Ch. 4.pdf

Transacon costs increase when these condions exist: 1. Organizaons begin to exchange more specic goods and service. 2. Uncertainty increases. 3. The number of possible exchange partners falls. When an organizaon will begin to feel it cannot a*ord to trust other organizaons, and it will start t...

Transacon costs increase when these condions exist: 1. Organizaons begin to exchange more specic goods and service. 2. Uncertainty increases. 3. The number of possible exchange partners falls. When an organizaon will begin to feel it cannot a*ord to trust other organizaons, and it will start to use more formal linkages, such as long-term contracts, to govern its exchanges. In a high-transacon-cost situaon, an organizaon should choose a more formal linkage mechanism to manage exchange as transacon costs increase. The more formal the mechanism, the more control organizaons have. Bureaucra c costs Bureaucra c costs are internal transacon costs. Integraon and communicaon are not only di;cult to achieve, but cost money because managers have to spend their me in meengs rather than creang value (this is an argument why not to create a joint venture or mergers). Using transac on cost theory to choose an interorganiza onal strategy Transacon cost theory can help managers choose an interorganizaonal strategy by enabling them to weigh the saving in transacon costs achieved from using a parcular linkage mechanism against the bureaucrac costs of operang the linkage mechanisms. Managers deciding which strategy to pursue must take the following steps: 1. Locate the sources of transacon costs and decide how high the transacon costs are likely to be. 2. Esmate the transacon cost saving from using di*erent linkage mechanisms. 3. Esmate the bureaucrac costs of operang the linkage mechanism. 4. Choose the linkage mechanism that gives the most transacon cost saving at the lowest bureaucrac cost. Three linkage mechanisms that help organizaons to avoid bureaucrac costs while sll minimizing transacon costs are keiretsu, franchising and outsourcing. 1. Keiretsu: can be seen as a mechanism for achieve the benets of a formal linkage mechanism without incurring its costs. 2. Franchising: a business authorized to sell a company’s products in a certain area. The franchiser sells the right to use its resources to a person or group in return for a :at fee or a share of the prots. 3. Outsourcing: the process of moving a value creaon acvity that was performed inside an organizaon to outside where it is done by another company. §4 Basic challenges of organiza onal design 4.1 Dieren a on Dieren a on is the process by which an organizaon allocates people and resources to organizaonal tasks and establishes the task and authority relaonships that allow the organizaon to achieve its goals. In short, it is the process of establishing and controlling the division of labour, or degree of specializaon, in the organizaon (see gure 4.1 on page 115 for an example). 16 Organiza onal roles the basic building blocks of di*erenaon are organizaonal roles. An organiza onal role is a set of task-related behaviours required of a person by his or her posion in an organizaon. Authority is the power to hold people accountable for their acons and to make decisions concerning the use of organizaonal resources. Control is the ability to coordinate and movate people to work in the organizaon’s interests. Subunits: func ons and divisions A func on is a subunit composed of a group of people, working together, who possess similar skills or use the same kind of knowledge, tools, or techniques to perform their jobs. A division is a subunit that consists of a collecon of funcons or departments that share responsibility for producing a parcular good or service. As organizaons grow in size, they di*erenate into ve di*erent kinds of funcons: 1. Support func ons facilitate an organizaon’s control of its relaons with its environment and its stakeholders (purchasing, sales and markeng, public relaons and legal a*airs). 2. Produc on func ons manage and improve the e;ciency of an organizaon’s conversion processes so that more value is created (producon operaons, producon control, quality control). 3. Maintenance func ons enable an organizaon to keep its departments in operaon (personnel to recruit and train, engineering and janitorial services). 4. Adap ve func ons allow an organizaon to adjust to changes in the environment (R&D, market research and long-range planning). 5. Managerial func ons facilitate the control and coordinaon of acvies within and among departments (acquision of, investment in, and control over resources). Dieren a on and horizontal dieren a on Ver cal dieren a on refers to the way an organizaon designs its hierarchy of authority and creates reporng relaonships to link organizaonal roles and subunits. This establishes the 17 distribuon of authority between levels to give the organizaon more control over its acvies and increase its ability to create value. Horizontal dieren a on refers to the way an organizaon groups organizaonal tasks into roles and roles into subunits (funcons and divisions). This establishes the division of labour that enables people in an organizaon to become more specialized and producve and increases its ability to create value. Organiza onal design challenges In this chapter, we look at thee more design challenges that confront managers who a9empt to create a structure that will maximize their organizaon’s e*ecveness (see gure 4.4). 4.2 Balancing dieren a on and integra on As a result of horizontal di*erenaon, the members of di*erent funcons or divisions develop a subunit orienta on, which is a tendency to view one’s role in the organizaon strictly from the perspecve of the me frame, goals, and interpersonal orientaons of one’ subunit. This might lead to communicaon problems between divisions. Integra on is the process of coordinang various tasks, funcons, and divisions to they work together, not at cross purposes. There are seven integrang mechanisms or techniques that managers can use as their organizaon’s level of di*erenaon increases (hierarchy of authority is the simplest, the most complex is the department created specically to coordinate the acvies of diverse funcons and divisions): 1. Hierarchy of authority di*erenates people by the amount of authority they possess. Because the hierarchy dictates who reports to whom, it coordinates various organizaonal roles. 2. Direct contact where managers meet face to face to coordinate acvies. 3. Liaison roles where there’s one specic manager that is given responsibility for coordinang with managers from other subunits on behalf of his or her subunit. 4. Task force is a temporary commi9ee set up to handle a specic problem. 5. Teams are permanent task forces. 6. An integra ng role is a full-me posion established specically to improve communicaon between divisions. 7. An integra ng department is a new department that is created to coordinate the acvies of funcons or divisions. Managers facing the challenge of deciding how and how much to di*erenate and integrate must do two things: (1) carefully guide the process of di*erenaon so an organizaon builds the core competences, and (2) carefully integrate the organizaon by choosing appropriate coordinang mechanisms that allow subunits to cooperate and work together. 4.3 Balancing centraliza on and decentraliza on 18 When the authority to make important decisions is retained by managers at the top of the hierarchy, authority is said to be highly centralized. By contrast, when the authority to make important decisions about organizaonal resources and to iniate new projects is delegated to managers at all levels in the hierarchy, authority is highly decentralized. The advantage of centralizaon is that it lets top managers coordinate organizaonal acvies and keep the organizaon focused on its goals. However, this becomes a problem when top managers become overloaded in operaonal decisions. The advantage of decentralizaon is that it promotes :exibility and responsiveness by allowing lower-level managers to make on-the-spot decisions. The downside of decentralizaon is that if so much authority is delegated that managers at all levels can make their own decisions, planning and coordinaon become very di;cult. The ideal situaon is a balance between centralizaon and decentralizaon of authority so that middle and lower managers who are at the scene of the acon are allowed to make important decisions, and top managers’ primary responsibility becomes managing long-term strategic decision making. The result is a good balance between long-term strategy making an short-term :exibility and innovaon as lower-level managers respond quickly to problems and changes in the environment as they occur. 4.4 Balancing standardiza on and mutual adjustment Standardiza on is conformity to specic models or examples – dened by well-established sets of rules and norms – that are considered proper in a given situaon. Mutual adjustment is the evolving process through which people use their current best judgment of events rather than standardized rules to address problems, guide decision making and promote coordinaon. Formaliza on is the use of wri9en rules and procedures to standardize operaons. Rules are formal wri9en statements that specify the appropriate means for reaching desired goals. → a high level of formalizaon typically implies centralizaon of authority. Norms are standards or styles of behaviour that are considered acceptable or typical for a group of people. Over me, norms in:uence and control the way people and groups view and respond to a parcular event or situaon. Socializa on is the process by which organizaonal members learn the norms of an organizaon and internalize these unwri9en rules of conduct. The challenge is to nd the best ways to use rules and norms to standardize behaviour while, at the same me, allowing for mutual adjustment to provide employees with the opportunity to discover new and be9er ways of achieving organizaonal goals. 4.5 Mechanis c and organic organiza onal structures Mechanis c structures are designed to induce people to behave in predictable, accountable ways. These structures result when an organizaon makes the following choices: individual specializaon, simple integrang mechanisms, centralizaon and standardizaon. Organic structures promote :exibility, so people iniate change and can adapt quickly to changing condions. These structures result when an organizaon makes the following choices: joint specializaon, complex integrang mechanisms, decentralizaon and mutual adjustment. 19 In an organic structure, specic norms and values develop that emphasize personal competence, experse, and the freedom to act in innovave ways. The con ngency approach to organiza onal design The con ngency approach is a management approach in which the design of an organizaon’s structure is tailored to the sources of uncertainty facing an organizaon. The structure is designed to respond to various conngencies – things or changes that might happen and therefore must be planned for. According to the conngency theory, an organizaon must design its internal structure to control the external environment. Paul Lawrence and Jay Lorsch think the strength of the forces in the general and specic environments have a direct e*ect on the extent of di*erenaon inside an organizaon. 20