Modern Business Characteristics and Managerial Practices

Characteristics of Modern Business

Effective use of information (knowledge) – Global concepts (organized on a global scale) – Interactions among economic agents and business networks (customers included), virtual networks, knowledge technology and relationship management

Implementing LAW of Requisite Variety in Managerial Practice

– Build up of a structural complexity (hierarchy, procedures, systems)

  • Business systems turned unmanageable
  • Empower organizational units and employees to solve problems autonomously
  • Management to solve residual variety, issues that cannot be solved by subsystems
    • Management by exceptions
    • Eg. SBU and subsidiary management

Strategic Level of Systematic Control

Assess prerequisites for future profits – competitive position – Competitive position determined by value creation potentials

Measure: Critical success factors: market share, relative market share, quality customer benefits, power of the brand, core competencies, flexibility, adaptability, technology

Follow: Effectiveness

Differences Between Positive and Normative Approaches

Positive: – Explains what is!

  • Provide models, generate hypotheses, test them against data on the phenomenon in question
  • Cuts through complexities of real life in order to get to the essence of the way in which the world works
  • Identify the most important factors and exclude the rest
  • Theoretically explained firm need bear no similarity to any real firm
  • Real firm as assumed to behave “as if” they conform to model assumptions
  • Assumes perfect knowledge
    • Eg. Cost and demand conditions known, manager sets output and prices on the basis of the rule MR=MC to maximize profits

Negative: – What should be!

  • Decision making in real environment
  • Reality: uncertainty, no perfect knowledge
  • Basic economic logic is still important
  • No “off-the-shelf” solutions for complex business problems
  • “Economics: a way of thinking about problems, rather than a set of solutions”

Accounting vs Economic Profits

Accounting profits: total revenue (price times quantity sold) minus total cost of producing goods and/or services

Economic profits: total revenue (TR) – accounting (explicit) costs – implicit costs (accounting (explicit) costs – implicit costs) = economic costs

Determining/Calculating the Value of a Firm

The value of the firm takes into account the long-term impact of managerial decisions on profits. The formula is the essence of all managerial decision-making

Freeman’s Contribution Regarding the Stakeholder Theory

Stakeholders: “any group or individual that can affect or be affected by the realization of a company’s objectives” (Freeman, 1984)

  • Managers to perform a value analysis
  • Identify congruency or fit between the firm and its stakeholders
  • Not about ethics but corporate strategic management
  • Identify type of effects that stakeholders have on the firm and that the firm has on stakeholders
    • Effects: economic, technological, social, political, and managerial

Making the Neoclassical Model Applicable in Managerial Practice

– Model as short-run model

– Maximize profits in the short run

  • Short run
    • period in which the firm is restricted to a given set of equipment and plant
    • fix costs cannot be avoided by ceasing production

Baumol’s Sales Revenue Maximizing Model

Observation: managers’ salaries, status and rewards more closely linked to: size of the company measured by sales revenue, than to their profitability

  • Managerial objective: increase size=revenues, not profits!
  • Revenue maximizer will produce more and charge less than a profit-maximizer
  • Condition for revenue maximization: marginal revenue MR = 0
  • Condition for profit maximization: MR = MC
  • Maximizing revenues may imply losses!
  • Profit constraint must be added
    • Minimum profit constraint set by shareholders
    • PC1 (profit constraint 1): constraint does not “bite”, enough profit is made to satisfy shareholders
    • PC2: insufficient profit is made, output is reduced
    • PC3: profit constraint equals maximum profit that can be made, reduce output even more, behavior exactly as in the profit maximization model

Reasons that Lead to X-inefficiency

Internal: Non-efficient contracts between principals and agents (managers and employees), Larger firms more difficult to control, bureaucracy

External: Too big company – no serious threat, High industry entry barriers

Reverse Engineering as a Source of Knowledge and New Technology

Working backwards: take the product produced by a competitor and devise a method of producing a similar product

Result: slightly different product and slightly different production function

Profit Theories Useful for Describing Business Performance of Amazon

Monopoly theory of economic profits. economies of scale, high capital requirements, patents, Monopoly profits can arise because of being in the right industry in the right time

Stages of Production for Labor

Production range divided into 3 stages, Stage 1 o From the origin to APL max – Stage 2 o From APL max to MPL = 0 – Stage 3 o MPL < 0 o Variable inputs are over-utilized

Manager should produce in : 2nd stage of production because MPL and MPK is positive but declining

Determining How Many Workers to Hire

Number of employees, Price of output Marginal product of labor MPL Value marginal product of labor Unit cost of Labor (wage)