Economic Foundations of Strategy

Economic Foundations of Strategy - Assignment

1. Consider your current work situation (or some prior one if it is more relevant). In the context of that situation, answer the following questions to the best of your ability:

a. Identify what you believe are fixed costs of operating the business and what costs are variable.

All the costs faced by firms can be broken into two main categories: fixed costs and variable costs.

Fixed costs are costs that are independent of output. These remain constant throughout the relevant range and are usually considered sunk for the relevant range (not relevant to output decisions). Fixed costs often include rent, buildings, machinery, etc.

Fixed costs at my company include (but not limited to):

• Telecom network systems (i.e. Mobile Switching Centre - MSC, Base Transceiver Station - BTS, Home Location Register - HLR,…)
• IT systems (i.e. Billing system, SMSC, Data Warehouse,…)
• Staff salaries.
• Rental fees (i.e. Buildings, BTS locations,…)

Variable costs are costs that vary with output. Generally variable costs increase at a constant rate relative to labor and capital. Variable costs may include utilities, materials used in production, etc.

Variable costs at my company include (but not limited to):

• Interconnection fee (pay to other operators for off-net call/SMS to their network)
• Revenue share (for content services)
• Distributor’s commission.
• Sales incentive.

b. To your knowledge, are the fixed costs high or low relative to the other costs? In other words, is this business a high-fixed cost business or a high-variable cost business? (You do not have to provide data, all we are looking for is qualitative answers.)

Our business (telecom business) is a very-high-fixed cost business. Most of our capital (more than 300 million of total 400 million US dollars investment) was used to build this “small” telecom network. Although operation costs (variable costs) are always big at any operator but they are still quite small in compare with fixed costs.

2. Consider your current work situation (or a prior work situation). In the context of that situation, answer the following questions to the best of your ability:

a. Who are your customers? (Do they have any distinguishing features? That is to say, are they old or young, rich or poor, foreign or domestic, married or single, etc.?)