Introduction to Organizational Architecture Allocation of Decision Rights, Incentives and Monitoring What does your firm do? How do we decide what to do to get things done without killing each other?

Allocation of Decision Rights What? Who? Where? When? Why? How? A decision requires options! No options no decision. One person? The same person each time? A team? The “boss” can’t be everywhere all the time and make all the decisions! One of the biggest things we each decide each day is what to do with out time (scarcest resource!) and how hard to work. “boss” can not make all decisions! Why – focus on mission critical decisions! On sight? In an office? Face-to-face? In cyberspace? TIME MATTERS!! On the spot or with reflection? What is the strategic situation? Core or routine decision? What is the organizational culture? Deliberate? Research?

Example: Who will teach what classes, where and when? What? Who? Why? How? What professor, what class, what room, What content and location on any given day Dean, Registrar, Department Chair, Professor NOT the College President, Trustees Office, Electronic documents Web scheduling has increased coordination! 1-year prior, 1 semester prior, Daily Remember – we can’t just allocate resources by price! Imagine if professors and/or students “bid” for classroom/time slots. Would you pay more for a class at a certain time in a certain room? Do an exercise where they think about a decision in their firm. Allocation of resources Time and space Negotiation among factions NOT the same at all schools!

MORE INCENTIVES! MORE Ambiguity Uncertainty Incongruence of Interests What does it mean to “do the right thing”? Can you tell if someone does “the right thing”? Incentives MORE Ambiguity Uncertainty Incongruence of Interests Information Asymmetry MORE INCENTIVES! Laffont & Martimort: You have to pay the rent! But there’s more than one way to pay the rent…

…and manage the fall-out. Mom: “Everyone is special…” Dash: “…which is another way of saying no one is.” Message: If you provide an incentive you need a way to determine who gets it and when… …and manage the fall-out.

Is it worth the transactions cost? Can you measure what you are interested in? Monitoring & Evaluation Is it worth the transactions cost? Ambiguity Time & Place Culture

What does your firm DO? Value Chain analysis – what you do Process Flow diagrams – how you do it

Where in the value chain is YOUR business? Business can be just distribution! – intermediary between manufacturers and retailers Coordination Business can be just service – repair Raw materials for service business are often customers!

Process Flow Diagram: General

Process Flow Diagram: Example

Williamson: Transaction Cost Economics : “…optimal architectures will differ across companies. Such structural differences are not random but vary in systematic ways with differences in certain underlying characteristics of the companies themselves.” BSZ p. 345 Decision Rights Incentives Monitoring & Eval Characteristic #1 Strategic Situation Martin Blair, Rules of the Game Characteristic #2 Type of Information General & Specific Knowledge Transactions Costs Williamson: Transaction Cost Economics Characteristic #3 Type of Resources Ostrom: common pool resources Characteristic #4 Organizational Culture Markets Bureaucracies & Clans Types of workers & motivation YOUR view of the nature of man

What YOU will do after Spring Break: What YOU need to do NOW: Figure out what your firm DOES? Make a process-flow diagram for your key process – WHAT needs to happen, not WHO or HOW. 2. Figure out your key DECISIONS including what you will make/buy What YOU will do after Spring Break: 3. Figure out what INFORMATION is needed to make/execute the decision. 4. Figure out what RESOURCES are needed to make/execute the decision. 5. Think about the INTERESTS & MOTIVATIONS of the people in your organization (back to factions…)