Managerial economics and organizational architecture 5e ch012

Managerial Economics and Organizational Architecture, 5e Managerial Economics and Organizational Architecture, 5e Chapter 12: Decision Rights: The Level of Empowerment McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc All Rights Reserved Managerial Economics and Organizational Architecture, 5e Assigning Tasks and Decision Rights • Production process involves tasks bundled into jobs • Job dimensions – variety of tasks • few or many – decision authority • limited or broad 12-2 Managerial Economics and Organizational Architecture, 5e Dimensions of Job Design Many Variety of tasks Few Narrow Decision authority Broad 12-3 Managerial Economics and Organizational Architecture, 5e Centralization vs Decentralization • Determines which level of the firms’ hierarchy to place the decision right 12-4 Managerial Economics and Organizational Architecture, 5e Benefits of Decentralization • Effective use of local knowledge – local tastes and preferences – price sensitivities of particular customers • Conservation of management time – senior management focus on strategy • Training and motivation for local managers 12-5 Managerial Economics and Organizational Architecture, 5e Costs of Decentralization • Potential agency problems – effective control systems may be expensive • Coordination costs and failures – Duplication may occur in market analysis • Less effective use of central information 12-6 Managerial Economics and Organizational Architecture, 5e AutoMart Example • AutoMart sells autos in two cities • Hierarchy includes CEO and two local managers • Which decisions are retained by CEO (centralization) and which are delegated to local managers (decentralization)? 12-7 Managerial Economics and Organizational Architecture, 5e Determining Level of Decentralization • • • • • • D is the degree of decentralization B is a positive constant Benefits of decentralization = BD Costs of decentralization =(AD)+(CD2) Where AD represents contracting costs CD represents coordination/information costs 12-8 Managerial Economics and Organizational Architecture, 5e Determining the Level of Decentralization • Objective: maximize net benefits • NB=BD-AD-CD2 • which occurs when D*=(B-A)/2C (which required a bit of calculus) 12-9 Managerial Economics and Organizational Architecture, 5e Determining the Level of Decentralization $ Total costs and benefits (in dollars) Costs Benefits D* Decentralization D 12-10 Managerial Economics and Organizational Architecture, 5e Determining the Level of Decentralization • Over time, the costs and benefits will change • Information costs and incentive costs may fall as technologies change • Benefits may increase if the importance of local knowledge increases 12-11 Managerial Economics and Organizational Architecture, 5e Management Implications • The net benefits of decentralization will be highest in rapidly changing environments • Benefits of decentralization increases as a firm enters more markets with a broader array of products – Information become more important • Vertical integration increases the net benefits of decentralization 12-12 Managerial Economics and Organizational Architecture, 5e Benefits and Costs of Team Decision Making • Benefits of team decision making • improved use of dispersed specific knowledge • Employee buy-in • Costs of team decision making • collective-action problems • free-rider problems 12-13 Managerial Economics and Organizational Architecture, 5e Management Implications • Team decisions are more beneficial when • specific knowledge is dispersed • It is easy to control the costs of collective decision making and the free-rider problem • Optimal team size • Tradeoff between increased knowledge base with the costs of team decision making 12-14 Managerial Economics and Organizational Architecture, 5e Decision Management and Control • Decision management is the initiation and implementation of decisions • Decision control is the ratifying and monitoring of decisions • Basic principle: – If decision makers not bear the major wealth effects of their decisions, decision management and decision control will be held by separate decision makers 12-15 Managerial Economics and Organizational Architecture, 5e Decision Management and Control • Four steps occur: • Initiation – Generation of proposals for resources utilization and structuring of contracts • Ratification – Choice of decision initiatives to be implemented • Implementation • Monitoring 12-16 Managerial Economics and Organizational Architecture, 5e Decision Management and Control • The ideas above explain why boards of directors have the ability to ratify decisions made by CEOs • Boards also have monitoring authority • Monitoring authority is also held by large shareholders • Explains the use of hierarchies 12-17 Managerial Economics and Organizational Architecture, 5e Decision Rights and Knowledge Creation • Decentralization gives employees incentives to experiment and innovate • Successful experiments must be: – identified – reasons for their success understood – codified – implemented by others in the firm 12-18 Managerial Economics and Organizational Architecture, 5e Influence Costs • Employees have incentives to influence managerial decisions • Influence activities may entail costs • time away from the job • dysfunctional activities 12-19 Managerial Economics and Organizational Architecture, 5e Influence Costs • Limits on managerial discretion may reduce influence costs • When firm’s profits are unaffected by decisions that may have a major impact on individual employees, bureaucratic rules are more likely 12-20 ... 12-2 Managerial Economics and Organizational Architecture, 5e Dimensions of Job Design Many Variety of tasks Few Narrow Decision authority Broad 12-3 Managerial Economics and Organizational Architecture, 5e. .. 12-9 Managerial Economics and Organizational Architecture, 5e Determining the Level of Decentralization $ Total costs and benefits (in dollars) Costs Benefits D* Decentralization D 12-10 Managerial Economics and Organizational Architecture, 5e. .. decisions, decision management and decision control will be held by separate decision makers 12-15 Managerial Economics and Organizational Architecture, 5e Decision Management and Control • Four steps