Organization Structure and
Management Systems
OUTLINE
• Evolution of the corporation
• Principles of organizational design
• The role of hierarchy: bureaucratic
control vs. modular integration
• Alternative structural forms
• Management systems
Theory 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, partnerships
Strategic Theory of the Firm
Firm Benefits
Market Costs
Knowledge sharing
Social controls
Flexible resource allocation
Limited liability
Intangible assets
Ex ante transaction costs
Ex post transaction costs
Dynamic transaction costs
Firm Costs
Market Benefits
Higher coordination costs as
size, scope, and distance grow
Agency costs (monitoring)
Cognitive limits on info.
processing (e.g. dominant logic)
Price acts as a signal of imbalance
Price allows easier economic
calculations
Freedom to transact with any agent
Protection of contract law
Source: Phelan & Lewin, 2000
The Basic Tasks of Organization
Achieving high levels of productivity requires SPECIALIZATION
Specialization by individuals necessitates COORDINATION
For coordination to be effective requires COOPERATION
But goals of employees == goals of owners
THE AGENCY PROBLEM
THE 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
Evolution of the Modern Corporation
The business
environment
Strategic
changes
Organizational
consequences
Early
19th
century
Local markets
Transport slow
Limited mechanization
Firms specialized &
focused on local
markets
Small firms.
Simple management structures
Late
19th
century
Introduction of
railroads, telegraph
industrialization
Geographical and
vertical expansion
Functional structures. Line/staff
separation. Accounting systems
Early
20th
century
Excess capacity in
distribution. Growth
of financial institutions & world trade
Product &
multinational
diversification
Development of
multidivisional
corporation
General Motors’ Organization Structure, 1921
Board of Directors
President
GM Acceptance
Corporation
Financial
Staff
Chevrolet
Division
Sheridan
Division
GM Truck
Division
Canadian
Division
Samson
Tractor
Division
Executive Committee
Legal
Department
Oldsmobile
Division
General
Advisory Staff
Buick
Division
Oakland
Division
Cadillac
Division
Intercompany
Parts
Division
Source: A.P. Sloan, My Years with General Motors, Orbit Publishing, 1972, p. 57.
GM Export
Company
Scripps
Booth
Corp.
Hierarchy Economizes on Coordination
(a) Self Organizing Team:
(b) Hierarchy:
10 interactions
4 interactions
But what about effectiveness of coordination?
--Depends upon the organization’s task
Hierarchy of Loosely-Coupled
Modules Allows Flexible Adaptation
Tightly-coupled, integrated
system: Change in any part
of the system requires
system-wide adaptation
Loose-coupled, modular
hierarchy: partiallyautonomous modules linked
by standardized interfaces
permits decentralized
adaptation and innovation
Weber’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 Forms
FEATURE
MECHANISTIC
ORGANIC
Task definition
Rigid & highly
specialized
Flexible; less
specialized
Coordination
& control
Rules & directives
imposed from the top
Mutual adjustment.
Cultural control
Communication
Mainly vertical
Horizontal & vertical
Commitment
& loyalty
To immediate superior
To the organization & its
goals & values
Environmental
context
Stable with low technological uncertainty
Dynamic, ambiguous,
high technological
uncertainty
Designing the Hierarchy: The Basis for Defining
Organizational Units and their Relationships
Units may be defined on the basis of Common Tasks, Products,
Geographical Proximity, or Process/Function
Critical issue: Intensity of Coordination—Employees with the greatest
interdependence should be grouped into same organizational unit.
Additional criteria: Economies of Scale, Economies of Utilization,
Learning, Standardization of Control Systems
General Motors’ Organization Structure, 1997
Board of Directors
President’s Council
North
American
Operations
Delphi
Automotive
Systems
GM
Acceptance
Corporation
Corporate Functions
International
Operations
Hughes
Electronics
GM Europe
Midsize
&
Luxury
Car
Group
Small
Car
Group
GM
Power
Train
Group
Vehicle
Sales, &
Marketing
Group
Development
& Technical
Cooperation
Group
Asian &
Pacific
Operations
Latin
American,
African, &
Middle East
Operation
Corporate Executive Office
Chairman & CEO
Service Divisions
GE Aircraft
Engines
GE Transportation
GE Power
Systems
Finance
GE
Industrial
Systems
GE Medical
Systems
GE
Lighting
Corporate Staff
Business
R&D
Development
GE
Plastics
GE
Specialty
Materials
Human
Legal
Resources
GE
Appliances
GE
Supply
NBC
26 businesses organized into 5 segments:
Consumer Mid-market Specialized Specialty
Services
Financing Financing
Insurance
General Electric’s Organization Structure, 2002
GE
Capital
Equipment
Management
Mobil Corporation, 1997
Board of Directors
CEO
Executive Office
Corporate Center
North
America
Asia/
Pacific
Support Services
New
Exploration
Europe
& CIS
Shipping
Africa &
Middle
East
Worldwide
LNG & IPP
Technology
South
America
North
America
M&R
Worldwide
Chemicals
Royal Dutch/Shell Group, 1994: A Matrix Structure
Recent Developments
• Internet and globalization
– Power to buyers, importance of supply chain mgt,
delivering solutions rather than products, need to
present one face to customers globally, global (location)
economies
• New forms
– Front-back organization, project-based org, global sales
coordination & subsidiary issues, growing importance
of lateral processes and rewards
– Growth in alliance formation & network/virtual/hollow
organizations
– Culture as a control mechanism
Control Systems
• Information systems & reporting
• Strategic planning & budgeting
• HRM (incentive system)
– Compensation
• Individual or team based
• High powered or low powered
• Input or output
– Promotions
• Tournament model
• Merit (absolute or relative) vs. seniority vs. up or out (Phelan & Lin,
2001)
• Recruitment and ports of entry
• Culture
High performance work practices
• One standard deviation increase in HR practices
resulted in a $41,000 increase in market value per
employee (about 14% of market cap)
• Seven practices of successful firms
–
–
–
–
–
–
–
Employment security
Selective hiring
Self managed teams and decentralization
High compensation contingent on performance
Extensive training
Reduction of status differences
Sharing information
Pfeffer & Veiga (1999)
Case: Royal Dutch Shell
• What were the strengths and weaknesses of the
pre-1995 structure? Did it need to change?
• To what extent did the 95-96 reorganization
remedy problems in the structure?
• What problems did the 1997-2000 restructure
solve?
• What additional changes would you recommend?