Lecture unit 01 Flashcards
What are the four broad classes of issues a firm must confront to successfully formulate and implement strategy?
- Boundaries of the firm
- Market and competitive analysis
- Internal organization
- Positioning and dynamics.
What are the 3 different directions of the boundaries of a firm?
- Horizontal product market coverage (how much of the product market the firm serves)
- Vertical: activities performed itselfs vs. outsourced (purchases from market specialty firms)
- Corporate: the set of distinct businesses the firm competes in
What do the firm´s boundaries define?
The firm´s boundaries define what the firm does
What must firms understand to formulate and execute successful strategies?
The nature of the markets in which they compete
The nature of industry structure.
- This is essential to understand why firms follow certain strategies.
- It helps in formulating strategies for competing in an industry
What does positioning and dynamics refer to in a firm’s strategy?
- Positioning: concerns resources + capabilities for cost or differentiation advantages that a firm might have
- Dynamics: how the firm accumulates resources and capabilities, and how it adjusts over time to changing circumstances
What is positiining and dynamics the shorthand?
Positioning and dynamics are shorthand for how and on what basis a firm competes
What controls does a firm’s management have, and what do they lack control over?
Control Over: Functions like finance, marketing, and production.
No Direct Control Over: Profits or market share
What determines if a firm’s decisions translate into markers of business success, and what are the key economic principles of a firm?
Determining Factors: Economic relationships.
Economic principles include:
- Costs: fixed vs. variable costs, average vs. marginal costs,
- demand, price, revenue, and
- the profit maximization condition (MR=MC) (price and output)
What is accounting cost?
- Accounting costs are based on the accrual principles
- They rely on historical costs
–>Accounting cost become useful in measuring the past performance of firms
What defines the economic cost of a resource, and why are opportunity costs important?
- Economic cost of a resource is its value in the best foregone use (opportunity cost)
- Good economic decisions consider opportunity costs
–>ignoring opportunity costs may overstate the profitability of a firm
What distinguishes accounting profits from economic profits?
- Accounting profit = Sales - Accounting costs
- Economic profit = Sales - Economic costs (including opportunity costs)
Econ. profit = acc. profit - (eco. cot - acc cost)
What are the characteristics of the demand curve for most products? (monopolistic price-demand function)
- Non-negative: at all prices
- continuous: to each amount of sales there exists a price
- differentiable: well-defined slope,
- negative slope indicating price increases lead to demand decreases.
What are the exceptions when a downward sloping deamd curve not exist?
Generally, exists for most products
Exceptions are when:
- price signals quality
- price implies prestige
What does the demand cure report?
- the quantity bought at various prices and
- the highest price the market will bear for a given output.
What are violations of the characteristics of the price-demand function? How are the goods. Alles and what is the example with cafe
- Giffen-good: cafeteria price increase example
- p=3 –> 4 x cafe + McDon.
- p=4 –>5x cafe, since now the budget does not allow to get McDon as well,
–>However, the student ends up buying lunch five times in the cafeteria, using up the entire budget of €20 (5 x €4 = €20)
- Price as an indicator of quality
