Chapter 11
Organizational Architecture
Essay Questions
1. Independence Burgers serves fast food at its 300 franchised outlets across the South. The chain has recently found that (a) people are upgrading to restaurants when they eat out, (b) government regulation of beef has been tightened, and (c) modern food preparation technology makes central commissaries more cost effective. What should Independence Burgers do about its organizational architecture?
Answer: They should consider centralizing some decision rights. Repositioning the product is a strategic issue that should be handled by the central office. Dealing with beef suppliers and designing safe food preparation systems should be standardized across outlets. Central preparation or supply of menu items or ingredients can be handled by a “wholesale” unit under the central office.
Difficulty: 03 Hard Blooms: Analyze
AACSB: Analytic
Topic: The Fundamental Problem
2. Sidney Featherstone of TIP Inc. is the owner and CEO of the company. He has made the company successful through his decision making over the years. This year he decided to retire and move to Costa Rica. He does not intend to change any aspects of decision making, rewards, or performance evaluation in TIP Inc. What is likely to happen to TIP? Why?
Answer: It is likely to perform poorly, at least in the short run. Under Featherstone, decision making was highly centralized. The fact that the company was successful implies that Featherstone possessed specific knowledge to make value-enhancing decisions. Unfortunately, other managers may not have the necessary specific knowledge or the decision-making skills they will need going forward.
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Topic: The Fundamental Problem
3. Describe the three aspects of organizational architecture of a firm. Which is the most important aspect?
Answer: The three important aspects are assignment of decision rights, the reward system, and the evaluation system. These aspects are interdependent and thus are equally important. The fundamental problem of designing organizational architecture is to ensure that decision makers in the organization have both the relevant information and the appropriate incentives to make decisions that enhance the organization’s value. The actual organizational architecture should fit external conditions and also the distribution of knowledge within the organization. If lower-level employees have the relevant knowledge, it may make sense to decentralize decision rights. However, reward and performance-evaluation systems must be set up to control incentive problems.
Difficulty: 01 Easy
Blooms: Remember
AACSB: Reflective Thinking
Topic: The Fundamental Problem
4. How do we solve the incentive problem and design optimal architecture?
Answer: In the US economy, the price system solves information and incentive problems by establishing private property rights. Further, the market system also rewards agents based on their performance. Most importantly, incentive problems and efficient design are solved with the help of the invisible hand.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: The Fundamental Problem
5. Economic theory implies that a mature industry without any significant technological change will tend to have firms with similar architectural structures, similar reward structures, and similar performance systems. Would the power of the marketplace be important in this case?
Answer: The correlation between market structure and organizational architectures is not spurious. If markets are relatively noncompetitive, then centralized decision making may be more the norm, since speed of response to changing market conditions is not as important. Similarly, centralized control is important in highly regulated marketplaces. In very competitive environments, or in situations where firms compete in different market segments with different characteristics, decentralization is usually the best solution. Local decision makers are more likely to have the appropriate knowledge and can act quickly in their submarkets.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Architectural Determinants
6. How is the architecture within firms usually designed?
Answer: Organization design is created by executives through explicit and implicit contracts. The senior management sets up policies regarding decision rights of the agents in the firm. Managers must also develop control systems that enable proper performance evaluation. CEOs are also decision makers and they can design alternative ways to obtain information, delegation being the most common method. Thus, a firm can be described as consisting of layers of management, where each layer is responsible for optimal information acquisition and distribution.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Architectural Determinants
7. Are organizational changes always needed?
Answer: No. Any organizational change should be undertaken only when the expected incremental benefits exceed the expected incremental costs. There are direct and indirect costs of organization. Frequent restructuring causes uncertainty about responsibility and the organization’s mission shifts to short-run gains rather than long-term viability.
Difficulty: 02 Medium
Blooms: Understand
AACSB: Reflective Thinking
Topic: Architectural Determinants
8. What is corporate culture?
Answer: Corporate culture usually refers to the design of authority and performance in an organization. It also includes customs, taboos, slogans, heroes, and social rituals. Economic reasoning indicates that corporate culture should enhance communication and help set clear and understandable expectations.
Difficulty: 01 Easy
Blooms: Remember
AACSB: Reflective Thinking
Topic: Corporate Culture
9. FedEx employees use the motto “Absolutely, Positively” to express their commitment to their customers. What should be the attitude of someone who studies economics toward this sort of company ritual?
Answer: Such symbols of corporate culture can provide valuable information to employees in that they potentially signal what is expected in the company. However, they will not be valuable in motivating employees unless they are reinforced by the formal architecture of the firm.
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Topic: Corporate Culture
10. Missy Knowles is in charge of all technical developments at Gumby Polymer Rubber. She makes all the choices concerning product innovations in the company. She finds that she is overworked and that several of her research chemists seem to be spending work hours playing golf. What managerial advice would you provide to Gumby Polymer Rubber (GPR)? Clearly explain your reasoning.
Answer: By centralizing decision rights she is overworked, while the scientists are not working. The scientists may have specific information about technical matters and rubber innovation that may be used for the good of GPR if some decisions were decentralized. In addition to changing decision rights, Knowles should also revisit the reward and evaluations systems for scientists. They are currently acting as if their compensation is completely unrelated to their productivity (or the lack of it thereof) or even whether they are physically in the lab or on a golf course.
Difficulty: 03 Hard
Blooms: Analyze
AACSB: Analytic
Topic: Managerial Implications
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