TOPIC 2

2.4 What is strategy?

General policies intended to generate profits
·Choice of indurstry
·Combination of products and services
·Competitive and cooperative change
-All strategies evolve as circumstances change, must
créate and capture value.
-VALUE CREATION
We have may ways to create this value
1. Innovation: Shift demand to the right by other
means: New products or better quality
2. Reduce transaction costs: Producer-borne
transaction costs and consumer-borne transaction
costs.
-TRANSACTION COSTS
We have consumer transaction costs:
-Product search
-Learning product characteristics and quality
-Post-sale services
And also we have producer transaction costs:
-Logistics

-Transaction costs- EXAMPLES:

·Consumer transaction costs:
-Product search: ITunes Apple
-Learning product characteristics and quality: (food,
apparel)
-Post-sale services: Gas natural
·Producer transaction costs:
-Logistics: IKEA

·Another source of Value: Organizational

knowledge
·Idea: Convert Organizational Knowledge
Value
·Key point: To rely on employees creativity
·Implications: Allow employees to
experiment and innovate
·Example: Innovation in McDonalds
through workers’ inputs.

-What the company owns I what the

company rents
·The company OWNS the physicial assets
·The company RENTS employees
brainpower and creativity
·This has important implications for
determining the value of the company

-Strategy Formulation
·Understanding internal resources and
capabilities.
-Physical, human and organizational capital
·Understanding the environment
-Markets, technology and government
regulation
·Combining environmental and internal
analyses
·Strategy and organizational architecture

TOPIC 3: Incentive conflicts and contracts

CONTENTS
3.1 Firms as networks of contracts
3.2 Incentive conflicts between firms
3.3 Controlling incentive problems with
contracts
3.4 Implicit contracts and reputational
concerns
-Where are we now?
·Firms are good because they reduce
transactions costs, but they create their
own costs…
·Firms are good because they can
implement strategies that create and
capture value
·However, with Firms new costs arise:
Those related to coordination, incentives,
etc.
3.1 Firms as networks of contracts
· In order to allocate resources
-Markets use prices
-Firms use managers
·Firms have many decisión makers. This is a
source of managerial conflicts
·In addition to this, even middel-level
managers have decisión authority. This also
generates conflicts.

Main issues
The behaviour of RJR executives raises
interesting issues:
1. A simplistic view of managers is that
they always maximize firm’s profits
2. The RJR suggests that there exist
material conflicts of interest between
owners and managers:
·Shareholders are interested in the firm’s
value. What is the “value of the firm”?
·Managers are interested in their own
utility
3. Owner-manager conflicts can result in
reduced productivity and waste. How do
firms limit unproductive actions and avoid
failure?

3.1 Firms as networks of contracts

·Managers are not the only party with a
legal relationship to firms
·Many other parties do have legal
relationships with a firm
. Thus the firm is a focal point for a set of
contracts
· Individual incentives may not be aligned
with the objectives of the firm

Main conflict within firms: Owner-Manager