As a manager, you should be acquainted with the following theories: 3 main economic questions, 4 factors of production, which strategy to employ to achieve a competitive advantage, Segmentation-Targeting-Positioning (STP) model in marketing.
Before you start your business activity, the knowledge of 3 fundamental economic questions would be extremely useful. Those questions are:
What to produce? How to produce? For Whom to produce?
Originally the concept was developed to determine the type of economic system of a country. The problem is that the resources are not unlimited. In deciding how to allocate scarce resources, societies must answer 3 basic economic questions, and their answers depend on what kind of economic system they use.
The concept can be applied not only in macroeconomics but also in business theory and practice.
Please, bear in mind the following assumptions:
The term “product” refers not only to physical goods, but to services as well.
The term “to produce” means both to manufacture goods and to render services.
As an entrepreneur, you should ask and find answers to these 3 key economic questions in order to allocate your scarce resources.
The traditional sequence What? How? And For Whom? sounds better, however, in practice, after an idea about what to produce comes to your mind, you have to consider who your potential customers are. And if you come to the conclusion that your idea is viable, then you can start analyzing how to bring it to life.
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| Three Main Economic Questions |
Let’s discuss the key questions in detail.
Question 1. What to produce?
Your number one question is to decide what goods and services are to be produced. And of course, those should be most wanted and needed products.
Probably, you would say that everything that is needed and wanted already exists and there is no room for new competitors. Besides, barriers to entry are too high and your resources are too limited to pay that much. At this point let’s turn to management theory.
In order to gain, preserve and increase your market share, your products must have something that will help the company stand out from its competitors. It is called competitive advantage.
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| Competitive Advantage |
In order to achieve a sustainable competitive advantage over rivals, managers have to choose between 2 main (generic) strategies: low-cost strategy and differentiation strategy.
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Generic Strategies in Strategic Management: Cost Leadership and
Differentiation. © Mond Management |
The differentiation strategy is a way to achieve competitive advantage by providing buyers with what they perceive as superior value compared to the offerings of rivals. Superior value can mean a good or service that is worth paying more for; it can be a novelty or a product that combines price, quality and other features in the best and most attractive way.
Giving buyers the same value as others but at a lower cost to the firm and therefore at a lower price to consumers is known as a low-cost strategy or cost leadership.
Regardless of your strategy choice, pay great attention to innovation. Using new technologies in production and marketing can greatly decrease your costs. Besides, novel products can stand out from analogous products and favour you with a first-mover advantage.
Question 2. For whom to produce?
Who are my potential customers? What is my target segment? Will my targeted customers be able to afford the product? Are there enough of them to support my business? How am I going to reach my customers?
Actually, this step is all about marketing. Since marketers have finite resources, they have to make decisions about how and where to focus their efforts. In other words, they have to perform 3 main steps: (1) to figure out segments in the market, (2) to decide which segments to target, and (3) to position their brand or products in the selected market and in the minds of target consumers.
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| Segmentation-Targeting-Positioning Model in Marketing. © Mond Management |
First of all, a big market means a sheer number of customers. But obviously, the cost of entry to the global or even your national market can be too high. Besides, it’s not so easy to organize cost-saving and timely logistics and operations in a big market. If you don’t possess enough initial investment to enter a broad market or to serve it effectively, then it’s better to start from targeting a smaller local market, for example, your city or even the district where you live.
In marketing, this step is called market segmentation. Market segmentation is the process of splitting buyers into distinct, measurable groups that share similar wants and needs. This may be on the basis of demographics, e.g. segmentation by age, gender; geographics, e.g. by country, city, rural and urban areas; psychographics, e.g. by lifestyle; or behavioural factors, e.g. by brand loyalty.
Once different segments are identified, marketers determine which segments to focus on. It is the second step known as targeting. The organisation will select a target market based on a number of factors. For example, will the target market provide the required level of sales? Will the target segment be accessible taking into account the available resources, etc.?
Time, money, and effort spent on marketing will be most effective when it focuses on target audiences.
The third stage is to position the product or the brand name (a) against competitors and (b) in the minds of the consumers. Positioning means arranging for a product to occupy a clear, distinctive and desirable place in the minds of target customers, and as a consequence, in the market. This is achieved through product design, pricing, promotional activities, etc.
Owing to technological advancement it has become so easy to reach prospective customers! A smartphone connected to the Internet can provide marketers with access to global markets and with cheap or even free communication tools. Among them are social media platforms, SEO and paid advertising on Google.
Communication and branding are essential elements of marketing strategy; therefore it is of vital importance to employ modern digital marketing tools.
Question 3. How are goods and services to be produced?
In economics, goods and services are produced by combining 3 traditional factors of production: land, labour, capital. And the 4th one that was added later is entrepreneurship.
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| Four Factors of Production in Economics. © Mond Management |
Land represents all of the natural resources a country is endowed with, such as the land, rivers and oceans, etc. It also includes all of the resources which can be extracted and cultivated from those natural resources such as agricultural products from farms.
Labour implies the mental and physical human input into the production process, or in other words, labour is a human factor of production. The quality of labour depends on skills, education, and motivation of workers. Generally speaking, the higher is the quality of labour, the more productive is the workforce. Consequently, more productive employees contribute to better product quality and higher business efficiency.
Capital represents the man-made goods which are used to produce the final product. The factor is made up of two different forms of capital: working capital and fixed capital. Machinery, technology, and buildings are classified as fixed capital, whereas working capital represents the day-to-day capital in the form of cash, inventories and raw materials.
Prior to beginning business activities, managers have to clearly define what kind of capital assets they need, how much, and how to obtain them. Besides, they need to elaborate a plan of distribution and management of those assets.
Entrepreneurship is the activity or sometimes it is even defined as the ability or skills to bring together all other factors of production and organize them in a complete process in order to make a profit. Examples of entrepreneurs may include managers or investors who take risks in order to gain a share of higher profits in the future. Often these entrepreneurs are seen as innovators, developing new products or new ways to produce goods and services.
In a nutshell, once you define what factors of production you need, how to obtain them, in which quantities and how to pay for them, you will actually give the answer to the third fundamental economic question.
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Now let’s sum up what we have learnt:
1. All businesses must respond to 3 basic economic questions:
What? For whom? How?
They must decide what to produce, how to produce and how to promote their products among the target consumers given limited resources.
2. Businesses must decide what will make their goods or services different from those offered by competitors, in other words, what their competitive advantage will be. They have to pursue either cost leadership strategy or differentiation strategy.
3. In order to craft their marketing strategy, businesses have to perform the following 3 steps:
Market Segmentation - Targeting - Positioning.
4. Businesses must define the optimal mix of limited inputs. In economics, they are known as 4 factors of production:
land, labour, capital and entrepreneurship.
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