Managerial Economics and Organizational Architecture, 5e Managerial Economics and Organizational Architecture, 5e Chapter 11: Organizational Architecture McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc All Rights Reserved Managerial Economics and Organizational Architecture, 5e The Fundamental Problem • Important information for profit maximizing decisions is – controlled by many individuals – may be costly to transfer • Decision makers may have incompatible incentives • Organizational architecture helps overcome these limitations 11-2 Managerial Economics and Organizational Architecture, 5e Architecture Within Firms • Decision-right assignment – empowering employees • Controls – Employees are granted authority over resources – Incentive may be misaligned • To align incentives managers must develop a reward and performance evaluation system 11-3 Managerial Economics and Organizational Architecture, 5e Determinants of Architecture Business environment Technology Computers Telecommunications Production methods Markets Competitors Customers Suppliers Regulation Taxes Antitrust International Strategy • Choice of industries Basis for competition (price, quality, service) Organizational architecture • Decision-right assignment Reward system Performance-evaluation system Incentives and actions Firm value 11-4 Managerial Economics and Organizational Architecture, 5e Determinants of Architecture • Strategy affects architecture and architecture affects strategy • As the business environment changes, architecture will change with it 11-5 Managerial Economics and Organizational Architecture, 5e Changing Architecture • Benefits of organizational change must exceed costs • Costs – Direct: resources for design and communication – Changes in accounting and information systems – Indirect: impact on employee incentives 11-6 Managerial Economics and Organizational Architecture, 5e Changing Architecture • Organizations are interdependent systems, change must be coordinated • As with three legs of a stool, if one leg changes, the others must change with it • Likewise for decision rights, reward systems and performance evaluation systems 11-7 Managerial Economics and Organizational Architecture, 5e Corporate Culture • Culture is the set of explicit and implicit expectations of behavior within the firm • Communicating culture – slogans, rituals, role models • Architecture shapes employee expectations • Architecture elements are complements 11-8 Managerial Economics and Organizational Architecture, 5e When Architecture Fails • Management is at risk of dismissal • Firm is at risk of takeover • Rivals are lurking in the wings 11-9 Managerial Economics and Organizational Architecture, 5e Managerial Implications • Does the strategy fit the business environment? • Does the current architecture fit the business environment and strategy? – Does it effectively link specific knowledge and decision rights? – Does it provide incentives to use information productively? 11-10 Managerial Economics and Organizational Architecture, 5e Managerial Implications • Given the decision rights system, does the control system fit? • If any of the above questions show a problem, determine what changes in strategy or architecture are appropriate • Determine problems that will be faces if the firm implements these changes 11-11 ... may have incompatible incentives • Organizational architecture helps overcome these limitations 11-2 Managerial Economics and Organizational Architecture, 5e Architecture Within Firms • Decision-right... rituals, role models • Architecture shapes employee expectations • Architecture elements are complements 11-8 Managerial Economics and Organizational Architecture, 5e When Architecture Fails •... service) Organizational architecture • Decision-right assignment Reward system Performance-evaluation system Incentives and actions Firm value 11-4 Managerial Economics and Organizational Architecture,