Chapters 12 and 13 Collect and Discuss Assignment 4 Decision Rights The Level of Empowerment & Bundling Tasks into Jobs & Subunits

Dimensions of job design Variety of Tasks Decision rights or decision authority

Benefits of Decentralization Effective use of “local” (specific) knowledge Local tastes and preferences Price sensitivities of particular customers Conservation of management time Senior management focus on strategy Training and motivation for local managers

Costs of Decentralization Potential agency (incentive) problems Effective control systems may be expensive Influence costs Influence activities = individuals’ attempts to affect the distribution of wealth or other benefits in an organization toward themselves, for motives of self-interest Coordination costs and failures Less effective use of central information

Decentralizing to Teams Benefits of team decision making Improved use of dispersed specific knowledge Employee buy-in Costs of team decision making Collective-action problems (e.g. voting) Free-rider problems Use teams if benefits exceed costs

Teams: Free-rider example Prisoner’s dilemma If probability of working together again is high enough, players will work hard today (result – chapter 9 appendix) Managerial implication for teams– repetition facilitates cooperation (don’t change team composition too frequently) Structure high rewards for cooperation and low if not

“Optimal” decentralization: Limits to net gains to decentralization Some decisions can be decentralized, or Can decentralize within parameters, or Decentralize decision management Discuss

Decision management and control Fama-Jensen model example of loan approval Decision control Ratification (by supervisor) Monitoring (check on performance of loan) Decision management Initiation (rep recommends loan approval for unusual case) Implementation (rep grants loan)

Example of decision management and control Grant major decision control rights to board Ratifies major decisions initiated by CEO; monitors & can fire & compensate CEO Initiates & implements major decisions

Alternative Organizational Structures Principals/ agents Private, For-Profit Private, Nonprofit Government Proprietorship Partnership Corporation Primary Stakeholders Owner Partners Stockholders Community Citizens Governing body Senior partners Elected board Board of directors/ trustees Legislative body Chief Executive Managing partner President/ chair director Commissioner/head Example of Organizational Structure Mom & Pop grocery Most law and accounting firms Any corporation Human service, arts, etc. Departments, bureaus, etc.

Fama-Jensen Rx and Berle and Means When decision makers are not owners, separate decision management and decision control > Hierarchies When decision maker is also the major residual claimant (owner), okay to combine decision management and control.

Influence costs = Lobbying, politicking, and other nonproductive activities that employees conduct in order to influence decision makers e.g. Sony acquired CBS records and top execs spent hours each day listening to requests for how decision rights were to be assigned in new organization Can be reduced by imposing bureaucratic rules But there is a cost to this approach as it makes the company less flexible and less able to respond to new information and situations

Specialized tasks in jobs Benefits comparative advantage lower cross-training expense Costs foregone complementarities across tasks coordination costs functional myopia reduced flexibility

Methods of grouping jobs U-form of organization (unitary) Functional specialization M-form of organization (multidivisional) Product/geographic subunits Matrix organization Combines aspects of U & M forms

Functional subunits (“U form”) advantages and disadvantages promotes effective coordination within functional area promotes functional expertise well-defined promotion path Disadvantages opportunity cost of senior management time coordination problems across departments employee focus on functions, not customers

Battle of the functional managers Ventura Motorcycle Company functionally organized Design, Marketing New product design options Speed, Safety Marketing options magazine advertising  older consumers television advertising  younger consumers

Battle of the functional managers Coordination problem Could fail to reach either Nash equilibrium Managerial solutions Reconfigure around products and motivate through profit-based bonuses OR form coordinating committees; evaluate & reward managers on value-maximizing coordination

Product/geographic subunits (“M form”) advantages and disadvantages decision rights tied to specific knowledge senior management able to focus on strategy promotes coordination pertinent to product/area Disadvantages unit interdependencies may be ignored Comparative advantage may be foregone

Matrix organizations advantages and disadvantages Functional expertise Customer-focused Disadvantages Battles between functional and product authorities Costs of team decision making Increase in potential influence costs

Evaluation of Decision Rights Do decision rights fit the external environment and strategy? Do decision makers have specific knowledge? Is there sufficient oversight? Do the economic benefits seem to outweigh the costs of decentralization?

Ore-phone Ore-phone is a cellular phone service company trying to increase its market share in the Duluth area. The manager has just received the latest benchmarking figures from his consultant. Salesperson productivity compares very well, but customer service appears very weak. Customer loyalty is well below the industry average. Currently, sales employees are also responsible for servicing customer accounts and are paid a mid-range salary with a commission for each new customer. How might the manager re-bundle tasks to improve these figures? What are the benefits and the costs of re-bundling tasks to improve these figures?

1. The CEO, von Hugel, is considering reorganizing as a multidivisional firm organized around customer type. Draw the revised organizational chart. 2. Discuss the pros and cons of the proposed reorganization, relative to the current structure. 3. Jessica Wilde, VP of product development, suggests that a matrix organization might be better. Draw the organization chart implied by her proposal. 4. Discuss the pros and cons of the matrix proposal relative to the multidivisional proposal.

Medford University, p. 325 Why did President Kobayashi appoint a task force to consider the issue of fringe benefits? Should the president anticipate that all members of the task force will strive to cut university expenses? What actions can the president take to increase the likelihood that the task force members have this objective as a major priority? Why did the president appoint the administrator of the hospital as the chair of the task force? What advice would you offer the chair in appointing subcommittee chairs? Explain. Does the president want to commit to accepting the committee report or does she want to reserve the right to make modifications? Explain. Why did the president appoint a key assistant as secretary of the task force?

Looking Forward November 18, 22, 23-- Labor Markets Managerial Economics Chapters 14 Cool Case: Safelite Auto Glass (A) Deadline for drafts: Nov. 18, 22, or 23 Please signup for in class presentations Nov. 18, 22, and 23 - first week Nov. 29,30 and Dec 2 – second week Course project due Dec. 6,7, and 8 Final Exam: Dec 13, 14, and 16