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Week4 SLides - 2 Important caveat Performance measurement...

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Lecture 4: Divisionalization — Partitioning and Delegating Decisions Examples of divisions at your former employers? Why do firms have divisions? Recall our discussion of Organizational Architecture The Unit of Analysis: Individual Decisions The Question: Who should make what decision within firms? * Value maximization requires co-location of decision-making rights and spe- cific information useful in making those decisions. * Important caveat: Performance measurement and reward systems must be in place to insure decision-making rights are used properly.
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Definition: Components of Organizational Architecture 1. Allocation of decision rights. 2. Performance measurement. 3. Reward systems. Today’s Application: Divisionalization Three basic divisional structures: 1. Functional (U-form) 2. Multidivisional (M-form) 3. Matrix
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Functional Form CEO Mfg. Division Head Mkt. Division Head Mfg. Head Product A Mfg. Head Product B Mkt. Head Product A Mkt. Head Product B Multidivisional Form CEO Division Head Product A Division Head Product B Mfg. Head Product A Mkt. Head Product A Mfg. Head Product B Mkt. Head Product B
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What decisions to delegate where? Activities should be organized to take advantage of economies of scale and scope. Structure affects what types of performance measurement and reward systems can be put in place. As we will see, because structure affects what performance measures can be used, structure also affects the set of decisions that can be delegated. Common Divisional Performance Measures Cost/Expense Centers Examples? Properties: * Useful when employees in the division control costs, but have little effect on revenues. * Basing rewards on cost-based measures tailors the performance measure to things the employees can control. This shields employees from revenue-based risk, and allows the firm to offer higher powered incentives.
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