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IB Engineering > 2P8 The Engineer in Business > Flashcards

2P8 The Engineer in Business Flashcards

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1
Q

Define the firm

A

The firm is an organisation consisting of one or more individuals working as decision-making unit to produce goods or services.

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2
Q

Name 3 types of firms.

A

Private sector:

Unincorporated businesses (hairdresses, partnerships)

Incorporated businesses (private limited company, public limited company)

Public sector firms (NHS)

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3
Q

Define the market

A

Market is an institution for resource allocation which is based on horizontal voluntary exchanges by individual economic agents who are motivated by preferences and price signals.

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4
Q

What is the neoclassical view of the firm?

A

Firm can be reduced to a mathematical construct.

Alllows the modelling of the determination of behaviour.

modelling firm strategies under types of market structure

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5
Q

What determines the size of a firm in the neoclassical view of the firm?

A

Technology prices
Economies of scales
Pursuit of ‘profit maximizing’ size

Problems of market power

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6
Q

What is a flaw of the neoclassical view of the firm?

A

Treats firm as black box

Assumption of rationality + perfect information

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7
Q

What are transactions cost?

A

Cost of discovering prices, negotating prices, and enforcing contracts. This leads to the formation of firms instead of relying on the market for everything

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8
Q

Who came up with the transactions cost view of the firm?

A

Coase 1937

Firm characterised by hierachy and incomplete contracts.

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9
Q

According to Coase, what determines the size of the firm?

A

The point where rising cost of internal organisation of an extra transaction and the fixed cost of the external organisation of a transaction are equal

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10
Q

What is the property rights view of hte firm?

A

Ownership matteries because it carries residual control rights (Hart and Moore, 1990)

Collections of assets represent the optimal trade off between operational and investment incentives.

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11
Q

What is the Marxist view of the firm?

A

Rise of factory is to gain control over production processes, which allow the owners to extract more value compared to their workers.

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12
Q

What is the managerial theory of the firm?

A

Modern corporation, dispersed share holdings.

Owners and managers are seperate, managers want to maximise their own welfare.

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13
Q

What are behavioural theories of the firm?

A

Limited rationality and uncertainty make optimisation impossible, organisations have lots of objectives. Adjusting to uncertain environments leads to organisational slack.

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14
Q

What is the capabilities approach to the form?

A

Knowledge of how to do something, is exploited to gain market advantage. Maybe management skill, history, specific assets, location.

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15
Q

What are evolutionary theories of the firm?

A

Dis-equilivrium,

rationality is bounded,

Population dynamics and firm heterogeneity

Innovation-driven structural change

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16
Q

What is the LRAC curve?

A

The long-run-average cost curve,

unit cost over output, MES is the lowest unit cost on the graph (minimum efficient scale0

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16
Q
A
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17
Q

What are constraints on firm growth?

A

Management skills
Management objectives,
Available finance
Technology
Opportunities for learning
Market size
Macroeconomic environemnt
Chance

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18
Q

What is managerially constrained grwoth?

A

If a firm is expanding faster than the managers can obtain experience, and therefore absorb new managerial resources, there is a limitation on the amount of expansion of the firm.

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19
Q

What is unique about amazon?

A

Grew without profit due to investment.

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20
Q

What is the role of new firms in the economy?

A

Challenge monopolistic position of large firms, with new technologies nd greater efficients.

Innovation is their easiest way to gain a competitive edge, more adaptable than larger firms

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21
Q

What are some limitations of SMEs?

A

Although create more jobs than average for their size/

There are also more jobs lost. Do not have resources to grow (many are large firm spin offs)

Increases number of SMEs does not correspond to proportional increases in share of economy wide turnover accounted for by SMEs

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22
Q

What is noteable about the distrbution of SMEs?

A

Large heterogeneity,

Growth rates are very skewed, few (innovative) firms are responsible for most of the SME contribution to the economy.

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23
Q

What is true about the introduction of new product/technology into a market?

A

OFten follower, not pioneer obtains the most profits from a new innovation.

Imitation and deisgn modification often leads to dominate players stealing profits.

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24
As the pre-paradigmatic design phase and the paradigmatic design phase?
Pre paragdimatic, is whne it is entirely product innovation Paragdimatic, is mostly process innovation
25
What is difference between internal expansion and external expansion?
Internal, adding new products within existing company framework. External, merging existing firms.
26
What are the three methods of internal expansion?
Differentation - same product but larger market share Vertical integration - different products, but different stages of same product (vertical integration) Conglomerate - Diversification, the introduction of totally different products
27
What are three methods of external expansion?
Horizontal integration - mergers of firms producing the same product Vertical integration - mergers of firms producing at different stages of same process Conglomerate - merger of firms producing totally unrelated products
28
What are some advantages of external horizontal integration?
Lower costs increased differentiation Increased market power access to new markets
29
What could different aspects of the value chain found in verticla integration be?
Raw materials, intermediate goods, manufacturing, marketing sales, after sales services.
30
Advantages of vertical integration?
Greater efficiency Reduced uncertainty Monopoly power Barriers to entry
31
Problems with vertical integration
Higher coordination cost Lack of flexibility Incentive problems Partial vertical integration, can lead to better cost information, more leverage but poor economies of scale
32
Difference between narrow spectrum and broad spectrum diversification?
Narrow - exsisitng technological base (new or existing markets) Broad - new technology base (new or existing markets)
33
Advantages of diversification
Greater stability, reduces risks Mantain profitiability by entering new markets Growing beyond a mature market
34
Advantages and disadvantages of merger
Growth, scale, monopoly power, higher market valuation, less uncertainty Can destory value Legal repercussions Less flexibility
35
What is the government incentive?
To maximise social welfare, differnece between social benefits and oscial costs
36
Market failure types
Public goods (no rivalry) [defence, health] market power (lack of social efficiency) [water] Ignorance and uncertainty Immobility of factors Protecting people's interests (protecting those who rely on others)
37
What is the ideal tax?
Tax such that the demand is reduced to a level where the marginal private cost = marginal social cost
38
Advantages of taxes
Tax negative externalities, and subsidise positive externalies, Correct for monopoly (tax excess profits, subsidise extra output) Can vary rate dpeending on market distortion
39
Disadvantages of taxes and subsidies
Infeasible to use different tax and subsidy rates Lack of knowledge to calculate right amount
40
What are other examples of government intervention in the market (except taxes)
Changing property rights (right to emit CO2), law prohibiting behaviour that imposes external costs (H&S liability), regulatory bodies, price controls, provision of information, direct provision of goods, competition policy
41
What are drawbacks of government intervention?
Shortages and surpluses, Poor information Bureaucracy and inefficiency, lack of incentives, shifts in government policy, voter ignorance, unrepresentatve government, lack of individual freedome
42
Advantages of free market?
Automatic adjustments Dynamic advantages of capitalism High degree of copmetition.
43
What is competition policy?
Govenment measures aimed at stimulating competition and protecting against monopoly.
44
What are alternative premises of competition policy?
structuralist view - lower arket concentration is better Austrian view - market competition is the issue not concentration
45
What are three approaches to competition policy enforcement?
efficiency - examines how social surplus is affected by firms 'public interest', impact on employment may be relevant Competition - examines how prices are reduced or choice increased
46
Three examples of competition policy?
Deregulation (and privatisation) Reduction of tariffs Stimulation of innovation
47
Three factors examined in competition cases?
Abuse of dominance (predatory pricing) Mergers (efficiency behind this) Collusion
48
What is predatory pricing?
Deliberately accepting losses to drive competitors out of businesses, expecting better profits afterwards
49
Example of collusion
Price matching
50
Why does Porter say some firms are more succesful than other?
Operational effectiveness is no strategy Strategy rests on unique activities, capabilities not marketing Sustainable strategic position rests on trade-offs Fit drives advantage and sustainability, 'systems thinking', whole greater than sum of parts
51
What creates rivalry among existing competitiors?
Bargaining power fo buyers Threat of substitute products Bargaining power of suppliers Threat of new entrants
52
What are old-fashioned ways of competiting?
Collusion and retaliatoin
53
What are modern ways of competiting
Market segments Value chain steps Cost advantage Differentiation advantage Ecosystem advantage
54
How does diversification affect performance?
Used to be thought to be linear (more diversification is always good) However, new consensus over inverted U, some diversification is better than none However too much can add extra costs of coordination compromise and inflexibility.
55
Porter definition of competetive advantage?
Unique configuration of activities allowing differentated meeting of customers needs and defensible position. REINFORCE UNIQUENESS
56
Barney definition of competitive advantage?
Rare and hard-to-imitate resource or capability Protect core, and spin it into growth
57
Adner view of compeitive advantage
Ability to orchestratea aunique set of stakeholder relationships to improve information lflow.
58
McGrath view of competitive advantage
Ability to spot and execute a series of temporary advantaages , fast to enter ready to exit
59
What are some views of strategy?
Positional, resource based, ecosystem, agility
60
What is the VRIO Framework?
Barney's resource based view to see whether the resource will lead to a sustainaned competitive adantage Valueable Rare Inimitable Organnized
61
Examples of "VRI" Resources?
Brand Enforceable IP (profit generating) Relationships Effective culture of execution Location Location location Capability to do things unique
62
What is ANsoff matrix
esisting products: exsisting markets - market penetration new markets - market development New products existing markets - product development new markets - diversification
63
What would a McGrath strategy look like?
Launch Rmap up exploit Reconfigure Disengage
64
How can strong agility be shown?
Conculsive results of bets Dynamic allocation of resources Back major moves regularly (including self-cannibalising) Decisive ramp up
65
What makes new ventures succesful?
Meeting evolving needs of customers better than competitiors in ways that cannot easily be replaced.
66
Problem with product-orientation based marketing?
Product fail to match with evolving customer needs, can't adapt to trends in behaviour, price is based on cost not value
67
Problem with selling oreintation?
Focus on transaction rather than relationship, fails to capture long-term customer value
68
What is the ideal marketing oreintation?
Customer-orientation, focused on continually improving customer experience, google and amazon
69
What is a three staged marketing strategy?
Segmentation - divide market into distinct groups of customers, Targeting - select which group to target Positioning - differentiate from competitiors in mind of customers.
70
What are the 3Cs for market opportunity analysis?
Customers, competitiors, company
71
What is the STP marketing strategy?
Segementation Targeting Positioning/Branding
72
What are the 4Ps of marketing mix?
Product Place Promotion Price
73
What is the customer need matrix?
Salient need -> exsisting need Latent Need -> doesn't realise its a need but will become a need rational need -> practical (battery life, ChatGPT) emotional need -> Louis Vuitton, Apple
74
What are the two aspects of the decision making process?
Subconscious intution, emotional vs Conscious reasoning, rational
75
Methods to understand consumer needs
Survey focsu group experiment behavioural data observation
76
What makes digital era different?
Connectivitity -information friction is lower Data- creating value from data and analytics
77
Where does the future of digital marketing lie?
With Agent AI, interacting
78
What is the customer journey in digital era?
Need recognition 'i need a car' Information search 'which car is best' Alternative evaluation 'is it right for me' Purchase 'can i afford it' 'where should i buy it' Post-purchase 'would i recomend it
79
How has customer decision making process changed?
Connected Highly heterogeneous Multi channel Intermediaries
80
How does marketing communication work?
Company -> paid ad (or other site) -> consumer Company -> consumer (via company owned media) consumer -> consumer (social media, reccomendation etc)
81
How does online tracking work
Cookies and tracking codes used to create a user profile and personalise marketing
82
What does a high click through rate on an ad indicate?
That the search ad is attractive
83
What does a high conversion rate indicate?
That the ladnign page is not attractive to users or not aligned to their interests
84
What should a brand positioning statement include?
Target customers, competitive set (direct competitors), unique value proposition offered, evidence (or reasons to believe)
85
What is a customer insight?
Motivating factor that underlies customer's behaviour
86
What are sources of rivalry among existing competitors?
Number of competitors Diversity of competitors Industry Concentration Industry growth Quality differences Brand loyalty Barrier to exit Switching costs
87
What are sources of bargaining power of suppliers?
Number and sizes of suppliers uniqueness of each supplier's product Focal company's ability to substitute
88
What are sources of threats for subsitute products?
Number of substitute products available Buyer propensity to substitute Relative price perfomacne of substitute perceived level of product differentation Switching costs
89
What are sources of threat of new entrants?
Barriers to entry Economies of scale Brand loyalty Capital Requirements Cumulative experience Government policies Access to distribution hannels Swtiching costs
90
What are some sources of bargaining power of buyers?
Number of customers Size of each customer order Differences between competitiors Price sensitivity Buyer's ability to substitute Buyer's information availability Switching costs
91
What is Porter's five forces model?
A way of analysing industry by looking at diference influences and affects on competition Rivalry among existing competitiors Threat of new entrants bargaining power of buyers Threat of substitute products Bargaining power of suppliers
92
What are the characteristics of a succesful differentation strategy?
Value enhancing Defensible Meaningful
93
What is differentiation?
Offering a unique product selling point, different from competitors.
94

IB Engineering (6 decks)

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