I don't know if in other areas of knowledge happens the same, but in Economics and Business Management it is very common to hear phrases like "Theory is very good for the faculty", "Paper resists everything, but reality is different" and the so on. Surely without realizing it, those who formulate them do not value the research work behind the theories taught in faculties and how onerous it would be for the State that the learning provided in the public education system was not useful.
In this sense, it would be very desirable that exposition of theoretical models in the classroom do not end with the results obtained from the hypotheses, but once explained the whole model, the opposite path should be initiated: the discussion about which sectors or situations present the initial assumptions, how restrictive they are and what knowledge the model in question offers. It is also very common in practical courses to solve problems in which the data are clearly defined and an information search process is not carried out; in that case it would be advisable to indicate to students and future professionals that data as they appear in the exercises of immediate application of the theory are not available in real situations and it would be necessary to train them in the search for the necessary data from all the global real information.
But all of the above are recommendations for teaching classes and in this small writing I intend to give very basic ideas on how to take advantage of theory in professional practice.
First of all, we must remember why there is a scientific branch called Economics: the scarcity of resources. And secondly, and derived from the above, that the object of study of the Economy is the allocation of scarce resources. These two apparently simple statements result in prices, markets where resources are allocated through exchanges, organizations dedicated to producing tangible goods and services and within which there is also an allocation of resources, etc. And the Economy studies all this complexity and provides tools which allow rigorous reasoning. There are precisely topics and situations generally known that generate debate and for which the use of economic concepts can provide a useful point of view.
For instance, a branch within the Economy studies the behavior of individuals and emphasizes the objectives they pursue and how they can be incentivized. Moreover, an agent's behavior can be modified through incentives that lead him to act in such a way that, pursuing his objectives, a goal is achieved outside him. This basic idea can be applied for the analysis of realities in which an agent has a certain market power, such as the granting of patents or the existence of monopolies. Let's see each one of them.
A patent allows the person who invents a product or process to be the only one who exploits it. We could think it will be an injustice to the rest of society, but if inventors were not allowed to benefit for a while from the result of their effort and were not rewarded for the uncertainty of doing a job or investing money without knowing whether it would yield a beneficial result, no one would do this effort and the society as a whole could not take advantage of the scientific advancement. Of course, this strictly economic idea can and should be complemented; in fact, patent rights can only be exploited for a limited period of time.
In cases of monopoly where there is no reason for only one company exist on the market, it is clear that the introduction of competition improves social welfare. But there are so-called natural monopolies (electricity, gas, etc.) in which the huge investments that companies must make cause the volume of production fall into the declining stretch of the unit cost function. This means that from a cost point of view it is better a single company serves the market. However, the economic authorities must anticipate that it has incentives to behave as a monopoly and to increase the price of the product in question. Therefore, knowing that the company's objective is to maximize its profit, the authorities must provide it with a remuneration system that encourages it to set a price similar to that of cost and does not diminish social welfare.
The theoretical teachings of Economics and Business Management can also be applied to the analysis of new, non-traditional sectors with some different characteristics. For example, sports clubs have peculiarities that go beyond the intangibility of their product, which would be a common feature for all companies within the services sector. In any analysis addressed by sports organizations, you must again determine what is their objective, which is usually one of the following: maximize monetary profit or maximize sporting success. It is true that they can also be focused as nested objectives: in order to maximize the economic benefit, clubs have to obtain sports successes that allow increase their revenues by advertising, by the sale of tickets and by subscriptions. To achieve either one, clubs have to develop an activity, which is the practice of the sport. That activity must be represented as a process with input and output variables; within the inputs we can consider human resources, the efficiency of all resources in obtaining the product can be measured, etc.
Finally, when the theory is applied to the resolution of a real problem, I would recommend losing the fear of data inaccuracy and learning to work with trends. I'm going to give the example of stockout costs in inventory management. In typical class problems the value of that stockout cost is an exact figure that is entered in a formula to solve the question of how much product quantity to order and when. All formal and theoretical teachings show that if the cost of stockout is very high it is advisable to create a large safety stock and the opposite, if that cost of stockout is low. It is also explained that the cost of stockout is the monetary valuation of the damage that the company suffers because it does not have a good that is demanded. And this last idea leads to linking the costs of stockout to the intensity of the competition that the organization supports. Therefore, in practice, the analysis of rivals, substitute products and customers as competitive forces in the sense that Porter gives them can be used and infer from there, not the exact value of the cost of stockout but in which level (high or low) can be found. In addition to all of the above, a sensitivity analysis can always be performed.
Author: Lucía Isabel García-Cebrián
(The opinions expressed in this article are the sole responsibility of the author)
