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Organization Theory: Strategy Implementation
ProcessSteven E. Phelan
June, 2006
Bureaucracy
Scale & Scope
Economics of Organization
Who am I?Associate Professor of Strategic Management at UNLV, formerly at UT Dallas
I have taught MBA students in 5 countries: Australia, Hong Kong, Singapore, Italy, and US.
Taught EMBA students at UT Dallas and UT Austin
Practitioner background: Telecom Australia Ansett Airlines Bridges Management Group (worked on credit cards,
loyalty schemes, distribution strategy, new product development, and acquisitions)
What is this course about?
Organization Theory Lots of academic textbooks Large membership in AOM (2000+) Dry as dust
Strategy Implementation No textbook since 1980s We know a plan is no good unless it is implemented –
kind of important then
The chosen path… Cover the interesting parts from OT and explore
something useful in strategy implementation (Strategy Execution & Change Management).
Goals
To be able to view organizational life through different lenses
To develop a critical appreciation of organizational discourse
To have an understanding of the major issues in strategy execution and change management
To have acquired skills in changing organizations
To gain an appreciation of some of the issues in strategy implementation
Teaching Philosophy
I am not into one-way transmissions of informationI favor a collaborative learning environment:
We learn from each otherWe learn from the problems and issues we identify and how we solve themI see myself as a coach or mentor guiding the learning experienceThus, the ultimate responsibility for learning is with you
Read the materials Come to class prepared to discuss relevant aspects of your
organizational life (or lives) PLEASE interrupt, discuss, question, argue, debate, clarify
Overview of Today
One Right Way
Metaphor in organizations
Organizations as machines
Perrow on Bureaucracy
Chandler on Scale and Scope
Paths of Glory DVD – Video Case Study
Contingency theory
Morgan Ch. 3
Phelan on Economics of Organization
Metaphor in organizations
We learn how to see…Eskimos are able to identify many different types of snow that are indistinguishable to the average personAsians can identify many different varieties of rice
Can you see the old/young woman?
Morgan on Metaphor
What, then, is truth if different people learn to see the same thing in different ways?Is there value in teaching people to see their organizations in different ways?“If you only have a hammer, does every problem become a nail?”“The test of a first-rate intelligence is the ability to hold two opposed ideas in mind at the same time and still retain the ability to function” -- F. Scott Fitzgerald“It is easy to teach anybody a new fact…but it needs light from heaven to enable a teacher to break the old framework in which the student has been accustomed to seeing” -- Arthur Koestler
Developing multiple interpretations
“At Foxboro, a technical advance was desperately needed for survival in the company’s early days. Late one evening, a scientist rushed into the president’s office with a working prototype. Dumbfounded at the elegance of the solution and bemused about how to reward it, the president bent forward in his chair, rummaged through most of the drawers in his desk, found something, leaned over the desk to the scientist, and said, “Here!” In his hand was a banana, the only reward he could immediately put his hands on. From that point on, the small ‘gold banana’ pin has been the highest accolade for scientific achievement at Foxboro.”
Can you develop 3 different angles or viewpoints on this story?
Viewing your organization as if you were from a foreign land…
On first joining…
What struck you as being novel, strange, or different about the way things happened compared to your expectations or what you had become used to elsewhere?
Organization as machine
Pre-determined goals and objectivesA rational structure of jobs and activitiesIts blueprint becomes an organizational chartPeople are hired to operate the machine and behave in a predetermined wayWhen an organization is seen as a machine it is expected to operate in a routinized, efficient, reliable, and predictable way
Max Weber
The bureaucratic form routinizes the process of administration exactly as the machine routinizes production.
Bureaucracies provide:
Precision, speed, clarity, regularity, reliability, and efficiency
Through:
A fixed division of tasks, hierarchical supervision, and detailed rules and regulations
Purging Particularism
According to Perrow, one of the major benefits of bureaucracy is purging particularism (incl. nepotism and favoritism)
Loyalty to the king was once everything, incompetence counted for little
Tenure was a early invention that provided freedom from unjust authority, separating the office from the person further controlled it.However, nepotism is still a big problem in a lot of countries – e.g. Italy, Mexico, ChinaWhy is it so bad?
Because there is often little relationship between the social criteria for hiring or promoting people and the characteristics that affect performance in the organizationIt may even hurt performance (lower morale, motivation etc.)
Perrow on corruption
Corruption (or enlightened self-interest) is also a likely to accompany favoritism
Perrow argues corruption is good for the individual and sometimes even good for the organization
“one of the best ways to seize or retain control [of an organization] is to surround oneself with loyal people”
It doesn’t hurt to have a sympathetic friend in government
Bureaucracy limits corruption: “since official goals are proclaimed, unofficial, unpublicized,
and unlegitimated uses can be held up to scrutiny when they are found, and action can be taken.”
“The hidden uses of organizations, always present, can be exposed and addressed”
Hierarchy
Downside to hierarchy:
Lack of motivation - ‘not my problem’
Fear of passing bad news or suggesting changes
Buck passing
Delays and sluggishness
Dictatorial/ignorant decisions by superiors
Stifling of independence and creativity
The Upside
Perrow argues that:
A lack of coordination between departments
The failure to exercise authority or be decisive, and
A lack of accountability are, in fact, much worse problems than the problems identified on the previous slide
Do you agree?
Strengths of the machine metaphor
For Morgan, mechanistic approaches work well when:There is a straightforward task to performThe environment is stable and predictable (to enable efficient division of labor)When one produces the same product time and againWhen efficiency and precision are at a premiumWhen the human parts are compliant and behave as they have been designed
For Perrow:Bureaucracies limit particularism and self-interest, and promote coordination
Limitations of the machine metaphor
Bureaucracies have difficulty adapting to change
They are designed to achieve predetermined goals not innovation
It takes time to get an efficient division of labor through detailed job analysis
Moreover…
Mechanistic approaches result in mindless and unquestioning bureaucracy
Problems can be ignoredCommunication can be ineffectiveParalysis and inaction can lead to backlogsSenior managers can become remoteSpecialization creates myopia and NIH syndromeEmployees know what is expected of them but also what is not expected of themInitiative is discouraged
Chandler on Scale & Scope
Large plants produce products at a much lower cost than small plants (scale)Large plants can make a variety of products from the same raw materials (scope)A constant flow of supply and demand is needed for full capacity utilization
The railroad, telegraph, and steamship made this possibleProfessional managers were needed to coordinate production and distribution (I.e. sales & marketing)
Significant first mover advantages
Modern scale and scope
Does Chandler’s argument apply in the Internet age?
Think: Microsoft/Intel Amazon Google/Yahoo Ebay
What are the lessons for: Startups? Followers? Leaders?
How can scale/scope advantages be lost?
Paths of Glory DVD
What are the strengths and weaknesses of army bureaucracy in the movie (use Perrow)?What evidence of particularism is there?Should/could the organization be redesigned?How would you change the incentive system?
Open Systems and Contingency Theory
Open systems theory emphasizes the importance of the environment (not seen in machine metaphor)Organizations are seen as sets of interrelated subsystems
Molecules, cells, organs, lifeforms, social systems, world, solar system, galaxy, universe
The approach encourages congruencies or alignments between different sub-systems (‘fit’)This led to the development of contingency theory
Contingency theory
There is no best way of organizing. The appropriate form depends on the kind of task or environment – many species of organizations
Management’s job is achieving alignment or fit
Fit applies not only to the org-env but also between sub-systems in an organization
First distinction
Mechanistic vs organic (Burns and Stalker)Changing technology or market conditions pose new problems and challenges that require open and flexible styles of organization and management
Lawrence and Lorsch showed that styles of organization might need to vary between organizational subunits
e.g. R&D departments need to be organized differently from production departments)How is this different from an ideal bureaucracy?
Typologies
This research led to the development of typologies of organizations:
Miles and Snow Prospectors, analyzers, defenders
Mintzberg Machine bureaucracy, divisionalized form, professional
bureaucracy, simple structure, adhocracy
BCG Cash cows, dogs, stars, question marks
Porter Cost leadership, differentiation, focus
Other developments
Organization development
The belief that we can diagnose the environment and thus improve internal and external fit
Expert Systems
Burton and Obel even developed an expert system to choose the right structure for an organization
Strengths of the Organismic Metaphor
Organizations must always pay close attention to their external environments
Achieving congruence with the environment becomes a key managerial task
What are the implications for strategy implementation?
Limitations of the Organismic Metaphor
Organizations are not organismsEnvironments are not concrete
Actual vs perceived vs enactedMetaphor overstates degree of functional unity and cohesion in most organizations and top management’s ability to choose subsystem settingsCan lead to social Darwinism and other ideological traps
i.e. the best performing organizations are the fittest and thus the ‘best’No guarantee the best today will be the best tomorrow
Ecoomics of Organization
Why do firms exist?OR why is all production not undertaken by one giant firm?
Subset of wider questionWhy do we see a diversity of economic arrangements?Spot contracts, joint ventures, firms, strategic alliances, franchises etc.
Payoff for managersShould help in determining the vertical boundaries of the firm = corporate strategyShould help in deciding when to start a new business – when you can beat the market
The BasicsAdam SmithThe wealth of society grows when we allow people to specialize in activities in which they have a comparative advantage and then exchange their surplus with other specialists
Harold DemsetzA firm is any individual or group that produces for exchange rather than personal consumptionThe alternative to the firm is therefore NOT the market but the householdFirms exist only because of gains from specializationBut, ‘the division of labor is limited by the extent of the market’Firm vs. market decisions are really MY firm vs. YOUR firm decisions
CoordinationMost products in today’s economy require the input of a multitude of specialists
First, an entrepreneur must perceive a need for a product or serviceThen, identify the inputs required to produce the product or serviceThen, assemble the inputs – make or buy (rent or own)
This problem of coordination is to make the right combination of make and buy decisions to maximize producer surplus or profit
Think of the inputs required to get just one product to market – start small…a pencil
CooperationNaturally, the specialists providing the inputs will try to maximize their own gains from exchange
The problem of cooperation is ensuring that the specialists (or agents) do what they are paid to do (i.e. that they don’t shirk or act opportunistically)
This is usually achieved through a combination of incentives and supervision (monitoring).
The problems of coordination and cooperation arise because of information costs
In a world with perfect knowledge/information these problems would not exist. Why?
EfficiencyAn organization is efficient when it has no better way of organizing itself
i.e. all opportunities for gain or profit are exhausted
Decisions are efficient with respect to information and transaction costs as well as coordination and cooperation costs
Is it efficient to sell wine for $5 per bottle in Las Vegas and the same wine for $10 per bottle in Henderson?
Efficiency Tautology If I could have made a better decision then I would have
But I didn’t so the actual observed outcome must be the most efficient case.
Decisions can be efficient ex ante but appear inefficient ex post.
Regret is irrelevant if it is too costly to change a decision.
So, if we commonly observe firms, joint ventures, strategic alliances, and market exchanges then they must all be efficient in some circumstances.
The task is to figure out when and why.
Ronald Coase (1937)Firms exist because there are costs to using the market Transaction costs are the costs of:
Searching for sellers of inputs and buyers of outputs, and negotiating and enforcing contracts between them when foundLong term contracts lower these transaction costs but require more flexibility for unforeseen developments, hence employment contracts usually allow employers to direct employees (specialists) to any reasonable task
All transactions do not occur in one firm:The number, dispersion, and dissimilarity of transactions increases coordination (administrative) costs What about cooperation costs?
Applications
What is the effect on firms of:
Railroads/telegraph/telephone
Internet
Government corruption
Single European market
Alchian and Demsetz (1972)
Firms are a fictionThere is no difference between an employment contract and a market contractFirms are just a particularly dense ‘network of contracts’
Team production provides opportunities for shirking (agency costs)
Someone must monitor the shirkers but who monitors the monitor?Solution: Give monitor rights to residual income --> provides strong incentive to monitor well
Holdup (another transaction cost)
Relying on a single supplier creates an incentive for opportunism in the form of hold-up
E.g. If I make you the exclusive supplier of a critical part then I expose myself to your demands
Firms integrate to avoid the threat of hold-up or the costs of avoiding it (e.g. litigation, distrust)Integration is efficient if the transaction costs of hold-up exceed governance costsIn theory, hold-up should be very rare because potential victims will integrate before being held up.
Property Rights
Why is the firm defined by ownership of physical assets?
Grossman, Hart, and Moore (1986, 1990) say it is because asset ownership grants residual rights of income and control
Owners can freely allocate assets to new uses AND control access to assets (=power)
They also keep any income from new usesThus, assets with real options should be ownedNote, human capital cannot be owned so doctors and lawyers tend to form partnerships. Why?
Summary: Reasons to Make
To avoid ex ante transaction costs
Searching, negotiating, re-negotiating, and enforcing contracts
To avoid ex post transaction costs
Holdup and costs of avoiding holdup
To gain upside from ownership advantage
Ability to re-deploy or sell resources
To gain management by fiat (authority)
Reasons to BuySpecialization (Smith)
Market specialists have greater economies of scale and scope
Information (Hayek)Market prices signal profit opportunities Market prices tell us how consumers value various offerings Market prices also convey information on supply and demand conditionsAll difficult to duplicate in companies
IncentivesMarkets provide high powered incentivesPay for performanceFirms must be efficient and innovative to survive(But measures must be affordable and relevant)
Firms often use low powered incentives (wages)
Creates shirking and agency costs (costs of monitoring) and influence costsLack of internal competition generates inertia
Other reasonsBusiness models may be dissimilar
Concept of dominant logicExternal suppliers may have unique capabilities
For instance, if Intel is the only company capable of producing a certain microprocessor
Using outsiders reduces risk and increases flexibility
Suppliers can be changedRisk and lack of flexibility are also costs of doing business
Final Thoughts
Alternative forms of organization existStrategic alliances, joint ventures, keiretsu, clan-based organization, franchises
According to efficiency principle, the fact that these forms persist points to their relative efficiencyAll make/buy decisions are a balance of
Technical efficiency and agency efficiencyTransaction costs and governance (administrative) costs
There is no such thing as a costless organization