According to Chander's account, what did these and other firms do in the late 1800s that enabled them to become large and successful? How were their strategic decisions interrelated? Which of these decisions were relatively easy to implement, and which were relatively difficult? Why did being first enable them to have a lasting competitive advantage relative to their competitors?
Chandler relates that these and other firms made three sets of investments: investments in production facilities, distribution and marketing facilites, and investments in new organizational forms. The latter facilitated coordination of the flow of products through the production process. This, in turn, allowed firms to better achieve economies of scale. Chandler claims that installing and implementing the new machines used in production was relatively easy; figuring out the new organizational structure was difficult. There were elements of learning by doing with respect to the organizational part. Learning by doing meant that firms' costs fell with experience using the new organizational forms. Later entrants were at a competitive disadvantage because they were competing against first movers which had lower costs. Organizational learning by doing created barriers to entry which meant that first movers remained successful relative to their competitors for years.
2. For many firms, allowing employees aceess to the World Wide Web (WWW) and internet-based electronic mail is potentially useful. The WWW permits employees rapid access to data and information they previously had to ask corporate librarians to obtain. Email is a lower cost and less intrusive means of communication than telephone conversations or fax exchanges. Lower information or communication costs can permit firms to realize new efficiencies.
However, as the attached article describes, the new capabilities can be value-decreasing when employees use them toward increasing their utility in ways that are not value enhancing to the firm.
Why is the misuse of firms' information and communication systems a potentially more severe problem with respect to the WWW and Email than in systems which rely on corporate librarians, letters, and faxes?
It can be more difficult to monitor usage of firms' information and communication resources. Corporate librarians serve not just as researchers, but as monitors. Letters and faxes are often accomplished with the aid of secretaries. Also, letters and faxes provide paper trails that allow firms to audit usage.
How might existing (pre-Web and pre-Email) information and communication systems be complementary with firms' organizational features? Explain why the features you cite or complements, using the definition of complementarities.
Organizational forms with these passive monitoring features (having secretaries or corporate librarians) are more valuable when the information system is letter- or fax-based. Letter- or fax-based systems make it difficult to circumvent passive monitoring. Conversely, letter- or fax- based systems are more valuable when there exist secretaries and corporate librarians to help reference, type, format, send, and file documents.
Why might a firm not respond to decreases in the price of electronic commerce (e.g., email) by moving away from a phone and fax-based system to an email-based system?
A firm may not switch over because moving to an internet-based system would be only valuable if they changed other organizational features as well. These organizational features would serve to monitor individuals' use (and misuse) of communication and informational resources. These organizational changes may be costly to conceive of or implement.
What organizational changes might be complementary to allowing employees web access and internet email accounts? Which of these might you be able to embed in the software itself? Which of these would involve changes in the relationships among employees, or between your firm and other firms?
One might, for example, allow individuals access to the Web only in certain offices where use could be easily monitored. Or only allow individuals who are paid primarily a function of their output access to the Web. Or a central computer might record each Web site each server visited. One might program the company email system so that each outgoing message be sent to an central computer. The monitoring accomplished by computer programs can clearly be embedded in software and would not require much organizational change.
None of these organizational changes required significant changes
in relationships among employees or between firms. It seems that there
are some conceptually simple ways of replacing the monitoring role of secretaries
and corporate librarians, particularly when it is possible to embed monitoring
elements into the Web browser or email systems companies use.
3. What is true when incentives are complementary? Suppose a worker chooses both the quantity and the quality of output he produces, and that the firm can obtain a measure of each. Why might incentives toward quantity and incentives toward quality be complementary? Suppose an innovation permits a firm to get a better measure of the worker's effort toward quantity, but does not change how well it can measure workers' effort toward quality. How would the firm then change how it compensates the worker? That is, would it provide stronger or weaker incentives toward quantity? Toward quality?
When incentives are complementary, the marginal benefits from increasing the intensity in incentives in any one dimension are higher, the more intense incentives are in other dimensions. Incentives toward quantity and toward quantity may be complementary for the following reason. Suppose you care both about the quantity and quality produced by a worker. The higher commission you pay the worker, the more this discourages him or her from producing high quality products. This increases the marginal benefits from increasing this worker's incentives toward quality. (Increasing the worker's quality incentives becomes more important at the margin because would counteract the quality-discouraging effects of quantity incentives.) One can tell a similar story going the other way.
If one can better measure effort towards quantity, one would increase the incentives toward both quantity and quality. This follows directly from the analysis in Holmstrom and Milgrom.
4. What is "flexible manufacturing equipment"? What is "just in time inventories"? Why might using flexible manufacturing equipment and just in time inventories be complementary (be careful -- remember the definition of "complementary")? What might initiate the adoption of these business practices? Why might implementing them be difficult and costly?
Flexible manufacturing equipment is capital used in production which can be used to produce more than multiple products or variants with low switchover costs. Just in time inventories refers to circumstances where there a short period between when inputs are delivered and used in production (or, alternatively, when outputs are produced and shipped to retailers or customers).
They may be complementary for the following reason. The marginal benefits of making inventories more "just in time" may be higher when you have flexible rather than inflexible manufacturing equipment because it would allow you to respond more quickly to demand. With inflexible manufacturing equipment, one might not be able to respond quickly to demand for individual variants regardless of how you manage inventories. With flexible equipment, JIT may enable you to do so. Going the other way, the benefits of using more flexible equipment may be higher given that you have JIT inventories. Using a similar logic, the flexibility of your mfg equipment may not matter with respect to your ability to quickly respond to demand given that you do not have JIT inventories (you, for example, ship to customers once a week). Having JIT inventories (and shipping to customers every day) may make it such that the flexibility of the manufacturing equipment does matter.
Decreases in the price of flexible manufacturing equipment, or devices used to manages the logistics involved in JIT inventories might initiate adoption of these business practices.
Implementing them might be difficult and costly because coordinating multiple organizational changes can be difficult, particularly when the goal is to create an organizational structure which looks much different than the one used in the past.