organization design evolution of the corporation principles of organizational design the role of...
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Organization DesignOrganization Design
• Evolution of the corporation
• Principles of organizational design
• The role of hierarchy: bureaucratic
control vs. modular integration
• Alternative structural forms
• Management systems
OUTLINE
Theory of the Firm
• Adam Smith (1776) Specialization often produces gains in economic efficiency.
• A firm is any economic unit that engages in specialization (and trade) rather than private consumption
• Not firm versus market but firm versus household• Coase (1937): The firm exists because there are costs to
using the market (i.e. trading with other firms), but then why is everything not organized as one giant firm? Must also be administrative (or governance) costs.
• Resources will flow to their most efficient use. Also hybrid structures – joint ventures, alliances, partnerships
Strategic Theory of the Firm
Firm BenefitsKnowledge sharingSocial controlsFlexible resource allocationLimited liabilityIntangible assets
Firm CostsHigher coordination costs as size, scope, and distance growAgency costs (monitoring)Cognitive limits on info.processing (e.g. dominant logic)
Market CostsEx ante transaction costsEx post transaction costsDynamic transaction costs
Market BenefitsPrice acts as a signal of imbalancePrice allows easier economic calculationsFreedom to transact with any agentProtection of contract law
Source: Phelan & Lewin, 2000
The Basic Tasks of OrganizationThe Basic Tasks of Organization
THE ORGANIZATIONAL CHALLENGE:
To design structure & systems that: Permit specialization Facilitate coordination by grouping individuals & link
groups with systems of communication, decision making, & control
Create incentives to align individual & firm goals
Achieving high levels of productivity requires SPECIALIZATION
Specialization by individuals necessitates COORDINATION
For coordination to be effective requires COOPERATION
But goals of employees == goals of owners THE AGENCY PROBLEM
Evolution of the Modern CorporationEvolution of the Modern Corporation
The businessenvironment
Organizationalconsequences
Strategic changes
Late 19thcentury
Early19thcentury
Early20thcentury
Local markets Firms specialized & Small firms.Transport slow focused on local Simple manage- Limited mechanization markets ment structures
Introduction of Geographical and Functional struct-railroads, telegraph vertical expansion ures. Line/staffindustrialization separation. Accou-
nting systems
Excess capacity in Product & Development of distribution. Growth multinational multidivisionalof financial institut- diversification corporationions & world trade
Board of Directors
President Executive Committee
Financial Staff
Legal Department
General Advisory Staff
GM Acceptance Corporation
Chevrolet Division
SheridanDivision
Canadian Division
Oldsmobile Division
GM Truck Division
GM Export Company
Cadillac Division
Buick Division
Inter-company
Parts Division
Oakland Division
Samson Tractor Division
Scripps Booth Corp.
Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.
General Motors’ Organization Structure, 1921General Motors’ Organization Structure, 1921
Weber’s Principles of BureaucracyWeber’s Principles of Bureaucracy
• Rational-legal authority of formal rules (as opposed to traditional (monarchy) and charismatic)
• Specialization of labor
• Hierarchical structure
• Coordination and control through rules and standard operating procedures
• Standardization of employment practices (meritocracy)
• Separation of jobs and people
• Formalization of administrative acts, decisions and rules
– Minimizes particularism (incl. nepotism)
• (See also Scientific Management or Taylorism)
• Does one size fit all?
Mechanistic and Organic FormsMechanistic and Organic Forms
Burns and Stalker (1961)
FEATURE MECHANISTIC ORGANIC
Task definition Rigid & highly Flexible; less specialized specialized
Coordination Rules & directives Mutual adjustment.& control imposed from the top Cultural control
Communication Mainly vertical Horizontal & vertical
Commitment To immediate superior To the organization & its
& loyalty goals & values
Environmental Stable with low tech- Dynamic, ambiguous, context nological uncertainty high technological
uncertainty
= CONTINGENCY THEORY
Designing the Hierarchy: The Basis for Defining Organizational Units and their Relationships
Designing the Hierarchy: The Basis for Defining Organizational Units and their Relationships
Units may be defined on the basis of Common Tasks, Products, Geographical Proximity, or Process/Function
Critical issue: Intensity of Coordination—Employees with the greatestinterdependence should be grouped into same organizational unit.
Additional criteria: Economies of Scale, Economies of Utilization,Learning, Standardization of Control Systems
Board of Directors
President’s Council Corporate Functions
North American Operations
Delphi Automotive Systems
International Operations
GM Acceptance Corporation
Hughes Electronics
Midsize & Luxury Car Group
Small Car Group
GM Power Train Group
Vehicle Sales, & Marketing Group
Development & Technical Cooperation Group
GM Europe
Asian & Pacific Operations
Latin American, African, & Middle East Operation
General Motors’ Organization Structure, 1997General Motors’ Organization Structure, 1997
Corporate Executive OfficeChairman & CEO
Corporate Staff
Finance Business R&D Human LegalDevelopment Resources
GE AircraftEngines
GE Trans-portation
GEIndustrialSystems
GEPlastics
GEAppliances
GESupply
GE PowerSystems
GE MedicalSystems
GELighting
GE SpecialtyMaterials
NBC GE Capital
26 businesses organized into 5 segments: Consumer Mid-market Specialized Specialty EquipmentServices Financing Financing Insurance Management
Service Divisions
General Electric’s Organization Structure, 2002 General Electric’s Organization Structure, 2002
Mobil Corporation, 1997 Mobil Corporation, 1997
Board of Directors
CEO
Executive Office
North America M&R
Technology
Worldwide Chemicals
North America
Europe & CIS
Africa & Middle East
Asia/ Pacific
New Exploration
South America
Worldwide LNG & IPP
Support ServicesCorporate Center
Shipping
Recent Developments
• Internet and globalization– Power to buyers– Importance of supply chain mgt, delivering
solutions rather than products, need to present one face to customers globally, global (location) economies, knowledge management
New forms
• Growing importance of lateral processes and rewards– Voluntary, e-coordination, integrators, formal groups
• Project-based organizations• Front-back organizations• Global sales coordination & subsidiary issues, • Growth in alliance formation & network/virtual/hollow
organizations• Reconfigurable organization, • Knowledge-based firm• Culture as a control mechanism (self managed teams)
Control Systems
• Information systems & reporting• Strategic planning & budgeting• HRM (incentive system)
– Compensation• Individual or team based• High powered or low powered• Input or output• Non-monetary rewards
– Promotions• Tournament model• Merit (absolute or relative) vs. seniority vs. up or out (Phelan & Lin,
2001)• Recruitment and ports of entry
High performance work practices
• One standard deviation increase in HR practices resulted in a $41,000 increase in market value per employee (about 14% of market cap)
• Seven practices of successful firms– Employment security– Selective hiring– Self managed teams and decentralization– High compensation contingent on performance– Extensive training– Reduction of status differences– Sharing information
Pfeffer & Veiga (1999)