Theory of the Firm - Corporate Attire Inc

The discussions and recommendations in this report are primarily based on the theory outlined by Hendrikse (2003) supplemented with litterateur outside the curriculum. Focus will for the most part be on the principle-agent problem and the aspiration is to move Corporate Attire Inc. (CAI) to a state of equilibrium which will increase sales and shareholder value. Surplus, conflict of interest and asymmetric information are according to Hendrikse (2003) the drivers behind an interesting principal-agent problem and these factors will show to be applicable in the CAI case. According to Laffont & Martimort (2001) the principle-agent relationship creates agency costs which can be handled in one of two ways. The first one being the monitoring of the agent's efforts and actions which reduces asymmetry in the information level. Secondly are incentives where an effort is made to align agent and principle interests. Chang & Taylor (1999) suggest two basic kinds of control, behavioral control which describes the mechanisms that monitor the business and behavior of agents and output control which are linked to the measurements of the desired output, this being either quality or quantity. The increased monitoring costs are according to Hendrikse (2003) and the monitoring intensity principle worthwhile.

This report will analyze the following three main areas: 1) the shortcomings of the current organizational structure and the redesign of a more efficient sales organization 2) the lack of appropriate performance measurements and the recommendations to a structured and beneficial set of measurements and 3) the current inadequate payment structure and the proposal of performance based pay.

Organizational structure

An efficient organization is at least as important as well functioning markets (Williamson, 1994) and thus it is vital that CAI is organized in a way that optimizes the value output. The primary attention has been put on the display consultants and the sales force.

Display consultants

The current setup with 20 special display consultants supporting 9,500 retailers worldwide is not a sustainable setup. The number of retailers is simply too high to handle effectively and combined with the 200 km restrictions it seems impossible to deliver sufficient support to the retailers. Furthermore, compensation based on the number of retailers assigned each display consultant is not an optimal payment structure and will not drive the correct behaviour among the display consultants. Maskin & Jean Tirole (1992) showed that compensation schemes must be linked to measurements which increase the profit of the principle. This will be addressed further under performance management and reward systems. Finally, the procedure of signing up new retailers online is likewise evaluated to drive the wrong behaviour. Consultants will basically be able to boost salaries