1. Economics of Strategy Besanko, Dranove, Shanley and Schaefer, 3 rd Edition Slide show prepared by Richard PonArul California State University, Chico  John Wiley  Sons, Inc. Chapter 1 The Evolution of the Modern Firm

2. 1840, 1910 and Today The years 1840, 1910 and 2003 represent widely disparate business conditions A historical analysis of business conditions illustrates the durability of fundamental economic principles behind business strategy

3. Infrastructure in 1840 Infrastructure in transportation, communication and finance were poorly developed in 1840 Poor infrastructure was behind the dominance of small family firms in that period

4. Transportation in 1840 Though railroads had begun to replace horse and wagon for transportation of goods, national railway network had not arrived Waterways used for long distance transportation was still in initial stages of development With poor transportation, producers were limited to local markets

5. Communication in 1840 Postal service which was the dominant mode of long distance communication still relied on the horse Telegraph was still in an early stage and was very expensive to use

6. Finance in 1840 Most businesses were partnerships and they found it difficult to obtain long term debt Shares of stock were not easily traded and cost of capital was high No institutional mechanism existed for handling business risk Futures trading was still to come about

7. Production Technology in 1840 Most factories used century old methods of production Use of standardized parts (prevalent in clocks and guns then) was just beginning Factories operated on the basis of internal contracts with supervisors leasing space, hiring workers and producing the goods

8. Government in 1840 Government was involved in large infrastructure investments such as canals and railroads Government also resolved commercial disputes and set the rules of the game for the businesses

9. Business in 1840 Technology limited production to traditional levels Without transportation infrastructure and access to large markets, mass production technologies would not have been useful

10. Business in 1840 Without communication infrastructure, information on prices, sellers and buyers were not readily available Given the tremendous risk, banks were unwilling to finance business expansion Under these conditions, businesses were small and informally organized

11. 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

12. Finance in 1910 Securities markets traded shares of large industrial firms Credit bureaus made credit information easily accessible Public disclosure of accounting information was in vogue

13. 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

14. 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

15. Transportation Infrastructure Today Air, rail and ground transportation have become better coordinated Cities like Atlanta have grown relying on air transport in spite of poor rail and water connections

16. Communications Telecommunication technology made instantaneous transmission of data possible and created global markets for some products and services Coordination of activities has become easier with modern computer and communication technologies

17. Finance Capital markets and financial institutions have become more active in evaluating firm performance Globalization of financial markets made many mergers and acquisitions (such as Daimler-Chrysler) possible Financial accounting developed to cope with the complexities of multi-divisional firms

18. Production Technologies 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

19. Government In some areas traditional regulation has been relaxed (deregulation of airlines, trucking, financial services) Regulation has increased in other areas (health care, workplace safety, discrimination, environmental protection)

20. Government Government support for basic research and commercialization of R & D projects Intergovernmental treaties and agreements create regional free trade zones

21. Business Today Strategies that were effective when competition was essentially domestic do not work well in globally competitive times Internal structure of firms have been changing, with firms focussing on their core businesses and leaving the rest to specialists Traditional hierarchies within organizations have been weakening

22. Business Today Advantage of large scale production diminished in some areas Advances in computing and communication long with industry standards have enabled complex coordination over long distances The role of the general manager has changed as the structure of the business organizations has changed

23. Infrastructure in Emerging Markets The variation seen among 1840, 1910 and 2003 can be seen to exist today when we look at cross section of countries 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

24. Business Conditions and Strategy Vertical integration was not needed in 1840 since scale of production was small Vertical integration trend is being reversed today since computer and communication technologies make complex coordination of tasks possible In some instances “virtual corporation” begins to make sense

25. 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