Managerial Economics: Lecture 1

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Managerial EconomicsLecture 1

• Carlos A. UlibarriDepartment of ManagementNew
  Mexico Tech

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Course Overview

• Syllabus
• Text Paul Milgrom and John Roberts, 1992.
  Economics, Organization Management.
  Prentice-Hall, Inc. ISBN 0-13-224650-3.
• Exams/grading/scheduling

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Economic organizations

• GM multi-division firm
• Toyota JIT mfg processes
• Solomon pay for performance

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Alfred Sloan?

• Reorganized GM into a multidivisional firm
• Introduced market segmentation (division A mfg
  product for segment A)
• Expanded the product line

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Case of GM

• Reorganization gt required closer coordination of
  mfg plants, distribution dealerships, component
  suppliers, marketing and research

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Sloan business model

• Heavy demands on information gathering
• Cost-accounting is crucial in coordinating
  operations
• Divisions given autonomous decision-making
  authority

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Organizational choices

• are interdependent
• marketing information on consumer taste
• product design choices (standardization?)
• mfg plant operations (econ-of-scale?)
• coordination of component supply chain

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Centralizing authority?

• for planning LR strategy
• managing legal matters
• coordinating RD
• managing financial functions

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Toyota JIT MFG

• Economizes on inventory and working capital
  during mfg process
• Requires tighter quality control over components
• Requires strong customer-supplier relations

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Toyotas organizational choices

• Flexible production lines facilitate design
  changes
• LR contractual agreements with component
  suppliers provides incentive to invest in
  specialized skills and equipment

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Solomon pay-4-performance

• Getting the organizations incentives right
• Base salary bonus
• Bonus stock ownership in firm placed in trust
  for 5-year period

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The effects?

• Matching-up the employees self interest with
  stockholders objectives
• one for all all for one
• Raises value of stock
• Raises market value of firm

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Insights from cases?

• Organizational structure matters
• Incentives motivate decision-making
• Finding balance between coordination and control
  and functional autonomy

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Question pg. 18 in MR

• 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?

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Organization design mgt

• Meaning of organization?
• How do organizations emerge?
• How are organizations structured?
• How well do organizations perform?

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An organizations design

• Determines how resources are allocated, how
  information is generated and diffused
• Determines decision-making authority in meeting
  goals

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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

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What agents?

• Human resources
• Capitalists
• Suppliers
• Consumers

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An organizations autonomy

• The organizations 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

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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.

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discussion

• Inefficient organizations disappear, efficient
  ones survive.
• F1 racing team
• Mfg chain
• United Air
• Outsourcing
• Malls
• Warehouse Super Stores