Hierarchies, incentives and firm structure ECOS3003 Tutorial 3 answers
1. Discuss the costs and benefits of decentralized decision making relative to centralized decision making?
Benefits of decentralised decision making:
More effective use of specific knowledge Conservation of senior management time Training and motivation for local managers
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Incentive problems Coordination costs and failures Less use of central information
2. Discuss the positive and negative effects of a university rule that would not allow lecturers to change a grade once recorded.
No grade change: Positives:
No time wasted (by lecturer dealing with spurious complaints Less change of ex post corruption
Mistakes not changed (new information not utilised) Students feel aggrieved
3. United Airlines assigns flight attendants to routes using the following procedure: once a month, the attendants request the routes they prefer, with conflicts resolved strictly on the basis of seniority. Why does United use this procedure rather than simply let the supervisor of the attendants assign the flights?
Limit influence costs – assignment of personnel has little effect on company, so want to resolve it with lowest possible cost
4. An organizational consultant evaluates your division. She indicates that she does not like the divisional manager’s top-down style. She recommends setting up a board that consists of the divisional manager and his top 10 department managers. The consultant suggests that all major policy decisions be made by the board by a majority voting rule. She argues this process will make better use of information within the organization. She also argues that tour political system is a democracy, which works well, and that the same concept could be applied beneficially within a corporation. Evaluate the recommendation.
Is a company a democracy?
Team decisions – advantages include better use of info and more inclusion (employee buy in)
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BUT – slower decision making, free-rider problems, and more scope for sectional interests to block unpopular but profitable projects.
5. Traditionally, lending decisions at financial institutions were made by people relatively high up in the organization. For instance, a senior loan officer might have to approve even a small loan. Recently, some financial institutions have decentralized this decision, sometimes to people without university degrees. Discuss why it might have historically made sense to centralise the lending decision. Discuss potential factors that might motivate the decentralisation of these rights in certain organisations.
History – why centralise? Knowledge about risks erquired to assess a loan held by senior managers (also financial position of bank)
Now – more decentralised. With more competition, need to make quicker decisions, technology allows for easier transfer of knowledge (about loans permissible) and computer software can calculate the risks (lessening the need for specific knowledge and training)
6. Define the terms decision management and decision control. Under what circumstances might it be optimal to make one individual responsible for both decision management and decision control? What do you expect the ownership of common stock to like in such a firm? Explain.
Decision management – the initiation and implementation of decisions Decision control – the ratification and monitoring of decisions
When an individual bears the major wealth effects of decisions, DM not separated from DC (stock own by one person, or just a few people)
7. Consider a firm’s decentralisation decision – a firm can completely decentralise decisions in which case D = 1 or a firm can completely decentralise a decision (D = 0).
a. What does it mean to partially decentralise a decision?
The benefits of decentralisation are given by 10.D. The costs of decentralisation are given by 2D + 6D2.
b. What is the optimal level of decentralisation?
a. partial decentralisation: subordinate can make decision within a range or below a certain budget; it could also mean random checking of decision
b. U=10D–2D–6D2. dU/dD = 10 – 2- 12D = 0
8. See page 359 of the text (the case study on ).
(a) What factors motivated Kodak to change its organisational architecture?
(b) What mistakes did Kodak make in changing tis architecture?
(c) What might have been done differently?
Referring to Figure 11.1, Kodak experienced important environment changes. In particular, it was experiencing increased competition from Japanese firms (Fuji). It was also experiencing rapid
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technological changes. The highly centralised decision rights and low incentives architecture it had were suboptimal in the new environment.
b. Kodak changed its decision rights system without corresponding changes in the evaluation and reward system. The resulting 3 legs of its org architecture were not balanced. Employees did not have strong incentives to make value- increasing decisions given the reward and evaluation system (Kodak might have also provided better training to make decisions).
c. They should have considered changes in evaluations and rewards earlier than they did. Even when they did introduce incentive compensation, they did not implement it very well.
9. Question 12-4 on page 393 of the text.
Does Karl have the specific knowledge to run the firm?
Decentralise decision making to making to more experienced staff
Along with this implement an incentive and performance evaluation scheme
10. In the past several years, General Motors, a large car manufacturer, and , a major apparel manufacturer, have implemented team-based production processes. Under team- based production each employee is assigned to a team and each employee is evaluated and compensated on the productivity of their team.
General Motors implemented team-based production at its new Saturn car plant. No other GM plant has implemented team-based production (at least not nearly to the same extent). The Saturn plant is new facility (that is, not an old facility that has been converted) and team-based production processes have been in place since the plant began production. Saturn employees are new hires; few, if any, came from other GM facilities.
adopted team-based production processes at its existing plants. Employees who had been previously paid a piece-rate were put on a team-based reward process.
a. In general, what are the advantages and disadvantages of team-based production?
b. Team-based production at GM’s Saturn division is widely considered as a success. Saturn cars are some of the best-built in the GM production line. Workplace morale is high at the Saturn plant. By constrast, the team initiative is widely considered a failure. Worker productivity has declined and employee morale is low. What factors caused the Saturn experiment with team-based production to be a success and the experiment to be a failure? Why?
a. Team Benefits:
Improved use of dispersed specific knowledge Employee buy in
Collective-action problems (slow process) Free rider problems
b. Effect of corporate culture
– Levi’s old employees, little incentives, an established relationship with fellow employees.
– GM, new employees, no corporate culture baggage; also selection effect → people join knowing (and presumably favouring somewhat) the work environment.
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