Organizational Architecture, The Brickley, Smith, Zimmerman Approach ManEc 300 Brother Bryson

The Fundamental Problem What is the information problem in planning for an organization? What is the incentive problem? What must the design system of a firm accomplish?

The Fundamental Problem The information necessary to make important decisions is held by many different people Actors may not only lack the needed information to make good decisions. They may not have the right motives or incentives to choose properly or to implement the choices reflecting the principal’s interests. Firms and economic systems must be designed to make sure agents have the right information and incentives.

Organizational architecture is organizational design What are the three aspects of organizational design? 1. The assignment of decision rights within the firm 2. The methods of rewarding individuals 3. The structure of systems to evaluate the performance of individuals and units

Determinants of the Business Strategy, Organizational Architecture, and Firm Value Why are different strategies appropriate for different firms? The Business Environment impacts the firm’s strategy. What does Environment include? Technology –Computers –Telecommunications –Production methods Markets –Competitors –Customers –Suppliers Regulation – Taxes – Antitrust – International

Determinants of the Business Strategy, Organizational Architecture, and Firm Value The Strategy of the Firm is affected by the business environment. How is strategy related to organizational design? Strategy affects the organizational design. Strategy includes? Increasing demand Capturing value Choosing the basis for competition (price, quality, service)

Determinants of the Business Strategy, Organizational Architecture, and Firm Value What does the organizational architecture of the firm impact? It has strong influence on the incentives and actions of the players. Once again, organizational design includes Decision-right assignment Reward system Performance-evaluation system

Determinants of the Business Strategy, Organizational Architecture, and Firm Value Organizational architecture, in turn, affects the incentives and actions of the players. The actions of individuals responding to the organization’s incentive effects determine the value of the firm.

Changing the Organizational Structure Changing the business environment or the strategy of the firm will probably call for a change in the organizational architecture. Analytically, how do we decide whether we should reorganize? Cost/Benefit Analysis! Change should be undertaken only when the associated benefits exceed the costs of reorganizing.

Costs of Organizational Change What costs are associated with organizational change? Direct costs may be considerable when the firm’s (accounting and information systems) have to be modified for new evaluation procedures, etc. Indirect costs may be even more important. Architecture changes can affect the incentives of employees positively or negatively, and their attitudes and actions largely determine the value of the firm.

Corporate Culture Corporate culture is ?  how work and authority are organized and how people are directed and rewarded.  the corporation’s features, including customs, slogans, heroes, taboos, and social rituals.

Corporate Culture and Organizational Architecture  How can managers affect corporate culture?  It is obviously related to organization design. Through deliberate actions, design changes impact the culture, just as a changing environment can.  Changes to superficial things can impact corporate culture indirectly, but changes to the organizational design have direct impact.