Accounting 6310

Chapter 4– Organizational Architecture

Organizational Behavior

• Individuals act in their self-interest to maximize their utility.

• Employees, managers, and owners are assumed to be rational, utility-maximizing people.

• Teams are good ways to accomplish tasks– Free-rider problem – the incentive to shirk in team

production. – Teams try to overcome the free-rider problem through

the use of team loyalty – pressure from other team members and through monitoring.

Agency Theory

• Principals hire agents to perform tasks for them.• Agents maximize their own utility, sometimes to

the detriment of the principal.• Agency costs – the decline in firm value that

results from agents pursuing their own interests to the detriment of the principal’s interest.

• Horizon problem – managers act in the short-term because they believe the benefits will arrive after they leave the organization

Goal Congruence

• The actions people take in accordance with their perceived self-interest are in the best interest of the organization

• Goal congruence is the MAIN objective of managers– Informal factors– Formal control systems

Informal Factors

• Work ethic – external factors– Diligence, spirit, pride in doing a good job

• Culture – internal factors– Common beliefs, shared values, norms of behavior– Influenced by personality of the CEO

• Management style – internal factors– People watch what the boss watches

• Informal organization• Perception and communication

Formal Control Systems

• Management control systems• Rules• Organizational Architecture and Structures• Decision rights and rights systems

– Assigned to various people who are then held accountable

– Employee empowerment – assigning decision rights to employees

Organizational Architecture

Administrative devices must be formed to

1. Measure performance

2. Reward performance

3. Partition decision rights• Termed the three-legged stool as all three must

be present in order to work.

Performance criteria: Financial and nonfinancial measures

Performance Measures

• Financial– Audited accounting numbers– More objective– Provide information for control

• Nonfinancial– Subjective– Relate to strategic factors– Provide information for decision making

Decision Management and Control

• Decision Management– Initiation

– Implementation

• Decision control– Ratification

– Monitoring

Accountant’s Role in the Organization’s Architecture

• Monitoring

• Providing accounting numbers

• Providing figures used in implementing executive compensation contracts

Performance Measures- Observations

1. Financial measures should not be under the complete control of the people being monitored

2. Nonaccounting measures are often more timely than accounting measures

3. Not every decision requires ratification or monitoring

4. Operating managers tend to be dissatisfied with financial measures for making operating decisions.

Organizational Structures

• Definition – the way in which individual parts or elements are arranged or put together to form a whole company; the structure facilitates work flows and focuses attention

• Work unit – represents a grouping of individuals who utilize the firm’s resources and are accountable for performance

• Individuals are grouped into work units to perform specific tasks

• Accountability – the outputs that a work unit is expected to produce and the performance standards that managers and employees of that unit are expected to meet

Basic Design Choices

• 1 – Groups of people and resources engaged in a similar work-process – FUNCTION– Sales, production, engineering, accounting,

customer service, research and development– Used to take advantage of specialization and

create economies of scale; EFFICIENCY– Often held accountable as cost or revenue

centers

Basic Design Choices

• 1 – FUNCTIONAL UNITS (Continued)– Hard to determine the effectiveness of the separate

functional managers– Hard to determine how much of the profit each division

contributed– Disputes between functional managers can only be

resolved at the top of the organization– Functional structures are inadequate for a firm with

diversified products and markets– Hard to coordinate new product development cross-

functionally

Basic Design Choices

• 2 – Groups of people and resources focused on a specific market – BUSINESS UNIT– All functions involved in producing and marketing a

specific product line are grouped together– Units can be clustered by product, customer, or

geography– Used to take advantage of economies of scope;

EFFECTIVENESS

Basic Design Choices

• 2 –BUSINESS UNITS (continued)– Provides training ground for general management

– Business units are often closer to the market for its product than headquarters and can react more quickly to threats and opportunities

– Often product managers held accountable for a single product’s profit and loss

– Units clustered by customer often found when a firm has a small number of large, important customers, each with distinct needs and attributes

Hierarchy of Accountability

• 2 –BUSINESS UNITS (continued)– Units are also clustered by geography

• Specialization necessary for new or different markets (language, culture, laws and regulations, etc.)

– Often business units act autonomously causing rifts between divisions

– Transfer pricing becomes an issue

• 3 – MATRIX ORGANIZATION (very complex) – Functional units have dual responsibilities to business

units

General Electric’s Geographic and Line of Business Segments

Trade-off when structuring

• A unit can be either as efficient as possible or as responsive as possible – but not both.

• Managers cluster units by function when the benefits of specialization are greater than the benefits of market responsiveness

• Managers cluster work units by business unit when the benefits of market responsiveness outweigh the benefits of specialization

Costs of Clustering

• By function – costs of monitoring line-by-line expenses

• By business unit – monitor profit plans but must have transfer prices between units

Problems/Cases

• P4-12 – Pratt &Whitney

• P4-18 – Rothwell Inc.

• ALL DUE WEDNESDAY, FEBRUARY 11