Matrix organization gives the firm flexibility by organizing resources along two (or more)
dimensions. Such combinations in turn enable the firm to achieve the optimal levels of staffing
given specific scenarios. Stochastic demand can greatly influence the amount or skill sets
required of resources. Flexibility can address such issues. For example, Amoco Corporation's
information technology department assigns experts to functional groups called Centers of
Expertise. Simple projects may demand only a few experts, whereas complex projects may
require numerous experts from multiple Centers.
Problem 6 (brilliant)
IQ, Inc., currently monopolizes the market for a certain type of microprocessor, the 666. The
present value of the stream of monopoly profits from this design is thought to be $500 million.
Enginola (which is currently in a completely different segment of the microprocessor market
from this one) and IQ are contemplating spending money to develop a superior design that will
make the 666 completely obsolete. Whoever develops the design first gets the entire market.
The present value of the stream of monopoly profit from the superior design is expected to be
$150 million greater than the present value of the profit from the 666. Success in developing
the design is not certain, but the probability of a firm's success is directly linked to the amount
of money it spends on the project (more spending on this project, greater probability of
success). Moreover, the productivity of Enginola's spending on this project and IQ's spending
is exactly the same: Starting from any given level of spending, an additional $1 spent by
Enginola has exactly the same impact on its probability of winning. The following table
illustrates this. It shows the probability of winning the race if each firm's spending equals 0,
$100 million, and $200 million. The first number represents Enginola's probability of winning
the race, the second is IQ's probability of winning, and the third is the probability that neither
succeeds. It shows the probability of winning the race if each firm's spending equals 0, $100
million, and $200 million. The first number represents Enginola's probability of winning the
race, the second is IQ's probability of winning, and the third is the probability that neither
succeeds. It shows the probability of winning the race if each firm's spending equals 0, $100
million, and $200 million. The first number represents Enginola's probability of winning the
race, the second is IQ's probability of winning, and the third is the probability that neither
succeeds.
Note: This is not a payoff table.
IQ's Spending
Enginola's
Spending
0
$100 million
$200 million
0
(0,0,1)
(0,.6,.4)
(0,.8,.2)
$100 million
(6,0,.4)
(4,.4,.2)
(3,.6,.1)
$200 million
(8,0,.2)
(6,.3,.1)
(5,.5,0)
Assuming that
(i) each firm makes its spending decisions simultaneously and no cooperatively;
(ii) each seeks to maximize its expected profit; and
(iii) neither firm faces any financial constraints, which company, if any, has the greater
incentive to spend money to win this “R&D race”? Of the effects discussed in the chapter
(productivity effect, sunk cost effect, replacement effect, efficiency effect), which are shaping
the incentives to innovate in this example?
Enginola in obtaining a breakthrough would earn $650 million in total profit and IQ would
only earn an additional $150 million since their current technology won them $500 million.
Enginola gain $650 million if success and willing to spend $200 million on research, since
more money will increase the probability of success. If IQ anticipated Engineola's decision, it
would spend $200 million as well. But why would a firm invest $200 million to get a 50%
chance of a $150 million gain? Arrow's replacement effect suggests that Enginola, not IQ will
be the innovator in this case.
In this case, the probabilities given do not support the efficiency effect. The winner is a
monopolist—there is no asymmetry whereby if the incumbent wins his/her monopoly position
is maintained and if the entrant wins he/she becomes a duopolist.
Similarly, the replacement effect suggests that the incumbent's marginal gain is smaller than
the entrant's marginal gain. Since the entrant's success means the incumbent is out of the
market, the incumbent's marginal gain. Since the entrant's success means the incumbent is out
of the market, the incumbent's marginal gain is not $150 million, but is equivalent to the
entrant's marginal gain. Given there is no asymmetry, the firms have equal incentives to
innovate.
Problem 7 (tia)
The Lincoln Electric Company is a longtime maker of welding equipment in Cleveland, Ohio,
whose industry performance has been legendary. Its operations have focused around its well-
known piece-rate incentive system, which permits it to gain significantly greater utilization of
its capital assets than competitors, with a resulting competitive advantage on costs. In the mid-
1990s, however, Lincoln experienced some difficulties in establishing new facilities outside of
the United States and ended up modifying its organizational system when it opened facilities
in Asia. What factors might contribute to the difficulties that even a well-managed firm might
face in transferring its management and production systems to international locations?
translate :
Lincoln Electric Company is a longtime maker of welding equipment in Cleveland, Ohio,
whose industry performance has been legendary. Its operations have been focused on a well-
known piece-rate incentive system, which allows it to obtain significantly greater utilization of
capital assets than its competitors, while generating a competitive advantage on costs. In the
mid-1990s, Lincoln experienced some difficulty in establishing new facilities outside the
United States and eventually modified its organizational systems when it opened facilities in
Asia. What factors might contribute to the difficulties even a well-managed company might
face in transferring management and production systems to international locations?
Answers :
[Question No. 7 (Tia) is the answer from searching on Google from various sources which is
actually different from the question asked. So hopefully it will be accepted.]
Cultural differences certainly play an important role. Labor laws are also different and
sometimes difficult to adapt. Attitudes and policies toward workers that are common and
accepted in one nation are not always appropriate in another and the leadership style in
America's headquarters is certainly different from the style of leadership that is considered
acceptable in Asia. The most basic but sometimes invisible thing when a company finally
expands from west to east or vice versa is how to adopt a genuinely neutral global perspective
without any presumptions about which way is best between the two.
