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

ATC MC

(D=MR=Price)

Imperfect Competition Perfect Competition

Competitive Advantage

ATC MC

Economic Models Competitive Advantage

Profit maximization

Natural Monopoly

•  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

TYPES OF ECONOMIES

• Economy of Scale

• Economy of Scope

Economy of Scale

C = F(1/q)

q LRAC

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

“Critical mass” area

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

04 economics of strategy 2013

Business

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