Managerial Economics: Lecture 1 Carlos A. Ulibarri Department of Management New Mexico Tech

Course Overview Syllabus Text: Paul Milgrom and John Roberts, Economics, Organization & Management. Prentice-Hall, Inc. ISBN Exams/grading/scheduling

Economic organizations GM – multi-division firm Toyota – JIT mfg processes Solomon – pay for performance

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

Case of GM Reorganization => required closer coordination of mfg plants, distribution dealerships, component suppliers, marketing and research

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

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

Centralizing authority? …for planning LR strategy …managing legal matters …coordinating R&D …managing financial functions

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

Toyota’s organizational choices Flexible production lines facilitate design changes LR contractual agreements with component suppliers provides incentive to invest in specialized skills and equipment

Solomon: pay-4-performance Getting the organization’s incentives right Base salary + bonus Bonus: stock ownership in firm placed in trust for 5-year period

The effects? Matching-up the employees self interest with stockholder’s objectives “one for all – all for one” Raises value of stock Raises market value of firm

Insights from cases? Organizational structure matters Incentives motivate decision-making Finding balance between coordination and control and functional autonomy

Question pg. 18 in M&R 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?

Organization design & mgt Meaning of organization? How do organizations emerge? How are organizations structured? How well do organizations perform?

An organization’s design Determines how resources are allocated, how information is generated and diffused Determines decision-making authority in meeting goals

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

What agents? Human resources Capitalists Suppliers Consumers

An organization’s autonomy “The organization’s 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

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.

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