Interview: Séan Rickard
The Economics of Organizations and Strategy
SM:
We are looking today at the issues that arise out of this book The
Economics of Organizations and Strategy by Séan Rickard. I am
joined today by Séan Rickard and I would like to address
straightaway Séan the first issue. In the book you say in order to
operate successfully managers must develop an economic way of
thinking. Perhaps you could expand on that and give me some
insights how the book answers that.
SR
The very essence of a good manager is someone who is in
command of efficiency, who understands how to create it and
understands the value of it. And economics is all about efficiency.
Economics stripped to its core is the study of efficiency. If you
understand the basis of what drives economics, you will be
understanding the basis of what drives a good manager.
The reason I wrote this book is that although that message is tucked
away in almost every economics text book you come across, what
the average economic text book does not do is to actually get down
to looking at the firm, the organisation within which managers
actually operate. Economics traditionally has been a bit of white
tower subject. We talk about a world in which people behave
sensibly, rationally, efficiently and will give you rules and outcomes
in that situation. That is not really the world that managers operate
in. They operate under uncertainty, they operate with private
interests and they have to deal with unexpected events. And really
what this book does is two things: it goes down into the firm to
recognise those difficulties that managers face and says well this is
what economics has to say about that; and then it says here is the
world in which firms operate, let’s see what economics has to say
about how firms in this uncertain world operate against their
competitors.
SM
Do you concede that the average manager, when faced with a text
book like yours and economics generally say I really can’t make that
bridge very easily.
SR
I accept that that is probably the reality, I think that with a little bit of
effort though it is all very accessible. What I have tried to do in my
book is to provide many examples and I have tried to use the
narrative to explain and I have pushed the formula and mathematics
into appendices rather than in the main text. I would like to think
that my book is accessible to anyone who has an interest in being
more efficient and wants to run their businesses better.
Séan Rickard
SM
I would like to explore that a bit more with you and I am going to
pick a number of areas that I would like you to illustrate how an
economic approach and insight can help.
The first one would be about the working of markets. What can an
economist bring to the party here?
SR
Well markets are the most fundamental of building blocks really for
all businesses. Markets are really where buyers and sellers come
together and a business has no business if it doesn’t have buyers
for its products.
What markets teach us is that there are some iron laws. If you
oversupply a market, your price is going to be forced down. If the
quality of your product falls relative to your competitors your returns,
your prices, are going to decline. What people have to understand
and can understand when they understand the workings of markets
is that the management skill really is supplying the quantity at the
right quality of the product that your market is prepared to buy.
That is an iron rule. Understand that and you are already a long
way down the road to a profitable business.
SM
The next one that I would like to get your advice and insight on
really is how economics can help you look at the assignment of
decision making powers, for instance, the measurement of
performance and incentive systems? Because that takes quite a bit
of your book and world that the manager is in, sure they are dealing
with those things, but what are the things that you would particularly
want to highlight from an economic perspectives?
SR
Well this is precisely one of the reasons why I wrote this book
because the typical economic text book assumes efficiency. It
assumes that people are doing what they do rationally and without
waste. The reality of course, once you are in a firm, is very
different than that.
If I were to speak to an experienced manager, he would understand
implicitly what I am saying in this book here. He would realise the
importance of information. He would realise the importance of
communication. He would realise the importance of incentives.
What my book does is really to explain against a background of
economic theories exactly why incentives are so important, exactly
how we can encourage incentives and how these come from a flow
of information that is balanced as to whether it is coming down from
senior managers in the form of instructions, or whether it is coming
up from employees in the form of this is the way our operations are
going.
Really we are providing a framework within which people can think
logically about the way they manage their businesses and whether
there are areas that they can improve upon once they understand
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Séan Rickard
the key issues involved in these organisational structures.
SM
If we move outside the firm and start to look in the competitive
environment, how can economics help people to secure competitive
advantage?
SR
Well economics has an awful lot to say in this area and what my
book concentrates on is game theory. There are many other
techniques as well, but really in the last fifty years we have come to
understand that when we have markets that are producing
differentiated products and where we have perhaps only a small
number of firms competing for a market segment, then game theory
tells us that in making a decision what a company has to do or
senior managers have to do is think not only about the decision
within their company, they have to think about the effect that their
decision making is going to have on the decision making of their
rivals and their rivals in making decisions to counteract my decision
is going to affect what I do.
Game theory allows us a framework for being able to analyse what
the effects of our decisions are actually going to be. It’s not good
enough to say I am going to lower my price and therefore I might
sell some more products. Well game theory teaches that if I do that
maybe my rivals will lower their products, in which case all I will do
is lower my profits. What game theory teaches is that perhaps at
times it pays me to signal to my rivals what I am going to do in the
hope that they will understand why I am doing it and that I am not
directly attacking them.
So above all game theory, if it is understood by managers, can allow
them to make better strategic decisions once again improving the
efficiency of their decision making and therefore reducing the
likelihood of a bad decision.
SM
Now, if I were to say to a manager look you are never going to get
to the level of expertise that a Séan Rickard has, you are not going
to become an economist, but what are the things that in your view a
manager needs really to work at, to get hold of? I would imagine
game theory would be one of those – are there any other areas that
you would advise managers to say of all the kind of economic
landscape, make sure you understand these things?
SR
Well we have already discussed markets. I think that is very
important for any manager. The second point that I think a good
manager has to understand is that we don’t live in a world of perfect
certainty, invidious have their own objectives and therefore a good
manager will always pay attention to trying to improve their
understanding of a situation, ensuring that they provide sufficient
information to their employees and recognising that when you are
achieving a successful outcome, rewards should follow from that.
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Séan Rickard
They are the fundamental economic laws and as I said a few
minutes ago, of course any good manager would understand that.
They just perhaps wouldn’t think of it in the way that it is put in the
book. The book is really saying to people this is giving you a lot of
background, theory, knowledge which is really supporting probably
what you are doing already if you are a good manager. And if you
are not doing it as well as you might do, it gives you some hints as
to what you perhaps could do to do it better.
Economics, like many other subject areas, is a body of knowledge
that people can dip into and use to make better decisions and I
hope my book facilitates that.
SM
Are there any other areas Séan out of the book that you would want
to say have a look at that, at least to get some kind of understanding
from it?
SR
The other thing that the book contains is quite a lot on competition
law and of course any senior manager in this day and age has to
have a concern for what the law will allow them to do and when the
law will take exception to what they are doing. This can be very,
very costly to companies if they ignore this and there are many
examples in the book of not only where people have fallen foul of
the law, but the law isn’t quite an ass, the law has developed
something called a rule of reason. And it began to realise over
recent years that perhaps firms collaborating together isn’t always a
conspiracy against the public. Sometimes in collaborating together
there can be benefits. An obvious example is where two firms
might share a distribution system and we have seen quite a lot of
encouragement for collaboration in the area of research and
development.
What the book provides are many examples of where firms working
together, with one eye on what the law allows them to do, can
greatly improve the efficiency and therefore the profitability of their
operation.
SM
Séan thank you very much. What you have done is help to take
theory and start to put it into the real world of managers. Thank
you very much.
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Cranfield School of Management
Produced by the Learning Services Team
Cranfield School of Management
© Cranfield University 2009