Lecture 1 (SET) Flashcards
SET doesn’t explain what?
firms profits in the long run, diversity of strategy, firm’s structure
SET: why firms exist?
(Coarse) firms reduce transaction costs, which cannot be reached through market transactions
For long-term transactions, when going to the market would be too bothersome
Coarse Firm description
a firm can be seen as an exchange place (as markets) where resources are exchanged, coordination is not done by prices but using authority.
6 coordination mechanisms (organizational configurations) of Mitzberg
- Direct supervision
- Standardization of work processes
- Standardization of outputs
- Standardization of skills/knowledge
- Standardization of norms
- Mutual ajustment
Direct supervision (organizational mechanism)
-One person gives orders to others, one step at a time
-Owner directs production and allocation of resources
-Authority as direct supervision
-Inefficient as organization grows
[Entrepreneurial organization]
Standardization of work processes (organizational mechanism)
- “How to work” tutorials
- production routines (leads to standard inputs)
[Machine organization]
Standardization of outputs (organizational mechanism)
- Specifies results but not the way they should be achieved
- Output expectations for divisions but autonomy in how to reach these goals
[Diversified organization]
Standardization of skills (organizational mechanism)
-Work coordinated by standard related training
-Well trained individuals
[Professional organization]
Standardization of norms (organizational mechanism)
-Norms (ideology) and same beliefs shared across organizational members
-Standardization of norms. Strong values and culture
[Missionary organization]
Mutual adjustment (organizational mechanism)
-informal communication, flexible structure, incouraged creativity and innovation
-trust-based organiozations
[innovative organizations]
Downside of organizational specialization
Silo effect
Silo effect
Consequence of overly specialized company.
Internal competition and asynchronized information on progress and actions
Coordinator between agents
Price system
What solves information problems?
Organizations
Market
Place that gives buyers and sellers possibility to trade
Atomicity
Many small buyers and sellers
Economic problem
situation where needs are not met as a result of scarcity of resources
Optimal allocation
Best use of scarced resources
Economic aspect
any situation where (optimal) use of resources is considered
Division of labour
splitting a task into seperate tasks
Economies of specialization
cost efficient economy in which division of labour takes place
Exchange
Transfer of the right to use goods or services
Sufficient statistic
all information delivered for a transaction to be made
environment
context of trade offs between market and organizational coordination
SET stands for, and assumptions
Standard economic theory
ideal markets, economic transactions between agents are coordinated by prices
Agents
buyers and sellers
Why agents are price takers?
They use an externally fixed price (demand=supply)
Market price fairness
Market prices are by nature fair for all agents
Agents behaviour in the exchange contract
Agents always behave as agreed. (otherwise costly penalties)
Control of contracts
No cheating. no need for quality, delivery, conditions control
Ideal market on these conditions:
Atomicity, Free entry and exit of firms, perfect information, product homogeneity
Product homogeneity
standardized (alike) products
Homo economicus (Economic person)
Fully rational, complete information, self-interested, no space for cooperation, ethics not considered
Agents’ goal
Wealth maximization. Attain specific goals to greatest extent at lowest possible cost
Black boxes
Holistic entities without borders, single unified entity, no people inside the firm
Ideal firm
Black box, any size, SINGLE goal (profit maximization), no strategy (adapt or die)
Paradox of profits
firms cannot make any profit in the long run
Firms’ actions determined by?
Prices of inputs and outputs
Changing firms’ strategy
Results in death of firm. Adapt or die
Isomorphism
Similarity of the processes or structure of one organization to those of another.
Same input and output prices = same costs and profits for all. Same optimal behaviours and decisions = same structure
Where does no room for differentiation lead to?
Isomorphism
In what environment markets can operate?
- conditions for markets to exist
- markets shaped by pressures
- is the selection mechanism for determining which markets can survive
Impersonal exchange
Exchange between parties with no knowledge of each other and occurring over time and space
What is the starting point of society
Division of labour
Recite market/organization mix in order
Division of labour
⌄
Specialization
⌄
Coordination
⌄ ⌄
Market Organization
^ ^
Information
^
Environmental pressure and selection
What are the ideal types of coordination of exchange transactions?
Markets and organizations
Process of market interaction
Process of agents interacting and consequently creating demand/supply
Law of demand
If prices go up, demand goes down
Law of supply
If the prices go up, supply should rise as well
Supply curve
Relationship between price and quantity supplied
Market equilibrium
intersection point of demand curve (D) and supply curve (S)
What happens to demand curve if demand rises not because of price related reasons? (E.G. war, population growth)
The whole demand curve shifts upwards, paralel to the old demand curve (P.S. - new equilibrium)
Transitive
If agent chooses A over B, and B over C, they should choose A over C also
Indifference curves
Curve showing agent’s preference for different choices
What does it mean if there are 2 choices of consumption bundles on the same indifference curve?
Agent prefers both of them equally (derives the same utilty)
Utility
Satisfaction that consumers derive from having goods
Budget line
All possible bundle combinations one can buy with given budget
What is Production function and what does it describe?
Direct relation betwen quantity produced (Q), capital (K) and amount of labour (L).
Describes combination of inputs (K and L) and output that firm can produce with those inputs
Perfect competition
imaginary market condition where all consumers have access to the same products and information
Pareto-optimal
Situation where no
one can be made better off by changing the allocation of resources without anyone becoming worse
off (It does not mean that everyone’s wants are satisfied to the same extent)
coordination mechanism of enterpreneurial organization
Direct supervision
coordination mechanism of machine organization
standardization of work processes
coordination mechanism of professional organization
standardization of skills
coordination mechanism of diversified organization
standardization of outputs
coordination mechanism of innovative organization
mutual adjustment
coordination mechanism of missionary organization
standardization of norms
internal market of goods meaning
exchange of resources or goods within an organization from one
division to another
internal capital market meaning
corporate management where allocation of its funds are made to the divisions on the basis of those divisional plans that
fit best with corporate policy and generate the highest returns
internal labour market meaning
place where divisions compete for the best human resources and may also bid up their
potential salaries
Collusion
Conspiracies by the few suppliers in oligopolistic markets to set prices higher than
would result under free market interaction
Tacit collusion
Collusion without anything being said
e-commerce
online retail
Enterprise
resource planning (ERP) systems
software used for managing internal operations (marketing, sales, product planning, inventory management)
Platform organization
organization that predominantly uses a digital platform as coordinating
mechanism
Platform organization characteristics
Digital platforms can be easily explained
Network effects accelerate the growth of platform organizations
New and successful digital platforms give their platform organizations a first mover
advantage
Successful platform organizations achieve high market valuations
Why successful platform organizations achieve high market valuations
Because of their
exponential growth, but also because they can operate with relatively low costs
