Managerial Economics and Business Strategy

Business Strategy is closely related with the concept of Strategic Management which is defined as a process of specifying an organization’s objectives, developing plans and policies to achieve these objectives and effectively allocating resources to implement the required plans and policies. Business Strategy can be defined as a constant process of strategizing and prioritizing the goals of a business such as to conform to its long term objectives of growth and expansion and a motive to capture a larger market share. It is a continuous and ongoing situation where the business assesses the industry trend in which the company is involved, the nature of its existing and potential competitors, new technologies and a constantly changing social, political and financial environment. Business strategies or strategic planning is undertaken by the top managerial authority of a business and is subject to dynamic changes. A business strategy would usually constitute a strategy formulation (evaluation of the present situation) and a strategy implementation (allocation of resources and assigning specific tasks to particular individuals). Business Strategies when formulated have the most important feature of assessing the strengths and weaknesses of the company, the opportunities that the future holds and reviewing the threats posed by competing business rivals. A business strategy can integrate all the aspects of a business’ activities and can serve as a systematic and management tool for problem solving and product development strategies and the issues of market planning.

Business Strategy and Managerial Economics is an interdisciplinary field of study of economics that encompasses the fields of both managerial economics and business strategy. The branch builds a bridge between the two closely interrelated fields of study in undertaking the most prudent business decisions in a competitive setting with a large number of firms where each of them act to maximize their revenue and profits. Business strategy and managerial economics as a branch of social science vis-à-vis economics is similar to theory of games which is extensively used to determine business decisions in a world of imperfect competition. The optimal solution in a situation of games occurs when each of the acting agents (business firms in this case) optimize their own strategies insuring against the best strategies of their rivals.

Managerial economics or business economics is a division of economics that involves heavy application of microeconomic analysis in case of business decisions. It is drawn heavily from quantitative techniques such as regression and correlation and methods of Lagrangian calculus. One of the essential features of managerial economics as a true bridge between economic theory and economics in practice is the attempt to optimize business decisions subject to the business’ objectives and the constraints imposed upon it by the scarcity of resources. This is where we find unison between business strategy and managerial economics. It is widely approached as an integration subject. Business strategy concentrates itself on the strategic planning techniques and business planning strategies to maximize its long term objectives. The long term objectives usually constitute growth objectives, maximization of sales and revenue in the long term and the constant effort to diversify its services. Business strategy is an ongoing and continuous process which undergoes continuous adaptations with changing objectives and plans and policies to achieve those objectives. The adaptations are made in view of the changing business environment with the with entry and exit of business firms and an assessment or review of its strategies annually or quarterly to face the competition meted out by the existing and potential competitors. Business strategy constitutes of strategy formulation and strategy implementation. While strategy formulation entails doing a situation analysis and competitor analysis and setting goals in accordance with this assessment, strategy implementation requires allocation of sufficient resources and establishing a chain of command or adhering by an alternative structure. Strategy implementation involves managing the process, monitoring the results and analyzing the efficiency and efficacy of the process and accommodating the necessary adjustments.

Development of its product and its effective marketing is one of the pillars of the business strategies for a business organization. Microeconomic considerations such as maximization of one’s own returns can be looked at both from the point of view of business economics as well as studies of business strategies of different firms or companies. Business strategy and managerial economics works with great efficacy in the following aspects of economics :

•  It is especially useful in analyzing the risk of a business decision and various uncertainty models, decision rules and risk quantification techniques comes under its ambit.

•  Production efficiency, optimum factor allocation, costs and economies of scale can be analyzed using microeconomic techniques that come under its fold.

•  Microeconomic methods coming under the ambit of business strategy and managerial economics can be used to evaluate pricing decisions such as transfer pricing, joint product pricing, price discrimination practices and the accounting for differences of price elasticity.

•  Investment theory which can be formulated by business strategy and managerial economics can be helpful to deal with capital budgeting used to examine the capital purchasing and investment decisions of a business.

Technically, Managerial Economics and Business Strategy encompasses the issues of the number of firms in the market, the extent of diffusion of technology and the extent of research and development undertaken by businesses to gain technological advantage, the demand conditions in the market and the behavior of consumers towards a particular brand, production efficiency in terms of economies of scale thus capturing market power, measures of industry concentration, profits of the business and whether production takes place at the socially optimum level. Business strategy and managerial economics also delves deep into the topics of integration and merger activity (horizontal or vertical integration or conglomerate mergers), antitrust policies, analysis of market failure in the presence of externalities and incomplete information.