Micro and Macroeconomic Questions - Essay Example

MICRO/MACROECONOMICS: EXAM QUESTIONS Q1. What distinguishes Williamsons from other divisional structures? To what extent do Williamsons requirements for the M-form place limitations on its widespread adoption? The M-form as explained by Williamson relates to an organisational structure in which the firm is divided into several semi-independent units that are centrally controlled and guided by financial targets. The multidivisional structure differs from other structures in that it refers to the existence of a parent company and other partially independent subsidiaries that bear its name and brand (Besanko, 2010). The whole organisation is controlled by the central management while most decisions are made at the semi-independent units. Under the M-form, a company is divided into divisions that have the ability to make decisions on the operations and maintain their unitary structures. Each division in the larger firm is responsible for the maximisation of its profits and production. The central office overlooks the other divisions with the primary responsibility for formulating the overall strategy for the entire business but not directly controlling the operations at the divisional levels. Large firms have adopted the M-form as opposed to the traditional Unitary structure (U-form) in which the operations of the business are centrally managed with no independence given to any sub-division. While Chandler’s multidivisional form advocates for growth through diversification across industries, markets and products, Williamson’s M-form does not make any reference to diversification. The multidivisional form explained by Chandler supports the delegation of complete power and authority to the divisions while that of Williamson is for the retention of control by the management at the major company. The advantage of the M-form over other divisional structures is based on its ability to combine the economies of scale and different brand benefits of a large collection while maintaining the operational flexibility. It provides the central optimisation level within a company (Besanko, 2010). Unlike other divisional structures, the M-form solves the dilemma of the differences observable in profit maximisation strategies, business needs, and output across the divisions when organisations grow to be too large. Each group, with its independence and flexibility, can be kept in the centralised profit maximisation expectation. Williamson proposes a perfect coordination between the general direction of the business and the daily operations of the divisions under the M-form structure. However, there lies a limitation on the wide adoption of the M-form that arises from Williamson’s requirements for this divisional structure. The largest limitation on the adoption of this structure, as argued by scholars, lies under the approach of M-form in allocating power. In the modern operations, it is feared that divisional managers may make decisions that oppose the rational long-term goals of the parent company. For this reason, decision-making and direction of actions is left to central management in order to reduce operational costs. The M-form has been criticised for the uncertainty of its ability to increase the divisional contribution to the profitability of the business. The cost of labour arising from its multiple management levels has been seen as a factor that may lower the profitability of the firm unlike under the unitary perspective. Q2. How can Argyres (1996) be used to shed light on the different make-or-buy decisions? Approaches that support the transaction costs and those that support knowledge and resources in the determination of the make or buy decisions make two competitive sides. The relative capabilities of suppliers and buyers are necessary for the making of decisions in a vertical integration structure (Besanko, 2010). Argyres (1996), shows how the issue of business ability is likely to be experienced most when there is a significant or little cross relationship between activity performance and the generic technological knowledge. Firms have different abilities to carry out the same activity at different operational costs. Buyers and potential suppliers are said to be the principal independent determinants of the transactional costs. Using examples from a manufacturing firm, Argyres found out that relative company capabilities are important drivers of the vertical scope. Using the example of Williamsons transaction cost economics concerning high specificity of assets, companies are advised to adopt the make of goods option as opposed to buying from suppliers (Besanko, 2010). Argyres’ arguments can be used to identify the relationship between the varied reasons for making rather than buying goods. It is easier for a firm to underestimate the strategic value of bought goods and hence the profitability of the organisation can be affected in the long run. The occurrence of internal and external changes according to Argyres may result in making the outsourced goods less relevant. Using the views of Argyres, firms can quickly evaluate the impacts of internal and external changes that are often underestimated in choosing between making and buying. Firms lose their flexibility over time, become inert, and may be locked in an outsourcing mode of governance. The explanations given by Argyres are particularly important in the analysis of the comparative productive capabilities of a firm faced with the make or buy decision. Profitability can be increased when a careful consideration of the relationship between the internal resources of the firm and the transactional costs is made using the arguments of Argyres. Argyres stresses the importance of firms to strike an optimal make-or-buy balance through careful consideration of the set of resources and capabilities available to contain the operational costs (Besanko, 2010). The consideration that the multi capabilities of a firm are at the core of its competitive advantage is an important contribution for the optimisation of make-or-buy decisions. Argyres expresses the deep concern about the inability of the organisational economics that most firms rely on in their make-or-buy choices, to address capabilities directly. The view of capabilities, as explained by Argyres, contains a framework that simplifies the explanations and predictions of the firm governance choice as postulated in the transactional costs theory. Thus, the purposeful consideration of this structure sheds light in the make-or-buy decisions by firms. Q3. Explain Penrose’s theory of the constraints on the growth rate of firms. Penroses theory states that changes to the firms set of productive opportunities and the adjustment of costs arising from a previous growth influence the firms current growth rate (Besanko, 2010). Although Penrose made an explicit consideration of the effect of the previous organic growth on the current one, she remains mostly silent on the effects of the past acquisitive growth. Her work on the theory of the growth of the firm is a seminal contribution to the field of management. The underlying intention in the creation of this theory was the need for a theory of the growth of the firm that was empirically tractable and logically consistent. Her contribution to the growth of the firm theory remains one of the most comprehensive theories. The set of the productive opportunity that faces a firm and the adjustment costs of growth are central to Penrose’s theory (Besanko, 2010). She postulates in this theory that the actual costs of growth are made up of the time and effort necessary to integrate the operations and new managers in expanding the firm’s activities. According to the theory, the ultimate limit on how fast a company can grow is set by the time taken to develop managerial resources. However, the adjustment costs only relate to companies that can realise and exploit their growth opportunity. To identify and use the growth opportunity refers to the subjectivity of managers in its assessment that is influenced significantly by the firms resources. These resources include firms’ knowledge base. The theory postulates that different managers, given the same set of resources will generate different returns. Penrose’s theory operates on the assumption that there are no external limits to a firm’s growth. Companies are considered administrative entities that have control over the potentially valuable resources. The historical and current activities of a company determine its future knowledge and resources. The theory articulates that the effectiveness of managers as a collection of experienced individuals working together indicates the rate at which a firm can expand its activities. However, the development of managerial capabilities through the expansion of the administrative team is limited in the short run. The theory proposes that the size of the set of the productive opportunity of a firm positively relate to its ability to grow. The combination of the available resources by managers in producing services determines the set of productive opportunity. Read More