Firms Rögnvaldur J. Sæmundsson ABMS Sept 8

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

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

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

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

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

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

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)

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.

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

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