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Firms

ABMS Sept 8. Firms. Rögnvaldur J. Sæmundsson. Overview. What are firms? Governance structure – legal entity Administrative unit (management) Bundle of resources What do firms do? Identify business opportunities (BO) Exploit BO through operations and exchange

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Firms

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  1. ABMS Sept 8 Firms Rögnvaldur J. Sæmundsson

  2. Overview • What are firms? • Governance structure – legal entity • Administrative unit (management) • Bundle of resources • What do firms do? • Identify business opportunities (BO) • Exploit BO through operations and exchange • How do firms create value and survive? • Balance revenues and costs

  3. Governance structure • Relatively new innovation (19th century) • Limited liability • Market for corporate control • Managerial discretion • Open employment contracts

  4. Administrative unit (management) • Central management direction – group • Dominant coalition • Management through admin. structure • Division of labor (R&D, Production, ....) • Coordination mechanisms • Efficiency of structure is dependent on size • Management provide two basic services • Identification and selection of new BO • Planning and guiding the execution of BO

  5. Bundle of resources • Three main types • Human, physical and financial • Used for execution of BO • A source for new BO Knowledge Resources Services Value

  6. Identification of BO • Based on prior knowledge • Understanding and information • BO: • What to offer? • To whom? • Why value? • How to execute? • Exploit. of new BO requires investments

  7. Operations and Exchange • Design products and production • Make products visibly available • Receive orders • Produce and deliver • Receive payments • NOTE: Division of labor across firms

  8. Importance of knowledge • For identifying and exploiting BO • Main types • Managerial knowledge • Technical knowledge (problem and solutions) • Market knowledge (demand, buying behavior) • Main knowledge acquisition strategies • Learning by doing (exploitation) • Learning by experimentation (exploration)

  9. Knowledge at the firm level • Organizations “store” knowledge in procedures, norms, rules and forms. • Mutual learning between individuals and the organization. • Develop of knowledge is costly – competes for resources • Balance between exploration and exploitation.

  10. Orientation of the firm • Maximizing profits – shareholder value? • Short term profits vs long term profits? • Survival requires revenues>costs

  11. Costs • Fixed costs ((independent) of volume) • Variable cost (changes with volume) • Economics of scale and scope • ‘U’ shaped cost curves (diminishing returns to scale) • Increasing returns to scale

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