Week 2: Markets · Week 2: Markets Dr Christopher Pokarier | EB202 Introduction to Business. Who is...

!Week2:MarketsDrChristopherPokarier|EB202IntroductiontoBusiness

Whoisincharge?

! Nobodycontrols‘themarketsystem’

! Thatisitsbeauty

! Itworksdespite/becauseofself-interest

! Peoplearemotivatedtoengageinmutualadjustment

! Foreverybuyer,thereisaseller

! Win/win

! Thoughexploitativeundersomeconditions

Markets:cooperation+competition

! Thereismuchmorecooperationthancompetitioninbusiness

! Aggressivepeoplewhodistrustothersgenerallydopoorly

! ‘performances’–rolesplayedbyindividuals(&organisations)

! Markettransactionsassignandlinkbothmultipleperformancesandmultiplechainsofthem(CharlesLindblom)

! CoffeefromGuatemalatoTokyocoffeeshop

! Governmentsmaysupportmarketsthroughrulesandinfrastructurebutareoftenapoorreplacementforthem

!Whatmakesagoodcoffeeshop?Product,performances,place..

Natureofcooperation

! Cooperationisnotlinearbutmultilateral(butwetalkoftenabout‘valuechains’whenfocusedonaparticularproduct)

! Noneofthe‘performances’are‘random,accidentalorcoincidental’

! Greatpredictabilityinmarketsystems(whensomethinggoeswrongorisnotavailableitisshocking.ThisisVERYmeaningful)

! Inmodernsocietiesmostworkersproducespecialisedperformances,notphysicalproducts(directly)

Marketsaspeace-keeper

! Marketsystemsbringprosperitywhichhelpstostoppeoplefighting

! However,theydoMOREtokeepthepeace

! Themarketsystemprovidesasimpleallocationruletorationscarcegoodsandopportunities

! It‘limitseveryperson’sclaimstoasumofmoneyobtainablebythatperson’sofferofsomethingofvalueonthemarket’(Lindblom)

! ‘quidproquo’rule(thereforeinheritance,inequalityisacontroversialissuewithinmarketsystems)

Marketinfrastructure

! Historically,neededaphysicalspacetomeet(‘za’,‘‘ichiba’inJapanese)

! Nowmostmarketsare‘virtual’

! Laws,commoncurrency&standards,disputemechanisms(egcourts)helpreducetransactioncosts

! Trustisstillvitalinmanymarkets

! Henceindividualsandfirmsshoulddeveloptheirreputationalcapital

! Informationaboutthedodgy,cheats,incompetentisalsoimportant

MarketversusPoliticalchoice

! Indemocracieswehaveinput(individually,rarelydecisive)onwhichleader/teamwillmakedecisionsforanumberofyears

! Butstateagencies(inbothdemocracies&authoritarianregimes)facenocompetitionformanyoftheirperformances–meaningthestatecanoftenintimidateandofferpoorservice(henceconstitutions,ombudsmanetctogivesomemeansofrecourse,rights)

! Inmarketsindividualsmakemanydecisivechoicesdaily,puttingpressureonfirmstosatisfycustomers

! Theremarketsmaybefree,butsellersarenot!

competition

! Competitionmaystimulateinnovation

! thesnowboardingindustrygrewrapidlythroughthetechnologicalimprovements,events,andstylisticdevelopmentsthatwerestimulatedbyintenserivalrybetweenentrepreneursJakeBurtonandTomSims

! innovativefirmsundercompetitivepressureseeknewtalents,technologies,businesspartnerstostayattheforefrontoftheirindustry

! so‘finalproductmarket’(egsnowboards)drivesclosecooperationwithsuppliers,staff,andawholeecologyofanindustry(including‘trademedia’andmassmediaetc)

Whencompetitionislimited

! Somemarketsarecharacterisedbylimitedcompetitionorevenmonopoly

! Efficiencyreasonsmightleadtothis(eg.networkorscaleeconomies–eg.railways)

! orcollectiveactiondynamics(eg.mypreferencesdependonothers’choices–eg.softwarethatmustbeinter-operable)

! Orfirmsmayabusemarketpowertobepowerful

! Thereforegovernmentsmayintervenetomakemarketsworkbetter:bemorecompetitiveorrequireinformationdisclosuretohelpconsumerchoice

Commandversusmarket-basedcoordination

! Firmsare‘islandsofcommandcoordinationinaseaofmarketmutualadjustment’(Lindblom)

! Hierarchicaltop-downcommand&controlisafeatureofsomeindustriesbutsometimescausesinefficiencyandreducescreativity

! Specialistknowledgeisneededforeffectivecontrol

! Somanyfirmsspecialiseonkeytasksandoutsource(marketcoordination)otherneededinputs(whichmaybeproducedbycommandwithinanotherspecialisedfirm)

MakeorBuy?

! Thisquestionoftomakeorbuyisakey,andsimple,concept

! Thisisthestartingpointoftransactioncosttheory

! Andthegeneraltheoryofthefirm(laterweek)

! Itfocusesourattentionontheboundariesofthefirm

! whatisdonewithinthefirm,bycommand,andwhatiscontractedforinmarketsoutsidethefirm

! Andwhatarecorecompetenciesofabusiness

! Itappliestoyourdailylifeaswell

!Whatmakesasuccessfulbusiness?Findingaplaceinthemarket,andthenmakesurecustomerscanfindyou.

Basicbusiness

Asuccessfulbusinessmust:

! Identifythegapinthemarket

! Thatis,identifyalatentdemandforaproduct–eitheranewproductoranexistingproductnotavailableinaparticularlocationorconvenientway

! havecustomersunderstandboththattheyhaveaneedforaproductandthatyourbusinesscansatisfytheirneed

BasicbusinessII

! Hence,keyquestionsare:! Issomeoneelsedoingthisbusiness?! Ifnot,whynot?! Ifyes,isthere‘roominthemarket’foranother?! Whatvaluepropositiondoyouoffertoconsumers?! howcanshowyourvaluepropositionstowould-be

customers..needingthemtofindyou,trustyou,commit

Asuccessfulbusinessmust..

Haveaviablebusinessmodel;thatis:

! Secureaccesstoneededinputs..

Asuccessfulbusinessmustoffer..

! meansofeffectiveproduction..

technologies,equipment,effectivemanagementofappropriatehumanresources

! atapricewhichcustomerswillpay(relatedtovalueofproduct&availabilityofsubstitutes)…

! Withaprofitmarginbetterthanthecostofcapital(marketrateofinterest)&allotheropportunitycostsfortheownerconsidered

! Consideringallrisks…

Riskadjustedreturn

Adecisiontoinvestinabusinessshouldbebasedonexpectedreturn,consideringriskandthecostsofmanagingit

Andsocietymustallowpeopletokeepsufficientrewardsfortheirbusinessefforts

TheDailyDodgy2

! Ifyouwanttosellyourselfasanexpert(eg.asamoverofveryexpensivepianos),beanexpert…