Economic Approaches to Organizations

Transcription

1 Economic Approaches to Organizations Sytse Douma Tilburg University, the Netherlands Hein Schreuder DSM NV and Maastricht University, the Netherlands Prentice Hall FINANCIAL TIMES An imprint of Pearson Education Harlow, England London New York Boston San Francisco Toronto Sydney Tokyo Singapore Hong Kong Seoul Taipei New Delhi Cape Town Madrid Mexico City Amsterdam Munich Paris Milan

2 Contents Preface Acknowledgements xiii xvi Part I Foundations 1 1 Markets and organizations The economic problem The division of labour Specialization Coordination Markets and organizations Information The environment and institutions Historical perspective Summary: the conceptual framework of this book Outline of the book 25 Questions 26 Suggested further reading 26 Notes 27 2 Markets Introduction Market interaction: analysis of demand and supply The theory of demand The theory of production The production function Profit maximization in competitive markets The paradox of profits Comments on standard microeconomic theory Summary: how economic decisions are coordinated by the market 42 Questions 44 Suggested further reading 44 Notes 44

3 VI Contents 3 Organizations The world of organizations Organizational coordination Types of organizations Organizational markets Organized markets Summary: how organizations achieve coordination Questions Suggested further reading Notes Information Coordination and information 63 Hidden information 67 Hidden action 73 The value of information 76 Summarv: information problems for markets and orqaniz; ations 79 Questions 80 Suggested further reading 81 Notes 81 5 Game theory Introduction The coordination game The entry game Auctions The prisoner's dilemma: single-stage and iterated The single-stage prisoner's dilemma The iterated prisoner's dilemma for many players Evolutionary game theory Summary: insights from game theory 110 Questions 112 Suggested further reading 113 Notes Part II Economic Approaches us 6 Behavioural theory of the firm Introduction The firm as a coalition of participants Organizational goals Bargaining and organizational slack Operational subgoals 122

4 Contents vii 6.4 Organizational expectations Organizational choice Summary: goals and decisionmaking within the firm in behavioural theory 127 Questions 129 Suggested further reading 130 Agency theory Introduction Separation of ownership and control Managerial behaviour and ownership structure in a world with certainty and symmetrical information Monitoring and bonding Entrepreneurial firms and team production The firm as a nexus of contracts Theory of principal and agent The principal can observe the agent's behaviour (symmetrical information) The principal cannot observe the agent's level of effort 7.7 (asymmetrical information) The principal can observe a signal concerning the agent's level of effort Extending the model Applying agency theory Summary: agency relations between owners, managers and employees Questions Suggested further reading Notes Transaction cost economics Introduction Behavioural assumptions: bounded rationality and opportunism Bounded rationality Opportunism Atmosphere The fundamental transformation Dimensions of transactions Asset specificity Uncertainty/complexity Frequency Competition between organizational forms Peer groups Advantages of peer groups 173

5 Vlll Contents Limitations of peer groups Simple hierarchies Team production Economies of communication and decisionmaking Monitoring Multistage hierarchies: U-form and M-form enterprises Organizational markets Markets for intermediate goods and services Internal labour markets Internal capital market Markets and organizations: are these all there is? Markets, bureaucracies and clans The role of trust Impersonal trust: institutions and reputation Governance in a three-level schema Summary: effect of transaction costs on choosing between markets and organizations and organizational forms 189 Questions 191 Suggested further reading 192 Notes Economic contributions to strategic management Introduction Industry analysis Competitor analysis Competitive strategy Resource-based view of the firm Dynamic capabilities Move and counter move The ice-cream-selling industry Number of ice-cream stands Commitment Lessons from the ice-cream example Spatial competition Product competition First mover advantages Moving lessons Vertical integration Technological interdependence Critical dimensions of transactions Diversification Related diversification Unrelated diversification Horizontal multinationalization

6 Contents ix 9.11 Summary: how economic analysis can contribute to the formulation of competitive and corporate strategies 232 Questions 234 Suggested further reading 235 Notes Evolutionary approaches to organizations Introduction Giraffes Organizations and giraffes Organizational ecology An evolutionary theory of economic change Comparison The evolution of dynamic capabilities Further developments Summary: the evolutionary perspective 270 Questions 272 Suggested further reading 273 Notes All in the family Introduction The basic conceptual framework Family resemblances Organizations and markets Efficiency Information Family differences Process versus content approaches Static versus dynamic approaches Levels of analysis Summary: all in the family? New developments: organizations as complex, adaptive systems 291 Questions 300 Suggested further reading 300 Notes 300 Part Ml Applications Mergers and acquisitions Introduction The significance of M&A 307

7 X Contents 12.3 Success and failure of M&A transactions Strategy, acquisitions and hidden information Auctions The winner's curse and hubris Adverse selection: remedies for hidden information Organizational solutions Market solutions Moral hazard: remedies for hidden action Transaction specificity and hold-up Alignment of managers and shareholders Summary: economic approaches to M&A 333 Questions 334 Suggested further reading 335 Notes Hybrid forms Introduction Long-term relations between buyers and suppliers Joint ventures Business groups Types of business groups Coordination within business groups Why do business groups exist? The development of business groups Informal networks Franchising ,. Why does franchising exist? Resource scarcity thesis Administrative efficiency thesis Comparing several hybrid forms Summary: hybrid forms as governance structures between ideal markets and ideal organizations 360 Questions 361 Suggested further reading 362 Notes Corporate governance Introduction The first public company The use of incentive contracts Cash bonuses Share plans Stock options Temporary contracts 372

8 Contents XI Factors outside a manager's control Incentives that are too strong Incentives that lead to wrong decisions Ubiquity and usefulness of incentives Internal monitoring Monitoring by shareholder(s) The role of the Board of directors Monitoring by non-executive Board members in a one-tier Board The two-tier Board system External monitoring Monitoring by audit firms Monitoring by stock analysts Monitoring by debt holders How markets constrain agency costs Competition in the product market Competition in the managerial labour market Competition in the stock market Competition in the market for corporate control Institutional frameworks: market-orientated and network-orientated systems of corporate governance Market-orientated systems of corporate governance Network-orientated systems of corporate governance A comparison of the two corporate governance systems The evolution of different corporate governance systems in the world Summary: how the agency problems of corporate governance can be reduced by organizational and/or market solutions 394 Questions 394 Suggested further reading 395 Notes 395 References 396 Index 410