1. Chapter 1: Introduction
Brickley, Smith, and Zimmerman, Managerial Economics and
Organizational Architecture, 4th ed.
Chapter 1: Introduction

2. Subject Overview Competitive strategy Internal structure
products and markets
product characteristics
production choices
product pricing
competitor behavior
Internal structure
decision rights (empowerment)
compensation practices
performance evaluation

3. Introduction learning objectives
Students should be able to
Describe generally how economics can aid in management decision making
Describe “economic Darwinism”

4. The Economic Perspective
How are resources allocated among competing uses?
in society
in the firm
How do individuals make decisions?
the role of incentives
incentive conflicts and opportunistic behavior

5. Economic Darwinism Only the fittest survive
competition encourages efficient decisions
maximizing shareholder value
Firms “benchmark” successful practices
successful management practices spawn imitators
but organization’s architecture must be compatible with innovation

6. Organizational Architecture
Systematic approach to identifying and correcting organizational problems
Three critical aspects of organization: the architecture
Assignment of decision rights
Methods of rewarding individuals
Performance evaluation of individuals and business units

7. Managerial implications
Existing architectures are not random
Surviving architectures are optimal relative to competitors
Environmental change may dictate architecture change

8. Fundamental concepts People act in their own self interest
which is not the same as being greedy!
Information is asymmetric
we don’t all share the same information
assignment of decision rights must be compatible with access to information
reward and evaluation systems must in turn be compatible with decision rights

9. Mechanisms for Allocating
Scarce Resources
Markets
“Sells” labor
“Buys” labor
Sells product
Buys product
Household division of labor
Hierarchical decision making

10. Making choices Individual Social Strategic
Buying DVDs
Social
Electing a president
Committee decisions
Strategic
Anticipating a response
What role does uncertainty play?

11. The nature of a free market economy
Property rights
Freely functioning markets
Supply function and curve
Demand function and curve
Equilibrium price and volume

12. Role and functions of prices
Coordination
Incentives
Rationing
Signaling

13. Organizational Decision Making
Costs
Benefits
If the benefits of an action outweigh the costs, do it
Create and sell a new product (marketing, operations)
Hire (or fire) an employee (human resources)
Build a new plant (senior management team--capital budgeting)
Select a new vendor (operations, purchasing)
Issue bonds (finance)