Organization Structure and Management Systems

Organization Structure and Management Systems

• 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 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

(a) Self Organizing Team:

10 interactions

(b) Hierarchy:

4 interactions

Hierarchy Economizes on Coordination Hierarchy Economizes on Coordination

But what about effectiveness of coordination?--Depends upon the organization’s task

Tightly-coupled, integrated system: Change in any part of the system requires system-wide adaptation

Loose-coupled, modular hierarchy: partially-autonomous modules linked by standardized interfaces permits decentralized adaptation and innovation

Hierarchy of Loosely-Coupled Modules Allows Flexible Adaptation

Hierarchy of Loosely-Coupled Modules Allows Flexible Adaptation

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)

• Does one size fit all?

Mechanistic and Organic FormsMechanistic and Organic Forms

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

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

Royal Dutch/Shell Group, 1994: A Matrix StructureRoyal Dutch/Shell Group, 1994: A Matrix Structure

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

• New forms– Front-back organization, project-based org, global sales

coordination & subsidiary issues, growing importance of lateral processes and rewards

– Growth in alliance formation & network/virtual/hollow organizations

– Culture as a control mechanism

Control Systems

• Information systems & reporting• Strategic planning & budgeting• HRM (incentive system)

– Compensation• Individual or team based• High powered or low powered• Input or output

– Promotions• Tournament model• Merit (absolute or relative) vs. seniority vs. up or out (Phelan & Lin,

2001)• Recruitment and ports of entry

• Culture

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)

Case: Royal Dutch Shell

• What were the strengths and weaknesses of the pre-1995 structure? Did it need to change?

• To what extent did the 95-96 reorganization remedy problems in the structure?

• What problems did the 1997-2000 restructure solve?

• What additional changes would you recommend?