1 Organizational architecture

2 The Enterprise  People create teams or a company because: –they can produce more as part of a team then they can individually –they can generate a greater set of possibilities  The enterprise is defined as a set of contracts between the resource owners, who voluntarily sign contracts with the team members, in order to achieve benefits for the firm and the individual persons  In an economic sense, the enterprise includes non-income generating units, departments inside the corporation, and other organizations

3 The enterprise as a set of contracts  The enterprise is a legal concern that can enter into contracts with many agents and enforce realizations of these contracts in court: –Employee contracts: employees, worker unions, freelance workers –Supplier contracts: inventory, materials, energy, water –Client/customer contracts: sales, warranties –Financial contracts: insurance, leasing, loans, stocks  Some contracts are entered into in a written form, others are oral contracts based on agents' reputation

4 The enterprise as a set of contracts ENTERPRISE Government Lenders StockholdersManagement Auditors Buyers Suppliers Employees

5 Shares and compensation of agents ContractorInputExpectations Stockholders Manager Employee Supplier Client/Customer Lender Government Auditor Own Capital Abilities Services, Goods Cash Public Goods Services Dividends Compensation, Perks, Awards Compensation, Awards, Bonuses Cash Services, Goods Interest, Repayment of the Loan Taxes Fees

6 Aims and functions of accounting  Measures the input of each agent into resources of the enterprise  Defines and divides compensation dedicated to agents based on signed contracts  Informs particular agents about the degree to which other agents completed their contractual responsibilities and received compensation  Helps in maintaining liquid market for contractual agreements and for the factors of production supplied by owners, so that a resignation or elimination of one agent would not endanger enterprise's existence  Because contracts with various agents are periodically reviewed, a specific knowledge is gathered which aids contractual renegotiations and formulation of contracts

7 Sky Air 1. Is Samuel Kaplan an owner or a manager in Sky Air Enterprise? How can the decision-making process change, when the company is sold? What decision must be reached by Kaplan in the near future? 2. If the company is sold, will Kaplan's aims change? 3. Whose valuation is proper: Kaplan's or the bank's? Why can the enterprise be worth less than Kaplan thinks? 4. What can Kaplan achieve by selling the company? 5. Let's assume that Kaplan (exclusive owner) considers a possibility of purchasing a new airplane used primarily for business, not for a commercial use. The cost of purchase is $3 million. The benefits for the enterprise will amount to $1.5 million and personal benefits up to $1 million. Should Kaplan purchase the airplane? 6. What will his decision be, if he sells 50% of his stock to the bank? 7. Can something be done to increase the value of the enterprise from the bank's point of view?