Systems Thinking and Managerial Economics
Term Group Project:
Our team in a Managerial Economics MBA course was tasked with identifying and providing a framework for a real world business’s managerial problem in need of a tangible answer. A practical application.
Project Question: How to maximize profits of a niche vintage product through optimizing price setting strategy?
Our client, a Bay Area business who was very generous in working with us, sells a unique product with high value and low volume. After researching and evaluating the client and with recommendations from the professor, we looked into Auction Theory. An additional text on Auction Theory helped us determine that this client’s unique product and behavior of its customers (complemented by our market research) share similarities with auction strategies. Our team consisted of managers including a non-profit executive, a civic engineer, a pharmaceutical researcher, an inventory operations manager, and myself. Information about the course below.
Framework for Addressing the problem: We applied auction theory to build a framework that determines optimum price and revenue using multiple strategies considering various pricing methods and sales channels.
Here is how we did it: This below Systems Dynamics model mapped the business system and calculated the changes in relationships between the fixed and shifting variables to measure how each strategy impacted returns.
In a concurrent Marketing Management MBA course we performed a marketing program plan and recommended that the client owner raise prices and seek wider markets via new sales channels that parallel these price strategies. A survey of clients provided the prices willing that informed the bid calculations.
We mapped the feedback loops of the entire system to model how each strategic rise in price impacted costs and ultimately profit. Each sales channel represented different pricing strategies, size of the potential market, probable sales, and changed costs.
The basic change in price and fixed cost could be calculated with excel, but answering how each pricing and marketing decision would impact this business system as a whole required more advanced modeling. So I crafted a Systems Dynamics model, a tool taught in a Systems Thinking course from the University of Houston’s Foresight grad program, to answer how each managerial decision impacts short and long term revenue and cost.
Stripping away all private company sales information, we are able to graph ratios of what returns and system changes the manager can expect.
If the manager chooses channel B or C these new set of variable relationships will play out in forecast vectors. Channel A is the reference baseline strategy, the nominal future.
More than an economic model, forecast, or scenario, this quantitative model of business futures considered a dynamic set of economic variables, uncertainty, a preferred future and strategies to optimize a system with complex stakeholders.
We applied a set of theories to a novel real world problem and assisted a manager with a data-based framework capable of projecting alternative futures. The professor was successful in equipping us with a set of competencies, we then had to be creative problem solvers in fashioning a framework to determine a solution. A new system, business economics, required of us a new problem solving technique. The combination of economic modeling with casual loop analysis and systems dynamics.
Economics for Managers – the Course:
This Managerial Economics course focused on management decision making via applied economic tools and techniques rather than general economic literacy. Economics can provide a system map for managerial decisions informed by analytical frameworks. I combined this MBA course with a concurrent Systems thinking course to produce alternative futures for pricing model decisions.
We were exceptionally lucky to learn from Professor Bar, an expert in Economic Growth, Demographic Economics, and Mathematical Economics. This course shared the second semester of our San Francisco State University’s Executive MBA program with Strategic Marketing Management and dovetailed previous courses on Financial & Managerial Accounting and Managing Organizational Change and rounded out my concurrent studies in foresight and strategy.
According to the textbook for this course, Managerial Economics & Strategy, managerial economics is about decision making in the face of scarcity.
An emphasis on asking the right question and solving the right problem. The singular goal was to make economic decision making useful for us as managers and instruct us in thinking like economists. Our big takeaways were the quantitative frameworks, equations, graphs, and formulas to engage on-the-ground management decision points.
In this course we applied the following topics outlined in the below graphic to quantitative frameworks for determining; business area selection, choice of product, optimum output, price, technology, sales promotion, motivating executives and workers, behavioral economics, and strategic interaction with competitors.
These techniques are used to answer questions including how much to invest in new technology and advertising, under what circumstances to continue versus ending a project or product, as well as what price to charge for specific products under different situations?
Managerial Economics and Foresight:
My objective in concurrently pursuing Masters Degrees in both Business and Foresight (Futures Studies) is to be a practical future-ready leader capable of managing through planned and discontinuous change. This project and course was a rich team platform for refining powerful discipline-crossing competencies at the management/Foresight overlap.
Economic forecasting can closely align with Foresight. Many of our endeavors in this course expanded upon our knowledge of data-driven projections; regression, residuals for determining the gap between actual and predicted values, confidence intervals, extrapolation, theory based forecasting using a systems thinking understanding of structure to better anticipate, dynamic analysis to consider relationships between time periods.
Systems thinking from foresight comes into play in managerial economics as we leverage models to describe & predict how changes in variables impact expected or envisioned scenarios.
The section on decision making under uncertainty was especially pertinent to futures based leadership. As with Foresight, uncertainty is a given. We study risk and how uncertainty affects decision making, why most prefer certainty over payoffs and the applications that follow, functions for when people are willing to pay/invest & how much. I found it helpful in many management scenarios to see who is risk averse and when.
We studied Expected Value and Expected Utility Theory valuable to me as quantitative tools for foresight and business application, strategies for reducing risk, empirical methods to analyze demand, and investment decision trees similar to the Framework Foresight Model.
In foresight we study the expected future then explore how trend breaks open up multiple futures. In economics we see that a competitor entering our field, or a merger, a change in a raw material, or external political forces might affect how steady our trend line is.
A considerable emphasis for me has been in sense making: contextualizing the global economic systems for the managing futurist.
Forward With a Map:
To refresh from the college courses that I had taken in macro and micro economics, I brushed up on economic theory before this course by reading a few economics books (A Concise Guide to Macroeconomics, Naked Economics, and An Introduction to Economic Dynamics) and by taking an online course. I needed a theoretical foundation upon which to build the decision making strategy focus of this course and I needed to keep up and compete with the seasoned business managers with whom I shared this course. I added the Wall Street Journal to my daily reading on top of the NY Times Business section.
Economics is a framework, a map of a complex system that impacts all levels of the organization and industry. This course delivered an environment to build skills for critically navigating that terrain with management strategies. It is about making decisions in leadership roles within the organization as we interface with the external world.
– Joe Murphy Librarian and Futurist (in training)