1. Managerial Economics: Today’s Agenda
Organizational Architecture
Kodak Case, P. 298
Ethics and Organizational Architecture
Recycling Corporate Responsibility, WSJ
Giving Until it Hurts, WSJ
Nordstrom

2. The fundamental problem within firms Knowledge and Incentives
Profit maximization may face information limitations
controlled by many individuals
may be costly to transfer
Individuals may have incompatible incentives
Organizational architecture must overcome these limitations

3. Basic Tenets of Economic Approach to Organizations
Self interest
Of employees, managers, even CEOs
Present to some extent
Architecture influences behavior
Behavior shaped by incentives
Implications for increasing value
Balance the 3-legged stool
Decision makers need specific knowledge to make appropriate decisions and the incentives to use the information productively

4. Components of architecture “three legs of the stool”
Decision-right assignment
empowering employees
who makes what decisions in organization
What knowledge/information does the decision maker have access to?
Reward system
compensating employees
Pecuniary; non-pecuniary
sets incentives
Performance-evaluation system
evaluating employees
accountability

5. Determinants of Organizational Architecture Goals: · link decision rights with knowledge · motive agents to make productive decisions based on their information. · Reward value-enhancing decisions

6. Corporate culture
Culture is the set of explicit and implicit expectations of behavior within the firm
Culture includes formal organizational architecture
Communicating culture
slogans, rituals, role models

7. Case Analysis Questions
Does the strategy fit the business environment and capabilities of the firm?
What are key features of the current architecture?
Does the current architecture fit the business environment and strategy? Does it link specific knowledge & decision rights and provide incentives to use info productively?
Are 3 legs of stool mutually consistent?
If problems, what changes in strategy & architecture should firm consider?
What problems in implementing changes?

8. When architecture fails
Management is at risk of dismissal
Firm is at risk of takeover
Rivals are lurking in the wings
Can you say Enron???

9. Changing architecture
Benefits of organizational change must exceed costs
Costs
direct: resources for design and communication
indirect: short-timer effect on human capital development
Organizations are interdependent systems, change must be coordinated

10. Managerial implications
Consultant advice should be examined closely
e.g., employee empowerment may not always be appropriate
Effective benchmarking requires architectural awareness

11. Discussion Question
What is a major difference between the organizational architectures of markets and firms?

12. Evaluate this organizational architecture
Decision rights – pricing decision rights are assigned to the sales associate
Evaluation – the metric is sales volume per quarter
Compensation – flat salary plus commission tied to sales volume

13. Eastman Kodak, p. 298
What factors motivated Kodak to change its organizational architecture?
What mistakes did Kodak make in changing its architecture?
What might it have done differently?
How does this relate to the concept of economic Darwinism?

14. Ethics and organizational architecture Chapter 22
What is the Social Responsibility of Corporate Management?
Karen Kozlowski (second from left) with friend and two models dressed as Roman centurions
Before Indictment
Dennis and Karen Kozlowski with two models dressed as Roman centurions

15. Ethical Conflicts Individuals versus Legal Fictions
Principles and Agents
Patients and doctors
Client and attorney
God and people
Shareholders versus Stakeholders
What is a stakeholder?
Customers, employees, owners, suppliers, competitors, communities?
Caux Round Table
Animals, managers, trees, non-sentient things
Business Ethics literature

16. Friedman on Social Responsibility of Managers
“…there is one and only one social responsibility of business – to use its resources and engage in activities designed to increase its profits so long as it stays within the rules of the game, which is to say, engages in open and free competition, without deception or fraud”.
Milton Friedman

17. “Corporate Social Responsibility”
“The solution lies in business practices that reflect
and respect the competing claims for all stakeholder
groups. No longer simply a matter of publicity or
philanthropy, socially responsible business practices
affect all aspects of business operations and
contribute significantly to corporate productivity and
profitability.”
-Website of Business for Social Responsibility:

18. How do we get ethical behavior?
Altering preferences? 
Altering incentives! 
Distinguish between policies designed to alter preferences and those designed to alter incentives

19. Recycling Corporate Responsibility, WSJ
What is the author’s opinion about the opportunity costs of the stakeholder approach?
What is the author’s opinion about Enron? Arthur Anderson
What is the author’s prescription?

20. Giving Until it Hurts, WSJ
What was Berkshire Hathaway’s policy on corporate giving?
What were the key differences between A and B shares?
Was Berkshire Hathaway ethical? Was Warren Buffett ethical?
What problem identified in this editorial lead to a change in the policy?
Identify company’s solution and add recommendations of your own if you have any. It would be unusual NOT to have differences of opinion in your group in regard to these issues. You may wish to acknowledge these differences with a list of several alternative solutions.
Should corporations ever give to charity? Always give to charity?
Who should control decision rights concerning corporate philanthropy?

21. Discussion: Nordstrom
What is the causes of the problems described in this case? Is the three-legged stool balanced?
Are Nordstrom employees pressured inappropriately by the sales-per-hour system? By management?
How effective is the memo (Exhibit 3) in clarifying the distinction between “sell’ and “non-sell” time?
How would you change management systems at Nordstrom?
Would proposed changes in overtime eligibility benefit Nordstrom? Your firm? Workers?

22. Ethics Summary
The term ethics has many different meanings which can change across cultures and time.
If a corporation is to survive in a competitive environment, it must maximize value. Taking care of corporate “stakeholders,” such as employees and local communities can be important, but such care can only be taken so far.
Private markets provide strong incentives for ethical behavior by imposing substantial costs on institutions and individuals that depart form accepted social standards.
Some corporations misplace considerable effort in trying to change employees’ preferences through corporate ethics programs. The economic view, instead, takes the employees’ preferences as given and focuses on incentives.

23. Looking Forward November 11 -8:00pm OEC Auditorium November 15 and 16
“Tax Policy and the Economy”
Professor Joel Slemrod, University of Michigan
Optional for Monday and Tuesday Sections
November 15 and 16
Managerial Economics Chapters 12 and 13
Decision Rights
Medford University, p. 325
Assignment 4: Due November 11, 15, and 16

24. Additional Ethics References
“The Social Responsibility of Corporate Management: A Classical Critique” by Coelho, McClure, and Spry (Friedman paradigm)
“A Response to The Social Responsibility of Corporate Management: A Classical Critique” by Post (Corporate Social Responsibility paradigm)
Mid-American Journal of Business, Vol. 18, No at the following website: