I was teaching a bit last week (an MBA Strategy course), and students have been sending in some questions.
I normally like to post the Questions and my Answers so all students can see them, but don’t have a good way to do that for this group of students. So I’ll put them here:
Could you elaborate why the triangle under the demand curve but above price represents consumer surplus?
You emphasized that we should think through profit = (Avg Price – Avg Cost)Quantity as an objective when formulating strategy. What about if the objective is to “maximize shareholders’ value”, “maximize growth”. How do we formulate our business strategies?
On page 7 seven of the slide deck from the first class, I wrote that the firm wants to maximize the profit formula you listed above and then said “probably some risk-adjusted present value thereof.”
Taking Silk Espresso as an example, what should be the growth strategy for a company like this?
In all the case studies, it seems there is a flow of thought to analyze the case in order to come to the most sensible solution. Are we only able to do it through accumulated experience or is there any systematic way of doing so?
My recommendation is that you begin analysis not by thinking about the company, but instead by thinking about the frameworks. Take the “Frameworks in Nine Sentences” document I showed the last day of class and think through how all of the ideas apply. That is, for Maersk, start by thinking about profit, and specifically the relation between average cost and quantity. Are there significant scale economies in this business? What is the relation between price and quantity? Then think about Value (B – C). Who is the customer? Where does B come from for that customer? What is C? What types of costs does Maersk have? Then think about consumer surplus… etc.