Topic: Economics of Organization and Strategy
Module Source Information: For Module 3, we looked at business strategy from the point of view of external competitors. But another key aspect of strategy involves internal organization of the firm. Different companies use different types of internal organization. Some companies are very focused and only sell one main product. Other companies sell many different types of products. Depending on how many different products a company sells, or whether the products are closely related to each other or not, we can describe a company as being engaged in related diversification or unrelated diversification. In addition, a company may be involved in several different stages of the value chain or only at one stage. A company that owns retail stores, factories, and mines their own raw materials for their factories would be called vertically integrated. Finally, there is horizontal integration, which means expanding within the same stage of the value chain. The reasons why companies choose different types of organizations will be the focus of this module.
Module Background Information: The focus of this module will be on the very important topic of market structure. Depending on which line of business you are in, you may have a huge number of competitors, a few competitors, or no competitors. A situation with a huge number of competitors is called perfect competition, and a situation with no competitors is called monopoly. Agriculture can be close to perfect competition as there are typically a huge number of farmers around the world producing the same crops. Your utility company is probably a monopoly – the government usually grants one company as a provider of electricity or other utilities in a given area. But most common are situations somewhere in between perfect competition and monopoly. For example, there are four main cell phone service providers – AT&T, Sprint, Verizon, and T-Mobile. This is a situation called oligopoly.
The type of market structure is a major factor in determining business strategy. If you are in a perfectly competitive industry, you have to sell your product at or below the market price; otherwise consumers will take their business elsewhere. If you are monopolist, you can get away with charging higher prices because you have no competitors. But if you have only one or two main competitors, then you have to think very strategically, similar to a board game. One aspect of market structure and business strategy involves game theory – which is an important tool for analyzing different strategies regarding your competitors.
Significance of the Course within the Program
This course will either implicitly or explicitly address the following program outcomes:
• Identify and apply appropriate quantitative and qualitative business models to evaluate business performance and solve complex organizational problems.
• Generate business plans at the corporate, business unit, and functional levels.
• Conduct business research by finding, collecting, analyzing, and evaluating business data.
• Evaluate information consisting of multiple perspectives, conflicting evidence, competing interests and priorities, and risk, to determine an optimal course of action.
• Generate oral/written presentations in various business formats (e.g., memos, reports, PowerPoint, spreadsheets, charts/graphs).
• Apply a system’s perspective to improve, integrate, and align business functions with organizational strategy.
• Demonstrate ethical and reasoned decision making and action in all facets of organizational management.
BUS530 is designed to expose students to the main issues in managerial economics. Managers in the business world need to make vital decisions, such as what price to charge, how much to produce, how many employees to hire, etc., that can make or break the company. Optimizing these decisions is complex, because this may depend not only on the internal nature of the firm, but also the nature of the market and competitors. We will learn specific decision-making tools such as marginal analysis and game theory, and also cover in detail the different types of industrial structures and their implications for firm strategy.
This course begins explaining the classical demand and supply model of price determination and the associated concept of price elasticity of demand, which plays an important role in the decision-making process of firms (Module 2: Production and Costs)
Modular Learning Outcomes
Identify and explain vertical integration, horizontal integration, and diversification strategies in the context of a recent corporate merger.
You will begin learning about the most basic market structure in this video about perfect competition.
Tabarrok, A. & Cowen, T. [Marginal Revolution University]. (2015, January 2). Introduction to the Competitive Firm. https://www.youtube.com/watch?v=muFSypea2vo
Now read Chapters 9 and 10 from the following book for more detail on these topics. In particular, pay attention to the numerical examples and the “Self-Check Questions” at the end of each section.
Taylor, T. (2014) Microeconomics. OpenStax College. http://cnx.org/contents/6i8iXmBj@10.174:WXgRcPaN@10/Introduction-to-a-Monopoly
Finally, read this slightly more advanced chapter. Pay special attention to the sections at the end on game theory and the “Policy Response to Oligopoly” section that covers the Herfindahl index:
Beveridge, T. M. (2013). Chapter 8: Between perfect competition and monopoly. A Primer on Microeconomics. [New York, N.Y.] [222 East 46th Street, New York, NY 10017]: Business Expert Press.
One of the hottest topics in the business press are rumors of major corporations merging together. Just as the entertainment press likes to report on rumors of celebrities who are dating, the business press likes to speculate about “corporate match-making”. For example, Whole Foods was subject to rumors about several potential suitors including supermarket giants such as Kroger, Albertson’s, and Walmart. But the world was somewhat surprised when a merger deal with Amazon was announced, as this seems like a bit of an “odd couple”.
Go to Google news or other news search engines and see what the latest merger rumors are. Pick one of the merger rumors that seems the most unusual to you – one that makes you wonder why these two companies think they are a good match for each other. Share the link to the article with your classmates, and discuss the following issues:
1. Is this merger horizontal? Vertical? Conglomerate (unrelated diversification)?
2. Why do you think these companies would or would not make a good match?
3. Do you think this merger will actually go through? Or won’t get beyond the gossip stage?