BUS 525.2: Managerial Economics

Lecture 1

The Fundamentals of Managerial Economics

Course OverviewPrerequisitesBus501 and/or Bus511Requirements and Grading3 Cases (20%)Two Midterm Examinations (40%)Final Exam (40%)Class MaterialsBaye,Michael R. Managerial Economics and Business Strategy. Sixth Edition. Boston: McGraw-Hill Irwin, 2009. [MRB]Web-page: http://fkk.weebly.comOffice: NAC 751Office hours: Tuesday, Wednesday and Saturday, 5pm-6:30 pm*

Activity Schedule:BUS525:2

ClassDateExamsCases128 May24 June36 June411 JuneCase 1518 JuneMid 162 July79 July816 JulyCase 2923 July1025 JulyMid 21130 July (Make up TBA)1213 AugustCase 31316 -27 AugustFinal

Activity Schedule:BUS525:3

ClassDateExamsCases129 May25 June312 June419 JuneCase 1526 JuneMid 163 July710 July817 JulyCase 2924 JulyMid 21031 July111 AugustCase 31214 August1316 -27 AugustFinal

Make-up Policy*There will be only one make-up for all examinations (mid-terms, final etc.) towards the end of the course to accommodate force majeure. All examination dates are pre-announced/agreed. Please make necessary arrangements with your office.

Historically, the performance of students taking make-up examinations were always poorer compared to students taking examinations on schedule.

I hope you will appreciate that it is not practical to offer a customized course for any or group of individual student(s).

Overview I. IntroductionWhy should I study Economics? Understand business behavior, profit/loss making firms, advertising strategyImpart basic tools of pricing and output decisionsOptimize production mix and input mixChoose product quality Guide horizontal and vertical merger decisionsOptimal design of internal and external incentives.Not for managers only-any other designationPrivate, NGO, GovernmentHeadline loss due to managerial ineptness

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Managerial EconomicsManagerA person who directs resources to achieve a stated goal.EconomicsThe science of making decisions in the presence of scarce resources.Managerial EconomicsThe study of how to direct scarce resources in the way that most efficiently achieves a managerial goal.Case No. 1, Global Standards for Garment Industry Under Scrutiny After Bangladesh Disaster

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Capitalism 101To identify money-making opportunities, you must first understand how wealth is created (and sometimes destroyed).Definition: Wealth is created when assets are moved from lower to higher-valued usesDefinition: Value = willingness to payDesire + income The chief virtue of a capitalist economy is its ability to create wealthVoluntary transactions, between individuals or firms, create wealth.*

Example: House SaleA house is for sale:The buyer values the house at $130,000 maximum priceThe seller values the house at $120,000 minimum priceThe buyer and seller must agree to a price that splits surplus between buyer and seller. Here, $128,000.The buyer and seller both benefit from this transaction:Buyer surplus = buyers value minus the price, $2,000Seller surplus = the price minus the sellers value, $8,000Total surplus = buyer + seller surplus, $10,000 = difference in values*

Wealth-Creating TransactionsWhich assets do these transactions move to higher-valued uses?Factory OwnersReal Estate AgentsInvestment Bankers Corporate Raiders Insurance Salesman Discussion: How does eBay/Bikroy.com create wealth?Discussion: Which individual has created the most wealth during your lifetime? Discussion: How do you create wealth?*

Do Mergers Create Wealth?The movement of assets to a higher-valued use is the wealth-creating engine of capitalism. Our largest and most valuable assets are corporationsDell-Alienware merger:In 2006, Dell purchased Alienware, a manufacturer of high-end gaming computers.Dell left design, marketing, sales and support in Alienwares hands; manufacturing, however, was taken over by Dell.With its manufacturing expertise, Dell was able to build Alienwares computers at a much lower costDespite this example, many mergers and acquisitions do not create value and if they do, value creation is rarely so clear.To create value, the assets of the acquired firm must be more valuable to the buyer than to the seller.*

Does Government Create Wealth?Discussion: Whats the governments role is wealth creation?Enforcing property rights, contracts, to facilitate wealth creating transactions Discussion: Why are some countries so poor?No property rights, no rule of lawDiscussion: Much of the justification for government intervention comes from the assertion that markets have failed. One money manager scoffed at this idea. The markets are working fine, but theyre giving people answers that they dont like, so people cry market failure.*

The One Lesson of EconomicsDefinition: an economy is efficient if all wealth-creating transactions have been consummated.This is an unattainable, but useful benchmark The One Lesson of Economics: the art of economics consists in looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups.Policies should then be judged by whether they move us towards or away from efficiency.The economists solution to inefficient outcomes is to argue for a change in public policy.*

One Lesson of Economics (cont.)Taxes Destroy Wealth:By deterring wealth-creating transactions when the tax is larger than the surplus for a transaction. Which assets end up in lower-valued uses?Subsidies Destroy Wealth:Example: flood insurance encourages people to build in areas that they otherwise wouldntWhich assets end up in lower-valued uses?Price Controls Destroy Wealth:Example: rent control (price ceiling) in New York City - deters transactions between owners and rentersWhich assets end up in lower-valued uses?*

The one Lesson of BusinessDefinition: Inefficiency implies the existence of unconsummated, wealth-creating transactionsThe One Lesson of Business: the art of business consists of identifying assets in lower valued uses, and profitably moving them to higher valued uses.In other words, make money by identifying unconsummated wealth-creating transactions and devise ways to profitably consummate them.*

Companies Create WealthCompanies are collections of transactions:They go from buying raw materials, capital, and labor (lower value)To selling finished goods & services (higher value)Why do some companies have difficulty creating wealth?They have trouble moving assets to higher-valued usesAnalogy to taxes, subsidies, price controls on internal transactions

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Government Destroys WealthZimbabwe experienced economic contraction of approximately 30 percent per year from 1999 to 2003Unemployment rates have been as high as 80 percent and life expectancy has fallen over 20 years during the reign of Robert MugabeWhy has economic growth been so low?*

Government Destroys WealthOne main problem occurred in 2000Mugabe backed his supporters takeover of commercial farms, essentially revoking property rights of these farmersThe state resettled the confiscated lands with subsistence producers - many with no previous farming experience. Agricultural production plummeted.Farm debacle had economic ripple effects through the banking and manufacturing sectorsDeclining production deprived the country of ability to earn foreign currency and buy food overseasWidespread famine ensuedThe government's initial attack on private property eventually led to more direct intervention in the economy and the destruction of political freedom in Zimbabwe.

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Problem SolvingTwo distinct steps:Figure out whats wrong, i.e., why the bad decision was madeFigure out how to fix itBoth steps require a model of behaviorWhy are people making mistakes?What can we do to make them change?Economists use the rational actor paradigm to model behavior. The rational actor paradigm states:People act rationally, optimally, self-interestedlyi.e., they respond to incentives to change behavior you must change incentives.*

How to Figure Out What is WrongUnder the rational actor paradigm, mistakes are made for one of two reasons: lack of information orbad incentives. To diagnose a problem, ask 3 questions:1. Who is making bad decision?2. Do they have enough info to make a good decision?3. Do they have the incentive to do so?*

How to Fix ItThe answers will suggest one or more solutions: 1. Let someone else make the decision, someone with better information or incentives.2. Change the information flow.3. Change incentivesChange performance evaluation metricChange reward schemeUse benefit-cost analysis to choose the best (most profitable?) solution*

Keep the Ultimate Goal in MindFor a business or organization to operate profitably and efficiently the incentives of individuals need to be aligned with the goals of the company. How do we make sure employees have the information necessary to make good decisions?And the incentive to do so?*

Manager Bonuses for Increasing ReservesThe bonus system created incentives to over-bid. Senior managers were rewarded for acquiring reserves regardless of their profitabilityBonuses also created incentive to manipulate the reserve estimate.Now that we know what is wrong, how do we fix it?Let someone else decide?Change information flow?Change incentives?Performance evaluation metricReward scheme

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EthicsDoes the rational-actor paradigm encourage self-interested, selfish behavior?NO!Opportunistic behavior is a fact of life.You need to understand it in order to control it.The rational-actor paradigm is a tool for analyzing behavior, not a prescription for how to live your life.*

Why Else this Material is ImportantEmployers expect that you will know these conceptsFurther, employers will expect that you are able to apply them.*

How Do Firms BehaveEconomists often assume the goal of the firm is profit maximization. Opinions do differ, however.Discussion: pricing of hotel rooms during tourist seasonTraditional economic view level pricing leads to excess demand; how are rooms allocated then (rationing, arbitrageurs, . . .)Contrasting view businesses should not raise prices during times of shortage; businesses have a responsibility to consumers and societyYour view?Text view: firms serve consumers and society best by engaging in free and open competition within legal limits while attempting to maximize profits. Not a license to engage in illegal behaviorNo denying that concerns exist about the ethical dimension of businessReasonable people have disagreed for millennia on what constitutes ethical behavior*

The Economics of Effective ManagementIdentify goals and constraintsRecognize the nature and importance of profitsFive forces framework and industry profitabilityUnderstand incentives Understand marketsRecognize the time value of moneyUse marginal analysis1-*

Identify Goals and ConstraintsSound decision making involves having well-defined goals.Leads to making the right decisions.In striving to achieve a goal, we often face constraints.Constraints are an artifact of scarcity.1-*

Economic vs. Accounting ProfitsAccounting profitsTotal revenue (sales) minus cost of producing goods or services.Reported on the firms income statement.Economic profitsTotal revenue minus total opportunity cost.1-*

Opportunity CostAccounting costsThe explicit costs of the resources needed to produce goods or services.Reported on the firms income statement. Opportunity costThe cost of the explicit and implicit resources that are foregone when a decision is made.Economic profitsTotal revenue minus total opportunity cost.

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*Significance of the Opportunity Cost ConceptAccounting profits = Net revenue Accounting costs (dollar costs of goods and services)Reported on the firms income statementEconomic profits = Net revenue Opportunities CostsEconomic profits and opportunity costs are critical to decision making

*The Principle of Relevant CostSound decision-making requires that only costs caused by a decision--the relevant costs--be considered. In contrast, the costs of some other decision not impacted by the choice being considered--the irrelevant costs--should be ignored. Not all accounting costs are relevant and many need adjustments to become relevant

Profits as a SignalProfits signal to resource holders where resources are most highly valued by society.Resources will flow into industries that are most highly valued by society.1-*

*Theories of Profits(Why are profits necessary? Why do profits vary across industries and across firms?)Risk-bearing theory of profit - Profits are necessary to compensate for the risk that entrepreneurs take with their capital and effortsDynamic equilibrium (frictional) theory - Profits, especially extraordinary profits, are the result of our economic systems inability to adjust instantaneously to unanticipated changes in market conditions.

*Theories of ProfitsMonopoly theory - Profits are the result of some firms ability to dominate the marketInnovation theory - Extraordinary profits are the rewards for successful innovationsManagerial efficiency theory - Extraordinary profits can result from exceptionally managerial skills of well-managed firms.

Understanding Firms IncentivesIncentives play an important role within the firm.Incentives determine:How resources are utilized.How hard individuals work.Managers must understand the role incentives play in the organization.Constructing proper incentives will enhance productivity and profitability.

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Agency ProblemsModern corporations allow firm managers to have no ownership participation, or only limited participation in the profitability of the firm.Shareholders may want profits, but hired managers may wish to relax or pursue self interest.The shareholders are principals, whereas the managers are agents.

Shareholders (principals) want profitManagers (agents) want leisure & securityConflicting motivations between these groups are called agency problems.Stock brokers and investorsPhysicians and patientsAuto mechanics and car owners

The Principal-Agent Problem

Solutions to Agency ProblemsCompensation as incentiveExtending to all workers stock options, bonuses, and grants of stockIt helps to make workers act more like owners of firm (but not always Citibank and Managers)Incentives to help the company, because that improves the value of stock options and bonusesGood legal contracts that can be effectively enforced

Market InteractionsConsumer-Producer rivalryConsumers attempt to locate low prices, while producers attempt to charge high prices.Consumer-Consumer rivalryScarcity of goods reduces the negotiating power of consumers as they compete for the right to those goods.Producer-Producer rivalryScarcity of consumers causes producers to compete with one another for the right to service customers.The Role of governmentDisciplines the market processBTRC, BERC, SECs failure brought debacle1-*

MarketDefinition: Buyers and sellers communicate with one another for voluntary exchangemarket need not be physicalBookstore, Internet bookstore Amazon.comOutsourcingindustry businesses engaged in the production or delivery of the same or similar itemsClothing and textile industry, Clothing industry is a buyer in the textile market and a seller in the clothing market

Competitive MarketBenchmark for managerial economicsPurely competitive market The global cotton marketmany buyers and many sellers no room for managerial strategizingAchieves economic efficiencyEntry of firmsCase No.2, Textile millers hit rough patch

Market PowerDefinition ability of a buyer or seller to influence market conditionsSeller with market power must manage costsprice advertising expenditure policy toward competitors

Imperfect MarketDefinition: where one party directly conveys a benefit or cost to others externalitiesor one party has better information than othersLack of competition, barriers to entry

The Time Value of MoneyPresent value (PV) of a future value (FV) lump-sum amount to be received at the end of n periods in the future when the per-period interest rate is i: Examples:Lottery winner choosing between a single lump-sum payout of Tk.104 million or Tk.198 million over 25 years.Determining damages in a patent infringement case.1-*

Present Value vs. Future ValueThe present value (PV) reflects the difference between the future value and the opportunity cost of waiting (OCW).Succinctly,PV = FV OCWIf i = 0, note PV = FV.As i increases, the higher is the OCW and the lower the PV.1-*

Present Value of a SeriesPresent value of a stream of future amounts (FVt) received at the end of each period for n periods:

Equivalently, 1-*

Net Present ValueSuppose a manager can purchase a stream of future receipts (FVt ) by spending C0 dollars today. The NPV of such a decision is

Decision Rule:If NPV < 0: Reject projectNPV > 0: Accept project1-*

Present Value of a PerpetuityAn asset that perpetually generates a stream of cash flows (CFi) at the end of each period is called a perpetuity.The present value (PV) of a perpetuity of cash flows paying the same amount (CF = CF1 = CF2 = ) at the end of each period is1-*

*Objective of the FirmNot market shareNot growthNot revenueNot empire buildingNot net profit marginNot name recognitionNot state-of-the-art technology

*Whats the Objective of the Firm?The objective of the firm is to maximize the value of the firm.Value of the firm is the true measure of business success (of course, from a for-profit perspective.)Two questions:1. How is the value of the firm defined and measured?2. How do managers go about adding value to the firm?

Value Maximization Isa Complex ProcessFigure 1.3

*Definition and Measurement of Value of the FirmThe present value of the firms future net earnings.

1 2 nV = [--------] + [ --------] + . . . + [ -------- ] (1+r)1 (1+r)2 (1+r)n

N t V = [ ------- ] , t = 1, 2, ... , N t = 1 (1+r)t

*Adding Value to the FirmProfit = Total Rev - Total Cost = P . Qd - VC . Qs - Fwhere = profit, P = price, Qd = quantity demanded, VC = variable cost per unit, Qs = quantity supplied, F = total fixed costs

Determinants of Value of the Firm N t N P . Qd - VC . Qs - FV = [ ------- ] = [---------------------- ] t=1 (1+r)t t=1 (1+r)t

Whatever that raises the price of the product and/or the quantity of the product soldWhatever that lowers the variable and fixed costsWhatever that lower the r (discount rate or the perceived risk of investment)

Firm Valuation and Profit MaximizationThe value of a firm equals the present value of current and future profits (cash flows).

A common assumption among economist is that it is the firms goal to maximization profits.This means the present value of current and future profits, so the firm is maximizing its value.1-*

Class ExerciseSuppose the interest rate is 10% and the firm is expected to grow at a rate of 5% for the foreseeable future. The firms current profits are $100 million.

What is the value of the firm (the present value of its current and future earnings)?What is the value of the firm immediately after it pays a dividend equal to its current profits?

Control variable, examples:OutputPriceProduct QualityAdvertisingR&DBasic managerial question: How much of the control variable should be used to maximize net benefits?Marginal (Incremental) Analysis1-*

Net BenefitsNet Benefits = Total Benefits - Total CostsProfits = Revenue CostsCase No. 3: Outsourcing and offshoring1-*

Marginal Benefit (MB)Change in total benefits arising from a change in the control variable, Q:

Slope (calculus derivative) of the total benefit curve.1-*

Marginal Cost (MC)Change in total costs arising from a change in the control variable, Q:

Slope (calculus derivative) of the total cost curve1-*

Marginal PrincipleTo maximize net benefits, the managerial control variable should be increased up to the point where MB = MC.MB > MC means the last unit of the control variable increased benefits more than it increased costs.MB < MC means the last unit of the control variable increased costs more than it increased benefits.1-*

The Geometry of Optimization: Total Benefit and Cost

Total Benefits & Total CostsBenefitsCostsQ*BCSlope = MCSlope =MB1-*

The Geometry of Optimization: Net Benefits

Net BenefitsMaximum net benefitsQ*Slope = MNB1-*

*What Will We Learn?Useful economic principles for sound economic decision-making in a management context.The basics of the demand side of the market and which factors influence the buyers behavior.The fundamentals of the markets supply side -laws of production and how these laws impact a firms costs.How firms costs and buyers demand together determine the firms price and net profit.

ConclusionMake sure you include all costs and benefits when making decisions (opportunity cost).When decisions span time, make sure you are comparing apples to apples (PV analysis).Optimal economic decisions are made at the margin (marginal analysis).

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*Myths and MisconceptionsEconomics is about money onlyEconomics assumes that everyone is selfishA companys value is measured by the companys assetsCosts are measured appropriately by accountants.

*Myths and Misconceptions (cont.)We must cover our fixed costs in the decisions we make as managersOur firm must create the best quality productWe should do more advertising, because its cost-effectiveOur price should be based on our costs

*Myths and Misconceptions (cont.)Unit or average cost provides useful management informationWider profit margins are desirableA price increase reduces demandHigh research and development expense results in high prices.

Managerial Economics is a Tool for Improving Management Decision MakingFigure 1.1

The Five Forces Framework1-*

Firm Valuation With Profit GrowthIf profits grow at a constant rate (g < i) and current period profits are po, before and after dividends are:

Provided that g < i.That is, the growth rate in profits is less than the interest rate and both remain constant.1-*

*Webpage: fkk.weebly.comTel:8852000/1713 ; 9898015, Office:NAC 751 Date: 28.05.13*Case studies, HBS case***Why mobile phone operators advertise so much but rice sellers do not advertise at all?Why pizza hut offers buy one get one free deals? Why A4 size papers are sold in a package of 500 sheets?Why clubs charge an annual/yearly fee as well as small user fee for their services?

Some newspaper headlines?Razzak blames rice price spike on cold spell, dishonest traders Withdrawal of GSP facility to hurt plastic industry Indias Ujala maker sets up factory in Tongi Power tariff hiked again

*Manager has the responsibility of his/her own actions as well as for the actions of other individuals, machines, and other inputs under his/her controlPurchase inputs, decides product quality and/ or priceGoal: maximize profit, increase shareholders wealthEconomics-scarcity- by making one choice, you give up another-advertising vs R&D; missing a great show on TV right now, could have watched Contagion (Matt Damon and Kate Winslet) or Bodyguard (Salman khan and Kareena Kapoor)* *Supplying fertilizer during Boro seasonPrice, subsidy, smuggling, overuseDistribution outlets, farmers time: fewer outlets longer queue, travel time Marketing-increase salesFinance-earnings growthMaximize profit or increasing market shareConstraints-available technology, prices of inputs, optimal price, how much to produce? which technology to use? how much inputs to use? how to react to competitors behavior?You will be able to answer such questions*Recognize the nature and importance of profits*Opportunity cost =explicit costs (accounting) + implicit costs (giving up the best alternative use of the resource)Opportunity cost is generally higher than accounting costsImplicit costs- Run business using own premise, own time, rentals foregoneRestaurant: Sales: 100,000 Costs of sales: 20,000Accounting profit 80,000 Own time -30,000 Rentals forgone -100,000 Costs of sales: - 20,000 Economic cost 150,000Economic Loss 50,000

*Particularly in making investment decisions. Many accounting items are irrelevant, depreciation, financing costsOther items receive different treatmentWorking capital, current assets, current liabilities-treated as outflow*Incremental costsSunk costs Costs that have already been incurred. They do not affect any future cost and cannot be changed by any current or future action.Sunk costs are investment costs incurred before a certain activity takes place which cannot be recovered by the possible sale of the asset they produced. Highly specific investment (e.g. R&D) are usually sunk costs. Sunk costs represent barriers to exit. A firm which has incurred in high sunk costs will have difficulties in deciding to exit the market even if it sees good opportunities outside. Conversely, a firm that is deciding whether to enter into a certain business will have to consider with a particular attention the sunk costs and the risk that during the operations period they might not be recovered. Sunk costs, in this perspective, represent barriers to entry.In the case of an exporter, an example of sunk costs could be the costs of analysing the market and of exploring opportunities and seeking commercial partners. "The more the setting up of an activity is innovative, the more is it likely to involve long periods of gestation, and thus higher sunk costs" states Prof. Sergio Bruno in "The economics of ex-ante coordination".High sunk costs makes an investment irreversible, what, couple with uncertainty about the future, impacts the level of investment by industry, as this empirical analysis points out.

*Profit versus profiteeringProfit is not badAdam SmithWealth of the NationsIt is not out of the benevolence of the butcher, the brewer, or the baker, that we expect our dinner, but from their regard to their own interest.*Difference between debt and equity, fixed claim vs residual claimSince shareholders are residual claimants, they need to be compensated for risk in the form of a higher return. Exposure to downsideThere exists a long-run equilibrium normal rate of profit that all firms should tend to earn.At any point in time, however, firms may earn returns above or below this normal level.*Steve Jobs of AppleIn 1996, Apple was in dire straits. Asked at the time what he thought Mr Jobs should do with Apple, Michael Dell, a rival computer-maker, helpfully suggested that he should shut it down.Mr Jobs ignored that advice. Instead he led the company on to its greatest triumphs. Among them were the creation of the iMac, which revived the firms ailing computer business, and the development of the iPod, which ended up transforming the music industry, iphone, ipad. But just as important as what Apple did was what it did not do. One of Mr Jobss greatest skills has been to decide which projects the firm should not undertake.In some industries, one firm is effectively able to dominate the market and earn above-normal rates of return for a long time.Ability to dominate market may arise fromEconomies of scaleControl of essential natural resourcesControl of critical patentsGovernment restrictionsPatent system is designed to ensure these above normal returns serve as a strong incentive to innovate

*Incentive plan, profit and bonus relationship, everyone is greedy !Bank failures, GM bailout-came to the US Senate in a corporate jetStaff turnover, Fixed pay, BonusHallmark, Destiny Corporate governance*12*13When the Doctor says see you, he/she really means it, as if praying for your sickness*14*Rickshaw puller on a rainy day versus normal day, buying sacrificial animal- apni jitsen- you have slaughtered the poor farmer already before the EidBuying big Hilsha fishGrameen bought all the Banglalink free SIMsPrice monitoring*Market need not be physical or organized oil market extends from organized exchange (wholesale level) to corner gasoline station (retail level)Various marketsmarkets for consumer products, buyers are households and sellers are businesses.markets for industrial products, both buyers and sellers are businesses.markets for human resources, buyers are businesses and sellers are households.E-commerce :In the US, e-commerce accounted for 55.3% of total book and magazine sales, 50.2% of music and video sales, 35% of computer and hardware and software sales

*Competitive market is the basic starting point of managerial economics -- where capitalist system performs best demand supply market equilibriumModel analyzes and explains systematic effect of prices and other economic variables on household choice and business decisionsinteraction of households and businesses

*Non-competitive market -- in which market power exists. market power -- in addition to managing costs, *Lack of competition, Barriers to entry*For example, the present value of Tk. 100 in 10 years, if the interest rate is 7 percent is Tk. 50.83

If you invested Tk. 50.83 today at 7 percent interest rate, in 10 years your investment would be worth Tk.100

Interest rate appears in the denominator. Higher the interest rate the lower the present value and conversely ****The value of a perpetual bond that pays the owner Tk 100 at the end of each year when the interest rate is 5 percent is Tk. 2000*These are the right answer to the wrong question. If the question was: What are the means effective in achieving the objective of the firm, then these are the correct answers. But the question is not about the means but rather about the fundamental objective of the firm. Do not make Type III error asking the wrong question. Type I error wrongly convict an innocent person; Type II error failure to convict a guilty person

*Stakeholders value*Stakeholders value****i = 10 percentg = 5 percentCurrent profit Tk. 100 millionFind value of the firmValue of the firm immediately after it pays a dividend equal to its current profitsTk. 2200 million 100x(1.1/.05)Tk. 2100 million 100x(1.05/.05)**************Internet strategy: broadband or dial up? Which company? Wi Fi? Should you give it to all employees? Chat during office hours? Disturb staff with internet facilities. Staff without internet facilities go out office to use internet. Allow Face book?*Michael porter:Forces that impact sustainability of industry profits: (i) entry; (2) power of input suppliers;(3) power of buyers; (4) industry rivalry; (5) substitute and complements

Entry: promotes competition, barriers to entry, OPEC: sent the world economy in a tailspin, rice cartel, higher barrier-sustained profits, trade policiesPower of input suppliers: lower profits when suppliers have power to negotiate favorable terms for their inputs, Low power when standardized inputs, level of concentration in the market, role of governmentPower of buyers: Buyers are usually fragmented, imperfect information, CAB, Consumer protection lawIndustry rivalry, concentration, product differentiation Substitutes: Close substitutes erode profitability, and Complementarities affect industry profitability: Microsoft Windows and compatible software such as MS Office, Linux, Open system

Five forces gives you the big picture, there are many other determinants, not a comprehensive list

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