UNIVERSITY OF ROCHESTER
WILLIAM E. SIMON GRADUATE SCHOOL OF
BUSINESS ADMINISTRATION
STR 403
Economic Theory
Of Organizations
Winter, 2005
Assistant: Ellen Dombrowski
Professor Gerard Wedig
Office: CS3 – 160J
Phone: 273-1647
Email: wedig@simon.rochester.edu
COURSE OVERVIEW
Basic economic concepts introduced in STR 401 are combined with propositions
about agency problems, information and the assignment of decision rights in
organizations to develop a framework for solving important managerial and
organizational problems.
COURSE MATERIALS
1) Text: Brickley, Smith, Zimmerman, Managerial Economics and Organizational
Architecture, 3rd edition (BSZ) (McGraw-Hill/Irwin.).
2) Harvard cases and reprints: The Harvard materials listed on the Course Outline
are available via the XanEdu System. Additional readings will be made
available on the course web page.
CLASS ORGANIZATION
Managerial Economics and Organizational Architecture by Brickley, Smith and
Zimmerman summarizes theoretical aspects of organizational design and provides the
student with a framework for solving organizational problems. The target audience of
the book is MBA students. Past experience indicates that students can comprehend
much of the material without substantial lecturing by the instructor. Wedig will spend
some class time summarizing and discussing the readings. There will be lectures on the
more difficult material. Students need practice and guidance in implementing the
concepts from the book. A relatively large portion of class time is used for real-world
applications: case studies and examples.
STR 403 Course Syllabus
2
Winter 2005
ASSIGNMENTS AND HOMEWORK
Individual Assignments
1.
2.
Case questions  Students will receive a handout that provides questions for all
the cases that will be discussed in class. Each student, on an individual basis, is
required to submit written answers to these questions at the start of the class
when the case will be discussed. No student should turn in an assignment that
is more than two typed pages, double-spaced with 12-point font with
appropriate margins. The idea is to provide a brief, but informative answer to
each question. When appropriate, bullet answers can be used. All assignments
should be typed. Grading of the assignments is on the following scale: 3 points
for providing a thoughtful set of answers to the questions; 2 points for making a
good faith effort, but providing less correct answers; 1 point for turning in an
assignment that shows that the student has read the case but the quality of
answers is not very good; 0 points for either not turning in the assignment or
doing a poor job on the assignment.
Practice problems  Students will receive a set of practice problems with
solutions. Students should work these problems to gain the necessary skills to
do well on the exams. Students do not have to turn in answers to the practice
problems. Experience shows that students will generally not perform well in the
class unless they do the practice problems on their own prior to seeing the
answers.
Team Assignments
There are four required homework problems to be completed by study groups.
Study groups should consist of no more than five students per study group, but may
consist of fewer students. Homework problems should be turned in at the start of class
on the due date. The problems will handed out in class during the prior week.
GRADING:
Individual case write-ups: 15%
Homework problems: 15%
Midterm Exam (February 10th): 30%
Final Exam (date to be determined): 40%
It is critical that students read the assigned material and analyze cases prior to
class discussion. The instructor will occasionally “cold call” students in class to
participate in discussion. Class participation will be considered for students who are on
the margin between grades.
STR 403 Course Syllabus
3
Winter 2005
COURSE SCHEDULE
JANUARY
11
TOPICS
INTRODUCTION
Course introduction
Managerial economics and organizational architecture
READINGS
CASE
JANUARY
13
TOPICS
READINGS
CASE
JANUARY
20
TOPICS
Example
Chapter 1, BSZ, Article ,“Meltdown-Barings Bank”
None – ½ class.
OVERVIEW OF ORGANIZATION ARCHITECTURE/
FOUNDATIONS – ECONOMIC BEHAVIOR
Overview of organizational architecture
 Economic Darwinism
 Determinants of OA
 Airtex Case
Building blocks of organizational economics
 Economic behavior
Chapter 2, 3 (pp. 42-48, 56-67), 10, 11 BSZ,
Jensen and Meckling, “The Nature of Man”
AirTex Aviation, Harvard Case #9-800-269
FIRMS AND MARKETS/
DECISION RIGHTS ASSIGNMENT
Markets and knowledge/Firms and markets
Centralization vs. Decentralization
Separation of decision management and decision control
READINGS
CASE
Homework 1 handed out
Chapter 12 BSZ,
Jensen and Meckling, “Specific and General Knowledge and
Organizational Structure”
Fama and Jensen, “Separation of Ownership and Control”
Visionary Design Systems, Harvard Case #9-800-269
STR 403 Course Syllabus
JANUARY
4
Winter 2005
ORGANIZATIONAL ARCHITECTURE /JOB DESIGN
27
TOPICS
Bundling tasks into jobs and subunits
Matrix and network organizations
Recent trends in organizations
READINGS
CASE
FEBRUARY
Homework 1 due – Homework 2 handed out
Chapter 13, BSZ
Pepsi-Cola U.S. Beverages (A), Harvard Case #9-390-034
PERFORMANCE EVALUATION AND COMPENSATION
3
TOPICS
Performance evaluation
 Performance metrics
Compensation policy
 Theory of incentive pay
CASE
Homework 2 due
Chapters 15, 16 BSZ
Kohn, “Why Incentive Plans Cannot Work, ” Harvard Reprint #2799
Nordstrom: Dissension in the Ranks, Harvard Case #9-191-002
FEBRUARY
10
TOPICS
MIDTERM EXAM/ATTRACTING AND RETAINING EMPLOYEES
How to attract and retain employees
READINGS
CASE
Internal labor markets
Chapter 14, BSZ
No case.
STR 403 Course Syllabus
FEBRUARY
17
TOPICS
5
Winter 2005
EXECUTIVE COMPENSATION/
DIVISIONAL PERFOMANCE EVALUATION
Structure of executive compensation/Stock options
Divisional performance measures
READINGS
CASE
FEBRUARY
24
TOPICS
Homework 3 handed out
“What You Need to Know About Stock Options”, Harvard Business
Review Reprint #00205
Chapter 17, BSZ,
Stern, Stewart and Chew, “The EVA ® Financial Management System”
Al Dunlap at Sunbeam, Harvard Case #9-899-218.
Gerald Weiss Stock Options, Harvard Case #9-899-258
BOUNDARIES OF THE FIRM: VERTICAL AND HORIZONTAL
Diversification
Vertical integration versus outsourcing
READINGS
CASE
MARCH 3
TOPICS
Homework 3 due – Homework 4 handed out
Chapter 8 (pp. 213-217), Chapter 19 (pp. 514-535), BSZ,
Jensen, “Agency Costs of Free Cash Flow”
“Goodyear Restructuring” Harvard Case #9-288-046
CHOOSING THE LEGAL FORM OF ORGANIZATION
For-profit vs. Nonprofit status/
Choosing among For-profit forms
Governance mechanisms in different organizational forms
READINGS
CASE
Homework 4 due
Chapter 18, BSZ,
Fama and Jensen, “Agency Problems and Residual Claims”
“SCORE Community Ventures”, Harvard Case #SI-08
MARCH 10
TOPICS
READINGS
CASE
LEADERSHIP AND IMPLEMENTING CHANGE
Leadership
Organization power/Marketing and implementing a proposal
Chapter 20, BSZ,
Lincoln’s Harsh Lessons from International Expansion, Harvard
Business Review Reprint #99305
“Becton-Dickinson-Designing the New SOF Process”, Harvard Case
#9-197-014