Organization Structure and Management Systems

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

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 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)
Source: Phelan & Lewin, 2000

Market Benefits
Price acts as a signal of imbalance Price allows easier economic calculations Freedom to transact with any agent Protection of contract law

The Basic Tasks of Organization

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

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

Evolution of the Modern Corporation

The business environment
Early 19th century Late 19th century Early 20th century
Local markets Transport slow Limited mechanization Introduction of railroads, telegraph industrialization

Strategic changes
Firms specialized & focused on local markets Geographical and vertical expansion

Organizational consequences
Small firms. Simple management structures Functional structures. Line/staff separation. Accounting systems Development of multidivisional corporation

Excess capacity in distribution. Growth of financial institutions & world trade

Product & multinational diversification

General Motors Organization Structure, 1921

Board of Directors President Executive Committee

Financial Staff

GM Acceptance Corporation

Legal Department

General Advisory Staff

Chevrolet Division

Sheridan Division

Canadian Division

Oldsmobile Division

Buick Division

Cadillac Division

GM Export Company

GM Truck Division

Samson Tractor Division

Oakland Division

Intercompany Parts Division

Scripps Booth Corp.

Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.

Hierarchy Economizes on Coordination

(a) Self Organizing Team: 10 interactions

(b) Hierarchy: 4 interactions

But what about effectiveness of coordination? --Depends upon the organizations task

Hierarchy of Loosely-Coupled Modules Allows Flexible Adaptation

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

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

Webers 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 Forms

FEATURE Task definition Coordination & control Communication Commitment & loyalty Environmental context MECHANISTIC Rigid & highly specialized Rules & directives imposed from the top Mainly vertical To immediate superior Stable with low technological uncertainty ORGANIC Flexible; less specialized Mutual adjustment. Cultural control Horizontal & vertical To the organization & its goals & values Dynamic, ambiguous, high technological uncertainty

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

General Motors Organization Structure, 1997

Board of Directors Presidents Council Corporate Functions

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

Corporate Executive Office Chairman & CEO Service Divisions Corporate Staff Business R&D Development

Finance

Human Legal Resources

GE Aircraft Engines

GE Transportation

GE Industrial Systems

GE Plastics

GE Appliances

GE Supply

GE Power Systems

GE Medical Systems

GE Lighting

GE Specialty Materials

NBC

GE Capital

26 businesses organized into 5 segments: Consumer Mid-market Specialized Specialty Services Financing Financing Insurance

Equipment Management

General Electrics Organization Structure, 2002

Mobil Corporation, 1997

Board of Directors CEO Executive Office
Corporate Center Support Services

North America
Asia/ Pacific

New Exploration Europe & CIS Africa & Middle East

Worldwide LNG & IPP South America North America M&R

Technology

Shipping

Worldwide Chemicals

Royal 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?