Organization Structure, Design and Change
PGCBM-22
Professor – Dr. Gloryson Chabil
Submitted by – Group 8 members
Meghna Govil
Saurabh Singhal
Sachin Suri
Manoj Kumar
Ravi Pratap Singh Tomar
Esha Kalia
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20/11/2012
Chapter 1 – Organizations and Organization Effectiveness
Q1 – How do organizations create value? What is the role of entrepreneurship in this process?
Answer:
Organizations create value at three stages – input, conversion and output.
Inputs to an organization can comprise of raw materials, money and capital, human resources,
information and knowledge etc. Outputs can be finished goods, services, dividends, salaries etc and
conversion process can be machinery, computers and human skills.
The way an organization chooses and obtains from its environment the inputs it needs to produce
goods and services determines how much value the organization creates at the input stage. The way
the organization uses human resources and technology to transform inputs into outputs determines
how much value is created at the conversion stage. The amount of value the organization creates is a
function of the quality of its skills, including its ability to learn from and respond to the
environment.
The result of the conversion process is an output of finished goods and services that the
organization releases to its environment, where they are purchased and used by customers to satisfy
their needs. The organization uses the money earned from the sale of its output to obtain new
supplies of inputs, and the cycle begins again.
Each stage is affected by the organizational environment which is a set of forces and conditions that
operate beyond an organization’s boundaries but affect its ability to acquire and use resources to
create value.
An organization that continues to satisfy people’s needs would be able to obtain increasing amounts
of resources over time and will be able to create more and more value as it adds to its stock of skills
and capabilities.
A value creation model is useful in describing how organizations create value. It has 4 steps –
Organization’s Inputs
Organization’s Conversion Process
Organization obtains inputs from its
environment.
Organization transforms inputs and
adds value to them.
Organization’s Environment
Organization’s Outputs
Sales of outputs allow organization to
obtain new supplies of inputs.
Organization releases outputs to its
environment.
Entrepreneurship is about bringing value in by being flexibility and focusing toward customer
oriented value addition in either of stage to satisfy needs and gather and use resources to meet those
needs. This is how organizations are born by one or more enterprising persons who believe that they
possess the necessary skill and resources to produce goods and services. Sometimes several people
form a group to respond to a perceived need by creating an organization. Therefore role of
entrepreneurship in value creation process is that it gives rise to organizations that, in turn, create
further value as described above.
In more flexible / entrepreneurship or startup business exhibits more readiness in changes at any
stage of resource utilization and / or output generation. Core focus of such organization is based on
resource acquisition at all levels, but more on output stage, where customer is easily able to
distinguish the superior value.
Q2 – What is the relationship among organizational theory, design, change, and organizational
structure and culture?
Answer:
.Organizational structure can be defined as two broad compositions of it one is formal part of it
where the skeleton of organization hierarchy , divisions the authority and task relations are presented
by RACI (Responsible ,accountable , consulted and Informed) flow / charts , which are jointly
committed to achieve the common , and other is the Informal part of it where set of shared values
way of interactions , cross functional relations with internal and external resources are shared and
directed to achieve the overall win-win situation and the common goal.
The Formal part can be classified as the Organization structure and the Informal part can be
nominated as Organizational culture , Design of any organization is done in composition and
balancing both the formal and informal component of it.
As any organization needs to change its shape and strategy to compete with dynamic forces of the
external and internal environment it becomes very vital to clearly distinguish the formal and
informal part of organization and the change in both results the required and most competent to
maintain the progressive growth stated Mission / vision under change.
Bigger changes are observed when organization is becoming more flexible and more oriented
toward specialized talent utilization.
The relationship among organizational theory and organizational structure, culture and design and
change can be depicted by the following diagram
Organizational Theory
The study of how organizations function and how they affect and are affected by the
environment in which they operate.
Organizational Structure
The formal system of task
and authority relationships
that controls how people are
to cooperate and use
resources to achieve the
organization’s goals
Controls coordination and
motivation; shapes behavior
of people and the
organization
Is a response to
contingencies involving
environment, technology
and human resources
Evolves as organization
grows and differentiates
Can be changed through
Organizational design
Organizational Design and
Change
The process by which
managers select and manage
various dimensions and
components of organizational
structure and culture so that
an organization can control the
activities necessary to achieve
its goals
Balances the need of the
organization to manage
external and internal pressures
so that it can survive in the
long run
Allows the organization to
continually redesign and
transform its structure and
culture to respond to a
changing global environment.
Organizational Culture
The set of shared values and
norms that controls
organizational members’
interactions with each other
and the people outside the
organization
Controls coordination and
motivation; shapes behavior
of people and organization
Is shaped by people, ethics,
and organizational structure
Evolves as organization
grows and differentiates
Can be managed and
changed through the
process of organizational
design
Q3 – What is organizational effectiveness? Discuss three approaches to evaluating effectiveness and
the problems associated with each approach.
Answer:
Organizational effectiveness is the concept of how effective an organization is in achieving the
Outcomes it intends to produce. An organization is said to be effective if it can
1. Secure scarce and valued skills and resources from outside the organization (external
resource approach)
2. Coordinate resources with employee skills creatively to innovate products and adapt to
changing customer needs(internal systems approach)
3. Convert skills and resources efficiently into finished goods and services (technical approach).
Control, Innovation and Efficiency are the 3 important processes to measure organizational
effectiveness.
Control means having control over the external environment and having the ability to attract
customers and resources.
Innovation means developing an organization’s skills and abilities so the organization can discover
new products and processes. It also means designing and creating new organizational structures and
cultures that enhance a company’s ability to change, adapt, and improve the way it functions.
Efficiency means developing modern production facilities using new information technologies that
can produce and distribute a company’s products in a timely and cost-effective manner.
There are 3 approaches to measuring organizational effectiveness:1. External resource approach – Evaluates the organization’s ability to secure, manage, and
control scarce and valued skills and resources.
Problems –
a) Taking a strictly external resource approach could lead to too much focus on stock
price and market share, and lead to inefficiencies and missed market opportunities
that would have been discovered using a technical or internal systems approach.
b) In many not-for-profit organizations it is hard to measure output goals or internal
efficiency.
c) In a fast changing organizational environment, companies have to focus closely on
customers and decide how best to meet their changing needs.
2. Internal Systems approach – Evaluates the organization’s ability to innovate and function
quickly and responsively.
Problems –
a) In inflexible organizations, with a long decision making process and long length of
time to market a product can lead to internal conflicts and the organization’s
effectiveness is reduced if measured using this approach.
b) No improvements to internal systems that influence employee coordination or
motivation can have a direct impact on an organization’s ability to respond to its
environment.
3. Technical approach – Evaluates the organization’s ability to convert skills and resources into
goods and services efficiently.
Problems –
a) Reduced product quality
b) Lot of defects in the product
c) High production costs
d) Poor customer service
e) High delivery time to customer
f) Involvement of more Non value added works then value added works.
g) Lack of technology renewal / advancement.
Chapter 02
Chapter 2 - Question 1
Draw a stakeholder map that identifies your organization’s major stakeholder groups. What kind of conflicts between
its stakeholder groups would you expect to occur the most?
Answer:
The stakeholder’s at American Express can be classified into two main groups: Inside Stakeholders and
Outside Stakeholders.
Map of Inside Stakeholders at AMEX
Shareholders
Business Units
Local/Global
Operations
Management
Team
Board of
Directors
Employees
Map of Outside Stakeholders at AMEX
Customers
Vendors/Suppliers
Channel Partners
Corporate
Partners
Government
Educational
Auditors
Various
Employee
Institutions
Communities
Families
The conflicts can possibly occur within the inside stake holders group and outside stakeholder
groups and also between various groups between the inside the and outside stakeholder groups.
There could be various reasons and sources of conflict in any organization. However the most likely
conflicts occur where the business, organizational, personal goals of groups and or individuals are
conflicting in nature. The following examples below further illustrate the point about conflicts
between different groups.
1. There is always conflict expected between the customers and the company as a whole. In
this particular case, the expectations of the customers are always high and keep on increasing
even if the previous expectations are met.
2. There is possibly tremendous amount of conflict between the Board of Directors and the
Management team. The board of director’s alwys expects the best performance from the
company management executives in terms of financial results, increase in share holder
values, branding and employee motivation etc. The management team always tries to deliver
the best against the promises and business goals however sometimes the results are not as
per the expectations which creates conflicts.
3. There are often conflicts between the management team/managers and the vendors and
suppliers of the company. One reason of the conflict is the perceived quality of products and
services delivered by vendors and suppliers to the company. Other source of conflict is
commercial in nature due to pricing and payment terms and timely release of payments.
Q3 - What is the agency problem? What steps can be taken to solve it?
Ans- When Shareholders(Principal) appoints Top management (agency) and delegates its power to
using, control and monitor the resources effectively and efficiently . The Shareholders expect the
top management being expert would help them to maximize its wealth. But sometimes top
management has its own goals and interest which may not be in line with shareholders goal and
interest. Shareholder through Board of directors judges the actions and its effectiveness of Top
management. But many a times , the important information are not made available to Board of
Directors and thus actions and decisions of top management on overall operation , health and
wealth of company is unkown to Shareholders . In order to avoid such kind of situation, a proper
managerial accountability of top management needs to be decided while delegating the authority.
This is known as Agency Problem
The Agency problem can be overcome by using governance mechanism or forms of control that
align the interest of principal and agent so that both parties have the incentive to work together to
maximis the organization effectiveness.
Few such governance mechanism are:1. Stock based Compensation schemes :- One way of aligning the agent interest is to award
them contingent on their outcomes of their decision that results in improvement in
organizational performance. The top management is given large stock as a part of their
remuneration. If company does well , then the value of stock options and monetary
compensation is much enhanced. This helps in aligning the agent goal to organizational gaol.
2. Promotion Tournaments an career Paths :- The board Of directors has the power of
promoting the managers to rise to CEO and its demoting too. This spreads a competition
among the managers to work within organizational interest
Chapter 03
Draw a chart of your organization's domain. List the organization's products and customers and the
forces in the specific and general environments that have an effect on it. Which are the most
important forces that the organization has to deal with?
(For answering this Keeping ABB as Organization, but for Ques 3 we are answering
keeping Amex as company, for which Mr. Susanta)
2) ABB Summary
ABB (www.abb.com) is a leader in power and automation technologies that enable utility and
industry customers to improve performance while lowering environmental impact. The ABB Group
of companies operates in around 100 countries and employs about 145,000 people.
History :
The history of ABB goes back to the late nineteenth century, and is a long and illustrious record of
innovation and technological leadership in many industries.
Having helped countries all over the world to build, develop and maintain their infrastructures, ABB
has in recent years gone over from large-scale solutions to alternative energy and the advanced
products and technologies in power and automation that constitute its Industrial IT offering.
As Introduced ABB is Technological Driven Company, where technology and operational
excellence is the key growth factors, the spread is very wide in terms of product / service offerings,
geographical presence and human resources, organization is resourceful and continuously investing
in R&D as well as changing dynamics of customer demand and competitiveness hence if we try to
classify in corporate matrix it can be:-
General And Specific forces:-
ABB is a conglomerate of power and automation products and services, having various industries
and government utilities to serve (Customers), shareholders. channel partners , technology partner ,
suppliers / vendors for which Marketing , sales, business development, Engineering , supply chain ,
logistics , operational excellence , project planning are the vital governing forces which are giving the
momentum of growth in dynamic situations.
Broadly Specific Forces are :-
Technology, Supply chain, logistics, planning and Operational excellence.
General Forces are:-
Shareholders, power and automation policy makers, planning commissioning of individual territory,
competitors and vendors / channel partners.
Uncertainty Environment:-
Since company has wide reach since 100 + years hence reputation is well established. And the policy
of creating channel partners with long-term contracts for critical / high value items are done.
Company is growing from one small manufacturing in 1859 to more than 109,
Mergers, take overs and Joint Ventures.
As mentioned above company is more formal and professional in mitigating the risk and keeping
individuality by inventing and exceling in planning and operational which indicates more sustainable
and stable growth.
Organization chart :-
ABB :Technology Core Team :-
Business Division and Busines unit Verticals :-
Functional and Administrative classifications:-
Q2. Analyze the effect of the forces on the complexity, dynamism and rich ness of the
environment. From this analysis, how would you characterize the level of uncertainty in
your organization’s environment?
A. The Company we are discussing is American Express, a global financial Giant which is operating
in multiple continents offering a range of Financial Products for the Premium segment of customer.
Let’s understand the environment of American Express;
The Organizational Environment: American Express primarily deals in financial products like
Credit Cards, Travel and Traveler’s checks and offers service like Risk Management to other
Companies.
American Express has established itself as a Premium brand by offering premium services only to
the premium Customers in the segment. American Express associates itself to the high earning high
spending segment of the society and offers premium value to its customers. It operates in a Niche
Environment as far as its Credit Card products are concerned. This enable American Express to
generate a high revenue through lesser but high value transactions compared to the competitors like
Visa and Mastercard who offer free credit cards to who so ever is willing to have it. The Target
market for American Express is high value customers and it charges a fee to offer the brand product
and services.
For its travel business American Express targets the Corporates where people travel on business
frequently and require travel arrangements to be made. This helps American Express to capture a
large number of corporate clients who have huge annual budgets for International Travel.
The Specific Environment: American Express is an American Company and has always maintained
a Niche market for itself, targeting only the premium customers. Now it wants to penetrate deeper
into the market however is facing a lot of challenges. Because of the “premium” tag and therefore
the associated fee that American Express charges from its Merchants (Discount Rate on every
Credit Card Transaction) the Acceptance of American Express is low compared to its competitors,
which means the Merchants Prefer other cards over American Express, due to which a considerable
volume of revenue goes to the competitors. Till now American Express used to get a huge revenue
through 5 star hotels where international travelers generally stay, however since it wants to penetrate
into the Indian market, it is critical for American Express to increase its acceptance.
The General Environment: American Express is primarily an American Company with global
footprint is riding the wave of Outsourcing. Lately all companies have been impacted by rising costs,
high interest rates and exchange rates and all companies want to expand their portfolio by reaching
out to other markets and expanding their customer base. While most of the cpmpanies start to
outsource most of their back office operations American Express is opening its own business
centers across the globe. This helps American Express to maintain substantial control yet gives the
benefit of lower costs of operations. Due to the increasing costs American Express is shifting a huge
volume of Customer Servicing operations other centers across the globe. This helps American
Express in considerable reduction of operating costs since the centers in India, Kuala Lumpur and
Philippines etc one third the cost compared to United States and one fourth the cost compared to
UK and Australia.
The Level of Uncertainty in American Express’s Environment: American Express is large
organization and is focused on growth and increases its footprint. At the same time it wants to lower
its costs as well. Therefore it is continuously on the lookout of newer markets for growth and
destinations to set up centers from where it can service its customers at a lower cost. At present
India is a huge market which offers growth potential as well low cost of operations, however if the
company gets the same quality of service at a yet lower cost in some other country then American
Express would need to consider shifting to that part of the world.
With continuous change in environment American Express has to be ready to embrace change,
With more companies coming in there is a certain threat of Attrition of good resources to
Competitors, which means American Express has to keep on investing in training and retaining its
workforce.
Chapter 3 Quest 3:
Draw a chart of the main inter organizational linkage mechanisms (e.g. long-term contracts,
strategic alliances, mergers) that your organization uses to manage its symbiotic resource
interdependencies. Using resource dependence theory and transaction cost theory, discuss
why the organization chose to manage its interdependencies in this way. Do you think the
organization has selected the most appropriate linkage mechanisms? Why or why not?
American Express is well known as organization serving in to multinational financial
services. As evolution of organization was in 1850 in US and which has spreader its presence
across the globe. This growth was Impossible without collective mechanism of
Multi-cultural and multifunctional organization linkages with various terms and its melodies,
depending upon business environment, general and specific forces , opportunities,
geographical locations and local and global economies.
Core competency of American Express is in to Credit cards, Charge cards and traveler`s
cheques. Emex it has been a deliberate part of DOW 30 since year 1896, company has
always recognized as “Heavy Industry” and the service is financing and has been growing
with growth of lenders from it hence company has identified the potential and growing
company information and linkages to offer.
As described below , at times and demand Amex has been taking vital decisions of
Purchasing, meregers, Joint ventures , co-options, networking, and reputation building
things, With the below histogram (Sourced from Web and Amex Informations) ,one can
clearly observe that Amex had taken more flexible methodology and to expand in all
dimensions with keeping all general and specific market forces which is helping Amex to still
survive after 162 Years of existence and continuous growth.
The only part we found can be improved upon is Networking , since in more financial
transection this firm is more possibilities of growth are open to be claimed.as company in
general is very open and having wide offerings in their sector, External Networking (to be
précised) is more valuable to American Express to grow up in market.
Since American Express is into financial service provider hence Purchase and merger has
much larger Impact than going in to alliance strategy, since they are cash rich company.
Let’s have a brief on Policies American Express has adopted:-
A . Mergers and Acquisitions:American Express extended its presence nationwide by arranging affiliations with other express
companies (including Wells Fargo – the replacement for the two former companies that merged to
form American Express), railroads, and steamship companies.
Railroad express business
During the winter of 1917, the US suffered a severe coal shortage and on December 26
President Woodrow Wilson commandeered the railroads on behalf of the US government to
move US troops, their supplies, and coal. This ended American Express's express
business, and removed them from the ICC’s interest. The result was that a new company
called the American Railway Express Agency formed in July 1918. The new entity took
custody of all the pooled equipment and property of existing express companies (the largest
share of which, 40%, came from American Express, who had owned the rights to the
express business over 71,280 miles (114,710 km) of railroad lines, and had 10,000 offices,
with over 30,000 employees)
Investment banking
As a major focus change in 1980s, A remarkable effort to become a financial services super
company and made a number of acquisitions to create an investment banking arm. In mid-1981 it
purchased Sanford I. Weill's Shearson Loeb Rhoades, the second largest securities firm in the
United States to form Shearson/American Express.
In 1984, American Express acquired the investment banking and trading firm, Lehman Brothers,
Kuhn Loeb, and added it to the Shearson family, creating Shearson Lehman/American Express.
In 1984 Shearson/American Express purchased the 90-year-old Investors Diversified Services,
bringing with it a fleet of financial advisors and investment products. In 1988, Shearson Lehman
acquired E.F. Hutton & Co., a brokerage firm founded in 1904, this was merged with the
investment banking business and the investment banking arm was renamed Shearson Lehman
Hutton, Inc.[16]
American Express in 1993, American Express decided to get out of the investment banking business
and negotiated the sale of Shearson's retail brokerage and asset management business to
Primerica. The Shearson business was merged with Primerica's Smith Barney to create Smith
Barney Shearson. Ultimately, the Shearson name was dropped in 1994. ]
In 1994, American Express spun off of the remaining investment banking and institutional
businesses as Lehman Brothers Holdings Inc which after almost fifteen years of independence
would file for bankruptcy protection in 2008 as part of the Late-2000s financial crisis.
B. Sunning of subsidiaries:Charge card services
In April 1992, American Express spun off its subsidiary, First Data Corp., in an IPO. Then, in
October 1996, the company distributed the remaining majority of its holdings in First Data Corp.,
reducing its ownership to less than 5%.
C .Strategic alliance:American Express believes in earning by making people spend on money transections and keeping
media as Emex , hence it was needed to have border channelization in to organizations , where
buyers and sellers are meeting at one point and rotating the funds.
"Boston Fee Party"
From early 1980s until the early 1990s, American Express was known for cutting its merchant fees
(also known as a "discount rate") to merchants and restaurants if they accepted only American
Express and no other credit or charge cards. This prompted competitors such as Visa and
MasterCard to cry foul for a while as the tactics "locked" restaurants into American Express. The
scheme ended in 1991, as several restaurants in Boston started accepting and encouraging the use of
Visa and MasterCard because of their far lower fees as compared to American Express' fees at the
time (which were about 4% for each transaction versus around 1.2% at the time for Visa and
MasterCard). A few even stopped accepting American Express credit and charge cards. The revolt,
known as the "Boston Fee Party" (in reference to the Boston Tea Party), was orchestrated by a PR
firm hired and paid by Discover Card. The campaign spread to over 250 restaurants across the
United States, including restaurants in other cities such as New York City, Chicago, and Los
Angeles. In response, American Express reduced its discount rate gradually to compete more
effectively and add new merchants such as supermarkets and drugstores to its network. Many
elements of the exclusive acceptance program were also phased out so American Express could
effectively encourage businesses to add American Express cards to their existing list of payment
options.
Cable TV
American Express formed a joint venture with Warner Communications in 1979 called WarnerAmex Satellite Entertainment, which created MTV, Nickelodeon, and The Movie Channel.
The partnership only lasted until 1984. The properties were sold to Viacom soon after.
D . Reputation and Co optation:Cobranding :
American Express has several co-branded credit cards, with most falling into one of three categories:
•
•
•
Airlines: e.g., Air Canada, Air France, Alitalia, British Airways, Cathay Pacific, Delta Air
Lines, JetBlue Airways, Qantas, Singapore Airlines, Virgin Atlantic, among others.
Hotels: e.g., Hilton Hotels. Starwood Hotels & Resorts Worldwide
Retailers: e.g., Costco, David Jones, Holt Renfrew, Harrods, Macys, Bloomingdales, Lowes,
Mercedes Benz, and others.
In 2006, the UK division of American Express joined the Product Red coalition and began to issue a
Red Card. With each card member purchase the company contributes to good causes through The
Global Fund to Fight AIDS, Tuberculosis and Malaria to help African women and children
suffering from HIV/AIDS, malaria, and other diseases.