January 17, 2003John Roberts, Stanford GSB1 Stanford GSB Sloan Program Stramgt 258 Strategy and Organization 4. Organization Design for Performance BP (A)

January 17, 2003John Roberts, Stanford GSB2 Why Organization? Coordinate and motivate people in the context of interdependencies Why not use the market? Failures of market dealings and simple contracting –Information asymmetries –Bounded rationality –Externalities and public goods Managed organizations handle interdependencies –Implications for boundaries

January 17, 2003John Roberts, Stanford GSB3 Needed Behaviors Initiative --- energetic, diligent, clever pursuit of own (unit) responsibilities and objectives –Required for performance, survival –Own cost, sales, investment, innovation, … Cooperation --- thought and action aimed at supporting the realization of others’ or overall corporate objectives –Needed because of externalities and interdependencies –Corporate reputation, sharable knowledge,…

January 17, 2003John Roberts, Stanford GSB4 The Basic Behavioral Tradeoff INITIATIVE COOPERATION Markets Functioning Bureaucracy Many companies have decided that they are not getting enough initiative and are changing their organizations to get more

January 17, 2003John Roberts, Stanford GSB5 Getting More of Both INITIATIVE COOPERATION It takes good management to get to the frontier, but until you do, you can have more of both C and I. However, many companies (like BP) opt to approach this indirectly, increasing I while losing some C, then increasing C while losing some I.

January 17, 2003John Roberts, Stanford GSB6 Getting More of Both INITIATIVE COOPERATION Once you reach the frontier, the only way to increase both is by expending more resources on motivating behavior or by an organizational innovation (e.g., based on new IT)

January 17, 2003John Roberts, Stanford GSB7 PARC The organizational designer must think about all aspects --- people, architecture, routines and processes, and culture --- and be aware of the interactions among them in affecting behavior. All can be adjusted, but at different speeds, controllability and ease.

January 17, 2003John Roberts, Stanford GSB8 PARC: People Their intelligence, skills and abilities Their motivations and fears Their attitudes to life, work and risk Their personal and professional interests

January 17, 2003John Roberts, Stanford GSB9 PARC: Architecture Formal structure --- What’s on the org chart –Grouping of tasks into jobs, jobs into units, units into departments/divisions,… –Hierarchic authority/reporting structure –Allocation of decision rights/responsibility Boundaries of the firm Financing, ownership and governance Informal networks

January 17, 2003John Roberts, Stanford GSB10 PARC: Routines Formal and informal procedures, processes, routines that determine –How work is done –How information is gathered and disseminated –How resources are allocated –How performance is measured and rewarded –How decisions are made

January 17, 2003John Roberts, Stanford GSB11 PARC: Culture Shared values, beliefs, mental models, norms, language –Why are we in business? What really matters? –How do we act towards one another and outsiders in different situations? What can we expect from one another? –How do we interpret observations and actions? –What do we mean by various words?

January 17, 2003John Roberts, Stanford GSB12 The Design Problem Leaders can manipulate all the elements of PARC in creating an organization Differences in speed, control Fast Sure Slow Uncertain Architecture RoutinesCulturePeople Control

January 17, 2003John Roberts, Stanford GSB13 Complementarity Two features that influence performance are complements if doing (more of) one increases the performance effect of doing (more of) the other. –Example: breadth of product line and flexibility of the manufacturing process (inverse of cost of changeovers), given total volume. Having a broader product line increases the frequency with which you want to shift production from one product to another, so the lower costs of changeovers is of greater value. With complements, the optimal solution tends to involve doing both at a high level or neither. Thus coherent patterns emerge. “Fit”

January 17, 2003John Roberts, Stanford GSB14 Complementarity Example Flexibility Breadth Low High Low Ford 1920 Toyota 1990 GM 1990 ?

January 17, 2003John Roberts, Stanford GSB15 Complementarity Complementarity implies “systems effects,” since the result of increasing all the complementary variables together is greater than the sum of the effects from increasing each one on its own. In fact, increasing any one variable may hurt performance, although increasing them all could be highly advantageous.

January 17, 2003John Roberts, Stanford GSB16 Implications of Complementarity You need to think very deeply about the interaction among features of your strategy and organization. “Best practice” must be treated very carefully, because performance depends on the whole system, not the individual pieces. Complementarity can thus be a barrier to imitation, but also to replication

January 17, 2003John Roberts, Stanford GSB17 Exploitation A key ability of the organization is to deliver performance in the context of the opportunities defined by the current strategy and environment: “exploitation” Effective exploitation requires learning –about how to do things better But it may be inconsistent with significant innovation –Incentives –Resources –Mindset

January 17, 2003John Roberts, Stanford GSB18 Disaggregation Disaggregated firms can provide strong incentives for performance –Local “ownership” and control –Better attribution of responsibility Performance pay is crucial in a disaggregated exploiter –Once move to performance pay, an important issue is how to reward activities that are harder to measure –Failure to provide balanced incentives can result in very twisted behaviors