ECOS2201-prelect05 - S I D E R E M E N S E A D E M M U T A...

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Unformatted text preview: S I D E R E M E N S E A D E M M U T A T O University of Sydney ECOS2201 - Lecture 5 1 Organizational Scope Organizational Scope addresses two questions 1. Should the decision making process be centralized or decentralized ? Eg Should the University hire academic staff or should a department? 2- Centralization helps coordination between levels of the organization, but fails to use information available at the local level to avoid mistakes and mutes incentives for individual initiative- Decentralization leads to coordination failures, but local information is easily incorporated into decisions and incentives are strong 3 2. How does the organization motivate individuals to achieve high performance?- This is a problem when organization does not observe all aspects of performance - look at this in next lecture 4 Make or Buy Decision A basic question of centralization is whether to make a product in the firm or buy it from an outside firm A merchant buyer strategy involves purchasing inputs from the supplier offering the best price/quality combination even if the input is produced within the firm 5 This means the final product is produced at the lowest cost possible It also encourages the internally produced input to be produced efficiently 6 Why Buy rather than Make? When an input is sold in a competitive market 1. competition can encourage R&D to improve the input and produce it at lower cost, this makes buying attractive. 2. if the market is large economies of scale can be reaped which lower cost making buying attractive 7 3. profits in the input market will be low once again favouring buying 8 Why Make rather than Buy? When an input is specific in design or not supplied competitively it may be profitable to make it. Four factors favour making 9 1. Hold-up Often production of an input requires a large investment that is specific to the input being...
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ECOS2201-prelect05 - S I D E R E M E N S E A D E M M U T A...

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