Lecture 1

Question 1

Control

Answer 1

1. Control refers to the process that helps ensure the proper behaviors of the people in the organisation. These behaviour should be linked to the company strategy.
2. Control is about influencing local decision makers (agents) decisions. (Coordination problems and Motivation problems)

Extra:
Control problems are handled through the organizational architecture.
Separating the decision making process in several steps takes advantage of both local and central knowledge.

Question 2

Organizational achitecture

Answer 2

3 focus points: Decision-right assignment, performance evaluation system and reward system.
All companies must construct 3 system, one for each bullet. A system that measures performance, a system that reward and punish performance and a system that assigns decision rights.

Extra:
provides the framework through which an organization aims to realize its core qualities as specified in its vision statement. It provides the infrastructure into which business processes are deployed and ensures that the organization’s core qualities are realized across the business processes deployed within the organization. In this way organizations aim to consistently realize their core qualities across the services they offer to their clients. This perspective on organizational architecture is elaborated below.

Question 3

Decision rights

Answer 3

Are restrictions on how economic assets of a firm can or cannot be used. (budget, job descriptions)

Extra:
Employee empowerment is a term that assigns more decisions rights to employees(decentralization)

Question 4

The principal tasks

Answer 4

1: Communicate to the agent the information, which guides local decision making, so the firms activities are coordinated (implementation of strategy).
2: Make sure that the agent do not deliberately act against the firms interest (motivation problem/incentive problem).
3: Commitment problem: Convince the agent that he/she will not cheat the agent!

Question 5

The issues of knowledge

Answer 5

Generel knowledge -> cheap
Specific knowledge -> expensive

Specific=perishable, complex, technical, etc.

Question 6

Usage(transfer) of knowledge

Answer 6

Coordination: Stategic know how(low price to enter a market)

Motivation: Transfer knowledge from agent to principal to set the right prices -> easier to sell product for agent.

Important: Transfor price top-down and bottom-up!

Helps better understanding of top-down strategy.

Extra:

Often linked to decision making: The right to make dthe decision and the knowledge to make it usually reside within the same person. An issue is to link these.

Question 7

Adverse selection

Answer 7

“Hidden information”: Prior to contracting, agents have better private information than principals (e.g. underestimate sales budget).

Question 8

Moral hazards

Answer 8

“Hidden action”: After contracting, agents have an incentive to deviate because the principal cannot readily observe deviations (hidden action or hidden information) (e.g. shirking, “move” sales order from one period to another in order to increase opportunities for bonus in the budget period to come, manipulate accounting figures, etc.).

Question 9

Self-interest behaviour

Answer 9

Individuals act in their self-interest and have preferences over a wide variety of things. This creates the agency problem when information asymmetry arise.

Question 10

The horizon problem

Answer 10

Managers expecting to leave the firm in near future and place less weight than the principal on those consequences that may occur after they leave.

Question 11

Influence costs

Answer 11

By not assigning the decision right to a specific individal, influence costs are lowered because there is no one to lobby.