Control: Organizational and Economic Approaches Kathleen M. Eisenhardt Department of Industrial Engineering and Engineering management, Stanford University Presented by Hui Chen

Organization Theory Theory Empirical Discussion Contribution Control Strategy Performance Evaluation Control Behavioral based control Outcome based control Social or “people” based Control Thompson(1967) Ouchi (1979) Task Programmability Theory Empirical Discussion Contribution Outcome measurability Determinant: ease of performance evaluation

Organizational Theory Empirical Discussion Contribution Perfect Imperfect High Behavior or outcome control Outcome control Low Behavior control Socialization “Clan” control Task Outcome Adapted from Ouchi (1979)

Incomplete information Agency Theory Agency Problem Incomplete information Behavior Control Outcome Control Complete Information Determine the optimal contract for the Agent Services Theory Empirical Discussion Contribution -Behavior measurement -Risk sharing -Outcome measurement Assumptions: -Uncertain outcome and risk averse agent -Divergent preferences between principal and agent for agent’s behavior(i.e., effort averse agent)

Comparison of Two Approaches Theory Empirical Discussion Contribution Similarities: Concerned with determinants of control strategy Rational Efficiency oriented Information based Distinguish between behavior and outcome based control

Comparison (Differences) Theory Empirical Discussion Contribution O A Cost Compare ability to measure behaviors and outcomes Compare costs of behavior control and outcome control Reward Control is a measurement and evaluation process Control is a measurement, evaluation, and reward process Social or ”People” Control Assume divergent performances for effort of workforce Possible to reduce divergent preferences through social control Role of Information Task characteristics determine the information available Information is a purchasable commodity Uncertainty Control determined by measurement issues Control determined by measurement and risk bearing issues

-Task Programmability -Behavior Measurement Hypothesis Model Theory Empirical Discussion Contribution Task Characteristics -Task Programmability Information System -Behavior Measurement -Outcome Measurement Uncertainty Control Strategy -Behavior Based -Outcome Based

Hypotheses H 1: As task programmability increases, behavior based control is more likely. (O) H 2: As behavior measurement increases, behavior based control is more likely. (A) H 3: As the cost of outcome measurement increases, behavior based control is more likely. (A) H 4: As outcome uncertainty increases, behavior based control is more likely. (A) Company Logo 9/19/2018

Organization Sampling& Methods Theory Empirical Discussion Contribution Sample: 95 specialty stores in a Suburban Bay Area shopping center (54 out 95 usable) Definition: Stores with less than 8,000 square feet of selling space Characteristics: Small size and high turnover Instrument: a questionnaire completed by each store manager

Measures Task Programmability Behavior Measurement Outcome Uncertainty Theory Empirical Discussion Contribution Task Programmability Behavior Measurement Outcome Uncertainty Cost of outcome Measurement Control Alternative Explanations

Measures Task Programmability Behavior Measurement Outcome Uncertainty Preliminary interview The amount of service in selling process. (less programmable) Service Customer effort Selling time Training time Theory Empirical Discussion Contribution Task Programmability Behavior Measurement Outcome Uncertainty Cost of outcome Measurement Control Alternative Explanations

Measures Task Programmability Behavior Measurement Outcome Uncertainty Theory Empirical Discussion Contribution Task Programmability Behavior Measurement Outcome Uncertainty Cost of outcome Measurement Control Alternative Explanations Preliminary interview Physical limitations on observation of salespeople by management Selling Space Square footage of the store Total number of store employees Number of salespeople per store supervisor (managers, assistant managers

Measures Task Programmability Behavior Measurement Outcome Uncertainty Theory Empirical Discussion Contribution Task Programmability Behavior Measurement Outcome Uncertainty Cost of outcome Measurement Control Alternative Explanations Secondary source Three measures Number of competitors in the San Francisco SMSA by merchandise category. Failure rates in 1975 by merchandise category Failure rates in 1979 by merchandise category

Measures Task Programmability Behavior Measurement Outcome Uncertainty Theory Empirical Discussion Contribution Task Programmability Behavior Measurement Outcome Uncertainty Cost of outcome Measurement Control Alternative Explanations Depend on the cost of the outcome measurement system. The number of stores in the store chain. The dichotomous ownership variable

Measures Task Programmability Behavior Measurement Outcome Uncertainty Theory Empirical Discussion Contribution Task Programmability Behavior Measurement Outcome Uncertainty Cost of outcome Measurement Control Alternative Explanations Behavior based vs. outcome based reward structures. Outcome based: Commission, commission against law and salary plus commission Behavior based: Salary or hourly rate compensation

Measures Task Programmability Behavior Measurement Outcome Uncertainty Theory Empirical Discussion Contribution Task Programmability Behavior Measurement Outcome Uncertainty Cost of outcome Measurement Control Alternative Explanations Talbert and Bose (1978) Sex composition Price Type (specialty vs. department) Location (city vs. suburbs)

Results Correlation Matrix Discriminant Analysis Theory Empirical Discussion Contribution Correlation Matrix Discriminant Analysis

Discussion & Implications Theory Empirical Discussion Contribution The organizational and economic perspective are complementary in terms of control strategy. Task characteristics contribute relatively more explanatory power than do measurement system. The information economics of performance measurement are relatively more important than the economics of risk bearing as measured by outcome uncertainty. Job boredom is more like an issue of direction and evaluation under uncertainty than a purely motivation problem. Responsibility needs not match controllability.

Organization Design Framework Theory Empirical Discussion Contribution Design simple and routine job (behavior based control by job design) Deign a more complex and interesting job (behavior based control by information systems) Design the more complex and interesting job using a much simpler evaluation scheme such as profitability (outcome based control) Employ people whose preferences align with those of management (selection, training and socialization)

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