Course Outline

1
Course Outline

• The Theory of the Firm
• Part I Introduction and Foundation
• Part II Seeking Competitive Advantage
• Application
• Part III Sustaining Competitive Advantage
• Part IV Analytic Problem-Solving Tools
• Part V Looking Outside the Firm
• Part VI Putting It All Together

2
Why do some firms succeed?

• Each year 7 of all firms are new and 1 go out
  of business. Why do some firms succeed and
  others fail? Possible explanations include-
• Luck. How does this help us understand
  decision-making?
• Quality. Are all improvements in quality good for
  business?
• First Mover. Are there advantages to going
  second?
• Size and Market Share. Market share and profits
  are positively related, although the relationship
  is not perfect.
• Mergers and Acquisitions. 57 of merged firms
  lagged behind their industries in terms of total
  returns to shareholders three years after the
  merger. Over a twenty-five year period nearly
  half of all acquisitions are subsequently
  divested.
• Globalization. Are world markets eventually going
  to converge?
• Leadership. Is success due to a charismatic
  personality or visionary leader, or is it
  independent of the person in charge?

3
Management and Economics

• There is no formula that guarantees success in
  business!!! Why?
• What can we do? We can teach how to make good
  decisions.
• Why is economics not employed by people in
  business?
• The value of economics is not well understood,
  because economics is not well understood.
• As a consequence, business often falls prey to
  consultants and gurus. These people often
  provide simple answers to complex problems
• Examples
• Know your Customer Should the customer always be
  number 1?
• Total Quality Management Should a firm always
  adopt improvements in quality?
• TO EVERY PROBLEM THERE IS A SIMPLE ANSWER THAT IS
  BOTH EASILY UNDERSTOOD AND COMPLETELY WRONG!!!

4
The Study of Managerial Economics

• What is economic decision making?
• Cost-Benefit Analysis (CBA) Comparing the costs
  and benefits of each decision.
• Managerial gurus often promise something for
  nothing. Economics teaches that this is not
  possible. To make good decisions one must
  recognize both the costs and benefits of each
  decision.

5
Chapter Summary

• Managerial Economics is the study of business
  decision making and strategy.
• Management is about making choices.
• Choice is selecting one thing or one use of
  resources over other things or other uses.
• There is no single formula for success. There is
  no quick and easy solution to business problems.