of large firms with 20 percent or more of their employees in teams grew from
37 percent in 1987 to 61 percent in 1999. The evidence shows that the use of
teams continues to increase today. For instance, like many large conglomer-
ates, DuPont is organized with independent subsidiaries, each responsible for
its own performance. In 2002, DuPont decided that it needed to offer national
security products that cut across its wide range of businesses. The company set
up committees containing executives from across its subsidiaries to develop
strategies and products to meet the new national security needs. Accenture,
IBM, and Google are examples of companies that have used teams with great
success. (IBM team members share information via the “wiki” technology.) ICU
Medical has probably taken the team concept as far as any company. Any group
of employees may form a team to solve a problem or to take on a project. Suc-
cessful teams are rewarded monetarily and many have made substantial con-
tributions.^19
Of course, team decision making is costly in terms of human resources and
risks difficulties in reaching a decision consensus; thus it should not be used
indiscriminately.600 Chapter 14 Asymmetric Information and Organizational Design(^19) This account is based on S. Warren, “DuPont Cajoles Independent Units to Talk to One Another,”
The Wall Street Journal, February 5, 2002, B4; E. White, “How a Company Made Everyone a Team
Player,” The Wall Street Journal Online (http:online.wsj.com), August 13, 2007; and E. P. Lazear and
K. L. Shaw, “Personnel Economics: The Economist’s View of Human Resources,” Journal of Economic
Perspectives(Fall 2007): 91–114.
CHECK In principle, how would an organization determine the optimal size of a team?
STATION 3
COORDINATION VIA TRANSFER PRICES Large, multidivision firms must
coordinate activities among their divisions, which often provide goods or serv-
ices to each other. For instance, a firm’s automotive division might receive fin-
ished engines from its parts unit. Transfer prices—the prices that selling
divisions charge to buying divisions within the firm—help coordinate internal
actions. (See the appendix to Chapter 6 for a full discussion and analysis.) The
key to maximizing the firm’s total profit is to set each transfer price equal to the mar-
ginal costof the good or service in question. For instance, the automotive divi-
sion should pay a transfer price for engines that reflects marginal cost;
therefore, these costs are recorded dollar for dollar in computing the auto divi-
sion’s profitability. (Of course, accounting for all marginal costs is also crucial
for setting optimal prices and quantities for finished vehicles.) As we saw in the
case of Airbus, setting appropriate transfer prices is not always easy. The sup-
plying division often pushes for a higher transfer price simply to enhance its
own measure of profit, while the receiving division wants a lower price for the
same reason. Either overstating or understating the transfer price can lead to
incorrect decisions, resulting in underproduction or overproduction of
both the transfer good and the final product. In short, setting transfer prices
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