Business strategies are founded on the ability of an enterprise to make firm decisions. On the other hand, both enforcement and antitrust policies evaluate the decisions made by the businesses and the resulting marketing outcomes. Therefore, the decisions made by these firms are scrutinized to the extent that the managing teams have come to comprehend how antitrust concerns have the capacity to constrain their activities and this ends up with these managers seeking other alternative decisions. Owing to the significance associated with the antitrust policies, most business managers introduce these issues and always involve the attorneys heading the antitrust policies whenever they are making decisions. In the same way, individuals of the antitrust community are required to look into the operations of the enterprises, their frameworks, and concepts they use in coming up with the decisions they evaluate.
Over the past few years, economics had always been regarded as the guiding discipline used in guiding the businesses on the strategic decisions they make. With this notion in mind, it is expected that there should exist a conflict between the interests of the antitrust, and those of the practitioners (Michael and Ryan2). Business strategies and decisions that are based on economics incline towards ensuring that the producer maximizes on their surplus, while enforcement and antitrust policies aim at ensuring that the welfare of the consumers has been met (Michael and Ryan2). The paper will look into circumstances under which these conflicts of interest arise, situations in which a firm can increase their profits while maintaining the welfare of the consumer. Through these methods, companies are exposed to many opportunities of succeeding, to the extent of enjoying the benefits associated with market power without necessarily being threatened by the authorities heading the antitrust policies (Michael and Ryan 2).
A firm, or any other organization, is supposed to have an objective that is clearly articulated to utilize economics as a framework for understanding its business strategies. In most public firms, the goal mainly focuses on ensuring that the wealth of the shareholders has been maximized (Peritz 237). However, the same goal for private enterprises and nonprofit-making institutions modify these objectives. Besides ensuring that a firm keeps track of its activities, they also serve a structured rubric where the managers refer to while making judgments about the most convenient approach and in evaluating alternative strategies (Peritz 238). Economists utilize the terms maximization of profits as a shorthand for describing shareholder wealth maximization, which is a reflection that a public company’s value is based on the current assets, as well as the profits expected to result from a firm’s activities (Peritz 240).
While referring to strategy, the issue emphasized here is businesses’ bigger picture, or rather, the problems of a business that are long term, rather than the short-term problems that affect the activities of business. The short term decisions in this can also be identified as tactics. The distinction between strategy and tactics can be seen as that the latter is reflecting the purview activities of a firm (Michael and Ryan 2). Another way in which strategy can be can be differentiated from tactics is that it comes to be revealed when the behaviors of a firm are consistent. In brief, when a plan is set, chances of reversing the whole system are not as easy (Michael and Ryan 2). Therefore, the antitrust officials embrace the strategy concept because individual conducts such as overpricing cannot fall under the idea of strategy, but rather under tactics (Michael and Ryan 2). On the same note, if a company adopts an overarching approach such that the decisions they make always indicate a business strategy that is consistent, the antitrust authorities may identify elements some items that will put the organization under a condition of scrutiny (Michael and Ryan 2).
Economics avails a structure for comprehending the concept behind business strategies, and this role has neither been considered uncontroversial nor universal. However, the discipline has had an influence on both practice and theory, and this is attributed to the fact that economics requires the need for precision concerning what inputs to be included in its model (Michael and Ryan2). Equally important, the assumptions made in this discipline are required in making conclusions that are grounded on empirical evidence. Morton (as cited by Michael and Ryan), economists have important tools: the maximal assumption of behavior by agents through the formal modeling tool and the notion of equilibrium (2). The tools enable them to produce crisps, as well as conclusions that are testable. Additionally, the managers of business organizations reap benefits associated with the structure of economic modeling because the insights that result suggest prescriptions that are dependent on a particular economic setting faced by a firm. From the analysis, the economics do not necessarily avail the answer expected in a strategy, but rather, it demonstrates the existing tradeoffs related to the alternative strategies. Besides the demonstration of these tradeoffs, they also point out the conditions under which they are most likely to succeed or fail.
Analysis of business strategies is analyzed on the basis of three audiences. One of them is the practitioners who are responsible for making the decisions, the researchers who look into the management of an organization and the decisions they make, and finally the business school instructors. These are responsible for teaching the frameworks and concepts of business strategy to business students. The students range from MBA candidates, the undergraduates, to those who participate in executive programs.
Concepts for Business Strategies
In business strategy, three fundamental concepts are put into consideration, and they include the value creation and capture. The concept identifies the connection between the notion of economic surplus and the activities carried out by a firm. Here, the welfare of the consumers because their willingness to pay is a representation of the bound on the magnitude of economic surplus that a business is capable of creating through the activities it carries out (McLeod and George 30). The total surplus generated by a business is determined by how it interacts with the external environment and is divided between producer and consumer surplus. Firms that focus on maximizing their profits concentrate more on producer surplus, which in decision making is identified as value capture (McLeod and George 30). However, a firm’s ability to generate the producer surplus is limited to two conditions, either they increase the total value they have created or increasing the share of the entire surplus they have generated (McLeod and George 32).
Two frameworks for a business strategy are used in explaining the role of a played by the external environment of business in capturing value. One of them is the five forces as described by Michael Porter (McLeod and George 33). The framework avails a detailed list of the economic aspects that adversely interfere with the conversion of created to captured value (McLeod and George 35). Therefore, antitrust concerns come in place when a business strategy is designed in such a manner of mitigating such factors.
Value Creation and Capture
The framework suggests tow ways through which a firm can generate profits, which include that a company can enhance its benefits through the creation of more value, which in this case can be realized through reducing the costs for their products and making their goods more attractive to the consumers. The concept behind these methods is that provided that the share captured does not in any way decrease, profits will always go up.
Enhancing the Creation of Value
To understand how a firm can increase value, a few factors and definitions have to defined. One, B, in this case, will refer to the willingness of the client to pay for a product, that is, the benefit that a customer gets from a company’s product (Michael and Ryan 6). P will refer the price that a client pays for a commodity in the market (Michael and Ryan 6). C, on the other hand, will refer to the average cost of production of a product (Michael and Ryan 6). A good understanding of these quantities is shown in figure 1.
Figure 1 Value Creation and Capture Framework (Michael and Ryan 6).
The starting point of the mastery of the concept of a strategy of a business begins in its attempt to combine B, and C. Porter (as cited by Michael and Ryan) describes the process of transition to a firm from C to B as operational effectiveness (6). The bottom line is that every company should strive to achieve the highest willingness of a buyer to buy for any given cost of production. That is, they should seek to achieve the highest sale of products when the costs of production are as low as possible. Operational effectiveness has been identified as a necessary factor in maximizing profit. For instance, if a certain business were more efficient compared to others in the same industry, it would mean that it was capable of providing B at times when production is low (C), or at the same time, a higher B when C is constant for all other industries (Michael and Ryan 7).
Strategies for creating value are less likely to capture the attention of the antitrust authorities. However, these regulators get more concerned regarding the split value that is developed from both producer and consumer surplus (Michael and Ryan 7). The five forces as proposed by Michel Porter have assisted in bringing these issues to the forefront.
Shifts to Produce Surplus: Five Forces According to Porter
The five forces as proposed by Porter analyze the competitive aspects that influence the split between producer and consumer surplus. The Michael Porter’s framework utilizes the principles of economics to enable a firm conduct an audit to identify factors that could have a reducing effect on the share values created by a business in its industry (Michael and Ryan 8). Intertwining the principles of economics with the profits of industry, the Five Forces go beyond addressing simple issues such as industry concentration, to assessing other bigger issues of concern, which include issues related to antitrust authorities such as effects that result from competitive mergers (Michael and Ryan 8). Threats to value capture are divided into five aspects, the rivals existing in the industry, substitute industries, buyers, potential entrants, and suppliers.
The rivalry between firms results from a competition of prices. For example, a company in a certain industry may decide to cut its costs down and end up causing price wars (Michael and Ryan 8). Some of the reasons that can make a firm push its prices down include increased costs of inventory or attempts to unload goods that are nearing obsolescence (Michael and Ryan 8). Additionally, firms operating in a market characterized by fixed costs can decide to decrease their prices to increase the volume of sales and in turn, reduce the average costs. On the other hand, when firms in an industry have similar products, they tend to compete on the grounds of price to stand out from the rest (Michael and Ryan 8). The firms counteract with the rivalry conditions by pursuing policies that capture the attention of the antitrust officials. For instance, companies come up with trade unions to shield them from engaging in wars with the antitrust authorities.
By using the concept of value creation and capture, strategists assume barriers of entry to industry as factors that make the prices high for other entrants to join in the industry. They also assume these as conditions that retain the willingness of the customer to buy products from the existing firms rather than those that enter the industry (Michael and Ryan 9). Again, the antitrust authorities intervene in such cases where companies take measures to block the entrants from joining their industry. Supplier power is also a significant aspect that can prompt the antitrust authorities to scrutinize a firm (Michael and Ryan 9). Labor is identified as a vendor, and this led the antitrust officials to examine Google, Intel, and Apple for conspiring not to employ employees that shift from either of the companies (10).
Another aspect used in explaining the role of the external environment in capturing value focuses on “added value” which is identified as the representation of the unique contribution availed by a firm in generating a surplus (Michael and Ryan 10). Most successful businesses have a tendency of capturing value as consequence of scarcity in the framework of added value, and the existence of this scarcity is attributed to the anticompetitive action in the industry (Michael and Ryan 10).
Added value is massive in cases where more value has been created, but the contributions made by the agent are scarce. That is, in situations where no other agent can generate the same value as the one made by the previous agent. The concept behind this reasoning relates to the Five Forces, specifically supplier and buyer power and the ability of firms to negotiate on the transfer of surplus (Michael and Ryan 11). The tactics used by a business to enhance their added value goes past the line of the regulations set by the antitrust authorities, hence attracting scrutiny. For example, a firm may protect its scarcity value by restricting the number of available licenses, therefore drawing the attention of antitrust regulators who may be the perception of it as anticompetitive (Michael and Ryan 11).
In conclusion regarding an aspect of value creation and capture, decisions made by firms focus on long-term maximization of profit. Therefore, a company may appear dormant on the short run maximization of benefits in some contexts such as network, research and development, and network effects. In contrast, antitrust authorities focus on the short-run activities, and this explains why firms succeed in merging without the consent of the authorities.
Competitive Advantage and Sustainability
The second fundamental concept in business strategy is a competitive advantage. Unlike the value creation and capture framework that addressed the link between a firm policy and economics, this framework addresses the structure used in the evaluation of the activities as well as the success of individual businesses (McGrath 140). It helps people comprehend and predict why there exists a difference in profit margins between industries with similar challenges and economic forces (McGrath 140). Specifically, the framework looks into the sources of a business’s inferior or superior profitability used guiding how strategic decisions are made (McGrath 140).
The concept addresses the ability of a firm to capture and create value in a way better manner compared to the current or expected future competitors. Therefore, the concept is more concerned with the performance of business concerning intra-industry heterogeneity (McGrath 142). The framework of competitive advantage does not address the profit-making activities carried out by a firm through concentrating market power. The framework seeks to address the factors that can sustain a company’s competitive advantage and how a business can retain a superior position in the chance that other firms attempt to imitate their way of doing things (McGrath 142). It has been established that successful strategies attract other companies to imitate, that is, wrong strategies die out while good ones replicate. The threat of imitation and calls for the need of a company to come up with strategies to protect their competitive advantage (McGrath 143). However, these approaches can be problematic to the point of attracting the attention of the antitrust authorities.
Scope of the Firm
The third framework is identified as the scope of the enterprise. Coase (as cited by Michael and Ryan), asserts that the decision made by a firm concerning its scope should seek to answer the question, “Why does the entrepreneur not organize on less transaction or one more?” (19). Authors have indicated that the answer to the question is based on the context in question, which can be either its products or resources (Baker 38). The framework, regarding strategy, addresses the economic issues that affect the decision of a firm in the manner it conducts its activities internally (Baker 38).
The decisions made by a business regarding the activities they should undertake critical to the overall business strategy of an organization (Baker 38). Companies can either acquire other organizations or merge with them with purposes of altering the set of activities they carry out, which again, captures the attention of the antitrust agencies (Baker 39).
In conclusion, business strategies have been analyzed on the basis of three audiences. One of them is the practitioners who are responsible for making the decisions, the researchers who look into the management of an organization and the decisions they make. In business strategy, three fundamental concepts are put into consideration, and they include the value creation and capture. The second fundamental concept in business strategy is a competitive advantage. Unlike the value creation and capture framework that addressed the link between a firm policy and economics, this framework addresses the structure used in the evaluation of the activities as well as the success of individual businesses. The third framework is identified as the scope of the enterprise. The framework addresses the economic issues that affect the decision of a firm in the manner it conducts its activities internally.
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