Foundations of international strategy
(week 1)
Agents (both buyers and sellers) are “price takers” they use an externally fixed
price. Price is determined by demand and supply.
SET assumptions about the ideal market:
- Atomicity: many small buyers and sellers
- Free entry/exit of firms
- Perfect information
- Product homogeneity
According to SET on markets, decisions by economic agents are very limited, related
only to quantities.
Firm = producer, “black boxes - holistic entities: no people inside the firm.”
A firm has one single goal: profit maximization.
They have no strategy so they adapt to the environment or disappear.
Efficient mechanisms to transform inputs to outputs.
Paradox of profits
In a situation of perfect competition, firms cannot earn any economic profits in the
long run.
Because: abnormal profits -> entries from new firms -> increased competition ->
lower market prices normal profits -> lower profits -> normal profits
SET does not explain firms profits in the long run, diversity of strategies, diversity of
structures and the non-profit maximization behaviours.
SET: why do firms exist?
Firms provide additional cost economies, which cannot be reached through market
transactions.
An organization can be seen as an exchange place where resources are exchanged.
Six organizational mechanisms.
1. Direct supervision: 1 person gives orders, owner directs production and
allocation of sources, inefficient as organization grows, Entrepreneurial
organization ( any small firm with a CEO ).
2. Standardization of work processes: specify work processes “how to work”,
production routines leading to standard inputs, machine organization
3. Standardization of outputs: specifies the results, but not how to be achieved,
diversified organization.
(week 1)
Agents (both buyers and sellers) are “price takers” they use an externally fixed
price. Price is determined by demand and supply.
SET assumptions about the ideal market:
- Atomicity: many small buyers and sellers
- Free entry/exit of firms
- Perfect information
- Product homogeneity
According to SET on markets, decisions by economic agents are very limited, related
only to quantities.
Firm = producer, “black boxes - holistic entities: no people inside the firm.”
A firm has one single goal: profit maximization.
They have no strategy so they adapt to the environment or disappear.
Efficient mechanisms to transform inputs to outputs.
Paradox of profits
In a situation of perfect competition, firms cannot earn any economic profits in the
long run.
Because: abnormal profits -> entries from new firms -> increased competition ->
lower market prices normal profits -> lower profits -> normal profits
SET does not explain firms profits in the long run, diversity of strategies, diversity of
structures and the non-profit maximization behaviours.
SET: why do firms exist?
Firms provide additional cost economies, which cannot be reached through market
transactions.
An organization can be seen as an exchange place where resources are exchanged.
Six organizational mechanisms.
1. Direct supervision: 1 person gives orders, owner directs production and
allocation of sources, inefficient as organization grows, Entrepreneurial
organization ( any small firm with a CEO ).
2. Standardization of work processes: specify work processes “how to work”,
production routines leading to standard inputs, machine organization
3. Standardization of outputs: specifies the results, but not how to be achieved,
diversified organization.
