Understanding a Business Through Hierarchies, Markets and Networks

Understanding a business through hierarchies, markets and networks

A firm is formed by linking of production with consumption i.e. by connecting producers and consumers.  If people did not have firms, each of them have to navigate the market to find a supplier and enter into the contract to buy each desired product.  Thus, understanding one own business is of great advantage, if a firm wants to survive in the present and grow in the future.  The firm can recognise where it is in the market through three concepts: hierarchies, markets and network.  Hierarchies are the organisational structure for getting things done inside the organisation whereas markets allow procedures outside the firm i.e. operations between firms and customers or firms and other firms.  For networks, they are observed both inside and outside the firm which include networks of individuals within the firm and external networks with other firms.

In this essay, the three mechanisms will be applied in the context of the Mingalar Royal Jadeite and Art (MRJA) Co., Ltd. which is a Myanmar / Burmese jewellery manufacturer and retailer founded in 2002.  MRJA produces and sells wide range of gemstones and jewellery, especially jade jewellery, jade carvings and rough jade.  The company started as a family-run jewellery shop in Yangon, Myanmar and expands its market to Guangzhou, China in 2012. The company has a production site in Myanmar and markets its products in both Myanmar and China.  It is a medium-sized company, operating with around 80 employees both in Myanmar and China.  

Hierarchies

A hierarchy is a system in which people or things are placed in a series of levels with different importance or status (Merriam-Webster online dictionary, 2015).  It is a chain of command usually from top to bottom where actions are taken place to achieve the goals of the firms.  The hierarchy is varied due to the size of the firm and costs are the key factor that form the structure of the hierarchy.  

There are different forms of hierarchy.  U (unitary) functional form can be found in small to medium-sized firms where managers of various departments report to the Chief Executive (CE).  The number of managers required depends on the number of operatives and people supervised by each manager.  The greater the span of control, the fewer the number of managers and levels of management (hierarchy).  In medium to large-sized firms, they usually practice M (multi-divisional) form in which it is made up of different divisions and each division is run by a divisional manager.  And divisional managers report to CE.  This form solve most of the U-form problems where CE can concentrate more on strategic issues rather than operational matters.

The H (holding company) form is quite different from M-form where each division is a subsidiary owned by the parent or holding company and strategy is pursued by the individual subsidiaries.  This form is typical in multinational companies.  In matrix form, the firm is sub-divided in at least two ways.  For example, there might be categorizing of geographical location and grouping based on product types.  And each manager has to reports to more than one superior.  Finally, the flat organization structure is normally used in firms where there are technological innovation and e-communication as they reduced the need of middle management.  Senior management can communicate directly to those at the bottom of the structure.  This form is so much look like the U-form structure.

Hierarchical Structure of MRJA

Since MRJA exercises U-form, referring to Figure 1, staff from the specific function increased specialization in their respective field.  Their role and responsibilities are clear and there are no clashes of role among the employees.  Moreover, if defective occurs within the organization, the company can easily access where the problem is rooted.  However, when the firm starts growing, this hierarchical structure is not efficient anymore. For MRJA also, since the company enlarges from family business to multinational company, this structure becomes unproductive since it is quite hard for functional managers to report the MD and wait for his decision.  The MD cannot absorb necessary information and he does not get full information from the lower level.  And rather than concentrating on strategic issues, the MD has to pay more attention to operational matters.  The managers have more freedom to pursue their own goal and difficult to control.  

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Figure 1: U (unitary) functional form of MRJA

Short-run and long-run production and costs of MRJA

        The firms total cost function can be projected more completely if they distinguish between fixed costs and variable costs.  Fixed costs are expenses that have to be paid by a company, that remain constant when outputs increase or decrease.  For MRJA, the fixed costs will be company building, jewellery stores, warehouse, working facilities, employee salaries and property taxes.  Variable costs are those costs that vary depending on a company's output; they rise as outputs increases and fall as outputs decreases. The variable costs for MRJA are direct labour, advertising and commissions to salespeople.  Thus, total cost (TC) is equal to total variable costs (TVC) plus total fixed costs (TFC).

        The distinction between fixed and variable factor allows the firms to distinguish between the short-run and long-run.  The short-run is a period of time at least one factor of production is fixed.  Thus, to increase outputs in the short-run, only using more variable factor is possible (Besanko, Dranove, Shanley and Schaefer, 2013).  As in MRJA, to increase the production of the jewelleries and jade carvings, the company increases the working hours of the direct labour.  Since the more factors of production the firm uses, the greater will its costs of production be.  Moreover, in the short-run, as long as a firm is covering TVC, it will still run its business.  Otherwise, it will also lose its TFC.

The long-run is a period of time in which all factors of production can be varied.  In the long-run firms are no longer constrained by capacity and it can expand its scale ― both economies and diseconomies of scale.  For MRJA, it has its economies of scale in purchasing because it gets discounts from the supplier mining company in buying rough jade and other precious stone.  The supplier company likes to sell their product in bulk as transaction costs are lower and it provides an assured income stream.  MRJA also has diseconomies of scale in coordination.  Due to the opening of new stores in China and growing business, it is more difficult to coordinate activities and line of communication within the firm gets longer.  As the firm grows, the MRJA’s managers tend to have their own objective and difficult to control.  Thus, the company has to insert new management level above the functional mangers.  

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