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STR203, Week 5 Notes

by: Danielle Katan

STR203, Week 5 Notes STR203

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About this Document

Notes from 2/9 and 2/11
Economic Theory of Organizations
Class Notes
25 ?




Popular in Economic Theory of Organizations

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This 4 page Class Notes was uploaded by Danielle Katan on Thursday February 11, 2016. The Class Notes belongs to STR203 at a university taught by Gilbert in Spring 2016. Since its upload, it has received 18 views.


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Date Created: 02/11/16
STR203     February  9,  2016     Shumpeter  –  concept  of  innovation   • New  delivery  system  or  ease  of  use     • Reshape  rivals,  “reconfiguration  creates  opportunity”   Seller  is  a  monopolist  à  captures  most  of  the  value     Chapter  3  –  economic  profits  for  Airline  and  Pharmaceutical     • Airline  –  big  guy  losers,  little  guys  relative  winners     o Highly  elastic,  consumers  won’t  buy  tickets  if  the  price  goes  up   slightly;  not  a  necessity     • Pharmaceutical  –  big  guy  winners,  little  guy  relative  losers       o Inelastic,  actual  need  for  products,  few/bad  substitutes     o High  R&D  costs,  patents  (not  key  point  but  additional  factor)   • Second  important  consideration:  contract/fixed  determined  relationship   with  pharmaceuticals     • Airlines  have  a  different  contract  relationship   Must  understand  firms/rivals’  competitive  advantage  as  they  see  them     Economic  profit  might  be  out  of  phase  with  other  industries     • Ex.  Oil  &  Gas  industries  being  crushed,  used  to  be  hugely  lucrative,  within  any   industry  there  are  times  that  are  more/less  attractive  or  earn  higher  or  lower   profits;  firms  act  in  their  own  best  interest     • Ex.  Southwest  didn’t  play  by  certain  rules;  other  airlines  would  reschedule   their  passengers  on  other  airlines’  flights  if  they  had  delays,  Southwest  didn’t   abide;  operated  differently;  invested  in  different  activities     Little  Debbie  –  effort  to  automate,  understood  competitive  position     • Defined  self  for  price  à  value;  stole  large  amount  of  market  share     • Understood  attributes  that  customers  need/want  through  multi-­‐step   analytical  process     o Step  1:  Find  variables     o Step  2:  Rate  yourself  and  competition  against  variables     • Have  to  lower  costs  to  offer  lower  prices     Look  at  a  company  and  costs  (centers  per  unit)       Try  to  minimize  costs,  ex.  transportation  &  preservation  to  increase  shelf  life     McKinsey  consulting  –  helped  struggling  large  companies,  focus  on  costs     • Separate  raw  materials  from  everything  else  –  is  there  a  way  to  buy  cheaper   or  outsource?     • Capture  “scale”  effect  and  simplification     • Allocation  methods  (accounting)   • Benefit  -­‐  more  information  for  managerial  decisions,  more  accountability  and   more  coordination  from  various  parts  of  the  organization     • Risks  –  long  process;  delays;  customer  decision  made  by  numbers,  not   relationship     There  is  give  and  take  with  customers  &  company/buyers  &  suppliers     Bain  –  economies  of  scope     • Economies  of  scope  –  value  in  representing  multiple  products  to  a  single   customer;  one  person  to  many  items     o Costs  more  to  attract  new  customers     • (Versus)  Economies  of  scale  –  cost  advantages  due  to  size  of  the  operation;   one  item  to  many  people     • Bottom  line  –  get  some  of  consumer  surplus     Differentiation  –  analyze  competitive  position  by  looking  at  customer     Porter  –  competitive  advantage  à  value  chain,  system  to  break  it  down     • Perform  similar  activities  in  a  different  way     Primary  activities  à  actual  making  of  product  “hands  in  a  box”   Secondary  activities  à  support  making  of  product     Companies  will  go  to  lengths  to  satisfy  an  unhappy  customer     Return  à  can’t  sell  as  new,  “refurbished”   Pick  up  and  return  at  store  system  –  reduce  transaction  costs  for  business  and  wait   time  for  customer     • Incentive  to  keep  shopping,  customer  might  see  something  else  they  like     • Bonuses  for  customer  that  come  out  of  cost  saved     Create  competitive  advantage     Only  motivated  to  change  if  sales  decrease/profits  drop   Added  value  –  spread  between  willing  to  pay  and  opportunity  cost     • Estimate  spread  and  close  gap     Low  cost  strategy  can  be  more  materially  rigorous     Within  organizational  structures  –  reward  system     Identify  advantageous  discrete  activities,  why  they  add  value     Ex.  Dell  à  saw  shift  in  market:  increased  computer  literacy   • Changed  distribution  to  direct  mail/catalog/phone     Ex.  Liz  Claiborne  –  made  work  close  for  women,  which  previously  didn’t  exist       February  11,  2016     Little  Debbies  –  model  defined  by  price,  not  freshness     • Use  more  additive  à  longer  shelf  life,  fewer  returns/transportation,   reduction  of  costs     Everything  that  money  is  spent  on  not  necessarily  adding  value  for  customers     Have  to  break  up:  producing,  marketing,  delivery,  after  market  support     • Strategic  deconstruction     • Varying  levels  of  value  added     Understand  value  of  cost:  inspection  vs.  late  delivery     • Inspection  –  value  added     • Late  delivery  –  cost  incurred     • Can  redirect  value     o Ex.  put  in  an  extra  $10  to  make  sure  it  gets  there  on  time   Points  of  competition  become  areas  to  invest  in     Ex.  Southwest  identified  items  not  valued  by  flyers:  meals,  lounges,  classes  of   service,  hub  connectivity     • Cut  costs  to  improve  operating  efficiency     Add  building  blocks  –  understanding  of  competitive  position     Internal  analysis:  organization  structure,  remuneration  &  reward  system,  corporate   culture,  leadership  style,  decision-­‐making,  accountability,  capabilities     Customers  don’t  get  care  internal  factors  when  trying  to  get  a  product  (coat   example)     Ex.  Wegmans  –  good  at  conducting  focus  groups     Ex.  Dollar  store  –  focus  on  households  <  $30,000/yr,  small  towns,  most  things  for  $1,   nothing  more  than  $5   • Deliver  promise  by  supplying  off  brands  that  are  high  quality   • Cut  overhead     • “Cut”  trick  –  if  sales  increase  and  costs  are  flat,  cost  will  comparatively   decrease  as  a  percentage  of  sales     • Cut  200  SKUs  every  year  (out  of  3500+/-­‐),  get  rid  of  slow  movers  and  have   new  merchandise  in  store     • Manage  scarce  resource  à  cash     • Purchasing  people,  “customer  representatives”     o Have  to  negotiate/cut  costs     • Invest  in  community  development,  help  employees  get  GEDs  à  business  is   better  with  more  educated  employees     o Incentive  system,  make  sure  employees  stay;  offer  managers  stock   options  and  other  perks     Ex.  K-­‐Mart  and  Sears  failing?     • Appeal  to  lower/middle  and  upper/middle  classes  –  some  disconnect,   wouldn’t  want  to  shop  in  same  places     • Value  proposition:  low  price  on  housewares,  pull  in  shoppers  then  offer   higher  priced  apparel     • Tried  to  offer  blue  light  specials  to  go  after  bargain  hunting  moms,  new   moms  didn’t  identify  with  older  program     • Walmart  beat  their  advertised  low  prices     • Would  be  out  of  stock  of  advertised  item     • Invested  in  companies  that  were  outside  of  their  core  business  à  failing     • End  result:  lack  performance,  bad  culture,  failing/downsize  of  additional   businesses         Ex.  Target  –  smaller  selection  but  more  upscale  than  Walmart     • 40%  name  brand,  60%  private  label     • Not  competing  with  Walmart’s  buying  power     Successful  companies  focus  on  creating  value  for  customers  by  performing  similar   activities  differently   Fast  foods  –  different  specialty  items,  change  with  time  –  force  by  customer   (healthier  market);  fast  food  market  well  saturated     Ex.  In-­‐n-­‐Out     • Simple  menu,  don’t  look  for  more;  fewer  buyers,  less  labor,  less  waste     • SoCal  geographic  cluster     Is  the  distribution  of  customers  large  enough  to  create  a  business?     • A  good  idea  with  worthless  without  buyers       Next  week:  Chapter  4,  Coase  &  Williamson;  competitive  dynamics  &  game  theory         *Disclaimer:  These  notes  are  intended  to  be  supplemental  to  the  provided   PowerPoint  presentations,  refer  to  blackboard  for  reference.    


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