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Organization Studies Chapter 1.3 - Texas Tech University

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Organization StudiesChapter 1.3
Organizational Economics
Focuses on economic reasons for the existence of firmsSome parts of OE focus on equilibrium-based models of economics (not all)
What Distinguishes OE from Other Research Streams in Org Studies?
Most economists focus on markets, OE focuses on firmsOrganizational economists tend to focus on the relationship between competition and firms
What Distinguishes OE from Other Streams in Economics Research?
Transaction Cost Economics (Williamson 1975)Agency Theory (Jensen &Meckling1976)Strategic Management TheoryCo-Operative Organizational Economics
Four Main Areas in OE
Coase(1937) questioned the lack of treatment in economics to the theory of the firm.Firms exist because some exchanges are better managed (cost less) inside organizations as opposed to across marketsCoaseplaced transaction costs at the center of analysis of firms – which led to TCE
Why Do Organizations Exist?
TeamsoutproduceindividualsIndividuals on teams have incentives to shirkTeams will assign a monitor who gathers the profits from teamwork and pays members accordinglyThe “monitor” is the shareholder, which suggests why firms form
Teamwork –Alchian&Demsetz
Williamson 1975Conditions of Uncertainty around SpecificityBounded rationalityOpportunism
Transaction Cost Economics
Vertical Integration: Make or BuyMultidivisional formOuchi’s(1979) Markets, Bureaucracies, and ClansMultinational EnterpriseHybrids
Applications of TCE
Focuses on cost minimizationUnderstates the cost of organizingNeglects the role of social relationships in economic transactionsEmphasis on opportunism can be harmful
Criticisms of TCE
Do those associated with the firm agree about how it should be managed?Major themes (Eisenhardt1989):Goal misalignmentInformation asymmetryDifferences in risk tolerance
Agency Theory
MonitoringBonding & Incentives
Responses to theAgencyProblem
Treats people as primarily financially motivatedIgnores other behavioral sciencesLack of realism in approach to governanceNot necessarilygeneralizableSome scholars argue it is self fulfilling
Criticisms of Agency Theory
Why do some organizations outperform others?Structure-Conduct-Performance (SCP)Resource Based View (RBV)
Strategic Management Theory
Originated as a search for industries that lacked competitionOverly profitable industries failed to maximize social welfareInnovation was stifledOnce identified, regulation was used to “remedy” the problem and increase competition
Structure – Conduct – Performance
Performance-enhancing industry attributes:Industry concentrationLevel of product differentiationBarriers to entry
SCP – Industry Structure
Termed “monopolistic competition” by Chamberlain (1933)Differentiating products allows firms to charge abnormal profits above the cost
Product Differentiation
Fewer firms in an industry can lead to collusive strategiesLarge economies of scale required to achieve certain profits can lead to performance differences
Industry Concentration
Economies of scaleProduct differentiationCost advantages independent of scaleContriveddeterranceGovernment imposed restrictions
Barriers to Entry
Strategy research now uses SCP concepts to suggest ways firms can reduce competitionPorter’s Five ForcesModel of generic industry structure and environmental opportunitiesStrategic groups
Strategic Management & SCP
Porter’s Five Forces
Threat of rivalry
Threat ofnew entry
Threat of buyers
Threat of suppliers
Threat of substitutes
Industry Structure and Opportunities
Firm performance being determined by industry fails to explain heterogeneity within industriesBy focusing on “attractive” industries, opportunities in other industries are overlookedThe inversion of the research stream has, in all likelihood, counteracted its original intent of improving social welfare
Criticisms of SCP
Built on the work of:Penrose (1959)Schumpeter (1934)Michael RicardoFirst introduced by:Rumelt(1984)Wernerfelt(1984)Barney (1986)Teece(1982)PrahaladandBettis(1986)
Resource Based View
Unit of analysis: resources and capabilities of firmsFinancials resourcesPhysical resourcesHuman resourcesOrganizational resourcesTwo assumptionsResources and capabilities can vary significantly across firmsResources can be immobile (differences may be stable)
Resource Base View
The be sources of superior performance resources must be:ValuableRare among current or potential competitorsCostly to imitateWithout close strategic substitutesTypes of imitationRole of historyRole of causal ambiguityRole of socially complex resources and capabilities
Sustainable Competitive Advantage
Various studies suggest that firm resources may explain more about its performance than the industry within which it operatesFirms may consider “unattractive” industries ideal for their blend of resourcesInstead of reducing social welfare by infringing on competition, RBV focuses on firms doing the best at something
Implications of RBV
Tacit CollusionStrategic Alliances
Cooperative Organizational Economics
Collusion is said to occur when the output of an industry is less than it would be in a competitive environmentReduced production leads to increased prices, which then lead to improved performanceThe collusion can also invite cheating on the agreement by one or more partiesGame theory suggests that incentives to cheat generally outweigh benefits of collusion
Collusion
Because explicit collusion is often illegal, tacit collusion is more often engaged in by firmsTacit collusion requires managers to interpret signals by competitors because no negotiating takes place
Tacit Collusion
Tacit collusion is easier whenthere areFewfirms in an industrySimilarcost structures & productofferingsHigh barriers to entryMonitoring competitor behaviors is uncomplicated
Industry Conditions for Collusion
Contractual allianceJoint venture
Strategic Alliances
Exploit economies of scaleLow-cost entry into new marketsLow-cost entry into new industry segments and new industriesLearning from competitionManaging strategic uncertaintyManaging costs and sharing risksFacilitate tacit collusion
Incentives to Form an Alliance
Adverse selectionMoral hazardHold up
Incentives to Cheat in Alliances
GovernanceTrust
Methods to Reduce Cheating
Why do organizations exist?Why do some organizations survive and others don’t?How and why do organizations differ?How and why do organizations change?What are the emerging issues?
Big Questions in OE

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Organization Studies Chapter 1.3 - Texas Tech University