BEMF 2 - slide + libro bemf 2 PDF

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BEMF 2FOURTH PERIODISTRUTTORE: Massimo Warglienmwarteaching@gmailSynergy :the interaction of 2 or more agentsor forces so that theircombined effect is greater than the sum of their individual effects.Complementarity : pencil and Eraser, left and right shoes➔ 2 choice variables are complements when d...

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BEMF 2 FOURTH PERIOD ISTRUTTORE: Massimo Warglien [email protected]

Synergy : the interaction of 2 or more agents or forces so that their combined effect is greater than the sum of their individual effects. Complementarity : pencil and Eraser, left and right shoes ➔ 2 choice variables are complements when doing (more of) one of the two increases the returns of doing (more of) the other ◆ if one of a pair of complements is introduced / increased it will be more attractive to introduce / increase the other ● for example : Coca Cola and a Supermarket that sells it , Managers and Employers. Economies of scope : TC (QX , Qy) < TC (QX , 0) + TC (0, QY) ➔ The total cost of making 2 products together is cheaper than making them separately Asymmetric Complements : One activity is more dependent on the other, yet the firm receives enhanced utility from doing both ➔ but activities can be inhibiting each other (for example Alcohol and Studying) Substitution : two choice variables are substitutes when doing (more of) one of them decreases the returns of doing (more of) the other ➔ if othe of a pair of substitutes is introduced / increased it will be less attractive to introduce / increase the other ◆ for example : Coca Cola and Pepsi, starting a New Business and spending time with family because they both require a lot of time. Exploiting Complements : low cost flights Map of all the complements that results in Low fares in Low Cost flights: frequent reliable departures, Point-to-point routes, no connections, no luggage transfer, secondary airports, high capacity utilization (small seats to fit more), lean and productive crew (the people you have at the desk you also find them at the gate, so less people need to be payed) limited services.

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FORDISM : the mass of production He did a standardization of the production : components (so the components of the car would not be unique anymore) , product, process and work so it would cost less making a Car. Standardization of Components: ➔ ➔ ➔ ➔ ➔ ➔

Precision mechanics The problem of avoiding re-fitting of parts (so you won’t lose time to adjust them) Working on hardened metals Fewer components than can be easily componed Reduced maintenance problems (if you break something, is so much easy to fix it) SO MUCH CHEAPER

Standardization of products : The ford T ➔ All the cars looked the same in 1908 : the ford model T ➔ All the Cars were Black so it was faster and cheaper to produce them ➔ Also easier to maintain because they were all the same with the same components Fundamental consequence : the price dropped because they were so much cheaper and growth of sales ! More than 15 million were manufactured Standardization of process : ➔ machines that can repeat always the same operation ➔ eliminating set up times (because for the same machine of the same operation, everything is the same, the measures,... don’t need to be change) ➔ specialization ➔ efficiency, rigidity Standardization of work : ➔ Since the process is always the same, operations can be standardized and simplified ◆ the task cycle : from 514 minutes to 2.3 minutes ◆ eliminating wasted time : from mobile work to fixed work stations ◆ reducing complexity : one operation at a time ◆ from skilled labor to “simple”, interchangeable labor ➔ the emergence of indirect labor (“Knowledge workers”) in the production process. The influence of taylorism : the Scientific management The problem of Taylor : human tendency to minimize effort, so they need to standardize tasks, simplify task, time and motion analysis (quanto serve per ogni operazione e da questo dare indicazioni sul tempo e su come devono svolgere il lavoro)

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The Assembly Line : 1913, Highland Park Plant An assembly line is a manufacturing process (often called a progressive assembly) in which parts (usually interchangeable parts) are added as the semi-finished assembly moves from workstation to workstation where the parts are added in sequence until the final assembly is produced. Vertical Integration : Vertical integration is a strategy whereby a company owns or controls its suppliers, distributors, or retail locations to control its value or supply chain. Vertical integration benefits companies by allowing them to control the process, reduce costs, and improve efficiencies. WHY? ➢ ➢ ➢ ➢

advantage in precisions coordinated design of fitting components coordination advantages : scheduling Mistrust and transaction costs

Increasing problems with Geographic development → Solution : centralize component production and decentralize geographically assembly Mass distribution : -

System of independent local dealers : Franchising Advertising After sale services repair scheduled delivery

By mid - twenties sales of Ford T decline because there were the need of differentiation, competitors introduce modern mechanical features and better design, Used car sales to lower income families

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From the Manufacturing Revolution to the Managerial Revolution : General Motors minor changes in Manufacturing strategies ….. from unique products to diversified product lines …. organizational innovation is central The Problem : Diversification ●

How to Reap the Benefits of Multiple Business?

The search for New Businesses : Dyestuff, paint and Varnish, chemicals, cellulose/cotton purification New Organizational solutions : semi-autonomous divisions → so different divisions to make different products General Motors : growth by acquisitions : acquiring numerous enterprises already existing with no central coordination. As a result, periodic overproduction and under-supply Laddered : Ladder of success -

Keeping customers as they age and their wealth increases Planned obsolescence (prevedere un life cycle, tipo la lavatrice farla durare solo 10 anni) Keeping economies of scale (average cost per unit of output falls as the volume of output increases) through shared components the emergence of design as a success factor GMAC : customer credit ( so they don’t have to pay all at once)

Multidivisional Structure of a firm Different activities are performed by different divisions, with a governing board and staff body. Operating autonomy of divisions: -

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full responsibility for success and failure, but not for the resources they get because the allocation is defined by the head of the firm, they are not fully autonomous but they are responsabile on how they use the resource they give them Return on Investment as the measure of success ( how much money you can get from the resources you have) Interdivisional billing and vertical disintegration : Independent firm but with given resources

the Strategic role of corporate entities : resource allocation -

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corporate executives (es: committee) should carry no operating responsibilities Large investments subject to central approval, based on sales and return forecast Centralizing cash flows Providing general standards and procedures (ex: cost accounting : developing standard costing and standard price)

the Strategic role of corporate entities : developing staff -

Research section : new products and new way to do them Sales section Factory section : Resource allocation purchasing section : purchase machines and resources

Birth of business school : from an initial focus on trade, law and accounting to a focus on emerging management disciplines (marketing, finance, business policy, organization) emerge of the “Case study method”

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TOYOTA: The emergence of the Toyota model ➔ ➔ ➔ ➔

Increasing product variety, flexibility, and productivity After WWII : responding to a fragmented market and diversified needs The toyota challenge : rethinking mass production to meet the needs of japanese market “produce what is needed, when it’s needed” - just in time production

Fordism beyond fordism? A visit to Ford Motor company. Inefficiencies of mass production: -

excess of inventory uneven amount of work performed in various department Amount of rework due to defects

after a visit to a supermarket they realize that from a push systems, they needed a pull system : reverse thinking “from the supermarket we got the idea of viewing the earlier process in a production line as a kind of store. The later process (customer) goes to the earlier process (supermarket) to acquire the required parts (commodities) at the time and the quantities needed. The earlier process immediately produces the quantity just taken (restocking the shelves). We hoped that this could help us to approach our just-in-time goal and, in 1953, we actually applied the system in our machine shop at the main plant.”

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Towards small - lots production ➢ batch production : the economic optimal quantity ➢ The key determinants : setup times and inventories ○ Inventory cost is a function of average inventory level ○ Setup cost is a function of number of setups and the cost of a single setup ➢ Total cost = inventory cost + setup costs Q = lot size D = total production H = unit inventory holding cost s = unit setup cost set up time is not taken as given ! KANBAN SYSTEM: ● ● ●

produrre solo quando lo “scaffale è vuoto” quindi produrre solo se ce n’è bisogno passing on errors to keep the line running multiples errors → stopping production when errors occur ! Get quality right the first time The role of workers in quality policies : workers as problem solvers structuring problem solving : ○ Integrating running and maintaining the machines ○ Visual control ○ Kaizen ( continuous improvement)

New: two side Loyalism : lifetime employment. Company was like a community. Teams with team leader rather than a supervisor / foreman.

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Cells : sequential operations, decouple operator from machine, parts in families, single piece flow within cell

Extending just-in-time to suppliers: ➔ ➔ ➔ ➔ ➔ ➔

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Small lot size, delivered to the assembly plant co-localization long term relationship : with suppliers multiple tiers of suppliers “market price minus” system; declining prices Information sharing, participation to product design

COMPLEMENTS GENERATE MULTIPLE “SOLUTIONS” Non convexity, non concavity : 2 basic standard microeconomics assumptions : ●

Convexity: if 2 options are available , any intermediate choice is also available

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Concavity : the impact of performance of successive increments in the choice variable is decreasing (and may ultimately become negative)

if 2 different choices lead to the same performance , any choice intermediate between the 2 must lead to a higher level of performance Implications : 1. there is a “one best way” to do things 2. It can be attained “incrementally” by local experimentation and adaption

the same process of local search and adaptation will work if the performance landscapes “shifts” (es: due to market or technology changes)

Non convexity : indivisibilities (es: capacity, you cannot cut in pieces) Non concavity : complementarity, scale (economies of scale) , learning (competence traps).

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Complementarities, multiple patterns and change: In presence of complementarities and non concavity, multiple stable configurations arise

they are “locally” stable, because any small deviation from a stable point will make performance worse. No changes in just one variable, no matter how large, will improve the performance! ➔ decentralized, local experimentation is not enough! ➔ search and change must be coordinated Change can only be “global” and “discontinuous” - you can’t change one piece at the time, but must coordinate (large) simultaneous changes along many dimensions. Threshold of change : find the point beyond which incremental change will lead to the new stable configuration.

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NETWORK EXTERNALITIES AND THE INFORMATION ECONOMY The automotive industry is a classical industry dominated by oligopolies, with large scale advantages and slow market share dynamics The information economy is populated by temporary near-monopolies … (twitter, facebook, yahoo…) Networks : In “real” networks, the linkages between nodes are physical connections, such as railroad tracks or telephone wires. In virtual networks, the linkages between the nodes are invisible, but no less critical for the market …. Whether real or virtual, networks have a fundamental economic characteristic : the value of connecting to a network depends on the number of other people already connected to it. The “ bigger is better” aspect of network gives rise to the positive feedback observed so commonly in today’s economy The key concept : positive feedback! What is negative feedback ? deviations are reduced

What is positive feedback? deviations are amplified

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traditional” industries : the source of positive feedback is economies of scale in production : larger firms tend to have lower unit costs (at least up to a point ). From today's perspective, we can refer to these traditional economies of scale as supply-side economies of scale

Positive feedback based on supply-side economies of scale runs into natural limits, at which point negative feedback takes over. These limits often arise out of the difficulties of managing enormous organizations In the information economy : positive feedback is based on the demand side of the market, not just the supply side.

Large networks are more attractive to users than small ones. The term that economists use to describe this effect, network externalities, usefully highlights 2 aspects of information systems that are crucial for competitive strategy. Externalities arise when one market participant affects another without compensation being paid. Lie feedback, externalities come in 2 flavors : negative and positive.

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Positive networks externalities give rise to positive feedback : when I buy a fax machine, the value of your fax machine is enhanced since you can now send faxes to me and receive faxes from me. Even if you don’t have a fax machine yet, you are more tempted to get one yourself since you can now use it to communicate with me. The challenge to companies seeking to introduce new but incompatible technology into the market is to build network size by overcoming the Collective switching costs - that is, the combined switching costs of all users. In many information industries, collective switching costs are the biggest single force working in favor of incumbents. Whether a market tips or not depends on the balance between 2 fundamental forces: economies of scale and variety. Strong scale economies, on either the demand or the supply side of the market, will make a market tippy. But standardisation typically entails a loss of variety, even if the leading technology can be implemented with a broad product line. If different users have highly distinct needs, the market is less likely to tip. Information goods and information infrastructure often exhibit both demand-side and supply-side economies of scale. Two Centrals problems of economic activity: -

Coordination ( arises from division of labor) Motivation (arises from contrasting interests)

Coordination definition : ➔ The process of organising people or groups so that they work together properly and well. The harmonious functioning of parts for effective results . ➔ What is the coordination problem ? ◆ Coordination is needed due to interdependence between actions / activities. ◆ In general : there are multiple ways to do things in coordinate ways… when such multiple possibilities exist, choosing one may be hard. ◆ Exambe : Street traffic ➔ 3 Basics types of coordination situations: ◆ Pure coordination: individuals have a clear interest in coordination and no conflict of interest, but there are many possible solutions 2 people parachute unexpectedly into the area shown, each with a map and knowing the other has one, but neither knowing where the other has dropped nor able to communicate directly. They must get together quickly to be rescued. Where should they try to meet? they meet by the bridge, because it’s in between (middle) of the two

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◆ Risky coordinations: individuals have (at least) 2 possible coordination solutions, but the one that pays off better is also the more risky for each individual . Example: the weakest link problem There are N players. Each can make a high effort or low effort. High effort is more costly than low effort. The lowest effort determines the payoff for every player. There are 2 coordination solutions: ➔ (A) everyone makes high effort ➔ (B) everybody makes low effort (A) is more risky : if I make a high effort, if just one makes low effort, my effort is wasted. (B) is safer: no matter what others do, by making low effort I know what I get for sure. ◆ Coordination with conflict : the battle of sexes individuals have an interest to achieve coordination, but they have divergent interest over which solution to adopt Imagine a couple that agreed to meet this evening, but did not decide if they will be attending a ballet or a boxe match ( and the fact that they did not decide is common knowledge). The husband would prefer to go to the boxe game. The wife would rather go to the ballet. Both would prefer to go to the same place rather than different ones. If they cannot communicate, where should they go? Some types of coordination solutions: -

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Tacit coordination by conventions, rules and precedents - A convention is a set of agreed, stipulated, or generally accepted standards norms, social norms, or criteria - Driving on the right side, waiting lines, plans - They create expectations of behavior that make coordination possible Tacit coordination by focal points - A focal point is a solution that people will tend to use in the absence of communication, because it seems natural, special, or relevant to them (salience) - Es : the date problem : Christmas as a Salient Day… Mutual adjustments - Coordination by the simple process of informal communication, frequents feedback ( often of a physical type) - ES: driving hybrid, moving in crowded supermarket, Bringing a large table over narrow stairs The price mechanism One-way communication (Broadcasting) The cost/complexity of one-way communication (number of channels) grows linearly with the number of agents… While it grows (almost) exponentially with multiple-ways communication:

𝐶 =

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𝑛 (𝑛 − 1 ) 2

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Multiple - ways communications Multiple-ways communication is great… But can easily create confusing / contradictory messages. For example: in volleyball, calling the ball from one single player is better than calling simultaneously the ball from two players.

COORDINATION AND THE DESIGN OF ORGANIZATIONS Organizations are designed to respond to the coordination problems arising from independence. The general principle is : 1. Grouping together activities which are strongly independent, minimizing interdependencies across the groups. 2. Managing different intensities of interdependencies with different coordination methods Grouping by functional interdependencies (the functional form)

It is grouped by the function of the firm

Grouping by product interdependencies (the “M” form)

Grouped by the product / brand

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Grouping by geographic interdependencies

Grouped by the state or country

Managing different intensities of interdependencies with different coordination methods Pooled : standardization

Sequential : Rules (planning)

Reciprocal : Mutual adjustments

Prices as a solution to the problems of economic activity… The interaction of buyers and sellers in the free market enables goods, services, and resources to be allocated. Relative prices, and changes in price, reflect the forces of demand...