Managerial Economics: Lecture 1 Carlos A. Ulibarri Department of Management New Mexico Tech.
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Transcript of Managerial Economics: Lecture 1 Carlos A. Ulibarri Department of Management New Mexico Tech.
Course Overview Syllabus
Text: Paul Milgrom and John Roberts, 1992. Economics, Organization & Management. Prentice-Hall, Inc. ISBN 0-13-224650-3.
Exams/grading/scheduling
Economic organizations
GM – multi-division firm Toyota – JIT mfg processes Solomon – pay for performance
Alfred Sloan?
Reorganized GM into a multidivisional firm
Introduced market segmentation (division A mfg product for segment A)
Expanded the product line
Case of GM
Reorganization => required closer coordination of mfg plants, distribution dealerships, component suppliers, marketing and research
Sloan business model Heavy demands on information
gathering
Cost-accounting is crucial in coordinating operations
Divisions given autonomous decision-making authority
Organizational choices
…are interdependent
marketing information on consumer taste
product design choices (standardization?)
mfg plant operations (econ-of-scale?) coordination of component supply chain
Centralizing authority?
…for planning LR strategy …managing legal matters …coordinating R&D …managing financial functions
Toyota: JIT MFG
Economizes on inventory and working capital during mfg process
Requires tighter quality control over components
Requires strong customer-supplier relations
Toyota’s organizational choices
Flexible production lines facilitate design changes
LR contractual agreements with component suppliers provides incentive to invest in specialized skills and equipment
Solomon: pay-4-performance
Getting the organization’s incentives right
Base salary + bonus Bonus: stock ownership in firm placed
in trust for 5-year period
The effects? Matching-up the employees self
interest with stockholder’s objectives
“one for all – all for one”
Raises value of stock Raises market value of firm
Insights from cases?
Organizational structure matters
Incentives motivate decision-making
Finding balance between coordination and control and functional autonomy
Question pg. 18 in M&R
In fast food chains, some decisions about standards are made centrally and others are left to individual managers. Who typically makes which kinds of decisions? Why? Can you think successfully about the fast-food business by dividing the issues between coordination and motivation?
Organization design & mgt
Meaning of organization? How do organizations emerge? How are organizations structured? How well do organizations
perform?
An organization’s design
Determines how resources are allocated, how information is generated and diffused
Determines decision-making authority in meeting goals
Alchian and Demsetz (AER)
Contracting approach to organizational theory: the firm is an organization of agents linked together by contract.
Agents form organizations voluntarily, according to their self-interest
An organization’s autonomy
“The organization’s economic boundaries are defined by its functional autonomy.”
…legal status to enter into contract on its own
… authority to decide product lines, prices, compensation, investments
Principal of efficiency An organization is a vehicle for
achieving efficiency through coordinating and motivating agent behavior.
Specific organizational forms & contractual arrangements represent a solution to the problems of coordination/motivation.