TJTS E50 Yritysverkostot ja niiden informaatiojarjestelmat 2006

Transcription

1 TJTS E50 Yritysverkostot ja niiden informaatiojarjestelmat 2006 L3: When firms, when markets? Jukka Heikkilä Marikka Heikkilä

2 Division of labour Adam Smith (1776) pin factory is a famous example showing how division of labour increases output volume. AN INQUIRY INTO THE NATURE AND CAUSES OF THE WEALTH OF NATIONS;BY ADAM SMITH, available e.g. from 2

3 Coordination Every organized human activity gives rise to two fundamental and opposing requirements: 1. the division of labor into various tasks to be performed and 2. the coordination of these tasks to accomplish the activity (Mintzberg, 1983) 3

4 Three types of dependencies (Thompson, 1967) Pooled dependency Minimal direct contact among participants Requires the least amount of coordination Sequential dependency More direct contact among participants as working in a chain Requires coordination Reciprocal dependency Much direct contact among participants through interaction Requires coordination Complexity grows in each type of dependency 4

5 Pooled dependency (c.f. Kumar & Van Dissel, 1996) Participants share and use common resources E.g. common transportation, mainframe Socio-technical risks: Misuse of common pool (core-competencies, knowledge robbery) Only some participants add information to common pool, others as takers Infiltration of pool with incorrect information (intentionally or unintentionally) 5

6 Sequential dependency (c.f. Kumar & Van Dissel, 1996) Participants work in series Output of one firm as input of another firm Socio-technical risks: Breaking the chain Participants failure affects at least the adjacent, possibly all subsequent downstream units 6

7 Reciprocal dependency (c.f. Kumar & Van Dissel, 1996) Participants feed tasks and activities back and forth among themselves Participants receive input from and provide output to others, often interactively Socio-technical risks: Failure of one participant can have ill-effect both upstream and downstream 7

8 Coordination: Organisation as an information processing entity (Galbraith J., 1977) Uncertainty is the difference between information required and information at hand (for a task) Management is to provide coordination mechanisms to handle uncertainty Basic mechanisms: Rules, guidelines, procedures, goals, etc. Growing complexity and exceptions overwhelm basic mechanisms: information must be prepared for decision making Firms are information processing units. With the help of IT, hierarchies will be able to process information timely and precisely (reducing uncertainty) 8

9 Hierarchy of authority Rules and Procedures Planning and goal setting Galbraith points out the organization must adopt at least one of the strategies when faced with greater uncertainty. If it does not consciously choose one of the five, then the first, reduced performance will happen automatically Creation of slack resources Creation of self-contained tasks Environmental management Investment in information systems Creation of lateral relations Reduce the need for Information processing Increase capacity to Process information (Galbraith J., 1977) 9

10 Invisible hand Adam Smith (1776) Free market, while appearing chaotic and unrestrained, is actually guided to produce the right amount and variety of goods by a so-called "invisible hand". 10

11 Organisations versus Markets? Why are there firms? Transaction costs Nobel Laureate Ronald Coase: The Nature of the Firm Economica, New Series, Vol. 4, No. 16 (Nov., 1937), pp

12 Why Firms, Not Markets Only? The main differences between market and internal organization: (Williamson, p. 90) Markets promote high-powered incentives and restrain bureaucratic distortions more effectively than internal organization Markets can aggregate demands to advantage, thereby to realize economies of scale and scope Internal organization has access to distinctive governance instruments Firms exist, because in some situations they can economise on transaction costs better than markets! 12

13 Transaction Costs (Williamson, 1985; original idea in Nature of the Firm, Coase, 1937) Transaction costs are costs of running the economic system (Arrow, 1969) such costs are distinguished from production costs Transaction costs are equivalent of friction in physical systems (Williamson, p.19) Ex ante contracting Ex post contract enforcement 13

14 Market vs. Hierarchical Coordination I/II Hierarchical coordination Internal Agency Information Monitoring costs Bonding costs Residual loss Information processing costs - communication - documentation Opportunity costs due to poor information (Gurbaxani & Whang, 1991) 14

15 Internal Coordination costs (Gurbaxani & Whang, 1991) 15

16 Market vs. Hierarchical Coordination II/II Market coordination External Coordination Costs, i.e., Transaction Costs Operational Contractual Search costs Transportation costs Inventory holding costs Communications costs Costs of writing contracts Costs of enforcing contracts (Gurbaxani & Whang, 1991) 16

17 External coordination costs (i.e. market transaction costs) 17

18 Behavioral Assumptions & attributes of contracting process (Williamson, 1985) Bounded rationality Opportunism Asset specifity Implied contracting process Planning Promise Competition Governance 18

19 Transaction Cost Economics (Williamson, 1985) Concentrates on contractual aspects of business transactions Uncertainty Asset Specificity ( investment characteristics ) 1. Site specificity 2. Physical asset specificity 3. Human asset specificity 4. Dedicated assets (a discrete investment in generalized production capacity that would not otherwise be made) Frequency & Duration 19

20 Markets vs. Hierarchies G = ß(k)-M(k), i.e. cost difference between Bureaucracy and Market governance of the transaction depending on the asset specificity = k Assume ß(0) > M(0), ß(0) - M(0) = ß 0 >0 M > ß i.e. decreasing curve Market more preferred when k is low, because of incentive and bureaucratic disabilities of internal organization Internal org more preferred when k is high, because market has no effective governance mechanism to allow adaptive, sequential adjustments to disturbances ß 0 G Buy k G Make (Williamson, 1985) k 20

21 Markets vs. Hierarchies C is production costs difference between producing to one s own requirements and buying the same item in the market Assume C is positive throughout but will be a decreasing function of k The production cost penalty of using internal organization is high for standardized items, hence C is large when k is low As good and services become close to unique, aggregation economies can no longer be realized in the market C G C k k G (Williamson, 1985) 21

22 Markets vs. Hierarchies Aim is to optimize sum of governance and production costs C + G Market has advantages in both C and G where k << k* Internal org has advantages where k >> k* Markets realize little aggregate economy benefits When k is high, markets hazardous Only small differences for intermediate degrees of k Mixed governance are apt rise C + G G Buy k * Mixed governance k C Make (Williamson, 1985) 22

23 Efficient Governance Structures F r e q u e n c y Occasional Recurrent Investment Characteristics Non-specific Mixed Idiosyncratic (e.g. std.equipment) (e.g. custom equipment) (e.g. construction) Market governance (classical contracting) (e.g. raw material) Trilateral governance (neoclassical contracting) Bilateral governance (relational (e.g. custom material) Unified governance contracting) (e.g. site specific transfer of intermediate product across successive stages) (Williamson, 1985) 23