Chapter Ten The Firms Architecture: Organization and Corporate Culture.

Chapter Ten

The Firm’s Architecture:

Organization and Corporate Culture

Copyright © Houghton Mifflin Company.All rights reserved. 10–2

Distinct Capability

• Not every firm has one.

• If a firm has no distinct capability, then to be successful, it must have a strategic asset that is valuable and inimitable.

• The search for a distinct capability ranges from innovation, brand name, and even the organization or architecture of the firm.


What determines the BEST organizational structure?

• A firm exists to carry out transactions in a more efficient way than they could be currently carried out in the market.

• A firm should be organized in such a way that the transactions costs are minimized.


Consider the following

• Suppose output is a “team” production and that individual effort is difficult to measure.

• What are the problems with such a situation?

• Individuals have what incentive?


Consider the following:

• How can the firm organize so as to achieve maximum effort and minimize shirking?

• One way might be to assign one team member to be the “monitor.”

• The monitor would have to have the incentive to ensure that team output is maximized.


Organization

• That might be done by allowing the monitor to keep all profits (or a portion of profits) after all team members have been paid.

Employees

Boss

Notice that this process has created a “firm” organized in a traditional, hierarchical manner.


Organization

• Various Forms of Organization

• Individually: Each person is responsible for his or her own task.

• Self-managed teams: A group of employees is responsible for a task.

• Hierarchy of authority: Boss is responsible for tasks (assigns employees).

• What are the incentives in each form?

• Which generates the least transaction costs?


Consider the following situation:

• Suppose there are n individuals, all of whom are producing one part of the final product.

• If each individual must interact, then the number of interactions among n independent individuals is n(n-1)/2.

• Now, suppose one is the boss and all must report to the boss. The number of interactions is n-1.


Consider the following… (cont’d)

• So, as n increases, the hierarchy of authority is more efficient in terms of the numbers of interactions.

• But, as n continues to grow, each supervisor hits the limit of his/her “span of control.”

• That is, he or she hits diminishing marginal returns.

• In this case, several supervisors who each have n individuals reporting to him or her is the most efficient.


Organization

• This results in a complex hierarchy comprised of several different supervisors or what we might call departmentalization.


Organization

• Departmentalization can arise along various lines • common tasks or functions -- accounting,

marketing, production.

• inputs or outputs -- Pepsi bottling Group and Fountain Beverage Division.

• geographic location-- regional offices or service centers.

• time of work-- multiple shifts within a manufacturing firm.


Departmentalization

• What form is best?

• It depends on economies of scale and scope, transactions costs, and agency costs.

• A firm should combine workers or teams into a department when there are economies of scale or scope in the activities they perform.


Departmentalization

• It might be efficient to have all the accountants together reporting to a general manager, and all the marketing people together reporting to a different general manager, and so on.


One form of firm organization based on departmentalization is called:

U-form• U is from “unitary,” referring to the idea that

a single department is responsible for each basic function.

• When is it used? When there are benefits from specialization of labor; when there are economies of scale in a function.


Corporate Headquarters: CEO, President, Staff VPs

General Manager, PR

GM, Finance

GM, Purchasing

GM, Mfg.

GM, Sales

GM, R&D

ComptrollerTreasurer

Products

Functional or U-Form Corporate Chart


Organization

• When would the U-form cause problems?

• One time would be when specialization is not fully exploited.

• A more complex form might minimize this problem.

• The more complex form would have departments within departments.

• This is called the M-form or multi-divisional form.

Corporate Headquarters:CEO, President, Staff VPs

Finance Engineering Marketing HR

Multidivisional or M-Form Corporate Chart

Divisions

Departments

By productline, geography, etc.

Mfg.


Organization

• The M-form creates problems when?

• When it is difficult or costly to coordinate the activities of the departments such as:

• When activities are based across departments rather than departmentalized.

• In short, when transaction costs are larger than the gains from specialization.

• Examples include business schools.

Dean’s Office

Econ. Finance Purchasing Mktg. Acctg. Mgmt.

Business School Corporate Chart

Programs

Undergraduate

MS/PhD

MBA Programs: Across All Departments

Departments


Organization

• In the 1980s, Pepsi faced the emergence of large regional supermarket chains.

• These chains operated in territories that encompassed several different regional offices within the Pepsi Bottling Group.

• Pepsi was organized hierarchically in the M-form. As a result, it could not respond quickly to the supermarket requests.

• How should it organize?


Organization

• A solution to the M-form problems might be:• A matrix. Simultaneously organizing along

multiple dimensions.


Organization

• For example, organizing by product groups and functional departments.

• Pepsi reorganized into a matrix based on geographic and functional lines.

• Area manufacturing managers reported to regional managers and a national senior VP for operations.

Executive

Program coordinators

Matrix Corporate Chart

Program office Executive committee

Staff service

Project 1

Project 2

Project 3

Project 4

Project director

Functional group A

Functional group B

Functional group C


Organization

• When would the Matrix form not make sense?

• When the gains from specialization and trade are less than the gains from reducing coordination costs.

• When transaction costs among or across units are higher than they are among or across tasks.

• When economies of scale in some tasks are small relative to the total market while those in other tasks are large.


Organization

• For instance, if a firm can carry out R&D on some activity more efficiently when it consists of a relatively few scientists, say about 20 rather than when it consists of 50 or 250 scientists, but at the same time there are large economies of scale in acquiring capital, then efficient organization might require something different than the Matrix-form.


Organization

• Network structure: A “looseknit” organization

• Work groups in a network may be organized by function, geography, or customer base.

• Example: The Japanese keiretsu, biotech firms, and hi-tech firms.


Network Illustration

Mfg.Retail Stores

RawMaterials

Import/Export

Bank

Mfg.


Organization

• What organizational structures make sense under each of the following:

• When the firm undertakes an increasing range of activities.

• When the environment becomes more volatile, for example, because of increased competition.

• When technological change is occurring more rapidly.


Organization

• The trends in the history of business range from: • U-form, then M-form, and now matrix and network

forms.

• Why the change?• Initially businesses were quite focused.

• But the range or scope of activities increased over time.

• Some went overseas and others diversified.


Organization

• The M-form created a division of labor between top managers and division managers that allowed top managers to specialize in strategic decisions and long-range planning.

• One study found a strong association between a firm’s early adoption of the M-form structure and profitability.

• That profitability did not persist. Why?


Organization

• For years it has been held that:Structure follows strategy.

• The idea is that once a firm has chosen a strategy, it can then select the firm organization or architecture that is most efficient for that strategy.


Organization

• Does structure follow strategy, or is it vice versa?

• Think of the effect of the structure on decision making throughout the firm.

• A firm’s structure determines how and in what order lower-level decision makers come together to contribute their information to corporate decisions.

• Thus, structure may dictate the strategy.


Organization

• The important point is that the two are related • You could have a good strategy but have

an inefficient structure.

• You could have an efficient structure but a poor strategy.

• You could have a good strategy, an efficient structure, but have a culture that is inconsistent with either or both.


Culture

• Culture is a set of collectively held values, beliefs, and norms of behavior.

• Examples:• “These are the voyages of the Starship

Enterprise. Her five-year mission: To explore strange worlds, to seek out new life and new civilizations, to boldly go where no man has gone before.”

• “At Ford, quality is job number 1.”


Culture

• Can culture be a source of sustained competitive advantage?

1. The culture must be specific to the firm.

2. The culture must be inimitable.


Culture

• How does culture create value for firms?

• It reduces information processing demands on individuals within the firm.

• It reduces the costs of monitoring individuals within the firm.

• It reduces the negotiation and bargaining costs of individuals within the firm.


Culture

Examples:

• Cray research is known for its innovations in the development of supercomputers.

• Culture stressed strong employee commitment, demonstrated by continually talking about the founder, Seymour Cray.


Culture

• 3M Corporation is known for a huge array of useful products that builds on the firm’s strength in adhesive chemistry -- Scotch tape and Post-it note pads, for example.

• The culture at 3M is one of innovation throughout the company, even in the finance and accounting departments (use of quality circles).


Culture

• Imperial Chemical Industries (ICI) is a chemical firm.

• In 1973, it was the largest firm in the U.K., but it had terrible years throughout the early 1980s.

• ICI had a conservative culture. Not much changed.

• As a result, it did not react to its changing environment.


Structure and Culture

• Honda was founded in 1948 by Soichiro Honda.

• It’s structure? Dictatorial. Mr. Honda made all decisions.

• Mr. Honda retired in 1973. Honda’s structure then changed. Decision making authority was spread among 30 senior executives; the hierarchy was flattened.

• In 1991, a new CEO announced a change: centralization. Honda was nearly alone in this; most firms were “empowering” employees at the time.



Decentralization

• Benefits: 1. More information about local markets.

2. Conservation of management time.

• Costs:1. Agency costs. Local managers may not have the

incentive to maximize firm value.

2. Coordination costs. Who gathers and then distributes information?



• Recent Trends: • Towards greater decentralization.

Why?• Global competition.

• Because technological change has accelerated.



Recent Trends:

• Teams

• Why?• Products require a variety of employees from

different functional areas.

• Example: Hallmark uses teams organized around specific holidays. One team works on Mother’s Day cards and another Valentine’s Day cards.



• When will team decision making work best?• When benefits > costs.

• What are the benefits?

• What are the costs?

• What is the optimal team size?• It’s a tradeoff between enhancing the knowledge

base of the team and free-riding.

Chapter Ten The Firms Architecture: Organization and Corporate Culture.

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Transcript of Chapter Ten The Firms Architecture: Organization and Corporate Culture.