1. Managerial Economics and Organizational Architecture, 5e Chapter 11: Organizational Architecture
McGraw-Hill/Irwin
Copyright © 2009 by The McGraw-Hill Companies, Inc. All Rights Reserved.

2. The Fundamental Problem
Important information for profit maximizing decisions is
controlled by many individuals
may be costly to transfer
Decision makers may have incompatible incentives
Organizational architecture helps overcome these limitations
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3. Architecture Within Firms
Decision-right assignment
empowering employees
Controls
Employees are granted authority over resources
Incentive may be misaligned
To align incentives managers must develop a reward and performance evaluation system
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4. Determinants of Architecture
Business environment
Technology  Computers  Telecommunications  Production methods
Markets  Competitors  Customers  Suppliers
Regulation  Taxes  Antitrust  International
Strategy
Choice of industries  Basis for competition (price, quality, service)
Organizational architecture
Decision-right assignment  Reward system  Performance-evaluation system
Incentives and actions
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Firm value

5. Determinants of Architecture
Strategy affects architecture and architecture affects strategy
As the business environment changes, architecture will change with it
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6. Changing Architecture
Benefits of organizational change must exceed costs
Costs
Direct: resources for design and communication
Changes in accounting and information systems
Indirect: impact on employee incentives
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7. Changing Architecture
Organizations are interdependent systems, change must be coordinated
As with three legs of a stool, if one leg changes, the others must change with it
Likewise for decision rights, reward systems and performance evaluation systems
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8. Corporate Culture
Culture is the set of explicit and implicit expectations of behavior within the firm
Communicating culture
slogans, rituals, role models
Architecture shapes employee expectations
Architecture elements are complements
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9. When Architecture Fails
Management is at risk of dismissal
Firm is at risk of takeover
Rivals are lurking in the wings
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10. Managerial Implications
Does the strategy fit the business environment?
Does the current architecture fit the business environment and strategy?
Does it effectively link specific knowledge and decision rights?
Does it provide incentives to use information productively?
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11. Managerial Implications
Given the decision rights system, does the control system fit?
If any of the above questions show a problem, determine what changes in strategy or architecture are appropriate
Determine problems that will be faces if the firm implements these changes
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