What is an Industrial Organization?
Before we dig into industrial organization let’s first start by clarifying the meaning of “industrial.” According to Webster’s New World Dictionary, “industry” refers to “manufacturing productive enterprises collectively, especially as distinguished from agriculture.” “Industry” also means “any large-scale business activity”, such as the steel industry. Industrial organization is concerned with the workings of markets and industries, in particular the way firms compete with each other.
Organizations are social entities that are goal directed and are designed as deliberately structured and coordinated activity systems and are lined to the external organization. The key elements of an organization are the people and their relationships with one another. An organization exists when people interact with each other to perform essential functions that help attain goals.
An industrial organization is a field of economics dealing with the strategic behaviour of firms, regulatory policy, antitrust policy and market competition. Industrial organization applies the economic theory regarding the model of price to industries. Economists and other academics who study industrial organization seek to increase understanding of the methods by which industries operate, improve industries’ contributions to economic welfare, and improve government policy in relation to these industries.
1. According to Luis Cabral (2000) defined it as, “Industrial organization is concerned with the workings of markets and industries, in particular the way firms compete with each other.”
2. According to Church & Ware (2000) defined it as, “Industrial organization or industrial economics is the study of the operation and performance of imperfectly competitive markets and the behavior of firms in these markets.”
Chester Irving Barnard defines formal organization as “a system of consciously coordinated activities or forces of two or more persons. It refers to the structure of well-defined jobs, each bearing a definite measure of authority, responsibility and accountability.”
Importance of Industrial Organization
Industrial organization refers to the study of how firms and industries are organized, how they compete with each other, and how they interact with the market. It plays a crucial role in shaping the economic landscape and determining the success of businesses. Understanding industrial organization is essential for both firms and policymakers as it provides insights into market behaviour, competitive strategies, and the overall efficiency of markets. Let's delve into the significance of industrial organization and examine its key aspects.
1. Market structure and competition: One of the primary focuses of industrial organization is analyzing market structure and its impact on competition. Different market structures, such as perfect competition, monopolistic competition, oligopoly, and monopoly, have distinct characteristics that influence the behaviour of firms and the outcomes in the market.
a. Perfect competition: In a perfectly competitive market, many small firms are producing identical products, with no barriers to entry or exit. Price is determined by market forces, and firms have no market power. For example, the agricultural sector often exhibits characteristics of perfect competition, with numerous farmers selling homogeneous products like wheat or corn.
b. Monopolistic competition: Monopolistic competition occurs when many firms are producing differentiated products. Each firm has some degree of market power due to product differentiation, but there is still some competition. Examples include the market for fast food restaurants, where firms differentiate themselves through branding and menu offerings.
c. Oligopoly: Oligopoly refers to a market structure where a few large firms dominate the industry. These firms have significant market power, and their actions can have a substantial impact on market outcomes. For instance, the automobile industry is typically characterized by a small number of major players who compete fiercely for market share.
d. Monopoly: In a monopoly, a single firm controls the entire market, leading to limited or no competition. This can result from barriers to entry, such as patents or exclusive access to resources. A prime example is Microsoft's dominance in the operating system market with its Windows operating system.
2. Strategic behaviour and competitive advantage: Industrial organization also examines the strategic behaviour of firms and how they gain a competitive advantage in the market. Firms adopt various strategies to differentiate themselves from competitors and capture a larger market share. Let's explore a few strategies commonly employed by firms:
a. Product differentiation: Firms can differentiate their products through unique features, branding, or superior quality. For instance, Apple's iPhones stand out in the smartphone market due to their sleek design, user-friendly interface, and strong brand image.
b. Cost leadership: Some firms aim to achieve a competitive advantage by becoming the lowest-cost producer in the industry. By minimizing costs through efficient production processes or economies of scale, these firms can offer lower prices and attract price-sensitive customers. Walmart is a prime example of a company that has successfully implemented a cost leadership strategy.
c. Innovation: Firms that emphasize innovation constantly strive to develop new and improved products or processes, giving them a competitive edge. Tesla's electric vehicles revolutionized the automobile industry, showcasing the power of innovation in gaining a competitive advantage.
3. Policy implications: Understanding industrial organization is not only crucial for firms but also has significant policy implications. Governments and regulatory bodies use insights from industrial organizations to design and implement policies that promote competition, protect consumer interests, and ensure market efficiency.
a. Antitrust regulation: Industrial organization research helps identify instances of anti-competitive behaviour, such as collusion or abuse of market power. Antitrust regulations aim to prevent such behaviour and promote fair competition. For example, the European Commission fined Google for abusing its dominant position in the search engine market.
b. Merger control: Industrial organization analysis assists in evaluating the potential effects of mergers and acquisitions on market competition. Regulatory bodies review proposed mergers to prevent excessive concentration of market power. An example is the scrutiny faced by the proposed merger of T-Mobile and Sprint in the U.S. Telecommunications industry.
c. Consumer protection: Industrial organization research helps policymakers understand market dynamics and protect consumer interests. It aids in identifying and addressing issues like price discrimination, misleading advertising, or unfair contractual terms. consumer protection agencies rely on such insights to ensure fair and transparent markets.
Understanding industrial organization and its significance is crucial for firms, policymakers and consumers alike. By comprehending market structures, strategic behaviour, and policy implications, stakeholders can make informed decisions that promote competition, innovation, and market efficiency.
Functions of Industrial Organization
There are three kinds of functions which must be performed whenever an organization comes into being:-
1. Division of labour: Since an organization is a structure of human association, it involves individuals and groups of individuals to join together to perform certain tasks and therefore division of work is done. This leads to fixing of responsibility, delegation of authority and specialization which are the principles of an organization.
2. Combination of labour: Because there is division of labour from the structural point of view it results in various units, departments and divisions of an organization. These divisions are made on the basis of skills of the workers, the tools and the machinery used.
3. Co-ordination: This is achieved through leadership in the structural sense. It involves fixing responsibilities and delegation of authority. It establishes control of authority. It establishes control which provides for the efficient performance of activities.
4. Specialization: Specialization allows proper utilization of the abilities of the individual workers and makes coordination of activities easier, facilitates the development and implementation of essential controls, encourages the efficient productiveness of workers, and quickens the training process.
Each role in the bureaucratic structure is specialized and defined. People are selected according to their level of skills and experience, the degree of loyalty and ability to perform.
5. Specialized Knowledge: According to E. V. Schneider, the need for specialized knowledge is also one of the functional requirements. The increasing complexity of industrial systems and technology, the search for new products and the need to engage in long-range research require specialized and authorized information in respective areas.
6. Indirect Lines of Communication: Communication between the subordinates and bosses should pass through each ring of ladder without omission, as a message is moved downward or upward.
To achieve proper and efficient coordination, it is of utmost necessity that all the concerned departments must be informed well. Workers must receive clear-cut and specific instructions, the foreman must be conveyed and convinced regarding the broad purpose of production, and all the intermediary level of management including technical specialists and junior managers must know the details of work and the routine job, they should also be related to the chief executives so the various important specific information’s and directions must go ‘down’ through the staff, through regular patterns of superior and reports and records must go ‘up’ both vertically and horizontally to reach the executives to enable them to make proper decisions effectively & immediately.
7. Long-Range Planning: The future financial aspects are to be considered, changes in technology and savings in costs of manufacture if not immediately, in the near future should also be kept in mind. The main aim i.e. profit has to be maintained. There is a need for proper systematic and scientific planning for future survival.
8. Personnel Training and Development: Employees must be trained for their work and motivated properly to perform satisfactorily the work assigned to them. Human Capacities must be made in consonant with the needs of production and profit making whether by command, force or persuading them.
9. Maintenance of External Relations: External relations may be analyzed in terms of ‘inputs’ and ‘outputs’.
Inputs include raw material, labour supply, capital, control and regulations of many kinds arising from different levels of government, and pressure from labour movement’s public opinions. Outputs include the sale of the finished products to another firm, to an institution or to the public at large, wages and salaries paid to employees, physical effects on surrounding Communities, donations to education or research laboratories.
Inputs like government’s demand for certain working conditions or labour welfare, forbidding, merging, and control over the quality of the products affect internal organizations indirectly. Outputs may lead to the creation of departments designed to survey o control the market, legal staff to deal with government, welfare officers to look after the needs of the workers etc.
Pre-requisites of Industrial Organisation
The basic pre-requisites of discipline in industrial organisations are as follows:-
1. The objective of industrial discipline should be clearly stated and specify the standards expected of the workmen.
2. Specific and clear rules and regulations should be laid down in consultation with the workers which serve as a code of conduct for workers and managers.
3. Rules must be communicated to all in an organisation and must be understood in the same terms.
4. The rules of conduct must contain provisions for the investigation and settlement of grievances arising out of and during the course of employment.
5. The management should ensure that their conduct and policies do not encourage a breach of discipline. This will promote self-discipline among workers.
6. The enforcement authority must be specified. The procedure for appeal against disciplinary action by an aggrieved party should also be provided.
7. The quantum of prescribed punishment in specified cases of indiscipline should be known.
8. All rules and regulations should be executed objectively and consistently. They should be appraised regularly to keep them suitable and up to date.
9. The discipline policy should seek to prevent the breach of discipline rather than to administer penalties. Penalties should be used only when they become absolutely necessary.
10. There should be a suitable grievance procedure for the prompt redressal of all grievances of employees. All awards & agreements should be implemented without delay and discrimination.
11. A discipline committee may be constituted to look into the causes of indiscipline in the enterprise and to suggest suitable measures for their removal.
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