Abcdebook coupon code

eTextbook, Study Guide, Manual, Slides, Test Bank Please Visit www.abcdebook.com

www.abcdebook.com

Managerial Economics and Organizational Architecture

The McGraw-Hill Series in Economics

ESSENTIALS OF ECONOMICS

Brue, McConnell, and Flynn Essentials of Economics Third Edition

Mandel Economics: The Basics Second Edition

Schiller Essentials of Economics Ninth Edition

PRINCIPLES OF ECONOMICS

Colander Economics, Microeconomics, and Macroeconomics Ninth Edition

Frank and Bernanke Principles of Economics, Principles of Microeconomics, and Principles of Macroeconomics Sixth Edition

Frank and Bernanke Brief Editions: Principles of Economics, Principles of Microeconomics, and Principles of Macroeconomics Second Edition

Karlan and Morduch Economics, Microeconomics, and Macroeconomics First Edition

McConnell, Brue, and Flynn Economics, Microeconomics, and Macroeconomics Twentieth Edition

McConnell, Brue, and Flynn Brief Editions: Economics, Microeco- nomics, and Macroeconomics Second Edition

Miller Principles of Microeconomics First Edition

Samuelson and Nordhaus Economics, Microeconomics, and Macroeconomics Nineteenth Edition

Schiller The Economy Today, The Micro Economy Today, and The Macro Economy Today Fourteenth Edition

Slavin Economics, Microeconomics, and Macroeconomics Eleventh Edition

ECONOMICS OF SOCIAL ISSUES

Guell Issues in Economics Today Seventh Edition

Sharp, Register, and Grimes Economics of Social Issues Twentieth Edition

ECONOMETRICS

Gujarati and Porter Basic Econometrics Fifth Edition

Gujarati and Porter Essentials of Econometrics Fourth Edition

Hilmer and Hilmer Practical Econometrics First Edition

MANAGERIAL ECONOMICS

Baye and Prince Managerial Economics and Business Strategy Eighth Edition

Brickley, Smith, and Zimmerman Managerial Economics and Organizational Architecture Sixth Edition

Thomas and Maurice Managerial Economics Eleventh Edition

INTERMEDIATE ECONOMICS

Bernheim and Whinston Microeconomics Second Edition

Dornbusch, Fischer, and Startz Macroeconomics Twelfth Edition

Frank Microeconomics and Behavior Ninth Edition

ADVANCED ECONOMICS

Romer Advanced Macroeconomics Fourth Edition

MONEY AND BANKING

Cecchetti and Schoenholtz Money, Banking, and Financial Markets Fourth Edition

URBAN ECONOMICS

O’Sullivan Urban Economics Eighth Edition

LABOR ECONOMICS

Borjas Labor Economics Seventh Edition

McConnell, Brue, and Macpherson Contemporary Labor Economics Tenth Edition

PUBLIC FINANCE

Rosen and Gayer Public Finance Tenth Edition

Seidman Public Finance First Edition

ENVIRONMENTAL ECONOMICS

Field and Field Environmental Economics: An Introduction Sixth Edition

INTERNATIONAL ECONOMICS

Appleyard and Field International Economics Eighth Edition

King and King International Economics, Globalization, and Policy: A Reader Fifth Edition

Pugel International Economics Sixteenth Edition

Managerial Economics and Organizational Architecture Sixth Edition

JAMES A. BRICKLEY CLIFFORD W. SMITH JEROLD L. ZIMMERMAN

William E. Simon Graduate School of Business Administration

University of Rochester

MANAGERIAL ECONOMICS AND ORGANIZATIONAL ARCHITECTURE, SIXTH EDITION

Published by McGraw-Hill Education, 2 Penn Plaza, New York, NY 10121. Copyright © 2016 by McGraw-Hill Education. All rights reserved. Printed in the United States of America. Previous editions © 2009, 2007, and 2004. No part of this publication may be reproduced or distributed in any form or by any means, or stored in a database or retrieval system, without the prior written consent of McGraw-Hill Education, including, but not limited to, in any network or other electronic storage or transmission, or broadcast for distance learning.

Some ancillaries, including electronic and print components, may not be available to customers outside the United States.

This book is printed on acid-free paper.

1 2 3 4 5 6 7 8 9 0 QVS/QVS 1 0 9 8 7 6 5

ISBN 978-0-07-352314-9 MHID 0-07-352314-3

Senior Vice President, Products & Markets: Kurt L. Strand

Vice President, General Manager, Products & Markets: Marty Lange

Vice President, Content Design & Delivery: Kimberly Meriwether David

Managing Director: James Heine Director, Product Development: Rose Koos Senior Brand Manager: Katie Hoenicke Lead Product Developer: Michele Janicek Senior Product Developer: Christina Kouvelis Director of Digital Content Development:

Doug Ruby

www.mhhe.com

Director, Content Design & Delivery: Linda Avenarius

Executive Manager: Faye M. Herrig Content Project Managers: Mary Jane

Lampe, Sandra Schnee Buyer: Carol A. Bielski Cover Design: Studio Montage Content Licensing Specialist:

Rita Hingtgen Cover Image: © Corbis / Glow Images Compositor: MPS Limited Typeface: 10.75/12 Adobe Garamond Printer: Quad/Graphics

All credits appearing on page or at the end of the book are considered to be an extension of the copyright page.

Library of Congress Cataloging-in-Publication Data

Brickley, James A. Managerial economics and organizational architecture / James A. Brickley, Clifford

W. Smith, Jerold L. Zimmerman, William E. Simon, Graduate School of Business Administration, University of Rochester.—Sixth edition.

pages cm.—(The McGraw-Hill series in economics) ISBN 978-0-07-352314-9 (alk. paper)

1. Managerial economics. 2. Organizational effectiveness. I. Title. HD30.22.B729 2015 658—dc23

2014043202

The Internet addresses listed in the text were accurate at the time of publication. The inclusion of a website does not indicate an endorsement by the authors or McGraw-Hill Education, and McGraw-Hill Education does not guarantee the accuracy of the information presented at these sites.

Dedicated to our children— London, Nic, Alexander, Taylor, Morgan, Daneille, and Amy.

PREFACE The past few decades have witnessed spectacular business failures and scandals. In 2001 and 2002, Enron, WorldCom, Arthur Andersen, as well as other prominent com- panies imploded in dramatic fashion. Internationally, scandals emerged at companies such as Parmalat, Royal Dutch Shell, Samsung, and Royal Ahold. In 2007 and 2008, prominent financial institutions around the world shocked financial markets by reporting staggering losses from subprime mortgages. Société Générale, the large French bank, reported over $7 billion in losses due to potentially fraudulent securities trading by one of its traders. JPMorgan Chase bailed out Bear Stearns, a top-tier in- vestment bank, following their massive subprime losses. Washington Mutual and Lehman Brothers were added to the list of “top business failures of all time.”

Due to these cases and others, executives now face a more skeptical investment community, additional government regulations, and stiffer penalties for misleading public disclosures. A common perception is that bad people caused many of these problems. Others argue that the sheer complexity of today’s world has made it virtu- ally impossible to be a “good” manager. These views have raised the cry for in- creased government regulation, which is argued to be a necessary step in averting fu- ture business problems.

We disagree with this view. We suggest that many business problems result from poorly structured organizational architectures. The blueprints for many of these prominent business scandals were designed into the firms’ “organizational DNA.” This book, in addition to covering traditional managerial economic topics, examines how firms can structure organizations that channel managers’ incentives into actions that create, rather than destroy, firm value. This topic is critical to anyone who works in or seeks to manage organizations—whether for-profit or not-for-profit.

New Demands: Relevant Yet Rigorous Education Thirty years ago, teaching managerial economics to business students was truly a “dis- mal science.” Many students dismissed standard economic tools of marginal analysis, production theory, and market structure as too esoteric to have any real relevance to the business problems they anticipated encountering. Few students expected they would be responsible for their prospective employers’ pricing decisions. Most sought positions in large firms, eventually hoping to manage finance, operations, marketing, or information systems staffs. Traditional managerial economics courses offered few insights that obviously were relevant for such careers. But a new generation of economists began applying traditional economic tools to problems involving corporate governance, merg- ers and acquisitions, incentive conflicts, and executive compensation. Their analysis fo- cused on the internal structure of the firm—not on the firm’s external markets. In this book, we draw heavily from this research and apply it to how organizations can create value through improved organizational design. In addition, we present traditional economic topics—such as demand, supply, markets, and strategy—in a manner that emphasizes their managerial relevance within today’s business environment.

Today’s students must understand more than just how markets work and the prin- ciples of supply and demand. They also must understand how self-interested parties within organizations interact, and how corporate governance mechanisms can control these interactions. Consequently, today’s managerial economics course must cover a broader menu of topics that are now more relevant than ever to aspiring managers facing this post-Enron world. Yet, to best serve our students, offering

vi

Preface vii

relevant material must not come at the expense of rigor. Students must learn how to think logically about both markets and organizations. The basic tools of economics offer students the skill set necessary for rigorous analysis of business problems they likely will encounter throughout their careers.

Besides the heightened interest in corporate governance, global competition and rapid technological change are prompting firms to undertake major organizational restructurings as well as to produce fundamental industry realignments. Firms now attack problems with focused, cross-functional teams. Many firms are shifting from functional organizational structures (manufacturing, marketing, and distribution) to flatter, more process-oriented organizations organized around product or region. Moreover, this pace of change shows no sign of slowing. Today’s students recognize these issues; they want to develop skills that will make them effective executives and prepare them to manage organizational change.

Business school programs are evolving in response to these changes. Narrow tech- nical expertise within a single functional area—whether operations, accounting, fi- nance, information systems, or marketing—is no longer sufficient. Effective man- agers within this environment require cross-functional skills. To meet these challenges, business schools are becoming more integrated. Problems faced by man- agers are not just finance problems, operations problems, or marketing problems. Rather, most business problems involve facets that cut across traditional functional areas. For that reason, the curriculum must encourage students to apply concepts they have mastered across a variety of courses.

This book provides a multidisciplinary, cross-functional approach to managerial and organizational economics. We believe that this is its critical strength. Our interests span economics, finance, accounting, information systems, and financial in- stitutions; this allows us to draw examples from a number of functional areas to demonstrate the power of this underlying economic framework to analyze a variety of problems managers face regularly.

We have been extremely gratified by the reception afforded the first five editions of Managerial Economics and Organizational Architecture. Adopters report that the earlier editions helped them transform their courses into one of the most popular courses within their curriculum. This book has been adopted in microeconomics, human resources, and strategy courses in addition to courses that focus specifically on organizational economics. The prior editions were founded on powerful economic tools of analysis that examine how managers can design organizations that motivate self-interested individuals to make choices that increase firm value. Our sixth edition continues to focus on the fundamental importance of markets and organizational de- sign. We use the failures of Enron (Chapter 1), Société Générale (Chapter 1), Arthur Andersen (Chapter 22), and Adelphia (Chapter 10) as case studies to illustrate how poorly designed organizational architectures can be catastrophic. Other books provide little coverage of such managerially critical topics as developing effective organiza- tional architectures, including performance-evaluation systems and compensation plans; assigning decision-making authority among employees; and managing transfer- pricing disputes among divisions. Given the increased importance of corporate gover- nance, this omission has been both significant and problematic. Our primary objective in writing this book is to provide current and aspiring managers with a rigorous, sys- tematic, comprehensive framework for addressing such organizational problems. To that end, we have endeavored to write the underlying theoretical concepts in simple, intuitive terms and illustrate them with numerous examples—most drawn from actual company practice.