Organization Structure and

Management Systems

OUTLINE

Evolution of the corporation

Principles of organizational design
The role of hierarchy: bureaucratic
control vs. modular integration
Alternative structural forms
Management systems
 Theory of the Firm
Adam Smith (1776) Specialization often produces gains in
economic efficiency.
A firm is any economic unit that engages in specialization
(and trade) rather than private consumption
Not firm versus market but firm versus household
Coase (1937): The firm exists because there are costs to
using the market (i.e. trading with other firms), but then
why is everything not organized as one giant firm? Must
also be administrative costs.
Resources will flow to their most efficient use. Also hybrid
structures joint ventures, alliances, partnerships
Strategic Theory of the Firm
Firm Benefits
Knowledge sharing
Social controls
Flexible resource allocation
Limited liability
Intangible assets
Firm Costs
Higher coordination costs as
size, scope, and distance grow
Agency costs (monitoring)
Cognitive limits on info.
processing (e.g. dominant logic)
Source: Phelan & Lewin, 2000
Market Costs
Ex ante transaction costs
Ex post transaction costs
Dynamic transaction costs
Market Benefits
Price acts as a signal of imbalance
Price allows easier economic
calculations
Freedom to transact with any agent
Protection of contract law
 The Basic Tasks of Organization
Achieving high levels of productivity requires SPECIALIZATION

Specialization by individuals necessitates COORDINATION

For coordination to be effective requires COOPERATION

But goals of employees == goals of owners

THE AGENCY PROBLEM

THE ORGANIZATIONAL CHALLENGE:

To design structure & systems that:
Permit specialization
Facilitate coordination by grouping individuals & link
groups with systems of communication, decision
making, & control
Create incentives to align individual & firm goals
 Evolution of the Modern Corporation

The business Strategic Organizational

environment changes consequences

Early Local markets Firms specialized & Small firms.

19th Transport slow focused on local Simple manage-
century Limited mechanization markets ment structures

Late Introduction of Geographical and Functional struct-

19th railroads, telegraph vertical expansion ures. Line/staff
industrialization separation. Accou-
century
nting systems

Early Excess capacity in Product & Development of

20th distribution. Growth multinational multidivisional
century of financial institut- diversification corporation
ions & world trade
 General Motors Organization Structure, 1921

Board of Directors

President Executive Committee

Financial GM Acceptance Legal General

Staff Corporation Department Advisory Staff

Chevrolet Sheridan Canadian Oldsmobile Buick Cadillac GM Export

Division Division Division Division Division Division Company

GM Truck Samson Oakland Inter- Scripps

Division Tractor Division company Booth
Division Parts Corp.
Division

Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.
 Hierarchy Economizes on Coordination

(a) Self Organizing Team: (b) Hierarchy:

10 interactions 4 interactions

But what about effectiveness of coordination?

--Depends upon the organizations task
 Hierarchy of Loosely-Coupled
Modules Allows Flexible Adaptation

Tightly-coupled, integrated Loose-coupled, modular

system: Change in any part
of the system requires
system-wide adaptation
hierarchy: partially-
autonomous modules linked
by standardized interfaces
permits decentralized
adaptation and innovation
 Webers Principles of Bureaucracy

Rational-legal authority of formal rules (as opposed to

traditional (monarchy) and charismatic)
Specialization of labor
Hierarchical structure
Coordination and control through rules and standard
operating procedures
Standardization of employment practices (meritocracy)
Separation of jobs and people
Formalization of administrative acts, decisions and rules
Minimizes particularism (incl. nepotism)
Does one size fit all?
 Mechanistic and Organic Forms

FEATURE MECHANISTIC ORGANIC

Task definition Rigid & highly Flexible; less

specialized specialized

Coordination Rules & directives Mutual adjustment.

& control imposed from the top Cultural control

Communication Mainly vertical Horizontal & vertical

Commitment To immediate superior To the organization & its

& loyalty goals & values

Environmental Stable with low tech- Dynamic, ambiguous,

context nological uncertainty high technological
uncertainty
 Designing the Hierarchy: The Basis for Defining
Organizational Units and their Relationships

Units may be defined on the basis of Common Tasks, Products,

Geographical Proximity, or Process/Function

Critical issue: Intensity of CoordinationEmployees with the greatest

interdependence should be grouped into same organizational unit.

Additional criteria: Economies of Scale, Economies of Utilization,

Learning, Standardization of Control Systems
 General Motors Organization Structure, 1997

Board of Directors

Presidents Council Corporate Functions

North Delphi GM International Hughes

American Automotive Acceptance Operations Electronics
Operations Systems Corporation

GM Europe
Midsize Small GM Vehicle Development
& Car Power Sales, & & Technical Asian &
Luxury Group Train Marketing Cooperation Pacific
Car Group Group Group Operations
Group
Latin
American,
African, &
Middle East
Operation
 Corporate Executive Office
Chairman & CEO

Corporate Staff
Service Divisions Finance Business R&D Human Legal
Development Resources

GE GE GE
GE Aircraft GE Trans- GE
Industrial Appliances Supply
Engines portation Plastics
Systems

GE
GE Power GE Medical GE GE
Specialty NBC
Systems Systems Lighting Capital
Materials

26 businesses organized into 5 segments:

Consumer Mid-market Specialized Specialty Equipment
Services Financing Financing Insurance Management

General Electrics Organization Structure, 2002

 Mobil Corporation, 1997

Board of Directors

CEO
Executive Office

Corporate Center Support Services

North New Worldwide Technology

America Exploration LNG & IPP

Asia/ Europe Africa & South

Pacific & CIS Middle America
East North
America Worldwide
Shipping M&R Chemicals
Royal Dutch/Shell Group, 1994: A Matrix Structure
 Recent Developments
Internet and globalization
Power to buyers, importance of supply chain mgt,
delivering solutions rather than products, need to
present one face to customers globally, global (location)
economies
New forms
Front-back organization, project-based org, global sales
coordination & subsidiary issues, growing importance
of lateral processes and rewards
Growth in alliance formation & network/virtual/hollow
organizations
Culture as a control mechanism
 Control Systems
Information systems & reporting
Strategic planning & budgeting
HRM (incentive system)
Compensation
Individual or team based
High powered or low powered
Input or output
Promotions
Tournament model
Merit (absolute or relative) vs. seniority vs. up or out (Phelan & Lin,
2001)
Recruitment and ports of entry
Culture
High performance work practices
One standard deviation increase in HR practices
resulted in a $41,000 increase in market value per
employee (about 14% of market cap)
Seven practices of successful firms
Employment security
Selective hiring
Self managed teams and decentralization
High compensation contingent on performance
Extensive training
Reduction of status differences
Sharing information
Pfeffer & Veiga (1999)
 Case: Royal Dutch Shell
What were the strengths and weaknesses of the
pre-1995 structure? Did it need to change?
To what extent did the 95-96 reorganization
remedy problems in the structure?
What problems did the 1997-2000 restructure
solve?
What additional changes would you recommend?