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Each year from the Ivy covered halls of Harvard and

Wharton to the fabled London Business School and

teeming campus of Hong Kong University of Science and Technology.

More than 100,000 students graduate from MBA programs.

That's more than three times the number of law degrees.

More than four times the numbers of engineering degrees.

And more than seven times the number of medical degrees.

There is very good reason why business education is so popular.

The big questions that are addressed, the key concepts that are taught, the skills

that are honed, and the tools that are developed provide everyone from top

level business executives to production line managers with the most powerful

arsenal of analytical weapons ever assembled to fight the corporate wars.

To illustrate this point, let's use one of the most tried and

true tools you will encounter in business school, the conceptual framework.

This figure shows how we can divide the business school universe up into its

toolbox, MBA Sun, and its four main planets.

The Strategic and Tactical MBA, the Functional MBA, the Organizational and

Leadership MBA, and the Political, Regulatory, and Ethical MBA.

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Just what exactly is in the Toolbox MBA?

Well, it certainly includes the tools of quantitative analysis

like statistics, regression equations, and linear modeling.

However, it also encompasses both microeconomics and

macroeconomics, our bread and butter in this course.

Of course, the hallmark of the integrative Toolbox MBA is that it

provides a set of concepts, skills and yes, tools that

apply across virtually all the traditional functional disciplines of business.

For example, a supply chain manager in a firm's operations management department

might use a linear programing model to improve production and

distribution efficiencies.

While a marketing executive can use statistical regression demand analysis

to forecast future demand for the firm's products.

Similarly, a concept like opportunity cost in

microeconomics can help identify very real costs to a firm

that may not otherwise show up in the ledgers of the financial accountants.

But, which have a big effect on the strategic decision making process.

And as I have already noted, the microeconomic concept of price elasticity,

which measures the sensitivity of the quantity demanded of

a product to price changes, is critical to the setting of prices.

Here, a key insight is that sometimes cutting pricing, technically, when demand

is price elastic, is actually the best way to actually boost total revenues.

It's not exactly an intuitive result.

And here is the broader point.

The tentacles of the Toolbox MBA reach out to virtually all of the other planets

in the business education universe.

And virtually all aspects of business and financial rooted in basic economics.

[SOUND] Let me show what I mean now in even more detail by taking a closer look

at each of the individual planets in the business education universe

starting with the grand chess master course of management strategy.

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Management strategy teaches you both how and

why to make the big decisions every corporation faces.

These range from market entry and market positioning to product diversification and

mergers and acquisitions.

And note here that in a very complimentary way,

the lessons of macroeconomics and tools like business forecasting,

help the management strategist identify exactly when to implement these decisions.

For example, the management strategist may first identify a large

capital investment or the acquisition of another firm

as possible actions to take to boost earnings.

This very same strategist may then further advice from a macroeconomics

perceptive that a recession maybe the most profitable time to take these actions.

This is because interest rates, and therefore borrowing cost per capital,

are relatively low during the recessions,

while acquiring another company can often be done on the cheap.

Because stock market prices are typically depressed during a recession.

As for how microeconomics fits into management strategy, the not so

dirty little secret here is that almost the entire field of management strategy

has its roots in the microeconomic analysis of how industries are organized.

Are they competitive or monopolistic or

somewhere in between like the dreaded oligopoly?

Here, I should tell you that one of the pioneers of management strategy

is a Harvard University scholar named Michael Porter.

And his famous Five Forces strategy concept is quite literally

an improvised page torn straight out of the microeconomics textbook.

[SOUND] My broader point of course, is that understanding both macro and

microeconomics will make you a heck of a better management strategist.

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As for our next and indeed largest planet in the business education universe,

we have the functional MBA.

In fact, this planet is home to the long time bedrock horses

of the traditional business education curriculum.

From the dynamic duo of accounting and corporate finance to marketing and

operations management.

For example, in operations management, you will learn about concepts like

process analysis, bottlenecks, and inventory levels.

As you come to understand how to manufacture and distribute your products

at the lowest possible cost while improving business processes.

Then by mastering the five Ps of marketing product, place, promotion,

price and profit, you will learn how to reap the biggest bucks.

Of course, you must also learn in your accounting classes

how to meticulously count your revenues, costs, and profits along the way.

And you will do such counting, not just for shareholder and regulatory purposes

when you learn about financial accounting, you will also do such counting for

internal decision making purposes like risk and performance management.

Using the tools of so called managerial or cost accounting.

Of course, an understanding the basic economics is critical to almost

every one of these tasks.

Just consider the realm of corporate finance.

Those who toil in this particular vineyard

are tasked of finding the cheapest source of funds for capital investment.

And determining whether proposed capital investments might be profitable.

All the while, managing the firm's cash flow over the course of doing business.

Here, a microeconomic tool like net present value,

which recognizes the time value of money, can help the corporate finance team

compare the value of the dollars or Euros or Rupees invested today,

to the value of the cash flow that comes over time from the investment.

In this way, microeconomics helps unlock the analytical secret as to whether

a proposed project is likely to yield a profitable rate of return.

At the same time, the lessons of microeconomics teach the corporate

financier how the price of capital, that is the interest rate,

is often heavily influenced not just by bond market investors in

private capital markets, but also by central banks around the world

that create new money using macro tools like monetary policy.

[SOUND] The point of course, is that a solid command of both micro and

macroeconomics is a particularly crucial part of the corporate

financing executive's job description.

And a key lynch pin of the functional MBA.

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As for the third area of the business education curriculum, this includes

a suite of courses that address questions of organizational behavior and

leadership, as well as human resource management.

By studying these courses, you will come to understand just why and

how managing a successful business is very much a team sport.

You will also see why even the best corporate strategies

will ultimately crash and burn if the company has severe people issues.

Here, while it may not seem obvious at first glance,

even in this part of the business education universe,

the lessons of economics often take center stage.

For example,

one of the most abiding macroeconomic lessons of strategic business

cycle management is that a recession is typically a great time to hire new people.

This is because the pool of labor is very deep and

some of the best talent is available.

However, firms often do just the opposite.

They fire some of their best people during hard times.

Hey, blame the accountants who forgot to take that macroeconomics course

as an undergraduate.

In a similar microeconomics vein,

one of the key issues in industrial organization is whether the managers of

an organization are under the full control of the organization's shareholders.

[SOUND] On the one hand,

if there is no separation between the ownership and control of the firm,

the firm will maximize profits just like the basic economic models predict.

If however there is a separation of ownership and control,

the firm's executives may be free to maximize their own benefits,

or what economists call utility.

And the result may be obscenely high salaries and a looting of corporate

profits through lavish parties and inappropriate expenditures.

[SOUND] The broader point, incentives matter and an understanding

of basic organizational economics is at the heart of understanding

how incentives may affect critical decisions in the workplace.

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As for our final planet in the business school in universe,

the political, regulatory, and ethical MBA.

This includes a set of courses that in one way or

another has to do with effectively and ethically managing within the broader

political and regulatory environments in which all businesses must operate.

Courses in this area may include business and

government, business law, corporate ethics, and so on.

And here, you may find it interesting that even though the government can do

your business far more damage than any ten competitors and

a breach in your own business ethics can get you into deep trouble or even jail.

These types of courses are often either ignored by business schools or

treated as backwater electives.

As for how economics fits into this part of the business school universe,

you will learn in vivid detail when we study the topics of externalities and

public goods in our microeconomics course that a lot of regulations that governments

around the world impose on businesses are actually rooted in basic economics.

As for just one example, consider that when companies pollute the environment

they generate what microeconomists call negative externalities.

These are the external costs, not directly born by the firm, that pollution imposes

on the broader society, like the increased cancer risks from dirty air and water.

At least from an economic prospective, the most efficient thing for

societies to do is to force companies to bear those pollution costs in a process

that microeconomists refer to as internalizing the externalities.

And this can be done in any number of ways from requiring specific pollution

control technologies to simply finding the polluters.

The broader point of course,

is that business managers need to understand the underlying economics of

the regulations being imposed on their organizations.

And in many cases, such an understanding may help a company better adapt to and

perhaps even constructively change the regulatory environment.

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Well that completes our tour of the business school universe.

And the last thing I can tell you at this point is that the first thing you really

need to do to succeed in business is to really master the principles of economics.

Trust my 25 years of experience here.

There's no better foundation for a business education then the insights,

principles, and tools of what some have called the dismal science.

But which I have found over the course of my own career to be one of

the most interesting and exciting subjects you can learn.

And here's one of the real payoffs.

Once you master the art and science of economics, the newspapers you read take

on new meaning and the world around you becomes a much more interesting place.

It is also a world where you will have a much better chance of prospering and

paving your own way for a very bright future.

Whether you wind up as an entrepreneur or a scientist or a teacher or

the head of a large corporation or small family business.

So dig deep into this material.

As we say in the economics trade, the rate of return on your investment in time and

energy will be very high.

And therefore, very well worth your while.

From University of California, I'm Peter Navarro.

We'll see you next time.

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Intro to UCI's Power of Microeconomics

Strategic Business Management - Microeconomics

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