Economics of Strategy

Topics: Microeconomics, Economics, Cost Pages: 9 (2316 words) Published: January 15, 2011



This chapter is the first of two chapters on strategy. It concentrates on the basic ways firms can create and capture value. Chapter 9 uses game theory to study strategic interactions among a small number of identifiable rival firms. Chapter 8 presents a framework for discussing how firms create value. It also discusses the conditions under which a firm can capture value (either by having market power or, in certain cases, having superior factors of production). The economics of diversification are examined, and a framework for strategy formulation is presented. A mini-case ( highlights some of the issues in the chapter and the answers for the associated discussion questions are included below. Most managerial economics books focus on a very limited set of decisions (for example, pricing, input selection and output), taking the market product, and its characteristics, as given; they also assume that a firm produces only one product. This chapter uses basic economic principles to analyze a broader set of corporate policies.


Production and Producer Transaction Costs
Managerial Application—Dell Computers: Reducing Producer and Consumer Transaction Costs
Consumer Transaction Costs
Managerial Application—Creating Value: Reducing Consumer Waiting Time
Managerial Application—Reducing Consumer Transactions Costs: Kraft Lunchables
Managerial Application—Terrorist Attacks Affect Value Creation in the Airline Industry
Other Ways to Increase Demand
Product Quality
Price of Complements
Historical Application—Giving Away Razors to Increase Demand for Blades
Price of Substitutes
Managerial Application—Airlines Restrict Cell Phone Use
New Products and Services
Managerial Application—Technology and Value
Cooperating to Increase Value
Managerial Application—Advanced Photo System
Converting Organizational Knowledge into Value
Managerial Application—Sonic Drive-Ins Convert Wetware to Software
Opportunities to Create Value
Market Power
Entry Barriers
Historical Application—Creating but Not Capturing Value: Eli Whitney
Degree of Rivalry
Managerial Application—Competition and the Number of Competitors
Threat of Substitutes
Managerial Application—Italian Textiles and Chinese Competition
Buyer and Supplier Power
Managerial Application—Sugar Prices
Market Power and Strategy
Superior Factors of Production
Producer Surplus Captured by Superior Assets
Second-Price Auctions
Team Production
Team Capabilities and Organizational Architecture
Managerial Application—Team Capabilities at Sharp Corporation
Academic Application—Flexible Manufacturing and Team Capabilities
A Partial Explanation for Wal-Mart’s Success
Managerial Application—Economic Profits without Market Power: A Summary of Key Concepts
Managerial Application—Walmart’s Strategy Proves Timely During the 2007 Holiday Season
All Good Things Must End
Managerial Application—Nomura Securities Company: It Is Not Easy to Remake a Business
Changing Fortunes
Polaroid’s Success and Ultimate Failure to Capture Value ECONOMICS OF DIVERSIFICATION
Benefits of Diversification
Economies of Scope
Managerial Application—Wal-Mart Diversifies into the Traditional Grocery Store Business
Promoting Complements
Costs of Diversification
Managerial Application—McFocus at McDonald’s
Managerial Application—Proposed Megamerger Collapses in the Drug Industry
Management Implications
A Faulty Reason to Diversify
When Does Diversification Create Value?
Managerial Application: Philips Electronics
Managerial Application: Diversification Problems at Xerox
Who Captures the Gains from Diversification?
Understanding Resources and Capabilities...
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