Designing Organizations to Create Value: From

A three-pronged strategy for dramatically increasing organizational performance and value Business leaders today need more than fads and buzzwords to beat the competition; they need a solid organizational architecture for identifying and resolving the problems that prevent companies from reaching their full potential. Designing Organizations to Create Valueoutlines just such a framework, providing executives with the tools they need to build a balanced, functional organizationshy;shy;one that helps ensure the success of the business as it lays the groundwork for increased firm value. This practical, sensible book, based on the author's bestselling college classic, follows a step-by-step process for identifying the critical aspects of an organization's internal structure and taking the appropriate actions to address them and lead the organization to greatness. That process, adaptable to virtually any organization or organizational structure, details: Assignment of decision-making rights Rewarding individuals Evaluating performance

James A. Brickley, Ph.D., is the Gleason Professor of Business Administration at the University of Rochester's Simon Graduate School of Business. He has coauthored a number of influential books, and his work has appeared in numerous professional journals, including The Journal of Business and The Journal of Finance.

Clifford W. Smith, Jr., Ph.D., is the Louise and Henry Epstein Professor of Business Administration at the Simon Graduate School of Business. He is the author or coauthor of more than a dozen books and numerous journal articles and has served as an economist with the Securities and Exchange Commission.

Jerold L. Zimmerman, Ph.D., is the Ronald L. Bittner Professor of Business Administration at the Simon Graduate School of Business. The author or coauthor of several books, he is a founding editor of the Journal of Accounting and Economics and has (along with coauthors Brickley and Smith) extensive corporate consulting experience.

Janice Willett is a senior manuscript editor with the Journal of Financial Economics and associate editor of the Journal of Applied Corporate Finance.

Preface

ix

Organizational Architecture: The Three-Legged Stool

1

(18)

Design Flaws

2

(5)

Organizational Architecture

7

(1)

A Question of Balance

8

(3)

Economic Darwinism: Survival of the Fittest

11

(1)

Benchmarking

12

(4)

Our Approach to Organizations

16

(3)

Maximizing Shareholder Value: Crafting a Strategy to Create and Capture Value

19

(24)

Changing Organizational Architecture to Create Value

20

(2)

Shareholder Value

22

(2)

Why Successful Managers Care about Shareholder Value

24

(1)

Creating and Capturing Value

25

(2)

How to Create Value

27

(6)

Can Firms Capture the Value They Create?

33

(3)

Strategy

36

(2)

Architectural Considerations

38

(2)

Can All Firms Create and Capture Value?

40

(3)

Knowledge and Incentives in Organizations

43

(22)

Unlocking Knowledge within Organizations

43

(1)

Converting Organizational Knowledge into Value

44

(6)

Incentives within Organizations

50

(5)

Alternative Models of Behavior

55

(4)

Which Model Should Managers Use?

59

(6)

The First Leg: Decision Authority, the Level of Empowerment, and Centralization versus Decentralization

65

(30)

From Centralization to Decentralization and Back

66

(2)

Assigning Tasks and Decision Authority

68

(2)

Centralization versus Decentralization

70

(10)

Lateral Decision Authority

80

(2)

Assigning Decision Authority to Teams

82

(5)

Decision Management and Control

87

(5)

Influence Costs

92

(3)

Decision Authority II: Bundling Task into Jobs and Jobs into Business Units

95

(28)

Reconfiguring Jobs to Boost Productivity

96

(1)

Specialized versus Broad Task Assignment

97

(6)

Forming Business Units: Function versus Product or Geography

103

(8)

Operating Environment, Strategy, and Architecture

111

(2)

Matrix Organizations

113

(4)

Recent Trends in Assignment of Decision Authority

117

(6)

The Second Leg: Performance Evaluation

123

(28)

Performance Evaluation That Works

124

(1)

The Contribution to Value

125

(3)

Setting Performance Benchmarks

128

(2)

Measurement Costs

130

(4)

Relative Performance Evaluation

134

(2)

Subjective Performance Evaluation

136

(7)

Combining Objective and Subjective Performance Measures

143

(2)

Team Performance

145

(4)

Government Regulation

149

(2)

Divisional Performance Measurement

151

(32)

Performance Measures Matter

152

(1)

Measuring Divisional Performance

153

(10)

Transfer Pricing

163

(14)

Internal Accounting and Performance Measurement

177

(6)

The Third Leg: Compensation

183

(26)

Compensation Structure Matters

184

(1)

Human Capital and the Level of Pay

185

(7)

Internal Labor Markets

192

(3)

Career Paths and Lifetime Pay

195

(6)

The Mix of Salary and Fringe Benefits

201

(8)

Incentive Compensation

209

(22)

Not All Incentive Plans Work

210

(1)

Forms of Incentive Pay

211

(2)

The Benefits of Incentive Pay

213

(3)

Reinforcing Strategic Objectives

216

(1)

Incentives from Ownership

217

(1)

Optimal Risk Sharing

218

(2)

Effective Incentive Contracts

220

(3)

Group Incentive Pay

223

(3)

An Application: Telecommuting

226

(2)

Do Incentives Work?

228

(3)

Leadership: Initiating, Motivating, and Managing Change

231

(26)

Leading the Vision

232

(2)

Leadership and Decision Making

234

(5)

Managing the Process of Change

239

(5)

Organizational Power

244

(4)

The Use of Symbols

248

(2)

Ethics and Organizational Architecture

250

(7)

The Process of Management Innovation

257

(24)

Management Innovations

258

(4)

The Risk of TQM and Other Innovations

262

(3)

Why Management Innovations Often Fail

265

(6)

Failure to Consider Other Legs of the Stool

271

(6)

Managing Changes in Architecture

277

(1)

Organizational Change Checklist

278

(3)

Sources

281

(14)

For Further Reading

295

(6)

Index

301

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Designing Organizations to Create Value: From Strategy to Structure

Summary

Author Biography

Table of Contents

Supplemental Materials