relationship (elastic or inelastic), and its strength, between price and quantity demanded
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Elastic demand:
Price increases, revenue ?
Price decreases, revenue ?
Price increases, revenue ?
Price decreases, revenue ?
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Price increases, revenue decreases
Price decreases, revenue increases
Price decreases, revenue increases
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Inelastic demand:
Price increases, revenue ?
Price decreases, revenue ?
Price increases, revenue ?
Price decreases, revenue ?
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Price increases, revenue increases
Price decreases, revenue decreases
Price decreases, revenue decreases
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TC(Q) (total cost function) shows...
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The total costs that the firm would occur at each level of output, Q, in a given time period, assuming an efficiency relationship
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Efficiency relationship
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At a given point in time, the firm produces in the most efficient manner possible
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Fixed costs
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Costs that do not vary with the quantity of output produced
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Variable costs
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Costs that vary with the quantity of output produced
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T/F a fixed cost can be a variable cost
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True. Whether costs are fixed or variable depends on the period in which decisions regarding output are contemplated
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AC(Q) (average cost) describes how...
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The firms average, or per-unit, cost vary with the amount of output is produced
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T/F as output goes up, average cost falls
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False. Average cost may rise, fall, or remain the same as output goes up
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Economies of scale
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Average cost decreases as output increases
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Diseconomies of scale
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Average cost increases as output increases
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Constant returns of scale
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Average cost remains the same as output increases
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T/F A process can experience both economies and diseconomies of scale
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True. A production process may experience economies of scale over a range & diseconomies of scale over another range
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Minimum efficient scale
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The level of output at which all economies of scale are exhausted
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MC(Q) (marginal cost) refers to the...
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Rate of change of total cost with respect to output (incremental cost of producing one more unit)
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MC(Q) formula
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(TC(Q + ∆Q_ - TC(Q)) / ∆Q
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When average cost is a decreasing function of output, ...
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MC < AC
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When average cost is a constant function of output, ...
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MC = AC
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When average cost is an increasing function of output, ...
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MC > AC
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