Essential Business Frameworks: Firm Structure, Customer Loyalty, and Strategic HR

Why Activities Are Directed by Markets or Firms

The fundamental question is: Why are some activities directed by market forces and others by firms?

The answer lies in the high cost of using markets. It is often cheaper to direct tasks internally within a firm than to negotiate and enforce separate contracts for every transaction. Such “transaction costs” are typically low in markets for standardized goods.

The Role of Transaction Costs and Contracts

Economic theory suggests that private bargaining could resolve social problems, such as pollution, as long as property rights are well defined and transaction costs are low (though they rarely are).

Characteristics of Spot Markets

Spot markets cover most transactions. Once money is exchanged for goods, the deal is completed. The transaction is simple: one party demands, and another supplies. Spot markets are thus largely self-policing and are well suited to simple, low-value transactions, such as buying a newspaper or taking a taxi.

Incomplete Contracts and Trust

For many business arrangements, it is difficult to set down all that is required of each party in all circumstances. In such cases, formal contracts are by necessity “incomplete” and sustained largely by trust. An example is an employment contract.

Successful economies need both the benign dictatorship of the firm and the invisible hand of the market.

Customer Relationship Management (CRM) Segments

Customer relationships can be categorized based on potential profitability and projected loyalty:

• Butterflies: High potential profitability and short-term projected loyalty.
• Strangers: Low potential profitability and short-term projected loyalty.
• True Friends: High potential profitability and long-term projected loyalty.
• Barnacles: Low potential profitability and long-term projected loyalty.

The BCG Growth-Share Matrix

The Growth-Share Matrix evaluates a company’s Strategic Business Units (SBUs) in terms of market growth rate and relative market share.

Challenges of the BCG Matrix

• It is difficult, time-consuming, and costly to implement.
• It is difficult to define SBUs and accurately measure market share and growth.
• It focuses on classifying current businesses but provides little advice for future planning.

BCG Matrix Categories

• Star: A fast-growing business with a high relative market share.
• Cash Cow: A mature business that generates significant cash flow.
• Bright Prospects (Question Mark): A risky but high-upside business in fast-growing markets, requiring heavy investment.
• Dog: A business with a weak position and few prospects for growth.

Internal vs. External Recruiting Strategies

Recruiting decisions involve trade-offs between acquiring new perspectives and managing costs and morale.

External Recruiting

• Pros:
  • Acquires a fresh perspective.
  • Creates a discipline effect on existing staff.
• Cons:
  • Costly in terms of time required to find and train the new hire (learning curve).
  • Can have a depressing effect on existing staff who were overlooked.

Internal Recruiting

• Pros:
  • Signals opportunity to the workforce, motivating other workers if they see promotions occur.
  • Less costly and faster.
• Cons:
  • Can create barriers to new ideas.
  • Might spur resentment among those not promoted.