business midterm

introduction VOD

standing in a navy blue jacket in a flower field

social coordination

• all goods and service require enormous amount of social coordination.

• markets involve coordination between buyers and sellers

  • mutual adjustment (buyers and sellers adjusting to each other)

• motive for coordination is the profit

• range from one-off transactions to long-term partners

Markets VOD

sitting his his office with his glasses and blue jecket

who is in charge of the market?

• no one is in charge of the market

• works because of self-interest

• motivated to engage in mutual adjustment

Cooperation

• process of individuals or groups working together toward common goals to achieve mutual benefits

• not linear but multilateral

• great predictability in markets

market as peacekeepers

• booming economy → financial prosperity

• people are less likely to resort to violence

• simple allocation rule to ration scarce goods and opportunities

  • whatever the person has to offer, and the value of it is how much that person profits

market infrastructure

• historically ichiba

• transaction costs (extra costs of doing business besides the actual product itself)

• reputational capital (the trust fund that company or person builds though having good reputation → invisible asset)

market vs political choice

• in markets, each person’s decision matter a lot (every purchase dir5ectly affects the company)

  • information is a key resource

• free market doesn’t mean businesses can do whatever they want

  • competition disciplines them

competition

• stimulate innovation

• seek new talents, technologies

when competition is limited

• efficiency reasons

• collective action dynamics (the choices people make depend on the choices of others)

• may abuse market power

command vs market-based coordination

• firms are islands of command coordination in a sea of market mutual adjustment

• hierarchical top-down command and control is a feature of some industries

  • many benefits

  • but could be inefficient and lead to less creativity

• specialist knowledge needed for effective control

• many firms specialize in key tasks and outsource other needed inputs

make or buy?

• transaction theory: cheaper to buy or make

• core competencies of a business

a sucessful business must:

• identify gap in market

• have viable business model

  • secure access to inputs

  • effective production

  • low price

  • profit margin better than cost of capital

• risk-adjusted return

Firms VOD

him sitting on a black couch with his glasses and navy jacket

scale economy

• the more you make the cheaper you can make each one

  • low marginal cost

• new technology allows mass production at higher efficiency

how do businesses expand?

• start small -→ taken advantage of by suppliers

  • solution: buy the supplier

technically efficient scale

• some things are most efficiently made in large volumes

• optimal level of production

  • exceed this -→ compromises in quality, etc

• some things are better made in smaller scale

  • handmade products

scope economy

• similar to scale economy, but makes related products

  • beer companies

why some small companies?

• The nature of the product doesn’t rest on economies of scale

• when you try to scale it up → make compromises in terms of quality

Governance VOD

sitting in a blue chair, with his glasses and a plaid shirt

public governance

• government creates and enforces rules for businesses

  • reduce harm caused by businesses

    • negative externalities

  • help markets work efficiently

    • create corporation laws to standardize how companies are formed and operate

• accountability

  • People dealing with companies can easily make sense of the company’s state

• responsibility

  • Since the government grants companies to exist, in turn, they must act responsibly

regulating foreign firms

• they follow local rules

• either create a subsidiary or branch

• usually positive effects (bring technology, create jobs, boost economy)

• if government os weak, successful regulation doesn’t happen

  • fear of losing economic benefits

  • companies can leave (leverage)

  • state may be weak

corporate governance vs managers

• corporate governance - focuses on making sure the company runs in the interests of shreholders and other stakeholders

• management - focuses on internal systems, controls, and decision-making (day-to-day)

Protecting firms’ assets

• protect valuable assets

• have to avoid needless losses

• earning return

  • profit should exceed their opportunity cost

principal-agent relationships

• principal: person who brings the assets to the firm

• agent: the person who is employed to work on the principal’s behalf

• when agents don’t work in the interest of principal

  • agency slack

• inherent difficulties

  • The principal need to make sure agent is working well

  • Monitoring can get difficult

• fragmented shareholders

  • BoD appoints several representatives of shareholders to oversee management on day to day basis

board of directors + managers

• connection between the firm shareholder and the managers who run the company

• BoD intervene or bring change to leadership if company goes wrong

• BoD monitor managers

• who monitors CEO?

  • BoD (picked by nomination from BoD)

• BoD could be influenced by political choice, etc

  • traditional japanese company → BoD coming from within the company

  • anglo-american → external directors

shareholder vs stakeholder model

• shareholder model = board represents shareholders only

• stakeholder model = board includes representatives of other groups

  • complicates principal-agent relationship

    • who’s interest is supposed to come first?

      • CEO and BoD

internalization and governance

• bring inside → govern it

• hierarchy cost = the greater the hierarchy involved, harder the internal coordination

  • departments may start competing with each other

  • silo effect = different parts of an organization stop working with each other, focusing only on its own goals

  • internal competition

• balance of inhouse work and outsourcing is important

society sets context in which businesses conduct

• structure regulation

  • governments approbe business → determines who gets to participate (lisence)

• conduct regulation

  • how businesses behave once they are operating

• performance regulation

  • may regulate prices, profitability, and service quality

• too much regulation isn’t good

exit, voice, loyalty

exit = customers and staff leave, shareholders sell out

voice = people choose to stay, but they express dissatisfaction

• much more common if exit is an option

• advantage

  • get to know why dissatisfaction is occuring

  • BUT, in businesses, exit is much more common

loyalty = people tolerate the poor performance

• gives stability to society

when markets are competitive → more exit

entrepreneurship

• starting and running a business by taking risks to make a profit

• decision making under uncertainty

entrepreneurship as risk-taking

• entrepreneurship = risk taking, being employed = no risk

• costs come before revenues

• Owners are the residual claimants

  • residual surplus (the money that is left over) is the profit

• Frank Knight’s view

  • profit exists because entrepreneurs bear the risk

entrepreneurship as innovtion

• innovation could disturb markets

  • Joseph Schumpeter’s study

    • creative destruction (new technologies disturbing the markets)

entrepreneurship as arbitrage

• taking advantage of market imperfections

  • buying something cheap in one location and selling it higher at another

• in its purest form = risk-free

  • in real life, not so simple

    • transportation costs, competition, etc

israel kirzner

argues that entrepreneurs are valuable because they possess entrepreneurial alertness

mark casson

• argues that entrepreneurship is fundamentally about making good judgment and decisions under uncertainty

• entrepreneurs aren’t just founders

  • ceo can decide to be an entrepreneur too

• western industries restructured in the 1980s and 1990s with this approach

intrapreneurship

• risk-taking and innovation inside a company

  • entrepreneurship by employees

• often applied to japanese firms

sociology of entrepreneurship (when do they emerge)

• in the right social context (support risk-taking, failure, social mobility)

• when people have few other options (after war, migrants, groups who face prejudice)

creativity in modern businesses

• old command and control management style conflicts with needs of creativity

  • hierarchy limits creativity

• recently:

  • organization has been becoming flatter

  • more businesses relying on outsourcing and boutique specialist firms

  • free agents

creative destruction

• success of new business can destroy old business and industries

  • export success → stronger currency → other exports more expensive

• rising labor costs

• international competition

• social welfare matters

Information and risk VOD

sitting in his brown chair, with his glasses and light blue shirt

information goods

• increasingly embodied in the products and services

• challenge

  • strong experiential component → can’t assess quality until after experience

  • information asymmetry

facilitation services

• coordination problems (buyers and sellers not knowing each other’s existence

• traditionally → bulltin boards, newspaper

• now → digital

• importance of user reviews

  • help solve information asymmetry

• facilitation businesses

  • facilitators help transactions happen

  • value comes from helping buyers and sellers find each other

• who pays?

  • The principal pays the agent

• platform neutrality

• ethical problems