Organization Structure and Management SystemsTheory of the FirmStrategic Theory of the FirmThe Basic Tasks of OrganizationEvolution of the Modern CorporationGeneral Motors’ Organization Structure, 1921Slide 7Slide 8Weber’s Principles of BureaucracyMechanistic and Organic FormsSlide 11General Motors’ Organization Structure, 1997Slide 13Mobil Corporation, 1997Slide 15Recent DevelopmentsControl SystemsHigh performance work practicesCase: Royal Dutch ShellOrganization Structure and Management SystemsOrganization Structure and Management Systems•Evolution of the corporation•Principles of organizational design•The role of hierarchy: bureaucraticcontrol vs. modular integration•Alternative structural forms•Management systemsOUTLINETheory 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, partnershipsStrategic Theory of the FirmFirm BenefitsKnowledge sharingSocial controlsFlexible resource allocationLimited liabilityIntangible assetsFirm CostsHigher coordination costs as size, scope, and distance growAgency costs (monitoring)Cognitive limits on info.processing (e.g. dominant logic)Market CostsEx ante transaction costsEx post transaction costsDynamic transaction costsMarket BenefitsPrice acts as a signal of imbalancePrice allows easier economic calculationsFreedom to transact with any agentProtection of contract lawSource: Phelan & Lewin, 2000The Basic Tasks of OrganizationThe Basic Tasks of OrganizationTHE 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 Achieving high levels of productivity requires SPECIALIZATIONSpecialization by individuals necessitates COORDINATIONFor coordination to be effective requires COOPERATIONBut goals of employees == goals of owners THE AGENCY PROBLEMEvolution of the Modern CorporationEvolution of the Modern CorporationThe businessenvironmentOrganizationalconsequencesStrategic changesLate 19thcenturyEarly19thcenturyEarly20thcenturyLocal markets Firms specialized & Small firms.Transport slow focused on local Simple manage- Limited mechanization markets ment structuresIntroduction of Geographical and Functional struct-railroads, telegraph vertical expansion ures. Line/staffindustrialization separation. Accou-nting systemsExcess capacity in Product & Development of distribution. Growth multinational multidivisionalof financial institut- diversification corporationions & world tradeBoard of DirectorsPresidentExecutive CommitteeFinancial StaffLegal DepartmentGeneral Advisory StaffGM Acceptance CorporationChevrolet DivisionSheridanDivisionCanadian DivisionOldsmobile DivisionGM Truck DivisionGM Export CompanyCadillac DivisionBuick DivisionInter-company Parts DivisionOakland DivisionSamson Tractor DivisionScripps Booth Corp.Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.General Motors’ Organization Structure, 1921General Motors’ Organization Structure, 1921(a) Self Organizing Team:10 interactions(b) Hierarchy:4 interactions Hierarchy Economizes on Coordination Hierarchy Economizes on CoordinationBut what about effectiveness of coordination?--Depends upon the organization’s taskTightly-coupled, integrated system: Change in any part of the system requires system-wide adaptation Loose-coupled, modular hierarchy: partially-autonomous modules linked by standardized interfaces permits decentralized adaptation and innovationHierarchy of Loosely-Coupled Modules Allows Flexible AdaptationHierarchy of Loosely-Coupled Modules Allows Flexible AdaptationWeber’s Principles of BureaucracyWeber’s 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 FormsMechanistic and Organic FormsFEATURE MECHANISTIC ORGANICTask definition Rigid & highly Flexible; less specialized specializedCoordination Rules & directives Mutual adjustment.& control imposed from the top Cultural control Communication Mainly vertical Horizontal & verticalCommitment To immediate superior To the organization & its& loyalty goals & valuesEnvironmental Stable with low tech- Dynamic, ambiguous, context nological uncertainty high technological uncertaintyDesigning the Hierarchy: The Basis for Defining Organizational Units and their RelationshipsDesigning the Hierarchy: The Basis for Defining Organizational Units and their RelationshipsUnits may be defined on the basis of Common Tasks, Products, Geographical Proximity, or Process/Function Critical issue: Intensity of Coordination—Employees with the greatestinterdependence should be grouped into same organizational unit. Additional criteria: Economies of Scale, Economies of Utilization,Learning, Standardization of Control SystemsBoard of DirectorsPresident’s CouncilCorporate FunctionsNorth American OperationsDelphi Automotive SystemsInternational OperationsGM Acceptance CorporationHughes ElectronicsMidsize & Luxury Car Group Small Car GroupGM Power Train GroupVehicle Sales, & Marketing GroupDevelopment & Technical Cooperation GroupGM EuropeAsian & Pacific OperationsLatin American, African, & Middle East OperationGeneral Motors’ Organization Structure, 1997General Motors’ Organization Structure, 1997Corporate Executive OfficeChairman & CEO Corporate StaffFinance Business R&D Human LegalDevelopment ResourcesGE AircraftEnginesGE