Thursday, October 2, 2014

Business, Bankruptcy and the Concept of Efficiency

“The company once stood at the top of the smartphone market. Its smartphones were carried by mobile professionals in the tens of millions. Former BlackBerry co-CEO Mike Lazaridis scoffed at the original iPhone. He thought it was a toy. He derided its poor battery life and balked at the idea that anyone would want to type on glass when BlackBerrys offered full QWERTY keyboards. The original iPhone may not be impressive by today's standards, but there's no denying that it forever altered the smartphone paradigm. It offered a big screen, a capable browser and the best music/video experiences available from a mobile device, something that BlackBerrys (and most other smartphones at the time) did not. As the saying goes, BlackBerry didn't adapt -- at least, not fast enough -- to the changes in the market. Classic Darwinism in action. (Nokia is guilty of this too.)

BlackBerry's leadership probably thought it was responding to the Apple iPad in a timely manner, getting a competitive product to market as quickly as it could. It did this at the expense of its smartphones. BlackBerry pulled resources away from its smartphone development teams in the months leading up to the PlayBook's debut. Instead, it should have skipped the tablet altogether and focused on its core smartphone business, which was already in trouble. (Handset sales historically are responsible for 80% of BlackBerry's revenue.)”


Analysis of the case study:
What is Economic Efficiency?

Economic efficiency is attained when scarce economic resources are combined in such a way to produce the highest number of output yet at the lowest cost which fulfills as many wants and needs as possible

BlackBerry and Productive Efficiency

Productive efficiency is achieved when a firm is able to produce the highest level of output using the least cost method of production. The first condition is related to technical efficiency and can only be achieved if the most productive set of inputs is chosen. The second part refers to cost efficiency. If it is possible, a firm would like to use or hire the cheapest set of factors of production which also happens to be the most productive. If these two conditions are met, then a firm would be able to operate at the level of output where MC = AC. It is written in such a way because MC (marginal cost) curve cuts AC (average cost) curve at its lowest

BlackBerry operates under the condition of imperfect market. Based on the information gathered, it suggests that BlackBerry was previously the market leader or better known as the monopoly in the smart phone market. However, the existence of substantial abnormal/ supernormal profits in the industry has somehow encouraged more new firms to join the industry. Two big names are Apple and Samsung. It did not take long for BlackBerry to move down the ladder to become an oligopoly then. In theory, a monopoly or an oligopoly firm will not be productive efficient. Absence of competition and the ability to engage in price fixing do not give large firms any incentive to cut costs to raise their abnormal profits. High operational costs and yet falling sales explain why BlackBerry’s margin gets thinner all time

BlackBerry and Allocative Efficiency

Allocative efficiency is achieved when a firm successfully combines all the scarce economic resources to produce goods and services that match consumer preferences. When this happens, P (price) = MC (marginal cost). It is also worth noting that P = MB (marginal benefit) = MU (marginal utility). What is meant by P = MB then? This is quite simple. The price that we are willing and able to pay for a particular output is reflected by the benefits that we get from its consumption. If we think that the private benefits are tremendous, we will place a high price for it. Likewise, if the private benefits are low, then the price paid must also fall. As an example, a rationale person will not pay $1 million dollar to own an ordinary second-hand car. However, this may not be the case with Rolls-Royce

In the case of BlackBerry, it is not being allocative efficient. It is likely to be operating at the level of output where MB < MC. Consumers in general no longer value the smart phones as much as the costs used up to produce them. As long as buyers feel that it is not worthwhile to own one at such a price, they will start to look for alternatives, causing market share and sales to shrink. It is said that BlackBerry initially refused to listen to customer complaints, refused to give consumers the design and functions that they badly want and refuse to move on in a dynamic market

It thought that its monopoly position could be safely secured making and as such there wasn’t any need to innovate and conduct R&D. Samsung and Apple on contrast, listen to the consumers. They gave the people what they want, making every dollar that is being paid for worthwhile. This is why the two of them thrive

Overall inefficiency

The article also suggests that BlackBerry pulled away its resources from smartphone development teams to fully concentrate on the PlayBook to compete against IPad. However, it seemed to forget that the main contributor to its revenue was smart phone segement. This means resources are not allocated in the most efficient way to meet its corporate agenda

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