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Introduction to Cost and Industry Structure Introduction to Cost and Industry Structure By: OpenStaxCollege Amazon is an American international electronic commerce company that sells books, among many other things, shipping them directly to the consumer There is no brick-and-mortar Amazon store (Credit: modification of work by William Christiansen/Flickr Creative Commons) Amazon In less than two decades, Amazon.com has transformed the way books are sold, bought, and even read Prior to Amazon, books were primarily sold through independent bookstores with limited inventories in small retail locations There were exceptions, of course; Borders and Barnes & Noble offered larger stores in urban areas In the last decade, however, independent bookstores have become few and far between, Borders has gone out of business, and Barnes & Noble is struggling Online delivery and purchase of books has indeed overtaken the more traditional business models How 1/3 Introduction to Cost and Industry Structure has Amazon changed the book selling industry? How has it managed to crush its competition? A major reason for the giant retailer’s success is its production model and cost structure, which has enabled Amazon to undercut the prices of its competitors even when factoring in the cost of shipping Read on to see how firms great (like Amazon) and small (like your corner deli) determine what to sell, at what output and price Introduction to Cost and Industry Structure In this chapter, you will learn about: • Explicit and Implicit Costs, and Accounting and Economic Profit • The Structure of Costs in the Short Run • The Structure of Costs in the Long Run This chapter is the first of four chapters that explore the theory of the firm This theory explains that firms behave in much the same way as consumers behave What does that mean? Let’s define what is meant by the firm A firm (or business) combines inputs of labor, capital, land, and raw or finished component materials to produce outputs If the firm is successful, the outputs are more valuable than the inputs This activity of production goes beyond manufacturing (i.e., making things) It includes any process or service that creates value, including transportation, distribution, wholesale and retail sales Production involves a number of important decisions that define the behavior of firms These decisions include, but are not limited to: • What product or products should the firm produce? • How should the products be produced (i.e., what production process should be used)? • How much output should the firm produce? • What price should the firm charge for its products? • How much labor should the firm employ? The answers to these questions depend on the production and cost conditions facing each firm The answers also depend on the structure of the market for the product(s) in question Market structure is a multidimensional concept that involves how competitive the industry is It is defined by questions such as these: • How much market power does each firm in the industry possess? • How similar is each firm’s product to the products of other firms in the industry? • How difficult is it for new firms to enter the industry? • Do firms compete on the basis of price, advertising, or other product differences? 2/3 Introduction to Cost and Industry Structure [link] illustrates the range of different market structures, which we will explore in Perfect Competition, Monopoly, and Monopolistic Competition and Oligopoly The Spectrum of Competition Firms face different competitive situations At one extreme—perfect competition—many firms are all trying to sell identical products At the other extreme—monopoly—only one firm is selling the product, and this firm faces no competition Monopolistic competition and oligopoly fall between the extremes of perfect competition and monopoly Monopolistic competition is a situation with many firms selling similar, but not identical, products Oligopoly is a situation with few firms that sell identical or similar products First let’s take a look at how firms determine their costs and desired profit levels Then we will discuss costs in the short run and long run and the factors that can influence each 3/3 1 Introduction to Cost and Management Accounting in a Global Business Environment CHAPTER LEARNING OBJECTIVES After completing this chapter, you should be able to answer the following questions: 1 How do financial and management accounting relate to each other? 2 How does cost accounting relate to financial and management accounting? 3 What is the role of a code of ethics in guiding the behaviors of an organization’s global workforce? 4 What factors have influenced the globalization of businesses and why have these factors been significant? 5 What are the primary factors and constraints that influence an organization’s strategy and why are these factors important? 6 How does an organization’s competitive environment impact its strategy and how might an organization respond to competition? 7 How does the accounting function impact an organization’s ability to successfully achieve its strategic goals and objectives? 8 Why is a company segment’s mission affected by product life cycle? 9 What is the value chain and why is it important in managing a business? ABN AMRO Bank INTRODUCING he Netherlands-based bank, ABN AMRO, was formed in 1990 when Algemene Bank Nederland merged with Amsterdam-Rotterdam Bank. Following the merger, ABN AMRO has established itself as a global bank with operations in 76 countries and territories including the United States, where the bank has a 16% share of the Midwest market. ABN AMRO’s global expansion was driven initially by mergers but more recently by innovative web- based delivery of products and services. By traditional measures (such as its $505 billion in as- sets and its capital position), ABN AMRO is the largest bank in Holland, the fourth largest in Europe, and the eighth largest in the world. ABN AMRO’s core lending business is solid. Over half of ABN AMRO’s revenues come from Dutch clients—a very stable source of business that includes such companies as Royal Dutch Shell, Philips Electronics, and Unilever. ABN AMRO formulated an identity statement in 1992 to reflect its corporate aspirations: “ABN AMRO Bank is a long-established, solid, multi-faceted bank of international reputation and standing. We will strive to fulfill the bank’s ambition in being a frontrunner in value-added banking, both on a local and worldwide level. . . .” The corporate values statement was formalized in 1997, although the values have been important priorities since the bank was established in the 1800s. The four values forming the basis of the bank’s activities are integrity, teamwork, respect, and professionalism. Bank managers believe that the values need to be formalized even though they are and should be self-evident. The formalization provides external parties criteria by which the bank can be assessed. ABN AMRO perceives its corporate identity and values as the underlying tenets of the organization. ABN AMRO is successfully pursuing a corporate identity as a “bank of international reputation and standing.” ABN AMRO was ranked as the fifth largest commercial and savings bank and the seventy-third largest corporation in the 1999 Fortune Global 500. The corporation (with its foreign subsidiaries and affiliates) is com- prised of over 3,500 branches and offices in 76 countries and territories across five continents. Although international trade was once confined to extremely large cor- porations such as ABN AMRO, the explosion of World Wide Web 1 Introduction to Cost and Management Accounting in a Global Business Environment CHAPTER LEARNING OBJECTIVES After completing this chapter, you should be able to answer the following questions: 1 How do financial and management accounting relate to each other? 2 How does cost accounting relate to financial and management accounting? 3 What is the role of a code of ethics in guiding the behaviors of an organization’s global workforce? 4 What factors have influenced the globalization of businesses and why have these factors been significant? 5 What are the primary factors and constraints that influence an organization’s strategy and why are these factors important? 6 How does an organization’s competitive environment impact its strategy and how might an organization respond to competition? 7 How does the accounting function impact an organization’s ability to successfully achieve its strategic goals and objectives? 8 Why is a company segment’s mission affected by product life cycle? 9 What is the value chain and why is it important in managing a business? ABN AMRO Bank INTRODUCING he Netherlands-based bank, ABN AMRO, was formed in 1990 when Algemene Bank Nederland merged with Amsterdam-Rotterdam Bank. Following the merger, ABN AMRO has established itself as a global bank with operations in 76 countries and territories including the United States, where the bank has a 16% share of the Midwest market. ABN AMRO’s global expansion was driven initially by mergers but more recently by innovative web- based delivery of products and services. By traditional measures (such as its $505 billion in as- sets and its capital position), ABN AMRO is the largest bank in Holland, the fourth largest in Europe, and the eighth largest in the world. ABN AMRO’s core lending business is solid. Over half of ABN AMRO’s revenues come from Dutch clients—a very stable source of business that includes such companies as Royal Dutch Shell, Philips Electronics, and Unilever. ABN AMRO formulated an identity statement in 1992 to reflect its corporate aspirations: “ABN AMRO Bank is a long-established, solid, multi-faceted bank of international reputation and standing. We will strive to fulfill the bank’s ambition in being a frontrunner in value-added banking, both on a local and worldwide level. . . .” The corporate values statement was formalized in 1997, although the values have been important priorities since the bank was established in the 1800s. The four values forming the basis of the bank’s activities are integrity, teamwork, respect, and professionalism. Bank managers believe that the values need to be formalized even though they are and should be self-evident. The formalization provides external parties criteria by which the bank can be assessed. ABN AMRO perceives its corporate identity and values as the underlying tenets of the organization. ABN AMRO is successfully pursuing a corporate identity as a “bank of international reputation and standing.” ABN AMRO was ranked as the fifth largest commercial and savings bank and the seventy-third largest corporation in the 1999 Fortune Global 500. The corporation (with its foreign subsidiaries and affiliates) is com- prised of over 3,500 branches and offices in 76 countries and territories across five continents. Although international trade was once confined to extremely large cor- porations such as ABN AMRO, the explosion of World Wide Web usage has en- abled any ... what to sell, at what output and price Introduction to Cost and Industry Structure In this chapter, you will learn about: • Explicit and Implicit Costs, and Accounting and Economic Profit • The Structure. .. production model and cost structure, which has enabled Amazon to undercut the prices of its competitors even when factoring in the cost of shipping Read on to see how firms great (like Amazon) and small.. .Introduction to Cost and Industry Structure has Amazon changed the book selling industry? How has it managed to crush its competition? A major reason