Organization Design

1. Organization Design OUTLINE • Evolution of the corporation • Principles of organizational design • The role of hierarchy: bureaucratic control vs. modular integration • Alternative structural forms • Management systems

2. 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

3. Strategic Theory of the Firm Firm Benefits Knowledge sharing Social controls Flexible resource allocation Limited liability Intangible assets Market Costs Ex ante transaction costs Ex post transaction costs Dynamic transaction costs Firm Costs Higher coordination costs as size, scope, and distance grow Agency costs (monitoring) Cognitive limits on info. processing (e.g. dominant logic) Market Benefits Price acts as a signal of imbalance Price allows easier economic calculations Freedom to transact with any agent Protection of contract law Source: Phelan & Lewin, 2000

4. The Basic Tasks of Organization Achieving high levels of productivity requires SPECIALIZATION Specialization by individuals necessitates COORDINATION 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 For coordination to be effective requires COOPERATION But goals of employees == goals of owners THE AGENCY PROBLEM

5. Evolution of the Modern Corporation Strategic changes The business environment Organizational consequences Early 19th century 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/staff industrialization separation. Accou- nting systems Late 19th century Excess capacity in Product & Development of distribution. Growth multinational multidivisional of financial institut- diversification corporation ions & world trade Early 20th century

6. General Motors’ Organization Structure, 1921 Board of Directors President Executive Committee GM Acceptance Corporation Legal Department General Advisory Staff Financial Staff Chevrolet Division Sheridan Division Canadian Division Oldsmobile Division Buick Division Cadillac Division GM Export Company GM Truck Division Samson Tractor Division Oakland Division Inter-company Parts Division Scripps Booth Corp. Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.

7. Weber’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?

8. Mechanistic 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

9. 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 greatest interdependence should be grouped into same organizational unit. Additional criteria: Economies of Scale, Economies of Utilization, Learning, Standardization of Control Systems

10. General Motors’ Organization Structure, 1997 Board of Directors Corporate Functions President’sCouncil North American Operations Delphi Automotive Systems GM Acceptance Corporation International Operations Hughes Electronics GM Europe Midsize & Luxury Car Group Small Car Group GM Power Train Group Vehicle Sales, & Marketing Group Development & Technical Cooperation Group Asian & Pacific Operations Latin American, African, & Middle East Operation

11. Corporate Executive Office Chairman & CEO Corporate Staff Finance Business R&D Human Legal Development Resources Service Divisions GE Appliances GE Supply GE Aircraft Engines GE Trans- portation GE Industrial Systems GE Plastics GE Lighting GE Specialty Materials NBC GE Capital GE Power Systems GE Medical Systems 26 businesses organized into 5 segments: Consumer Mid-market Specialized Specialty Equipment Services Financing Financing Insurance Management General Electric’s Organization Structure, 2002

12. Mobil Corporation, 1997 Board of Directors CEO Executive Office Corporate Center Support Services North America Technology New Exploration Worldwide LNG & IPP Asia/ Pacific Europe & CIS Africa & Middle East South America North America M&R Worldwide Chemicals Shipping

13. Royal Dutch/Shell Group, 1994: A Matrix Structure

14. 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

15. 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)

16. 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

17. 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)

18. Cases • USA Today • AHA