The business organisation

The business organisation and its environment

The nature of firms:

Complex production -

Most products require a complex production process that will involve many individuals. These individuals are organised in 2 different ways in order to produce these goods and services..

• Within markets via price signals

This involves each stage of production establishing a distinct contract with each seperate producer.

•  Within firms via a hierarchy of managerial authority

In this case a single firm (or a few firms) replaces the market. 

The benefits of organising production within firms -

• Lower transaction costs

These are the costs of making economic arrangements about production, distribution and sales.

Goals of the firm -

• The divorce of ownership from control

The owners and those who control the firm (managers) are different groups with different objectives. The owners will more than likely wish to pursue a profit maximising objective; however the managers will more than likely have their own agenda.

The principal-agent relationship -

The principal-agent problem is one where people (principals), as a result of a lack of knowledge, cannot ensure that the best interests are being served by their agents. Therefore, this is a situation of 'asymmetric information'.

Principals could attempt to get round this issue by..

- Monitoring the performance of agents - through AGM's etc

- Establish incentive for the agents to act appropriately

Staying in business -

If a firm is concerned with survival, it must be careful to balance caution and strong competition, This is because being a firm being too cautious, or too risky can both have it's own disadvantages.

The internal organisation of the firm:

The internal operating structures of firms are frequently governed by their size. Small firms tend to be centrally managed, while large firms tend to be more complex..

U-Form (Unitary form) -

In this case, the central organisation of the firm (i.e. - chief exec) is responsible for both the firms day-to-day activities and for forumulating its business strategy,

M-Form (Multidivisional form) -

In this case, the business is organised into seperate departments (or divisions). Each division could be responsible for a particular product or a particular market.

The flat organisation -

In this case, technology enables senior managers to communicate directly with those lower in the organisational structure. Middle managers are therefore bypassed.

Multinational and business organisation -

The 3 forms of multinational business organisations are..

• H-Form (Holding company) - (Parent company leaves strategic & technical decisions to individual firms)

• Integrated international enterprise - (International subsidiaries co-ordinate and integrate their activities in pursuit of shared corporate aims and objectives)

• Transnational association - (subsidiaries recieve managerial and technical assistance from HQ, in exchange for contractual agreements that output produced is sold to the HQ)