Session 9 Hierarchical Organization Forms

1. Session 9Hierarchical Organization Forms

2. This course explores the links between organizational architecture and performance Strategy/Scope (Sessions 12-15):What business(es) are we in? Assumptions Values Interests Power Political Cultural Structure (Sessions 8-11): Who makes the decisions? Architectural Incentive Systems (Sessions 2-7): How is performance measuredand rewarded? IncentivesStructures Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

3. Organization Structure =Assigning Decision-Making Authority Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

4. Hewlett-Packard under Carly Fiorina“Functional Form” Organization CEO CustomerSolutionsGroup Printer Division PCDivision ServerDivision Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

5. Give the “D” to the Manufacturing Division Total Costs = k + cQ € c Q Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

6. Give the “D” to the Marketing Division Total Revenue = Price x Quantity € MC P = A - bQ Q MR Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

7. Functional Form: Who decides? CEO CustomerSolutionsGroup Printer Division PCDivision ServerDivision Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

8. Hewlett-Packard under Mark Hurd”Multidivisional Form” Organization CEO PrinterDivision ServerDivision PCDivision PrinterMfg. PrinterMkt. ServerMfg. ServerMkt. PCMfg. PCMkt. Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

9. Assigning authority is a balancing act between entrepreneurship and coordination Proximity to vital information Specialized skills and knowledge Motivation Seeing the“big picture” Coordination Entrepreneurship Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

10. Any organization structure leaves interdependencies to be managed CEO Manager 2 Manager 1 Externalities Coordination Failure Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

11. Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

12. Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

13. P P Q Q Pricing decisions impose externalities on other divisions Demand for Ibizas Demand for Polos Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

14. P P Q Q Pricing externalities can work in both directions OS Demand in France OS Demand in Germany Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

15. Externalities lead to distorted decision making Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

16. Delegation often separates decisions over complementary policies Cost of strong incentives = 20 Cost of high inventories = 20 Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

17. Managers should coordinate on high levels of their activities Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

18. Often, coordination is a win-lose proposition Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

19. Managerial Implications:Achieving Coordination Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms

20. Takeaways • Organization structure: Who Has the D? • Unavoidable tension between entrepreneurship and coordination • Three imperatives for organizational “architects”: • Don’t chase the “Holy Grail”; • Think about structure and “KPIs” together; • Accept responsibility for inevitable “coordination gaps”. Frank ▪ Strategy, Structure and Incentives ▪ Session 9 - Hierarchical Organization Forms