Managerial economics and organizational architecture 5e ch008

• General policies intended to generate profits – Choice of industry – Combination of products and services – Competitive and cooperative behaviors • Strategies evolve as circumstances c

Managerial Economics and Organizational

Architecture, 5e

Chapter 8: Economics

of Strategy: Creating and

Capturing Value

• General policies intended to generate

profits

– Choice of industry

– Combination of products and services

– Competitive and cooperative behaviors

• Strategies evolve as circumstances

change

• Strategies must create and capture value

8-2

Transaction Costs

• Consumer transaction costs

– product search

– learning product characteristics and quality

– negotiating terms of sale

– enforcing agreements

• Producer transaction costs

– negotiating terms

Ways to Create Value

reduction of transaction costs

Effective supply given transaction costs

Potential supply if no Transaction costs

Potential demand if no Transaction costs Effective demand after Transaction costs

Q

8-4

Value Creation

• Reduce production costs or producer

transaction costs

– shift supply curve to the right

• Reduce consumer transaction costs

– shift demand curve to the right

• Shift demand to the right by other means

• Devise new products and services

Other Ways to Increase Demand

• Improve product quality

• Price complements so consumers will buy

more

– printers and ink cartridges, razors and razor

blades

• Change the price of substitutes

– Theaters ban patrons from bringing food into

the theater, no liquids are allowed past the

security gates at airports

8-6

Pricing Complements Example

• CompuInc produces computers

• PrintCo produces complementary printers

• Demand for each product is

(

P i  12  j 

P

P  6  5

• Each will view its demand curve as

Price of personal computers

Compulnc’s reaction curve

in choosing PC

PrintCo’s reaction curve

in choosing Pp6

8-8

– customers better off as product prices fall,

quantity purchased rises

Converting Organizational

Knowledge into Value

• Hardware – physical assets

• Wetware – employee brainpower

• Software – formulas or recipes for creating value

• Implications - allow employees to

experiment and innovate

8-10

Market Power Comparison

Market Power Rests In

• Entry barriers

– Economies of scale, patents, brand

names, high exit costs

Other Value-Enhancing Strategies

• Introduce new products and services

• Cooperation with other firms

8-14

Superior Factors of Production

Superior Factors of Production

• Bidding for specialized assets may erode

profits

• If a resource is adding value to a firm,

other firms will attempt to bid this resource

Superior Factors of Production

• Bidding for specialized assets may erode

profits

• If a resource is adding value to a firm,

other firms will attempt to bid this resource

away

• The price of this resource will rise, raising

costs

Superior Factors of Production

• Bidding for specialized assets may erode

profits

• If a resource is adding value to a firm,

other firms will attempt to bid this resource

Superior Factors of Production

• Bidding for specialized assets may erode

profits

• If a resource is adding value to a firm,

other firms will attempt to bid this resource

away

• The price of this resource will rise, raising

costs

Producer Surplus Captured by

8-20

Superior Factors of Production

• Team production

– interdependencies among workers increase

value beyond the “sum of the parts”

– luck or foresight may endow firms with unique

team production capabilities

• Rivals may be unable to pinpoint source of advantage and unable to capture

Diversification and Management

• Diversification for earnings volatility

– may not increase value

• Investors can diversify on their own

• Related diversification

– can increase value

• Capturing the gains

Strategy Formulation

• Understanding internal resources and

capabilities

– physical, human, and organizational capital

• Understanding the environment

– markets, technology, and government

Framework for Strategic Planning

INTERNAL RESOURCES AND CAPABILITIES

Physical Capital Human Capital Organizational Capital