MANAGERIAL ECONOMICS
INTRODUCTION, BASIC PRINCIPLES
February 17 – March 03, 2014
Session 1 - 3
a hypothetical case …
• What if Walmart came to central Europe?
• Get some basic facts about:
– the company
– The environment – PESTLE, industry, market, competition
…
– Go through the notes up ahead and try to tackle the
hypothetical question
Running a company? Or about to get started?
Questions & worries exceed answers and
security
• Running a company? Or about to get started?
• More questions & worries than answers and security
– How does the economic environment look? What will it be
like next and following years? Why?
• What about major econ indicators? -> past, present, future
• What about the industry we are in?
• What about the market and market segment(s) we are in?
Demand?
• What about our decision-making capacity? Resources? Time?
Getting started?
Dealing w/issues from the 1st day of ops & even long before
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A great idea for a product?
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let’s invest time to look at it …
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because of nonexistence of a competitive product and reasonable
market for it? OR
Because of a huge market although product is NOT unique?
From a strategic standpoint -> then analyze each factor
Worth the time and making $ commitments? -> make $ &
other types of investments?
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What to invest in? Why? Opportunity cost = vacation in Tahiti?
Where to get $? -> limited resources -> How to appraise the business?
What about Human Capital? Physical assets? Working capital?
Decision-making at all levels
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Short- & long-term risks and benefits to every choice for a
course of action – your job to decide what to do
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Goal = increase firm’s value => TR – TC = π
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Firm’s value = expected profit
FC=? VC=? (FC = fixed costs) (TR = total revenue)
TR=? -> market research? => demand for product? common sense?
Price-taker/maker (setter)? Mkt size = demand & competition?
•
Maximize π = (max. TR) – (min. TC)
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Competitive advantage?
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Strategy? Remember strategic management?
Strategic Management Model
Existing
Existing business model
Mission, vision, goals, objectives, corp.
values
External
analysis ->
opportunities,
threats
SWOT =>
Strategic
choice
Functional-level strategies
Business-level strategies
Corporate-level strategies
Strategy implementation
Internal
analysis ->
strengths,
weaknesses
Strategic Management Cycle
Strategic management – mgmt for distant
horizons = TOP MANAGEMENT
• Series of destinations which are coming closer with
time for everyone
– Where was the company yesterday? (if applicable)
– Where is the company now ($, ext. environment, market)? What
conditions is it in (internally)?
– Where will the company be tomorrow? vs. Where can the company
be tomorrow? vs. Where is the company likely to be tomorrow – if we
do a, b, c, or nothing at all?
• Nothing happens by itself =>
=> What are the business objectives? -> WHERE TO?
=> What are the best ways to achieve these objectives? ->
HOW, WHEN?
=> What resources are necessary to execute the plan? ->
w/WHAT & WHOM
From top management down - decisions
• CEO, COO, CFO, CTO – make strategic decisions to optimize
=> choose between the BAD and WORSE 
but based on what?
• … on the outcome of analysis of stats data from middle-level
management – accounting, $ dept, marketing, HR …
• External & internal environment modify the direction and
pace every day
Common managerial mistakes
• Never increase output just to reduce avg costs
• Grabbing a greater mkt share often times reduces π
• Do NOT maximize π margin -> it does NOT maximize
total π
• Maximizing TR reduces π
• Minimizing HR costs => lowers productivity
What assets do we have available?
Corporate capital structure
• How do we finance the entire set of:
- current operations &
- continuity = growth
– Short-term & long-term debt
• Issuing bonds
• Long-term payables
– Common & preferred equity
• Common stock – primary owners (shares) who benefit most
• Preferred stock – fixed dividends + NO voting rights like common
shareholders
• Retained earnings - $ to be reinvested or pay off debt (surplus
earned)
What assets do we have available?
Corporate capital structure
• How much cash-flow should we generate? Why?
• Current assets – used up (utilized) w/in 1 year period
– Cash, acc receivables, inventory
• Fixed assets – source of benefits beyond 1-year horizon
– Real property (building, real-estate), equipment
Corporate capital structure
• Balance sheet (p.237, Exhibit 5-19)
– Liquidity – are we able to meet short-term $ obligations?
– Solvency = liquidity with time-dependent factors –> long-term
•
•
Title: International Financial Statement Analysis
Author: Robinson, Thomas
• Sample problem (p. 230, 231)
– A & B .. current assets but:
• A … over 50% of assets = cash; B … 6% of assets = cash
• A … no current lia’s; B … $2.5 mil of current lia’s !! (cash-flow
fluctuations = death unless B manages to collect receivables or
issues more bonds or brings in investors)
•
•
Title: International Financial Statement Analysis
Author: Robinson, Thomas
• Leverage = Little capital = big risk
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Debt-to-equity ratio … financing by debt = risk of default
That is – using leverage to invest risky if the investment moves against you => loss is
greater than had the investment been made with equity
Annual reports
• Czech Airlines - annual report 2010 (p.94 - 95)
•
http://www.csa.cz/en/portal/quicklinks/news/vyrocnizpravy.htm
• Zappos - annual report 2009
•
http://www.slideshare.net/Devcorporate/zappos-financials-1781754
• BMW - annual report 2012
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http://www.bmwgroup.com/e/0_0_www_bmwgroup_com/investor_relations/finanzberichte/ueberblick.shtml
• Your own start-up?
• How do you set up your asset, lia, equity structure and why?
Revenues and costs overview
1. From the accounting perspective
2. From the “production” perspective
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Maximize π = (max. TR) – (min. TC)
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How do we “know” how much $ we will be making and
spending?
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Market data - qualitative, quantitative …
Where does it come from?
Available for our product?
Time vs. $ to be invested to get such data
Reliability issues
Price-taker/maker (setter)? - mkt size = demand & competition?
Revenues and costs overview
Revenue Management & Planning
• Some businesses (industries) start off with loss, then swing
into 0+ profits, then back to loss and then start making profit
– seasonality factors (ski-resorts, restaurants, hotels, airlines)
• Floating vs. fixed prices
– analyzing micro-level consumer behavior and optimizing product
availability and prices => max. profit
– dynamic revenue management planning => avg Ps, avg Qs and avg TC
– airlines, hotels – choosing the right time to customize the product for
the customer (of our choice)
• Do all industries face seasonalities?
Revenues and costs overview
• Revenue recognition
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$ before sale of good/service – unearned revenue
$ at the time of good/service delivery
Good/service before $ - receivables
Examples …
• Expense recognition
– Matching principle
• expenses recognized when revenues are recognized
– Systematic allocation of costs –> in the absence of cause & effect
• Periods in which benefits are provided -> costs = expenses (accounting)
– Immediate recognition
• Costs recognized as expenses because they have no future benefit OR were
recorded as asset and benefits came to end OR neither matching no systematic
allocation principles are not uselful
Accounting ratios
• Return on sales = Net profit margin
– Net income / revenue
– If costs have gone up faster than sales -> lower profit margin
• Operating profit margin
– Operating profit / net sales
– Profit margin before interest and taxes
– Dynamic figures -> comparison needed
• Int’l Financial Statement Analysis – p. 180
Revenues and costs overview
• Plan for & minimize TC = FC + VC
– Costing – ABC – activity-based costing
– Maximize time and HR efficiencies -> productivity
– MRP (material requirement planning) – current expenses
• Costs in short-run
– Production function, VC, FC, diminishing marginal product, AC curves,
MC curves, TC, AVC, AP, MP, estimates …
• Costs in long-run
– Production isoquants, isocost curves, optimum combination of inputs,
cost optimization (impossible in short-run), long-run vs. short-run …
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Chapters 8 – 10 (pp. 284 – 386) – Managerial Economics foundations of business analysis and
strategy, tenth edition – Christopher R. Thomas, S. Charles, Maurice
Bakery – $ analysis
Bakery – $ analysis
• Average per-unit VC … $0.35
• Estimated monthly FC = $32,343
• Profit .. month 1 = -$12,899, month 2 = -$8,289, month 3 = -$2,007, month
4 -> 12 = $4,024
• B-E units sold per month … pcs ?
– # of units to be sold in order to B-E from the start
• B-E revenue earned per month … $ ?
– Revenue to be earned in order to B-E from the start
• Average per-unit B-E revenue … $ ?
• ROE/ROI by ?th month of ops
• Start-up working capital to survive?
Bakery – $ analysis
Bakery – sales & revenue plan
Answers
• B-E units sold per month … 17,255 pcs
• B-E revenue earned per month … $ 38,336
• Average per-unit B-E revenue … $ 2.22
• ROE/ROI by 9th month of ops
• Start-up working capital to survive = $ 23,195
Cost planning, control, analysis – reverse
marketing?
• Start-up project/business – set your goals
– Budget -> milestones -> operational level breakdown -> back-check ->
evaluation
– Project manager OR CEO or executive level -> project manager ->
departments -> reporting to 1 level up at each level -> performance
evaluation
• Established operations – objectives defined
– Current balance of actual vs. planned expenses => adjust current
budget -> adjust $ for & timing of milestones -> re-adjust op level costs
-> evaluation of cost-management performance
– Performance cycle complete -> report to 1 level up at each level ->
performance evaluation
Cost planning, control, analysis –
closer look
• Budgeting first
– total $ available at beginning + new $ coming from external sources
– then cost breakdown by milestones/time periods/activities
– applying prices to the purchase/hire of inputs within a time frame:
• HR (aka Human Capital)
• “raw” material – semi-finished products (tangible items vs. intangible
services)
• Inflation, IR
• Degree of cost assignment precision – how accurately are costs assigned
to items/activities
• Cost control
– Degree of freedom and competency of decision-making at level
– Instantaneous checks of actual against planned costs
Cost planning, control, analysis –
closer look
• Buffers
A. additional time needed for building a back-end mechanism of a
website:
1. Individual ops took longer and/or
2. Higher expenses incurred by supplier and/or
3. Unexpected (unaccounted for) problems/issues occurred
B. Inflation, IR, loss of HR, dynamic developments on the market …
C.
HR and legal aspects
• Capacity to make decisions and take action
• i.e. education (needed and/or required by law), experience
• Use precedent where possible
Cost planning, control, analysis –
closer look
What happens if costs exceed $ available?
• Re-allocation / re-distribution of $:
– within departments, items
– at milestones
• Re-definition of objectives at each level
• More $ obtained
– Depending on projected revenues & profits -> ROE, ROI …