Chapter 11: Organizational Architecture

1. Chapter 11: Organizational Architecture Brickley, Smith, and Zimmerman, Managerial Economics and Organizational Architecture, 4th ed.

2. Organizational Architecturelearning objectives Students should be able to • Define architecture and distinguish between markets and organizations • Identify the determinants of architecture

3. The fundamental problem • Profit maximization may face information limitations • controlled by many individuals • may be costly to transfer • Individuals may have incompatible incentives • Organizational architecture must overcome these limitations

4. Components of architecture“three legs of the stool” • Decision-right assignment • empowering employees • Reward system • compensating employees • Performance-evaluation system • evaluating employees

5. Determinants of architecture

6. Changing architecture • Benefits of organizational change must exceed costs • Costs • direct: resources for design and communication • indirect: impact on job-specific human capital formation • Organizations are interdependent systems, change must be coordinated

7. Corporate culture • Culture is the set of explicit and implicit expectations of behavior within the firm • Communicating culture • slogans, rituals, role models • Architecture shapes employee expectations • Architecture elements are complements

8. When architecture fails • Management is at risk of dismissal • Firm is at risk of takeover • Rivals are waiting to take over

9. Managerial implications • Consultant advice should be examined closely • e.g., employee empowerment may not always be appropriate • Effective benchmarking requires architectural awareness