THE OPERATIVE LOGIC OF THE FIRM The Combinatory Systems Theory view

In this paper I propose two models to understand (not merely describe) the operating logic of the firm that is the business for profit organization both at the micro level, considering the firm as a unit, and at the macro level, considering collectivities of firms of the same kind: 1) when viewed as individual units firms can, at the micro level, be interpreted as operating systems for efficient transformation that carry out five parallel transformations, a. a productive transformation of factors into production; this is a transformation of utility, governed by productivity and by quality; b. an economic transformation of costs and revenues into operating income; this is a transformation of value, governed by prices and therefore by the market; c. a financial transformation of risks, which transforms capital into returns and guarantees the maintenance of its financial integrity; d. an entrepreneurial transformation of information into strategies, which leads to a continual readjustment of the firm's strategic position; e. a managerial (organizational) transformation of strategies into actions of management control. 2) when viewed as elements of the economic system firms can, at the macro level, form a combinatory system of improvement and progress in which each firm acts to maximize its efficiency measures, and this inevitably leads to progress in productivity, quality, costs and technology for the system as a whole. SUMMARY Abstract............................................................................................................................................................................... 1 1. The tools: Operating Systems and Combinatory Systems .............................................................................................. 2 2. Production oriented organizations. The fundamental variables ...................................................................................... 3 3. Business organizations. Measures of performance ......................................................................................................... 6 4. The fundamental relations (continued) ........................................................................................................................... 7 5. Profit and non-profit organizations................................................................................................................................. 7 6. The system of risks ......................................................................................................................................................... 8 7. Capitalistic Firms. The entrepreneurial transformation .................................................................................................. 9 8. Measures of performance of the entrepreneurial transformation .................................................................................. 11 9. The Hypothesis of increasing productivity and quality ................................................................................................ 13 10. The combinatory system of Increasing productivity................................................................................................... 15 11. Productivity and employment..................................................................................................................................... 18 References ........................................................................................................................................................................ 22 Piero Mella Chair of Business Administration (Economia Aziendale) University of Pavia (ITALY) Faculty of Economics Department of Management Research 27100 Pavia, Via San Felice, 5 Phone: +39.0382 506263 Fax (office): +39 382 506228 .0 web page: www.ea2000.it/mella e-mail: [email protected]