04 economics of strategy 2013

Economics of Strategy @ RU 2013

04. Economics of Strategy


Economics of Strategy

•  Overarching Goal: Maximize Profits –  Returns to Scale –  Demand and competition –  Value Creation and Innovation –  Network Effect : Understanding Network Effects


Q

P

D

MR

D

ATC MC

Q

P

(D=MR=Price)

Imperfect Competition Perfect Competition

Competitive Advantage

ATC MC

Economic Models Competitive Advantage


Profit maximization


Natural Monopoly

$

q

c1

q1 q2

c2

M c3

q3

LRAC


•  Industry Structure


Concentration

Entry and Exit Barriers

Product Differentiation

Information

Perfect Competition Oligopoly Duopoly Monopoly

Many firms A few firms Two firms One firm

No/Low barriers Significant barriers High barriers

Homogeneous Product Potential for product differentiation

Perfect Information flow Imperfect availability of information

Industry structure


Monopolistic vs. Perfect Competition


Monopoly vs. Perfect Competition


•  Competitive Advantage


The Ability to Create More Economic Value Than Competitors

Competitive Advantage


Positional Advantage


Positional Advantage


TYPES OF ECONOMIES

• Economy of Scale

• Economy of Scope


Economy of Scale

C = F(1/q)

$

q LRAC

c1

q1

c2

q2

c3

q3


Economy of Scope

C( x1 + x2 ) C( x1 ) + C( x2 ) <

Economies of scope occur where it is cheaper to produce a range of products rather than specialize in just a handful of products.


•  Return to Scale


Return to scale


Long Run Average Cost Curve


Long Run Costs – Importance of Minimum Efficient Scale (MES)


Economy of Scale


Long-run costs - economies & diseconomies of scale


Internal economies of scale come from the long-term growth of the firm.

•  Technical economies of scale: Expensive (indivisible) capital inputs, Specialization of the workforce, The law of increased dimensions, Learning by doing

•  Managerial economies of scale: division of labour •  Financial economies of scale ‘credit worthy’ •  Network economies of scale: network economy.


External economies of scale occur outside of a firm but within an industry.


Diseconomies of scale

•  Nokia, diseconomies of scale and lost competitive advantage •  Diseconomies of scale a business may experience relate to:

– Control – Co-ordination – Co-operation

•  Avoiding diseconomies of scale – Human resource management –  Performance related pay schemes (PRP) –  out-sourcing


Economies of Scope

Common expressions that describe strategies that exploit the economies of scope – “Leveraging core competences” – “Competing on capabilities” – “Mobilizing in visible assets” – Diversification into related products

Besanko, Dranove, Shanley and Schaefer


Diseconomies of Scale

l Beyond a certain size, bigger may not always be better l The sources of such diseconomies are – Increasing labor costs – Bureaucracy effects – Scarcity of specialized resources – “Conflicting out”


•  Value Creation



Market power comparison


Producer surplus captured by superior assets


•  Value Innovation


◆Casio’s case



•  Network effect


Old and New Economy

•  Industrial Economy –  Populated with oligopolies –  Economies of Scale

•  Information Economy –  Temporary monopolies –  Economies of Networks


Salient structural features of high technology industries

• Product and price differentiation

• Bundling

• Switching costs and lock-in

• Supply-side economies of scale

• Demand-side economies of scale

• Standards




Networks and Positive Feedback


Size of network

Willingness to pay

Demand curve

Supply curve

Network Effects and Demand

0

“Critical mass” area

N*

Willingness to pay begins to diminish at network size N* due to “network congestion” effects.


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04 economics of strategy 2013

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