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!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…