Structure

a. Hierarchy

 Take hierarchy seriously – the principle of a single decision

maker
– benefits of team decision making
» broader skills & knowledge
» may reduce decision making biases (unless team members are “Yes Men”)
» can serve as a coordination mechanism (see below)
– however, it is almost always more efficient for one person to have ultimate authority
» example: EADS / Airbus

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Functions

 Use a functional structure for specialization

– people
» economies of scale in investments in skills
» extremely unlikely a person can be an expert at many things, so specialization allows better
matching of skills to jobs
– job design
» specialized jobs tend to increase productivity, often dramatically (below)
» lowers communication costs with close colleagues
» simplifies supervision
 [Jargon warning: Specialization can mean two things
– in job design, the worker is given a small number of tasks
– in education & training, the person focuses on a narrow area of study]

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The Classic: Functional Hierarchy

CEO

R&D Sales Production

EVP EVP EVP
 Putting these together,
virtually every structure
VP VP VP
uses functional
hierarchy
Manager Manager Manager

Assistant Assistant Assistant

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b. Divisions & Modularity

CEO
 Modularize the overall structure
– a firm of any reasonable size is too large for a single
person to effectively manage … you have to break it
Division 1 Division 2 Division 3
President President President
into divisions
 How? Put the most closely related steps
R&D R&D R&D in the business process together, to
reduce coordination costs
– by definition, modularity achieves this, so it is a good
Sales Sales Sales
rule of thumb
– but balance that against economies of scale
Production Production Production
» some (support) functions corporate-wide
» others organized at the division

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c. Coordination Mechanisms

 The classic way to guarantee coordination is to centralize

decision making
 Functional hierarchies need coordination across functions
– typically done by a small # of generalists
» broadened by job rotation across functions, or
» this is a primary reason for MBAs

 Markets coordinate a great deal through prices. Firms can

achieve much coordination through similar schemes
– performance evaluation & incentives – later
– AirTex has several examples of other tools (next slide)

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Internal Market Mechanisms

 Internal Competition for Resources

– by bidding, specific knowledge of divisions is considered in resource allocation
– bidding managers must have good incentives, & skills for estimating their value from using
resources
– depending on how far you take the model, you are decentralizing strategy
» ex.: GSB “RATS” system; HBS; Hewlett Packard in the good old days; AirTex
 Transfer Pricing
– centrally-set prices must be based on meaningful accounting #s, or they will distort incentives
– negotiated prices are more flexible, incorporate specific knowledge of divisions
 Outsourcing (buying or selling)
– provides benchmark prices, reduces danger of internal monopoly / monopsony

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More Coordination Mechanisms

 Many coordination problems require consistent actions

across divisions, but not regular communication
 These are the easiest coordination problems to solve
– evaluation & incentives … to take into account effects on other divisions
– consistency of practices
» recruit similar personalities
» build strong culture
» communicate extensively about common goals, strategy, etc.
» train thoroughly in standard operating procedures

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Still More Coordination Mechanisms
 Integration problems are the most challenging coordination problems
– multiple pieces of specific knowledge must be combined to make a decision … who do you
decentralize to?
– example: Apple’s laptop computer design process
 Individuals from different areas must work together (lateral coordination
mechanisms)
– cross-functional teams CEO
– matrix structures
– informal networks R&D Sales Production

B A

A B

B A

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Lateral Coordination Mechanisms
 Below is a matrix structure
 Each person is assigned to a
function, & to a division
 Cross functional teams are
similar, though less formal
 Each person has 2 bosses, violating
the single decision maker principle
 Performance evaluation is complex
 The structure can be highly political
– political & teamwork skills are valuable

CEO
R&D Sales Production
EVP EVP EVP

Division 1
A B C
President

Division 2
D E F President

Division 3
G H I President

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Network Structures
 Organizations also use informal “network” structures
– either overlaid on formal structure, or made more explicit
– often serve a similar purpose to lateral coordination mechanisms
– but are more fluid / less permanent
 Network structures are essentially a form of internal market
– the “asset” is “capital”
– less transactional, more relationship-based Industry
Consortium
– more political Team 1

Customer

R&D

Team 3

Team 2
Production

Supplier

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Bureaucracy

 Hierarchy, functions, divisions, & (esp. lateral) coordination

mechanisms add complexity & inefficiency
– complexity grows more rapidly than # of employees
 Bureaucracy costs are one of the most important sources
of dis-economies of scale in firms
€
– what are the costs of a given structure?
» slow decision making
» human resources (management staff)
» loss of creativity
» imperfect coordination Q

 If these costs are too severe, rethink your business plan!

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d. Key Ideas

 Hierarchy
 Functional specialization
 Modularity
 Simple coordination problems
– variety of coordination mechanisms
 Integration problems
– lateral coordination mechanisms

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Effects of IT Technology
Effects of Information Technology

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a. IT & Decision Making

 Decentralizing?
– facilitates product complexity, time-based competition, etc.
– better collection & use of specific knowledge in real-time
– lower-level employees have more info, better analysis tools
– facilitates ad hoc communication & groups
 Centralizing?
– fewer layers, geography less important
– central monitoring & direction is easier
– much knowledge becomes general, not specific
– more can be standardized …

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b. IT & Job Design

 A Dismal View
– “A new era of production has begun … brought about by the
combination of the computer and the self-regulating machine.
– “This results in a system of almost unlimited productive capacity
which requires progressively less human labor.”

Ad Hoc Committee on the Triple Revolution, 1964

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Examples

 Computers often replace humans

– re-engineering
– software that writes software
– or facilitate offshoring & outsourcing
 Computers often make jobs less meaningful
– “Big Brother” in the trucking industry
– Mrs. Fields Cookies – who runs the store?
 End result: less empowered, less skilled workers
– now let’s think about the other face of IT …

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A More Positive View of IT

 Jobs
– IT often empowers even low skilled workers
– places even greater value on skilled workers
 Firms
– speeds up product cycles
– facilitates customization & complexity
– opens up new customers & products never before possible, or even conceivable

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Example: Boeing Aircraft Development
1962: Boeing 727
 131 passengers, 100,000 parts
 81 month development
 5,000 engineers
1. 1000s of pounds of blueprints,
done by hand
2. Construct full-scale model
3. Set specifications for parts
machining
4. Fix errors & imperfections with
“shims” (0.5” tolerance)
 ½ ton out of 44 tons = shims
1994: Boeing 777
 305 passengers, »100,000 parts
 52 month development
 many fewer engineers
1. CAD/CAM entire plane
2. Digital code for computer controlled
machine tools
Results
 better quality, far fewer shims (0.023”
tolerance)
 allows Boeing to offer customization
 facilitates outsourcing of parts
 Italy, UK, Japan, etc.
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How to Explain the 2 Faces of IT?

 IT sometimes substitutes for, & sometimes is a

complement to, humans
 What do computers do best, & what do humans do best?
– Computers
» information transmission
» repetitive tasks
» rules-based tasks
– Humans
» pattern recognition
» abstraction / generalization
» creativity

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