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

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 (or governance) costs. Resources will flow to their most efficient use. Also hybrid structures – joint ventures, alliances, partnerships

The Basic Tasks of Organization 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 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

Evolution of the Modern Corporation The business environment Organizational consequences Strategic changes Late 19th century Early 19th century Early 20th century Local marketsFirms specialized &Small firms. Transport slowfocused on localSimple manage- Limited mechanizationmarketsment structures Introduction of Geographical andFunctional struct- railroads, telegraphvertical expansionures. Line/staff industrializationseparation. Accou- nting systems Excess capacity inProduct &Development of distribution. Growthmultinationalmultidivisional of financial institut-diversification corporation ions & world trade

Board of Directors President Executive Committee Financial Staff Legal Department General Advisory Staff GM Acceptance Corporation Chevrolet Division Sheridan Division Canadian Division Oldsmobile Division GM Truck Division GM Export Company Cadillac Division Buick Division Inter- company Parts Division Oakland Division Samson Tractor Division Scripps Booth Corp. Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57. General Motors’ Organization Structure, 1921

Weber’s 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) (See also Scientific Management or Taylorism) Does one size fit all?

Mechanistic and Organic Forms Burns and Stalker (1961) FEATURE MECHANISTIC ORGANIC Task definition Rigid & highly Flexible; less specialized specialized Coordination Rules & directives Mutual adjustment. & control imposed from the top Cultural control Communication Mainly vertical Horizontal & vertical Commitment To immediate superior To the organization & its & loyalty goals & values Environmental Stable with low tech- Dynamic, ambiguous, context nological uncertainty high technological uncertainty = CONTINGENCY THEORY

Designing the Hierarchy: The Basis for Defining Organizational Units and their Relationships 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 Coordination—Employees with the greatest interdependence should be grouped into same organizational unit. Additional criteria: Economies of Scale, Economies of Utilization, Learning, Standardization of Control Systems

Board of Directors President’s Council Corporate Functions North American Operations Delphi Automotive Systems International Operations GM Acceptance Corporation Hughes Electronics Midsize & Luxury Car Group Small Car Group GM Power Train Group Vehicle Sales, & Marketing Group Development & Technical Cooperation Group GM Europe Asian & Pacific Operations Latin American, African, & Middle East Operation General Motors’ Organization Structure, 1997

Corporate Executive Office Chairman & CEO Corporate Staff FinanceBusiness R&DHuman Legal DevelopmentResources GE Aircraft Engines GE Trans- portation 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 SpecialtyEquipment Services Financing Financing InsuranceManagement Service Divisions General Electric’s Organization Structure, 2002

Mobil Corporation, 1997 Board of Directors CEO Executive Office North America M&R Technology Worldwide Chemicals North America Europe & CIS Africa & Middle East Asia/ Pacific New Exploration South America Worldwide LNG & IPP Support ServicesCorporate Center Shipping

Royal Dutch/Shell Group, 1994: A Matrix Structure

Star Model

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, knowledge management

New forms Growing importance of lateral processes and rewards –Voluntary, e-coordination, integrators, formal groups Project-based organizations Front-back organizations Global sales coordination & subsidiary issues, Growth in alliance formation & network/virtual/hollow organizations Reconfigurable organization, Knowledge-based firm Culture as a control mechanism (self managed teams)

Control Systems Information systems & reporting Strategic planning & budgeting HRM (incentive system) –Compensation Individual or team based High powered or low powered Input or output Non-monetary rewards –Promotions Tournament model Merit (absolute or relative) vs. seniority vs. up or out (Phelan & Lin, 2001) Recruitment and ports of entry

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)

Strategic Theory of the Firm Firm Benefits Knowledge sharing Social controls Flexible resource allocation Limited liability Intangible assets Firm Costs Higher coordination costs as size, scope, and distance grow Agency costs (monitoring) Cognitive limits on info. processing (e.g. dominant logic) Market Costs Ex ante transaction costs Ex post transaction costs Dynamic transaction costs Market Benefits Price acts as a signal of imbalance Price allows easier economic calculations Freedom to transact with any agent Protection of contract law Source: Phelan & Lewin, 2000

American Heart Association –How would you rate the Western Affiliate’s new structure in terms of the AHA mission? How would you “tweak” the Western Affiliates structure to improve it? –Would you recommend that the Western structure (or a variant of it) be adopted nation- wide What should the national structure look like?