Success in the world of business, no matter how you earn it, you have to rule on the marketplace.
Although luck plays a role in the outcome of the market strategies. In the business decisions, there should be the understanding of market otherwise the failure will take place by the marked decisions.
While the text focuses on making the most profitable business decisions, the principles and techniques set forth also offer valuable advice for managers of non-profit organizations such as charitable foundations, universities, hospitals, and government agencies.
This post is for the maximization of the primary objective. The economic way of thinking about business decisions and strategies provides all managers with a powerful and indispensable set of tools and insights for furthering the goals of their firms or organizations.
Way of Thinking about Business Practice and Strategies
In this theory to explain how to make more profitable business decisions, we want to explain briefly how and why economic theory is valuable in learning how to run a business. There are two major areas or say 2 closely related areas of economics-
- Industrial Organization
That’s Ok in theory but I want a practical solution. Practical solutions to challenging real-world problems are seldom found in cookbook formulas, superficial rules of thumb, or simple guidelines and anecdotes. Profitable solutions generally require that people understand how the real world functions, which is often far too complex to comprehend without making the simplifying assumptions used in theories.
Using economic theory is in many ways like using a road map. A road map abstracts away from nonessential items and concentrates on what is relevant for the task at hand. Suppose you want to drive from Dallas to Memphis. Having never made this trip, you need to have a map. So, you log on to the Internet and go to Google maps, where you get to choose either a satellite view of the region between Dallas and Memphis or a simple street view. The satellite view is an exact representation of the real world; it shows every road, tree, building, cow, and river between Dallas and Memphis.
While the satellite view is certainly fascinating to look at, its inclusion of every geographic detail makes it inferior to the much simpler street view in its ability to guide you to Memphis. The simpler street view is better suited to guide you because it abstracts from reality by eliminating irrelevant information and showing only the important roads between Dallas and Memphis. As such, the (abstract) street view gives a much clearer picture of how to get to Memphis than the (real-world) satellite view. Likewise, the economic approach to understanding business reduces business problems to their most essential components.
The roles of Microeconomics and Industrial Organization
As we know, there are two major areas in managerial economics theory: microeconomics and industrial organization.
Microeconomics is the study and analysis of the individual segments of the economy, individual consumers, workers, and owners of resources, individual firms, industries, and markets for goods and services.
These routine business decisions, made under the prevailing market conditions, are sometimes referred to as business practices or tactics to distinguish them from strategic decisions, which involve business moves designed intentionally to influence the behaviour of rival firms. In other words, the firm’s management team makes many decisions about business practices or tactics to create the greatest possible profit for the specific business environment faced by the firm. Because business practices typically involve maximizing or minimizing something, the field of microeconomics can be extremely helpful in understanding how to make these operating decisions.
While microeconomics serves as our “Swiss army knife” for explaining most business practices, a specialized branch of microeconomics, known as industrial organization, gives us an additional, complementary tool for business analysis.
Industrial organization, which focuses specifically on the behavior and structure of firms and industries, supplies considerable insight into the nature, motivation, and consequences of strategic actions firms may wish to undertake. Many of the most important developments in business analysis and strategic thinking over the past 30 years flow directly from advances in the theory of industrial organization. Most of the discussion in this text about strategic decision making can be attributed to these advances in the field of industrial organization.
Strategic decisions differ from routine business practices and tactics because strategic decisions do not accept the existing conditions of competition as fixed, but rather attempt to shape or alter the circumstances under which a firm competes with its rivals. In so doing, strategic decisions can create greater profits and, in some cases, protect and sustain the profits into the future. While common business practices and tactical decisions are necessary for keeping organizations moving toward their goals—usually profit-maximization—strategic decisions are, in a sense, “optional” actions managers might be able to undertake should circumstances arise making a strategy suitable and likely to succeed.
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