Business Organization

BUSINESS ORGANIZATION
ESCI-UPF | 2ND TRIMESTER | 2016-207
 TOPIC 1-Economists’ view of behavior
1. Economic behavior

People have unlimited wants but the resources are limited. People face trade-offs
(sacrificios) when choosing an option, so they opt for the preferred option within the
limits of:

• Limited resources
• Costly and imperfect information

Not all the choices are directly economic but all have economic implications. The
economists approach these decisions with 2 criteria:

• Marginal analysis: When making choices, people use to look at the margin.
There can be marginal benefits or marginal costs. The better option is the one
in which the marginal benefits are greater than the marginal costs.
• Cost-benefit analysis: Benefits and costs before the decision are sunk and
irrelevant and sunk costs are not reversible.

Opportunity cost: Choices involves sacrifices and those are the value of the
rejected option.

There are also two types of costs:

• Explicit costs: direct money expenditures.

• Implicit costs: opportunity costs that are not expenditures.

2. Alternative Models of Behaviour

There are two models of behavior in the “economic model”:

• Only money matters: Everyone and everything has a price. The only component
of a job is monetary compensation. So, anyone can get anybody to do anything for
a sufficiently amount of money.
• Happy is productive: Happy employees are more productive. Employees
exert higher effort when they are good treated instead of being better paid.

3. Decision making under uncertainty

• Describing risky outcomes: A lottery is any event with an uncertain
outcome. A probability of an outcome is the likelihood that this outcome
occurs (between 0 and 1). The probability distribution represents all the
possible payoffs and their probabilities. The expected value of a lottery is
the average payoff that it will generate. The variance and the standard
deviation are measures of the lottery riskiness.
• Evaluating risky outcomes:
a) Risk preferences:
1. Risk Lover
2. Risk Averse
3. Risk Neutral
b) Utility functions: Mathematical simplifications to represent human
behavior. Most people are risk averse. The expected utility is a measure
of the average utility that the lottery will generate.
EU (Lottery) = Pr(A)xU(A) + Pr(B)xU(B) + Pr(C)xU(C)
 TOPIC 2- Markets, organizations, knowledge and strategy
The main goal of the economic system is to satisfy human needs and wants. It
depends on the distribution mechanisms like free markets, central planning or a
mix between both.

An organization is all the individuals in it and their relationships. The organizations

work with social rules and they can be explicit (laws) or implicit (culture).

1. The market economy

A market is an organization where individuals exchange goods at a price. In the

market, the decision of what to produce is made in a decentralized way. The price
system includes the competition between companies which made the most
efficient survive and the others disappear. This price system also decides those
who take the product are the ones to that make optimal consumer choices.

The market also must have well designed property rights in order to obtain good
results. The property right is a legally enforced right to select use of an economic
good and have two main properties

• Private rights are alienable: they can be transferred to another

individual, within limits.
• Property rights confer use rights: they can use the asset they have
acquired with certain limits.

The market gets gains from trade. Individuals trade something the value less for
something they value more. Trade creates value and it is voluntary. Individuals
specialize in producing goods for which they have comparative advantage.
Specialization and trade make both parties better off.

2. Market vs. Central Planning

As an alternative to the market economies, there have been some “experiments”

consisting in a Central Planning. The foundation for these economies has been comes
from Marx, who argued that freedom of exchange can be a means of domination of
one class of individuals (the capitalists) over other classes (the labor).

• Central Planning: The decisions are centralized, what means that a committee
decides the prices and quantities for products and services. The committee
makes production plans and also decides and allocates the people.
 MARKET ECONOMIES
Requires good regulation in place to
avoid anticompetitive practices and
systemic risk
The system tends to generate
inequality
What if you simply don’t have money?
CENTRAL PLANNING
It’s hard that a committee replicates
OK the individual decisions
Socialism puts Equality ahead of
Freedom
If there is corruption the effect is
catastrophic

• Knowledge: General knowledge is freely transferable. Specific knowledge is

expensive to transfer. It is hard for a committee to obtain specific knowledge.
Free markets are able to make a superior use.

3. Contracting costs and existence of firms

Total cost of production:

• Transformation costs: direct costs of transporting inputs (raw materials) into

outputs.
• Transaction costs: Search and information costs; bargaining (negociación) and
decision; policing and enforcement (notary). Most optimal organizations are
able to minimize them.

There are many advantages that firms have over the markets:

a) Fewer transactions so fewer transaction costs

b) Information specialization
c) Reputational concerns
d) It is less costly to deal with transaction costs within a firm than openly in the
market.
4. What is strategy?

Strategies must create and capture value. Strategies are long-term and tactics are
short-term. In order to create value, companies have to be innovative by create
new products or achieve better quality; and reduce transaction costs.

Transaction costs can be reduced by the producer in the part of the logistics; and
also can be reduced by the customer making product search, learning the product’s
characteristics and quality, etc.

More ways to create value may be by converting organizational knowledge in

value, rely on employee’s activity or allow employees innovate and experiment.
The company is the one that owns the physical assets. Then it rents the brainpower
and creativity of the employees. Both of them have important implications in
determining the value of a company.

In order to formulate the strategies, there has to be a full internal understanding of

the resources, the capabilities and the environment. Also the company has to be
able to combine environmental and internal analyses and organize a strategical
architecture.
 TOPIC 3- Incentive conflicts and contracts
1. Firms as Networks of contracts

In order to allocate the resources, the markets use prices and the companies use
managers. Firms have many decision makers and that can leads to managerial
conflicts. All type of managers have has decision authority even those of the
middle-level, what can also generate conflicts.

The conflict provokes reduced productivity and waste. It is usually initiated by the
interest of the shareholders to have a good firm’s value and the interest of the
managers to have a great own utility.

The focal point of the firm is to have a set of contracts with the stakeholders. The
individual incentives are to maximize their own utility and sometimes are not
aligned with the objectives of the firm.

Owner: The owner looks for maximize the value of the firm over the long run
(profits, stock…).

Manager: The manager looks for maximize its own private utility.

That is the reason why sometimes the owner decides to make the manager a co-
owner of the company in order the make him want the best of the firm and not of
his own profit.

2. Incentive Conflicts
A. Owner vs. Manager.
➢ Salaries and perquisites (propina): in some countries perks pay fewer taxes.
It is hard to control their use by the managers. This leads that some
managers abuse of them.
➢ Work hard or shirk: It is hard to control the effort of the workers. They can
always say that they have done their best.
➢ Risk aversion: Owners tend to be risk neutral because they are able to
diversify their resources of income. However, managers are risk averse
because it is more difficult for them to diversify their sources of income.
➢ Different time horizons: Managers are more “short-termists” instead of
owners that look for long-term results.
➢ Overinvestment: Managers are reluctant to reduce the size of the company
because they don’t want to fire people, they want make their little empire
and if the company needs to downsize, it can be seen as “loser”.
B. Other Conflicts.
➢ Free ride or not: taking advantage of being part of a group without paying
costs. The efforts are individual but the result is for the whole group.
 ➢ Management vs. Labor: In bad economic times, many firms have to
downsize but it is not clear which part of the company should be most
affected. The manager is the final decision maker.
➢ Buyer-Supplier conflicts.
3. Controlling incentive problems with contracts

Contracts define the firm’s organizational architecture:

-Decision Rights
-Performance Evaluation
-Reward systems

Therefore contracts can control incentive conflicts within the firm. Costless
contracts are impossible because there are a lot of contracting costs. Complete
contracts are perfect knowledge about a contract and that is almost impossible.

The contracting costs in a company are the difficulty to negotiate or administer,

there are asymmetric information in which many times one party has more info
than the other and an opportunistic behavior where parties want to exploit their
perceives percentages.

Now, we introduce the agency model in which there are two parties: the principal
and the agent. The principal has formally the power but needs to delegate tasks.
The agent is supposed to do the job delegated by the principal.

Information asymmetry is that the two parties (principal and agent) who sign the
contract are not equally informed and one knows more than the other. There are
two types of information problems:

• Precontractual: Bargaining failures where individuals overreach during

negotiations to the point that the negotiations stop; and adverse
selection where there is a use of private information in a determined
way.
• Postcontractual: The principal incurs monitoring costs and the agent
may incur in bonding costs.
4. Implicit contracts and reputational concerns

Implicit contracts are agreements that can’t be legally enforced. Reputational

concerns can motivate implicit contract. With reciprocity you may obtain a level of
commitment from the agent you cannot with a contract.
 TOPIC 4- Organizational Architecture
The main problem is the important information to maximize the gaining decisions
is dispersed and costly to transfer. The challenge is to ensure that decision makers
have relevant information to make good decisions and appropriate incentives to
use the information.

1. Architecture within firms

The elements of organizational architecture are:

• Decision right assignment: who decides what.

• Performance- evaluation system: what are good and bad results.
• Reward system: how good and bad results are rewarded.

When a firm grows beyond an expected size, the CEO doesn’t pass all the information
for decision. As a result, there are 3 alternatives:

• The CEO makes decisions despite looking for information: There are limited
incentive problems and no need to develop control systems. It is likely to make
wrong decisions.
• The CEO tries to acquire more information to make decisions: Here, the CEO is
likely to retain control over the decision making process. This alternative is
costly and time consuming.
• The CEO decentralizes decision making to individuals with better information:
This alternative assigns decision-making authority to employees with better
information. This can lead also to many incentive problems.
2. Determinants of Architecture

Strategy and architecture affect one another. However, strategy is more likely to
adapt to the environment, and then the architecture will change to adapt to the
strategy.

The business environment has nothing to do with technology, markets and

regulation. All of them are also the basis of the competition and have to be taken
into account to define a strategy in order to create value.

3. Centralization vs. Decentralization

The factor to choose one or another depends on the size of the company. The
degree of decentralization determines which level of the firm’s hierarchy to place
the decision right. It is the origin of many business scandals.
 Decentralization

PROS
Effective use of local knowledge: Local
tastes and preferences.
Price sensitivities of particular
customers.
Conservation of management time:
Senior management focus on strategy.
Creativity and motivation for local
managers.
CONS
Potential agency problems: Effective
control system may be expensive.
Coordination costs and failures.
Less effective use of central
information.

Information and incentive costs may fall as technology changes. Benefits increase
when the importance of local knowledge increases. When talking about managerial
implications, the net benefits of decentralization will be higher in rapidly changing
environment. It is important to differentiate two main functions:

• Decision Management: Initiation and implementation.

• Decision Control: Ratification and monitoring.

Boards of directors make the ability to satisfy decisions made by the CEOs. They also
have monitoring authority related with corporate governance. The need for decision
control explains the use of hierarchies. Decentralization gives employees incentives to
experiment and innovate, which is also known as empowerment. The problem is that
instead of having one boss, now there is a boss in each team.

When talking about influence costs, employees have incentives to influence

managerial decisions, what can entail costs. The quality of the work is negatively
affected and what can reduce influence costs are the limits on managerial discretion.
To prevent influence costs, it needs to be bureaucratic rules in order to prevent
suborns.

4. Corporate Governance

It describes the organizational structure at the top of a firm. Corporations have the
legal standing of individuals since they can be part in a contract. Shareholders elect a
board of directors with decision control and they also have limited liability with the
owners since loses are the equity invested.

The stock can be closely held since it is not freely traded (in those that are wildly held,
the owner controls more than 10% of the shares); or publicly-traded which shares can
be bought and sold.
The main goals of the shareholders are maximizing long term value, protect the assets
of the company and produce financial statements. Some companies separate the
ownership from the control.

Good properties of large corporations:

• Survival and return: the corporate form is flexible.

• Benefit of publicly- traded corporations: able to raise large amount of capital.
This is one of the reasons of SL turning into SA.

Top-level architecture: decision rights divided among the stakeholders:

• Shareholders: those are the ultimate owners. They have limited participation in
management. They elect the board which oversees the management and also
have some ratification rights. Small shareholders have incentives to free ride
rather than be actively involved.
• Board of Directors: they delegate legal authority to professional managers. The
primary function is top-level decision control. The size usually is between 4 and
30. Over than a half are outside directors. The CEO usually chairs on board. The
work done in these committees are to audit, compensation and nominating.
The board members are compensated with some stock ownership.
• Top Management: The CEO decision rights are delegated to managers. The CEO
deals with investors and customers; the COO manages internal operations and
the CFO oversees financial managers. The performance is based in the
compensation (bonus, stock ownership…)
• External Monitors: the external monitors can be public accounting firms, stock
markets analysists, commercial banks, credit-rating agencies and regulatory
authorities.
 TOPIC 5- Vertical integration & Outsourcing
1. Vertical chain of production

Firms identify the costs and benefits of acquiring inputs, which can be acquired
through transactions in competitive markets (outsourcing) or producing them
internally (vertical chain). Kodak was the first big company to outsource services to
IBM.

Vertical Chain: raw materials- transportation- intermediate process- transportation-

assemblers- transportation- distribution of the finished good (retailer)- final consumer.

• Support Services: accounting, human resources, finance, marketing and

legal.

We outsource to find an enterprise more specialized in the activity. If you get closer to
the customer, you can capture the mark-up of the retailer.

• Vertical Integration: There are two types of vertical integration:

➢ The Forward/Downstream type is used when a firm moves into distribution
or additional finishing work. La compañía establece subsidiarias que
distribuyen o venden su propio producto tanto para consumidores como
para su propio consumo.
➢ The Backward/Upstream type is used when a firm produces its own inputs.
La compañía crea subsidiarias que producen algunos de los materiales
utilizados en la fabricación de sus productos. Por ejemplo, una compañía
automovilística puede poseer una empresa de neumáticos, una de vidrio y
una de metal.

• Outsourcing: the outsourcing can be Types of long-term contracts:

divided in spot transactions (punctual) and 1. Standard Supply and
long-term contracts with suppliers and distribution
2. Joint Ventures
customers.
3. Lease Contracts
4. Franchise agreement
5. Strategic alliances

The benefits of buying in competitive markets are the economies of scale and
specialization that can be taken from it. If the firm doesn’t use sufficient volume to
reach economies of scale, the market will be able to produce the input at a much
lower price. Another benefit of the competitive markets is that incentives can reach
efficient production.
 2. Reasons for nonmarket transactions

It is not always profitable to use the market because there are transaction frictions
that are costly. Some specific assets have a greater value because of its specific use but
not much value outside the firm.

• Site specificity: the asset is located in a very specific area useful only to
producers in that area.
• Physical asset specificity: the product design makes the asset useful to only
few buyers (personalized).

3. Vertical Integration vs. Long-term contracts

There are many factors that influence the choice between opting for vertical
integration and going for long-term contracts:

• Incomplete contracting: As we have seen, it is almost impossible to have full

information about the contracts and sometimes it can be difficult to specify the
rights. Also, we have to make sure which contingencies are going to be covered
and which not. Contracting costs will increase.
• Ownership and investment incentives: The owner determines the residual use
of an asset. Is the owner who takes more care of the asset or the user?
• As the asset is more specific, the vertical integration is preferred.

Long-term contracts are preferred to do in-house when they are nonspecific assets or
are basic products or services. Also, when there are incentive distortions and
dysfunctions within the firm.

4. Contracting with distributors

To avoid free-ride problems in contracting with distributors it is need to charge

franchisees for advertising and give them exclusive territories.
 TOPIC 6- Ethics
The relative efficiency of a firm depends on how ethical its behavior is. Ethical
problems arise from conflicts of interest. A good “reputational capital” is the key for
these conflicts to be self-resolved. This capital can be gained through repeated sales,
seller-provided warranties and third-party monitors and transparency.

1. Ethics and organizational architecture

The three elements of org. architecture can be designed to encourage ethical behavior.
An ethical behavior also reduces transaction costs. You don’t do ethics without further
change in the incentives of the organization. If we want real ethic change, we need to
change the incentives and the architecture.

An important subject in this matter is The Golden Rule: do to others as you would like
them to do to you.

2. Ethics and business choices

There are important trade-offs between monitoring and shirking (descartar). The
prices that customers are willing to pay will be lower if shirking is expected. Altruism
and business ethics economize on the contracting costs.

Business ethics seek to proscribe behaviors deemed inappropriate for firms (taking
gifts, mispresenting data, boycotting…). Good business performance is the first ethical
exigency. By maximizing a firm’s value, all stakeholders can share a bigger pie. Firms
that produce quality products at a low costs are the ones that survive and also are
loyal to the owners and stockholders. There can be problems of implementation,
corruption incentives can be strong. That’s why firms adopt Corporate Social
Responsibility (CSR) policies. Economists’ view on CSR: firms should do them until the
marginal benefit is equal as marginal costs.

3. Codes of ethics

Firms control ethical behavior with employees that voluntarily adopt standards, write
contracts that align interest and also write codes of ethics and provide training. They
use to be effective because alter both preferences and incentives.

There are two types of view the codes of ethics:

• Cynical view: helps to aim to defend itself for criticism and there is no real
desire for change (fake).
• Positive view: a good ethical behavior reduces transaction costs.

Codes of ethics also educate workers and inform them. They also have an impact in the
corporative culture: team building, corporate identity, employees’ personal growth.
 TOPIC 7- Finance
1. Financial Management

The financial management is responsible for investment decisions, financing decisions

and cash management. The goal of the financial manager is to maximize the
shareholder’s wealth in the long-term.

Value creation occurs when we maximize the share price for current shareholders.
Wealth maximization doesn’t preclude the firm from being socially responsible.

The profit maximization is at the short-term and its goal is to maximize earnings after
taxes. This can lead to two problems: the current profits could increase while harming
the firm and the changes in the risk may be ignored. Moreover, another goal in the
short-term is maximize the earnings per share after taxes divided by shares
outstanding. The problems that this can leads to are that it doesn’t specify the
deviation of the expected returns, the changes on the risks are ignored, it call for a
zero payout dividend policy and there is an excessive looking at the long-term.

2. Financial Statements

The financial statements are a snapshot of the current firm’s financial position. The
balance sheet identity (balace) is the sum of all the assets (activo) equal to the sum of
the liabilities plus the stockholder’s equity (pasivo).

The assets are what the company owns both currently and in the long-term. The
current assets are the cash or the expected to be turned into cash in the next year. The
long-term assets are the set of equipment, net property…

The liabilities are what the company owes both currently and in the long-term. The
current liabilities are debts due to be paid within the next years. The long-term
liabilities are the capital leases, long-term debt…

The stockholder’s equity is the difference between Assets and Liabilities. It is also the
book value of the company and it can be negative.

The market value of equity is the market price per share x the number of shares
outstanding. It can’t be negative and differs from the book value.

The market value vs. book value

Market Value of Equity

➢ Market-to-Book Ratio=
Book Value of Equity
➢ Enterprise value= Market value of equity+ debt- cash.
➢ Gross profit= total sales- cost of sales
➢ Operating Income= Gross Profit- Operating Expenses
 ➢ EBIT= Operating Income+- Other Incomes/Expenses
➢ Pre-tax Income= EBIT+- Interest Income or Expenses
➢ Net Income= Pre-tax Income- Taxes
➢ Change in Stockholder’s equity= Retained earnings+ Net sales of stock= Net
Income- Dividends+ Sales of stock- Repurchase of stock.

Financial statement analysis is used to compose the firm with itself over time and
compare the firm to other similar firms.

Profitability Ratios Leverage Ratios

Gross Profit Net debt= Total debt+ excess cash and

Gross Margin=
Sales short-term investment
Operating Income
Operating Margin= Debt- to- enterprise value=
Sales
Net debt
EBIT Market value of equity+Net debt
EBIT Margin=
Sales
Total Assets
Net Income Equity Multiplier=
Net Profit Margin= Book Value of Equity
Total Sales

Valuation Ratios

Share price
Price/ Earnings Ratio=
Earnings per Share

Market Value of Equity+Debt−Cash

Enterprise Value to EBIT=
EBIT

Market Value of Equity+Debt−Cash

Enterprise Value to Sales=
Sales

3. Financial Environment

Business interacts with financial markets which are composed of all the institutions for
bringing buyers and sellers of financial instruments together. The purpose of the
financial markets is to allocate efficiently savings to ultimate users.

The stock market provides liquidity to shareholders: ability to easily sell an asset for
close to the price you can currently buy it for.

In the public company the stock is traded by the public on a stock exchange. In the
private company the stock may be traded publicly.
In the primary market, the company sells new shares of stock to investors. In the
secondary market the transactions are after the ones from the primary market and
shares continue to be traded between investors.

The funds will flow to economic units that are willing to provide the greatest expected
return (holding the risks). The highest expected returns will be offered by those
economic units with most promising investment opportunities. Savings tend to be
allocated to the most efficient uses. The risk of expected return increments from
bonds to stock.

The default risk is the failure to meet the terms of a contract. Marketability is the
ability to sell a significant volume of securities in a short time in the secondary market
without big price concession.

The maturity is concerned with the life of the security, amount of time before the
principal amount of security becomes due. Taxability considers the expected tax
consequences of the security.

El vencimiento se refiere a la vida de la seguridad, cantidad de tiempo antes de que el

importe principal de la seguridad se venza. La fiscalidad considera las consecuencias
fiscales esperadas de la seguridad.

4. Financing decisions

The financing decisions determine the way the assets will be financed. The capital
structure is the relative proportions of debt, equity and other securities that a firm has
outstanding (para pagar).

If we had perfect capital markets, the total value of a firm wouldn’t depend on its
capital structure. The leverage increases the risk of the equity of a firm. El
apalancamiento aumenta el riesgo de la equidad de una empresa.
 TOPIC 8- Marketing
Amazon has succeeded because of its highly customer driven. They have created
unique personal customer experience (personalized home pages or product
recommendation), the have the “Discovery Factor” which means that users have to
look, learn and discover; also they have focused on the delivering customer value.

Marketing involves creating value for customers and building strong customer
relationships in order to capture value from customers in return. The goals of
marketing are attract new customers by promising superior value and keeping and
growing current customers by delivering satisfaction.

Traditional Contemporary
View-making a sale View- satisfying customer needs
Abundance of products in shops Webs/mobile, apps and blogs
TV/ magazine/ mail/ adds Reach customers directly, personally

The process to create value for customers is the following:

Understanding Marketing
Design Build Capture value
the market and program to
marketing relationships from customers
customer deliver superior
strategy with customers feedback.
needs value

1. Understanding the market and customer needs

In the marketplace there are customer needs, wants and demands. The needs are
classified in physical (food, clothes…), social (belonging and affection) and individuals
(knowledge and expression). The wants are taken by human needs but shaped by
culture and individual personality. Finally, the demands are wants that are backed by
the buying power.

The market offers a combination of products, information and experiences in order to

satisfy a need or a want of the population. The phenomenon called marketing myopia
is the mistake of paying more attention to the products of a company instead of
looking for the benefits and experiences produced by these products (Apple good;
Nokia bad).

Customers form expectations about the value and satisfaction of market offerings. Los
clientes forman expectativas sobre el valor y la satisfacción de las ofertas del mercado.
Satisfied customers buy again and spread the word. However, dissatisfied customers
change to competitor’s product and criticize your product.
Setting low expectations may surprise customers but on the other hand, sales are
lower. However, setting high expectations disappoint consumers.

2. Designing marketing strategy

The marketing management is in charge to choose the target audience and markets
and build profitable relationships with them. The value propositions and the marketing
orientations are the following:

• Production concept
• Product concept
• Selling concept
• Marketing concept

Nike Example

Nike built its image with promotional events and with big budget adds. The new
product creates an image of innovation and they focus on relationships both social and
network.

The selling concept comes from the profits through sales volume.

Profits
Existing Selling and
Factory through
products promoting
sale volume

The marketing concept comes from profits through the quality and the product in
relation with the profits through the consumer satisfaction.

Profits through
Customer Integrated
Market customer
needs marketing
satisfaction

3. Marketing Mix

The marketing mix is the set of tools that the firm uses in order to implement the
marketing strategy (4P). Each tool is mixed in a marketing program.

• Marketing segmentation: consists in dividing the market into groups of buyers

who have different needs and characteristics and who require separate
products or programs.
• Market segment: group of consumers who respond in a similar way to a given
set of marketing efforts.
 • Market targeting: evaluating the attractiveness of each segment of the market
and selecting one or more to enter.
• Positioning: occupy a distinctive place relative to competing products in the
minds of the target consumers. In this case the differentiation is really
important in order to create superior customer value.

The four Ps on the marketing mix are:

Product: variety, quality, design, name…

Price: list price, discounts, payment period…
Place: channels, coverage, locations, logistics…
Promotion: advertising, personal selling, sales promotions…

The 4P also have some criticism like the omission of service products, the need to
include packaging as a product decision and that it doesn’t provide the buyers
perception of the 4C (customer solution, customer costs, communication and
convenience).

4. Relationships with customers

The goal of the relationships with the customers is to deliver superior customer value
in order to build and maintain the relations. There are two ways of looking the
relationships with the customers:

• Customer- perceived value: customer’s evaluation of the difference between

benefits and costs of a marketing offer relative to those of competing offers.
Evaluación del cliente de la diferencia entre los beneficios y los costes de una
oferta de marketing en relación con los de ofertas competidoras.
• Customer satisfaction: extent to which a product’s perceived performance
matches a buyer’s expectations. Medida en que el rendimiento percibido de un
producto coincide con las expectativas de un comprador.

The levels of the customer’s relationships can be basic or full. However, the tools of
the relationships are marketing and reward programs.
 Marketing

Customer
Support Relationship Sales
Management

Orders

Customer-engagement marketing involves fostering direct and continuous customer

involvement in shaping brand conversations, experiences, and community. La técnica
de mercado de compromiso con el cliente implica fomentar la participación directa y
continua del cliente en la formación de conversaciones de marca, experiencias y
comunidad. The key is to find ways to enter consumer’s conversation with relevant
brand messages.

The customer- generated marketing: Consumers play an increasing role in shaping

their own brand experiences and those of other consumers. Los consumidores
desempeñan un papel cada vez más importante en la configuración de sus propias
experiencias de marca y de otros consumidores. It occurs by asking for new products
or service ideas and asking to play an active role in shaping ads.

The customer loyalty and retention: loyal customers are beneficially for the company.
The customer lifetime value is the value of the purchases that a customer makes over
a lifetime of patronage.

The customer’s relationship groups are:

The changing marketing landscape is divided in these groups:

• Digital age: engaging customers via digital devices. The mobile marketing
stimulates immediate buying: shopping easer and enrich brand experience.
• Economic environment: The Great Recession of 2008 was an undetermined
customer confidence. After that, consumers are more frugal (tend to spend
less). The spending of the new consumers reflects a simpler living. Marketers
now are focused on practicality and durability.
• Rapid globalization: marketers are taking global and local views of the industry,
the competitors and the opportunities. CSR are a very important factor of the
firms.
5. Marketing strategy

The strategic planning involves the adaption of the firm in order to take advantage of
the opportunities in its constantly changing environment.

The steps in strategic planning are:

Define the Set of the

Design the Planning
mission of main
portfolio marketing
the firm objectives
• Market level
• Corporate level

The SWOT analysis is a structured planning that evaluates those four elements of an
organization:

• Strengths: internal capabilities that help the fear reach its objectives
• Weaknesses: internal limitations that interfere with its ability to achieve its
objectives.
• Opportunities: external factors that the firm can exploit to its advantage.
• Threats: emerging externa factors that challenge the firm.

The portfolio analysis is the evaluation of the products and businesses and its purpose
is to direct resources toward more profitable businesses while dropping weaker ones.

The growth- share matrix is a chart to help corporations to analyze their business units
and product lines.
 The growth-share matrix evaluates the
company’s strategic business units (SBU) in terms of market growth rate and relative
market share.

The problems that this matrix causes are the difficulty, time consuming and costly to
implement. It is also difficult to define the SBUs. Finally, it focuses only in the
classification of the current businesses but provide little advice for future planning.

The Product/ Market expansion grid

The role that the marketing gets in strategic planning is to provide guiding philosophy
to create customer value and build relationships; to provide inputs to strategic
planners what helps to identify the market opportunities; and to design strategies for
reaching the unit’s objectives.

The marketing strategy is the marketing logistic by which the company hopes to create
customer value and relationships. It is formed by: analysis, planning, implementation
and control.

The marketing return on investment (ROI) is the net return from a marketing
investment divided by the costs of the marketing investment.
 TOPIC 9- Human Resources
1. Human Resource Strategy

The human resources are the total value of all the employees. The human resources
strategy is the utility of the firm’s HR to help it gain an advantage against its
competitors.

The key challenges of the individual human resources are:

- Matching people and organizations

- Ethics and Social Responsibility
- Empowerment
- Brain drain
- Job insecurity

The main benefits of the strategic HR policies are:

- Communicating company goals

- Encouraging productive behavior
- Stimulating critical thinking
- Identify gaps between current and future situations
- Encouraging managers’ participation
- Creating common bonds

There are also many human resources strategies that have to be chosen like staffing,
employee rights, remuneration…

2. Recruiting and selecting employees

The Human Resources planning is the process used to ensure that the firm has the
right number of people with the right skills. A failure in this plan can lead us to
significant financial costs.

Promotion from
within

Labor demand>
Training
Labor supply

Subcontracting

Pay cost
HR supply and
demand
Labor supply>
Reduced hours
Labor demand

Voluntary early
retirements
The three
Labor supply= Internal components on
Labor demand tranfers
the hiring
process are:
recruitment, selection and socialization.

The costs of the turnover are classified between the good employees and bad
employees. Good employees are worth about the 40% more than average employees.
However, bad employees cost about 25% of the salary (both directly and indirectly).
The major costs come from separation, recruitment, selection, hiring and productivity.

The challenges in the hiring process are the capability to recognize which
characteristics are more important. The performance of the workers is the
combination between ability and motivation.

The recruitment refers to the process of attracting, selecting and appointing suitable
candidates for jobs within an organization.

RECRUITMENT EXTERNAL INTERNAL

PROS Acquire fresh perspective Signals opportunity to workforce
and discipline effect on and less costly
existing staff
CONS Costly in terms of time to find Barriers to new ideas and might
and to learn and depressing spur resentment among those not
effect of existing staff promoted

The learning curve

 Slow Steep
Plateau
beginning acceleration

The selection tools are the ones that are taken into account when hiring staff. Those
can be:

Letters of recommendation
Application forms
Ability tests
Honestly tests
Psychology tests

Also companies must take into account the legal issues in staffing:

- Discrimination laws: develop clear policies for hiring and dismissing employees
- Affirmative action: not just for government and government contractors. Can
apply if guilty of discrimination
- Negligent hiring: learn as much as possible about past work related behavior.

3. Managing compensation

The objective of the managing compensation is to understand the differences between

the compensation systems in which employees are paid for the skills they use or for
the job they hold. They also have to make compensation decisions that comply with
legal framework.

The total compensation is the total sum of quantifiable rewards received for an
employee’s labor.

The pay mix is the combination of: base compensation, pay incentives and indirect
compensation (perks).

The compensation system should be able to enable the firm to achieve its objectives,
adapt to the characteristics of the firm and to incorporate the features in
compensation system. The equity is perceived as a fairness of the design.
 JOB-BASED INDIVIDUAL-BASED
Jobs are stable Company and environment are dynamic
Training required to learn a job Workforce is educated
Turnover is low Workforce is able to learn different jobs
Teamwork encouraged

EGALITARIAN ELITIST
Same system for most employees Different pay systems for employees
Reduces barriers between workers Result in more stable workforce
Easier to move workers to other jobs

TOPIC 10- Operations

1. Operations and supply chain

Most organizations function as part of larger supply chains. The operations

management is the set of planning and control activities that transform inputs into
outputs. The supply chain is the management of supply chain activities in order to
maximize customer’s value and achieve a sustainable competitive advantage.

Second-Tier First-Tier
Company Distributor Retailer
Supplier Supplier

Upstream Downstream
m

- The upstream activities are those positioned earlier in the supply chain.
- The downstream activities are those positioned later in the supply chain.
- First- tier supplier is a supplier that provides products or services directly to the
firm.
- Second-tier supplier is a supplier that provides products or services to a first-
tier supplier.
Major operations are the set of activities that contains process selection, forecasting
for decision making, planning for work scheduling, logistics…

There are three important trends:

• Electronic commerce: reduces costs and time.

• Increasing competition and globalization
• Relationship management: coordination and competition.

The elements of the supply chain strategy are the following:

Finance
MIS (info systems)
Human Resources
Design
Accounting
Marketing

The decisions must be guided by the SCO strategy depend on factors like capacity,
facilities and technology.

2. Four performance dimensions

Quality:

The performance quality is the basic operating characteristic of the product or service.
The conformance quality refers to the capability of the product or service following the
correct specifications. Finally, the reliability quality refers to the lifetime of the
product.

Time:

The delivery speed is the ability of the supply chain to quickly fulfill a need or want.
The delivery reliability is the ability to deliver products when promised.

Flexibility:

The mix flexibility is the ability to produce a wide range of diversified products. The
changeover flexibility is the ability to produce a new product with the minimum delay.
The volume flexibility is the ability to produce whatever volume the customer needs.

Cost:

There are labor, material, engineering and quality- related costs.

Generally is almost impossible to fulfill all of these four dimensions.

3. Logistics

The logistics management is the part of the supply chain that plans, implements and
controls the efficiency of services and information between the point of origin and
final point in order to meet customers’ needs and wants (transportation, warehousing,
packaging, inventory…).

Logistics are critical because of the impact on costs, the flexibility and delivery, the
advances in information systems, the globalization and the push towards
sustainability.

The transportation of the products can be done by:

• Highway: more flexibility of places but more slow and expensive. The highway
dominates the logistic infrastructure because of its geographic extension and
the fast delivery speed. It involves different types of shipment like the direct
truck (no stops) or the less than truckload (combines other loads).
• Water: is cost- effective for bulky items but it can only reach limited locations
and poor delivery speed.
• Air: it is the quickest and flexible but it is expensive and only for products with a
determined volume.
• Rail: it is cost- effective for bulky items and is faster than by water by it has
limited locations.

The multimodal solutions are the transportation solution that exploits the strengths of
multiple transportation modes for example roadrailer (can switch from rail to ground).

The warehousing is the operation part in charge to store, stage and centralize the
goods. It is used to reduce transportation costs, improve operational flexibility,
minimize customer lead times and minimize inventory costs.

The consolidation of the warehousing is the form of warehousing that combines small
shipments of sources of a same geographic area into larger and more economical loads
(cross-docking, break-bulk, hub-and-spoke system).

The logistic strategy is the strategy which ensures that the logistic choices are
consistent with its overall business strategy.

The outsourcing offers common carriers, contract carriers and third-party logistics
producers.

The reverse logistic system is a complete supply chain dedicated to the reverse flow of
products for the purpose of returns, repairs, recycling… The challenges are that the
firms have less control over timing and transportation for goods flowing back, the
goods can return for different reasons that the system needs to handle and the
forward systems don’t handle reverse logistic flows.
 Business Organization Economists’ View of Behavior

Poeple hanve unlimited wants but resources are limited so choices must be made in terms to
allocate those limited resources among unlimited wants.

When making a decision individuals are constraint by limited resources and costy and imperfect
information. This can trigger the “Suvival of the Fittest” phylosophy (Darwinism)

However all the choices that we face can be analyzed from a rational point of veiw but “Is there
any common pattern that explain individuals behavior when making decisions?”. There are:

THINKING AT THE MARGIN when making a decision

Marginal Benefits are additional benefits given by a choice

Marginal Costs are additional costs incurred by a choice

So the final choice will be the one where Marginal Benefits > Marginal Costs

THE COST-BENEFIT ANALYSIS when making a decison

Sunk Costs are benefits and costs that have preceded the decision; therefore they’re non-
recoverable and no longer relevant to the decison. Sunk Costs influence the decision-making.

The Opportunity Cost (≠explicit costs) is the trade-off or sacrifice that choices invlove.
Meaning, what does it cost to accept a particular outcome? Rejecting others.

So the final choice will be the one that has the lowest opportunity cost

The Economic Model doesn’t take into account individuals’ selfishness and greedyness.

! When promised a lifetime job and high salary the “Economic Model” can trigger easy job life
and poor results.

The Only-Money-Matters is reductionist and simplistic as everything and everyone has a price.
The main component of a job is the monetary compensation. Therefore anything can be made
by anybody as long as compensation is suffeciently high.

The Happy is Productive uses employee satisfaction and happiness as an instrument to achieve
firm’s goals. When employees feel better treated they exert higher effort and dedication:

! When promised a lifetime job and high salary the “Happy is Productive Model” will trigger high
motivation, higher effort, higher performance.
DECISION MAKING UNDER UNCERTAINTY Article Assignment “The Hidden Traps in Decision Making”

A Lottery is any event with an uncertain outcome.

The Probability of an outcome is the likelihood that the outcome occurs, which might be given
by the historical frequency among others. Therefore the Probability Distribution represents all
the possible payoffs in the lottery and their associated probabilities; it’s always between 0 and 1.

The Expected Value is a measure of centrality that measures the average payoff that the lottery
will generate; it’s value will always be different from any of the possible outcomes:
The higher, the better

EV = Pr(A) · A + Pr(B) · B + […]

*Where Pr is the probability and A is the payoff if the outcome occurs.

The Variance is a measure of dispersion that measures the lottery’s riskiness:

The lower, the better

V = Pr(A) · (A—EV)^2 + Pr(B) · (B—EV)^2 + […]

The Expected Utility is a way to measure the average utility that a lottery will generate, whereas
the expected value measures the payoff a lottery will generate.

EU = Pr(A) · U(A) + Pr(B) · U(B) + […]

This equations pretends to represent the human behavior when making a decision;

1. The Risk Averse person avoids risks and follow the status quo

2. The Risk Neutral go for the lower vairance

3. The Risk Lover likes to take risk and get extreme outcomes.
 Business Organization Markets, Organizations, Knowledge and Strategy

Satisfying unlimited humad needs & wants we should know what, how and who.
Those questions will be answered differently depending on the Allocation Mechanism and their
behavior.

An Organization is the sum of individuals and their relationships; therefore relationships matter
as much as individuals when defining an organization.

Organizations work with Social and Organizational Rules with are both Implicit like laws and
corporate protocols and Explicit corporate culture and values.

The FREE MARKET ECONOMY

The Free Market Economy is an organization where individuals exchange goods at a price.
Those goods include Production Factors too wich are all those goods that participate in the
process like land, labor…

What to Produce decisions are made in a decentralized system; hence, this is defined by
consumers and producers.
How to Produce the price induces competition between producers=competitors. This arise
a “survival of the fittest” culture which triggers on an increase in
productivity and efficiency.
Who gets it the price induces consumers to make optimal consumer choices.

-main inconveniences.

technical inconvenience regulation needed to avoit anti competitive parctices + risk system
ethical & human inconveniences it tends to generate inequality

Property Rights are needed in a Market Economy to work; this is a legally enforced right to
select use of an economic good. They are alienable -can be transferred between individuals-
and confer use rights to individuals within limits.

To Trade is when individuals exchange goods they value less than what they get; therefore this
creates value for all the parties and it’s voluntary. Gains in trading are given by:

Difference in preferences or Differenciation

Comparative Advantage where the individual has lower opportunity cost when producing a good

Specialization which is about producing goods for which they have comparative advantage. This
increases productivity but makes it more complicated to coordinate problems.
 -market is driven by 3 main mechanisms-

The Demand Curve shows the quantity of goods that consumers are willing to pay at a certain
Price; therefore it describes consumers’ behavior among price.

The Supply Curve shows the quantity of goods that sellers are willing to offer at a certain Price;
therefore it descrives suppliers’ behavior among price.

The Price coordinates consumption and production decisions. It is fixed by consumers’ and
suppliers’ behavior, so it gives them incintives to shift production or reduce quantity of high
priced products.

“Goods are rationed to those willing to pay”

Supply Curve SURPLUS when P increases; Qs > Qd

Market-Clearing Price
SHORTAGE when P decreases; Qs < Qd
Demand Curve

exercice How do we workout the Market-Clearing Price meaning, equilibrium price and quantity:

The CENTRAL PLANNING MARKET

The Central Planning Market suggested by Karl Marx, believes that freedom of exchange is a
means of domination of Capitalists over Lavor classes.

What to Produce decisions are made in a centralized system; hence, quantities and prices
are fixed by a committee.
How to Produce the committee fixes it
Who gets it the committee decides where to spend money, allocates jobs and so on.

-main inconveniences-

technical inconvenience the committee can’t replicate individual decisions

ethical & human inconvenience equality over freedom
Specific Information is expensive to transfer and it refers to consumers’ preferences…
General Information is freely transferible and it refers to general laws…

What differentiates Free Markets and Centrally Planned Markets is the right use and flow of
Specific Information, although they both own it:

DIFFERENCES IN THE USE AND FLOW OF SPECIFIC INFORMATION

CENTRALLY PLANNED MARKETS FREE MARKETS

There are frictions between agents so the They make superior use of Specific
committe doesn’t get specific information Information
It provides incentives which promote higher
There’s a lack of incentives
efforts

Production Costs include both Transaction Costs and Transformation Costs

Transformation Costs are direct costs incurred when transformint inputs into outputs. That
includes raw materials, machinery, investments…

Transaction Costs are those related to search & information, bargaining & decision-making and
policing & enforcement costs.

Therefore the MAIN GOAL is to minimize transaction costs to be economically optim so this is
why Hierarchy makes it easier for Firms to reduce costs compared to the whole Market as:

-the Market Hierarchy Model-

-advantages of firms over markets-

There are fewer transactions meaning it is less costly and easier to deal with problems in-house
It is easier to practice information specialization.
It is easier to deal with reputational concerns.
Strategy is any short/long term General Policy intended to generate profits and creates &
captures value through innovation or diversification, for instance. This can be the choice of an
industry, product innovation, competitive behavior…

-how to Create Value-

1. Innovation new products or quality improvement (demand curve shifts to the right)
2. Decreasing Transaction Costs both Producer-related and Consumer-related Costs.
3. Organizational Knowledge relying on employee’s creativity and allowing them to experiment
and innovate; this might help reduce Consumer-related Costs -improving the product through
employees feedback-.

When it comes to determine the Company’s Values two things should be taken into account; the
company owns the physical assets, but it rents employee’s brainpower and creativity.

STRATEGY FORMULATION

1. Understanding Internal Resources and Capabilities like physical, human and organizational capital
2. Understanding the Environment like markets, techonology, government regulation…
3. Combining External and Internal Analyses from customers and employees.
4. Apply Strategy and Organizational Architecture

! When Strategy Formulation the Swot Matric works as a helpful tool to analyse external and
internal weaknesses and strengths of the company.

HELPFUL to achieve Goals HARMFUL to achieve Goals

INTERNAL STRENGHTS WEAKNESSES

EXTERNAL OPPORTUNITIES THREATS

 Business Organization Incentive Conflicts and Contracts

When resources have to be allocated Markets use Price and Firms use Managers.

The actual decision-making process within firms is complex because:

There are many deicision-makers within the firm — the CEO concentrates most of decision
rights and delegates operating decisions to lower-level managers.

Decision-makers’ objective is in conflict with the firm’s objective; personal incentives ≠ profit
maximization.

A Firm is a focal point for a set of contracts, because:

The firm is a creation of the legal system.

A firm is always one of the parties to each contract -either explicit or implicit contracts- that
constitute the firm like employee contracts, supplier contracts…)

! Implicit Contracts are ensured by the manager’s reputation; besides, they should be avoided as
they can’t be proved.
INCENTIVE CONFLICTS WITHIN FIRMS

Incentive Conflicts arise when the individuals in a firm don’t have their goals aligned; either
between them and with the firm -profit maximization-. The most common conflicts within a firm
are between owners and managers:

Choice of Effort additional effort from managers increases the value of the firm; when this effort
is expended by managers, the additional effort will decrease their utility.

Perquisite Taking or Perks Taking owners should pay sufficient salaries to maintain competent
managers; if owners don’t want to overpay, managers want perks in exchange.

Differential Risk Exposure managers are more risk averse because most of their personal
wealth is invested on the company; whereas owners are more risk neutral as they diversify their
source of income.

Differential Horizons managers are more shor-terminist because they have limited incentives to
care about long-term cash flows that extend their tenure with the firm.

Overinvestment managers are more likely to overbuild than reducing the firm’s size as they have
to bear most personal costs while owners receive benefits.

Other external conflicts are Buyer-Supplier Conflicts over price-quality relationship; Joint
Ownership when decisions affect the whole organization, creating free-riders where some
partners benefit for others’ effort while they shirk; and conflicts between Management and
Labor Unions.
 Business Organization Economists’ View of Behavior

Poeple hanve unlimited wants but resources are limited so choices must be made in terms to
allocate those limited resources among unlimited wants.

When making a decision individuals are constraint by limited resources and costy and imperfect
information. This can trigger the “Suvival of the Fittest” phylosophy (Darwinism)

However all the choices that we face can be analyzed from a rational point of veiw but “Is there
any common pattern that explain individuals behavior when making decisions?”. There are:

THINKING AT THE MARGIN when making a decision

Marginal Benefits are additional benefits given by a choice

Marginal Costs are additional costs incurred by a choice

So the final choice will be the one where Marginal Benefits > Marginal Costs

THE COST-BENEFIT ANALYSIS when making a decison

Sunk Costs are benefits and costs that have preceded the decision; therefore they’re non-
recoverable and no longer relevant to the decison. Sunk Costs influence the decision-making.

The Opportunity Cost (≠explicit costs) is the trade-off or sacrifice that choices invlove.
Meaning, what does it cost to accept a particular outcome? Rejecting others.

So the final choice will be the one that has the lowest opportunity cost

The Economic Model doesn’t take into account individuals’ selfishness and greedyness.

! When promised a lifetime job and high salary the “Economic Model” can trigger easy job life
and poor results.

The Only-Money-Matters is reductionist and simplistic as everything and everyone has a price.
The main component of a job is the monetary compensation. Therefore anything can be made
by anybody as long as compensation is suffeciently high.

The Happy is Productive uses employee satisfaction and happiness as an instrument to achieve
firm’s goals. When employees feel better treated they exert higher effort and dedication:

! When promised a lifetime job and high salary the “Happy is Productive Model” will trigger high
motivation, higher effort, higher performance.
DECISION MAKING UNDER UNCERTAINTY Article Assignment “The Hidden Traps in Decision Making”

A Lottery is any event with an uncertain outcome.

The Probability of an outcome is the likelihood that the outcome occurs, which might be given
by the historical frequency among others. Therefore the Probability Distribution represents all
the possible payoffs in the lottery and their associated probabilities; it’s always between 0 and 1.

The Expected Value is a measure of centrality that measures the average payoff that the lottery
will generate; it’s value will always be different from any of the possible outcomes:
The higher, the better

EV = Pr(A) · A + Pr(B) · B + […]

*Where Pr is the probability and A is the payoff if the outcome occurs.

The Variance is a measure of dispersion that measures the lottery’s riskiness:

The lower, the better

V = Pr(A) · (A—EV)^2 + Pr(B) · (B—EV)^2 + […]

The Standard Deviation is an alternative measure of risk — Standard Deviation = Variance

The Expected Utility is a way to measure the average utility that a lottery will generate, whereas
the expected value measures the payoff a lottery will generate.

EU = Pr(A) · U(A) + Pr(B) · U(B) + […]

This equations pretends to represent the human behavior when making a decision;

1. The Risk Averse person avoids risks and follow the status quo

U(x) = x

2. The Risk Neutral go for the lower vairance

U(x) = x^2

3. The Risk Lover likes to take risk and get extreme outcomes

U(x) = ax
example We must decide between two lotteries:

Lottery 1 Stock of an Internet Firm Lottery 2 Stock of an Auto Industry Firm

Value Probability Value Probability

€80 0,3 €80 0,1

€100 0,4 €100 0,8

€120 0,3 €120 0,1

EV = (80·0,3)+(100·0,4)+(120·0,3) EV = (80·0,1)+(100·0,8)+(120·0,1)
EV = 100€ EV = 100€

Variance = 0,3·(80-100)^2 + Variance = 0,1·(80-100)^2 +

0,4·(100-100)^2 + 0,8·(100-100)^2 +
0,3·(120-100)^2 = 0,1·(120-100)^2 =
V = 240€ V = 80€

Expected Utility = 0,3 · 80 Expected Utility = 0,1 · 80

0,4 · 100 0,8 · 100
0,3 · 120 0,1 · 120
EU = 9,97 EU = 9,99

answer The best choice is Lottery 2 because the risk is lower.

! We could have guessed beforehand that the Internet’s firm variance is higher because the
chances to get one or the other valuer are more equally distributed, whereas in the Auto firm
you have 80% chances to get a good value. Moerover, they both have the same expected
value.

! The Expected Value has been calculated assuming we’re “risk averse”
 Business Organization Markets, Organizations, Knowledge and Strategy

Satisfying unlimited humad needs & wants we should know what, how and who.
Those questions will be answered differently depending on the Allocation Mechanism and their
behavior.

An Organization is the sum of individuals and their relationships; therefore relationships matter
as much as individuals when defining an organization.

Organizations work with Social and Organizational Rules with are both Implicit like laws and
corporate protocols and Explicit corporate culture and values.

The FREE MARKET ECONOMY

The Free Market Economy is an organization where individuals exchange goods at a price.
Those goods include Production Factors too wich are all those goods that participate in the
process like land, labor…

What to Produce decisions are made in a decentralized system; hence, this is defined by
consumers and producers.
How to Produce the price induces competition between producers=competitors. This arise
a “survival of the fittest” culture which triggers on an increase in
productivity and efficiency.
Who gets it the price induces consumers to make optimal consumer choices.

-main inconveniences.

technical inconvenience regulation needed to avoit anti competitive parctices + risk system
ethical & human inconveniences it tends to generate inequality
Property Rights are needed in a Market Economy to work; this is a legally enforced right to
select use of an economic good. They are alienable -can be transferred between individuals-
and confer use rights to individuals within limits.

To Trade is when individuals exchange goods they value less than what they get; therefore this
creates value for all the parties and it’s voluntary. Gains in trading are given by:

Difference in preferences or Differenciation

Comparative Advantage where the individual has lower opportunity cost when producing a good

Specialization which is about producing goods for which they have comparative advantage. This
increases productivity but makes it more complicated to coordinate problems.

-market is driven by 3 main mechanisms-

The Demand Curve shows the quantity of goods that consumers are willing to pay at a certain
Price; therefore it describes consumers’ behavior among price.

The Supply Curve shows the quantity of goods that sellers are willing to offer at a certain Price;
therefore it descrives suppliers’ behavior among price.

The Price coordinates consumption and production decisions. It is fixed by consumers’ and
suppliers’ behavior, so it gives them incintives to reduce quantity or shift production,
respectively, of high priced products.

“Goods are rationed to those willing to pay”

Supply Curve SURPLUS when P increases; Qs > Qd

Market-Clearing Price
SHORTAGE when P decreases; Qs < Qd
Demand Curve

exercice How do we workout the Market-Clearing Price meaning, equilibrium price and quantity:

Supply Formula P = 5Qs = Qs = P/5

Demand Formula P = 120 - Qd = Qd = 120 - P

as Qd = Qd; P/5=120-P therefore P*=100 (Equilibrium Price)

then, Qd = 120 - 100 = Q*=20 (Equilibrium Quantity)

The CENTRAL PLANNING MARKET

The Central Planning Market suggested by Karl Marx, believes that freedom of exchange is a
means of domination of Capitalists over Lavor classes.

What to Produce decisions are made in a centralized system; hence, quantities and prices
are fixed by a committee.
How to Produce the committee fixes it
Who gets it the committee decides where to spend money, allocates jobs and so on.

-main inconveniences-

technical inconvenience the committee can’t replicate individual decisions

ethical & human inconvenience equality over freedom

Specific Information is expensive to transfer and it refers to consumers’ preferences…

General Information is freely transferible and it refers to general laws…

What differentiates Free Markets and Centrally Planned Markets is the right use and flow of
Specific Information, although they both own it:

DIFFERENCES IN THE USE AND FLOW OF SPECIFIC INFORMATION

CENTRALLY PLANNED MARKETS FREE MARKETS

There are frictions between agents so the They make superior use of Specific
committe doesn’t get specific information Information
It provides incentives which promote higher
There’s a lack of incentives
efforts

Production Costs include both Transaction Costs and Transformation Costs

Transformation Costs are direct costs incurred when transformint inputs into outputs. That
includes raw materials, machinery, investments…

Transaction Costs are those related to search & information, bargaining & decision-making and
policing & enforcement costs.

Therefore the MAIN GOAL is to minimize transaction costs to be economically optim so this is
why Hierarchy makes it easier for Firms to reduce costs compared to the whole Market as:
 -the Market Hierarchy Model-

-advantages of firms over markets-

There are fewer transactions meaning it is less costly and easier to deal with problems in-house
It is easier to practice information specialization.
It is easier to deal with reputational concerns.

Strategy is any short/long term General Policy intended to generate profits and creates &
captures value through innovation or diversification, for instance. This can be the choice of an
industry, product innovation, competitive behavior…

-how to Create Value-

1. Innovation new products or quality improvement (demand curve shifts to the right)
2. Decreasing Transaction Costs both Producer-related and Consumer-related Costs.
3. Organizational Knowledge relying on employee’s creativity and allowing them to experiment
and innovate; this might help reduce Consumer-related Costs -improving the product through
employees feedback-.

When it comes to determine the Company’s Values two things should be taken into account; the
company owns the physical assets, but it rents employee’s brainpower and creativity.
STRATEGY FORMULATION

1. Understanding Internal Resources and Capabilities like physical, human and organizational capital
2. Understanding the Environment like markets, techonology, government regulation…
3. Combining External and Internal Analyses from customers and employees.
4. Apply Strategy and Organizational Architecture

! When Strategy Formulation the Swot Matric works as a helpful tool to analyse external and
internal weaknesses and strengths of the company.

HELPFUL to achieve Goals HARMFUL to achieve Goals

INTERNAL STRENGHTS WEAKNESSES

EXTERNAL OPPORTUNITIES THREATS

 Business Organization Incentive Conflicts and Contracts

When resources have to be allocated Markets use Price and Firms use Managers.

The actual decision-making process within firms is complex because:

1. There are many deicision-makers within the firm — the CEO concentrates most of decision
rights and delegates operating decisions to lower-level managers.

2. Decision-makers’ objective is in conflict with the firm’s objective; personal incentives ≠ profit
maximization.

A Firm is a focal point for a set of contracts, because:

1. The firm is a creation of the legal system.

2. A firm is always one of the parties to each contract -either explicit or implicit contracts- that
constitute the firm like employee contracts, supplier contracts…)
INCENTIVE CONFLICTS WITHIN FIRMS

Incentive Conflicts arise when the individuals in a firm don’t have their goals aligned; either
between them and with the firm -profit maximization-. The most common conflicts within a firm
are between owners and managers:

Choice of Effort additional effort from managers increases the value of the firm; when this effort
is expended by managers, the additional effort will decrease their utility.

Perquisite Taking or Perks Taking owners should pay sufficient salaries to maintain competent
managers; if owners don’t want to overpay, managers want perks in exchange.

Differential Risk Exposure managers are more risk averse because most of their personal
wealth is invested on the company; whereas owners are more risk neutral as they diversify their
source of income and only focus on the expected return.

Differential Horizons managers are more shor-terminist because they have limited incentives to
care about long-term cash flows that extend their tenure with the firm.

Overinvestment managers are more likely to overbuild than reducing the firm’s size as they have
to bear most personal costs while owners receive benefits.
Managers’ ego plays a big role here too; “the bigger, the better”

Other external conflicts are:

Buyer-Supplier Conflicts over price-quality relationship; or when they make the wrong puchasing
decision by only focusing on the profits or kickbacks that the buyer gets, regardless of the
quality of the puchase itself.

Joint Ownership when decisions affect the whole organization, creating free-riders where some
partners benefit for others’ effort while they shirk; a way to avoid “shirking” is when the owner
knows about how the business works.

Conflicts between Management and Labor Unions; like when the company has to fire
employees it’s not clear what part of the company should be most affected.
CONTROLLING INCENTIVE PROBLEMS WITH CONTRACTS

Contracts define the organizational architecture of a firm in terms of reward system and
decision rights among others.
Moreover, they are a good way to control potential conflicts with in a firm as they set boundries.

Costless Contracts ain’t possible as Contracts themselves trigger a set of costs:

Transaction Costs from negotiating, writting and administering it.

Asymmetric Information where one party has more or better information than the other creating
an imbalance of power in transactions, which can sometimes cause the transactions to go awry.
Opportunistic Behavior as parties want to negotiate their perceived advantages.

The Agency Model is an organizational model that defines the relationship between the Principal
who is the person who formally has the “power” and delegates tasks to the Agent who is
supposed to do the “dirty job”.

Its main problem is with the Information Asymmetry which is not equal as the parts of the
contract don’t have the same amount of information; besides, we distinguish between:

1. Precontractual Information Problems wich involve:

Bargaining Failures when, because of asymmetric information, individuals overreach during

negotiations to the point that the bargaining process stops
Adverse Selection when, in an asymmetric information scenary, traders with better private
information about the quality of a product selectively participate in trades which benefit them
the most at the expense of the other trader.

2. Postcontractual Information Problems which involve:

Monitoring Costs, incured by the Principal, when they attempt to monitor or restrict the actions
of the agent.
Bonding Costs, incured by the Agent, when he commits to contractual obligations that limit or
restrict his activity.

IMPLICIT CONTRACTS AND REPUTATIONAL CONCERNS

Implicit Contracts are agreements that can’t be legally enforced. The only reason they work is
because of Reputational Concerns and Reciprocity as they can build a level of commitment
from the agent that a normal contract wouldn’t.

! Implicit Contracts should be avoided as they can’t be proved.

 Microeconomía Les Forces de Mercat de l’Oferta i la Demanda

Oferta i Demanda forces que possibiliten el funcionament de les economíes de mercat.

Determinen la quantitat de producció i el preu de venda.

L’Estructura de Mercat son el conjunt de condicions que determinen el comportament de les

persones -grup de compradors i venedors- quan s’interrelacionen en el mercat competitiu.
Els Compradors determinen la Demanda del producte i els Venedors determinen l’Oferta.

! Actualment, aquesta activitat no comporta coincidència temporal ni presencial entre les parts.

-per tal d’assolir un grau de competència màxima s’han de complir un seguit de condicions-

1. Els bens que s’ofereixen son iguals; no hi ha diferenciació.

2. Hi ha una gran quantitat de compradors i venedors i cap pot influïr en el preu de mercat; son
Preu-Acceptants qui tenen poc poder de mercat.
3. Hi ha un grau elevat de Transperència en l’informació
4. Lliure entrada-sortida de compradors i venedors.

-tipus de mercat-

En el Monopoli hi ha un únic venedor qui fixa els preus (≠competència perfecte)

L’Oligolopi es un grup reduit de venedors qui tenen domini de mercat i per tant fixen preus.

El Monopsonio és el mercat on hi ha un únic comprador qui fixa els preus.

LA DEMANDA la conducta dels compradors

La Llei de la Demanda explica la relació directe entre la quantitat demandada i el preu del bé;
quan el preu d’un bé augmenta, la quantitat demandada disminueix.

La Quantitat Demandada és la quantitat d’un bé que els compradors volen i poden pagar.

És important saber que per entendre el funcionament dels Mercants s’ha d’estudiar la Demanda
del Mercat la qual és la suma de totes les demandes individuals d’un bé (es sumen les
quantitats individuals per obtenir la colectiva).

La Corba de la Demanda és el gràfic que representa la relació entre el

preu i la quantitat demandada; aquesta té pendent negativa.
Figura 1.3. Taula
de la Demanda

! Independentment de que la quantitat demandada depengui del preu, a l’eix d’abscisses hi va la

Quantitat Demandad i a l’eix d’ordenades el Preu.

La posició i moviments que pugui experimentar la corba ve determinat per un conjunt de

Variables Rellevants o Independents que alteren la quantitat demandada:

1. La Renda afectara de manera diferent en funció del producte; un Bé Normal es aquell que
quan la renda augmenta, la demanda augmenta; en canvi el Bé Inferior és aquell que quan la
renda disminueix, la demanda augmenta.
2. Els preus dels Bens amb Relació Directe com son els Substitutius que son bens aque
satisfan les mateixes necessitats; la demanda d’ambdós es comporta igual. D’altra banda, hi ha
els Complementaris que son bens que es complementen.
3. Els Gustos i Tendències basats en forces històriques i psicològiques.
4. Les Expectatives de Futur respecte l’evolució dels preus i disposició de recursos.
5. El Número de Compradors influeix en la quantitat demandada d’un bé.

El desplaçament de la corba de Demanda variará en funció de la variant que canvïi; la Variació

del Preu provoca un desplaçament al llarg de la corba de demanda; en canvi una Variació d’una
Variable Rellevant provoca un desplaçament de la corba de demanda.
L’OFERTA la conducta dels venedors

La Llei de l’Oferta explica la relació entre el preu d’un bé i la quantitat oferida del bé; quan el
preu d’un bé augmenta, s’obté més rendibilitat i per tant augmenta la quantitat oferida.

La Quantitat Oferida és la quantitat que els venedors volen i poden vendre.

És important saber que per entendre el funcionament dels Mercants s’ha d’estudiar l’Oferta del
Mercat la qual és la suma de totes les ofertes individuals d’un bé (es sumen les quantitats
individuals per obtenir la colectiva).

La Corba de l’Oferta és el gràfic que representa la relació entre el

preu i la quantitat oferida; aquesta té pendent positiva.
Figura 1.3. Taula
de l’Oferta

! Independentment de que el Preu sigui la variable Dependent i la Quantitat la variable

Independent; a la funció de l’oferta a l’eix d’abscisses la variable dependent correspon a la
Quantitat i a l’eix d’ordenades la variable independent correspon al Preu.

La posició i moviments que pugui experimentar la corba ve determinat per un conjunt de

Variables Rellevants o Independents que alteren la quantitat demandada:

1. El Preu dels Factors Externs com els Factors de Producció afecten la rendibilitat de la
producció, mantenint el preu constat; per tant un augment en el Preu d’un factor extern,
disminueix la rendibilitat i la quantitat oferida.
2. La Tecnología i els avenços tecnològics permeten augmentar la rendibilitat i
conseqüentment, la quantitat oferida.
3. Les Expectatives de Futur respecte l’evolució de preus, disposició de recursos…
4. El Número de Venedors o Ofertants influeix en la quantitat oferida.

El desplaçament de la corba d’Oferta variará en funció de la variant que canvïi; la Variació del
Preu provoca un desplaçament al llarg de la corba d’oferta; en canvi una Variació d’una Variable
Rellevant provoca un desplaçament de la corba d’oferta
EQUILIBRI DE MERCAT

El punt d’Equilibri de Mercat és on es creuen la corba de Demanda i la corba d’Oferta; per tant
on s’assoleix:

El Preu d’Equilibri que és el Preu on la quantitat oferida i la quantitat demandada coincideixen.

La Quantiat d’Equilibri és la quantitat oferida i quantitat demandada al Preu d’Equilibri.

“La quantitat del bé que els consumidors volen i poden pagar és exactament la mateixa
quantitat que els venedors volen i poden oferir”

Els Excedents o Accés d’Oferta d’un bé es generen quan Quantitat Oferida > Quantitat
Demandada a un Preu en determinat; per tant aquest Preu és > al Preu d’Equilibri.

L’Escassedat o Accés de Demanda d’un bé es genera quan Quantitat Oferida < Quantitat
Demandada a un Preu en determinat; per tant aquest Preu és < al Preu d’Equilibri.

! La Llei de l’Oferta i la Demanda estableix que el Preu d’un bé s’ajusta per equilibrar les
quantitats demandades i oferides; per tant és el mateix comportament de compradors i
venedors el que desencadena un escenari d’Equilibri de Mercat.
Per tant, partint de les següents premisses:

1. La Demanda és la quantitat que, per cada preu, els demandants estan disposats a demandar
i comprar, és a dir els Plans de Compra.

2. L’Oferta és la quantitat que, per cada preu, els ofertants estan disposats a oferir i vendre, és
a dir els Plans de Venda.

L’Equilibri de Mercat es trobarà en aquell punt on Plans de Compra = Plans de Venda, és a dir,
on totes les parts veuen satisfets els seus plans.

com trobem el Preu d’Equilibri mitjançant un exemple

Quan disposem de les funcions de la gràfica, el Punt d’Equilibri es trobarà en aquell punt on
Qd=Qs, per tant, si disposem de les següents funcions:

Qd(P) = 19 - 6P Si Qd=Qs; 19 - 6P = 6P - 5; P*=2

Qs(P) = 6P - 5 quan P*=2; Qd=Qs=6·2 - 5 = Q*=7

En aquest cas, les Qd i Qs (nominador) depenen d’una única variable; el Preu (denominador), pel
qual haurem d’utilitzar el Diferencial per determinar la relació entre variables; quan la relació és
positiva, confirmen la Llei de l’Oferta; quan la relació és negativa confirment la Llei de Demanda.

Tot i així aquestes deriven de funcions en les que també hi intervené el preu d’un conjunt de
Factors Externs com ara Qd(P,R,Pr,Pg); en aquests casos haurem d’utilitzar:

La Derivada que ens permet avaluar el comportament d’una variable (Quantitat) quan depèn
d’una altra variable (Preu), per tant el que haurem de fer serà aïllar la P de les funcions Qd i Qs,
per tal de determinar la relació entre variables.

La Derivada Parcial que ens permet avaluar el comportament de la variable de Quantitat

(nominador) quan està subjecte a la variable del preu dels Factors Externs (denominador)
Els Canvis d’Equilibri venen donats per esdeveniments que provoquen el desplaçament de totes
o part de les corbes; hi ha 3 passos per analitzar aquestes situacions:

primer pas averiguar quina corba es veu desplaçada; oferta, demanda o ambdúes.
segon pas averiguar en quin sentit es desplaça la corba
tercer pas representar el desplaçament a una taula d’oferta i demanda per estudiar quin efecte
té el despalaçament sobre el Preu i les Quantitats.

Variació de l’Oferta Desplaçament de la Corba d’Oferta

Variació de la Quantitat Demandada Moviment al llarg de
la Corba de Demanda

Variació de la Demanda Desplaçament de la Corba de Demanda

Variació de la Quantitat Oferida Moviment al llarg de la Corba d’Oferta

Per tant, els canvis d’equilibri es poden desenvolupar de diferents maneres, com ara;

Una Expansió de la Demanda ve donada per un augment en la

preferèncie per un bé, és a dir, per cada preu, els consumidors
estarán disposats a demandar una quantitat superior.
En aquest ascenari, l’Oferta es manté.

augment P* augment Demanda

augment Q* (Qd i Qs) manteniment Oferta

Una Contracció de l’Oferta succeeix quan, per cada preu, els

venedors estan disposats a oferir una quantiat inferior.
En aquest ascenari, la Demanda es manté.

augment P* manteniment Demanda

disminució Q* (Qd i Qs) disnimunció Oferta
Una Expansió de la Demanda i una Contracció de l’Oferta simultànies provocarán un augment
del Preu, però l’efecte sobre la Quantitat será ambigüo, en funció de la dimensió de l’expansió
de la demanda.