BSZ_IM_Ch08_4e - Managerial Economics and Organizational...

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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 8: Page 1 CHAPTER 8 E CONOMICS OF S TRATEGY : C REATING AND C APTURING V ALUE This chapter is the first of two chapters on strategy. It concentrates on the basic ways firms can create and capture value. Chapter 9 uses game theory to study strategic interactions among a small number of identifiable rival firms. Chapter 8 presents a framework for discussing how firms create value. It also discusses the conditions under which a firm can capture value (either by having market power or, in certain cases, having superior factors of production). The economics of diversification are examined, and a framework for strategy formulation is presented. A mini-case (Wal-Mart.com) highlights some of the issues in the chapter. Most managerial economics books focus on a very limited set of decisions (for example, pricing, input selection and output), taking the market product, and its characteristics, as given; they also assume that a firm produces only one product. This chapter uses basic economic principles to analyze a broader set of corporate policies. C HAPTER O UTLINE S TRATEGY V ALUE C REATION Production and Producer Transaction Costs Consumer Transaction Costs Other Ways to Increase Demand New Products and Services Cooperating to Increase Value Converting Organizational Knowledge into Value Opportunities to Create Value C APTURING V ALUE Market Power Superior Factors of Production A Partial Explanation for Wal-Mart’s Success All Good Things Must End E CONOMICS OF D IVERSIFICATION Benefits of Diversification Costs of Diversification Management Implications
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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 8: Page 2 S TRATEGY F ORMULATION Understanding Resources and Capabilities Understanding the Environment Combining Environmental and Internal Analyses Strategy and Organizational Architecture Can All Firms Capture Value? C ASE S TUDY : W AL -M ART . COM S UMMARY T EACHING THE C HAPTER We begin by defining strategy and discussing the objective of making profits by devising ways to create and capture value. We use Figure 8.1 to structure our discussion of value creation, and also discuss how value can sometimes be created through cooperation with other firms and customers. We discuss how creating value is not a sufficient condition for profits; the firm also has to capture value. In class we talk about PARC (Palo Alto Research Center of Xerox) and the many inventions they made (such as the computer mouse) but on which they failed to capitalize. The subsequent discussion is structured on capturing value by organizing it around market power and superior factors of production. We begin with Porter’s five forces and give examples of how firms have tried to capture value by increasing market power through taxes, import restrictions, etc. on competitors. Our discussion then turns to superior factors of production, indicating that this
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This note was uploaded on 04/27/2010 for the course FIN 320f taught by Professor Toprac during the Spring '08 term at University of Texas at Austin.

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BSZ_IM_Ch08_4e - Managerial Economics and Organizational...

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