1. Lecture 4 – ECON.S-1620 Prof. Charles Moran 1 Motivation: Contracts & Information Lecture 4 (continued) Copyright 2015

2. Lecture 4 – ECON.S-1620 Prof. Charles Moran 2 Attention to Introducing Great by Choice into our Discussions Copyright 2015

3. Lecture 4 – ECON.S-1620 Prof. Charles Moran 3 Drucker – Management and the Worlds Work (1988) – Group 1 “Fundamental task of management remains…:…make people capable of joint performance by giving them common goals, common values, the right structure [later clarified no “one” is right]… ongoing training and development they need to perform and respond to change” Copyright 2015

4. Lecture 4 – ECON.S-1620 Prof. Charles Moran 4 Drucker – Management and the Worlds Work (1988) (continued) Is this a sustainable perspective? Can a command model be effective for knowledge work? Where communication is effective? Where information has transparency? What does “working smarter – not harder” mean? What is biological model for organizations? –Independent –Knowledge intensive –Organized by flow of information –Adapting Copyright 2015

5. Lecture 4 – ECON.S-1620 Prof. Charles Moran 5 Drucker’s Pension Fund Socialism Employees become true owners of the country’s means of production – Is identity of interest of (enterprise and employee) required But assets (hard) have decreasing value (Murphy’s Law) – Power and independence of knowledge worker Issues – Will they become more independent –or- join in groups? Implication for organizations - employee model - independent contractor model Copyright 2015

6. Lecture 4 – ECON.S-1620 Prof. Charles Moran 6 Who Sets the Rules – The Standards? Manager Organization Education/Training Continuity Loyalty to Firm Production Self-Management Common Goals/Values Learning Opportunistic Individual Responsibility Customer Satisfaction Future: Copyright 2015

7. Lecture 4 – ECON.S-1620 Prof. Charles Moran 7 Role of Motivation Closing off routes for retreat before committing an army to battle Isolating the organization responsible for a new product Splitting a corporation into good/bad (i.e. a bank packaging non-performing loan portfolios) Repeated potential solution Reaction to deBeers selling unexamined lots of diamonds Savings – CostsLack of “Information” Can this concept be generalized? Copyright 2015

8. Lecture 4 – ECON.S-1620 Prof. Charles Moran 8 Role of Motivation (continued) Do bonus plans and stock options consistently produce efficient behavior (as determined by organizational objectives)? If Child A hits Child B and you punish A (physically or verbally) what does A learn about attracting attention? What alternatives are available to get intended message across! Apply this to: Terrorists Unmotivated employees Encouraging employees to take risk – innovate Can we apply this thinking to – Adverse selection – signaling – screening Self-selection (customers determining price, employees determine comp.) Copyright 2015

9. Lecture 4 – ECON.S-1620 Prof. Charles Moran 9 Risk Sharing and Incentive Contracts Huck Finn: “…What’s the use…learning to do right when it’s troublesome to do right and aint no trouble to do wrong and the wages is just the same.” Can we address moral hazards with incentive? Contracts? (uncertain future) Compensation? (quick, specific, trust) Copyright 2015

10. Lecture 4 – ECON.S-1620 Prof. Charles Moran 10 Risk Sharing and Incentive Contracts (continued Can we link action of individual to the result being incented in a complex organization? Incent input and reward output? Results influenced + or – by external (uncontrollable) factors that may over- reward or penalize the individual. Does incenting individuals result in inefficient organizations? Copyright 2015

11. Lecture 4 – ECON.S-1620 Prof. Charles Moran 11 Dot.Coms v. Not.Coms – Group 2 Midland Bank CEO – Wolfe: Lack of imagination? Entrepreneur (Customer Needs) Our-Lives.com(young prof. women) -Anderson Avocado Nat’l Bank (Service Provider-to our lives) Second Mover (well funded) concierge2235.com – aggressive Comment on: “With the internet you have to work from the future backward.” Copyright 2015

12. Lecture 4 – ECON.S-1620 Prof. Charles Moran 12 What is the model for a successful/sustainable business? Customer Oriented The Business Model Value Creation Driven? What are you delivering to the customer – differentiation (Revlon) – Charlie Revson Copyright 2015

13. Lecture 4 – ECON.S-1620 Prof. Charles Moran 13 Implications for Organizations and Management Behaviors? Consider (pg 25-Dot.Coms) “Companies are going to have learn to bring…vibrant market for ideas…talent…capital inside their organization” Consider “The Bottom Line” from GartnerGroup (pg. 25) - What about Coase? Copyright 2015