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Organization and Strategy Summary
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Summary of 16 pages for the course Organisatie & Strategie at UVT
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Samenvatting organisatie en strategie tentamen.Hoofdstuk 1.
Resources that are optimally allocated are said to be used with efficiency. Division
of labour refers to the splitting of composite tasks into their component parts and
having these performed separately.
In our present economic terminology we say that there are economies of
specialization to be gained. Specialized production is thus more efficient than
unspecialized production. Division of labour thus leads to specialization, which
allows for efficiency gains.
For the individual, specialization has the advantage of allowing higher levels of
performance to be reached, but the disadvantage of restricting choice.
Specialization leads to a need for coordination. There are two types of
coordination: transactions may take place either across of within organizations.
The price system is the coordinating device that takes care of allocation. The
price contains all the information you need to base your transaction on: it is a
sufficient statistic. Coase maintained that usually there is a cost associated with
using the price system. First of all, there is usually a cost (if only time) involved in
finding out what the relevant prices are. Next, when important, a contract is
usually drawn up to provide the basis for a market transaction. Finally, there may
be conditions under which it is hardly possible (or extremely costy) to reach a
contractual agreement that may serve as a basis for market exchange. In those
cases, too, organization may provide an alternative. Within organizations, the
price system is, replaced by authority as a coordinating mechanism. As a
consequence, transactions will shift between markets and organizations as a
function of the transaction costs under those two alternatives.
Organizations arise as solutions to information problems. The costlier it is to
process and transmit information, the more it makes sense to do things in firms;
the cheaper communication becomes, the more efficient markets will be.
Organizations do not operate in a vacuum, but live in an environment that:
- Provides the conditions for particular organizations to be created;
- Shapes all organizations by exerting economic, social, political and other
pressures;
- Is also the ultimate selection mechanism for determining which
organizations can survive and be successful.
Not only organizations but also markets are shaped and selected by
environments. Markets operate in an environment that:
- Provides the conditions for particular markets to be created;
- Shapes all markets by exerting economic, social, political and other
pressures;
- Is also the ultimate selection mechanism for determining which markets
can survive and be successful.
Institutions are the rules of the game in a society, or more formally, are the
humanly devised constraints that shape human interaction. Environmental and
institutional factors co determine which markets and organizations are allowed to
exists and also exert pressure on how they function. Those factors are not static,
but evolve over time as governments change, laws are amended, social norms
develop, and new issues and challenges have to be addressed by societies.
Hoofdstuk 3.
Within organizations, authority directed the allocation of resources instead of the
price mechanism. Mintzberg (1979, 1989) has developed a typology of
organizational configurations, a distinction between various types of coordination
mechanism.
, 1. Mutual adjustment.
2. Direct supervision.
3. Standardization of work processes.
4. Standardization of outputs.
5. Standardization of skills.
6. Standardization of norms.
All six mechanisms are alternatives to the price mechanism for communicating
information and coordinating economic activities.
The six coordination mechanisms correspond with six organizational
configurations. The main point has come across: when markets are replaced by
organizations, coordination by the price mechanism gives way to coordination by
a set of other mechanisms.
CONFIGURATION PRIME COORDINATING MECHANISM
Entrepreneurial organization Direct supervision
Machine organization Standardization of work process
Professional organization Standardization of skills
Diversified organization Standardization of outputs
Missionary organization Standardization of norms
Innovative organization Mutual adjustment
Internal market for goods: decisions on whether to sell or procure internally will
be based on the transfer price as compared with external prices.
Markets do not operate in isolation: they are embedded in an institutional
environment that sets the rules of the game.
Hoofdstuk 4.
Individual transactions will not have an effect on the market price as there is such
a huge volume of transactions that no individual transaction can make a
difference. Only the collective effect of all those individual transactions becomes
noticeable as changes of the market prices. Under these circumstances perfect
competition exist.
Only In such circumstances can we say prices act as sufficient statistics that
convey all the necessary information to the market parties.
Given the prevailing market price, each seller can only decide how much to
produce and sell. Each buyer can only decide how much to buy.
Reasons for incomplete contracting include the following:
- It is usually difficult to foresee and plan for all possible contingencies.
- It may be expensive to fully negotiate contracts. Parties may make a trade
off between such expenses and the risks of leaving contingencies open.
- Language limitations may prevent the totally unambiguous description of
terms and situations. Thus, after the fact interpretations may remain
necessary.
It is especially in situations where there are information asymmetries that all
kinds of interesting problems occur. The reason is that such asymmetries may
give rise to opportunistic behavior. Adverse selection is a type of information
asymmetry. It is a problem of hidden information, which means that one party in
a potential transaction is better informed about a relevant variable in the
transaction than the other party. It is an information problem that already exist
before the insurance contract is written. It is an ex ante information problem.
Hidden action (moral hazard) is another kind of information asymmetry. It is an ex
post phenomenon.
The economic aspect of information pertains to its scarcity and the value that
scarce information may have. A decision tree may have two kinds of node: nodes
where an individual has to choose an act, and nodes where nature chooses her
, moves by means of a random process. Working backwards, we can calculate the
expected value for each node.
Hoofdstuk 5.
Game theory is concerned with situations in which there are two or more players.
Each player in making their decision has to take into account the other player’s
decision. There are several types of games. Two important characteristics of
games are the number of:
- Players involved;
- Stages in the game.
Combining these two characteristics, we can distinguish the types of game.
2 players N players (N>2)
1 stage Coordination game; Auctions
Singe stage prisoner’s
dilemma
M stages (M>1) Entry game Iterated prisoner’s
dilemma for many
players;
Evolutionary game
theory
The coordination game introduces the important distinction between
simultaneous and sequential games. Is it really necessary that both players make
their choices at exactly the same time? That is a simultaneous game. It is that
lack of information which distinguishes the simultaneous game from the
sequential game. In sequential games where the moves of the first player can be
observed by the second player, coordination is easily achieved. The second
player has information to base a decision on. In contrast, simultaneous games
lack such information and, hence, have no predictable outcome.
The entry game is a sequential game between a monopolist and a potential
entrant. In a sequential game like the entry game, it is known which player
moves first.
We now turn to a situation involving more than two players in a single stage
game. A prototypical example is the auction. Auctions come in various shapes
and forms. An important distinction between the open auction, in which the bids
of all parties are observable, and the sealed bid auction, in which that is not the
case. An increasing bid competition is not entirely optimal from the seller’s point
of view. There are several strategies the seller could employ to counter that risk.
One of the most interesting is to use a dutch auction instead of an increasing bid
competition. In a dutch auction, the auctioneer starts with a very high price ( a
price that is, in the auctioneer’s opinion, well above the highest private value of
all bidders). The auctioneer cries loudly prices that slowly decrease. This process
stops when one of the bidders cries out mine. In a dutch auction, the seller
probably receives t least a part of the difference between the private values of
the highest bidders. For the seller there is also a risk, however. In an increasing
bid auction the auctioneer can start with a minimum price. In a dutch auction
there is no such minimum.
In order to establish a minimum, the seller can convert the auction from a one
stage to a two stage game. In the first stage, the game is played as an increasing
bid competition. The winner of the first stage gets a financial reward (a fixed fee
or a small percentage of his bid), but not the land. The land is subsequently
auctioned in a second stage, which takes the form of a dutch auction. If, in the
second stage no one cries out mine before the first stage price is reached, the
winner of the first stage has to buy the land for the first stage price.
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