Understanding the Evolution and Organization of Firms in a Global Market - Prof. 1091, Apuntes de Economía gerencial

¡Descarga Understanding the Evolution and Organization of Firms in a Global Market - Prof. 1091 y más Apuntes en PDF de Economía gerencial solo en Docsity! 1 TOPIC 1. The Corporate Governance 1.1. Types of firms: Design and ownership structure 1.1.1. The configuration of the firm 1.1.2. Types of firms and legal forms 1.2. Shareholders and managers. The agency relationship 1.3. Corporate control Basic references: Brickley,1; Milgrom and Roberts, 16; Serra (2001), 4 (Spanish) Mäntysaari, Petri (2012), Organising the Firm. Springer; [Ch. 2: Theories of the firm http://www.springer.com/gp/book/9783642221965 (sample pages PDF; see also Moodle). 2 Some general considerations ◘ the market environment is similar in countries around the world: adverts, logotypes or home favourite brands are now available for sale in distant places ◘ the world is flatter ◘ main features of the change ◘ greater competition (more difficult to distinguish the products of those of the competition) ◘ greater complexity ◘ Information and Communication Technologies (ICTs) revolution 5 A good combination between strategies, organizational structure, production processes, and human capital TOGETHER with core values, organizational culture flexible to changes, and the capacity to foreseen the changes in the business environment and to adapt to them Are all factors explaining why some firms are successful while others are not. 6
Ross Ahlgren (Kreos Capital): “Catalan firms have to think globally”  http://www.anella.cat/web/portal/experiencies/- /custom_publisher/yB90/26959297/Les+empreses+catalanes+han+d e+pensar+globalment  Some useful links and digital databases
SABI (digital library - UdG)
Government of Catalonia – Acció - Coneixement & Networking Empresarial / Knowledge and business networking http://www.catalonia.com/en/
FACTIVA (digital library- UdG)
The Economist (digital journal)
Harvard Business Review (digital journal)
FORTUNE 100 Magazine / MERCO (Spain); websites 7 Business Economics entails the application of principles and methodologies from economic theory to the analysis of the nature of the firm and its behaviour in order to establish a reference framework for the effective and efficient management of the firm.
Effective: achieving proposed objectives
Efficient: optimum use of resources (lower opportunity cost) 10 Number of firms? Monopoly Perfect Competition Monopolistic Competition Types of Products Oligopoly 1 Firm Few Firms Many Firms Similar or identical products: crude oil, tennis balls Water, cable TV Similar but not identical products: novels, movies wheat, milk 11
The firm is one of the 2 coordination mechanisms for economic activity:  The market (“the invisible hand” of A. Smith)  The firm (“the visible hand” of A. Chandler) The market
The theory of market developed by the Classical School. It was conceived by Adam Smith in his work “The Wealth of Nations” (1776) 12
This school creates the theory of utilitarianism: individuals, driven by selfish instincts and seeking their own profit, make it possible for what constitutes the interests of the community to be obtained.
A. Smith speaks of “the invisible hand” that reconciles all interests and allows the coordination of all individuals.
The reason for the Division of Labour is also addressed: a task is divided into smaller tasks, leading to Specialization which entails increased production. 15
These costs may be avoided if coordination is conducted through the firm. The equivalent of these transaction costs within the firm are internalization costs: information on production processes, rival products, staff incentives, etc.)  Market: Price + Transaction Costs  Firm: Production Costs + Internalization costs
In an efficient economy the coordination method that entails least cost would be imposed.
In the Seventies, TC theory was studied further and this was when the discipline of industrial organization was created within economic studies 16 Neoclassical model Real situation Markets Perfect Imperfect Rationality Unlimited Limited Information Perfect Imperfect Who controls the firm? The owner (businessperson) Very often the managers What interests are pursued? Those of the owner Those of the managers controlling the firm (may be several people and non-owners) Decision-making Simple process Complex process Internal organization Irrelevant Relevant, of increasing complexity importance Prices Transparent Imperfect information Behaviour of the firm Like a single individual There may be a divergence of interests Environment Static, unalterable for the firm Dynamic, alterable. optional 17 1.1. Types of companies: Configuration of the company and ownership structure The (capitalist ) Firm: Generally accepted definition: A conscious and deliberate effort to organize an economic activity that consists of a series of contracts involving more than one party
Conscious: there exists an “unconscious” way of doing the same, which is through the market. Doing something within the firm or buying it on the market
Deliberate: organization expressly constituted to achieve an objective (obtain profits, receive a salary,….etc.) 20 Balanced Scorecard Perspective Key question Financial To succeed financially, how should we appear to our stakeholders? Customer To achieve our vision, how should we appear to our customers? Internal business processes To satisfy our customers and shareholders, at what business processes must we excel? Learning & growth To achieve our vision, how will we sustain our ability to change and improve? Society To achieve our vision how should we appear to our community? Optional Q: What should be the goal(s) of an organization? A: Organizational effectiveness, that is, the output(s) are the result of an outstanding high performance Source: Kaplan, Robert S.; Norton, David P. (1992). The Balanced Scorecard- Measures that drive Performance, Harvard Business Review, 70(1):71-9. 21 Old Performance Measures New Effectiveness Measures Efficiency / Productivity Costs Capacity Product Quality Financial /accounting ratios: Return on Assets (ROA) Return on Capital Employee (ROCE) Return on Sales (ROS) Return on Investment (ROI) Return on Equity (ROE) ‘Performance’ measures plus others Customer Responsiveness Delivery Time Speed to Market Customer Satisfaction / Complaints Innovation/Creativity/Ideas Product and Service Quality Learning Employees’ Quality of Work Societal Responsibility (Balance scorecard) Optional 22 Superior organizational effectiveness implies:
Superior Financial Results
Excellent Customer Satisfaction
High Employee Involvement
Superior Innovation (conducting to performance improvement)
Social responsibility 25 2) Implement the changes  In the case of a salesperson, e.g. if the firm reimburses all expenses he or she may continue to use the car as before, and the telephone or email less, but if expenses are not reimbursed for contacting new clients, there will certainly be incentives for using the cheapest means.  According to the theory of evolution, those who adapt best to their environment survive: Economic Darwinism 26 1.1.1. The configuration of the company  Organizational form: who designs the contracts, who makes the decisions, how are the results distributed (wages, surplus), who bears the risk  Property rights (employer = owner) imply:
Receive the residual rent
Control and reassign the remaining inputs (coordinate, monitor)
Be the pivot (the common central part) of all input factors contracts (raw materials, labor, equipment). DECIDE 27
How are contracts being established between all the parties involved?  Example: Suppose we want to produce Q units, and i different input factors are needed, factors which are produced by individuals internalized in an unit of production (firm). Microeconomic Vision (no firm): Example: 5 individuals (m=5) How many contracts? 10 • m (m-1)/2 (combinations of m taken as pairs of two) • Many contracts, high costs For (m=10), 10 individuals => 10x9/2 => 45 contracts 30 1.1.2. Types of firms and legal forms
Hansmann (1980:269 ): the owners are “those persons who share two formal rights: the right to control the firm and the right to appropriate the firm’s residual earnings”.
According to Hansmann (1980), there are 4 possible solutions (4 legal scenarios) for the administration of the rights of who will act as central “pivot”: four types of organizations. Source: Hansmann, H. (1980). Ownership of the firm. Journal of Law, Economics and Organization, 4(2), 267-304. 31
1) Those who provide the raw materials (M); (producer cooperative, e.g., cheese cooperative).
Only those who provide raw materials are entitled to participate in the decision making process and vote.  Votes are distributed evenly or according to the amount of M provided.  Only those who provide raw materials can act as monitors.
2) Those who contribute labor (L); worker-owned cooperatives  The owners (who receive residual rent and control) are part (or all) of those who contribute labor.  They usually rent the necessary equipment (machinery).  Profit is distributed according to the agreements established among the participants. 32
3) The investor-owned cooperative  The providers of capital (K, equipment, machinery) are the ones receiving the residual rent  They play the role of monitor/pivot: establish contracts to obtain raw materials, labor, equipment, coordinate and supervise the participants in the cooperative.  Difference with the previous forms: they do not receive compensations in advance (neither on prices nor wages) and often these type of organizations are not called cooperatives.
4) The Consumer Cooperative:  Residual rent and control are reverted to the clients (part of the total users)  They pay a fixed price for the purchases and the profit is distributed among the partners (uniformly or proportional to the consumption realized). Organizational structure: Consell l de consumidors Socis consumidors 35 36
All the forms above are called pure forms: all the receivers of the residual rent belong to the same category of stakeholders  Facilitates agreements  Reduces the risk of conflicts
Who has the ownership rights/decision rights, bears the risk (receives the residual rent) Q:
Which is the best way to fallow in order to simultaneously achieve two objectives: the efficient management of the firm and the maximization of its stakeholders’ satisfaction? A:
The most efficient outcome would be the one that minimizes Transaction Costs (the costs of market contracting or of acquiring the necessary input factors) and the Management Costs (the ownership costs): [where management costs include:  costs of the collective decision  cost of control/monitoring  costs of risk-bearing (of setting up the organization)] 37
Hansmann: of the four organizational solutions presented, finally will end up imposing the one that better suits the environment:  the one that generates lower transaction costs (the acquisition of input factors through the market by the pivot) and lower coordination and monitoring costs (obtaining information on business operations, negotiating to make decisions, enforcement of decisions’ execution).
In Western countries the most common organizational solution is the capitalist organization (capitalist firm) 40 COOPERATIVES Advantages:  Workers get the residual income: ∆ motivation/effort  The highest motivation can be the engine of the social change (Mill) BUT there are problems with undertaking the risk of the firm  It is not necessary to devote so many resources to monitor the activities of the members (Marshall). Disadvantages:  Opportunism does not disappear (Prisoner's Dilemma in the choice of the level of effort)  Financing is more risky because they do not have much capital assets  Risk aversion among workers (inability to diversify risk through their work)  Fear of workers to invest in specific assets, that would be lost if the company goes bankruptcy (Alchian)  Collective decision making process could be complex due to the heterogeneity of the objectives of the workers  Problems with the authority of the elected supervisor (who is not always the most appropriate, but it is the most "popular") (Robertson). 41 Why then there aren’t more cooperatives?
The defenders of the cooperatives argue that the cooperative did not flourish due to externally imposed constraints:  Cultural and educational environment that favors hierarchical (organizational) forms and limits people's initiative (Doucouliagos)  Financial institutions prefer the control to be in hands of managers in order to influence in their decisions (Gintis).  Politicians want to avoid the creation of cooperatives, because they could act as schools that build management skills (Putterman) HOWEVER  In times of crisis cooperatives appear as participatory solutions to prevent the loss of jobs (Bradley and Gelb).  http://www.yesmagazine.org/issues/the-new-economy/mondragon-worker- cooperatives-decide-how-to-ride-out-a-downturn  http://sociedad.elpais.com/sociedad/2013/05/24/actualidad/1369416937_376190.html 42 2 problems with the cooperatives: a) Efficiency b) Degeneration in the cooperative Efficiency  Proven facts: the capitalist firm is the norm and the cooperative is the exception.  It seems, then, that the capitalist way must be more efficient than the cooperative. Why is the cooperative less efficient? 1) Cooperative: monitor/director has fewer incentives Lack of adequate education, environment that fosters individualism, competitiveness. 2) Difficult to find monitors => directors
If the majority of firms are capitalist, few directors are trained, and they can therefore earn a lot
If the majority of firms are cooperatives, many directors are trained, and they therefore earn less
More capable directors will therefore certainly choose capitalist firms. Source: Isabel Vidal (2009), “Mapa territorial de las entidades no lucrativas y de las cooperativas en España”, CIES, p.8. Distribution by autonomous communities J LA ECONOMÍA SOCIAL Trabajadores Variación total » Evolución del empleo mn 01 007-2012 Variación anual, en % Empresa privada Mi Cooperativas 10.766.800 274.469 20,7% 2008 1 " m MN 2,7 2009 2010 2011 2012 2013 1 T mu " mM Iv 1 " m v 1 " m1 Iv 1 0,7 =p. no. € 0,5 0,5 -1,2 $8 -1,8 -1,9 2.6 2,8 2,9 4,0 4,9 -5,0 48 6,0 —3,8 8.436 3.695 trabajadores de » Evolución del número de empresas » Cooperativas de trabajo asociado constituidas empresas participadas por Eroski se convirtieron 115.580 en socios cooperativistas 102.532 5.727 en 2012 4.741 Excluyendo f | Eroski 3% > Socios iniciales 1.500 o Nuevas sociedades 2007 2012 572 733 Sociedades anónimas 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 46