ECO433: Economics of the firm - pergamoncampus.com€¦ · "Key"conceptis"the"“strategic"triangle”"" ... ( tbc) PART"I –STRATEGY ... compeOOve#advantage,#industry#analysis,#coststructure,#value#chain,#growth#

1 A. Galichon / Ph. Tibi – ECO433 – Lecture 1

ECO433: Economics of the firm

Lecture 1: the firm and its strategy


Course introduc/on

  Strategy comes from warfare

  Key concept is the “strategic triangle” (clients, compe/tors, internal strengths and weaknesses). Add to this currencies and government interven/on

  It is all about resource alloca/on, performance and compe//on

  Strategy is the remit of the CEO and the Supervisory Board

  Strategy is an art...based on a simple toolkit, intui/on and common sense


I.   How we work together

II.   Strategy is about survival in an evolving world

III.   Firms are prone to destruc<on…

IV.   … so they must an<cipate

V.   Textbook strategy

Today


Organisa/on of the course

1.  The firm and its strategy 2.  Resource alloca/on. Basic strategy tools 3.  The compe//ve advantage 4.  Protec/ng compe//on

Case 1: Canal +/ Decoda Case 2: Soccer, the rules of the game Case 3: Matching Dell Case 4: GE/Honeywell (tbc)

5. The firm: a porWolio of businesses

6.  Growth: internal and external 7.  Innova/on 8.  Globalisa/on 9.  Organisa/on and governance

challenges

Case 5: The Walt Disney Company

Case 6: Hotwings Case 7: The Nespresso story Case 8: Chinese business in Africa Case 9: Messier’s reign at Vivendi Universal (tbc)

PART I – STRATEGY: INTELLECTUAL FRAMEWORK AND CONCEPTS

PART II – CORPORATE STRATEGY


Strategy is about survival in an evolving world

I WILL SURVIVE!

5

GEOPOLITICS, VOLATILITY AND INNOVATION



Source: U.S. Census Bureau

China – US trade : the mother of all imbalances

US

$bn

6


Trade balance in goods and services

China Saudi Arabia

Germany Russian Federation

Source: World Trade Organisation

US$295m US$217m

US$155m US$220m

7

Oil prices



Source: International Monetary Fund

+118%

+79%

+37% +33%

+11%

8


GDP Trend 2005 - 2013

9 A. Galichon / Ph. Tibi – ECO433 – Lecture 1 9

Source: World Bank

1960=100

x 55

x 5

GDP 1960 -‐ 2010

Emerging countries taking off



Source: IMF


Emerging countries taking off

GDP 1980 -‐ 2010 ($bn)


Source: International Monetary Fund

1980=100

x 13

x 4

GDP per Capita 1980 -‐ 2010


Emerging countries becoming more affluent


Source: World Bank

China + India

OECD

China + India > 1/3 of world popula/on OECD from 1/4 to 1/6 of world popula/on

12



Source: Bloomberg

Oil & Copper prices

$/Metric Ton $/Barrel

13


The race for commodi/es


Source: FAO

China and food

14


Is there enough fer/le land?

Soybean imports Meat production

Millions de tonnes

0

10000

20000

30000

40000

50000

60000

70000

80000

1961 1970 1980 1990 1995 1999 2001 2003 2005 2007 2009 2011

15 A. Galichon / Ph. Tibi – ECO433 – Lecture 1 Source: EIA

Thou

sand

bar

rels

per

Day

Oil Consump<on: China vs the World

China

India

France

15


Is there enough oil?


Source: Interna/onal Monetary Fund

The Great Recession 3 lost years

Unsustainable sovereign debt?

GDP 2005=100

Debt/GDP %

16

Developed countries hit by sub-‐par growth and debt. Keynes and Friedman seem to miss the point…



 Historically, only agriculture products and economy (and other commodi/es to a lesser extent) was constantly facing high vola/lity (and this is why deriva/ves markets were originally invented in this space).

  Aqer WW1 and WW2, and the collapse of the Breron Woods framework, interest rates, currencies also experience vola/lity

•  1974: end of dollar-‐gold conver/bility

•  1973-‐1982: great infla/on in the US •  1990-‐ “great modera/on”

•  1992: Black Wednesday, 1997: Asian financial crisis, 1998: Ruble crisis




 Technological breakthroughs •  Gutenberg vs monks, Elzctricity vs candles, Automobiles vs Horses

•  Digital camera and Kodak, Polaroid

•  PC and minicomputers (DEC)

•  LCD TVs and Thomson

•  Smartphones and Nokia??

•  Amazon vs Barnes & Noble

•  When was the last /me you bought a CD?

  Threatening emerging firms •  Samsung – Philips and now Samsung-‐Apple •  Lenovo -‐ IBM •  Tata Steel -‐ Corus •  CVRD -‐ Inco




Firms are prone to destruc/on…


  One role of strategy is to challenge the status quo, and there are strong reasons to believe that status quo is not sustainable

 Historically, Marx’s view: to sustain compara/ve advantage, capitalis/c firms invest more and more in machines and less and less in labor.

 Self-‐destruc<on of capitalism •  Role of fixed costs, leading to corporate giants. Eg. Railways in the XIXth

century.

•  Starva/on of masses, class struggle

•  Instability and recurring crisis




A look at the last 40 years confirms that, despite strong hopes to remove vola/lity and risk from the Western world (the Great Modera/on):

  Globalisa<on has deeply changed the balance of powers (who has cash? Who is indebted?)

  Trade flows also reflect that components of value chains are not interlocked as they used to be (outsourcing, Asia as the workshop of the world, Apple as a metaphor of this)

  Globalisa/on means enlarged workforce, enlarged financing, new markets and new compe/tors too

  Geopoli/cs evolves as all industrialized countries race for resources and commodi/es: Beijing consensus vs Washington consensus

Because of increased compe//on on a globalized scale, firms cannot expect to s/ck to status quo. They need strategy to evolve


  Only solu<on to survive: innovate, build up compe//ve advantage, move before other players. Need for strategy.

  Schumpeter’s answer to Marx: “crea/ve destruc/on” process and the role of entrepreneurs.

“Only the paranoid survive” (Andrew Grove, Intel)

...so they must an/cipate


  Crea/ve destruc/on: a cynical view?

•  Restructuring and the labor force: the tex/le example.

•  Rajan and Zingales: protect individuals, not structures.




Why firms?

  Adam Smith’s view: market is the most efficient ways of organizing alloca/ng produc/on, superior to central planning

  At a smaller scale, firms are central planners. Then why shouldn’t they be efficiently replaced by individual entrepreneurs?

  Coase, Williamson’s answer: theory of transac/on cost. Determines (in theory) which ac/vi/es should be internalized, which should be externalized

This raises a number of ques/ons:   What is the DNA of the firm?

  What should be the op/mal fron/ers of the firm?

  How to setup incen/ves within the firm?

The objec/ve of the course is to develop tools to answer (some of) these ques/ons


Strategy in textbooks



  Strategy is the art of resource alloca<on to outdo one’s opponents in order to create a durable compe<<ve advantage and perform. Note that for all the mar/al vocabulary, NGOs, public service also use strategy. Their KPIs are just different.

  3 major ingredients:

Alloca<ng scarce resources (tangible/intangible assets, skilled workforce, <me) Trade-‐offs ; Prices (market or shadow)

Outdoing one’s opponent Relevance of Game Theory: Prisoner’s dilemma Number of players: Collusion issues

Compe<<ve advantage = source of a rent. Constantly challenged by the game of compeOOon and by regulaOon.


Resource alloca/on is the process of assigning resources among the various projects and business units of an organiza<on in order to achieve the goals set in the strategic plan

Resources are of four types

  financial

  physical

  human

  technological

Depending on the goals, the plan sets which projects/business units will get which resources and at which levels

Similarly, it establishes a hierarchy among projects and lists which one to sacrifice in case of resource reduc/ons

Strategy in textbooks Resource alloca/on


Vision

  The strategic process

Implementa/on Ar/cula/on



“A car for every purse and purpose” (A. Sloan)

vs.

“Democra/ze the automobile” (H. Ford)

Vision

Example: Ford vs. General Motors

Implementa/on Ar/cula/on

 Industrial organisa/on,

 cost and pricing structures, differen/a/on vs price

  product cycle,  marke/ng, sales, aqer sales support,

 geography, management structure

The GM model: many brands to cover all market segments.

vs.

The Ford model: one all-‐purpose car.



Corporate Strategy vs. Business Strategy   Business strategy: how to develop a compe//ve advantage within a single

business (Lectures 2, 3, 4)

  Corporate strategy: how to take decisions about the firm’s porWolio of ac/vi/es (Lectures 5, 6, 7, 8)

This raises a number of ques/ons:   Can these strategies conflict?

  Should the firm hold porWolios of ac/vi/es at all?

  How should the firm organize itself to implement op/mally its strategies (Lecture 9)



Corporate Strategy vs. Business Strategy decisions: Misc. examples

  Renault launches an alliance with Nissan

  IBM divests its Laptop division

  PPR purchases PUMA

  Lafarge divests its Cement and Aggregates & Concrete Ac/vi/es in Italy

  Fnac launches a Kindle killer

  Orange launches Sosh



  Who implements strategy? •  Business strategy: implemented at the level of the Business Unit

•  Corporate strategy: implemented at the level of the top management (typically CEO assisted by his/her office, incl. VP Strategy). Role of Management Consultants

  Pressure from financial markets, oqen need of short term results when CEOs are under pressure

  Key importance of execu/on, up to the point that many CEOs find strategy irrelevant



All of the following topics have a strategic aspect

  Organiza/on   Performance   Shareholder rela/ons   Human resources   Accoun/ng

However we shall hardly cover them in this course. We shall focus on key strategic concepts such as compeOOve advantage, industry analysis, cost structure, value chain, growth and sector posiOoning, porSolio of acOviOes and major macro concepts such as innovaOon and globalizaOon


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ECO433: Economics of the firm - pergamoncampus.com€¦ · "Key"conceptis"the"“strategic"triangle”"" ... ( tbc) PART"I –STRATEGY ... compeOOve#advantage,#industry#analysis,#coststructure,#value#chain,#growth#