1. Managerial objectives and the firm
OHT 10.1
CHAPTER 10.
Managerial objectives and the firm
Principal 紡gent theory.
Managerial theories.
Behavioural theories.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

2. This chapter will help you to:
Learning outcomes
This chapter will help you to:
Analyse the different objectives firms may choose when deciding on their production and pricing decisions.
Appreciate the meaning and significance of principal–agent theory and its relationship to business objectives and corporate governance.
Recognise the nature of different managerial theories of the firm, namely sales revenue maximisation, utility maximisation and corporate growth maximisation models.
Distinguish between managerial and behavioural theories of the firm and the contrast between maximising and satisficing strategies
Understand the importance of business ethics within the framework of managerial decisions in today’s business environment.
OHT 10.2
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

3. Challenging the traditional assumptions
OHT 10.3
The traditional approach is based on two key assumptions:
Decisions are made under conditions of perfect knowledge.
The objective of the firm is to maximise profits.
Challenging the traditional assumptions
There are five main reasons which can be offered as justification for abandoning these two assumptions.These relate to the following:
The growth in oligopoly.
The growth of managerial capitalism.
Difficulties surrounding profit maximisation in practice.
The organisational complexity of firms.
Recognition that real life decisions are often made in the face of imperfect or incomplete information.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

4. It may not be readily applicable to oligopoly markets.
OHT 10.4
In summary, therefore, the traditional theory of profit maximisation featured in previous chapters may be criticised because:
It may not be readily applicable to oligopoly markets.
It takes inadequate account of the need to gather and utilise information.
It is no longer appropriate in today’s environment,where managerial capitalism has taken over from entrepreneurial capitalism and where control of businesses has become divorced from their ownership in many industries.
Pricing policies in practice may bear little obvious resemblance to those suggested by the MR =MC principle.
The complexity of organisational structures today calls into question some of the basic assumptions of the traditional theory and draws attention to the process of decision-making.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

5. Principal-agent theory
OHT 10.5
Figure The principal-agent relationship: private v public sector
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

6. Figure 10.2 Impact of inefficiency on average cost
OHT 10.6
Figure Impact of inefficiency on average cost
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

7. Sales revenue maximisation. Managerial utility maximisation.
OHT 10.7
Managerial theories
Sales revenue maximisation.
Managerial utility maximisation.
Corporate growth maximisation.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

8. Sales revenue maximisation
OHT 10.8
High and expanding sales revenues help to attract external finance to the firm 僕larger firms generally find it easier to raise capital, while financial institutions may be less willing to deal with a firm suffering from declining sales.
High sales assist the distribution and retailing of products 睦resulting in economies from selling in bulk.
Consumers may view a firm with falling sales in a less favourable light 釦this may deter consumers from buying and reduce sales even further.
The distributive trade may be less co-operative,for example in extending credit lines, when a firm’s sales are declining.
Falling sales may result in reductions in staffing levels, including managerial staff, as costs are cut.
Last,but not least,managers’ salaries may depend on a fast growth of sales revenues
卜managers are often rewarded for expanding the business.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

9. Figure 10.3 Sales revenue maximisation
OHT 10.9
Figure Sales revenue maximisation
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

10. Managerial utility maximisation
OHT 10.10
Williamson’s model suggests that managers’ self-interest focuses on the achievement of goals in four particular areas, namely:
High salaries
Staff under their control
Discretionary investment expendtirue
Fringe benefits
U =f (S ,I d ,M )
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

11. Corporate growth maximisation
The valuation ratio for any company is its current share price multiplied by the number of its issued shares divided by the net book value (assets less liabilities) of the company.
OHT 10.11
Figure The corporate growth maximisation model
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

12. Behavioural theories
OHT 10.12
Production . A goal that output must lie within a certain satisfactory range.
Sales .A goal that there must be a satisfactory level of sales however defined.
Market share .A goal indicating a satisfactory size of market share as a measure of comparative success as well as of the growth of the firm.
Profit . Still an important goal,but one amongst a number rather than necessarily the goal of overriding importance.
In these circumstances,the objectives of the firm are
eventually determined by factors such as the following:
Bargaining between groups and the relationship between groups within the firm.
The power and influence of different groups within the firm.
The method by which objectives are formulated within the organisation.
How groups and,therefore,the ’firm’ react to experiences and make adjustments .
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

13. OHT 10.13
Business ethics
Firms now recognise the importance of issues such as:
The public’s growing interest and concern about environmental challenges ,involving pollution, the use of non-renewable resources,energy efficiency,etc.僕leading to the so-called ‘greening of business’.
The rights of workers and human rights in general, the development of fair pay,equal opportunities,health and safety at work,etc.
Ethical marketing involving limitations on the selling of products such as tobacco and alcohol that may damage public health and general well-being.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

14. OHT 10.14A
Key learning points
The traditional theory of the firm, based on the assumptions of perfect knowledge and profit-maximising behaviour, may not be readily applicable, given the complexity of markets and organisational structures today.
Principal 紡gent theory recognises the growth in managerial capitalism and the complexity of modern organisational structures based on a growing separation between the owners of the firm (the principals) and the firm’s senior management or directors (the agents). This theory leads to a focus on corporate governance arrangements.
Baumol concludes that management which attempt to maximise sales revenue will tend to produce at a higher output level,set lower prices and invest more heavily in measures that boost demand than management which attempt to maximise profits.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

15. OHT 10.14B
Key learning points
Williamson 痴 managerial utility maximisation model argues that managers seek to maximise their own self-interest based on the achievement of goals such as high salaries,authority over staffing, discretionary investment expenditure decisions and fringe benefits.
Marris’s corporate growth maximisation model suggests that management seek to maximise the growth of the firm subject to an optimal dividend-to-profit retention ratio, in order to safeguard the firm from a hostile takeover bid.
The satisficing explanation of managerial behaviour is associated with behaviouralist theory and argues that there is no single objective of the firm; instead, there are multiple goals.These emerge from the potential for conflict amongst interest groups within the firm, such that the aim will be to achieve a satisfactory performance for each of the goals without necessarily any single, maximisation objective.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

16. OHT 10.14C
Key learning points
Business ethics is concerned with the social responsibility of management towards the firm’s major stakeholders, the environment and society in general. There is a growing belief that ethical and ‘green’ business are linked to improved business performance over time because of increased public concern for human rights and the world environment. Business ethics extends to treating all stakeholders ‘fairly’; hence the growing emphasis on health and safety issues,’good 蜘working practices and the like in business decision-making.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

17. Understanding competitive strategy
OHT 11.1
CHAPTER 11.
Understanding competitive strategy
The meaning of competitive strategy .
Mission and objectives of the firm.
Levels of competitive strategy.
Environmental scanning.
Industry analysis.
Strategic positioning.
Formulation and implementation of competitive strategy.
Resource-based theory and the value chain.
Change management and force-field analysis.
Competitive strategy and globalisation.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

18. This chapter will help you to:
OHT 11.2A
Learning outcomes
This chapter will help you to:
Appreciate the meaning of competitive strategy and competitive advantage.
Recognise the different levels of strategy within a firm, namely corporate, strategic business unit (SBU) and functional levels.
Understand the importance of effective environmental scanning, at both the macro and micro levels, in the pursuit of competitive advantage. Identify how competitive advantage can be achieved through effective industry analysis using Porter’s five forces model.
Grasp the importance of strategic positioning in terms of cost and differentiation strategies.
Understand how competitive strategies are formulated and implemented based on the classical (traditional) approach to strategic decision-making.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

19. Comprehend the importance of globalisation in competitive strategy.
Learning outcomes
OHT 11.2B
Recognise other approaches to strategic decision-making including the notion of emergent strategies.
Appreciate the nature of the resource-based approach to strategic decision-making with its emphasis on the firm’s core competencies and distinctive capabilities.
Identify the role of the value chain in the determination of competitive advantage.
Grasp the importance of change management and the usefulness of force-field mapping as a means of determining the key drivers and restrainers relevant to the achievement of change within the firm.
Comprehend the importance of globalisation in competitive strategy.
Identify the significance of Porter’s diamond in exploring competitive advantage at the international level.
Recognise the limitations of the traditional structure–conduct – performance paradigm in the context of achieving competitive advantage.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

20. The meaning of competitive strategy
OHT 11.3
The meaning of competitive strategy
Competitive strategy is defined as the search for appropriate corporate-level and business-level strategies to achieved sustained competitive advantage .
Competitive strategy is,in essence,concerned with the nature of competition within the market place.To understand the meaning of competitive strategy requires management to address three fundamental questions,namely:
Where should the firm compete?
What products and services should the firm compete with in the market?
How can the firm gain sustainable competitive advantage?
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

21. Mission and objectives of the firm
OHT 11.4
Mission and objectives of the firm
The mission 紡 similar concept is the vision 撲of the firm encapsulates the firm’s overall values and general aspirations.
Objectives set out precisely the quantitative or qualitative goals through which the firm’s mission is to be achieved.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

22. Levels of competitive strategy
OHT 11.5
Figure Levels of competitive strategy
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

23. Environmental scanning
OHT 11.6
Environmental scanning
Environmental scanning involves identifying and evaluating external drivers of change affecting the business at both macro and micro levels.
Macro-environmental analysis is concerned with identifying external trends relating to political, economic,social and technological developments which are likely to impact on the firm.
Micro-environmental analysis focuses on the nature of the competitive environment of the firm at the industry or market level.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

24. Industry analysis OHT 11.7 Figure 11.2 Porter’s Five Forces Model
Source: Adapted and reprinted with permission of The Free Press, a Division of Simon & Schuster from Competitive Strategy. Techniques for Analyzing Industries and Competitors by Michael E. Porter. Copyright ©1980 by The Free Press.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

25. The bargaining power of buyers
OHT 11.8A
(a) Intrinsic leverage
How many buyers are there in the market?
Has buyer concentration been increasing or decreasing?
How well informed are buyers about the firm’s costs?
What substitute products or services exist which buyers can or could consider using?
Is there evidence of buyers operating together (e.g.buyer groups or associations)?
(b) Price sensitivity
How large are buyers’ purchases of a particular product or service compared to their total spend?
Is there any brand or company loyalty?
How different are competing products or services?
How does product or service quality affect buyer performance?
How profitable are buyers from the viewpoint of the firm?
Do buyers need to receive any incentives to buy?
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

26. The bargaining power of buyers
OHT 11.8B
The bargaining power of buyers
(c) Buyer purchase criteria
What are the buyer purchase criteria (BPCs)?Why will customers choose one particular product or service rather than another?
Are there ‘minimum’ standards or requirements that need to be met?
Can the BPCs be ranked (high,medium,low)?
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

27. The bargaining power of suppliers
OHT 11.9
The bargaining power of suppliers
This force is concerned with the degree of competition amongst input suppliers which determines the availability and price of inputs to the firm.Key questions here are:
What are the main purchased inputs?
What percentage of total costs does each input account for?
How many suppliers are there?
How differentiated are suppliers?
How easily can the firm switch from one supplier to another?
How often does the firm switch suppliers?
Can the firm backward integrate (i.e.take ownership of suppliers)?
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

28. The threat from potential new entrants into the market
OHT 11.10
The threat from potential new entrants into the market
This force is concerned with the degree of ‘market contestability’ or the extent to which firms are able to enter the market and compete for customers. Key questions concern:
How much does it cost a new entrant to get into the industry in terms of:
膨capital?
紡access to inputs,e.g.staff?
紡advertising?
貌experience or learning curve?
How important are economies of scale?
How easy is it to access distribution?
How easily or how often do customers switch?
Have there been any new entrants recently into the industry?
Is retaliation likely against new entrants (by existing players)?
How differentiated are competitors?
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

29. The threat from substitute products or services
OHT 11.11
The threat from substitute products or services
This force is concerned with the extent to which existing products or services can be substituted by new product or service innovation and focuses on issues concerning:
What substitutes exist or may be introduced which could replace existing products or services?
What is the relative cost or benefit to users of each product or service?
What are the costs of switching from existing to new products or services?
What are the current trends in usage for existing products or services which might determine the potential for customers to switch?
What is driving current usage and substitution trends?
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

30. The degree of competition (rivalry) in the market
This force is concerned with understanding the nature and impact of rivalry amongst existing firms in the market place.Key questions which arise are:
OHT 11.12A
What is the industry growth rate?
Who are the main players in the market?
What are the market shares of existing firms in the market?
What percentage of the market is controlled by the top 2,5,10 firms?
How have market shares been changing over time?
How committed is each player to the business based on:
膨core business (yes or no)?
朴percentage of revenue and profits?
防historical reasons for commitment to the business?
朴personal attitudes of senior management?
膨current actions or signals?
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

31. The degree of competition (rivalry) in the market
OHT 11.12B
The degree of competition (rivalry) in the market
How diverse or similar are competitors?
What is the role and importance of branding?
Is there over-capacity in the industry?
What is the ratio of fixed to variable costs?
What exit barriers exist?
How differentiated are the competitors?
How much brand or company loyalty exists?
How easily can buyers switch from one firm to another?
What product or market strategies are competitors following in terms of:
朴product or service design?
吠image?
卜market position?
Is there evidence of price competition?
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

32. Strategic positioning
OHT 11.13
Strategic positioning
Generic strategies:
Low-cost producer . A firm can aim to be the low-cost producer thereby earning higher profits to reinvest in the business or to undercut the competition on price.
Product differentiation . A firm can develop differentiated products (through innovation and marketing)and possibly charge premium prices.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

33. Figure 11.3 Strategic product positioning
OHT 11.14
Figure Strategic product positioning
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

34. OHT 11.15
Figure Strategy formulation and implementation - classical approach
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

35. Figure 11.5 Mintzberg’s emergent strategy
OHT 11.16
Figure Mintzberg’s emergent strategy
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

36. Figure 11.6 Resource capabilities of the firm
OHT 11.17
Figure Resource capabilities of the firm
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

37. Figure 11.7 Force-field analysis
OHT 11.18
Figure Force-field analysis
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

38. Figure 11.8 Porter’s diamond
OHT 11.19
Figure Porter’s diamond
Source: The Competitive Advantage of Nations by Michael E. Porter. Copyright © The Macmillan Press, London.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

39. Figure 11.9 The structure-conduct-performance paradigm
OHT 11.20
Figure The structure-conduct-performance paradigm
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

40. A competitive strategy should address three fundamental questions:
OHT 11.21A
Key learning points
Competitive strategy is concerned with a search for appropriate corporate-level and business-level strategies to achieve sustained competitive advantage.
A competitive strategy should address three fundamental questions:
- Where should the firm compete?
- What products and services should the firm compete with in the market?
- How can the firm gain sustainable competitive advantage?
The mission encapsulates the firm’s overall values and general aspirations usually captured within a formal mission statement .
The objectives of the firm can be distinguished from the mission because they are usually a more precise set of goals that can be measured quantitatively or qualitatively.
Competitive strategy is usually formulated and implemented at three levels within large organisations:corporate ,business (SBU) and functional levels
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

41. Key learning points
OHT 11.21B
Environmental scanning involves analysing the firm’s external environment and is often undertaken using a PEST framework.
PEST analysis is concerned with detailing the main political, economic, social and technological factors impacting or likely to impact on the firm.
A SWOT analysis looks at the firm’s internal strengths and weaknesses in the context of the external analysis of the opportunities and threats which it faces.
Determining an appropriate competitive strategy requires managers to understand the nature of the industry and markets in which the firm operates 撲often achieved using Porter 痴 Five Forces Model as the framework for analysis.
The Five Forces Model helps us to identify the impact on profitability of:
釦the power of buyers;
釦the power of suppliers;
睦rivalry in the market place;
釦the threat from new entrants;
釦the threat from substitute products or services.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

42. OHT 11.21C
Key learning points
Strategic positioning involves the firm identifying what competitive stance it should take in the market place 釦two generic positioning strategies are usually recognised, namely being the low-cost producer or pursuing product differentiation .
Successful strategy formulation and implementation involve a number of steps ranging from clearly establishing the mission and goals of the firm to successful implementation of the strategy.
Approaches to competitive strategy formulation and implementation range from the classical approach, based around formal planning and rational analysis, to approaches which more clearly recognise that strategy decision-making is less predictable and more incremental and are based,for example,on the culture and values of the firm, internal decision-making processes as well as responses to continuous changes in the external environment 僕leading to the notion of an emergent strategy .
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.

43. Key learning points
OHT 11.21D
A resource-based theory of the firm identifies the critical importance of the firm’s internal resources in determining competitive scenarios,including the firm’s core competencies and distinctive capabilities .
Value chain analysis centres on a study of the different stages in the production process and the extent to which value is created at each of these stages.
Sustainable competitive advantage requires the firm to adapt to changes in the external environment change management is concerned with bringing about this adaptation and managing the forces for and against change within any organisation (perhaps analysed using a force-field mapping ).
Competitive advantage today is concerned with assessing and adapting to dynamic forces in the global economy Porter 痴 diamond is a useful mechanism for assessing competitive advantage under conditions of globalisation.
The traditional structure 膨conduct 朴performance paradigm in business economics suggests that market structure determines the conduct and behaviour of management and,in turn,industry performance.The study of competitive strategy in this chapter emphasises a much more complex set of factors that impact upon and underpin the behaviour of management when formulating and implementing strategy.
J. Nellis and D. Parker, Principles of Business Economics. © Pearson Education Limited 2002.