The Evolution of Firm - Essay Example

? Managerial Economics The firm’s evolution The firm, back in the year 1840, was regarded or described as owned by a family. This means that businesses were not big and also scattered. They were greatly limited at that time by the infrastructures that were available; sea was the major means of transport, and this made it very slow as communication was also done in the same way. There was basically no funding as the banks never wanted to take on what during that time appeared as a dangerous undertaking. If loans were provided, then it was done on the basis of individual associations. Nothing was there to prevent the market price fluctuations. There was no development in the product technology. In addition, the government did not take an active role in the environment of business. Following the initiation of railways during the 1910s, businesses started expanding and appeared to integrate vertically. However, mass production resulted in less corporations being around but those that remained were slightly larger and were in a position of colluding in the marketplace; the government, therefore, had to make an intervention in the market (Milgrom, 2007, p.83). The business agency-principal relationship was not enhanced by infrastructure. The telephone radically decreased the time that was spent in communication and distributers together with suppliers could now be in a position of keeping abreast of what was taking place in the market so that have an idea of how they were supposed to plan production, thus, minimizing oversupply. Globalization plays a very crucial role in the present world. Specialists are coming up as the firms do not see the importance of vertical integration any longer. There was introduction of new transport modes such as air travel as well as interstate trucking. The issue of communication has also been enhanced substantially by the introduction of computer. Banks now have large amount of money available for the purposes of investment on the basis of the ability of the firm to be capable of paying back. Moreover, changes in the technology of production create better goods quality at cheap prices. There was increase in government regulation which greatly changed the manner in which firms involve in competition in the market. Definition of transaction Transaction costs include the costs that are incurred during the process of looking for the best or most appropriate client or partner or even supplier, the costs incurred in the establishment an apparently ‘tamperproof’ contract, together with the monitoring costs as well as the enforcement of the contract’s implementation. Nevertheless, transaction costs is also referred to as costs of coordination. The total costs that are incurred by a firm has two components which are costs of production and costs of transaction. The costs of transaction involve all the information that is required for the purposes of coordination individuals’ work and equipment that do then principal processes. On the other hand, costs of production include the costs that are incurred from the other primary or even physical processes that are needed in the creation and distribution of the services or goods that are being made. Firms experience difficulties or problems with the market that compels them to do in house goods production. It is used when the market appears to be favorable or conducive (Milgrom, 2007, p.83). Transaction cost characteristics Transaction cost economics, usually abbreviated as ‘TCE,’ is the same as game theory whereby it is assumed that all the parties to a contract have an understanding of the strategic position and will put themselves in a good position; however, the difference between TCE and the game theory comes up because the incompleteness of the contracts sets in as the rationality’s limits becomes obligatory in relation to the complexity of transactions. Transaction cost economics uses authority as a means of deterring ‘bad games.’ The major characteristics of TCE include: Bounded rationality: this is a principle that the decision-makers should work under three constraints that are unavoidable, which are: Only limited; unreliable information is usually available about the positive alternative together with their repercussions. The mind of human beings only has a limited capacity for evaluation and processing of the available information available. There is only a limited amount of time available or making a decision. These bounds or limits on sagacity also make it almost unfeasible to draw up contracts, which cover each emergency or eventuality, calling for reliance on the thump rules. Opportunism: This is the practice of the exploitation of circumstances in egotism, particularly without considering the moral principles or even the interests of others. Uncertainty: making of decision- it is a situation whereby the present state of knowledge is in a manner that the nature or order of things are not clear or not known. However, even though too much of indecision is not desirable, one that is manageable offers the freedom of making decisions that are creative. Frequency: it is the measurement of the total number of times that an event that is repeated happens per unit of time. Hold up problem: This happens when the contracts are not complete and the corporation can gain from the holding up of its contractors. Asset specificity: This is the feature or aspect of an asset, including specialized machine, which makes it important or useful for one or even few special purposes, and which thus cannot be sold off easily in a quick manner in a sure fire sale. There are four dimensions in the asset specificity: Site specificity: this refers to the availability of a natural resource at a particular place and only movable at great cost. Physical site specificity: this refers to a complex computer system or specialized machine that is specifically designed for just one purpose. Human asset specificity: refers to highly specializes skills of human beings that come up in learning by the doing of a fashion. Dedicated assets- refer to a separate investment in a firm that cannot easily be applied or even be put to work for some other purposes. The firm’s vertical boundaries A firm is described by its size, the way it controls production and distribution. The boundaries of a firm refer to whether settles on expansion upstream into the supply chain or even downstream into distribution. Its choice of buying or making is dependent on the situation it faces. The corporation that I am going to analyze is the Jamaica Broilers Group of Companies. The Jamaica Broilers Group of Companies Jamaica Broilers Group of Companies began its operations in the year 1958 as the country’s first commercial producer of broiler meat. The company has, to date incorporated poultry production and has also done diversification into the rearing of cattle, feed milling, fish farming and the production of beef, as well as the marketing and development of some other value added products both for export and for consumption locally. Within the company, which is the largest poultry operation in the entire region, we find that a broiler hatchery is a very critical link in the chain of production. The best Dressed Chicken Hatchery’s operations are designed for making the production of small or baby chicks both healthy and efficient process. The selection of hatching eggs is done and ocean freighted from the United States of America on the basis of the International Poultry Breeders also from the Jamaica Poultry Breeders. The transportation of the eggs is then done to the BDC Hatchery in the trucks that are refrigerated. Those that are put in setters for about eighteen days are then transferred on the nineteenth day in the hatchers whereby they stay for three days. The eggs that are hatched are then moved for grading in the Processing Room. The company that has been examined demonstrates the relationship-specific assets; called dedicated asset specificity and physical asset specificity. The contractors should make considerable investment of growing the broiler chicks. They also require specialized skills like feed management knowledge. The vertical disintegration in combination with these investments’ location specificity results to the contractor being held up by the broiler it attempting to get minimal prices that makes the contractor not to venture in more expensive upgrade as the return rate on the investment is not actually worth it. Much time and funds are spent in the drawing up of contracts with the contractor because there is no trust on both of the sides. Usually, the contractor feels like the corporation is trying to rip them off; particularly if there is a high rate of mortality on the chicks due to a fault that is not their own. Conclusion It is better off for the company to contract out the chicks’ growing since there are numerous risks that are associated with the process; these include flu that can considerably decrease the number of chicks, mortality rate, flooding following hurricanes, as well as lack of water availability following hurricane’s residual effects. The group used tapered integration that is a combination of the using of the market, which is buy and make and vertical integration. The transactions between the company and its contractors are influenced by the bounded rationality making of changes is done when conditions emerge that were not initially addressed by the present contract. Bibliography Milgrom, P 2007, Economics, Organization and Management, Englewood Cliffs, NJ: Prentice-Hall. Read More