The Organization of the Firm

Prepared by: Prof. Rebecca T. Gorospe

 Overview
I. Methods of Procuring Inputs
• Spot Exchange
• Contracts
• Vertical Integration
II. Transaction Costs
• Specialized Investments
III. Optimal Procurement Input
IV. Principal-Agent Problem
• Owners-Managers
• Managers-Workers
 Methods of Procuring Inputs
• Spot Exchange
• When the buyer and seller of an input meet, exchange,
and then go their separate ways.
• Contracts
• A legal document that creates an extended relationship
between a buyer and a seller.
• Vertical Integration
• When a firm shuns other suppliers and chooses to
produce an input internally.
 Transaction Costs
• Costs of acquiring an input over and above
the amount paid to the input supplier.
• Includes:
• Search costs - is the time, energy and money expended
by a consumer who is researching a product or service
for purchase.
• Negotiation costs or bargaining cost - required to come
to an acceptable agreement with the other party to the
transaction, drawing up an appropriate contract and so
on.
• Other required investments or expenditures
 Specialized Investments
• A mutual fund or other fund that invests
predominantly or exclusively in a single industry
or sector. For example, a sector fund
may invest only in energy companies, or, even
more narrowly, only in natural gas companies.
• Lead to higher transaction costs.
 Variations on Asset Specificity
• SITE SPECIFICITY - One variation of asset
specificity is site specificity. An asset might be considered
highly specific because it is impossible or prohibitively
expensive to move to a different location.
• PHYSICAL SPECIFICITY - which indicates equipment,
machinery, or software that has been customized for a
specific customer or a unique use.
• DEDICATED ASSETS - a discrete investment in a plant
that cannot readily be put to work for other purposes.
• HUMAN SPECIFICITY - is a ponderous term for
company employees who are highly trained in a
specialized task that is not easily transferable.
OPTIMAL PROCUREMENT
INPUT
• defined and measurable quality
characteristics and requires specialized
investments.
 Manager’s Role
• Procure inputs in the least cost manner
• Provide incentives for workers to put forth
effort
 The Principal-Agent Problem
• is a conflict in priorities between a person or
group and the representative authorized to act on
their behalf. An agent may act in a way that is
contrary to the best interests of the principal.
• Occurs when the principal cannot observe the
effort of the agent
• Example: Shareholders (principal) cannot observe the effort
of the manager (agent).
• Example: Manager (principal) cannot observe the effort of
workers (agents).
• The Problem: Principal cannot determine
whether a bad outcome was the result of the
agent’s low effort or due to bad luck
 Solving the Problem Between
Managers and Workers
• Profit sharing - an incentivized
compensation program that awards
employees a percentage of the
company's profits. The amount awarded is
based on the company's earnings over a set
period of time, usually once a year. Unlike
employee bonuses, profit sharing is only
applied when the company sees a profit.
 Solving the Problem Between
Managers and Workers
• Revenue sharing - the distribution of the
total amount of income generated by the
sale of goods or services between the
stakeholders or contributors. It should not
be confused with profit shares. As
with profit shares only
the profit is shared, that is the revenue left
over after costs have been removed.
 Solving the Problem Between
Managers and Workers
• Piece rates - pay system means that the
worker is paid per unit of creation. Whether
the "unit of creation" is a clay pot or
a piece of writing, a person is paid by
individual output, no matter how long it
takes.
 Solving the Problem Between
Managers and Workers
• Time clocks and spot checks
• TIME CLOCKS - A clock that records the
starting and quitting times of employees,
usually by punching timecards.
• SPOT CHECKS –an occasion when you
check a particular person or thing in a group
without a particular reason for choosing
them in order to make sure that there are no
problems with the group.
 COMPENSATION
MANAGEMENT
• The process of ensuring that an
organization's salaries and bonuses remain
competitive, appropriate, and equitable. It
also involves managing company benefit
programs to make sure they meet the needs
of the current workforce.
 Disciplined Manager
• Is not someone who punishes individuals or
tries to gain control through lots of rules and
high levels of obedience but is instead a
positive role model for high standards.
He/she acts as a personal role model for
others to emulate.
How to Discipline an Employee
 1. Investigate
• Before you begin any disciplinary action,
it’s important to review any evidence
against the employee and reach your own
verdict.
• Once you’ve gathered enough evidence, you
should then discuss further action with the
employee in question.
 2. Review the Employee Policy
• Employee policies are there for a reason,
and once an employee has signed their
contract, it means that they have understood
what is expected of them within the
workplace. If it has come to your attention
that the employee isn’t following the rules
outlined in the policy, take them aside and
tell them exactly what they’ve done wrong.
 3. Communicate Clearly at All
Times
• is essential when disciplining an employee.
• it’s best to approach situations logically
rather than emotionally and to remain calm
at all times (even if the employee raises
their voice) and be assertive when needed.
Your voice should be firm, and all points
discussed should be logical and within
reason, without making the employee feel
remorse.
 4. Use Correctional Methods
• The best approach to use before jumping
into disciplinary procedures are correctional
methods. Instead of merely listing the issue
and telling the employee the solution, you
should work together to come up with
solutions that are both logical and
achievable.
 5. Give a Verbal Warning
• These types of warnings should only be
carried out when an employee has gone
against company rules. By doing so, you’re
showing that you have faith in your staff
member to make a few changes to better
themselves.
 6. Finish on a Positive Note
• During the disciplinary process, many
managers forget to highlight the positives
and end the meeting on a negative note,
leaving a bitter taste in the employee’s
mouth.
• you should let your employee know that
you’re aware of all the excellent work they
have done.
 7. Give the Employee Time to
Speak
• it’s vital to give your employee time to
speak and share their side of the story.
• It’s possible that there are specific
circumstances that you might not even be
aware of or valid reasons your staff member
is behaving the way they are.
 8. Do it in Private
• it’s essential that any discussions are carried
out in private. This not only protects your
staff member’s privacy, but it also shields
their reputation.
 9. Follow Up in Writing
• This also gives the employee a chance to
reply if they do not entirely agree with your
summary.
• if you would like to proceed with a written
warning. It ensures there’s consistency and
that you are abiding by the rules set out in
the company’s employee handbook.
 10. Give a Written Warning
• If you still haven’t seen any improvement
after your verbal reprimand, it’s time to take
further action in the form of a written
warning.