Organisation !

Lehrstuhl: Welpe
01 - Introduction

Organisation = made of people, labour

division, pursuit of shared goals/objectives
Org. exist because

Specialisation / division of labour

Economies of scale/scope

Manage external environment

Economize on Transaction cost

Exert power/ control

--> trade-off:
Division of labor & specialisation (efciency gains) Need for coordination (resource consumption)
-> Agency problem
-> Lack of knowledge
-> Managing interdependency
-> Lack of motivation
Evolution of the modern
corporation
Business Environment Strategic Changes Organisational
Consequences
Early 19th cent
Late 19th cent
Early 20th cent
Late 20th centry
Poor transport Specialised rms, local markets Simple mgmt structures
Railroads, telegraph,
industrialisation
Geographical & vertical
expansion
Line/Staff separation, functional
structures & accounting syst.
Road transport,
communication, nancial
markets, world trade
Product diversication,
multinational growth
Multidivisional structures
Rapid innovation, IT Competitive advantage,
Outsourcing
Matrix structure,
Decentralization, alliances &
networks
02 - Organisation Theories

Different org. theories because of multiple aspects/ factors in organisations

Individual, group, organisational factors (see effectivenes)

External environment

Performance / Humanistic orientation

No simple, linear causal relationships

--> Contingency = Situational approach due to high organisational variance (-> no stable laws apply)
! -> adapt best available knowledge to situation
Individual effectiveness
-> Ability, skill, knowledge, attitude, motivation
Group effectiveness
-> Cohesiveness, leadership, structure, status
Organisational effectiveness
-> Environment, technology, strategy, structure, culture
Beaurocratic Theory (Max Weber, 1864- 1920)

1800: Organisation = extension of families, hiring based on favoritism, subjectivity --> growth uncovered inefciency

Proposition for efcient / rational bureaucracy:

Dened authority (hierarchy) + assigned responsibilities

Objective criteria for evaluation of performance / suitability of staff

Fixed salaries for administrators

TUM School of Business
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
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34 01.05.2011
Processes
lnputs Transformation Outputs
External environment
Boundary spanning
(resource acquisition)
Human resources
Material resources
Financial resources
and information
Management
(decision making,
planning, controlling
and structuring)
Production
Maintenance
Adaptation (R&D,
market research, etc.)
Boundary spanning
(output transactions)
Sales of output
Advertising
Public relations
Subsystems
Sources of
inputs and
constraints
Output
opportunities
and constraints
Source: Hodge et al. (2003), p. 12-16
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. Isabell M. Welpe
Management contributes to individual, group and
organizational effectiveness
14 06.05.2011
Management performs the
functions of

Planning
Organizing
Leading
Controlling
To coordinate the
behavior of

Individuals
Groups
Organizations
To attain


Individual effectiveness
Group effectiveness
Organizational effectiveness
Feedback
Source: Gibson et al. (2009), p. 16
Marius Scholinz TUM BWL - SS2011!
! 1
Administrative theory (Henri Fayol, 1841 - 1925)
Management has two distinct functions:
Coordination Specialisation
Scalar principle: Hierarchical distribution of power, pyramid
structure
Unity of command: Only one superior
Span of control: Optimal no. of subordinates
Exceptions principle: lower lvl employees handle routine
events, managers for more complex tasks
Departmentalisation: Similar tasks / functions that need
coordination grouped within same unit
Line / Staff functions: Line contributes directly to pursuit of
primary organisational goals, staff adds support activities
Scientic management (Frederick Taylor, 1856 - 1915)

Decisions abt organisational- job design based on scientic study

Method to deliver greatest output:

Standardised procedures

Qualied human capital

Work planning

Incentives to increase output --> Link of output to payment -> Employees improve wages, Shareholders increase surplus
Neo-Classical theories

Classical theories only concerned with Meso- (Group) and Macro-level (Org) --> Neo-classical theories focus on micro

Importance of human needs / relations

Expectancies of employees

Give-and-Take relationships
Hawthorne Studies

Human relations more important than physical work conditions -> socio-economic factors inuenced performance

Psychological factors strongly inuence performance

--> Turning point: Peoples roles extend beyond work in organisations, multiple and divergent needs
Behavioral decision theory (Simon & March)

Bounded rationality: individuals only capable to act rational to certain extent

Limited by imperfect knowledge, evaluation of future outcomes, incapability to consider all alternatives
--> Facilitate decision making by reducing complexity and uncertainty

Division of Labor -> Problems are divided in sub-problems, Individuals confronted with subsets of goals/ alternatives

Standardisation of processes

Hierarchy limits decision space of subordinates

Communication aids in diffusion of information

Indoctrination establishes trust culture, less supervision required, company goals/ values/ mission are internalised
Institutionalism

Companies perform when perceived by larger environment

to have legitimacy to exist

Environment composed of norms/ values of external

stakeholders

Legitimacy: Organisations actions = desirable, appropriate

within system of norms/ values

Isomorphism: similarity among orgs in population

Coercive = pressure by other organisations/ society

Mimetic = imitate competitor to increase legitimacy

Normative = indirect adoption of norms through

exchange of employees, knowledge transfer
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. Isabell M. Welpe
35
Property rights
Quelle: Picot, A./ Dietl, H./Franck, E. (2008), S. 46 ff. & Kieser, A. (2002), S. 201.
Insitutions have and assign property rights














4
Property Rights
Abusus
Change of the property
Usus fructus
Right to any benefit from
the property
Usus
Use of the property
Ius abutendi
Right to transfer or sell
the property
Property rights are defined and protected within state laws, normally within constitution
or bill of rights
Property rights are assigned to legal not necessarily natural persons
Property is not a relationship between people and things, but a relationship between
people with regard to things
Marius Scholinz TUM BWL - SS2011!
! 2
03 - Corporate Governance

Denition: Set of mechanisms used to manage relationships among stakeholders and to determine and control the
strategic direction and performance of organisations

Specialised capabilities/ knowledge of agent --> delegation of tasks by principal (through contract)
--> Assumption: Contract aligns utility function of agent with principal (to avoid interest conicts)

BUT: Information asymmetry = principal does not know how outputs can be achieved efciently, cannot judge agents
behaviour / output adequately --> agent can cheat by self-enhancing / deceiving self-portrayal
Solutions:
1. Direct regulation of agents behavior by principal
2. Improvement of IS
3. Sharing of results between principle / agent
Agency cost = cost associated w/ monitoring agent behavior / enforcing contracts

Separation of ownership / mgmt control in corp. governance = agency problem

Agent focus on short-term prots, fulllment of own needs

Contracting / Monitoring to reduce agency costs through

Behavioral contracts: obligate behavior (-> desired outcome difcult to measure, routine tasks, no goal conict)

Outcome-based contracts (-> measurable outcome, differences in goals, behavior on job difcult to monitor)

Problems w/ pay for performance: Information asymmetry, Measure for Performance, Board members selected by CEO
5 Ways of CEOs inuence on organisational
effectiveness
1. Setting goals / designing structure
2. Select key executives
3. Determine mgmt rewards / incentives
4. Allocation of scarce resources
5. Actions and Reputations impact on stakeholders
Board of Directors: Representation of Shareholders

Advice / counseling for top mgmt

Monitoring / controling mgmt

Policies and objectives

Election of corporate ofcers

Report on nancial condition of rm

Maintain integrity of board

Developing corporate strategy

Two-tier structure reqd in Germany w/ employees > 2000, slows decision making but more stable
04 - Inside the corporation (I)

Focus on resources and capabilities:

Primary sources of protability

External environment uncertain / subject to rapid change -> internal resources offer secure basis for strategy
Identifying Org. resources / capapabilities

Internal focus: Analyse value chain

Primary / Secondary activities (line / staff)

Allows to understand parts of operations that add value

--> outsource unprotable parts

External focus: Analyse key success factors

How do customers choose?

What do we need to survive competition

What resources are needed to deliver key factors?

Intangible Resources = more sustainable source of competitive
advantage
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
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Shareholders
Board of Directors
Chair of Board of Directors
Chief Executive Officer (CEO)
President or Chief Operating Officer (COO)
Executive vice Presidents
Senior vice Presidents and vice Presidents
General Managers or Divisional Managers
Functional Managers
Executive Committee Salary Committee
Ownership
Trusteeship
Corporate Management
Divisional Management
Functional Management
Source: Jones (2002), p. 35
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Chair for Strategy and Organization
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Source: Grant (2010), p.127
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Key influence on
coordination
and firm priorities
Effective coordination
requires that the team
performing a capability
is housed" within an
organizational unit
Team performing a
capability needs
information, incentives,
and resource allocation
Organizational
Structure
Management
Systems
Strategic
lntent
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Organizational
Capabilities
Source: Grant (2010), p.155
Marius Scholinz TUM BWL - SS2011!
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Capabilities exist when resources have been purposely integrated to achieve task

Development of capabilities that lead to competitive advantage evolve over time

! --> based on developing, carrying and exchanging information / tacit knowledge through human capital

Core competencies: resources and capabilities that serve as a source of competitive advantage over rivals
! --> characterise activities that rm performs exceptionably well/ through which unique value is added

Human capital: sum of skills, knowledge, general

attributes of people in an organisation

does not depreciate, but enhances through use

critical resource: superior knowledge abt customers,

markets, technologies and competitors used to gain competitive advantage
05 - Inside the corporation (II)

Managers w/ requisite knowledge for capability building = key resource for development of capabilities

Capability = path dependent (competence today is result of past developments)

Linkages between resources & capabilities (see chart in 04)

Organisational culture:

Shared perceptions, common values and behavioral norms

Capacity to comprehend one another/ collaborate without direction --> mutual adjustment

Organisational Structure (see 07)

Management system

IS allowing organisational members to identify changing circumstances/ actions of workers

Incentive systems to promote cooperation and motivation

Strategic intent

Effective leadership that communicates drive and direction of organisation

Capabilities can act as barriers: development over long time/ embodied in culture and structure --> rigidity, inertia
! --> the more developed capabilities, the narrower repertoire/ adaption to new circumstances
Dynamic capabilities: Reconguration of internal and external competences to address rapidly changing environment
! --> capacity to change may be regarded as organisational capability
Acquiring capabilities

Mergers & Acquisitions: acquiring desired capability developed in another rm to shorten development
! --> major risks, e.g. irreversible investmt/ surplus of acquired resource needs integration -> culture clashes

Strategic Alliances: cooperative relationship between rms to reduce costs/ risks and transfer knowledge
Internal development: Focus and sequencing

Obtaining resources easy, challenge = integration of resources to achieve task

Requires organisational design / managemt systems and is facilitated by culture / strategic intent

Building superior capabilities requires leveraging resources by concentration within units / aggregation among units

Focusing within units implies sequential development -> incremental evolution

Incubation in seperate organisational units may foster capabilities through different cultures, structures and system
from existing rm --> combines exibility of startups w/ resources of established players
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
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Are capabilities that cannot be easily
developed.
Examples:
Historically: unique or valuable
organizational culture or brand name
Ambiguous: the causes of the competence
are unclear
Social complexity: lnterpersonal
relationships, trust, and friendship among
managers, suppliers, and customers

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Allow the firm to exploit opportunities or
neutralize threats in its external environment
Example
General electrics in exploiting opportunities:
Competence in financial services
Competence of integrating acquired firms
Competence of management development


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Are capabilities that do not have strategic
equivalents
Examples
Apples ability to develop well-designed and
easy-to-use products.
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Are capability that few, if any, competitors
possess.
Example
Patents
Slots at an airport
Source: volberda et al. (2011), p.107-108
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
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Scarcity
Relevance
Durability
Transferability
Replicability
Property rights
Relative
bargaining power
Embeddedness
The extent of the competitive
advantage established
Sustainability of the
competitive advantage
Appropriability
The profit earning
potential of a resource
or capability
Source: Grant (2010), p.136
Marius Scholinz TUM BWL - SS2011!
! 4
Knowledge management

Systematic leveraging of information and expertise to improve organisational innovation, responsiveness, competence

Firm = assemblage of knowledge assets --> value created by deploying knowledge

Knowledge mgmt = most important resource, provides overview of interlinkages betw. knowledge development,
transfer, utilisation activities

Explicit knowledge = easy to exploit but difcult to protect from rivals -> weak basis for sustainable advantage

Tacit knowledge = slow / costly to transfer, but strong basis for sustainable comp. advantage
Tacit -> Tacit knowledge = Socialisation
Tacit -> Explicit knowldg = Externalisation
Explicit -> Tacit knowldg = Internalisation
Explicit -> Explicit knowldg = Combination
Strategic Leadership

Ability to anticipate, envision, maintain exibility

and empower others to create strategic change

Leaders guide rm according to vision / mission

Vision = picture of what rm wants to be/ achieve

Mission = specic businesses in which rm wants

to compete/ customers it intends to serve

Transactional Leadership: engaging followers through exchange between them / leaders, typically done through
formalisation of rules/ establishing hierarchy and correcting behavior

Transformational Leadership: motivating followers to exceed expectations of others, continuosly enrich capabilities,
place interests of organisation above own
06 - Inside the corporation (III)

Productivity of manufacturing processes increased --> lower prices, offshoring

Service quality contingent upon management of strategies, systems / employees meeting needs, expectations

Service innovation creates new markets and are more likely generating high returns

Service innovations characterised by two dimensions:

Type of benet: New core benet vs. Existing benet by new delivery

Type of service: Can consumption be separated from production?

Factors that foster market-creating innovations:

1. Scalable business model
2. Comprehensive CRM
3. Investment in employee performance
4. Operational innovation (Process design)
5. Brand differentiation
Characteristics of service rms Characteristics of manufacturing rms
Intangible output
Simultaneous production & consumption (no storage)
Labor- and knowledge intensive
Customer interaction high
Quality difcult to measure
Rapid response time
Location important
Tangible product
Products stored in inventory
Capital asset-intensive
Little b2c interaction
Human element may be less important
Quality directly measured
Longer response time
Site of facility depends on transport

Flexible Manufacturing Systems: link manufacturing components that previously were isolated, e.g. robots,
machines, product design and engineering integrated through IS
---> allows companies to produce customized products in mass production
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
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Knowledge
Generation
pExplorationq
Research
Recruitment
lntellectual property licensing
Mergers & acquisitions
Benchmarking
Knowledge
Application
pExploitationq
New product development
Operations
Strategic planning
Communities of practice
Best practices transfer
On-the-job training
Databases
Standard operating practices
lntellectual capital accounting
Competency modeling
Project reviews
Competency modeling
Knowledge
Creation
Knowledge
Acquisition
Knowledge
lntegration
Knowledge
Sharing
Knowledge
Replication
Knowledge
Storage & Organization
Knowledge
Measurement
Knowledge
ldentification
Source: Grant (2010), p.164-167
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
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A service innovation creates new markets
Service innovations are likely to generate high returns.

Two dimensions characterize service innovations
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Either offering a new core benefit or offering an existing benefit by a new delivery.
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Determines whether the service must be produced and consumed simultaneously,
i.e. whether production can be separated from consumption.%

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Google
Netfix
Skype
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FedEx
eBay
CNN
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Starbucks
Cirque de Soleil
Barnes & Noble
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Southwest Airlines
Hertz #1 Gold Club
Ball Memorial Hospital

Type of
service
Separable
lnseparable
Type of benefit Core Delivery
Source: Berry et al. (2006), MlT Sloan Management Review
Marius Scholinz TUM BWL - SS2011!
! 5

Lean Manufacturing: Cut waste and improve quality by training employees in continuous improv / problem solving

requires adequate organizational system --> decision making, culture that supports employee participation

focus: people (e.g. Toyota)

Key advantage of exible manufacturing: products of

different size / type to fulll customer needs
--> customer satisfaction.

Mass Customisation: Firm applies technology and

management methods to provide product variety and
customisation through exibility & quick responses
--> produce enough variety to satisfy broad range of need

Mass Production: Standard goods at affordable prices

Department Design

Analysis of nature of departments technology leads to design

structure of department

Analysability: Tasks reduceable to mechanical steps

Variety: Unexpected situations / contingencies

Dimensions of dept design:

Formalization: Standardisation, division of labor

Decentralisation: Decisions centralised vs Delegation

Workers skills

Span of control

Communication and coordination: frequency, medium

Types of interdependence among departments

Pooled: work does not ow between units

Each Dept. contributes to common good/ independent

Mediating technologies
! --> standardisation

Sequential: Outputs of one Dept. = inputs to another

Effectiveness depends on prior Department

Greater need for horizontal mechanisms

Long-linked technologies
! --> planning

Reciprocal: Output depend mutually on each other

intensive technologies required

! --> mutual adjustment
07 - Organisational and structure design
Organisational Structure Organisational Design
Pattern of jobs and groups of jobs in an organisation
Important cause of individual and group behaviour
Regularity of predictable activities
Process by which managers select and manage aspects of
structure and culture so that an organisation can control
necessary activities to achieve its goals
Management decisions and actions that result in specic
organisation structure
Differentiation = breaking up work in array of tasks
Integration = task coordination to achieve goals
Depicted by org. chard representing authority
Umbrella concept including structural and process issues
Considers unit grouping, size, planning and controlling
systems, behavior formalisation, centralisation
Organisational design = important:
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
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Key advantage of flexible manufacturing
Products of
different size,
different types, customer requirements
freely intermingle on
the assembly line.
lncrease customer satisfaction.
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Batch size Small Unlimited
New
Choice
Small batch
Flexible
manufacturing
Mass
customization
Mass
production
Continuous
process
Product
flexibility
Standardized
Customized
Source: Daft et al. (2010), p. 279-281
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
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1. Moderate formalization
2. Moderate centralization
3. Work experience
4. Moderate to wide span
5. Horizontal, verbal communication

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1. Low formalization
2. Low centralization
3. Training plus experience
4. Moderate to narrow span
5. Horizontal communication, meetings

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1. High formalization
2. High centralization
3. Little training or experience
4. Wide span
5. vertical, written communication

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1. Moderate formalization
2. Moderate centralization
3. Formal training
4. Moderate span
5. Written and verbal communication

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Source: Daft et al. (2010), p. 289
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
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Low
communication
Standardization,
rules, procedures

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Low
Medium
communication
Plans, schedules,
feedback

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Medium
High communication
Mutual adjustments,
cross-departmental
meetings, teamwork

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Pooled
(banks)
Clients
Sequential
(assembly line)
Clients
Reciprocal
(hospital)
Clients
Source: Daft et al. (2010), p. 291
Positive effects of good design

Ability to deal with contingencies

Achieve competitive advantage

Manage diversity

Raise efciency (e.g. cross functional IS)

Innovation
Negative effects of poor design:

Decline in prots / sales

Loss of control over Org. structure / culture

Inability to adapt to change

Slow value creation

Marius Scholinz TUM BWL - SS2011!
! 6
Dimensions of Organisational Design
Structural:
1. Formalisation: Reliance on written documentation (e.g.
procedures, regulations)
2. Specialisation (Differentiation): Degree of subdivision of tasks
into separate jobs (e.g. extensive -> narrow range of tasks)
3. Hierarchy of Autonomy
4. Centralisation
5. Professionalism: Level of formal education / training of
employees
6. Personnel Ratios / Span of command: Ratio of ppl in various
departments
Contextual:
1. Size: Measured for aggregates
2. Organisational technology: Tools used to turn inputs into outputs
3. Environment: All elements outside organisation
4. Goals and Strategy/ Mission: Goals dene purpose and competitive techniques which set it apart from other orgs, Strategy
is plan of action describing resource allocation / activities dealing with environment to reach goals
! ! --> Together dene scope of operations and relationship with employees, customers and competitors
5. Culture: Set of shared key values, beliefs, norms of employees
5 Key Design decisions
1. Division of Labor (Differentiation vs. Integration)

Personal Specialities (occupational and professional specialities)

Horizontal: Division as necessary by natural sequence of tasks

Vertical (Hierarchy): From low to high-level managers

Economies on coordination, increased adaptability

Increased no. of hierarchy = more face-to-face control

Problems of Tall vs. Flat structures:

Communication (long decision time, distortion, manipulation)

Motivation (Less responsibilty, passing problems up hierarchy)

Bureaucratic cost

Parkinsons Law (Multiply subordinates to enlarge empire)

2. Departmentalisation (Homogeneous vs. Heterogeneous)

Individuals requiring most coordination should work within same department

Grouping into: Tasks, Product, Geography, Process

Group to achieve economies of scale / scope, learning

Functional Structure: similar functions, work processes grouped together

Conditions: Small number of similar products, few locations, one major customer type

Advantages: Learning / Spill-over effects through peer supervision, especially for

cooperation-savvy work

Disadvantages: Communication, measurement, location

Divisional Structure: organised according to outputs

Advantages: Increased organisational effectiveness (synergies), control through prot

centers

Disadvantages: Divisional relationship, coordination between divisions, transfer pricing,

commuication

Matrix Structure: incorporates two grouping approaches simultaneously

Appropriate only if high cross-functional efforts needed, e.g. NPD-Process

Advantages: Reducing cross-functional barriers, Increasing cost/ quality awareness across

departments, Effective use of expertise as needed, Know-how synergies

Disadvantages: Lacks bureaucratic structure and stable expectations, no clearly dened

hierarchy/ chain of command

Virtual Network: loosely connected cluster of separate components, Depts. =

separate organisations

Connected for information diffusion, can be spread worldwide

Advantages: Cost economies

Disadvantages: Coordination problems -> the more complex value creation the higher Integrating effort, Trust
3. Span of Control (Narrow vs. Wide)

Number of subordinates under direct management, increases expontially

The more complex task, the smaller efcient span

Advantages of wide spans = Lower coordination costs, BUT loss of control possible
4. Authority (Centralised vs. Decentralised)

Advantages of centralisation: Top Mgmt coordinates activities, assures goals are met

Disadvantages: Little focus on long-term strategic decisions

Advantages of decentralisation: exibility, responsiveness, motivation

Disadvantages: Coordinating effort substantially increased, agency problems

5. Formalisation (Standardised vs. Mutually adjusted)

Formalisation = use of written rules / procedures to standardise operations -> proper actions for given situation

Mutual adjustment = Own judgement rather than standardised rules to address probem

Advantages: Better control of employee behavior

Disadvantages: Rules/ routine vs. innovativeness, openness and exibility

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. Isabell M. Welpe
Goals and
Strategy
Size Environment
What are important dimensions of organisational
design? (1/5)
13 21.06.2011
Culture Technology
Structure
1. Formalization
2. Specialization
3. Hierarchy of
authority
4. Centralization
5. Professionalism
6. Personal ratios
The organization
Structural
dimensions
Contextual
dimensions
Structural dimensions:
Provide
Labels to distinguish
key, internal
characteristics of an
organisation
A basis to compare the
composition of
organisations

Contextual dimensions:
Characterize
organizations as a
whole and the broader
organizational setting
Sources: Daft et al. (2007) p. 17-20

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. Isabell M. Welpe
What are five key design decisions?
Division of labor
21 21.06.2011
10 interactions 4 interactions
Self Organizing Team Hierarchy
Division of labor Vertical specialization (hierarchy of authority) 1
Tightly-coupled, integrated system: Change
in any part of the system requires system-
wide adaptation
Loose-coupled, modular hierarchy:
Partially-autonomous modules linked by
standardized interfaces permits
decentralized adaptation and innovation
Hierarchy economizes on coordination and increases adaptability
Sources: Grant (2010) p. 183-188

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. Isabell M. Welpe
What are five key design decisions?
Departmentalization
All employees placed together performing similar functions, work processes
or knowledge and skills
Conditions: Small number of similar products, few locations, one mayor
type of customer
Advantages: People in a function can learn from each other and increase
their skills, employees with common skills can supervise and control each
other, peer supervision is important for complex work relying on
cooperation (supervision from above is very difficult).
Disadvantages: Communication, measurement, location, customer
28 21.06.2011
Departmentalization Functional grouping 2
CEO
Engineering Marketing Manufacturing
Sources: Daft et al. (2007) p. 105-107, Jones (2010) p. 144-146

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. Isabell M. Welpe
What are five key design decisions?
Departmentalization
People are organized according what the organization produces
More complex structure results from three design choices: An increase in
vertical/horizontal differentiation or integration
Three product types: Product division structure, multidivisional structure,
product team structure
Advantages: Increased organizational effectiveness and control, profitable
growth, and internal labour market
29 21.06.2011
Departmentalization Divisional grouping (by product, geographic or market) 2
CEO
Product
Devision 1
Product
Devision 2
Product
Devision 3
Sources: Daft et al. (2007) p. 105-107, Jones (2010) p. 149-165

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. Isabell M. Welpe
What are five key design decisions?
Departmentalization
Advantages: (1) Cross-functional teams reduce functional barriers,
overcome subunit orientation (2) Team member from different functions
learn from each other (3) Effectively use skills of specialized employees by
moving from product to product as needed (4) Dual focus on function and
product promotes concern for both cost and quality

32 21.06.2011
Departmentalization Multifocused grouping (matrix/hybrid) 2
CEO
Product Devision 1
Marketing Manufacturing
Product Devision 2
Sources: Daft et al. (2007) p. 105-107, Jones (2010) p. 166-167

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. Isabell M. Welpe
What are five key design decisions?
Span of control
40 21.06.2011
Span of control 3
X Y
Z
X U Y
W
Z V
A. The manager has two subordinates
and must manage three relationships

B. With the addition of just one more
subordinate (for a total of three), the
manager has six relationships to handle
Span of control: The number of subordinates a manager directly manages
Number of subordinates' relationships increases exponentially
Recommendation: Complex and dissimilar tasks Small span of control
Advantage (wide span of control): Lower management cost
Disadvantage (wide span of control): If managers lose control of subordinates or
their relationships, they have the opportunity to follow their own goals, coast along on
the performance of group members or shrink their responsibilities
Sources: Jones (2010) p. 124-125
Marius Scholinz TUM BWL - SS2011!
! 7
Mechanic Structure Organic Structure
Individual specialisation: Employees work seperately and
specialise in clearly dened task
Simple Integrating Mechanisms: Hierarchy clearly dened
and serves as major mechanism
Centralisation: Authority to control tasks kept at top lvl
Standardisation: Extensive use of rules and SOPs to
coordinate tasks, work process = predictable
Joint specialisation: Teamwork, coordination of actions
Complex Integrating Mechanisms: Task forces
Decentralisation: Authority delegated to all lvls, most
communication is lateral
Mutual adjustment: Extensive use of face-to-face contact,
work process relatively unpredictable
08 - Organisational design and performance management

Performance = heavily routed to inteded purpose of organisation, mostly nancial protability

Strategic Control Systems:

Tools that allow managers to monitor and evaluate whether given strategy and structure are working as intended and
how they could be improved or changed to achieve goals

Used to create incentives

Important because of impact on competitive advantage, e.g. efciency, innovation, quality and cust. service

Effective systems are: exible, provide accurate information and support decisions in a timely manner.
Personal control system: Shape and inuence behavior of person in face-to-face interaction

Direct supervision by manager, peer supervision --> prevents free-riding

Output control system: Managers estimate performance goals, then compare actual performance

Often incentives are linked to performance -> motivate employees at all levels
Behavior control system: Establishment of comprehensive system of rules / procedures

Intent not to specify goals, but to standardise means of achieving them

Three typical control strategies Bureaucratic Control Market Control Clan Control
Description
Requirements
When to use
Use of rules, policies, hierarchy
of authority, standardisation
Use of price mechanisms to
evaluate performance, e.g.
divisional structures -> prot
Use of social characteristics,
such as culture, shared values
Rules, standards, legitimate
authority
Prices, competition, exchange
relationship
Tradition, trust
Large organisations with stable
environment and routine
technology
Outputs can be priced,
competitive bidding available
-> management accting
Small departments, uncertanity
Complementing nancial performance measures:

Performance goals = long-term BUT performance targets = short term --> add non-nancial measures and targets

Avoid mistakes:

Not linking measure to strategy

Not validating links (e.g. does measure really evaluate performance)

Not setting right performance targets

Measuring incorrectly
Strategic reward systems

Managers have to decide which behaviors to reward --> measure desired behavior, then link reward-system

Extrinsic rewards vs. intrinsic rewards

Systems should encourage:

1. Attraction/ retention of valued staff
2. Predictability of behavior
3. Above average performance
4. Working exibility

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$%#&'%$"'%("#&#($'&)*$)(*%+,%#-%',,'($).'%*$&#$'/)(%
(+-$&+0%*1*$'2%#-3%$"'%*$'4*%$+%3'.'0+4%)$5%
An effective strategic control system should have $"&''%("#&#($'&)*$)(*:
1. lt should be ,0'6)70' enough to allow managers to respond as necessary to
unexpected events.
2. lt should provide #((8&#$'%)-,+&2#$)+-, thus giving a true picture of
organizational performance.
3. lt should supply managers in a $)2'01%2#--'&%because making decisions on
the basis of out dated information is a recipe for failure.
There are ,+8&%*$'4*%required to design an effective strategic control
system:
9:% 28.06.2011
Establish standards and
targets.
Create measuring and
monitoring systems.
Compare actual performance
against the established targets
Evaluate results and take
actions if necessary.
Sources: Jones et al. (2010) p. 388-389
Marius Scholinz TUM BWL - SS2011!
! 8
Classication of reward
systems, key characteristics
Feature to which payment
is tied
Presence of incentive Usual frequency of
payment
Unit to which basis of
payment is related
Flat time - time rates
Output incentives
Merit Rating
Performance-related pay
Gain Sharing
Prot Sharing / ESOP
Fulllment of agreed hours
of work
No Weekly / monthly, additional
hours deffered
Individual
Set formula relating to lvl of
output or sales
Yes, may be entirely
dependent on work
achieved or bonus
Weekly Individual, workgroup,
department
Performance assessed
subjectively by supervisor
Yes, usually lump-sum
bonuses. May be weak if
criteria clear, mistrust
Deferred bonus, increased
wage
Individual
Performance assessed
according to agreed criteria,
objective
Yes, Lump-sum bonuses Varies, 6-monthly or
annually
Individual or group
Increase in productivity /
saving in cost / improvement
in exibility
Yes, may be one-off
payment or bonus
guaranteed while
improvement lasts
Varies Plant-wide, limited to
specic groups that are part
of agreement
Increase in organisations
prot / dividend payment
Yes, but weak and indirect Long deferred, prot
distribution yearly, dividend
semi-annually
Whole company or prot-
center
Considerations of reward systems

Trade-off between ne-tuning pay policies and cost of establishing

Simplicity vs. complexity of reward systems

Standardisation vs. Differentiation of reward systems

Relatively xed vs. Flexible and adaptable

Inuence on individuals motivation/ performance vs. Fostering harmonious collective relationship

09 - Vertical integration and the scope of the rm
Business Strategy = how a rm competes in particular are of business
Corporate Strategy = where a rm competes --> Scope of the rm

Product Scope: Firms product range (specialised vs. broad)

Geographical Scope: Optimal geographical spread of activities

Vertical Scope: Range of vertically linked activities

Vertical integration = ownership of vertically related activities along value chain
! --> indicator is EVA to sales revenue
Recent trends: downsizing and refocusing as result of greater turbulence in bus. environment / ICT efciency
Cost of linkages in value chains

within rms: Administrative / bureaucratic cost of organising production

within markets: Transaction Cost

Relative cost between the 2 = decision mechanism

Transaction Cost: Cost in excess of actual amount paid to input supplier

Vary with required amounts of transaction specic investments, uncertainty and frequency of transactions

Relatively high when:

competitive market is missing (e.g. monopolistic supplier -> relative bargaining power too high --> integrate)

hold up through transaction specic investment

Relatively low when:

Differences in optimal scale present (e.g. 40k rubber boots needed, but MES is at 100k --> outsource)

Distinctive capabilities needed

Strategically different businesses (special capabilities needed to manage integration of rubber boots)

Incentive problems (mkt offers high power incentives -> efciency gains/ quality improvmt., internal mkt does not)

Competitive effects of vertical integration (if monopoly @ one stage of value chain, integration cannibalises prot)

Flexibility needed --> uncertain demand/ new combination of technical capabilities/ risk
Considerations for Outsourcing decisions:
Characteristics of Vertical Relationship Implications
How many rms?
Transaction-specic investments needed?
External transaction subject to tax / inhibitive regulation?
Uncertainty of exchange relationship high?
Optimal scale given?
Strategically similar stages?
Market demand / Risk?
The fewer the greater transaction cost (monopol. sup. --> VI)
Investments increase advantage of VI
Can be avoided by internal production --> VI
Difculty of contracting, reliability threatened -> VI
If not, outsource
The greater, the higher advantage of VI over outsourcing
Higher uncertainty --> need for exibility --> outsource
Marius Scholinz TUM BWL - SS2011!
! 9
10 - Guest Lecture, Dr. Eberl of Siemens AG
Page 4 Juli 2011 UIrich EberI, 2011
Pictures of the Future
- die Siemens-Methode der strategischen Zukunftsplanung
11 - Interorganisational relations
Competitive resource dependency: interdependency among orgs competing for scarce inputs / outputs
Symbiotic resource dependency: interdependencies along value chain (supplier / distributor / manufacturer...)
Strategies for managing competitive interdependencies:

Collusion: Secret agreement among competitors to share

information for deceitful or illegal purpose
! --> reduce competitive uncertainty

Cartel: Association of rms explicitly agree to coordinate their

activities
! --> increase stability / richness of orgs environment

Third party linkage mechanism: Regulatory body that alows orgs

to share information and regulate the way they compete
! --> increased ow of info allows easier adaptation to changes in environment
! --> stabilises industry competition

Strategic alliance: Many varieties, e.g. competitors pool resources to avoid high R&D cost/ errect barriers to entry/ harm competitors

Merger and Takeover: Ultimate option to manage problematic competitive interependency

! --> Monopolies are illegal, thus may not be allowed
Strategies for managing symbiotic interdependencies:

Reputation & Trust: most common linkage, dishonesty = unsuccessful over long-run

Co-optation: Neutralising problematic forces by internalising competitors, thus transfering them into stakeholders
Strategic Alliances
Objectives:

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$%#&'%($&#$')*'(%$+%,#-#)'%.+,/'$*$*0'%#-1%
(2,3*+$*.%&'(+4&.'%*-$'&1'/'-1'-.*'(5%
6$&#$')*'(%7+&%
.+,/'$*$*0'%&'(+4&.'%
*-$'&1'/'-1'-.*'(%
!"#$%&'()*
6$&#$')*'(%7+&%
(2,3*+$*.%&'(+4&.'%
*-$'&1'/'-1'-.*'(%
8% 28.06.2011
Collusion
and cartel
Third-party
linkage
mechanism
Strategic
alliance
Merger and
takeover
Reputation
Co-
optation
Strategic
alliance
Merger and
takeover
lnformal Formal
9+,/'$*$*0'%&'(+4&.'%1'/'-1'-.2
lnterdependencies that exist among organizations that .+,/'$' for scarce
inputs and outputs.
62,3*+$*.%&'(+4&.'%1'/'-1'-.2
lnterdependencies that exist between an organization and its (4//:*'&(%#-1%
1*($&*34$+&(.
Source: Jones (2010) p. 67-75
1. reduction of risk
2. achievement of economies of scale / scope
3. technology transfer
4. pre-empting, countering or co-opting competition
5. overcoming regulatory / trade / investment barriers
6. facilitate international expansion
7. vertical quasi-integration advantages
Marius Scholinz TUM BWL - SS2011!
! 10
Types of Strategic alliances

Long-term contracts (non-equity)

reduce costs / share resources and risk of activities

least formal type of alliance, can be written, casual etc.

no ties linking organisations apart from agreement

Networks (non-equity)

cluster of different organisations whose actions are

coordinated through contracts / agreemt

members work closely to support / complement each

others activities

Minority ownership (equity strategic alliance)

forges strong cooperative bonds, e.g. keiretsu in JP

Joint Venture (equity strategic alliance)

jointly established business w/ shared ownership

legal agreement spells out rights and responsibilities of partners

reduces problems of managing complex organisational relationships experienced e.g. in contract-relationships

Important considerations of interorganisational strategy

Manage competitive risk with coop. strategies:

Cost minimisation: use detailed contracts / monitoring

Opportunity maximisation by developing trust relationships = most efcient way to inuence & control partners

Purpose of Alliance should be identied upon entering --> indication of future problems helps deciding on formal vs. informal alliance
! --> chose informal rather than formal alliance whenever possible

Transaction cost theory to identify benets vs. costs of alliances

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$"%&'()$**'$+(%,)
-.$")"/0%,)12),"#$"%&'()$**'$+(%,)$#%)".%#%)(1+,'3%#'+&)
1#&$+'4$"'1+$*)'+"%&#$"'1+5)*%&$*)$+3)16+%#,.'0)21#78)
9:) 28.06.2011
lnter-firm links
Contractual
agreements
Traditional
contracts
#TOoUNGPIVJ
buy/sell
contracts
Franchising
Licensing
Cross-
Licensing
Non-traditional
contracts
Joint R&D
Joint Product
development
Long-term sourcing
agreements
Joint manufacturing
Joint marketing
Shared
distribution/service
Standards
setting/research
consortia
Equity
agreements
No new entity Creation of
entity
Dissolutions of
entity
Minority equity
investment
Equity swaps
Mergers and
acquisitions
Non-subsidiary
joint ventures
Joint ventures
subsidiaries of
MNCs
Fifty/fifty joint
ventures
Unequal equity
joint ventures
Source: Child (2005) p. 224

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$"%&''#&($)%*+,)-.-*/&*)0#)-%&/)%$1221(%&*%
34-#()--%&(5%$1/,1/&*)6')7)'8%
94-#()--6')7)'%$11,)/&*#7)%
-*/&*)0#)-%
:1/,1/&*)6')7)'%$11,)/&*#7)%
-*/&*)0#)-%
:12,')2)(*&/+%-*/&*)0#$%&''#&($)-
Firms share some of their resources
and capabilities in complementary
ways to develop competitive
advantage.
:12,)*#*#1(%/)-,1(-)%-*/&*)0+
Launch competitive actions to attack
rivals.
;($)/*&#(*+6/)54$#(0%-*/&*)0+
Hedge against risks and uncertainty,
especially in fast-cycle markets.
:12,)*#*#1(6/)54$#(0%-*/&*)0+
Often an illegal type of strategy.
Explicit collusion (directly
negotiating) and tacit collusion
(observing).%
<#7)/-#=+#(0%&''#&($)-
Firms share some of their
resources and capabilities to
diversify into new product or
market areas.
>+()/0)*#$%&''#&($)-
Firms share some of their
resources to create economies of
scope.
?/&($"#-#(0
The franchisor uses a franchise as
a contractual relationship to
describe and control the sharing of
its resources and capabilities with
partners (the franchisees).%
@A% 28.06.2011
Source: volberda (2010) p. 369-377

TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$%#&&'#()*%$+,*-%#.*%/0.*%-,*)'1')%10.%)0/,*$'(2%
#(3%(0(4)0/,*$'(2%1'./-5%

67% 28.06.2011
8#.$(*.-"',-%9*$:**(%
(0(4)0/,*$'(2%1'./-%
;&&'#()*-%9*$:**(%
)0/,*$'$0.-%
<($*.(#$'0(#&%*=,#(-'0(%>?-
Often used to overcome trade or
investment barriers (e.g. missing
local knowledge or local government
requirements)
?*.$')#&%,#.$(*.-"',%
Usually formed to achieve quasi-
vertical integration advantages (e.g.
concentrating on core competencies
and share development cost)
@.0--4'(3A-$.+%#2.**/*($%
Combine complementary
competencies, as well as assist
diversification or pre-empt
competition in a new field.%
B"#.*3%-A,,&+%#&&'#()*-
Formed to achieve economies of
scale and, often, to reduce risk by
sharing R&D costs.
CA#-'4)0()*($.#$'0(%#&&'#()*-
Co-opt or counter competition, as
well as to reduce risk by sharing
R&D costs.
@0/,&*/*($#.+%#&&'#()*-%
Formed to achieve potential
synergies by e.g. pooling
complementary strengths like a
small company's inventiveness
and big company's financial
strength.
Source: Child (2005) p. 226-227
12 - Global Strategies and the Multinational Corporation
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$%#&'%$"'%(#$$'&)*%+,%-)$'&)#$-+)#.-/#$-+)0%
lnternationalization occurs from two patterns:
12 3&#4': sale and shipment of goods and services from one country to another.
52 6-&'7$ -)8'*$9')$: Building or acquiring productive assets in another country.
:+&'-;)%6-&'7$%<)8'*$9')$%
=
+
>
%
=+>%
?
-
;
"
%
?-;"%
@.+A#.%<)4B*$&-'*%
automobiles
oil
semiconductors
consumer electronics
<
)
$
'
&
)
#
$
-
+
)
#
.
%
%
3
&
#
4
'
%
3&#4-);%<)4B*$&-'*%
aerospace
military hardware
diamond mining
agriculture
CB.$-4+9'*$-7%<)4B*$&-'*%%
packaged groceries
investment banking
hotels
consulting
D"'.$'&'4%<)4B*$&-'*%
railroads
laundries/dry cleaning
hairdressing
milk
Source: Grant (2010), p.372-373
E%
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$"%&'()*&%+,%$,-.(/#*&%'0.#$(110%.(&&%'"2,3)"%
,/%'"*%4(0%',%(%)1,5(1%.1(0*26%
Source: Daft (2010), p. 226-227
Domestically
oriented

lnitial foreign
investment

Domestic
structure, plus
export
department

Moderate, mostly
domestic
Export-oriented
multidomestic

Competitive
positioning

Domestic
structure, plus
international
division

Large, multi-
domestic
Multinational


Explosion


Worldwide,
geographical
product


very large,
multinational
Global


Global


Matrix,
transnational



Whole world
1. Domestic 2. lnternational 3. Mulitnational 4. Global
Strategic
orientation

Stage of
development

Structure




Market
potential
= Sheltered lndustries = Trading lndustries
= Multidomestic
lndustries
= Global lndustries
Stages
7%
Implications of internationalisation:

Lower entry barriers: tariff reductions, lower transportation costs --> increased intensity of competition

Higher industry rivalry: higher seller concentration/ diversity of competitors ----> reduction of industry protability

Higher bargaining power of buyers: worldwide market

Marius Scholinz TUM BWL - SS2011!
! 11
Motivation for global expansion

Economies of scale through large-volume prodcution -> low per-unit cost

Economies of scope through wider access to markets, adapt products to local needs

Cheaper production factors

Exploiting national resources

Competing strategically: e.g. Unicredit 2010 -> German operations prot make up for loss in main activities

Learning benets: integrating knowledge from multiple locations

Comparative advantage

Results from availability of national resources

Refers to relative efciency of producing products

If exchange rates stable, then comparative adv. = competitive advantage

---> historical change of focus: from natural resources / labor supply / capital stock to knowledge and commercialisation potentials
Determinants of geographical location for production
1. National resource availability (determine resource needs, then nd lowest cost location)
2. Firm-specic competitive advantage (to what extent is comp. adv. based on rm-specic resources? transferable?)
3. Tradability (economic transportation cost? trade restrictions?)
Recent development = fragmented value chain to best t resource availability cost according to requirements at each vertical stage
! --> HOWEVER: subject to exchange rate risks
Entering New Markets

Benets of joint ventures

Combining resources / different capabilities -> synergies

Knowledge / technology transfer

Reducing time-to-market for innovations

Risk sharing

Proting from local partners expertise w/ mkt. environment

Drawbacks:

Management differences --> conict

Distribution of benets
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$%"$&'%&($)$'&#$*)(+&%,$
The firm's potential for establishing competitive advantage in a foreign
market has important implications for the means by which it enters a
foreign market.
We distinguish between transactions and direct investments:
!"#$%&'"('$))*+)",+(
-()'.)/%0"'.$ 10(&/%$0'2&.%*&'%.$
Spot
sales
Exporting
Long-term
contract
Licensing
Franchising
Joint venture
Marketing &
distribution
only
Foreign
agent /
distributor
Licensing
patents &
other lP
Fully
integrated
Wholly owned
subsidiary
Marketing &
distribution
only
Fully
integrated
3"#$ !045$
Source: Grant (2010), p.383
67$
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$%##&$'()$%*+,(%*-$&,''#)#%+,*+,(%.$!"#$/012$
')*3#4()5$'()$*66#66,%7$8(9%+):$&,''#)#%8#6$
/9-+9)*-$
&,6+*%8#$
0&3,%,6+)*+,;#$
*%&$<(-,+,8*-$
&,6+*%8#$
1#(7)*<",8*-$
&,6+*%8#$
28(%(3,8$
&,''#)#%8#6$
!"#$%&'()
*($+((&)$+,)
',-&$."(#)
"&'.(%#(#)
+"$/0
Different
languages,
ethnicities
religions,
social norms
Lack of
connective
ethnic or social
networks
Absence of shared
political or
monetary
association
Political hostility
Weak legal and
financial
institutions
Lack of common
border, water way
access, adequate
transportation or
communication
links
Physical
remoteness
Different
consumer
incomes
Different costs
and quality of
resources
Different
information or
knowledge
1&2-#$."(#)3,#$)
%44('$(2)*5)
#,-.'(),4)
2"#$%&'(0
lndustries with
high linguistic
content
(Tv, publishing)
and cultural
content
(food, wine,
music)
lndustries viewed by
government as
strategically
important (e.g.
energy, defense,
telecommunication)
Products with low
value-to-weight
(cement), or that
are fragile (glass)
or perishable
(milk), or where
depend upon
communication
(financial
services)
Products whose
demand is
sensitive to
consumer income
levels (luxuries) or
labor intensive
products
(clothing)
Source: Grant (2010), p.388-389
=>$
TUM School of Management
Chair for Strategy and Organization
Prof. Dr. lsabell M. Welpe
!"#$%"$&'()"&'*$+,*(,-./$%)00.-1$
People differ between countries with regards to beliefs, norms, and value
systems (Hofestede, 1993):

Power distance
Extent to which inequity and decision-making power is accepted within organizations.
(High in Malaysia and most Latin America countries, low in Austria, Scandinavia)

Uncertainty avoidance
Preference for certainty and established norms vs. tolerance for uncertainty and ambiguity.
(Certainty in most Sothern European and Latin America countries, uncertainty in Singapore,
Sweden, UK, US, lndia)

lndividualism
Concern for individual over group interest vs. identification with group and collective interest.
(lndividualism in US, Canada, Australia, collectivism in Latin America and Asia)

Masculinity/Femininity
Masculine as emphasis on work, material goods and demarcation of gender vs. feminine as
emphasis on personal relationships and belief in gender equality.
(Masculinity in Japan, Austria, venezuela and ltaly, femininity in Scandinavia and Netherlands.)

Source: Grant (2010), p.391-392; http://www.geert-hofstede.com/hofstede_dimensions.php
23$
Marius Scholinz TUM BWL - SS2011!
! 12