1111 Business Economics 2 3 4 5 6 7 8 9 1011 1 2 3 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 43 44 45 46111 ii Business Economics 1111 This Page Intentionally Left Blank 2 3 4 5 6 7 8 9 1011 1 2 3 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 43 44 45 46111 Competition and competitive strategy iii 1111 2 3 Business Economics 4 5 Theory and application 6 7 8 9 1011 1 2 Neil Harris 3 4 5 6 7 8 9 20111 1 2 3 4 5 6 7 8 9 30111 1 2 3 4 5 6 7 8 9 40111 1 2 43 44 45 46111 OXFORD AUCKLAND BOSTON JOHANNESBURG MELBOURNE NEW DELHI iv Business Economics 1111 Butterworth-Heinemann 2 Linacre House, Jordan Hill, Oxford OX2 8DP 3 225 Wildwood Avenue, Woburn, MA 01801-2041 4 A division of Reed Educational and Professional Publishing Ltd 5 A member of the Reed Elsevier plc group 6 7 First published 2001 8 9 © Neil Harris 2001 1011 1 All rights reserved. No part of this publication may be reproduced in 2 any material form (including photocopying or storing in any medium by 3 electronic means and whether or not transiently or incidentally to some 4 other use of this publication) without the written permission of the 5 copyright holder except in accordance with the provisions of the Copyright, 6 Designs and Patents Act 1988 or under the terms of a licence issued by the Copyright Licensing Agency Ltd, 90 Tottenham Court Road, London, 7 England W1P 0LP. Applications for the copyright holder’s written 8 permission to reproduce any part of this publication should be addressed 9 to the publishers. 20111 1 British Library Cataloguing in Publication Data 2 Harris, Neil 3 Business Economics: theory and application 4 1. Managerial economics 5 I. Title ′ 6 338.5 024658 7 ISBN 0 7506 4454 0 8 9 Every effort has been made to contact Copyright holders requesting 30111 permission to reproduce their material in this book. Any omissions 1 will be rectified in subsequent printings if notice is given to the Publisher. 2 3 4 5 6 7 8 Typeset by Florence Production Ltd, Stoodleigh, Devon Printed and bound in Great Britain 9 40111 1 2 43 44 45 46111 Competition and competitive strategy v 1111 2 3 4 5 6 7 Contents 8 9 1011 1 2 3 4 5 6 7 List of figures ix 8 List of tables xi 9 List of abbreviations xiii 20111 Acknowledgements xv 1 Introduction xvii 2 3 4 Chapter 1. What is business economics? An overview 1 5 1.1 What business economics is and why it is needed – 6 how it differs from economics 1 7 1.2 Types of business organisation, profitability, 8 industrial sectors, domestic ownership and 9 foreign direct investment 12 30111 1.3 A brief introduction to price determination; 1 demand and supply; types of market structure 20 2 1.4 The business economic environment and how 3 businesses appraise it; key macroeconomic 4 variables; economic policies 27 5 1.5 BskyB’s attempted acquisition of 6 Manchester United 37 7 1.6 Summary of chapter 41 8 1.7 Further questions 42 9 1.8 Further reading 43 40111 1 Chapter 2. How businesses produce 44 2 2.1 Competing theories of the business: profitability 43 and other motives 44 44 2.2 Porter’s value chain. Formulating a strategy to 45 meet business objectives 49 46111 vi Contents 1111 2.3 SWOT analysis; anticipating production – 2 market research and forecasting 55 3 2.4 Flexible management systems; TQM and lean 4 production; just in case and just in time 5 production; Japanisation 63 6 2.5 Nissan car plant, Sunderland: a case study of 7 Japanisation 68 8 2.6 Summary of chapter 70 9 2.7 Further questions 70 1011 2.8 Further reading 71 1 2 Chapter 3. Producing for profit 73 3 3.1 The short term production process: developing 4 cost theory 73 5 3.2 The impact of the long term: economies of scale 81 6 3.3 Calculating business revenues 87 7 3.4 Profitability; optimum production levels 90 8 3.5 The global car industry: seeking profitability 9 through rationalisation 100 20111 3.6 Summary of chapter 104 1 3.7 Further questions 104 2 3.8 Further reading 105 3 4 Chapter 4. Marketing the product 106 5 4.1 Marketing characteristics 106 6 4.2 Segmenting markets, targeting and positioning 110 7 4.3 The marketing mix; the product life cycle; 8 pricing theories 114 9 4.4 Developing a marketing strategy 131 30111 4.5 The decline of the fine fragrance industry 135 1 4.6 Summary of chapter 138 2 4.7 Further questions 138 3 4.8 Further reading 139 4 5 Chapter 5. Market forces 140 6 5.1 How markets function; consumer sovereignty. 7 The collapse of non-market economies in Central 8 and Eastern Europe 140 9 5.2 Market demand 146 40111 5.3 Market supply 151 1 5.4 Determining market prices 155 2 5.5 The rise of the grey market 162 43 5.6 Summary of chapter 167 44 5.7 Further questions 167 45 5.8 Further reading 168 46111 Contents vii 1111 Chapter 6. Markets in the real world 169 2 6.1 Elasticity of demand 169 3 6.2 Elasticity of supply 180 4 6.3 Market failure 184 5 6.4 Input markets 192 6 6.5 The minimum wage 197 7 6.6 Summary of chapter 202 8 6.7 Further questions 203 9 6.8 Further reading 203 1011 1 Chapter 7. Competition and competitive strategy 204 2 7.1 Business strategies: the structure–conduct– 3 performance paradigm. Porter’s five forces 4 model 204 5 7.2 Oligopolies; competition and collusion strategies. 6 Porter’s generic strategies for gaining competitive 7 advantage 211 8 7.3 Monopolistic competition; how firms compete 221 9 7.4 Other market structures: monopolies; perfect 20111 competition as the template 224 1 7.5 Competition for British retailing 230 2 7.6 Summary of chapter 232 3 7.7 Further questions 233 4 7.8 Further reading 233 5 6 Chapter 8. Regulating market power 235 7 8.1 How and why firms grow. Mergers and 8 acquisitions. Diversification as a competitive 9 strategy 235 30111 8.2 The need for legislation – monopolies, oligopolies 1 and market failure 243 2 8.3 UK policy – the Office of Fair Trading and the 3 Competition Commission. Regulating privatised 4 industries 245 5 8.4 The role of the EU – policies; state aid and 6 subsidies; public procurement 251 7 8.5 Scottish Widows carried off by Lloyds–TSB 258 8 8.6 Summary of chapter 261 9 8.7 Further questions 261 40111 8.8 Further reading 262 1 2 Chapter 9. The macroeconomy and its impact on business: I 263 43 9.1 Defining national income 263 44 9.2 Ways to measure real gross domestic product 267 45 9.3 The components of real GDP 272 46111 viii Contents 1111 9.4 Inflation – causes and costs of; money supply 2 and monetary policy 280 3 9.5 The 1999 Budget 295 4 9.6 Summary of chapter 299 5 9.7 Further questions 299 6 9.8 Further reading 299 7 8 Chapter 10. The macroeconomy and its impact on business: II 301 9 10.1 Unemployment – types, causes and remedies 301 1011 10.2 The inflation–unemployment relationship and 1 its effect on business 309 2 10.3 The business cycle – causes and trends 313 3 10.4 Economic growth – theories, causes and costs 325 4 10.5 The role of economic briefings for business 330 5 10.6 Summary of chapter 333 6 10.7 Further questions 333 7 10.8 Further reading 333 8 9 Chapter 11. International trade and finance 335 20111 11.1 International trade: theories, gains and 1 implications. The terms of trade 335 2 11.2 The balance of payments accounts. Problems and 3 remedies. The impact of capital flows 345 4 11.3 Managing exchange rates as a policy tool. 5 Implications of exchange rate fluctuations for 6 trade and businesses 350 7 11.4 Different exchange rate regimes 359 8 11.5 Economic and monetary union; the implications 9 of the single currency for European business 362 30111 11.6 Summary of chapter 368 1 11.7 Further questions 369 2 11.8 Further reading 369 3 4 Index 371 5 6 7 8 9 40111 1 2 43 44 45 46111 Contents ix 1111 2 3 4 5 6 7 List of figures 8 9 1011 1 2 3 4 5 6 7111 1.1 A diagram of business economics. 4 8 1.2 The influences on business economics. 11 9 1.3 Types of market structure. 24 20111 2.1 The break-even chart. 47 1 2.2 The total quality management model. 65 2 3.1 Total revenue and total cost curves of Sounds ‘R’ Us. 77 3 3.2 Average and marginal costs of Sounds ‘R’ Us. 79 4 3.3 Long term average costs: economies and diseconomies of 5 scale.