1. Economics of Strategy The Power of Principles:
Sixth Edition
Besanko, Dranove, Shanley and Schaefer
Chapter 1
The Power of Principles:
A Historical Perspective
Copyright  2013 John Wiley  Sons, Inc.

2. 1840, 1910, and Today
The years 1840, 1910 and 2009 represent widely disparate business conditions.
The general economic principles behind business strategy are enduring.
Business practices evolve with changing environment.

3. Doing Business in 1840
Numerous intermediaries - Farmers to factors to brokers/agents to buyers
Substantial price risk for participants
Infrequent transactions
Scarcity of information regarding sales and prices of comparable goods

4. Infrastructure in 1840
Infrastructure in transportation, communication and finance were poorly developed in 1840.
Poor infrastructure meant the dominance of small family run firms.
Markets were local.

5. Transportation in 1840
Railroads, in their infancy, were fragmented. National railway network had not yet arrived.
Waterways were used for long distance transportation. Yet routes were limited.
With poor transportation, producers were limited to local markets

6. Communication in 1840
Postal service was the dominant mode of long distance communication.
Postal service relied on the horse and stagecoach.
Telegraph was expensive and was used only for important time-sensitive information.

7. Finance in 1840
Most businesses were sole proprietorships or partnerships which made long term debt difficult to obtain.
Shares of stock were not easily traded and cost of capital was high.
No institutional mechanism existed for handling business risk.
Futures trading to manage price risk was yet to come about.

8. Production Technology in 1840
Most factories used century old methods of production.
Textile manufacture was mechanized.
Use of standardized parts (prevalent in clocks and guns then) was just beginning.
Scale intensive industries and high volume production were non existent.

9. Government in 1840
Government was involved in large infrastructure investments such as canals and railroads.
Later in the century government regulation of the business environment was emerging.
Prime Meridian Conference led to the system of standard time.

10. Business in 1840 Technology limited production to traditional modes.
Production served local markets.
Without transportation infrastructure and access to large markets, mass production technologies would not have been useful.

11. Business in 1840
Without communication infrastructure, information on prices, sellers and buyers was not readily available.
Credit was available based on personal relationships.
As a result businesses were small and informally organized.

12. Business Conditions in 1910
Mass-production technologies made possible high volume low cost manufacture of goods.
Railroads dominated transportation and allowed mass distributors to reach widely scattered customers.
Telegraph and telephones greatly improved long distance communications.

13. Business Conditions in 1910
Manufacturing became more vertically integrated.
Multidivisional firms emerged in response to the size and complexity of operations.
Industries were becoming concentrated.
As standardization increased so did labor related conflicts.

14. Finance in 1910
Securities markets traded shares of large industrial firms.
Credit bureaus made credit related information easily accessible.
Innovations appeared in monitoring and reporting business activities.
Public disclosure of accounting information was in vogue.

15. Government in 1910
Government regulation extended to such areas as corporate law, antitrust and worker safety.
Increased regulation forced managers to collect a lot of data on internal operations.
Mandatory secondary schooling provided the labor force needed by large bureaucratic organizations.

16. Business in 1910
Expanded infrastructure allowed firms to expand their markets, product lines and production scale.
New technologies allowed high volume standardized production.
Growth of financial infrastructure made large scale firms viable.

17. Doing Business Today
Large vertically integrated firms have been declining.
Alliances and joint ventures could work better than mergers and acquisitions.
Diversification yields to “deconglomeration.”
Firms adopt complex matrix structures.

18. Transportation Infrastructure Today
Air, rail and ground transportation have become better coordinated.
Sophisticated communication and data processing technologies enable container shipping.
Cities like Atlanta have grown relying on air transport in spite of poor rail and water connections.

19. Communications Technology Today
Capacity for instantaneous transmission of complex information makes possible global markets for products and services.
Technology has enhanced worker productivity.
Coordination of activities has become easier with modern computer and communication technologies.

20. Finance Today
Regulation of banking and securities markets resulted in a stable financial services sector.
Capital markets and financial institutions became more active in evaluating firm performance.
Globalization of financial markets made many mergers and acquisitions possible.
Liquidity crisis of 2008 has slowed economic and entrepreneurial activity.

21. Production Technology Today
Modern technologies such as CAD/CAM have made low cost tailor-made production feasible.
Use of new technologies often means reorganizing the firm around these technologies.

22. Government Today
In some areas (airlines, trucking and financial services) traditional regulation has been relaxed.
Regulation has increased in other areas (workplace safety, discrimination and environmental protection).

23. Government Today
Intergovernmental treaties and agreements create regional free trade zones.
Government’s anti trust policy encourages in-house development of capabilities.
Government policy supports basic research and the commercialization of R & D projects.

24. Business Today
With rising demand from developing nations the market size has increased.
Firms focus on a narrow range of activities and enjoy the economies of scale.
Financial innovation enables faster growth of firms and the ability of new entrants to challenge the incumbents.

25. Infrastructure in Emerging Markets
Unlike the advanced nations, many developing nations still lack transportation and finance infrastructures.
Businesses are reluctant to invest in countries where corruption, cronyism and conflicts are rampant.

26. Business Conditions and Strategy
Business conditions change over time and so do the optimal strategies.
Principles needed to arrive at successful strategies do not change.
Recipes change from period to period but principles behind the recipes do not.

27. Questões para Discussão
An industry that is dominated by a few large companies. Why might that be?
An industry that consists of many small companies. Why might that be?
An industry that is highly government-regulated. How has it affected industry structure and the size and scope of the firm?
A company that is vertically integrated. Why is that?