Chapter 11: Organizational Architecture Brickley, Smith, and Zimmerman, Managerial Economics and Organizational Architecture, 4th ed. Chapter 11: Organizational Architecture

Organizational Architecture learning objectives Students should be able to Define architecture and distinguish between markets and organizations Identify the determinants of architecture

The fundamental problem Profit maximization may face information limitations controlled by many individuals may be costly to transfer Individuals may have incompatible incentives Organizational architecture must overcome these limitations

Components of architecture “three legs of the stool” Decision-right assignment empowering employees Reward system compensating employees Performance-evaluation system evaluating employees

Determinants of architecture

Changing architecture Benefits of organizational change must exceed costs Costs direct: resources for design and communication indirect: impact on job-specific human capital formation Organizations are interdependent systems, change must be coordinated

Corporate culture Culture is the set of explicit and implicit expectations of behavior within the firm Communicating culture slogans, rituals, role models Architecture shapes employee expectations Architecture elements are complements

When architecture fails Management is at risk of dismissal Firm is at risk of takeover Rivals are waiting to take over

Managerial implications Consultant advice should be examined closely e.g., employee empowerment may not always be appropriate Effective benchmarking requires architectural awareness