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STR203, Week 9 Notes

by: Danielle Katan

STR203, Week 9 Notes STR203

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Danielle Katan

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About this Document

Notes from 3/29, 3/31 and 4/7.
Economic Theory of Organizations
Class Notes
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This 4 page Class Notes was uploaded by Danielle Katan on Friday April 29, 2016. The Class Notes belongs to STR203 at a university taught by Gilbert in Spring 2016. Since its upload, it has received 7 views.

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Date Created: 04/29/16
STR203   March  29,  2016     • Agency  Theory  –  incentive  workers  so  intentions  are  in  line  with  owner     • Incentive  plan  too  large  à  can  lead  to  à  lying/cheating     • If  CEO  makes  decision  w/o  all  relevant  info  –  can  be  costly     o Can  get  relevant  info  à  delay     o Decentralize  to  people  with  better  info     • Mix  of  these  choices     • Coase  –  firm  growth  slows  when  owners  cant  make  timely/effective   decisions     • Firm  grows  à  more  and  more  decisions     • How  does  company  continue  to  grow     o Delegate,  cant  continue  to  accept  decisions  (inevitable)     o Individual  cant  process  everything     • Delegation?   o Passing  on  decision  rights  in  certain  areas  (controls)     o Need  reward  mechanism  when  passing  on  responsibilities     o Has  to  align  with  strategy/culture  of  company     • Goal:  maximize  value,  minimize  costs     • Managers  may  not  effectively  coordinate  all  activiites     o Bounds  around  things  –  checks  and  balances     • Control  system  creates  rewards,  performance  evaluations,  monitoring   o Push/promote/measure  goals     • Apple  –  decision  making  was  centralized  with  Jobs  ($350  billion)     o Today  decentralized  à  $600  billion     • Altering  decision  rights  à  impact  on  productivity/value  of  firm     • Not  only  delegating  what  can  do,  also  what  they  cant     • Tasks  –  divided  into  many  jobs;  jobs  have  two  issues     o Variety  within  the  job;  different  scope     § Degree  of  variety  and  decision  making     § Ex.  low  low  secretary,  high  high  plant  manager     • Job  design  –  experience  leads  to  greater  decision  authority  for  employee     o Responsibility  of  manager  –  job  design  and  filling  position     • 4  Diff  locations  -­‐  CEO  Choices:   o Let  each  restaurant  make  decision     o Maintain  all  choices     o Managers  act  as  team     o What  is  the  firms  strategy     • Decision  rights  –  series  of  choices     • Very  centralized  industries  –  airline,  medicine     • Not  centralized  industries  –  gaming,  software     • Increase  decision  authority  à  increase  rewards     • 2002  Google  experiment  –  flat  firm     o Flat  firm  –  no  managers,  100%  decentralized     § CEO  was  involved  in  Nitty  gritty  issues     o Only  lasted  a  few  months   o Managers  foster/coordinate  communication     o Managers  assure  proper  incentive  alignment  (can  give  one  engineer   more  incentive  if  necessary)   o Consider  alterative  solutions     o Succession  of  thoughts  –  continuity,  if  someone  leaves  who  takes  over     o Now  decentralized  –  30+  engineers  to  one  manager     § Reduces  managerial  meddling     • Blend  of  centralized/decentralized  –  dynamic  pricing    (ex.  scheduling)     o Computers  change  price  of  products  multiple  times/day     § Ex.  Delta,  Amazon,  Hyatt,  Marriott     • Decentralized  administration  –  different  price  in  different  locations  with   different  competitive  conditions     • Walmart  –  satellite  allows  them  to  be  more  centralized,  remotely  respond  to   market  conditions     o More  informed  purchases  –  cost  saving,  inventory  control  (automated   restocking),  decisions  can  be  made  in  real  time     • Tendency  to  hold  back  bad  information  but  more  effective  to  communicate   info  to  resolve     • Hiring  weak  managers  –  remove  threat  of  replacement     o Goals  not  aligned  –  lower  performance     o Not  trying  to  maximize  firm  value     • Asymmetry  –  how  to  use  it  to  the  principal’s  advantage     • Relinquish  economies  of  scale  vs.  centralized  decision  authority  (advertising)     March  31,  2016     • Centralized  decision  making  –  highly  regulated  or  don’t  change  much     • Decentralized  –  unregulated  industries  and/or  moving  quickly     • CEO,  agency  costs     o All  controls     o Decision  rights  to  individuals     o Decision  rights  to  specific  subjects     o Decision  rights  to  teams     • Consider  where  info  resides  –  industry  based;  best  to  have  knowledge  rights   where  they  reside     o Cost  of  establishing  bounds  of  decision  right     o Cost  of  establishing  incentives/recording  metrics     • Centralized  vs.  decentralized:  business  strategy,  corporate  culture,  business   environment     • Decentralized     o Pros:   § Continued  growth     § Local  knowledge  –  lower  level  managers/decisions   o Risks:   § Managers  may  have  shortened  perspective     § Higher  weaker  people     § Difficulty  transferring  info     o Limits:   § Knowledge  of  top  execs     § Doesn’t  bring  decisions  to  lower  level     • Safelight  Autoglass-­‐  link  between  specific  knowledge  and  decision  authority     o Providing  correct  incentives  supported  productive  results,  increased   productivity     • Teams  –  bring  together  diverse  knowledge/capabilities     o Slow  decision  making  process  (coordinate  many),  everyone  want  to   articulate  their  thoughts     • Ex.  Nucor  Steel  –  production  teams,  base  pag  and  incentives     o Rewarded  for  production  quality,  cost  savings,  safety     o Incentive  weekly  –  effective  for  that  line  of  work     • E.  Levi  Strauss:  piecework  à  teams,  failure,  free  rider     • Purpose  of  an  organization:  rationally  coordinate  activities  of  many  people     o Through  division  of  labor  and  function     o Common  explicit  purpose     o Hierarcy  of  decision  and  responsibility     • Appropriate  architecture-­‐  owner/founder  introduces  strategy     o Corporate  culture/values     o Policies/boundaries     o Organizational  architecture  consistent  with  industry  environment     • Functional  org  –  small-­‐mid,  small  change     o Eliminates  economies  of  scale     o Duplication  of  resources  (in  each  grouping)     o Duplication  of  effort     o Inconsistent  reward/goal  with  coropate     • Increase  firm  size,  increase  information  transfer  costs     • Line  of  business  or  geographic  [division  or  product]  –  larger  or.  Multiple   businesses     o Divide  by  customer  service  or  process  of  final  product  (production)   o Enable  management  to  focus     o Separate  goods     • Matrix  management  –  cross  functional  teams  BUM  (business  unit  manager)     o Individuals  report  to  multiple  functions  –  unclear  line  of  authority       April  7,  2016     • Efficiency  wages/compensation   o Measure  individuals  to  value  added  -­‐  good  efficiency  measure     • Employees  have  little  incentive  to  go  beyond  expectations     o Expectations  too  high  à  drastic  failure     • Efficiency  wages  established?   o If  comp  not  >  market  rate  =  no  penalty  for  failing     o Set  compensation  above  employee’s  opportunity  cost     o Ex.  Walmart  buyers    -­‐  must  work  hard  to  keep  their  job     • Get  employees  to  work  in  own  best  interest     o Need  a  boundary/control  to  assure  quality     • Internal  labor  market     • Employee  –  renting  skills  to  a  company  –  determined  by  demand/supply   o Knowledge  and  knowhow     • If  knowledge  general  to  many  firms  –  no  premium     • Firm  specific  knowledge  –  willing  to  pay  a  premium,  valuable  skill  to  a  select   group    


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