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Introduction
During the course of managerial economics, we have learned to understand the choices that leaders and managers of organizations make in terms of economy. In this paper, I want to focus on two topics we have discussed in class. Those are the five forces model and the so-called principal-agent problem. For a better understanding of the concepts and showing how those can be applied in the real world, two news articles will be discussed in the essay.
Porter’s Five Forces and Profitability
Key Points of the Topic
The five forces framework is aimed to analyze the level of competition within a particular industry in order to draw conclusions about the profitability of this industry and, consequently, the profitability of organizations that operate in it. Although the model analyzes the industry as a whole rather than some organization, it is still very useful for particular companies, both new entrants and already existing ones. The framework was firstly introduced by Michael Porter in his book Competitive Strategy. Five forces he talks about are the entry, the power of input suppliers, the power of buyers, industry rivalry, and substitutes and complements.
A Brief Summary of the Article: eBay Through The Lens Of Porter’s Five Forces
The article published on the Forbes site tells about the current position of eBay within the global e-commerce market. A multinational corporation enjoys worldwide popularity, and even though now it is “facing headwinds”, its success is changeless (Trefis Team par. 1). Moreover, the organization continues to expand, which is why its revenue increases. In the previous year, eBay’s net total payment volume increased by more than 30 percent during only nine months.
Nevertheless, the analysis of the industry in which eBay operates according to the five forces model shows that the corporation has many obstacles to overcome. According to the evaluation, the primary risks for eBay are the industry rivalry, new entrants, and the power of buyers. Thus, three Porter’s forces out of five pose a threat to the organization’s success and profitability. The results of the five forces model application are presented in the table below.
My Understanding of the Article in Relation to the Topic from the Class
The competition within the industry is intense. As we have discussed in the class, the first factor that determines the level of rivalry within the industry is the concentration of rivals. There are numerous online and offline practitioners (distributors, retailers, other online auctions, and search engines) that eBay users can buy from, so the concentration is high. The next factor that significantly influences rivalry in the e-commerce industry is the price. Aiming to impress their buyers, corporations usually participate in price competitions with each other, and that disables them to raise prices. Finally, eBay also faces competition in the payment space because of both existing payment mechanisms and the risk of the entrance of such players as Apple Pay or Alibaba (Trefis Team par. 3).
As for the risk of new entrants, since the level of entry and the entry costs in the industry are low, new players can enter it more or less easily. However, the level and costs of entry make up only one of the factors that determine the risk of new entrants, and while it is relatively easy to enter the industry, it is much harder to adjust to it. Moreover, the payment market has a higher level of entry, which is why it is hard to enter it. That is why eBay will hardly be influenced by new entrants; the only exceptions are such players as Apple Pay or Alibaba mentioned above. Therefore, the risk of new entrants is medium, not high.
The last risk factor for eBay is the power of buyers. Due to the intense competition within the e-commerce industry, users can choose the company that offers the most favorable conditions, particularly the lowest prices and the widest range of services or products. That makes any e-commerce organization highly dependable on what customers want, and since eBay positions itself as a company that cares about its customers, that makes buyers even influential.
eBay does not sell anything on its own – it is only an intermediary. The corporation has not only buyers but also sellers, who provide all that people purchase on eBay. Hence, these sellers are suppliers. In view of the fact that tens of millions of people can sell within the e-commerce industry, the power of suppliers is rather low. Still, if the organization provides policies or changes that are unprofitable for suppliers, they can go to competitors, such as Amazon or Etsy.com, for example.
Finally, the threat of substitutes and complements is rather low since e-commerce organizations usually offer a wide range of products and low prices, which is why there is no need of searching for substitutes.
The Principal-Agent Problem
Key Points of the Topic
In the context of the principal-agent problem, a principal is an individual who employs a person (or several of them) to do the job for him or her. An agent is an individual who is employed by a principal to achieve particular objectives. Therefore, an agency relationship refers to an agreement, under which the profit of one person depends on the actions of another. The problem is that every individual in this, as well as in any other, the situation always tries to benefit themselves, which is why agents often pursue their own goals instead of those of their principals.
A Brief Summary of the Article: Apple Insists That Executives Must Hold Company Stock
People have always hired others to do the job for them. It is dictated by the need to do work that an individual himself or herself does not have the skills or time to do. However, even though employees are provided with rewards, and primarily with money, that does not mean that they always do what benefits their employers. The need to solve the principal-agent problem is essential for large corporations since this issue costs them large sums of money.
Over the previous several decades, organizations have been trying to overcome this obstacle, and Apple’s approach is one of the most effective, according to Worstall (par. 1). In Apple’s case, principals are stakeholders, and agents make up the management system. To ensure that agents work to increase the company’s stock price, which obviously benefits stakeholders, Apple makes its executive officers hold some part of their money in the company’s stock. Hence, the company’s stock price becomes not only the interest of principals but the interest of agents as well.
My Understanding of the Article in Relation to the Topic from the Class
The principal-agent problem is not some kind of fraud. For a better understanding of this issue, let us consider the following example. If an employee is paid for the amount of work that he or she completes per day or hour, this employee is obviously interested in working more, and the productivity of his or her work is rather high. If a worker is paid for an hour of his or her time, the principal-agent problem appears. In this case, an employee is not interested in doing more since he or she gets the same money for both a lot and a little of the work done.
I agree that this problem should be addressed because the solution both saves the organization’s money and benefits employees: if they are not only motivated to work more but benefit from this, they will be satisfied with their work. However, I do not think that Apple’s approach to solving the principal-agent problem with the separation of ownership is the best possible way. Admittedly, when it comes to Apple’s stock, such kind of policy is profitable because Apple’s stock is valuable. However, in the case of less successful organizations, executive officers who are made to hold the company’s stock can be left with nothing if the firm closes its doors. I believe that a better alternative exists. That is a policy of performance-based salaries: the more an employee does, the more he or she gets.
Works Cited
Trefis Team. eBay Through The Lens Of Porter’s Five Forces 2014. Web.
Worstall, Tim. Solving The Principal Agent Problem: Apple Insists That Executives Must Hold Company Stock 2013. Web.
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