FRANK PISCH

Question 1

WHAT IS A “FIRM” OR “COMPANY”?

Answer 1

Legal Dimension:
* Legal Person
* Includes private liability depending on legal form
* Often includes capital and reporting requirements

Economic Dimension:
* Legally circumscribed set of production factors
(capital, labor, knowledge etc.)
* A set of contracts!
* Often black-box technology in economics, but we
take a very different view here
* Potentially part of a business group or
“corporation“

Question 2

Corporate strategy - definitions

Answer 2

Corporate strategy is the pattern of decisions in a company that determines and reveals its objectives,
purposes, or goals, produces the principal policies and plans for achieving those goals, and defines the
range of business the company is to pursue, the kind of economic and human organization it is or
intends to be, and the nature of the economic and noneconomic contribution it intends to make to its
shareholders, employees, customers, and communities.

Question 3

Competitive Strategy

Answer 3

Industrial Organisation view, driven by
product market (Porter 1980)

Question 4

Visions and Mission Statements

Answer 4

• Sometimes serve similar purposes
• Usually a motivating dream; often lack the precision of
  a strategy; empirically devoid of content

Question 5

Capability-Based Strategy

Answer 5

Aka Resource-Based-View (RBV) of the
Firm (e.g. Rumelt 1984, Wernerfelt 1984,
Barney 1991)
* Input side view of strategy

Question 6

Strategic or Business Plan

Answer 6

• Once again similar, but often very focused on
  financials and milestones/horizons

Question 7

ELEMENTS OF A STRATEGY

Answer 7

1. Goal
2. Scope
3. Sustainable Competitive Advantage
4. Logic/Coherence

Question 8

Definition of strategy?

Answer 8

For us, strategy is a sort of manual
* If in doubt about a decision, consult the list of goals,
scope, and competitive advantage
* Aligns and coordinates (Function 1)
* Motivates and provides incentives (Function 2)
Always in the face of an ambiguous and uncertain
environment plagued by conflicts of interest

Question 9

THE TWO ROLES OF STRATEGY?

Answer 9

Coordination of managerial decisions across the organisation:

• E.g. when multiple coherent approaches to a problem are possible (multiple equilibria)
• E.g. with incomplete information

Motivation and commitment in the absence of contracts, e.g. in the context of…

… innovation or effort provision in general
* Certainty about future implementation or reward increases expected returns
* Even if uncertainty is high (the manager sets the common belief)
… strategy swings (fear motivates)
… strategy-specific investments by workers

Question 10

DYNAMIC STRATEGY?

Answer 10

How do they form?
* Top-down (start-ups)
* Bottom-up (multi-business corporations)
* Both (companies with professional middle
managers)

How do they adapt?
* Not too often since costly; it’s a “compass“
* Switches are regime changes, often triggered by
environment
* Shake-ups

Question 11

Four elements of organisation?

Answer 11

1. People
2. Organisational architecture
3. Routines, processes and procedures
4. Culture

Question 12

Trade-offs in design?

Answer 12

Initiative vs Cooperation
Exploration vs Exploitation
Many others…

Question 13

INTERACTION OF STRATEGY AND ORGANISATION?

Answer 13

Polar Views on Design Process:
* Alfred Chandler (1962): “Structure follows
Strategy”
* Inertia (“Our organisation is our strategy”, John
Browne, former CEO of BP)
* Resources are costly to adjust and limit
strategy in the short- and medium-run

The Problem of “Fit”:
* “Rugged Landscapes”
* Complementarity often helps (Milgrom, Roberts)

Question 14

TERMINOLOGY?

Answer 14

Layer:
* Group of similar workers, e.g. in terms of salary,
hierarchical distance from CEO, task complexity

Reporting:
* Who is whose boss?

Span of Control:
* Number of people a manager is responsible for/report to
the manager

Division, business unit:
* Sub-organizations that carry certain decision-making
power, have their own structures and joint accountability

Question 15

BOUNDED RATIONALITY AND THE DIVISION OF
LABOUR

Answer 15

Sophisticated organisational forms are due to bounded rationality of managers in a complex business
environment
* Division of labour between workers with different skills
* Coordination, monitoring and information sharing essential
* With perfect information and plenty of time, a firm could be managed by a single person
* Managerial capability is a resource of a company

Question 16

A TALE OF TWO RATIONALES

Answer 16

At least two important strands of explanations:
Incentive Theories, e.g.:
* Monitoring problems
* Coordination vs vertical control

Knowledge and Information Theories, e.g:
* Knowledge-based hierarchies (Garicano 2000)
* Team Production (e.g. Geanakoplos/Milgrom 1991)
* Information processing (e.g. Mount/Reiter 1990)

Question 17

A SIMPLE MODEL OF HIERARCHIES:
THE WILLIAMSON 1967 MODEL

Answer 17

Key idea:
* Managers are limited in how many workers they can supervise
→ firm growth requires supervision layers
* Vertical control/degree of compliance diminishes further down the hierarchy

Question 18

PROFIT MAXIMISATION? The firm’s profit maximisation problem is to pick 𝑛 to maximise