Chapter 2 Managing in Complex Environments

Chapter 2 Managing in Complex Environments

1. Firm: social intervention with boundaries, goals, deliberately structured set of tasks, a legal existence and identity, rights and responsibilities, and some level of concern with the creation of wealth

   • Individual roles within firm: regular employees, supervisors, managers, general managers
   • Multiple goals of firm
     • Satisty stakeholders

2. Firm's unique environment: all are complex

3. Firms must have transactions within environment

   • Assisted by brokers
   • Assisted by Infrastructure providers
   • Many different types of transactions
     • Barter Transaction: no money is involved
       • No distinguishing factor between buyer and seller
     • Purchase transaction: involves money
       • Involves buyer and seller
       • Spot Transactions: transaction struck and delivery occurs in more or less continuous and temporally contiguous manner
       • Future Transaction: Delivery of transaction in future date; riskier
       • Domestic Transaction: transactions within country
       • international Transactions: involve outside countries; more complicated as law, language, currency has to be considered
       • Market Transaction: transactions involving the firm and some party in its environment
         • Markets and Regulatory Mechanisms
           • Relatively Orderly
             • How?
               • Price system
                 • Law of supply and demand: sellers can maximize profits and buyers can maximize personal preference
                 • Economies based on these assumptions called capitalistic systems
               • Regulatory Mechanisms
                 • Human trust
                   • Less expensive, but easier to exploit
                 • Continuum of Regulatory Mechanisms
                   • Cost of any regulatory mechanism must be borne by some party as decreases in profit, increases in price, higher taxes, or combo of three
             • Why?
               • If perfect competition and assumptions of price theory met...
                 • There is one generic product
                 • Supply equals demand, so enough of product is available
                   • All hinges on parties having...
                     • Identical public information
                       • If this is true, all relevant info is symmetric
                     • Unique private information
                 • Price tends to converge to a single equilibrium price, so price is relatively stable
             • Unless..
               • Incentives to have asymmetric info to give them an advantage in the market
                 • Can be done through data mining
           • Competitors
             • Rivals are a competitor on your sell side
           • Price
             • Tends to reflect supply, demand, attributes of a product, and time
           • Idealized Markets
             • Size measured by market share for producer or purchase share
             • Assumptions about info available to buyers and sellers
               • All sellers know prices being charged by all other producers, know their technologies, and seek maximum profits
               • All buyers know the prices charged by all producers, know their preferences, and seek to gain a maximum set of preferences
             • Pure competition
               • Price results from mutual action of sellers and buyers
                 • Sellers tend to avoid perfect competition because they have little control over the price
                   • Seller can set the price they want, but buyers will buy the cheapest because of the homogenous products
                     • Pushes prices downward
                   • Sellers must estimate demand and decide what attributes to provide before actual demand is known
                   • Firms have no competition advantage over other competitors because long term profits are zero
                 • Perfect Competition favors buyers
                   • Absence of entry barriers allows new producers to easily enter market, keeping supply high and prices low
                   • Firms encouraged to have product differentiation, product enhancement, or a new business model
               • Regulatory mechanisms
                 • Buyers themselves
                 • Trust
                 • Formal mechanisms
                   • Consumer Product Safety Commission
                     • Reduce likelihood that exploitation will occur in many retail products
                     • Incur costs
                       • Sellers pay costs, but will reduce potential profit and may decrease supply
                       • Buyers may be willing to pay more for product if they know it's protected
                       • Society at large via taxes
                   • Security and Exchange Commission
               • Escape from perfect competition
                 • Product differentiation
                   • As long as company guesses correctly about the potential demand for the product with new attributes, as long as the cost of making new attributes can be "covered" by higher prices, and as long as the buyers are willing to pay additional cost
                 • Process Enhancement
                   • Improving means of production
                     • If successful, price for customer can be lowered
                       • Other firms may not be able to afford to drop their prices that low
                         • Fewer firms in market
                 • Business Model Adjustment
                   • Evolve over time
                   • Many firms revert to modifying their business model because competition through product enhancement and product differentiation too difficult
                 • Require investments
                   • Investments are typically for major projects called capital budget projects
                     • Capital bugeting problem determines if firm should take on investment
                       • Short term effect is to reduce accounting profit
                       • Long term effect is increase accounting profit and economic profit
             • Oligopoly
               • Pricing
                 • Strongly favors sellers
                   • Have control over price, increasing survival odds, earns a profit
                 • Effects on buyers
                   • Positives
                     • Prices tend to drop in short run
                     • When one firm drops prices, creates incentive for other firm to follow. If they are successful, prices may generally drop
                   • Negatives
                     • If other firms can't learn to reduce costs, may close down or shift to another product. Prices may increase as supply dwindles
                     • If only one firm remains, prices increase sharply
             • Monopoly
             • Monopolistic Competition
               • Effects on buyer
                 • Positives
                   • New products and attributes
                   • If new idea popular, other firms will enter, lowering price
                 • Negatives
                   • Initial price for new product will be high
                   • As new firms enter, incentive for firms to abandon new product and move onto new advancements
       • Transfer Transactions: Involve one part of a firm and another of the same firm
         • Prices are usually lower than normal market price, but higher than cost of production
           • Transfer Pricing Problem
       • Goods Being Exchanged
         • Finished goods transaction
         • Intermediate goods transactions
         • Raw material transactions
         • Labor Transactions
         • Real property transactions
         • Intellectual property transactions
         • Capital transactions
         • Distribution channel transactions
         • Professional service transactions
         • Garbage transactions