BSZ_IM_Ch11_4e - Managerial Economics and Organizational...

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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 11: Page 1 CHAPTER 11 O RGANIZATIONAL A RCHITECTURE This chapter introduces the concept of organizational architecture. It begins by discussing the dual economic problems of: linking decision rights with knowledge, and motivating agents to make productive decisions based on their information. Markets solve this problem though a system of alienable private property rights. Within firms, the problem has to be addressed by management through the design of the organizational architecture. The three components of organizational architecture (decision-right assignment, performance-evaluation system, and reward system) are like three legs of a stool . They are complements and must be considered together. They also complement the less formal aspects of a firm’s “corporate culture.” If the management does not adopt a productive architecture the firm will suffer. Architecture is an important managerial tool that can be used at all levels in the organization. The short case study on Eastman Kodak emphasizes some of the key points from the chapter. C HAPTER O UTLINE T HE F UNDAMENTAL P ROBLEM Architecture of Markets Architecture within Firms A RCHITECTURAL D ETERMINANTS Changing Architecture Interdependencies within the Organization C ORPORATE C ULTURE W HEN M ANAGEMENT C HOOSES AN I NAPPROPRIATE A RCHITECTURE M ANAGERIAL I MPLICATIONS Evaluating Management Advice Benchmarking O VERVIEW OF P ART 3 C ASE S TUDY : E ASTMAN K ODAK S UMMARY
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Managerial Economics and Organizational Architecture Instructor’s Manual Part 1: Chapter Overview and Solutions Chapter 11: Page 2 T EACHING THE C HAPTER Students generally can comprehend the material in the chapter without substantial lecturing. The instructor can add value by focusing on applications. We provide a brief overview of the key points in the chapter and move quickly into a case to illustrate the application of the framework. In our brief overview, we focus on two key words: knowledge and incentives . We stress that productive architectures link knowledge and decision-making authority and provide the correct incentives for productive actions. It is easy to find examples of how managers can gain insights into organizational problems by focusing on the relevant knowledge and incentive issues. For instance, we give the example of a support unit in a large company that provided technical consulting (for example, engineering assistance) to other units in the firm. The unit was organized around product lines (for example, consumer products and health products). Individual technicians within the unit worked on problems by themselves. The department head had read about peer reviews and wondered if they should be used for the technical staff. There are two important concerns about peer reviews. First, do the peers have important information about each others’ performance? Second, do they have incentives to be honest in reporting this information?
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This note was uploaded on 04/27/2010 for the course FIN 320f taught by Professor Toprac during the Spring '08 term at University of Texas at Austin.

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BSZ_IM_Ch11_4e - Managerial Economics and Organizational...

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