Organizational Architecture, The Brickley, Smith, Zimmerman Approach ManEc 300 Brother Bryson

The Fundamental Problem The information necessary to make important decisions is held by many different people Actors may not only lack the needed information to make good decisions. They may not have the right motives or incentives to choose properly or to implement their choices. Firms and economic systems must be designed to make sure agents have the right information and incentives.

Organizational architecture is organizational design Organizational design’s three main aspects: 1. The assignment of decision rights within the firm 2. The methods of rewarding individuals 3. The structure of systems to evaluate the performance of individuals and units

Determinants of the Business Strategy, Organizational Architecture, and Firm Value The Business Environment impacts the firm’s strategy. Environment includes Technology –Computers –Telecommunications –Production methods Markets –Competitors –Customers –Suppliers Regulation – Taxes – Antitrust – International

Determinants of the Business Strategy, Organizational Architecture, and Firm Value The Strategy of the Firm is affected by the business environment. Strategy, in turn, affects the organizational design. Strategy includes Increasing demand Capturing value Choosing the basis for competition (price, quality, service)

Determinants of the Business Strategy, Organizational Architecture, and Firm Value The organizational architecture of the firm is strongly influenced by the firm’s strategy. The organizational design, in turn, affects the incentives and actions of the players. Organizational design includes Decision-right assignment Reward system Performance-evaluation system

Determinants of the Business Strategy, Organizational Architecture, and Firm Value Organizational architecture, in turn, affects the incentives and actions of the players. The actions of individuals responding to the organization’s incentive effects determine the value of the firm.

Changing the Organizational Structure Changing the business environment or the strategy of the firm will probably call for a change in the organizational architecture. But change should be undertaken only when the associated benefits exceed the costs of reorganizing.

Costs of Organizational Change Direct costs may be considerable when the firm’s accounting and information systems have to be modified for new evaluation procedures, etc. Indirect costs may be even more important. Architecture changes can affect the incentives of employees positively or negatively, and their attitudes and actions largely determine the value of the firm.

Corporate Culture Corporate culture is  how work and authority are organized and how people are directed and rewarded.  the corporation’s features, including customs, slogans, heroes, taboos, and social rituals.

Corporate Culture and Organizational Architecture  Managers can affect corporate culture, which is obviously related to organization design, through deliberate actions. Changing the architecture impacts on the culture, just as a changing environment can.  Changes to superficial things can impact corporate culture indirectly, but changes to the organizational design have direct impact.