! Week 2: Markets Dr Christopher Pokarier EB202 Introduction to Business

Transcription

1 Week 2: Markets! Dr Christopher Pokarier EB202 Introduction to Business

2 Who is in charge?! Nobody controls the market system! That is its beauty! It works despite/because of self-interest! People are motivated to engage in mutual adjustment! For every buyer, there is a seller! Win/win! Though exploitative under some conditions

3 Markets: cooperation + competition! There is much more cooperation than competition in business! Aggressive people who distrust others generally do poorly! performances roles played by individuals (& organisations)! Market transactions assign and link both multiple performances and multiple chains of them (Charles Lindblom)! Coffee from Guatemala to Tokyo coffee shop! Governments may support markets through rules and infrastructure but are often a poor replacement for them

4 What makes a good coffee shop?! Product, performances, place..

5 Nature of cooperation! Cooperation is not linear but multilateral (but we talk often about value chains when focused on a particular product)! None of the performances are random, accidental or coincidental! Great predictability in market systems (when something goes wrong or is not available it is shocking. This is VERY meaningful)! In modern societies most workers produce specialised performances, not physical products (directly)

6 Markets as peace-keeper! Market systems bring prosperity which helps to stop people fighting! However, they do MORE to keep the peace! The market system provides a simple allocation rule to ration scarce goods and opportunities! It limits every person s claims to a sum of money obtainable by that person s offer of something of value on the market (Lindblom)! quid pro quo rule (therefore inheritance, inequality is a controversial issue within market systems)

7 Market infrastructure! Historically, needed a physical space to meet ( za, ichiba in Japanese)! Now most markets are virtual! Laws, common currency & standards, dispute mechanisms (eg courts) help reduce transaction costs! Trust is still vital in many markets! Hence individuals and firms should develop their reputational capital! Information about the dodgy, cheats, incompetent is also important

8 Market versus Political choice! In democracies we have input (individually, rarely decisive) on which leader/team will make decisions for a number of years! But state agencies (in both democracies & authoritarian regimes) face no competition for many of their performances meaning the state can often intimidate and offer poor service (hence constitutions, ombudsman etc to give some means of recourse, rights)! In markets individuals make many decisive choices daily, putting pressure on firms to satisfy customers! There markets may be free, but sellers are not!

9 competition! Competition may stimulate innovation! the snowboarding industry grew rapidly through the technological improvements, events, and stylistic developments that were stimulated by intense rivalry between entrepreneurs Jake Burton and Tom Sims! innovative firms under competitive pressure seek new talents, technologies, business partners to stay at the forefront of their industry! so final product market (eg snowboards) drives close cooperation with suppliers, staff, and a whole ecology of an industry (including trade media and mass media etc)

10 When competition is limited! Some markets are characterised by limited competition or even monopoly! Efficiency reasons might lead to this (eg. network or scale economies eg. railways)! or collective action dynamics (eg. my preferences depend on others choices eg. software that must be inter-operable)! Or firms may abuse market power to be powerful! Therefore governments may intervene to make markets work better: be more competitive or require information disclosure to help consumer choice

11 Command versus market-based coordination! Firms are islands of command coordination in a sea of market mutual adjustment (Lindblom)! Hierarchical top-down command & control is a feature of some industries but sometimes causes inefficiency and reduces creativity! Specialist knowledge is needed for effective control! So many firms specialise on key tasks and outsource (market coordination) other needed inputs (which may be produced by command within another specialised firm)

12 Make or Buy?! This question of to make or buy is a key, and simple, concept! This is the starting point of transaction cost theory! And the general theory of the firm (later week)! It focuses our attention on the boundaries of the firm! what is done within the firm, by command, and what is contracted for in markets outside the firm! And what are core competencies of a business! It applies to your daily life as well

13 What makes a successful business? Finding a place in the market, and then make sure customers can find you.!

14 Basic business! Identify the gap in the market A successful business must:! That is, identify a latent demand for a product either a new product or an existing product not available in a particular location or convenient way! have customers understand both that they have a need for a product and that your business can satisfy their need

15 Basic business II! Hence, key questions are:! Is someone else doing this business?! If not, why not?! If yes, is there room in the market for another?! What value proposition do you offer to consumers?! how can show your value propositions to would-be customers.. needing them to find you, trust you, commit

16 A successful business must.. Have a viable business model; that is:! Secure access to needed inputs..

17 A successful business must offer..! means of effective production.. technologies, equipment, effective management of appropriate human resources! at a price which customers will pay (related to value of product & availability of substitutes)! With a profit margin better than the cost of capital (market rate of interest) & all other opportunity costs for the owner considered! Considering all risks

18 Risk adjusted return A decision to invest in a business should be based on expected return, considering risk and the costs of managing it And society must allow people to keep sufficient rewards for their business efforts

19 The Daily Dodgy 2! If you want to sell yourself as an expert (eg. as a mover of very expensive pianos), be an expert