Assignment:
Learning & Assessment Activities
Read:
• Required
o Textbook: Managerial Economics & Business Strategy
Chapter: Fundamentals of Managerial Economics
Chapter: Market Forces: Demand and Supply
Discuss:
• Discussion: Porter's Five "Forces"
Module 1: Module Notes: Fundamental Tools of Economic Analysis Show Details
Managers differ in the nature and scope of their responsibilities, and the character of sound managerial decisions will depend on the underlying goals of the manager. All managers, nevertheless, are responsible for maximizing profits after all costs are accounted for. All managers will, in pursuing this goal, be affected by the economic fact of scarcity: limited resources exist that may be used to satisfy a particular goal, and when resources are put to one use, their use in other areas or in other applications must diminish. Thus, scarcity, imposes constraints.
Economic analysis is the application of analytical techniques designed to evaluate decisions under conditions of scarcity. Whether a manager must allocate workers having differing skills, financial resources to new or improved technology or to production of goods and services at varying levels, a manager responds to scarcity by using available information to allocate resources to their highest-value uses. To accomplish this, effective managers identify opportunity costs (or costs associated with moving resources to one use versus another) to direct resources to their highest-value uses within the firm, or at least across their area of enterprise.
In other words, a manager maximizes profits, in their area of responsibilities, by using the tools of economic analysis to direct scarce resources to their most productive and profitable uses. Scarcity constrains a manager's efforts to maximize profits and expand their firm's market share; this requires the manager to use sound criteria for evaluating alternative uses of scarce resources. Economic analysis is the application of analytical techniques to ensure that resources are allocated with the greatest efficiency possible. A use is "efficient" if the net economic benefit associated with that decision is maximized. The Time Value of Money reminds managers that a dollar received today is more valuable that one received in the future, given that it could be invested to derive an increase in its value, between now and that future date.
The profit motive incentivizes a channeling of scarce resources to uses having the highest economic value. As resources flow into high-value uses, firms earn profits. To remain competitive, a manager behaves efficiently, to achieve the most profits possible given all variables under his or her control. Where an opportunity for profit exists, however, others are interested in this opportunity. Harvard University Economist Michael Porter condensed a great deal of economic theory into a compact framework that helps us to understand the effects of this incentive. Porter's Five Forces Framework summarizes the forces that affect the sustainability of industry profits: (1) entry, (2) power of input suppliers, (3) power of buyers, (4) industry rivalry, and (5) substitutes and complements. Broadly, these are the five categories of analysis that an effective manager conducts as they engage in strategic decision-making.
Economic analysis is based on intuitive principles. We may expect, for instance, that as income rises consumers are, on average if not in an individual case, likely to buy more of everything, and thus we would expect that an increase in consumer incomes will lead to an increase in demand for any particular good. Similarly, each of us may know from our own experience that, as the price of a good rises, we may be less willing to purchase it. While intuition is a reliable guide in the case of a Normal Good, it may mislead us in the case of an Inferior Good. When the price of an Inferior Good increases, consumers may purchase more, not less, of the good.
For instance, Scottish Economist Sir Robert Giffen noted that "a rise in the price of bread makes so large a drain on the resources of the poorer labouring families...and, bread being still the cheapest food which they can get and will take, they consume more, and not less of it."1 This may currently be the case for rice and tortillas in some areas of the world. As this example implies, consumer incomes and the prices of related products influence consumers' willingness to purchase goods.
1. Marshall, A. (1890). Principles of economics. London: McMillan and Co.
ASSIGNMENT:
Porter's Five "Forces"
Assume that you have recently joined a firm that makes high-quality waterproof action cameras; these were originally designed to appeal to consumers participating in extreme and not-so extreme sports and recreational activities. These cameras are now used by consumers worldwide and have become popular for filming extreme sports and recreation, and even sports analysis because they offer remarkable ease of operation and durability, and may be fixed to a user or object, for instant capture of motion with high resolution. The firm divides its resources between production of cameras for both personal and professional use. In reviewing product pricing, you note that existing prices of all products sold by this company are substantially below pricing of products commonly used by professionals, however this camera maker's products offer quality similar to that of established brands commonly used by professionals. Higher-end models within your product line incorporate functions suited to personal users, such as Wi-Fi for instant upload to the internet, that are equally attractive to professional users, and no constraints on production or supply exist that might allow production for one variety of user to be more costly.
As manager of the product development division of this firm, you have been asked to evaluate existing product lines. Using Porter's five categories or "forces" that impact the sustainability of industry profits and your own knowledge of this industry, explain which type of user might provide optimal benefit to the company, and briefly describe facts which justify your recommended allocation or re-allocation of productive resources toward personal and/or professional users. If additional topics covered in this chapter are relevant to these issues, these should be included in your presentation. Assume that you will present your findings to your firm's board of directors, whom you know to have only limited familiarity with economic concepts and principles. You will, therefore, need to be creative in your presentation.
Responses should comprise 200 to 400 words.
Readings:
Managerial Economics and Business Strategy
By Michael R. Baye and Jeffrey T. Prince