The modern firm

The Modern Firm This page intentionally left blank The Modern Firm Organizational Design for Performance and Growth John Roberts Great Clarendon Street, Oxford OX2 6DP Oxford University Press is a department of the University of Oxford It furthers the University’s objective of excellence in research, scholarship, and education by publishing worldwide in Oxford New York Auckland Bangkok Buenos Aires Cape Town Chennai Dar es Salaam Delhi Hong Kong Istanbul Karachi Kolkata Kuala Lumpur Madrid Melbourne Mexico City Mumbai Nairobi São Paulo Shanghai Taipei Tokyo Toronto Oxford is a registered trade mark of Oxford University Press in the UK and in certain other countries Published in the United States by Oxford University Press Inc., New York © Donald John Roberts 2004 The moral rights of the author have been asserted Database right Oxford University Press (maker) First published 2004 First published in paperback 2007 All rights reserved No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, without the prior permission in writing of Oxford University Press, or as expressly permitted by law, or under terms agreed with the appropriate reprographics rights organization Enquiries concerning reproduction outside the scope of the above should be sent to the Rights Department, Oxford University Press, at the address above You must not circulate this book in any other binding or cover and you must impose this same condition on any acquirer British Library Cataloguing in Publication Data Data available Library of Congress Cataloging in Publication Data Data available Typeset by SPI Publisher Services, Pondicherry, India Printed in Great Britain by Clays Ltd., St Ives plc ISBN 978–0–19–829376–7 (Hbk.) 978–0–19–829375–0 (Pbk.) 10 To Kathy This page intentionally left blank Contents Preface ix Preface to the Paperback Edition xiii Strategy and Organization Key Concepts for Organization Design 32 The Nature and Purpose of the Firm 74 Motivation in the Modern Firm 118 Organizing for Performance 180 Organizing for Growth and Innovation 243 Creating the Modern Firm: Management and Leadership Challenges 281 References 289 Index 303 vii This page intentionally left blank Preface The most fundamental responsibilities of general managers are setting strategy and designing the organization to implement it Over the last decades the great value of economics for the study of strategy and the practice of strategizing has become evident This book attempts to show how economics can contribute in a similar way and at a similar level to organizational design I hope that practicing managers will read and benefit from this book It is not, however, a “how to” book offering the final, simple answer about how to succeed Instead, it offers ways to think about the problem of designing business organizations for performance and growth Both students of organizations and management and practicing managers can benefit from having an understanding of the basic principles of the economics of organization and its application to business enterprises The book tries to offer this It mixes case studies and shorter examples with fundamental conceptual and theoretical material that is developed and presented in a nontechnical manner and then applied to the design problem It also seeks to explain some of the very great changes in ix Index architecture of firms (cont.): internal 240 and motivation 168 Arco see BP Arrow, K 78, 104 Asanuma, B 205 Asea Brown Boveri see ABB Asea Brown Boveri assembly line 42, 58, 68 “asset federation” in BP 184 assets 91–3, 95–6, 107, 225 in BP 186–90 ownership of 104 pricing theory 215 specific 193 specificity 117 n asymmetry of information see information asymmetry AT&T 213, 254 Athey, S 141 automobile industry 38–9 in Japan 64–5 Avery, C 177 n, 229 Baker, G 158 “Balanced Scorecard” 140 bargaining 85, 95 Coasian 218 Barnett, W 250 Barnevik, Percy 110: see also ABB Asea Brown Boveri Baron, J 46, 174 Bartlett, C A 166 “basket weave” model in General Motors (GM) 239 Bell Laboratories 254 Benetton 191–2 Berg, N A 41 Berger, P 225, 226 Berzins, A 25 best practices 72, 112, 286 in BP Exploration 112, 173; sharing in BP Exploration 173–4, 187–8 Betamax 219 Bhambri, A 153 bonus 150, 157 boundaries of firms 240 horizontal 230–1 vertical 230–1 BP 30, 95, 136–7, 172–3, 182–90, 239, 250–2: see also Browne, John and Amoco 182, 190, 250 and Arco 182, 190, 250 and Burmah Castrol 182 “asset federation” 184 assets of 186–90 lifestage of 197 best practice in 173, 187 capital budgets in 184 changes in culture in 189 discrete business units 189 employees in 184 ExCo 186, 188–9 federal groups in 188 human resources in 188 management in 183–4 matrix system in 183 operations in 185 organizational changes 182 organizational design 185–6, 190 organizational model 188 outsourcing 188 pay in 238 peer assists 113, 187–9 peer challenges 189 peer groups 113, 172–3, 187–9, 239, 284–5 performance 137, 190 performance contracts 189 performance reviews 186 performance targets 186, 188 production in 185 Quarterly Performance Reviews 186–7 rationalization in 184 redesign of 25 304 Index Regional Operating Companies 185–6 “self help” in 95, 136 strategic changes in 182–3 BP Exploration (BPX) 24–5, 30, 112, 114, 182–7, 256 best practice sharing 173–4, 187–8 incentives in 172–3 linkages in 239 small business units 172 Brady, D 191 Bresnahan, T 46 British Petroleum see BP British Telecom see BT Browne, John 25–6, 112, 187, 189 Brynjolfsson, E 37, 38, 46, 73 n BT 213 Burgelman, R 257, 273, 280 n Burmah Castrol 182 Burt, T 208 Burton, D 46 Businesses units: discrete 189 small 166 buying growth see growth, buying Campa, H 227 capital allocation, internal 223–4, 226 capital goods, depreciation of 169 career management 201 carve-outs 114 CBS 246 CBS Records 218, 251 and Sony 218 centralization 94 centralized decision making 55 CEOs’ compensation 138–9: see also compensation Chandler, A 13, 30 n, 93 changes 241, 242 n adaptation to 71 and performance 66 environmental, in firms 23, 27, 50, 54, 60, 68, 71–2, 111 organizational 22–7, 51, 56, 60, 66–8, 231, 237, 241, 282 environmental 111; in BP 182–3 strategic 23 cheating 162, 172, 200 Chevalier, J A 177 n, 226, 227, 229 choices: organizational 52, 54 strategic 32, 52, 54 Cisco Systems 246, 250, 252 CNC see computer numerically controlled (CNC) Coase, R 77, 81, 87, 88, 103 Coasian bargaining 218: see also bargaining Columbia Pictures 218 and CBS Records 218 and Sony 218, 251 Comment, R 214, 226 commitment 233 problems of 85, 90 communication 65, 259 among employees 101, 232 among managers 237 in the firm 217 Compaq computer 252 comparative performance evaluation 152 compensation 138–9, 266, 271: see also executive compensation CEOs’ 138–9 competition 3, 114, 123 imperfect 87 internal 269 competitive advantage 5, 14–15 competitive bidding 248 complementarities 33–51, 55, 58, 60, 67–9, 143, 218, 234, 240–1, 249–51, 283 and discrete coherent patterns 40 f and internal organizations 240 in human resource management (HRM) 46 in Lincoln Electric Company 41 in Newell Co 250 305 Index complementarities (cont.): of design 190, 241 relationships 232, 283 computer numerically controlled (CNC) machines 41, 195 concavity 51–2, 54: see also non-concavity of the objective 55 Concert (AT&T and BT joint venture) 213 “concurrence system” in IBM 153 conflict of interest 127 conglomerates 214, 217, 222–3 and stock markets 214 conglomerates discounts 214, 226 contracting 94–5, 218 contractors 169 contracts 86–7, 90–2, 94, 96, 121–3, 125, 198 employment 104 enforcement of 85, 122–3, 158 incentive 153 incomplete 115 n long-term 117 n performance 136 relational 114, 197–8, 212 renegotiation of 86–7, 92 short-term 206 termination of 202–3 convexity 51–2: see also non-convexity cooperation 197–8, 204, 206, 207, 213, 218 and initiative 106–15, 108 f, 196 and teamwork 154 between firms 209 measuring 114 coordination 88, 103 in firms 78, 107 of markets 77 problems of 75–6 corporate: form 180 management 120 performance 155 incentives and 270 policies, clarity of 231, 237 strategy 16 values 285 coupling, loose see loose coupling coupling, tight see tight coupling Crawford, R 86, 90 “creosote plant” 257, 271–2 cross-subsidization 223, 225, 227 culture 5, 18, 26, 28, 30, 56, 72, 172, 173, 175, 190, 220, 221, 261, 272, 284–5 aspects of 34, 176 elements of 56, 154 in firms 18, 172 norms of 180 PARC 17 in trust 176 current: performance 98, 168–9, 243, 246, 255, 264, 269 incentives for 264 Dai-ichi Kango Bank 253 Daimler-Benz 215 Day, J 273, 280 n de Verdier, A.-K 191 decentralized structure 238 in Johnson and Johnson 238 decision-making 2, 28, 80, 100, 125, 150–2, 171, 233, 235, 237–8, 270 centralized 55, 108 decentralized 55 in units 152–3 limit to 102 monitoring of 171 decisions 17, 28, 101–2, 152, 233, 236–8, 272 authority for 17–18, 56, 141, 170, 237, 283 processes for 101, 153 delayering 114, 232–3, 236, 242 n delegation 242 n Delphi see General Motors (GM), Delphi demergers 214 Demsetz, H 103 306 Index Denso 202 design: see also organizational design “coherence” in 57–9 the decision-making process 152 elements of 2, 190, 191, 284 of employee incentives 35, 42–43, 64, 67, 94–98, 103, 123, 125, 127–53, 157–60, 165, 166, 169–72, 175, 178, 192, 194, 232, 265, 273, 283 features of 234, 241 of firm of incentives 132 of jobs 141, 172, 268 of performance contracts 136 of system 151 techniques of 212 disaggregation 180–1 in BP Exploration (BPX) 112, 181, 184 in firms 181 model 240 discrete business units 231–2 in BP 189 leaders of 232 diversification 215–17, 219, 226–30 and value 226 “diversification discount” 224–6 division of labor (A Smith) 74 divisions performance measurement of 150–1 Doornik, K 115 n, 242 n dual reporting 110 earnings see pay Eastman Kodak 212 economic: activities 74–5, 77–8, 88 in the firm 93 efficiency 88–90, 94, 116 n, 181, 225–6 “efficiency wage” 178 n; see also pay “effort provision” 127 empire building 229, 249 employees 3, 169 incentives 94–5, 97–9, 107–8, 123–4, 128, 131–4, 141–6, 148, 158, 165, 171, 192, 218, 224, 232–5, 255, 262–4 and ownership stakes 169 and tools 169–70 for teachers in USA 146–7 manipulation of 159 quantitative measures 255 monitoring of 124, 172, 176 recruitment of 164–5 relationship with employer 103 turnover 166 employment: contracts 104 relations 48 empowerment: of managers 170 of small business units 235–6, 239 enforcement of contracts 122, 158 Enron 156–8 Ericsson 274–5 evaluations, subjective see subjective evaluations excludable public goods 80 ExCo see BP, Exco executive: compensation 137–8, 249, 271 and stock price 249, 271 overload 237 team 240 externalities 80, 119, 217–18 family-owned firms 215–16 Fast, N D 41 federal groups in BP 188 firms 74–117; see also architecture of firms; family-owned firms; modern firms and markets 88–103 behavior in 103, 139 boundaries in 168, 240 horizontal 230–1; vertical 230–1 communication in the 217 coordination in 78, 107 design of 1, 73 307 Index firms (cont.): diversified 216–17, 219, 224–5, 227–9 and acquisitions 227–8 discount 224 literature on 225–7 environmental changes in 12–13, 18, 23–4, 27, 50, 60, 68, 71–2, 111, 230 external boundaries of 168 family-owned 215–16 financial structure of 171 innovations in 253–68 investments in 97–9, 117 n multibusiness 223–4 nature of 74–115 norms in 56 organizational design of 2, 72, 180–241 ownership of 171 processes in 240 purpose of 74–115 strategy in 72 flexibility 40, 45, 68 Flextronic 192 focus in firms 228, 230, 242 n Ford, H 38–9 Ford Motor Company 38–9, 208, 242 n free riding 124, 154, 160, 194, 208, 234 “front-and-back” model 167 Fuji Photo Film 209–12 Fuji Xerox 209–12 functional organization 167 Geneen, H 217, 242 n General Electric (GE) 41, 217, 227, 245 GE Capital 245 General Motors (GM) 40–1, 62–3, 201, 207–8, 227, 242 n, 245, 272 and suppliers 207–8 and Toyota 201 basket weave model 239 Delphi 205 organizational choices in 40–1 strategy and organization 63 Gibbons, R 160, 177 n, 242 n globalization 230 Gomes-Casseres, B 209 Grinblatt, M 280 n Gross, B 258 Grossman, S J 95, 96, 115 n group norm 154 group performance pay 154 Grove, A 273 growth 230, 244, 264–5, 269, 271; see also organizing for growth buying 245–53 by acquisitions 248–9 in organizations 243–80 in Nokia 276 strategy for 230 H J Heinz & Co 156 Hannan, M T 46 Hart, O 95, 96, 115 n, 117 n HBC see Hudson Bay Company (HBC) Hellmann, T 261 Helper, S 202 Hewlett-Packard (HP) 252–3 high-commitment human resource management 135, 156, 174–5, 273–4 Hitt, L M 37, 38, 46, 73 n hold-up 92–3, 107, 116 n, 193, 195 investments in 90 Holmström, B 104, 106, 115 n, 136, 161, 177 n, 234 horizontal linkages see linkages, horizontal horizontal scope see scope, horizontal Horngren, C T 156 Horton, Robert 183 Houston Oil and Minerals 222–3, 252 Hudson Bay Company (HBC) 4–11, 13, 15–16, 30, 60, 261–2 human resource management (HRM) 46, 135–40, 174 career management 201 complementarity, literature on 46 Hurstak, J 111, 181 308 Index IBM 212, 272 “concurrence system” in 153 Ichniowski, C 46 ICI 215 IdeaLab 258 incentives 42–3, 94–9, 101, 105–8, 114, 117 n, 123–5, 128–36, 141–51, 150–1, 153, 157, 159, 165, 169–73, 179 n, 197, 202, 218, 224, 232, 234–5, 237, 262–4, 267, 270, 283 and corporate performance 270 and piece rates 42–4 contracts 153 design of 132, 157 employee see employees, incentives for cooperation 114 for current performance 98, 264 for exploration 266 for innovation 265 in BP Exploration 173 in firms 105, 117 n in Houston Oil and Minerals 222 in Lincoln Electric Company 144 in Nokia Corporation 277 in sales force 105–6, 138, 194 in two-supplier policy 202 misaligned 238 monetary 119 pay 135, 242 n performance-based 35, 99, 170 performance see performance, incentives schemes 130, 134, 140, 152 in Sears Roebuck 157 incomplete contracts 115 n: see also contracts individual performance pay 154: see also performance, pay indivisibilities 56 influence activities 100–2, 160, 170, 225–6 influence costs 67, 102, 253, 271–2 influence techniques of 100 information 193, 235, 237, 239, 247–8, 272–3 about performance 158 asymmetries of 82–4, 87, 89, 160, 204–5, 216–17, 272–3 gathering 106, 170, 193 markets for 80 sharing (in Toyota) 204–5 systems 232, 237 technology 38, 112, 237 Informativeness Principle 136–7, 151 initiative 184 and cooperation see cooperation and initiative innovations 243–5, 257, 264, 269 in 3M 268 in firms 253–68 in Lincoln Electric Company 260 in Nokia Corporation 274–5, 277 in organizations 3, 63 in Proctor and Gamble 266 incentives for 265 Intel 256, 273 intellectual property 193 internal competition 269 international expansion 230 interventions 99–102, 237 and managers 99–100 inventories 64, 68 in Toyota 65 investments: in businesses 226 in firms 97–9, 116 n, 117 n, 169 ITT 217 Jaikumar, R 41 Japan: automobile industry 64–5, 196–7, 242 n economic performance 69–70 firms in 197 governance system 69 production lines 63 309 Index Jarillo, J 191 Jarrell, G 214, 226 Jensen, M 103 Jobs, Steve 164 jobs: functional definition 167 design of 141, 172, 268–80 for multi-tasking 268–80 performances in 114 design of 140–1 redesign of 3, 172 Johnson and Johnson 111, 181, 238 decentralized structure 238 joint ventures 115, 211 Jones, D T 197 Joskow, P L 116 n just-in-time 65 JVC (Victor Company of Japan) 219 kaizen 54, 57 Kamper, A 113 Kawasaki, T 206 Kedia, S 227 Kennan, J 90 Kikutani, T 206 Klein, B 86, 90 Kotter, J 287 n KPMG 208 Kreps, D M 46, 164, 174 kyohokai 205 Lang, L H P 214, 225 Lazear, E 165 leadership 62–3, 65, 283–6 in modern firms 281–7 in Sony 220–1 “value-based leadership” in Nokia Corporation 276–7 vision in 63 lean manufacturing see manufacturing, lean “lean” production systems 45 learning 71 Levin, J 242 n Levinthal, D A 32 liability, limited 131 Lichtenberg, F 142 life cycle 244 Lincoln Electric Company 41–4, 144, 260–2 and foreign acquisitions 166 complementarities in 41 competitors of 260 employees incentives in 144 turnover of 166 exploitation in 255–6 incentives in 144 organizational design in 42, 44–5, 64, 68, 255 ownership of 44 pay in 166 piece rates in 42–4, 64, 256 production in 43 quality 144 specialization 260 work-in-process inventory 68, 256 Lincoln, James F 64: linkages 239 among staff, horizontal 232 between performances 240 horizontal 232, 241 in BPX 239 Lins, K 225 local optimality see optimality, local Lockheed 271–2 lock-in 90–1 long-term contracting 117 n: see also contracts loose coupling 67–3, 181, 237: see also tight coupling MacDuffie, J P 202 make-buy choice 195 make-to-order 35 make-to-stock 35 management 108, 283–4, 286 and organizations 112 as a profession buyouts 98, 171 310 Index corporate 120 development 232, 239 in BP 183–4, 239 empowerment of 170 in BP 183 middle 237 of modern firms 281–7 of supply 214 processes 17–18 training 232 managerial vision see vision, managerial managers and current results 148 and interventions 99–100 and organizational design 12 communication among 237 general 12 motivation 161 pay 151 risk-taking and 120 manipulation of performance measures 156, 159 Mannesmann 246, 251 manufacturing: lean 47, 49–51, 64 modern 49 t piece rates 148 quality in 148 March, J 254 market exchanges 77 market-facing units 168 “markets for lemons” problem 89 markets 22, 76–7, 84 and firms 88–103 dealings 84, 199 failure 78, 82–3, 105 foreign 181 for information 80 organization 103 transactions in 88 Martinez, J 191 mass production 47–50, 48 t Masten, S E 116 n matrix forms 239–40 in ABB Asea Brown Boveri 239 system in BP 183 Matsusaka, J 214 Matsushita 219 McMillan, J 77, 206, 242 n McQuade, K 209 measures; see also performance, measures of behavior 140 of value 22 results 140 Meckling, W 103 Meehan, J W 116 n, 117 n “merger of equals” 251–2 mergers 226 and acquisitions 214, 247, 250–1 merit pay 146; see also pay for teachers in USA 146–7 measurement of 147 Meyer, M 225 middle management 237 middlemen 4, 8, 10 milestones 270 Milgrom, P 31 n, 35, 41, 47, 73 n, 96, 99, 105, 106, 115 n, 116 n, 141, 146, 169, 170, 177 n, 178 n, 201, 225, 226, 233, 242 n Mirrlees, J 81 mix and match 33, 241, 253 modern manufacturing see manufacturing, modern Mohammed, A 258 monitoring 154 intermittent 124 behavior 128, 157 of customers’ 192 of employees’ 128, 172, 176 of Board 160 of decision-making 171 of employees 124 monopoly 79, 81, 88 Monteverde, K 116 n Montgomery, C A 214, 225 Moore, J 95, 115 n moral hazard 83–4, 123, 220, 228 motivation 75, 88, 118–79, 177 n, 234, 236, 270–1: see also PARC 311 Index motivation (cont.): and organizational architecture 168 in modern firms 77–8, 107, 118–79, 262, 270 in markets 77 of unit managers 270 problems of 75–6, 268–9 Motorola 29, 274–6 multibusiness firms 223–4 multidivisional form 1–2, 93 multi-tasking 97, 105–7, 140–54, 172, 179 n, 262–3, 265, 269–73 exploitation 269–70 exploration 269–70 for job design 268–80 in agency relationships 140–54 in firms 168–9, 262–3 in organizational design 106, 153 incentive schemes 147 Murphy, K 139, 160, 161, 242 n Myerson, R 116 n Nagar, V 242 n nature of the firm 74–115 Newell Co 250–1 Newman, P C 30 n “nexus of contracts” 104 Nickerson, J 73 n Nike 191 Nissan 40 Nokia Corporation 28–30, 164, 274–80, 285 acquisitions 224 architecture of 276 culture in 30, 173–5 efficiency in 274 exploitation in 280 exploration in 278, 280 growth in 276 incentives in 277 innovations in 274–5, 277 managerial vision in 164 objectives in 29 organizational design in 276 pay in 277 risk-taking in 285 sales 275–6 strategy in 29 teamwork 276–7 “value-based leadership” 276–7 Ventures Organization (NVO) 278–9 non-concave performance 56 f: see also concavities non-concavities 33–4, 51–67: see also convexities and coherent points 59 f, 61, 61 f non-contractual rewards 161 non-convexities 33–4, 51–67 non-excludability 79 non-rivalry in consumption 79 Nordstrom 285–6 norms: in firms 56 of behavior 18, 23 of culture 180 of trust 26 of sharing information 113 of hard work 155, 277 North West Company (NWC) 4–11, 13, 30, 60 and value chain 16 customer-oriented strategy customers and information in organization in 231 organizational innovations in recruitment in reward systems in strategic recognition in 62 strategy in 15 supplier structure in Novartis 215 Novo Nordisk “facilitators” 113–14 NWC see North West Company (NWC) O’Connell, J 166 Ofek, E 225, 226 312 Index Ohno, T 64 opportunity costs 90 optimality, local 57 O’Reilly, C 252 organizational architecture see architecture, organizational organizational choices see choices, organizational organizational design 1–30, 32–73, 112, 118, 140–1, 151, 153, 176, 180–1, 221–2, 234, 243, 245, 251–3, 255, 273, 280–1, 283–4, 286–7 and influence activities 101 and managers 11 differentiation 221–2 economics and 12 for performance 191 framework for 281 in BP 185–6, 188, 190, 240, 288 in firms 1–2, 101, 112, 118–19, 181, 281 in Lincoln Electric Company 42, 64, 255–6 in Nokia Corporation 276 North West Company (NWC) 11 in Novo Nordisk 113 multi-tasking in 106–7, 273 multidivisional 1–2 patterns of 88 problems of 13, 36, 153, 283–4 strategy and 1–30, 19 f, 23–7, 32, 57, 61–4, 109, 281–3 units 153, 167 variation in 71 organizational exploitation 255–7, 262, 264, 267–9, 271, 273 organizational exploration 255, 257–8, 262–4, 267–9, 271–3 in Nokia Corporation 278, 280 incentives for 266 organizations 10–11, 16–17, 55, 88, 108–9, 114, 118, 224 and incentives 266 and management 112 and strategy 1–30, 19 f, 32, 61–4, 281–3 creativity 286 behavior in 106–7, 224 centralized decision-making 55 changes in 2, 11, 23–7, 66–8, 231–2, 237, 241, 282 compensations in 266 complementarities and internal organization 240 decentralization in 93 design of 180 economics of 12 excellence in 167 growth in 243–80 in BP 182 internal 240 and performance 230–40 managed 123 motivation in 118–79 of firms 180–241 people in 17 performance in 237 strategy in 28, 109, 283 structure of units in 231–32 leaders of 232 visions in 175 organizing for growth 243–80 organizing for performance see performance, organizing for outcomes-based rewards 126, 172 outsourcing 2, 114, 170, 191–5, 199–200, 242 n, 250 costs 195 in BP 188 in Toyota 203 ownership 105, 155 and power 105 of assets 104 of firms 171 of Lincoln Electric Company 44 stakes 169 structure of 171 Oyer, P 156 313 Index PARC framework 17, 254 and motivation 164–76 partners 10, 201 partnerships 2, 171, 198, 210–11, 213 pay 136, 161, 175; see also merit pay; performance-based incentive pay direct performance 167 group performance 154 in BP 238 in Nokia Corporation 277 managers 151 performance 237 stock-based 155 teachers in USA 146–47 withholding of 159 Pearce, D 200 Pearson, A 111, 181 peer: assists see BP, peer assists groups see BP, peer groups performance 3, 19–20, 37, 56–7, 68, 129, 139, 142–4, 152, 180, 182, 229–30, 233, 240, 255, 271: see also organizations, internal and performance agent 149 and changes 66 environmental 68 and choice 52, 53 f, 54–5 f, 57, 59 f collective 154 contracts, design of 136 in BP 189–90 corporate 155 current 169, 243, 246, 264, 269 economic evaluations 124, 139, 159–60 comparative 152 in BP Exploration 112 in activities 144–5 in firms 66, 68, 71, 139 in jobs 114, 142–3 in Lincoln Electric Company 144 in organizations 237 in units 233–4 incentives 99–100, 108, 152, 165, 170, 232 investments in 97–8 information on 158 improvements of 182, 232 linkages between 240 measures 83, 94, 97–8, 106, 112, 130, 133–40, 142, 149–51, 154, 165, 171–2, 175–6, 234–5, 240–1, 262–3 in 3M 259 in smaller units 233–4 manipulation of 156 of divisions 150–1 of teachers in USA 147 random 128, 234 rewards and 172 of colleagues, subversion of 154 of suppliers for Toyota 203 organizational design for 191 pay 85, 134–6, 140, 148, 237 direct 167 group performance 154 individual 154 performance-based 176 rewards, withholding of 159 targets in BP 186, 188 test, of teachers in USA 147 variation in 85 performance-based incentive pay 35, 176 “petropreneurs” 185 Pfeffer, J 46 Philips 219, 257 piece rates 42–5, 139, 148 in Lincoln Electric Company 42–4, 64, 256 in manufacturing 148 in Safelite Auto Glass 165 Podolny, J 13, 25, 113, 280 n Porter, M 12 postmerger integration 251 organization after 251 power and ownership 105 Prendergast, C 140, 177 n Prennushi, G 46 314 Index processes, control of 255 Proctor & Gamble 257 innovation in 266–7 procurement 199 production 167–8 in BP 185 in Lincoln Electric Company 43 lines in Japan 63 productivity 38, 45–6, 63 in Lincoln Electric Company 45–6 products 47, 261 development of 167–8 in Sony 220–1 profitability 245 property rights 95, 105 public goods 79–80, 87 excludable 79–80 public traded corporations 171 purpose of the firm 74–115 quality: circles 63 control 203 in Lincoln Electric Company 144 in manufacturing 148 of goods 82 quasirents 92, 116 n R&D groups 259 in Proctor and Gamble 266 Rajan, R 104, 225 recruitment: in North West Company (NWC) of employees 164–5 Reddy, P 250 relational contracts see contracts, relational relationships between firms 209, 213 long-term 209, 213–14 renegotiation: of contracts 86–7, 92, 115 n of employment 85–7 rents 116 n reputations 121–2, 125, 160–4 and contracts 120–1 as motivation 161 formation of 162 in agency context 242 n in reward systems 163 in Toyota 206 in Vietnam 163 Research and Development groups 259 results, measurement of 140 rewards 124, 128, 130–1, 139, 142–4, 154–5, 158–9, 165 for subjective evaluations 270–1 in 3M 259 non-contractual 161 outcomes-based 126 performance-based 144, 176 measures 176 schemes 131, 140, 150, 154, 158–9 and behavior 159 for sales staff 138 formulaic 158 systems 138, 154, 165 in North West Company (NWC) politicization of 160 reputations in 163 risk 134–5, 151, 216, 234, 263, 266 aversion 131–4, 165, 262, 265–6 manage 255 reduction 215, 242 n sharing 129–30 taking 171, 268 and managers 120 risk-neutrality 132, 178 n Roberts, J 25, 28, 31 n, 35, 41, 47, 73 n, 99, 113, 115 n, 116 n, 141, 146, 169, 170, 177 n, 178 n, 201, 218, 225, 226, 233, 242 n, 280 n Roos, D 197 Rosen, S 139 Rotemberg, J 164 Roy, D 154 Rubbermaid 250 Ruigrok, W 240 Sabel, C 202 sabotage of projects 224 315 Index Safelite Auto Glass 165 piece rates 165 salaries see pay sales: force 138, 149, 193–4 in Nokia Corporation 276 incentives 105–6, 149, 193–4 Saloner, G 13, 164, 280 n Satterthwaite, M 116 n Schaefer, S 67, 177 n, 229 Scharfstein, D 225 Schmittlein, D C 106, 149 scope: horizontal 214–30, 240 vertical 214–30, 240 Sculley, J 273 Sears Roebuck 157–8 selection 71–2 selective intervention 94–9 Servaes, H 104, 225 shareholders 120, 215, 243, 247 value 14, 181, 246, 249 Shaw, K 46 Shepard, A 13, 280 n Shin, H.-H 225 short-term contracts see contracts, short-term Simon, D 184 Simon, H 77, 103 “skunk works” model 271 Smith, A 74, 76 Smith, J 62: see also General Motors (GM) Snyder, E A 116 n, 117 n Solectron 192 Solow, R 38 Sony 218–23, 257 allocating resources 223 acquisitions and 220 and Columbia Pictures 218, 251 and leadership 220–1 and Philips 219 control in 223 differentiation in 222 influence activities in 223 products in 220–1 specialized investments 90 Spence, A M 82 spillovers 73 n, 238 spin-offs 114 Spraakman, G P 31 n Stacchetti, E 200 Stanford University Graduate School of Business 168 Stein, J 225 Stevenson, H 191 Stiglitz, J 81 stock: market prices 137 markets 214, 227, 247 in USA 225 options 266 prices and compensation 249, 270–1 stock-based pay 155 strategic recognition 62 strategy 12–15, 24, 57, 230, 255 and choice 32 and North West Company (NWC) 15 and organizations 1–30, 19 f, 23–7, 32, 57, 61–4, 109, 281–3 creativity 286 clarity of 231, 234, 237, 240 corporate 16, 237 customer-oriented for growth 230 in Nokia Corporation 29 top-down 27 Stulz, R M 214, 225 subjective evaluations 158–9 in 3M 259 rewards for 270–1 suppliers: and General Motors (GM) 207–8 in Toyota 202, 205 performance 203 two-supplier policy 202–3 long-term 196 f, 200, 214 316 Index relations with 2, 4, 200 Toyota 204–5 structure in North West Company synergies 249–50 team: work and cooperation 154 work in Nokia Corporation 276 team-organized work 42, 124 Teece, D 116 n Tenaris 168 supply management system 168 Tenneco 222–3, 252 compensation systems in 222 corporate processes in 222 Thermo-Electron Corporation 95 tight coupling 34, 67–73: see also loose coupling Tirole, J 99, 170, 233 Titman, S 280 n top-down strategy 27 “tournaments” 139 Toyoda, E 64 Toyota 39–40, 196, 201–6 and General Motors (GM) 201 and suppliers 202–6 reputation 206 two-supplier policy 202–3 assembly operation in USA 201 cooperation in 201 inventories in 65 just-in-time in 65 product line 39 Production System (TPS) 64, 201 reputations in 206 suppliers’ performance for 203 suppliers’ relations with 205 tracking stocks transaction costs 88, 90, 93, 105: see also costs transfer: and retention 71 prices 102 two-supplier policy in Toyota 202–3 units: business, small 166 empowerment of 235–6, 239 discrete business 189, 231 leaders of 232 market-facing 168 organizational 167 performance of 151–3 UPF–Thompson 208 value 20–2, 96, 216, 228–30, 261 and diversification 226 corporate 285 creation 13, 20, 104, 197–8, 245–7, 249–51, 270, 286 in the firm 104, 228 long-term 98 maximization 20–2, 127 measurement of 22 of acquisitions 248 shareholder 14 statements of 285 value-chain 16 organizer 191 van den Steen, E 155, 164 Vance, R 153 variation 71–2 in organizational design 71 in performance 85 venture capitalists 172, 261 vertical architect 191 vertical disintegration 191 vertical integration 93, 96, 117 n, 193, 195 Viacom 246 Vietnam, reputations in 163 Villalonga, B 226, 227 Virgin 217 vision 63 managerial 164 of strategy and organization 284 in organizations 175 Vodafone 246 317 Index wages see pay Waldman, M 177 n Walt Disney Co 218 Wernerfeldt, B 214, 225 Westinghouse Electric 41, 246, 251 Westinghouse/CBS 251 Whang, S 191 Whinston, M 117 n Whittington, R 240, 242 n Williamson, O 86, 90, 94, 115 n, 216, 222 Wilson, J 153 Wilson, R 90 “winners’ curse” 248 Womack, J P 197 Woodruff, C 163 work-in-process 45, 68 in Lincoln Electric Company 68, 256 Worldcom 156–8 Wozniak, Steve 164 Wulff, J 242 n Xerox 209–12, 254 Zemsky, P 218 Zenger, T 73 n Zingales, L 104, 225 318 ... further from them than were the HBC forts The Nor’Westers could not expect the potential customers to come to them, and so they were forced to go to their customers This was the origin of their... they indeed use the ideas from the book and have invited me to meet with them and their colleagues I thank them for their interest and support Especially striking to me was that managers in the. .. between these and the technological, legal, and competitive environment The organization of the HBC fit its strategy and the environment that obtained until the entry of the North West Company, and the