The Managerial Economics & Business Strategy Relationship

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Table of Contents

Introduction
Managerial Economics
Formulating Business Strategies
Internal and External Environment Analysis
Defining a Mission
Market Research
Linking Managerial Economics and Business Strategy
Strategic Approaches
Conclusion
References

Introduction

The business environment is becoming increasingly volatile as a variety of forces impact numerous organizational processes. The largely unfavorable circumstances have created highly unpredictable conditions for businesses to operate. One of the main forms of uncertainty that plagues businesses is state uncertainty, which refers to the indecision that results from variations in the business environment (Orovwiroro & Nwinee, 2019). Effect uncertainty is the hesitancy associated with limited knowledge of the extent to which identified forces will impact the business (Orovwiroro & Nwinee, 2019). Response uncertainty refers to a manager’s limited confidence in the proposed actions’ ability to address specified threats (Orovwiroro & Nwinee, 2019). It is evident that the business environment is riddled with challenges that must be addressed through the application of strategies informed by managerial economic principles.

Managerial Economics

Managerial economics is an integral element in the functioning of a business enterprise. It is defined as “the application of economic principles and methodologies to the decision process” in an institution (Orovwiroro & Nwinee, 2019, p. 201). It is used to facilitate the achievement of set goals and objectives. Managerial economics is vital for the development of solutions in a highly competitive and uncertain business environment. There are a variety of managerial decisions that leaders must deal with in their businesses. For instance, they often have to make decisions on pricing and the quantity of a product to produce. In addition, managers must decide whether to manufacture specific items or purchase them from other organizations and decide on the most suitable production technique to apply.

The concept includes various aspects of macroeconomics, microeconomics, and management. The main elements of microeconomics that impact managerial economics are the theory of price, demand analysis and forecasting, the theory of supply and production, and the theory of revenue and cost (Orovwiroro & Nwinee, 2019). Managerial economics demands the application of economic concepts, methodologies, and theories to address business challenges. It involves the application of the economic theory, which addresses the interactions between markets and various micro-economic forces.

Managerial economics defines processes that allow managers to use scarce resources effectively. It provides guidance on how to address consumer needs, competitors as well as suppliers. It also applies concepts inherent in the Theory of a Firm, insofar as it delineates the steps required to maximize wealth. This means that it addresses an organization’s wider perspective, such as its identity, objectives, and the forces that impact profitability. It focuses on the decisions that determine operations in a firm in a given context. It also addresses key elements such as the forces that determine entry into a specific market, features that promote productivity, and processes that guarantee sustainability.

Managerial economics involves the application of key principles and concepts in the achievement of organizational goals. The first is the marginal and incremental principle which posits that a decision is considered sound and rational if it aligns with the firm’s primary objective. Managers must be in a position to judge the effects of a unit change in a single variable on another, and the extent to which the identified change impacts the organization’s position. The second is opportunity cost which refers to the alternatives forgone in order to achieve a specific target. This means that factors of production can only be applied if they yield rewards that are equal to or greater than the opportunity cost. The tenets that define managerial economics play vital roles in the formulation of strategies.

Formulating Business Strategies

The contemporary economic environment is characterized by high-speed productivity, technological advancements, and increased competition. The formulation and implementation of effective strategies are, therefore, integral to the success of a business enterprise. An enterprise management strategy is defined as the measures implemented by organizations to maintain a competitive edge through the comprehensive analysis of trends, the internal environment, and external factors (Wang & Zhang, 2020). An effective strategy details the mechanisms through which goals are set and resources are deployed in response to market changes, environmental factors, and competitors. There are three main mechanisms through which managerial economic impacts the formulation of business strategies. These are the organization’s mission, the assessment of the external and internal environment, and market research.

Internal and External Environment Analysis

Strategic management refers to the process of selecting, analyzing, implementing, and adjusting the organization’s strategy. It includes a comprehensive assessment of the internal and external environment, the identification of key elements that affect the organization, and the implementation of plans (Wang & Zhang, 2020). It is a business function that blends economic theory with decision science to conduct managerial economic activities effectively (Orovwiroro & Nwinee, 2019). The analysis of environmental factors is essential for the identification of threats, opportunities, weaknesses, and strengths. The external factors that must be considered include political, legal, technological, social, and community factors. A systematic assessment of issues that impact a business’s functioning is essential when determining the most ideal strategy.

An assessment of the organization’s internal environment is critical to the development of a strategy. The resource-based theory posits that internal resources and capabilities determine the degree of success experienced by a business (Orovwiroro & Nwinee, 2019). The theory surmises that variations in resources result in differences in performance between competing organizations. Therefore, the identification of valuable resources that are instrumental in helping a firm maintain a sustainable competitive edge and profitability is essential. The effective management of organizational assets, information, knowledge, and processes increase an institution’s capacity to create economic value. The ability of managers to use resources in the formulation of strategies helps companies to develop new products, expand their market share and increase profitability.

The assessment of the highlighted managerial economic elements is important when choosing an approach. According to Wang and Zhang (2020), strategies can be classified as total cost leading, differentiation, specialization, market penetration, abandonment, diversification, and product development. The choice of tactic depends on the organization’s position and the context of the business environment. For instance, a total cost-leading strategy is ideal for institutions facing financial challenges because it lowers costs while maintaining high product quality. In addition, if the assessment of an organization’s internal and external environment demonstrates that there are deficits in sales volume, the adoption of a market penetration strategy, such as lower pricing and intensive advertising.

Defining a Mission

It is vital for managers to understand the organization’s mission and objectives. The expression of the institution’s core purpose helps guide its activities. It, therefore, follows that leaders must know their clients, comprehend their needs, and devise mechanisms for meeting the aforementioned wishes (Wang & Zhang, 2020). A comprehensive grasp of the aforementioned features ensures that organizational leaders are in a position to determine future trends and prepare to address competitor advances. A well-defined mission determines the strategic direction an organization must take.

Market Research

The fundamental principles of managerial economics are based on the findings of market research. The collection of information and the analysis of data to identify trends is essential in business practice. It is important to identify elements that need to be assessed exhaustively and apply scientific methodologies to evaluate their impact on various facets of the organization. The use of questionnaires, surveys, and systematic reviews is essential in the formulation of evidence-based strategies. The application of research strategies is essential for the identification of consumer preferences, trends, and threats to business success. In essence, managers are in a position to develop strategies with real-world applications.

Linking Managerial Economics and Business Strategy

The presented discussion of managerial economics highlights the fact that the concept deals with the processes involved in making decisions in areas such as production, marketing, accounting, financing, and the management of human resources. The development of business strategies is hinged on the desire to maximize profit, maintain a competitive edge, expand market share, and address environmental concerns. There are a variety of approaches that apply managerial economic principles in the formulation of solutions.

Strategic Approaches

The first is a process and content approach to strategy development. In this technique, a strategy is developed after the comprehensive evaluation of the opportunities, weaknesses, threats, and strengths that characterize an organization. For instance, when developing a strategy for the type and quantity of goods and services to introduce to the market, the demand theory is often applied to determine the most suitable approach (Orovwiroro & Nwinee, 2019). This theory highlights the importance of examining consumer behavior on the basis of purchases made and the factors that impact the utilization of specific goods or services. It also explicates the effect of change on the demand for specific goods and services, as well as products that may be declined by the market in the future. Therefore, the principles that underscore demand forecasting must be applied in the formulation of strategies intended to facilitate the introduction of new products. It is worth noting that managerial economic principles highlight the relevance of addressing an institution’s internal and external environment in the quest for success. The aforementioned approach is also vital for the identification low-cost tactics designed to maximize overall profitability.

The consideration of economic and organizational factors is essential in strategy development. The consideration of elements that determine the position and functioning of an institution is critical (Orovwiroro & Nwinee, 2019). Therefore, an analysis of the competitive environment, industry parameters, resources, and long-term goals is essential. For instance, when determining the techniques to apply in the production of goods and services, the application of cost and production analysis techniques, and product appraisal tactics is essential. Managers must observe how an organization responds to specific stimuli, such as alterations in relative output prices over time to assess the exact nature of the institution’s costs and production parameters. It is also important to evaluate a product’s safety and suitability for a defined market segment. The inclusion of the aforementioned managerial economic principles in this approach facilitates the creation of strategies that allow firms to compete favorably in a complex business environment through diversification and the expansion of market share.

The exhaustive evaluation of internal and external factors is necessary for the development of effective stratagems. A focus on external parameters necessitates the evaluation of elements such as politics, government involvement, and technology, while dependence on internal factors requires the analysis of organizational structures, resources, and culture (Orovwiroro & Nwinee, 2019). For instance, the COVID-19 pandemic presented significant last mile challenges in view of the fact that stay-at-home orders forced firms to rely on online distribution channels (Ketchen & Craighead, 2020). Managers had to devise ingenious ways of ensuring that their products reached their target consumers. Such an approach enables managers to detect external threats and opportunities that are integral to business processes. It also allows for the definition of a business on the basis of its strengths, which can help the firm remain relevant in a constantly evolving business environment.

Descriptive and prescriptive approaches involve the adoption of explicit and logical thought processes in strategy creation. The tactic is informed by the idea that organizations apply plans based on their position in the business environment. Therefore, objectives are crafted based on prevailing factors rather than theoretical practices. It is necessary to complete an environmental scan, contextualize strengths and weaknesses and propose alternative measures for value maximization. It is vital to consider the interplay of macroeconomic and microeconomic factors in the firm’s setting. The aforementioned approach is particularly useful for institutions that are planning new product launches, preparing to enter new markets, or determining the needs of a particular market segment.

The evaluation of a firm’s competitive advantage is an effective way of formulating strategies. The prioritization of internal resources and unique capabilities such as qualified personnel, intellectual property, and market segmentation helps organizations gain an edge over their rivals. The generation of plans using the aforementioned elements is based on the understanding that the company in question has distinctive and scarce resources which are difficult to imitate. In addition, the classification of resources as both tangible and intangible facilitates the development of measures intended to outperform rivals.

The consideration of customers, costs, and competition involves the proposal of steps designed to reduce operational costs, attract clientele, and beat competitors (Orovwiroro & Nwinee, 2019). The price and performance attributes of a business’s products determine its position in the market. Managers must, therefore, propose measures that address consumer demands, lower product prices, and increase the brand’s overall appeal. The application of strategic thought is vital for the development of policies that take full advantage of available opportunities while preparing responses to identified threats.

Conclusion

The link between managerial economics and strategy formulation is indisputable. The decisions made in organizational contexts have far-reaching consequences with regard to the firm’s ability to maintain its position in a competitive environment. Managerial economic principles and concepts form the foundation on which sound business decisions are made. They inform strategic approaches which are at the core of institutional functions such as entry into new markets, expansion of market share, product differentiation, the satisfaction of client needs, and the maximization of profitability. The adoption of a process and content approach, as well as the consideration of economic and organizational factors is essential in strategy development. In addition, the exhaustive evaluation of internal and external factors coupled with descriptive and prescriptive approaches enhance the effectiveness of decisions intended to address market challenges. Finally, the evaluation of a firm’s competitive advantage and the consideration of customers and costs is vital for success. The challenges that characterize the business environment can only be overcome through the application of strategies informed by managerial economic principles.

References

Ketchen, D. J., & Craighead, C. W. (2020). Research at the intersection of entrepreneurship, supply chain management, and strategic management: Opportunities highlighted by COVID-19. Journal of Management, 46(8), 1330–1341. Web.

Orovwiroro, G. O., & Nwinee, B. F. (2019). Understanding the link between managerial economics, business strategies formulation, and implications. International Journal of Science and Business, 3(3), 199–209. Web.

Wang, H., & Zhang, H. (2020). Discussions on three methods of formulating the business strategy. Proceedings of the 2020 5th International Conference on Modern Management and Education Technology (MMET 2020), 360–363. Web.

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