Riassunto esame Business of the firm

Agency problem = adverse selection & moral hazard solutions(conflicting objectives - un-observability) (different attitudes to risk) → 2. incentivesperformance indicators to design incentives : principle of “informativeness” (measurement reflect effort and action)I. 3. contractnet of price changes (ex. R O I : earnings over total investment - reduce noise)" eturn n nvestment' - Ii.less noise = less randomness = less risk and cost not measure what you are interested in (profit) but what is influenced by effort of your agentrisk of manipulation of performance : can create distorted behaviour (problem : agent might spend attention and effort on multiple activities)1. unilateral incenitvescenariosex. stock options. 2. rewards for extra effort on each task not the samereduce variability of pay and introduction of strong non monetary* solutionsi. 3. accuracy of performsnce measurement÷motivations or to shift reward from payment to career

(winner-take-all) provide incentives and good allocation of talent? NO alternatives to monetary rewards : (allocates who loves to compete) .. society and culture affect willingness to compete ←~Fairness and social preferences: workers receive a subjective reward by complying to norms of fairness (ex. Lincoln electric) not always the best, a- depends on the situation Reputation: facilitate trust between entities Auction : public sale in which goods or property are sold to the highest bidder 1 Reverse auction : roles inverted (goal : lowest price) new technologies and products : shorter life cycle Growth and innovation life cycle hypothesis "→ fmonth - -↳ introduction stage of a product > growth > maturity (saturates market) > decline one over the other mutual agreement corporate transactions. r new, joint organization with a new ownership Ii Crowd sourcing : solution to innovation within the firm enter foreign market‣ f→ Act of taking a function performed by employees

and outsourcing it to a growth strategy‣ undefined, large network of people in form of an open call instead ofreduce excess capacity and decrease competition‣ relying only on employeesgain new technology (more efficient than develop technology itself)‣ Crowdfunding : funding a project by raising money from a large number‣evaluating candidates : of people (online)price right?‣ Other example of growth :examine debt load and financials‣ Open innovation (intrinsic motivation) : use of inflows and outflows of‣knowledge to accelerate internal innovation and expand market for externaluse of innovation (inbound or outbound >>> open innovation)firm’s profit = revenues - costs -b -IDemand curve = quantity of product a firm is able ←to sell (other variables constant price and are inverselyrelated downward sloping)→depends on : price of product and related ones,‣ income and taste of consumers . .eports quantity bought at various prices andr‣ highest

price beard by market for given output

Elasticity of demand = sensitiveness to price change

I.I. P* and Q* : optimal quantity and price for Profit-Maximising Firm elementary (layers, departments, finctions),price of output : ' functional (specialisation), M-form (growth), project

MR = MC

MR > MC : firm increases profit increasing output

• management (coordination), matrix (process)

MR < MC : firm increases profit decreasing output Isubstitute Q* in the demand curve

• microeconomics, macroeconomics, management . .

Business of the firm goal : identify successful factors in a business and detect general rules (there are different theoretical approaches & structures )

complex systems rooted in a thick network of interdependences > ecosystems

horizontal boundaries : how do firm decide their size and scope?/ how much of the total product market is variety of products and services that my

1. La defines boundaries*served by my firm firm produces(how many products

are mine) (how many products I offer) i.depend on economies of scale and scope : present whenever producing more of different products is more convenient (cost advantage)→ ↳ advantages : market power, entry barriers, lower costs →indivisibilities fixed→costs economies oftoI source : spreading fixed costs over a greater volume of output| → scale & scope→ ""Special sources : arise when there are indivisibilities in production process (certain input not scaled down)Density = cost savings arise within a transportation network due to a greater• geographic density of customers (reduce area increase consumer = less average cost) arms-length = business deal in which buyers and sellers actPurchasing = bulk buying leads to discount• (scale) independently without one party influencing the other.Advertising = the more you do it the more you sell (costs advertisement and negotiation• (scale) ex. Virginwith media : spread over different

markets umbrella branding ⁹ consumers use information from one product to make deduction about other ones with the sameR &D = different projects

• Research Development (beneficial) brand name (higher ad effectiveness for broad product line I well known brand lower average cost)

Complementarity produces economies of scope

• Synergy (strategic fit)

Economies of scale refer to advantages from producing larger output

• Learning curve refers to advantages from accumulating experience

Sources of diseconomies: increasing labor cost, bureaucracy, spreading resources

• Know-how (learning & experience lower costs)
• Too thin (skills cannot be replicated)

Diversification = existing entity branching out into new business opportunities (enter new markets) (can exploit economies of scale and scope)

• Types: horizontal, vertical and conglomerates

Reasons to merge: economies of scale and scope, economizing transaction costs, internal capital

1. markets
   • it reduces risk & smoothes earnings, needs elaborate control system to reward surplus funds channelled to units that needs them (firm as banker) and punish managers (have personal interests)
   • market firms: specialist who perform vertical chain tasks
   • performance in long-term is poor (acquisition divested)
   • determine which tasks are to be performed inside vertical boundaries: which activities do we do and which do we leave to the market? = make or buy decisions
   • the firm (organisation) and which to be outsourced→ (market)
2. production of good or service requires wide range of activities organized in a vertical chain
   • early steps to 81 upstream: suppliers of raw inputs
   • start: acquisition of raw material
   • downstream: manufacturers, distributors, retailers
   • end: sale of finished goods
   • later ones
3. two main concepts underlies such decisions: technical and agency efficiency
4. integration can be best alternative for some cases, while market for others
5. market:

• Technical efficiency (least cost production)
• Raises the cost of transacting exchanges: vertical integration
• Agency efficiency (coordination, transactions costs) µ
• Contract negotiation more difficult¥
• Focus on governance and technological efficiency
• Investments made to improve bargaining position
• Alternatives: tapered integration, joint ventures - strategic alliances
• Japanese can cause distrust: keiretsu
• Implicit contracts supported by reputational considerations
• Underinvestment in relationship specific assets
• Suppliers scared (possibility of being exploited)
• Spends time in negotiations in order to have complete contracts and safeguards against constrained by asset specificity
• Possible opportunistic behaviours
• Alternatives to vertical integration: industrial distincts (born in Italy) sr an example of industrial organisation
• Key factors are: local dimension, cultural aspects, division of labor, production collaboration specialisation

collaboration market structure and competition. Similar anyone who produces a substitute product is a competitor have similar performance, similar occasion for use, sold in the same area. Four approaches to empirically identify competitors: 1. Firms in the same standard industrial classification 2. Cross price elasticity of demand 3. Diversification analysis Market structure = characteristics which affect nature and one way to face competition: differentiation - degree of competition difficult to understand differences. Monopoly: no competition at all - consumers face search costs to gather information about alternatives, which can discourage switching to a cheaper alternative. Oligopoly: depends on inter-firm rivalry according to the range of Herfindahl's switching to cheaper alternative. Perfect competition: fierce competition. Market share = percent of total sales in a specific industry generated by a particular company/product total units sold by a company/of a product over total.units sold in a certain market • dynamics of entry and exit in the marketplace i. entrants: firms that produce and sell in new (for them) markets incumbents: established firms operating in certain markets, have a competitive advantage with respect to potential entrants potential entries: competitive dynamics could develop as a consequence faced 1- reduced market share (slow market growth) intensified competition exit dynamics: entry forms: - firm won't be in that market anymore - price competition = reduced profits - fold up entrant = brand new firm - opportunity to grow stolen (rapid market growth) - discontinue product or product group - entrant = established firm diversifying into a new product/market - leave a particular geographic market segment - sunk costs of: cost benefit analysis - Entry: costs that a firm has to pay to enter a specific market (not recovered) - potential entrant compares sunk cost of entry and exit with present value of post-entry profit - Exit:re considered an advantage for incumbents3. Economies of scale and scope are easier to achieve for incumbents4. Brand loyalty and reputation are usually stronger for incumbents5. Access to distribution channels may be more difficult for entrants6. Government regulations and licensing requirements may create barriers for entrants7. Switching costs for customers may favor incumbents8. Network effects may give incumbents a competitive advantage9. Patents and intellectual property rights can protect incumbents from competition10. High capital requirements may deter potential entrants11. Established market share and market dominance by incumbents can make it difficult for new entrants to gain a foothold12. Limited access to resources and funding may hinder potential entrants13. Lack of knowledge and experience in the industry may be a barrier for new entrants14. High customer switching costs may discourage potential entrants15. Strong brand recognition and customer loyalty towards incumbents may make it challenging for new entrants to attract customers16. Limited availability of skilled labor or specialized expertise may pose a barrier for new entrants17. Established distribution networks and relationships with suppliers can be difficult for new entrants to replicate18. Economies of scale enjoyed by incumbents may make it difficult for new entrants to compete on price19. Regulatory barriers and compliance requirements may create obstacles for new entrants20. Limited access to technology or proprietary knowledge may hinder potential entrants from entering the market.