290 likes | 411 Views
2. Introduction. How can you make decisions?Average the predictions of many peopleMeet to deliberate and discuss the decisionUse the help of a person who you preferUse some form of a price system where people who are correct are rewardedPut the question on the internet and see how people respon
E N D
1. Decision Making
2. 2 Introduction How can you make decisions?
Average the predictions of many people
Meet to deliberate and discuss the decision
Use the help of a person who you prefer
Use some form of a price system where people who are correct are rewarded
Put the question on the internet and see how people respond
3. 3 The Wisdom of the Crowd The average of the crowd is often an excellent predictor.
The weight of a horse
The amount of money in a jar
It works when people are more likely to be right than wrong.
It does not work when people are more likely to be wrong than right (conventional wisdom is incorrect)
Surveys are good in this regard.
The problem is that there is no penalty for a wrong answer, so there is no sorting in a survey. You can do potentially better.
4. 4 Committees and Discussion The idea is to gather information in a group discussion rather than averaging. There are serious problems with this approach:
If people have similar views, group discussion tends to lead to extreme results. Other views are crowded out.
People are reluctant to present their view if they believe that it is in the minority.
The majority will tend to disregard a minority view as being incorrect so that new information is ignored.
It may therefore be better to ask views individually
There is the Eureka situation where groups are good: when it takes several people to put together a solution (crossword puzzles) the solution is seen immediately when it is suggested
5. 5 Prediction Markets Prices play the role of information in markets. You can get better results when people are sorted based on their own judgment of the value of their information
The Iowa experiment
Google
These are modeled after market economies and the invisible hand.
6. 6 Overview Markets as a metaphor for economics of organizational design
Centralization v. decentralization
Coordination
Decision making, hierarchy, & control
(next lecture) Job design & decision making
(next module) Incentives
7. 7 1. Organizational Design of an Economy Adam Smith
he intends only his own gain, & is
led by an invisible hand to promote an end which was no part of his intention
By pursuing his own interest he frequently promotes that of society more effectually than when he really intends to promote it.
Leontief: central planning (centralization) is efficient
coordination, economies of scale, control
Hayek: market (decentralization) is more efficient
costly to move all info. to central planner; decentralization makes better use of specific knowledge of time & place:
How can
fragments of knowledge existing in different minds bring about results which, if they were to be brought about deliberately, would require a knowledge on the part of the directing mind which no single person can possess?
8. 8 Markets asInformation & Incentive Systems Examples of markets as forms of organization
prediction markets (insurance, financial, etc.)
Market economies have 3 important features:
decentralization makes good use of specific knowledge of time & place
prices provide good general knowledge for coordination
incentives (through ownership)
motivates good decision making
moves decision rights to person with most valuable/ relevant specific knowledge
motivates investments in human capital
motivates creativity / innovation
9. 9 Organizational Design of a Firm Org. design must address the same problems
use of specific knowledge of time & place
coordination across decision makers
incentives for both
innovation & adaptation
Can we design an organization to mimic a market?
even if we cant completely, the intuition is very useful
Note, though, the limits of markets
they are best at aggregating information (e.g., into prices or predictions)
when coordination in the sense of coordinated actions is important, organizations tend to be set up
10. 10 2. Benefits of Centralization Economies of scale
physical capital
managerial talent
brand name & reputation
design
Better use of central knowledge
aggregated information & experience of the combined organization
Better coordination
knowledge transfer across units
consistency / standardization
synchronization
control
common strategy
11. 11 Benefits of Decentralization Better use of specific knowledge dispersed throughout the organization
Prevents senior management from being overwhelmed
Training/ development & intrinsic motivation for lower level managers
Less bureaucratic/ more manageable scale
12. 12 Specific Knowledge Attributes of knowledge / information that make it more specific
costly to transfer
perishable
complex
costly to understand
requiring scientific or specialized technical skills
subjective or experiential
unreliable / risky to use
noisy (garbling)
13. 13 3. Coordination & Structure The classical approach: centralized hierarchy
Decentralization implies that coordination must happen at lower levels of the organization
roughly speaking, 2 kinds of coordination problems: simple & integration
Simple coordination: getting units to act in concert
real-time communication not needed, as long as actions of all units are compatible
use incentives, communication, job rotation, culture
e.g., UPS;
14. 14 Modularization Putting people with the most interdependent jobs together amounts to modularizing overall structure
ex: break XP Consulting into smaller divisions
regional? (NA; Europe; Asia)
type of customer? (Corporate; Government; Not-for-profit; etc.)
practice area? (Strategy; IT; 6s)
You can structure authority w/ some decisions organized by one set of divisions, others a different set
ex: decisions about hiring & compensation determined by region; decisions about training & promotion determined by practice area
Note how complex it starts to get
there are clear advantages to reducing overlapping lines of authority
hypothesis: the largest source of dis-economies of scale is bureaucracy (coordination costs)
15. 15 Integration Integration: for some decisions, pockets of specific knowledge throughout org. need to be combined
ex: Apple Computer laptop product design
use lateral mechanisms
teams, matrix
informal networks
e.g., product design
the most cumbersome organizational designs tend to involve integration problems
Or, balance the 2 goals of coordination & use of specific knowledge
separate decision management & control (below)
16. 16 Think of decision making as a 4-stage process
1. initiatives
2. ratification
3. implementation
4. monitoring
Different stages can be more centralized or decentralized 4. Decision Making, Hierarchy, & Control
17. 17 Notes on Decision Mgt. v. Control It often makes sense to separate decision management from decision control
if decision maker has weak incentives
Board v. CEO
can provide benefits of decentralization & centralization at the same time
decentralizing decision management
centralizing decision control
The distinction is useful in practice
innovation process
managing change
empowerment
18. 18 How Much Decision Control? Consider 2 firms with 2 employees
The units evaluate new ideas differently
Hierarchy: W evaluates new ideas, passes some to G. G approves or rejects those
Flat: G&W both different new ideas
N = # of ideas each can evaluate per period
flat firm evaluates twice as many ideas per period
19. 19 Evaluating New Ideas Assume new ideas are binary (good or bad / profitable or unprofitable)
At first stage, p = probability of correct decision; p > ˝
At second stage (hierarchy only), q = probability of correct decision; q > p
20. 20 Hierarchy
21. 21 Flat
22. 22 Results
23. 23 Are Hierarchies Conservative? Flat structures
evaluate ideas more quickly
evaluate more ideas for the same # of employees
make more changes, good & bad
have more successes & failures
What kind of environments favor a more hierarchical or flat structure?
24. 24 Other Methods to Increase Control Resources spent on accuracy (a & b)
Skills & emphasis of decision makers
liberal v. conservative evaluator
conservative org. likely to recruit / train more carefully
Incentives of decision makers
e.g., downside punishments & upside rewards
Constraints on decisions
e.g., budgets
Culture & process
25. 25 Structure and Errors
26. 26 5. Implementation So what should XP Consulting consider in its structure?
First, Modularize overall structure, possibly in overlapping ways
ex: Cambridge Technology Partners
makes the problem more manageable
put most interdependent parts together, reducing coordination problems
Second, allocate decisions within each division: ask who / what / where / when / why? to identify key specific knowledge
who has valuable specific knowledge?
what kind of knowledge?
where in (& out) of the organization?
when (is timing relevant)?
why is it of economic value?
Third, think about what needs to be made consistent or coordinated across the division or whole organization
27. 27 Implementation The last two give strong guidance on what to decentralize & centralize
Fourth, go back & refine the overall structure
try to streamline further to cut bureaucracy
look for & address coordination problems
integration problems require the most attention, & will create most of your day-to-day headaches
Fifth, design jobs (next lecture)
balance benefits of specialization, standardization against benefits of using specific knowledge, intrinsic motivation
In all of this, balance desires for control v. creativity & adaptation
self organizing systems can be extraordinarily powerful; dont be a control freak!
Sixth, design performance evaluation & incentives to match job design (after Midterm)
28. 28 6. Economic Ideas The knowledge problem of organizational design
specific knowledge
coordination types & mechanisms
incentives & price mechanisms
Decision making
decentralization v. centralization
decision management v. control
degrees of decision control / hierarchy, & their effects
29. 29 Summary Points The metaphor of a market highlights the role of economics in organizational design
design is largely about creating & making use of knowledge
by its nature, specific knowledge tends to have more economic value
incentives play a crucial role
approximating ownership
performance measures are prices
but market approaches are limited when complex coordination (especially of the integration kind) is needed
The concepts apply to design of an individual job, to a workgroup, to structure of a global conglomerate