Chapters 12 and 13
Collect and Discuss Assignment 4
Decision Rights
The Level of Empowerment &
Bundling Tasks into Jobs &
Subunits
Variety of Tasks
Dimensions of job design
Decision rights or decision authority
Benefits of Decentralization
• Effective use of “local” (specific)
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
Costs of Decentralization
• Potential agency (incentive) problems
– Effective control systems may be expensive
– Influence costs
• Influence activities
= individuals’ attempts to affect the distribution of
wealth or other benefits in an organization toward
themselves, for motives of self-interest
• Coordination costs and failures
• Less effective use of central information
Decentralizing to Teams
• Benefits of team decision making
– Improved use of dispersed specific knowledge
– Employee buy-in
• Costs of team decision making
– Collective-action problems (e.g. voting)
– Free-rider problems
• Use teams if benefits exceed costs
Teams: Free-rider example
• Prisoner’s dilemma
• If probability of working
together again is high enough,
players will work hard today
(result – chapter 9 appendix)
• Managerial implication for
teams–
– repetition facilitates
cooperation (don’t change
team composition too
frequently)
– Structure high rewards for
cooperation and low if not
“Optimal” decentralization:
•
•
•
•
Limits to net gains to decentralization
Some decisions can be decentralized, or
Can decentralize within parameters, or
Decentralize decision management
• Discuss
Decision management and control
Fama-Jensen model
example of loan approval
• Decision management
– Initiation
• (rep recommends loan
approval for unusual
case)
• Decision control
– Ratification
• (by supervisor)
– Implementation
• (rep grants loan)
– Monitoring
• (check on performance
of loan)
Example of decision management and control
Grant major decision
control rights to board
Ratifies major
decisions initiated by
CEO; monitors & can
fire & compensate
CEO
Shareholders
(Residual Claimants)
Board of Directors
CEO
Senior management
Initiates &
implements
major
decisions
Alternative Organizational Structures
Principals/
agents
Proprietorship
Partnership
Corporation
Private,
Nonprofit
Primary
Stakeholders
Owner
Partners
Stockholders
Community
Citizens
Governing
body
Owner
Senior
partners
Elected
board
Board of
directors/
trustees
Legislative
body
Chief
Executive
Owner
Managing
partner
President/
chair
President/
director
Commissioner/
head
Mom & Pop
grocery
Most law
and
accounting
firms
Any
corporation
Human
service,
arts, etc.
Departments,
bureaus, etc.
Example of
Organizational
Structure
Private, For-Profit
Government
Fama-Jensen Rx and Berle and Means
• When decision makers
are not owners,
separate decision
management and
decision control
= > Hierarchies
• When decision maker
is also the major
residual claimant
(owner), okay to
combine decision
management and
control.
Influence costs
= Lobbying, politicking, and other nonproductive
activities that employees conduct in order to
influence decision makers
e.g. Sony acquired CBS records and top execs spent hours
each day listening to requests for how decision rights
were to be assigned in new organization
Can be reduced by imposing bureaucratic rules
But there is a cost to this approach as it makes the
company less flexible and less able to respond to new
information and situations
Specialized tasks in jobs
• Benefits
– comparative advantage
– lower cross-training expense
• Costs
–
–
–
–
foregone complementarities across tasks
coordination costs
functional myopia
reduced flexibility
Methods of grouping jobs
• U-form of organization (unitary)
– Functional specialization
• M-form of organization (multidivisional)
– Product/geographic subunits
• Matrix organization
– Combines aspects of U & M forms
Functional subunits (“U form”)
advantages and disadvantages
• Advantages
– promotes effective coordination within functional area
– promotes functional expertise
– well-defined promotion path
• Disadvantages
– opportunity cost of senior management time
– coordination problems across departments
– employee focus on functions, not customers
Battle of the functional managers
• Ventura Motorcycle Company
– functionally organized
• Design, Marketing
• New product design options
– Speed, Safety
• Marketing options
– magazine advertising  older consumers
– television advertising  younger consumers
Battle of the functional managers
• Coordination problem
• Could fail to reach either
Nash equilibrium
• Managerial solutions
– Reconfigure around
products and motivate
through profit-based
bonuses
– OR form coordinating
committees; evaluate &
reward managers on valuemaximizing coordination
Product/geographic subunits
(“M form”)
• Advantages
advantages and disadvantages
– decision rights tied to specific knowledge
– senior management able to focus on strategy
– promotes coordination pertinent to product/area
• Disadvantages
– unit interdependencies may be ignored
– Comparative advantage may be foregone
Matrix organizations
advantages and disadvantages
Advantages
• Functional expertise
• Customer-focused
Disadvantages
• Battles between functional
and product authorities
• Costs of team decision
making
• Increase in potential
influence costs
Evaluation of Decision Rights
• Do decision rights fit the
external environment and
strategy?
• Do decision makers have
specific knowledge?
• Is there sufficient
oversight?
• Do the economic benefits
seem to outweigh the costs
of decentralization?
Ore-phone
• Ore-phone is a cellular phone service company trying
to increase its market share in the Duluth area. The
manager has just received the latest benchmarking
figures from his consultant. Salesperson productivity
compares very well, but customer service appears very
weak. Customer loyalty is well below the industry
average. Currently, sales employees are also
responsible for servicing customer accounts and are
paid a mid-range salary with a commission for each
new customer. How might the manager re-bundle tasks
to improve these figures? What are the benefits and the
costs of re-bundling tasks to improve these figures?
1. The CEO, von Hugel, is considering reorganizing as a
multidivisional firm organized around customer type. Draw the revised
organizational chart.
2. Discuss the pros and cons of the proposed reorganization, relative to
the current structure.
3. Jessica Wilde, VP of product development, suggests that a matrix
organization might be better. Draw the organization chart implied by
her proposal.
4. Discuss the pros and cons of the matrix proposal relative to the
multidivisional proposal.
Medford University, p. 325
•Why did President Kobayashi appoint a task force to consider
the issue of fringe benefits?
•Should the president anticipate that all members of the task
force will strive to cut university expenses? What actions can
the president take to increase the likelihood that the task force
members have this objective as a major priority?
•Why did the president appoint the administrator of the hospital
as the chair of the task force? What advice would you offer the
chair in appointing subcommittee chairs? Explain.
•Does the president want to commit to accepting the committee
report or does she want to reserve the right to make
modifications? Explain.
•Why did the president appoint a key assistant as secretary of
the task force?
Looking Forward
November 18, 22, 23-- Labor Markets
• Managerial Economics
– Chapters 14
• Cool Case: Safelite Auto Glass (A)
• Deadline for drafts: Nov. 18, 22, or 23
• Please signup for in class presentations
– Nov. 18, 22, and 23 - first week
– Nov. 29,30 and Dec 2 – second week
• Course project due Dec. 6,7, and 8
• Final Exam: Dec 13, 14, and 16