Foundations of Competition

The Blues FoundationSummaryMission StatementHow does/can retail operations contribute

to the organization meeting its mission?

TBF MissionThe Blues Foundation is Memphis-based,

but world-renown as THE organization dedicated to:preserving our blues music history;celebrating recording and performance

excellence; supporting blues education, and; ensuring the future of this uniquely American

art form.

Neoclassical EconomicsRefers broadly to the set of ideas that have

dominated economic theory for the past century.

Basically, what you read in your Micro textbook – mainstream, traditional economics.

Retail RevolutionFinish video …Marketing == Creating Value and

Building/Maintaining RelationshipsValue Components?Quality Relationships?

Retail Strategy == ?Bell’s Retail Models

History lesson …Classical Period

Adam Smith – The Wealth of NationsHow is wealth created and allocated?What determines how wealth and resources are

allocated in society?How much to supply? How much to demand?

Turgot – law of diminishing returnsBentham – utility = a measure of pleasure and pains

Economic choices were the result of an individual’s calculation as to what actions would maximize utility.

Gossen – law of diminishing marginal utility

MarginalistsWalras – late 1800s

Dreamed of making a scientific theory of economics.

Saw parallels between the idea of balancing points in economic systems and balancing points in nature.Applied Newtonian

physics and algebra to economic problems.

Marginalists continuedWalras - Assumed various goods already

exist in the economy and the problem is to determine how prices are set and how the goods would be allocated among the individuals involved.

Jevons – sought predictability.The notion of utility is to our science what

that of energy is to mechanics.First Law of Thermodynamics – Conservation

of Energy Principle

Neoclassical SynthesisMarshall combined Jevons model of a

single market in isolation (partial equilibrium) with Walras’s model of many interlinked markets in an economy (general equilibrium).

Arrow-Debreau developed a theory of general equlibrium.All markets would coordinate on an optimal

set of prices even when uncertainty existed because some goods acted as substitutes and others as complements.

Perfection == Equilibrium

Whither …How many economists does it take …

Ceterus paribus

Economic Space as an Integrally Connected “Field”

A choice problem …Stripped of all elements of choice

“If knowledge is perfect and the logic of choice complete and compelling, then choice disappears”

o Brian Loasby (1975)

A theory of competition …That excludes every kind of competitive

action.The rational choices that economists

attribute to economic agents exhibit no signs of purposeful reasoning; they are programmed responses to the circumstances in which those agents are placed, especially – but by no means only – when agents are located in a competitive economy which excludes every kind of competitive action.

o Brian Loasby (1991)

Problem lies in the theory’s assumptionsIt’s ok to make unrealistic assumptions so

long as theory makes correct predictions.Purpose of scientific theory is not to predict

but to explain.Blue sky Giants

Bad assumptions can lead to false conclusions even if the math works out!

Incredibly Smart People in Unbelievably Simple WorldsPeople pursue their self-interest in

fantastically complex and calculating ways.Inflation ratesFuture government spendingTrade deficits

Homo Economicus?

The State of Economics ". . . economics has become increasingly an arcane branch of mathematics

rather than dealing with real economic problems"Milton Friedman

“We really do not know how [the economy] works … The old models just are not working.”

Alan Greenspan

“[Economics as taught] in America's graduate schools... bears testimony to a triumph of ideology over science. … Anybody looking at these models would say they can’t provide a good description of the modern world.”

Joseph Stiglitz

"Existing economics is a theoretical [meaning mathematical] system which floats in the air and which bears little relation to what happens in the real world"

Ronald Coase

“We live in an uncertain and ever-changing world that is continually evolving in new and novel ways. Standard theories are of little help in this context. Attempting to understand economic, political and social change requires a fundamental recasting of the way we think”

Douglass North

Cuban Cars

So what does any of this have to do with strategy?

Competition – Imagine a world where …

All customers have the same needs. These needs do not change over time.Information, for consumers and firms, is perfect

and costless.Economic decision makers do not interact.All firms in a market make and sell the same

thing Firms have access to the same factors of

production (inputs) which are perfectly mobile.There are no transaction costs.Human behavior = maximize self-interestFirm sole objective = maximize profits.

In such a world …在这样一个世界里…

The role of management is … (1) to select what industry to be in; and 2) determine quantity and to implement a production function.

Firms compete by … adjusting quantity.

Persistent differences in firm performance beyond industry choice … would be the result of random anomalies.

Does this view accurately describe competition in modern economies?

Simplifying Assumptions …Man is infinitely selfish and infinitely

farsighted.Why is the sky blue? How do firms enjoy

long-term success?Porter’s Five Forces Model and Value ChainEmpirical Studies of Firm Profitability

Brian Arthur’s “New World”

Let’s consider a marketplace where these assumptions are reversed …

Customer needs are different and change over time.

Information, for consumers and firms, is not perfect and is costly.

Firm resources are not the same and some resources are less mobile than others.

Human behavior = Constrained (by moral codes, context, etc.) self-interest seeking.

Firm objective = Superior (“better than”) performance.

Economic Space is not a Field

Our ideas on how firms compete change as well …

There are groups of customers whose needs are relatively the same.

Their needs are constantly changing.Firms make different products, which appeal

more/less market segments.Customers behavior may not always be purely

rational.Persistent differences in firm performance

result from superior management of resources.

ValueWhat is value?

Is it something that is perceived by the customer?

Is it something that is created by the firm?Is it something that is appropriated by the

firm?

Value-in-Exchange Perspective

Value is embedded into tangible goods.

Focus on transactional value.

“Purposive action better taken in the protection of rents than their creation.”

o Moran and Ghoshal (1999)

Value-in-Use PerspectiveMarket Offering

Application of Specialized Skill & Knowledge

Knowledge & Differentials in the Rates of Firm Learning

CompetitionIs about the creation and deployment of

economically “useful” knowledge.What is knowledge?