BU111 Lecture Notes - Lecture 18: Risk Aversion

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BU111–Lecture18–TechnologyFactors
Whydolargefirmssometimesfail?
Avoidsmall,uncertain,unfamiliarmarkets
oNichemarketssmallandfinanciallyunattractive
Butsmallnichemarketsmakefoundationforbigcompaniesandcan
makeasmallcompanybig
oGrowthpotentialuncertain
Managementdoesnotwanttotakerisk
oLowerprofitmargins
Needbigmarketstomakebigprofit
Example–ifprofitis100000AppleorAlphabetlaughatthesenumbers
whilenewsmallcompaniesusethistoestablishthemselvesinmarket
oGreaterriskofbeingcriticizedifyoufail–managerialriskaversion
Alphabethasrealizedthatsmallermarketsareimportantandhasfoundwaystokeep
theirmanagerialpreferencesnotbiasedtoseeallthesemarkets
oDifferentdivisionsofAlphabetlikeGoogle,Youtubeallowthecompanytoseeall
marketsandearnfromallsmallmarkets
● Managerialpreferencesarebiasandlimittheviewofthestrategyofabigcompany
o theyfocusonimprovingtheirsuccessthroughwhattheyaresuccessfulatanddo
notseelittlemarketsmadeupbylargeconsumers
Howtoavoidfailureifyouarethelargefirm
Designproductsbasedontasktheyareintendedtoserveratherthanthecustomers
whobuythem
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