BEMF 1 - libro + lezioni bemf 1 PDF

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BEMF 1THIRD PERIODISTRUTTORE: Anna Morettiannamoretty@unive and elenaale@unive➢ Different theoretical approaches: ○ Macro :analysisof the conditions an economic system must assume in its main variables to create value in the long run ○ Micro: analysisof individuals’ behaviors that affect equilibrium...

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BEMF 1 THIRD PERIOD ISTRUTTORE: Anna Moretti [email protected]

and

[email protected]

➢ Different theoretical approaches: ○

Macro : analysis of the conditions an economic system must assume in its main variables to create value in the long run

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Micro: analysis of individuals’ behaviors that affect equilibrium of the economic system (axioms of preferences, buying choices…)

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Business Management (L.R. →Long Run) : Analysis of different ways of acquiring necessary resources to get a competitive advantage

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Business Management (S.R.→ Short Run) : Analysis of how to use and coordinate most efficiently and effectively available resources

➢ different organization structure:

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Elementary structure (increasing complexity…)

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Entrepreneurial firm, artisan.

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One chief/manager/CEO and all other people are on the second organisational/hierarchical level. The entrepreneurs make all the decisions and govern all activities. Every person needs to report to him.

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New Layers are added when the complexity increases, the first layer is still the entrepreneur, but then the management level is added, to this level people have to report

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New departments: operations

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New functions emerge in the administrative department: HR management, purchasing office, sales office.

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Different combinations

Functional form:

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Specialisation: CEO/general manager, departments (they correspond to a different function: Marketing, HR, Operations, Purchase, Administration) it’s driven by the specialisation criterion that makes the first department level organised according to the function, in the same department people have the same knowledge and competences.

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The M-form (multi divisional) ■

typical of large corporations like disney companies : different branches division that are taking care about different brands (Armani)

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hierarchical level

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we need this form because they are so large that we need different division to better control and follow the work

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the division follows the market criterion : they are divided based on the things they make and based on the customers

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Product Management

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goal to improve coordination, the more coordinated are, the more efficient they are

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group all the parts that are required to produce a specific product

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also called project management : following the project or product

Matrix form

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PM departments is not present, but there are PMs that coordinate directly different people within their departments, hierarchical distinction

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Coordination happens both at the vertical and horizontal level: coordination happens in the functional form which is still present.

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VALUE CREATION PROCESS A process composed by a complex set of activities (hard and soft) based on material and immaterial resources, with several actors (among which, the client) participating into it What’s Value? The value, also called margin, is the difference between the customers willingness to pay the cost of production ➢ Typology of a firm: ○

Production ( you make products) vs Consumption (you purchase goods)

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Profit vs Non-Profit

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Small, Medium, Large

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Product vs Service

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Primary, Secondary, Tertiary (based on the sector (agriculture, industry, tourism))

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Single product (you produce one product) vs diversified (you produce more product)

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B2b ( business to business firm, sell our product to other businesses)vs b2c (business to client, sell product to client)

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Entrepreneurial (if we have the single entrepreneur who has founded the firm and manages it) vs LLC/INC (come SPA e SRL, are companies who property rights are share between shareholders)

THE VALUE CHAIN : It’s a scheme that allows to understand where the margin (value) comes from, by analysing activities and processes. 1st step : divide primary (marketing) and support activities (accountant), primary activities are the one that are directly contributing to the production, the support activity are the ones that indirectly contribute and and make the firm function) 2nd step : determine the cost and the value of activities, determine the value that each activity adds to the process, along with the costs involved How does each increase the end user’s satisfaction or enjoyment? How does it create value for my firm? For example, does constructing the product out of certain materials make it more durable or luxurious for

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the user? Does including a certain feature make it more likely your firm will benefit from network effects and increased business? ➢ understand the costs associated with each step in the process. Depending on your situation, you may find that lowering expenses is an easy way to improve the value each transaction provides. 3rd step: identify opportunities for competitive advantage. The margin comes from the fit because we must reduce cost of production but also increasing the willingness to customer to pay (sustainability) coherent of the message so we are more willing to pay ○

Value is the organisation of all these steps of the value chain

➢ driving principles: ○

efficiency : max output with minimum input

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effectiveness : ability to reach our goal and get the expected results

➢ The systematic view: ○

firms are complex systems

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they are embedded in a thick network of interdependencies

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value/creation processes involve numerous stakeholders

➢ supply chain and value chain : we have different types of value chains based on the product and the market… everyone has its own ➢ Sustainability : triple bottom line

Economic primer: A firm’s profit equals its revenues minus its costs ➔ cost function : the total cost function is the relationship between output and the lowest possible cost of producing a given output . Total cost = Fixed cost + Variable cost ◆ the fixed cost are always the same, it doesn’t depend on the number of units (rent of the building, salary) when a firm increases its a capacity fixed costs will not remain fixed (es: need larger building) ◆ Variable cost, vary with our quantity (materials, resources) ➔ Average cost (AC) : can vary with output. If it doesn’t it has constant return to scale. When AC decreases (increases) with output there are economies (diseconomies) of scale. and when it remains the same with respect to output, we have constant return of scale.

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◆ it describes how the firm’s average or per-unit-of-output costs vary with the amount of output it produces ◆ Average cost = Total cost ÷ Quantity della prima parte del grafico abbiamo economies e nella seconda metà abbiamo diseconomies ➔ minimum efficient scale (MES): is the lowest point on a cost curve at which a company can produce its product at a competitive price. At the MES point, the company can achieve the economies of scale necessary for it to compete effectively in its industry. This average cost function exhibits economies of scale at output levels up to Q′. It exhibits constant returns to scale between Q′ and Q″. It exhibits diseconomies of scale at output levels above Q″. The smallest output level at which economies of scale are exhausted is Q′. Q’ is known as the minimum efficient scale. in terms of efficiency it’s more rational to go for Q’. Marginal cost: an incremental cost of producing one more unit of output.

It often depends on the total volume of output. At low levels of output total cost doesn’t change much: low marginal cost. At higher levels of output total cost will be impacted greatly: high marginal cost. (total cost and marginal cost relationship)

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The importance of the time period: long-run versus short-run cost functions ●

When a firm commits to a production facility of a particular size, it can vary output only by varying the quantities of inputs other than the plant size.

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The period in which the firm cannot adjust the size of its production facilities is known as the short run. The curves labeled SACS(Q), SACM(Q), and SACL(Q) are the short-run average cost functions associated with small, medium, and large plants, respectively. For any level of output, the optimal plant size is the one with the lowest average cost. For example, at output Q1, the small plant is best. At output Q2, the medium plant is best. At output Q3, the large plant is best. The long-run average cost function is

the “lower envelope” of the short-run average cost functions,represented by the bold line. This curve shows the lowest attainable average cost for any output when the firm is free to adjust its plant size optimally. ●

Plant size short-run average cost function SAC (it includes annual costs of relevant variables inputs - labour, material – fixed costs of the plant) ○

To minimize costs when knowing the quantity of output: plat size that allows for the lowest short-run average cost for the desired output level.

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Results: reductions in fixed costs of the plant and the firm can more efficiently tailor the rest of its operations to its plant size.

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Plant size long-run average cost function (the lowest attainable average cost for any particular level of output when the firm can adjust its plant size optimally. The average cost function the firm faces before it has committed to a particular size) ○

Economies of scale: when operating with larger plant sizes and a significant output, the plant can lower its average costs.

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Firms cannot fully exploit economies of scale unless they have sufficient inputs for production and distribution to get their products to market. Without such throughput, strategies that hinge on scale economies are doomed to fail.

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Short-run average costs = average fixed costs + average variable costs SAC(Q) = AFC(Q) + AVC(Q

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When the volume of output increases, average costs become smaller and it pulls down SAC. This happens when average fixed costs decline because total fixed costs are being spread over an ever-larger production volume.

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The average variable cost rises with output which pulls SAC upward.

Sunk versus avoidable costs Sunk costs: costs that a company has already incurred and cannot be recovered (it depends on the decisions made and the options) (hiring bonus, room painting, marketing bonus, software installation) Avoidable costs: costs that can be avoided when certain choices are made.

Economic costs and profitability Economic versus accounting costs Business decisions require the measurement of economic costs: concept of opportunity costs. ●

Opportunity costs: the economic cost of deploying resources in a particular activity is the value of the best foregone alternative use of those resources.

Economic profit versus accounting profit Accounting profit: Sales revenue – Accounting cost Economic profit: Sales revenue – Economic cost THE HORIZONTAL BOUNDARIES OF THE FIRM : ECONOMIES OF SCALE AND SCOPE How do we define a firm? ★ size : how much of the total product market will the firm serve ★ scope: what variety of products and services does the firm produce How do firms decide the size and their scope? the horizontal boundaries of the firm depend critically on economies of scale and scope economies of scale and scope are present whenever large-scale production, distribution, or retail processes provide a cost advantage over small processes

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➔ Economies of scale exist whenever the average cost per unit of output falls as the volume of output increases. ◆ when the marginal cost is less than average cost, there are economies of scale ◆ average cost declines with output ◆ if average cost increases with output we have diseconomies of scale ➔ Economies of scope: it’s cheaper for one firm to produce both X and Y than 2 different firms to specialize in X and Y each : TC ( Qx , Qy) < TC (Qx,0) + TC(0,Qy) ◆ for example because we can have discounts from suppliers if we buy more raw materials, but we can also be better at what we do. Because it’s more convenient producing 200 pens in 2 hours than 2 pens in 2 hours. ◆ per esempio se noi produciamo prodotti con il mais, possiamo venderli ma anche usare gli scarti per altre produzioni come l’olio, piuttosto che avere un'azienda che produce pop corn e un’altra che produce l’olio, si spenderebbe molto di più nelle risorse prime size and scope can represent an advantage for 3 reasons: ◆ market Power : like amazon, power in negotiation, power to decide and set the rules of the game ◆ Entry barriers : when you make so many products of your brand that basically there is no space for others to enter the market because you are so famous and you have a huge vary (like kellogs) ◆ Lower units cost ●

When the marginal cost is less than average cost, there are economies of scale

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Average cost declines with output

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If average cost increases with output, we have diseconomies of scale

➔ Sources : spreading fixed costs ◆

certain inputs cannot be scaled down below a minimum (capital intensive vs. market and labor intensive)

◆ (Capital intensive: in order to enter the market a great investment is necessary: biotech industry…) ◆ these indivisibilities lead to fixed costs and thus economies of scale and scope, when we have such high fixed costs we’re likely to experience economies of scale

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➔ special resources of economies: ◆ Economics of density ●

Refer to cost savings that arise within a transportation network due to a greater geographical density of consumers.

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Increasing the number of customers.

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Reducing the size of the area.

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TNT, Deliveroo.

◆ Purchasing (economies of scope) ●

it is less costly to sell to a single buyer (group insurance is cheaper than individual one)

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big buyers will be more price sensitive and may drive hard bargains with the suppliers

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supplier may dislike disruption and may offer better deals to bigger buyers

◆ Advertising (economies of scale) ●

large national firms may experience lower cost per potential customer when compared with small regional firms

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cost of production of the advertisement and the cost of negotiation with the media can be spread over different markets

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umbrella brand: ○

a well known brand like “virgin” covers different products and industries - trust in the brand if we are loyal to some virgin

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there are economies of scope developing and maintaining these brands

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New products are easier to introduce when there is an establishment brand with the desired imagine

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limitations: ◆ umbrella branding may not always help ◆ conflict in brand imagines may cause diseconomies of scope ◆ corporate brand name be less important than the individual product’s brand as in pharmaceuticals

◆ R&D (research and development)

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minimum feasible size for R&D projects and R&D departments

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Ideas from one project can help another project

➔ Complementaries and Strategic FIT ◆ Strategic fit is complementarità that yields economies of scope ◆ Strategic fit renders piecemeal copying of corporate strategy by rivals unproductive ◆ Strategic fit is essential for long term competitive advantage ◆ In the streaming world competition is tough (Fox, Netflix, Disney +, Hulu…) Netflix was the first one and they had an easy strategy : they started doing their own movies, tv series… that were parallel businesses and gave them an important competitive advantage. The complementarities of having both the platform but also their own production was more convenient (not cheaper because their production is extremely expensive) because they have more control and they don’t have to negotiate. For Netflix their own production is an investment. COMPLEMENTARITY : THEIR ARE USING THEIR DATA FROM THE PLATFORM STREAMING TO USE THEM IN THE PRODUCTION, TO SEE WHAT PEOPLE PREFER TO WATCH. Why is it difficult to imitate? Because they were the first one that did both streaming and production, and also we don’t know what they are using ➔ Why diversity? ◆ Diversification across products and across markets can exploit economies of scale and scope ◆ Diversification that occur for other reasons tends to be less successful ◆ diversification is an act of an existing entity branching out into a new business opportunity ◆ This corporate strategy enables the entity to enter into new market segments which it does not already operate in. types: ●

Vertical : ZARA

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Horizontal : facebook-instagram

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Conglomerates : Walt Disney

➔ Internal Capital Markets ◆ is a diversified firm, some units generate surplus funds that can be channeled to units that need the founds (internal capital market) ➔ diversification and risk ◆ diversification reduces the firm’s risk and smoothes the earnings stream ◆ but the shareholders do not benefit from this since they can diversify their portfolio at near zero cost ◆ when shareholders are unable to diversify (Example : owners of a large fraction of the firm) they benefit from such risk reduction

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➔ cost of diversification ◆ diversified firms may incur substantial influence costs ◆ diversified firms may need elaborate control systems to reward and punish managers ◆ internal capital markets may not function well in practice ➔ Managerial reasons for diversification ◆ manager may prefer growth even when it is unprofitable since it adds to their social prominence, prestige and political power ◆ managers may be ple to enhance their compensation by increasing the size of their firm ➔ diversification & long-term performance ◆ long term performance of diversified firms appears to be poor ◆ a third to half of all acquisitions and over half of all new business acquisition are eventually divested ◆ corporate refocusing of the 1980s could be viewed as a correction to the conglomerate merger wave of the 1960s

CHAPTER 3 : THE VERTICAL BOUNDARIES OF THE FIRM ➢ The vertical chain The production of any good or service usually requires a wide range of activities organised in a vertical chain Production activities are said to flow from upstream suppliers of raw inputs to downstream manufactures, distributors and retailers The vertical chain begins with the acquisition of raw materials and ends with the sale of finished goods/services. Organizing the vertical chain is an important part of business strategy

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Vertical boundaries of the firm ➢ vertical boundaries of the firm determine which tasks are to be performed inside the firm and which to be outsourced ➢ the choice between the using the market or using the organization is a make or buy decision Making decisions is a vertical integration. we have different levels: ➢ Partial where we cover just 2 steps of the chain ➢ Full when we cover all the steps of th...