Chapter 1: Introduction

1. Chapter 1: Introduction Brickley, Smith, and Zimmerman, Managerial Economics and Organizational Architecture, 4th ed.

2. Competitive strategy products and markets product characteristics production choices product pricing competitor behavior Internal structure decision rights (empowerment) compensation practices performance evaluation Subject Overview

3. Introductionlearning objectives Students should be able to • Identify the “three legs of the stool” of organizational architecture • Describe generally how economics can aid in management decision making • Describe “economic Darwinism”

4. The Economic Perspective • How are resources allocated among competing uses? • in society • in the firm • How do individuals make decisions? • the role of incentives • incentive conflicts and opportunistic behavior

5. Economic Darwinism • Only the fittest survive • competition encourages efficient decisions • maximizing shareholder value • Firms “benchmark” successful practices • successful management practices spawn imitators • but organization’s architecture must be compatible with innovation

6. Organizational Architecture • Systematic approach to identifying and correcting organizational problems • Three critical aspects of organization: the architecture • Assignment of decision rights • Methods of rewarding individuals • Performance evaluation of individuals and business units • “Three legs of the stool”

7. Managerial implications • Existing architectures are not random • Surviving architectures are optimal relative to competitors • Environmental change may dictate architecture change

8. Fundamental concepts • People act in their own self interest • which is not the same as being greedy! • Information is asymmetric • we don’t all share the same information • assignment of decision rights must be compatible with access to information • reward and evaluation systems must in turn be compatible with decision rights

9. Mechanisms for Allocating Scarce Resources Markets “Sells” labor “Buys” labor Sells product Buys product Household division of labor Hierarchical decision making

10. Making choices • Individual • Buying shoes • Social • Electing a president • Committee decisions • Strategic • Anticipating a response • What role does uncertainty play?

11. The nature of a free market economy • Property rights • Freely functioning markets • Supply function and curve • Demand function and curve • Equilibrium price and volume

12. Role and functions of prices • Coordination • Incentives • Rationing • Signaling

13. Economics and the management disciplines James March— “Business schools are basically schools of applied economics” • Marketing • Finance • Human resources • Operations • Accounting

14. Organizational Decision Making Costs Benefits • If the benefits of an action outweigh the costs, do it • Create and sell a new product (marketing, operations) • Hire (or fire) an employee (human resources) • Build a new plant (senior management team--capital budgeting) • Select a new vendor (operations, purchasing) • Issue bonds (finance)