Final Exam Notes – Innovation and Markets

Chapters 1,2,5,8 and 10

Part A (Written) Part B (Multiple Choice)

Chapter 1
1- A 5 Minutes Preview of Chapter 1
LO 1.1- Meaning of innovation, its 6 aspects & entrepreneurship.
Exploiting new ideas, etc., Creating opportunities…etc.
LO 1.2- Explain why innovation isn’t easy - Risky, why change, etc.
LO 1.3- Identify the sources of innovation - Companies, Society…
LO 1.4- Explain the different types of innovation – Incremental,
disruptive & cost.
LO 1.5- What do successful innovators & entrepreneurs do?
There are 5 key practices: Manage the dimensions of
innovation, manage innovation as a process, etc.

1.1 – Meaning of Innovation

Meaning of Innovation
Innovation is a new method, idea, product to improve product to create great value for the
customers and shareholders. Innovation = Invention * Commercialisation
- Innovation is ‘the process of creating value from ideas.
- Innovation is the successful implementation of creative ideas within an organisation
- Entrepreneurship is the powerful mixture of energy, vision, passion, commitment,
judgement and risk-taking which provides the motive power behind the innovation process.

6 Aspects of Innovation
Six ways in which innovation can be viewed or characterised as:
1. Identifying or creating opportunities e.g. Mobile phones and tablets have revolutionised the
way we communicate
2. New ways of serving existing markets e.g. Coles, Woolworth's online shopping
3. Growing new markets e.g. the auction market with eBay
4. Rethinking services e.g. Online banking and nor more queues
5. Meeting social needs e.g. Facebook and LinkedIn as social platforms
6. Improving operations e.g. using robotics in manufacturing, mining and medicine

Innovation and entrepreneurship

Innovation is the specific tool of entrepreneurs, the means by which they exploit change as an
opportunity for a different business or service. It is capable of being presented as a discipline,
capable of being learned, capable of being practised.
- Innovation is driven by Entrepreneurs: Passion, vision, energy, enthusiasm, judgement & lots
of hard work. Start-up entrepreneur's, Intrapreneurs/corporate entrepreneurs & Social
Entrepreneurs: champions of social

Stage in life cycle of Start-up Growth Sustain/scale Renew

an organisation
Creating commercial Individual Growing the business Building a portfolio of Returning to the
value entrepreneur exploiting through adding new incremental and radical frame-breaking
new technology or products/services or radical innovation to kind of innovation
market opportunity moving into new markets sustain the business which began the
and/or spread its business and enables it
influence into new to move forward as
markets something very
different
Creating social value Social entrepreneur, Developing the ideas and Spreading the idea Changing the system
e.g. Mission Australia passionately concerned engaging others in a widely, diffusing it to — and then acting as
having a cafe that to improve or change network for change — other communities of agent for next wave of
acts as training something in their perhaps in a region or social entrepreneurs, change
grounds for the immediate around a key issue engaging links with
unemployed environment mainstream players
like public sector
agencies

LO 1.2 - Innovation isn’t easy

Barriers to innovation include:
- Seeing innovation as ideas, not managing the whole journey
- Not recognizing the need for change
- Mindset and complacency — core competence becomes core rigidity
- Closed information network insulated from new ideas.

LO 1.3 Sources of innovation

Within a company or an industry
Peter Drucker identified four sources of innovation:
1. Unexpected occurrences
2. Incongruities
3. Process needs
4. Industry and market changes

Within social and intellectual environment:

Outside a company or industry, three additional sources of opportunities exist:
5. demographic changes
6. perceptual changes
7. new knowledge

LO 1.4 Different types of Innovation

- Ideas are NOT enough for innovation!
- Innovation is a multidimensional concept, and it is not necessary to reinvent the wheel to
become an entrepreneur.
- Innovation is the successful creation of value within an organisation
- Entrepreneurship can occur with little, if any, innovation

Innovation and types of innovation

Innovation
- Innovation is the successful implementation of creative ideas within an organisation
- Entrepreneurship can occur with little, if any innovation
- Innovation is a multidimension concept

Incremental VS Disruptive Innovation

Incremental – Small improvements or upgrades made by existing product/service
Disruptive – Refers to a technology whose application significantly affects the way a market or
industry functions.
Incremental Innovation Disruptive Innovation
Steady Improvements Fundamental rethink
Based on sustaining technologies Based on disruptive technologies
Develop customer loyalty Create new markets
 Types of Incremental Innovation
Incremental innovations make existing products or service better.

Disruptive Innovation
- Change the value proposition
- Cause fundamental changes in the marketplace
- ‘Innovators dilemma’ in large organisations can enable more flexible, entrepreneurial
companies to capitalise on industry growth

Cost Innovation
- Innovation which considers the ‘value for money’ segment
- Cost innovation can be delivered in three years: selling high end products at mass-market
prices.
- Turning niches into mass markets

LO1.5 – What do successful innovators and entrepreneurs do?

Successful innovators/entrepreneurs do the following:
1. Explore and understand different ‘Dimensions of innovation’, also known as ‘The 4P’s of
innovation’
2. Manage innovation as a process
3. Develop innovation capability
4. Create innovation strategy
5. Build dynamic capability

1. Explore & understand the dimensions of innovation: The 4P’s of Innovation

Dimension Type of change
‘Product’ Changes in the things (products/services) which an
organisation offers.
Cars with GPS, auto reverse.
‘Process’ Changes in the ways in which these offerings are created
and delivered
Macdonald’s – Crate your own taste
‘Position’ Changes in the context into which the products/services are
introduced
Lucozade – from illness recovery to health drink
‘Paradigm’ Changes in the underlying mental models which frame
what the organisation does
 Easing the fears of Online Banking

2. Manage innovation as a process

Figure 1.2 The resulting model: What we need to pay attention to if we are going to manage
innovation well

3. Develop innovation capability

If Innovation is only seen as… …The result can be
Strong R&D capability Technology which fails to meet user needs and
may not be accepted: ‘the better mousetrap
nobody wants’
The province of specialists in white coats in the Lack of involvement of others, and a lack of key
R&D laboratory knowledge and experience input from other
perspectives
Meeting customer needs Lack of technical progression, leading to inability
to gain competitive edge
Technological advances Producing products, the market does not want or
designing processes which do not meet the needs
of the user and are opposed
The province of large firms Weak small firms with too high dependence on
large customers
Breakthrough changes Neglect of the potential of incremental innovation.
Also, an inability to secure and reinforce the gains
from radical change because the incremental
performance ratchet is not working well
Associated with key individuals Failure to utilise the creativity of the remainder of
employees, and to secure their inputs and
perspectives to improve innovation
Internally generated The ‘not invented here’ effect, where good ideas
from outside are resisted or rejected
Externally generated Innovation becomes simply a matter of filling a
shopping list of needs from outside and there is
little internal learning or development of
technological competence

4. Create Innovation strategy

We can think of strategy as a process of exploring the 4 innovation types.
4.1 Strategic analysis: What could we do?
4.2 Strategic selection: What are we going to do,
and why?
• What is our overall business strategy (where we are trying to go as an organisations) and how will
innovation help us get there?
• Do we know anything about the direction we want to go in — does it build on something we have
some competence in (or have access to)?

4.3 Strategic implementation: How are we going to

make it happen?
Implementation issues to consider are:
• What resources do we need?
• How do we obtain the resources?
• Who we may need to partner with?
• What likely roadblocks we could face?

5. Build dynamic capability

Most of the time innovation takes place within a set of rules of the game and involves players
trying to innovate by doing what they do (product, process, position, paradigm) but better.

Dynamic capability is the ability to review and reset the approach which the organisation takes to
managing innovation in the face of a changing environment.

Occasionally something happens which dislocates this framework and changes the rules of the game. By
definition, these are not everyday events but have the capacity to redefine the space and the boundary
conditions.

Chapter 2
Chapter 2 Learning Objectives
LO 2.1- Understand the nature of creativity
Association, incremental & radical, left/right brain... etc.
LO 2.2- Understand the creative process
Recognition-incubation-insight-validation/refinement
LO 2.3- Understand the components of creativity, use a series of creativity techniques, and identify factors
influencing creativity
Creative thinking…, Problem reversal ... etc., Pressure…. etc.
LO 2.4- Explain the link between creativity, innovation and entrepreneurship, and outline the steps for
screening opportunities
Product feasibility, Market feasibility & Economic feasibility
 2- An Open Forum:
Time to take a closer look at some of the theoretical aspects in ‘Chapter 2’.
* (LO 2.2) The Creative Process
(Graham Wallas, 1926 model)
* (LO 2.3) The 5 Creativity Techniques

2.1 The Nature of Creativity

What Is Creativity?
In business, creativity can be defined as the production of new and useful ideas, Ideas must fulfil a need in
the marketplace and generate profit. Successful, innovative companies do systemically encourage the
development of ideas. It is the ability to produce work that is both novel and useful.

Creativity involves the following thinking strategies:

1- Associations between problems or ideas
2- Incremental and radical ideas
3- Divergent (Explore) and convergent (Focus) thinking
4- Left and right brain thinking
5- Pattern recognition
6- Individual and group creativity
Features underlining the nature of creativity
1: Associations: Between problems and ideas. Forge a new and unexpected link.
2: Incremental and Radical: Creativity is about breaking through to radical new ideas, new ways of
framing the problem and new direction for solving it.
3: Divergent (Explore) and convergent (Focus) thinking: Divergent thinking is about making
association, often exploring round the edges of the problem, and convergent thinking is about focus,
homing in on a single best answer. Sometimes you need to mix the 2 kind of thinking skills.
4: Left/Right Brain: The way of our brain operates. Both hemispheres are involved, and they play
different roles
5: Pattern Recognition: is about pattern and our ability to see these
6: Individual and Group Creativity: It is important to recognise the power of interaction with other.
We are all different in personality, experience and approach. That means we identify the problem and
solution from different points of views.

2.2 Creativity as a Process – Graham Wallas Model, 1926

• Research has shown there is more to creativity – there is a process which starts long way before
the light bulb moment!
• Process is associated with convergent & divergent thinking.

This model shows the creative process (Graham Wallas Model, 1926)
1. Recognition/Preparation
Creativity starts with recognising we have a problem or puzzle to solve and then exploring its
dimensions. Working out real problems/issues and finding a solution. Redefining and reframing
the skills used here.
2. Incubation
This is an important stage of the process of creativity since it enables us to make new connections
that weren’t identified in step 1.
3. Insight
Sometimes an idea is only half formed. This step offers us another area where other skills may
help. Techniques such as brainstorming ideas allow us to identify ideas which require different
uses of skills/tools.
4. Validation/Refinement
This stage involves trying the idea out – prototyping (an early sample or model) – and using
feedback to adapt and develop It. Prototyping can be done in various ways and forms the core of
design methods aimed at bringing new ideas into widespread use. By sharing the original idea, we
can explore its different dimensions from new perspectives and open up new ideas for
development.

Additional: Developing Person Skill & Developing Group

2.3 COMPONENTS OF CREATIVITY AND CREATIVITY TECHNIQUES

 Learning Objective 3 - Understand the components of creativity, use a series of
creativity techniques, and identify factors influencing creativity

The Three Components of Creativity.

1. Thinking
- Creative thinking is how people approach problems and solutions
- Depends strongly on the individual’s personality, as well as how a person thinks or works
- People are more creative if they feel comfortable disagreeing with others
2. Knowledge
- Expertise or knowledge encompasses everything a person knows and can do
- Knowledge can be acquired in different ways:
• through formal education
• practical experience
• or interaction with other people
3. Motivation
- Motivation determines what a person
will actually do
- Two types of motivation exist:
• intrinsic motivation (motivation from inside, such as enjoyment of work)
• extrinsic motivation (motivation from outside, such as financial rewards)

Creativity Techniques
1. Problem Reversal: This is a technique based on the idea that the world is full of opposites. The
action of viewing a problem from an opposite angle. E.g. like stating out what everybody else is
not and learning from the loopholes and creating another strategy.
2. Forced analogy: The action of making an association between two unlike things to obtain new
insights. E.g. Marriage as a pencil. Comparing 2 unlike things but comparing them similarly.
3. Attribute listing: The identification and listing of all major characteristics of a product, object or
idea and evaluating that idea to bring possible improvements.
4. Mind maps: A visual method of mapping information to stimulate the generation and analysis of
it.
5. Brainstorming: A conference technique which a group tries to find a specific solution for a
specific problem amassing spontaneous ideas Factors influencing creativity:

Factors Influencing Creativity:

1. Encouragement of creativity - Encouragement and development of ideas can come from
organisational encouragement (encouragement of risks, idea generation and supporting evaluation
of new ideas), encouragement from supervisors, and from the group itself (openness to ideas and
shared commitment to the project)
2. Autonomy – A sense of ownership and control over their own work and their own ideas
3. Resources – Resources restrictions limit what can be accomplished, perceptions of adequacy of
resources may affect people psychologically by affecting their intrinsic value of projects.
4. Pressures - pressure can influence the individual negatively or positively on creativity. Pressure
from workload will result in decline in creativity but, if it’s from pressure as a challenge, it could
increase creativity
5. Mental Blocks – Prejudice stems from preconceived ideas. 2 Types of mental blocks;
Prejudice (fixed ideas we have about things, thus generally blocking us from enacting a vision
beyond what we already know inhibiting acceptance of change and progress) and Functional
Fixedness (see it for its name and not what it can do, e.g. basically seeing something for only 1
purpose)

2.4 LINKING CREATIVITY, INNOVATION AND ENTREPRENEURSHIP

Learning objective 4 - Explain the link between creativity, innovation and
entrepreneurship, and outline the steps for screening opportunities
 Figure 2.4 A process model linking creativity, innovation and entrepreneurship

Knowledge development during the entrepreneurial process

At the centre of the model, innovation represents the capabilities and its linkages with both the
marketplace and science base. Entrepreneurial process is influenced 2 main factors. The
unsatisfied needs in the marketplace which is an opportunity for developing and commercialising
new products or new services (pull factors). The other is technological progress, such as power
computers, microscopes, digital networks and scanners, combined with the advance of science
produce knowledge at an exponential rate (push factors).

Many people see the successive stages of creativity, innovation and entrepreneurship as being
distinct and spate. In fact, these stages can overlap, and entrepreneurship is not necessarily a linear
process. 2 important concepts are developed in this section:
- These 3 stages consist of creating new knowledge
- This knowledge is developed and formulated through different types of social network

Knowledge development during entrepreneurial process

1. Creativity stage: Knowledge is present in a very raw form
2. Innovation stage: Knowledge is further refined, and the initial idea should pass the
3. Entrepreneurship stage: Knowledge is embedded in the product or service sold
*What creativity, innovation and entrepreneurship have in common is Knowledge development

Developing and disseminating knowledge through social networks

- Social networks are the catalyst for the development and dissemination of knowledge both for
emerging and established organisations
- Networks impact on social, emotional and material support available to entrepreneurs
- Three features of social networks:
1. Diversity (Age, Gender, Education or Ethnicity)
2. Affective strength (Positive People)
3. Structural equivalence (Degree of similarity and the extent the network spread)

From creativity to entrepreneurship: Screening opportunities

- The creativity-innovation-entrepreneurship process essentially entails identifying and
evaluating opportunities
- During this process, business ideas will be assessed to determine if they represent an
entrepreneurial opportunity
— i.e. sustainable value and wealth can be created
 Three critical issues to consider when screening opportunities:
• Product feasibility — Is it real?
Can the product be made, or service delivered using currently available technology?
• Market feasibility — Is it viable?
Does anyone want it? Has the product any features that someone values and would
be ready to pay for?
• Economic feasibility — Is it worth it?
Can the product be developed, manufactured and distributed while generating a profit?

Chapter 5

Chapter 5 Learning Objectives:

LO 5.1 - Explain the elements of the marketing mix
LO 5.2 - Define 'Product', and understand product classification, product differentiation and branding
LO 5.3 - Understand the concept of price and customer perception of value
LO 5.4 - Understand the integrated marketing communications (IMC) approach to marketing promotion
and the major elements of the promotion mix
LO 5.5 - Understand the concept of place and how distribution channels connect producers and consumers
LO 5.6 - Describe how to develop and manage an effective marketing mix based on the unique
characteristics of services
Course Learning Outcome 'CLO':
CLO 3 Critical Thinking: Think Critically
3.1 Identify logical connections and use of evidence in well-formulated ideas and arguments

LO 5.1 Explain the elements of the marketing mix - The 4Ps & 7Ps

A set of variables that a marketer can exercise control over in creating an offering for exchange.
Traditionally The 4 Ps:

PLUS: people, process, physical evidence = (7Ps)

Remember*** That Marketing, whatever marketing mix framework (4Ps, 7Ps) you apply or consider, is
ultimately about a total focus on servicing the needs and wants of the target market.

LO 5.2 Product
Product: can be a good, service or idea offered to the market for exchange.
• Good: a physical (tangible) offering capable of being delivered to a customer, e.g. Fridge.
• Service: intangible offering that does not involve ownership, e.g. a taxi ride.
• Idea: concept, issue or philosophy offered to the market, e.g. ‘Clean up Australia Day’.

Total Product Concept

Total Product Concept - Describes the 4 levels; core product, expected product, augmented product and
potential product in order to analyse how the product creates value for the customer.

Product Relationships
Product item
• A version of a product.
Product line
• A set of product items related by characteristics such as end use, target market,
technology or raw materials.
Product mix
• The set of all products that an organisation makes available to customers.

Product Classifications
1- Consumer products: Purchased by households and
individuals for their own private consumption.
2- Business-to-business products: Purchased by
individuals and organisations for use in the
production of other products or for use in their daily
business operations.

Consumer Product
1- Shopping products: moderate to high engagement in the decision-making process, with the purchase
decision based on features, quality and price. Clothing, camera…
2- Convenience products (fast-moving consumer goods): Inexpensive, frequently purchased, products
bought with little engagement in the decision-making process. Milk, magazine…...
3- Specialty products: Highly desired products with unique characteristics that consumers will make
considerable effort to obtain. Car - BMW, overseas holiday….
4- Unsought products: To meet a sudden, unexpected need.

Product Differentiation
-The creation of products and product attributes that distinguish one product from another.
-Characteristics that customers may perceive to be differentiators include design, brand, image, style,
quality, features and price.

Branding
• Brand
A collection of symbols such as a name, logo, slogan and design intended to create an image in the
customer’s mind that differentiates a product from competitors’ products.
• Brand image
The set of beliefs that a consumer has regarding a particular brand.
• Brand name
Part of a brand that can be spoken, including words, letters and numbers.
• Brand mark
The part of a brand not made up of words — it often consists of symbols or designs.
• Trademark
A brand name or brand mark that has been legally registered so as to secure exclusive use of the brand.
• Brand equity
Added value that a brand gives a product.
• Brand loyalty
Customer’s highly favourable attitude and purchasing behaviour towards a brand.
• Brand metrics
Measure the value of brands and include brand assets, stock price analysis, replacement cost, brand
attributes, and brand loyalty.

LO 5.3 Price

• Price is a measure of value for buyers and sellers

• Sellers need prices to cover their costs (short and long term) and to provide sufficient returns to
justify the risk of business and invested capital.
• Buyers need prices that reflect what they think the product is worth and what they can pay.
• Prices generally need to appeal to target customers, yield acceptable profit margins and provide a
competitive market offer.

The Psychology of Pricing

• Consumer purchasing behaviour is usually based on a rational evaluation of value.

• The relative importance of price varies between individual customers, market segments
and product categories.
• Perceptions of price also vary with time, especially over economic cycles between booms
and recession.

Managing Customers’ Perception of Value and Price

Customer Value Perceptions

• Internal reference price: The price expected by consumers, largely based upon their
actual experience with the product.
• External reference price: A price comparison provided by the manufacturer or retailer.
• Buyers sensitivity to price fall into three categories; value-conscious, price-conscious,
prestige-sensitive.
• Product-line pricing: An approach to pricing that sets prices for groups of products in a
product line rather than for individual products.

LO 5.4 Promotion
• Promotion
Is the creation and maintenance of communication with target markets. Comprises a strategic mix of
advertising, Public relation, sales promotion and personal selling.
• Marketing communication
A term for promotion that refers to communicating a message to the marketplace.

Integrated marketing communications (IMC)

 • Integrated marketing communications (IMC)
The coordination of promotional efforts to maximise the communication effect.
• Promotion mix
⁻ Combinations of methods used to promote a product or idea
⁻ The four main elements of a promotion mix are:
⁻ advertising
⁻ public relations
⁻ sales promotion
⁻ personal selling
Advertising
• The transmission of paid messages about an organisation, brand or product to a mass
audience.
• Worth over $12 billion/year in Australia
• Benefits: Reaches many people at relatively low cost per person
• Limitation: Difficult to measure effectiveness

Public Relations
• Communications aimed at creating and maintaining relationships between the marketing
organisation and its stakeholders.
• Effective PR messages are timely, engaging, accurate and in the public interest.
• Benefits: Credibility, resulting word-of-mouth, low- or no-cost, effectively combat
negative perceptions or events.

Sales Promotion
• Offers of extra value to resellers, salespeople and consumers in a bid to increase sales.
• Used irregularly to smooth demand
• Rewards the sale of company’s products
• Limitations: Can lose effectiveness if overused, easily copied, public becoming
increasingly cynical about whether they offer real value.

Personal Selling
• Personal communication efforts that seek to persuade consumers to buy products.
• Expensive, high-involvement or industrial products favour personal selling
• Benefits: Can be specifically tailored to individuals, so has greater influence than
advertising, sales promotions and PR strategies.
• Limitations: Expensive, limited reach, labour intensive, time-consuming.

Integrating Promotion Mix Elements

• Marketing organisations have different promotional needs and finite financial and other
resources, so must choose from options in the promotion mix.
• Those with large promotion budgets usually use multiple strategies.
• Small budgets will rely on fewer, simpler strategies.
• Best promotion mix will change over time.

Push and Pull Policies

• Push policy - A product is promoted to the next organisation down the distribution channel. E.g.
Producer promotes its product to wholesaler. Generally, B2B
• Pull policy- A product is promoted by the producer directly to consumers to create demand to
‘pull’ goods through the marketing channel. Generally, B2C.

LO 5.5 Place
• Marketing intermediaries are individuals or organisations that act in the distribution
chain between the producer and the end user (e.g. industrial buyers, wholesalers, agents
and brokers and retailers).
 • The distribution channel involves a group of individuals and organisations directing
products from producers to end users.

Market Coverage strategies

• Market coverage decisions consider the nature of the product and the target market. Generally,
marketers will choose from:
• intensive distribution which distributes products via every suitable intermediary
• exclusive distribution which distributes products through a single intermediary for any
given geographic region
• selective distribution which distributes products through intermediaries chosen for some
specific reason.

Benefits of using distribution channel and intermediaries

5 Consumer product distribution channels

LO 5.6 The services marketing mix

• Combined with the traditional 4 Ps of the marketing mix, People, Process & Physical
evidence make up the 7 Ps marketing framework, also known as the ‘Extended services
marketing mix’.
• Focus on ‘the delivery of the promise’.
• Heavy focus on the People who deliver the service.
4 Characteristics that distinguish services from goods
1- Intangibility
2- Inseparability
3- Heterogeneity
(variability)
4- Perishability

People
Create and deliver the service and affect value for the customer as they are directly involved in the service
experience.
Staff is the most controllable factor in service delivery. Must choose staff who are:
- technically competent
- deliver high standards of service
- promote products through personal selling.

Process
• All the systems and procedures used to create, communicate, deliver and exchange an
offering that exceeds the customer’s expectation.
• Functional expectations: Expectations of the technical delivery of the service transaction
• Customer service expectations: Relate to the service experience.

Physical Evidence
• Tangible cues that can be used to evaluate service quality prior to purchase.
• The physical environment includes architectural design, floor layout, furniture, décor,
shop or office fittings, colours, background music and even smell.

Chapter 8

1- A 5 Minutes Preview of Chapter 8

LO 8.1- Understand meaning of ‘Competition’ & ‘Market Structures’
Perfect competition, monopolistic competition…etc.
LO 8.2- Identify ‘Perfect Competitive’ firm profit firm in the short run.
Perfect competitive firm is a price taker, offering market price….
LO 8.3- Why ‘Perfectly Competitive’ firm breaks even in long run.
In the long run perfect competitive firm will break even…. etc.
LO 8.4- Understand a market with no completion ‘Monopoly’
Monopoly profits, price discrimination, natural monopoly, …
LO 8.5-Understand Imperfect Competition & ‘Monopolistic Competitive’.
Monopolistic Competition - Consumers value variety and prepared to
pay higher price
LO 8.6- Understand the model of ‘Oligopoly’ market structure
Collusion, game theory, restrictive practices, entry deterrence

8.1 Competition & Market structures

• For most economist’s competition is about how many rivals there are in the market and how
evenly matched they are.
• The principal criteria according to which the structure of a market can be defined:
1. Number of buyers & sellers in the market
2. Degree of differentiation (homogeneity)
3. Degree of knowledge possessed by buyers and sellers
4. The extent of barriers to entry

Four market structures

8.2 Perfectly competitive firms in the short-run

• In the case of perfect competition, the firm’s AR(P) curve is horizontal (because the price is fixed
no matter what Q is produced), and therefore the MR curve will also be horizontal — after all if
the AR curve is perfectly flat, it has zero slope, so the MR curve will also have zero slope because
doubling zero equals zero.

8.3 Perfectly competitive firms in the long-run

• A perfectly competitive market leads to a situation where all firms in a market end up producing
output at the lowest possible price they can afford — i.e. they all end up breaking even.
• What is the underlying cause of this “Problem” of zero long run profits?
• Many new rival businesses producing an identical product can freely enter the market in the
long-run.

LO 8.4 Monopoly
• Monopoly: the operation of a market where there is no competition at all.
• So the monopolist who doesn’t face competition (and like any other firm try to maximise its
profit) can benefit from much higher selling prices (the market power is maximised under
monopoly condition).
• Monopoly faces a downward sloping demand curve, so setting higher prices at a lower level of
output is possible.
• Under a monopoly the marginal revenue is not equal to market price.
Monopolist
Have to develop a unique product (good or service) that consumers want.
That is, radically differentiate product from existing rivals.
Always a risk that people won’t be interested, so requires market research into untapped wants.
• If successful, the business can choose the price and output level that will maximise “monopoly
profit”.
• And because the business has no competitors, it can sustain those profits in the long run.
o That is, their customers will not be “stolen” by rivals, so their revenue will not fall over
time.
• We can show this situation graphically (of course).
• But first, some important technicalities…

Monopolist’s marginal revenue

And it turns out that as the price charged falls, the business’s marginal revenue falls twice as fast.
Marginal revenue = amount added to total revenue by selling an additional increment of output.

Maximising monopoly profit

Now let’s include the average cost and marginal cost curves to find the price & output which maximises
monopoly profits in the long run.
Recall the decision-rule for the profit-maximisation:
“Keep producing more whilst ever revenue from an additional unit of output (MR) is greater than cost of
an additional unit of output (MC).”

Price discrimination
A firm with monopoly-power may discover that it can make even larger profits by segmenting its
consumers.
That is, by identifying distinct sub-groups of potential customers who have different purchasing
capacities, and then charging them different prices for the same product.
This is called price discrimination.

Is the cinema motivated by charitable thoughts? Don’t be so naïve!

By charging only one price ($20.50), the cinema would be “pricing out of the market” some lower income
customers.
By offering lower prices to certain groups  these groups will buy tickets  more revenue for the
business. Profit is the motive!

There are many ways a business can try to ensure and protect its monopoly profits.
All these methods aim at keeping or driving other businesses out who could “steal” some of its customers.
That is, the business erects barriers to entry to potential rivals.

Restricting competition
Consumer perceptions
• Generating brand loyalty: customers become psychologically attached to a brand; won’t even try
a rival’s product.
• False or misleading advertising (about own or rivals’ products).

Aggressive pricing strategies

• Predatory pricing: charging a very low (even loss-making) price designed to send rivals bankrupt.
Resale price maintenance: supplier dictates to retail outlets the (low) price they must charge

Mergers and acquisitions

• Vertical integration: purchase the essential inputs, or the outlets of sale.
• Horizontal integration: buy-out rivals, absorb them or shut them down.
• De Beers diamond company would buy all newly discovered diamond deposits.
• Have you noticed that you can’t buy Pepsi on campus?
• Google has acquired at least 189 companies to date!
Develop related products
• Complements: to fully enjoy a product, customers have to buy a complementary product.
• Substitute proliferation: produce substitutes for own product to beat out competitors.

Natural monopoly
Sometimes it is inevitable that there will only be one seller in the market; a monopoly will “naturally”
occur.
This is called a natural monopoly.
• Sometimes giant: Sydney Water; Sydney trains
• Sometimes small: petrol station in a country town.
What they have in common? Demand is only sufficient to efficiently support one business in the area.
A business usually does not need to construct barriers to entry in this case.

LO 8.5 Monopolistic competition

• Relatively few industries in the Australian economy that conform to the model of monopoly
previously outlined.
• Most industries lie somewhere between Perfect Competition and Monopoly, i.e. there is some
competition, but it is not ‘perfect’.

In reality, very often, attempts to erect barriers to entry are unsuccessful.

A business can differentiate its product from potential rivals and so have its “own” downward-sloping
demand curve (like a monopolist) …
but it still faces many competitors producing similar products because there is freedom of entry into the
market (like perfect competition).
This is called monopolistic competition.

Examples of monopolistic competition include:

Restaurants, cafés, hotels, pubs, hairdressers in a city

Monopolistic competition in the long run

Alas, because there are no barriers to entry, a business cannot protect itself from new rivals who “steal”
some of its customers.
So, in the long-run, the business’s demand will fall, “squeezing” profits until it breaks-even:
where average revenue (price) = average cost
This is just like the long-run outcome for perfect competition. The difference is that the firm’s demand
curve is still slightly downward sloping. Graphically…

LO 8.6 Oligopoly
What about a situation where barriers to entry are moderately successful or where there is only enough
consumer demand to sustain a few businesses?
This is called an oligopolistic market.
o A few businesses dominate the market.
o E.g. 10 or fewer firms supply 50% or more of a national market.
Australia has more oligopolistic markets than most developed countries because of our relatively small
population.

Because there are only a few rivals, the behaviour of rivals can have a big effect on demand (and thus
revenue) for a particular business’s product.
E.g. if your rivals decrease their prices, or launch big advertising campaigns, you might lose many, many
customers, and thus lots of revenue.

Collusion and reaction

• Collusion: when firms act jointly (more nearly as they would if they were a monopolist) to
increase overall profits.
• Cartel: a group of producers with an agreement to collude in setting prices and output.
 • Game theory (to model collusion): theory designed to understand strategic choices, that is, to
understand how people or organisations behave when they expect their actions to influence the
behaviour of others.

Game theory to model collusion

Thus, each business has to pay close attention to how rivals behave, and then react in a rational way to
maximise profits (or minimise losses). Like playing checkers or chess.
Game theory is about such strategic decision-making.

Restrictive practices
• The ongoing pursuit of restrictive and entry deterrence practices are also a typical characteristic of
the behaviour of firms in an oligopolistic market
• Firms engage in a number of restrictive practices to limit competition
• Many restrictive practices are aimed at the wholesalers and retailers who sell a producer’s goods –
called ‘Vertical restrictions’, whereas price fixing is called ‘Horizontal restrictions.

Entry deterrence
• Another way to reduce competition — to prevent other firms from entering the market
• Intended to limit the number of firms — the fewer the firms, presumably the weaker the
competitive pressure.
• E.g. Natural barriers to entry, predatory pricing, building more production facilities than needed
i.e. ‘excess capacity’

Collusion, cartel, restrictive practices & entry deterrence

Bid rigging: rivals communicate before lodging their bids and agree among themselves who will win and
at what price.
Market sharing: rivals agree to divide customers between them.
Price fixing: rivals agree on a pricing structure rather than competing against each other.
Price signalling: rivals disclose future price changes to each other for the purpose of lessening
competition.
Collective bargaining & boycott: rivals act as a block to “blackmail” lower prices from suppliers.

“As if” a monopoly

When businesses collude, they ideally seek to maximise the group’s profits – not any single individual
firm’s profits.
When this occurs, the legally separate businesses, economically speaking, resemble a single firm.
In that case, one can treat the industry as if it were a monopoly.

Chapter 10
1- A 5 Minutes Preview of Chapter 10
LO 10.1- Define entrepreneurship & its key elements
5 elements: The entrepreneur, opportunity, resources, organisation
and the environment
LO 10.2- Explain the process of new venture creation
Recognise opportunities, evaluate opportunities & exploit
opportunities
LO 10.3- Explain the role of entrepreneurship in economic growth
Creative destruction, entrepreneurship & economic growth,…..
LO 10.4- Discuss common features of Entrepreneurship in the
Asia-Pacific region
The role of ethnic Chinese, types of relationships, role of the state….

LO 10.1 Defining entrepreneurship and its key elements

 • Entrepreneurship stems from the French word entreprenerd meaning ‘to undertake’ or ‘to take in
one’s own hands’.
• Entrepreneurship as a term was first used during the Industrial Revolution.
• It described the new phenomenon of the individual who formulated a venture idea, developed it,
assembled resources and created a new business venture.

Towards a definition of entrepreneurship

• Entrepreneurship is difficult to define because it is a multi-faceted phenomenon spanning
a number of academic disciplines.
• Defining entrepreneurship:
‘The process brought about by individuals of identifying new opportunities and converting them into
marketable products or services’

The key elements of entrepreneurship

There are five generally agreed conditions that are necessary for entrepreneurship to occur:
1. an individual (the entrepreneur)
2. a market opportunity
3. adequate resources
4. a business organisation
5. a favourable environment.

1- The entrepreneur
- Cornerstone of the entrepreneurial process.
- Perceives, pursues and exploits opportunities.
- Four factors are considered to influence the way entrepreneurs perceive and pursue opportunities:
- Active search of opportunities
- Entrepreneurial alertness
- Prior knowledge
- Social networks.
2- Opportunity
A situation where a new product, service or process can be introduced and sold at greater than its cost
of production.
3- Resources
Financial
Physical
Human
Technological
Social
Organisational

4- Organisation
Entrepreneurship can take place in diverse environments:
• New independent start-ups
• Corporate ventures
• Franchises
• Joint ventures
• Business acquisitions.
5- Environment
• Community level
- Population density: number of organisations in an industry.
- Strength of the relationship between these organisations.
• Societal level
- Cultural norms and values.
- Government activities and policies.

LO 10.2 The process of new venture creation

• Not all individuals have the potential to launch a business venture ...
• Of those that do, not all will attempt a founding ...
• Of those who attempt, not all will succeed in founding.

A model of new venture formation

LO 10.3 The role of entrepreneurship in economic growth and development

• At a macro level, entrepreneurship is a process of creative destruction (Schumpeter).
• This refers to the simultaneously destructive and constructive consequences of entrepreneurship.
• However, a good proportion of creation is non-destructive and satisfy new demands rather than
displacing existing products or services.

Values, politics and economic institutions

• Values:
– A readiness for change is essential if a society is to get richer.
• Politics:
– Provide a framework for entrepreneurship.
• Economic institutions:
Institutions like property rights, stock exchanges and banks allow different types of economic
enterprises to flourish

The relationship between entrepreneurship & economic growth

• At a macro-level entrepreneurship is the process of creative destruction.
• Creative destruction is the process of simultaneous emergence and disappearance of technologies,
products and firms in the marketplace as result of innovation.
• The level of entrepreneurial activity is a function of the degree to which people recognise the
opportunities available and their capacity to exploit them.
• At a broader level, there is a relationship between national conditions and the performance of
established firms.

Measuring entrepreneurial activity

• Difficulties in measuring entrepreneurial activity in an economy occur due to the number of
institutional ways of exploiting opportunities.
• The Global Entrepreneurship Monitor (GEM) measures:
- The level of start-up activity
- The prevalence of those who survive the start-up phase.

LO 10.4 Common features of entrepreneurship in the Asia-Pacific region

Some key features distinguish Asia-Pacific entrepreneurship from European and American
entrepreneurship:
• Presence of ethnic entrepreneurs such as ethnic Chinese and ethnic Indians
• Pyramid structures of Asian firms, which are mainly family-owned
• Key role played by the state in the development of entrepreneurship.

Sociocultural features of ethnic Chinese

• Western and Eastern entrepreneurs approach relationships differently.
• Asian companies cultivate relationships to identify investment opportunities.
• Vertical relationships are taught via Confucian concepts: benevolence, righteousness, and
propriety or courtesy .
• Horizontal relationships distinguish between in-group members or insiders and out-group
members or outsiders.

Ethnic Indians
• A vast majority adhere to some form of the caste system and Hindu mythology.
• They are highly skilled and educated professionals and entrepreneurs due to an exceptional
education system.
They created social and professional networks to mobilise information, skill, know-how and capital to
start technology firms

The pyramid structures of Asian family firms

• Proportion of family owned businesses are higher in Asia compared to Australia and New
Zealand.
• Legal structures are similar across the region.
• A distinct feature of Asian companies is the use of a ‘pyramid’ structure.

The role of the state

• Promotion of entrepreneurship and SMEs
- Creation of a conducive environment e.g. Singapore
- Development of a network of small business agencies.
• State Entrepreneurship
- Ownership
- Deregulation.

Emerging trends
• Liberalisation and globalisation
• Adoption of Western ideas
• Adoption of rules-based systems
• Emergence of an entrepreneurial society