Managerial Economics and Organizational Architecture

Transcription

1 Managerial Economics and Organizational Architecture Fifth Edition JAMES A. BRICKLEY CLIFFORD W. SMITH JEROLD L. ZIMMERMAN William E. Simon Graduate School of Business Administration University ofrochester McGraw-Hill Irwin Boston Burr Ridge, IL Dubuque, IA New York San Francisco St. Louis Bangkok Bogota Caracas Kuala Lumpur Lisbon London Madrid Mexico City Milan Montreal New Delhi Santiago Seoul Singapore Sydney Taipei Toronto

2 Part 1: Basic Concepts Chapter 1: Introduction 2 Managerial Economics and Organizational Architecture 4 Organizational Architecture 4 Economic Analysis 5 Economic Darwinism 8 Survival of the Fittest 8 Economic Darwinism and Benchmarking 8 Purpose of the Book 10 Our Approach to Organizations 11 Overview of the Book 12 Chapter 2: Economists' View of Behavior 16 Economic Behavior: An Overview 17 Economic Choice 18 Marginal Analysis 18 Opportunity Costs 20 Creativity of Individuals 20 Graphical Tools 22 Individual Objectives 22 Indifference Curves 23 Opportunities and Constraints 24 Individual Choice *. 26 Changes in Choice 27 Motivating Honesty at Merrill Lynch 29 Managerial Implications 32 Alternative Models of Behavior 34 Only-Money-Matters Model..35 Happy-Is-Productive Model 35 Good-Citizen Model 36 Product-of-the-Environment Model 36 Which Model Should Managers Use? 37 Decision Making under Uncertainty 39 Risk Aversion 40 Certainty Equivalent and Risk Premium 41 Risk Aversion and Compensation 41 Summary 42 Appendix: Consumer Choice, 43

3 xiii Chapter 3: Markets, Organizations, and the Role of Knowledge 60 Goals of Economic Systems 61 Property Rights and Exchange in a Market Economy 62 Dimensions of Property Rights 62 Gains from Trade 63 Basics of Supply and Demand 68 The Price Mechanism 68 Linear Supply and Demand 70 Prices as Social Coordinators 72 Measuring the Gains from Trade 73 Government Intervention 74 Externalities and the Coase Theorem 78 Markets versus Central Planning 81 General versus Specific Knowledge 81 Knowledge Creation 83 Specific Knowledge and the Economic System 86 Incentives in Markets 86 Contracting Costs and Existence of Firms 87 Contracting Costs in Markets 88 Contracting Costs within Firms 89 Managerial Decisions 91 Summary ; 93 Appendix: Shareholder Value and Market Efficiency 94 Part 2: Managerial Economics Chapter 4: Demand 106 Demand Functions 107 Demand Curves 108 Law of Demand 109 Elasticity of Demand 110 Linear Demand Curves < 114 Other Factors That Influence Demand 116 Prices of Related Products 117 Income 119 Other Variables 120 Industry versus Firm Demand 121 Network Effects 122 Product Attributes 124 Product Life Cycles 125 Demand Estimation 127 Interviews 127 Price Experimentation 128 Statistical Analysis 129 Implications 132 Summary 133 Appendix: Demand 134

4 Chapter 5: Production and Cost 142 Production Functions 143 Returns to Scale 144 Returns to a Factor 145 Choice of Inputs 148 Production Isoquants 148 Isocost Lines 150 Cost Minimization 152 Changes in Input Prices 153 Costs 154 Cost Curves 154 Short Run versus Long Run 157 Minimum Efficient Scale 160 Learning Curves 162 Economies of Scope 164 Profit Maximization 165 Factor Demand Curves 166 Cost Estimation 169 Summary 171 Appendix: The Factor-Balance Equation 172 Chapter 6: Market Structure 178 Markets 180 Competitive Markets K 180 Firm Supply 180 Competitive Equilibrium 182 Barriers to Entry 185 Incumbent Reactions 186 Incumbent Advantages 187 Exit Costs 188 Monopoly 188 Monopolistic Competition 190 Oligopoly 191 Nash Equilibrium 192 Output Competition 193 Price Competition 194 Empirical Evidence 197 Cooperation and the Prisoners' Dilemma 197 Summary 200 Chapter 7: Pricing with Market Power 206 Pricing Objective 207 Benchmark Case: Single Price per Unit 208 Profit Maximization 208 Estimating the Profit-Maximizing Price 211 Potential for Higher Profits 214 Homogeneous Consumer Demands 215 Block Pricing 215 Two-Part Tariffs 216

5 xv Price Discrimination Heterogeneous Consumer Demands 217 Exploiting Information about Individual Demands 219 Using Information about the Distribution of Demands 221 Bundling 225 Other Concerns 227 Multiperiod Considerations 227 Strategic Interaction 229 Legal Issues 230 Implementing a Pricing Strategy 231 Summary 233 Chapter 8: Economics of Strategy: Creating and Capturing Value 240 Strategy 241 Value Creation 242 Production and Producer Transaction Costs 244 Consumer Transaction Costs 245 Other Ways to Increase Demand 246 New Products and Services 248 Cooperating to Increase Value 249 Converting Organizational Knowledge into Value 250 Opportunities to Create Value 252 Capturing Value 252 Market Power 253 Superior Factors of Production 256 A Partial Explanation for Wal-Mart's Success 262 All Good Things Must End 264 Economics of Diversification 266 Benefits of Diversification 266 Costs of Diversification 267 Management Implications 268 Strategy Formulation 270 Understanding Resources and Capabilities 270 Understanding the Environment f 271 Combining Environmental and Internal Analyses 272 Strategy and Organizational Architecture 272 Can All Firms Capture Value? 275 Summary 276 Chapter 9: Economics of Strategy: Game Theory 281 Game Theory 282 Simultaneous-Move, Nonrepeated Interaction 283 Analyzing the Payoffs 284 Dominant Strategies 284 Nash Equilibrium Revisited 286 Competition versus Coordination 289 Mixed Strategies 291 Managerial Implications 293

6 Sequential Interactions 295 First-Mover Advantage 297 Strategic Moves 297 Managerial Implications 298 Repeated Strategic Interaction 299 Strategic Interaction and Organizational Architecture 300 Summary 303 Appendix: Repeated Interaction and the Teammates' Dilemma 304 Chapter 10: Incentive Conflicts and Contracts 313 Firms 314 Incentive Conflicts within Firms 316 Owner-Manager Conflicts 316 Other Conflicts 318 Controlling Incentive Problems through Contracts 318 Costless Contracting 319 Costly Contracting and Asymmetric Information 323 Postcontractual Information Problems 324 Precontractual Information Problems 327 Implicit Contracts and Reputational Concerns 331 Incentives to Economize on Contracting Costs 333 Summary 334 Part 3: Designing Organizational Architecture Chapter 11: Organizational Architecture 340 The Fundamental Problem 342 Architecture of Markets 342 Architecture within Firms 343 Architectural Determinants 345 Changing Architecture 349 Interdependences within the Organization 350 Corporate Culture * 351 When Management Chooses an Inappropriate Architecture 354 Managerial Implications 355 Evaluating Management Advice 356 Benchmarking 357 Overview of Part Summary 359 Chapter 12: Decision Rights: The Level of Empowerment 363 Assigning Tasks and Decision Rights 365 Centralization versus Decentralization 367 Benefits of Decentralization 367 Costs of Decentralization 369 Illustrating the Trade-Offs 371 Management Implications 374

7 xvii Lateral Decision-Right Assignment 377 Assigning Decision Rights to Teams 378 Benefits of Team Decision Making 379 Costs of Team Decision Making 379 Management Implications 380 Decision Management and Control 381 Decision Right Assignment and Knowledge Creation 384 Influence Costs 385 Summary 387 Appendix: Collective Decision Making 388 Chapter 13: Decision Rights: Bundling Tasks into Jobs and Subunits 394 Bundling Tasks into Jobs 395 Specialized versus Broad Task Assignment 395 Productive Bundling of Tasks 398 Bundling of Jobs into Subunits 399 Grouping Jobs by Function 400 Grouping Jobs by Product or Geography 401 Trade-offs between Functional and Product or Geographic Subunits 402 Environment, Strategy, and Architecture 405 Matrix Organizations 406 Mixed Designs 408 Network Organizations 408 Organizing within Subunits 409 Recent Trends in Assignments of Decision Rights 409 Summary 414 Appendix: Battleof the Functional Managers 416 Chapter 14: Attracting and Retaining Qualified Employees 420 Contracting Objectives 422 The Level of Pay '. 422 The Basic Competitive Model 422 Human Capital 423 Compensating Differentials 425 Costly Information about Market Wage Rates 428 Internal Labor Markets 429 Reasons for Long-Term Employment Relationships 429 Costs of Internal Labor Markets 431 Pay in Internal Labor Markets 431 Careers and Lifetime Pay 431 Influence Costs 437 The Salary-Fringe Benefit Mix 438 Employee Preferences 438 Employer Considerations 440 The Salary Fringe Benefit Choice 441 Summary 447

8 Chapter 15: Incentive Compensation 452 The Basic Incentive Problem 453 Incentives from Ownership 456 Optimal Risk Sharing 457 Effective Incentive Contracts 459 Principal-Agent Model 459 Informativeness Principle 465 Group Incentive Pay 466 Multitasking 468 Forms of Incentive Pay 469 Incentive Compensation and Information Revelation 470 Selection Effects of Incentive Contracts 471 Does Incentive Pay Work? 472 Summary 476 Appendix: Multitasking Theory 478 Chapter 16: Individual Performance Evaluation 485 Setting Performance Benchmarks 488 Time and Motion Studies 489 Past Performance and the Ratchet Effect 489 Measurement Costs 490 Opportunism.. : 492 Gaming 492 Horizon Problem 493 Relative Performance Evaluation 494 Within-Firm.Performance 495 Across-Firm Performance 496 Subjective Performance Evaluation 496 Multitasking and Unbalanced Effort 497 Subjective Evaluation Methods 498 Problems with Subjective Performance Evaluations 500 Combining Objective and Subjective Performance Measures 503 Team Performance ~ Team Production 505 Evaluating Teams 506 Government Regulation of Labor Markets 508 Summary 509 Appendix: Optimal Weights in a Relative Performance Contract 511 Chapter 17: Divisional Performance Evaluation 520 Measuring Divisional Performance 522 Cost Centers 522 Expense Centers 524 Revenue Centers 525 Profit Centers 526 Investment Centers 526 Transfer Pricing 531 Economics of Transfer Pricing 532 Common Transfer-Pricing Methods 538 Reorganization: The Solution If All Else Fails 542

9 xix Internal Accounting System and Performance Evaluation 542 Uses of the Accounting System 542 Trade-offs between Decision Management and Decision Control 544 Summary 546 Capstone Case Study on Organizational Architecture: Arthur Andersen LLP 553 Part 4: Applications of Organizational Architecture Chapter 18: Corporate Governance 562 Publicly Traded Corporations 564 Corporate Form of Organization 564 Stock Exchanges 565 Stock Ownership Patterns 565 Governance Objectives 566 Separation of Ownership and Control 566 Incentive Issues 566 Survival of Corporations 567 Benefits of Publicly Traded Corporations 567 Top-Level Architecture in U.S. Corporations 568 Sources of Decision Rights 569 Shareholders 570 Board of Directors 575 Top Management.578 External Monitors 582 International Corporate Governance 585 Market Forces / 588 Sarbanes-Oxley Act of Corporate Governance: An Historical Perspective 592 Summary ^ 594 Web Appendix: Choosing among the Legal Forms of Organization A-l Chapter 19: Vertical Integration and Outsourcing 599 Vertical Chain of Production 601 Benefits of Buying in Competitive Markets 604 Reasons for Nonmarket Transactions 606 Contracting Costs 606 Market Power 609 Taxes and Regulation 611 Other Considerations 611 Vertical Integration versus Long-Term Contracts 612 Incomplete Contracting 612 Ownership and Investment Incentives 613 Specific Assets and Vertical Integration 614 Asset Ownership 617 Other Reasons Continuum of Choice 619

10 xx Contents Contract Length 620 Contracting with Distributors 620 Free-Rider Problems 621 Double Markups 622 Regulatory Issues 625 Recent Trends in Outsourcing 626 Summary 628 Appendix: Ownership Rights and Investment Incentives 630 Web Chapter 20: Leadership: Motivating Change within Organizations 637 Leadership 20-3 Vision Setting 20-3 Motivation 20-4 Decision Making within Firms 20-5 Incentive Problems and Organizational Politics 20-5 Understanding Attitudes toward Change 20-6 Changing Organizational Architecture 20-8 Proposal Design 20-9 Maintaining Flexibility 20-9 Commitment Distributional Consequences Marketing a Proposal Careful Analysis and Groundwork Relying on Reputation Emphasizing a Crisis Organizational Power Sources of Power Tying the Proposal to Another Initiative Coalitions and Logrolling Is Organizational Power Bad? The Use of Symbols Summary Appendix: Strategic Value of Commitment and Crisis ^ Chapter 21: Understanding the Business Environment: The Economics of Regulation 638 Importance of Regulation to Managers 639 Economic Motives for Government Intervention 641 Defining and Enforcing Property Rights 641 Redressing Market Failures 643 Redistributing Wealth 649 Economic Theory of Regulation 651 Demand for Regulation: Special Interests 652 Supply of Regulation: Politicians 652 Market for Regulation 654 Deadweight Losses, Transaction Costs, and Wealth Transfers 658

11 xxi Managerial Implications 658 Restricting Entry and Limiting Substitutes 659 Forming Coalitions 661 On Business Participation in the Political Process 662 Summary 664 Chapter 22: Ethics and Organizational Architecture 667 Ethics and Choices 669 Corporate Mission: Ethics and Policy Setting 671 Ethics 671 Value Maximization 672 Corporate Social Responsibility 674 Economists' View of Social Responsibility 675 Corporate Policy Setting 677 Mechanisms for Encouraging Ethical Behavior 681 Contracting Costs: Ethics and Policy Implementation 684 Codes of Ethics 686 Altering Preferences 687 Education 688 Corporate Culture 689 Summary 691 Web Chapter 23: Organizational Architecture and the Process of Management Innovation 695 Management Innovations 23-3 The Demand for Management Innovations 23-5 The Rise of TQM 23-6 Other Innovations 23-7 Why Management Innovations Often Fail 23-8 Marketing 23-8 Underestimating Costs of Change Failure to Consider Other Legs of the Stool Managing Changes in Organizational Architecture Summary Index 696 Web Glossary G-l