We discussed in class today the dynamics of decision making in a committee, which I found to be particularly interesting. As Professor Arvan described the gridlock that occurred from his experience on committees at the University, I could not help but take the insights he offered and apply them to my own experiences. I am currently the president of a rather small RSO here on campus, and viewing the executive board as a committee really drives home the idea of transaction costs for me. For example, my RSO decided to reboot its online marketing and communication strategy last year. At the time, we had almost no internet presence all. The only ways to find us online were on a derelict Facebook account which nobody could access and a homepage provided by the RSO office on Collegiatelink.
So, we agreed that in order to effectively reach potential members we needed to increase our web presence. The first decision was easy. We could simply "go to the market" and create a new Facebook page with nothing more than a small time cost to us. The real issues arose when we began discussing how to go about creating our own website. We initially considered building a site from the ground up and hosting it on a free internet domain service. This course of action, however, would have required a great deal of web-page design, which none of us were knowledgeable and would therefore have meant seeking out somebody with the skills to create a website from scratch and potentially incentivizing them to create one for us. From there we discussed making a more "cookie cutter" site through a site builder service, but that led us to realize that such sites, especially the ones that give you a personal domain name, generally cost more than we were willing to pay. Ultimately we tabled the idea of having a dedicated website and focussed instead on our Facebook page. We put our marketing chair, who had some experience with digital editing and social media marketing, in charge of creating a new logo for our rebranding and adjourned our meeting on the matter. Since then, the Facebook page has not changed and there is still no logo for our club. While this most likely indicates poor management on my part, I think that this situation also illustrates the nature of transaction costs in an organizational setting. Once a course of action has been decided, each decision involved in implementing it has the potential to snowball into a project of its own, and without careful consideration of the costs involved can derail the plan entirely thus harming the organization in the long-run.
This is a good post in that among the ones I've read so far it comes closest to get at what transaction costs are actually about. But there still remains an issue of where those transaction costs are incurred and if when we think about this whether we are confounding transaction costs with production costs. (They are not the same.)
ReplyDeleteOne aspect of transaction cost is monitoring performance. In your last paragraph you said your marketing chair was tasked to work on the Facebook page. Was anyone tasked to monitor the marketing chair's work on this project? Does such monitoring fall under the president's job? Or was it somebody else's responsibility?
Beyond monitoring there is then the question of what sort of action is necessary to take when the monitoring proves the effort was inadequate. There is an term that's arisen since email has become a mode of communication that I don't like but I must admit on occasion has a purpose. It is called a naglet. Typically it is sent by somebody who is playing the role of your mother in abstentia, sent as if you aren't aware that you've been shirking, or if you are aware that a bit of embarrassment qua guilty conscience will get you off your duff and then do the work. As a general approach to management I think naglets fail, because it makes people dislike work. In a pinch, however, they may be effective.
That discussion of naglets is meant so you will ask - was there a transaction cost that should have been incurred but wasn't? Had it been incurred would we now have an effective Facebook page? Or does the explanation lie elsewhere for why we seem to haven't made any progress. For example, the marketing chair was assigned the task based on prior experience, but maybe someone else should have been assigned the task because the other person would have been more likely to complete it. So, to put it a different way, since nobody is getting paid to do this stuff, did you solicit volunteers for the task or did you just assign the marketing chair to the work? Volunteering, one might expect, implies some commitment to get the job done.
What should be done then if there are no volunteers? Let's leave that for now and please bring it up in class on Tuesday, if we get to this example.
Thank you for your insightful response Professor Arvan. I think I understand the distinction you are making between transaction costs and production costs, however I am still unclear how to go about applying the transaction costs approach to identifying where costs occur in a managerial stream of decisions. For the example I provided regarding my experience as the leader of an RSO, would the transaction cost that should have been incurred be the provision of proper monitoring once a course of action regarding our Facebook page was agreed upon?
ReplyDeleteI revisited chapter two of Milgrom and Roberts to clarify my understanding of transaction costs, and it seems that motivation costs most closely describe the situation I experienced with my organization. Specifically, it seems that our transaction costs arose from imperfect commitment. On my part as the leader, I was not able to follow through and monitor my fellow executives, and on their part as board members they did not volunteer or fully commit to the work required for our goals. How should an organization apply the transaction costs approach to address this problem?
Also, I recently read an excerpt of a text called "The Leadership Challenge" by Kouzes and Posner in my Management and Organizational Behavior class. The section I read was aimed at describing transformational leadership and the functions a leader must fulfill to foster organizational greatness - to motivate everyone on board to not only do what is required, but to engage and inspire them so as to obtain their effort out of a genuine want to build the organization. I was just wondering, have you encountered the transformational leadership model before? If so, how do you think it interplays with our examination of transaction costs?