Organizational Architecture

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Organizational Architecture
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• Accountancy 503
• Fall 2006
• Professor Clifton Brown

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Economic resources
People have rights to a variety of economic
resources.
They may contract with others to make specific
decisions about those economic resources.
The objective of such contracting is gains to
trade.
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Gains to trade
Assume I own an asset that I believe is worth at
least 100. That is, I wont sell this asset for
less than 100.
Assume you believe this asset is worth up to
150. That is, youd pay as much as (but no more
than) 150 to own the asset.
My reservation price?
Your reservation price?
100
150
?
Potential gain to trade 50
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Organizations
Organizations are a network of contracts to
exchange economic resources with a gains-to-trade
objective.
An agency contract
Principal
Agent
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Agency problems and costs
Agents may take advantage of their private
know-ledge to increase their own well-being at
the expense of the principals well-being.
Adverse selection
Moral hazards
Principals Control of the Agent
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Organizational control
Control Activity
Control Output
Goals, objectives, strategies and policies
Strategic Control
Planning and implementation of objectives and
strategies
Management Control
Efficient and effective performance of operating
tasks
Operational Control
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Management control
Objectives and Strategies from Strategic Control
Management Control
Assignment of Decision Rights
Design of Performance Evaluation Systems
Design of Incentive and Reward Systems
Management Activities
Decision Making Planning
Coordination Implementation
Monitoring Evaluation
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Decision rights
Viewing the firm as a collection of economic
resources and people
Economic resources embody a collection of
decision rights
What should be done with those resources?
Which economic resources should the firm hold?
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Types of decision rights
Decision management rights
Decision control rights
Decision initiation
Decision approval
Decision monitoring
Decision implementation
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Assignment of decision rights
Management is a process
That assigns decision rights over the firm's
resources to specific people within the firm
Those people are then held accountable for
outcomes that result from their use of those
resources
What is managements primary objective in
assigning decision rights over economic resources?
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Assignment of decision rights
Assigning decision rights involves designing
organizational structures and hierarchies in which
Decision management generally is separated from
decision control
The assignment of the decision rights is
collocated with the knowledge necessary to make
the decision
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Alliance Insurance Co.
Describe Alliances organizational architecture
Management Control
Assignment of Decision Rights
Design of Performance Evaluation Systems
Design of Incentive and Reward Systems
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Turn-in a case write-up
The following individuals should e-mail a
write-up of Alliance Insurance Co. to the
instructor no later than 24-hours from now
Abumansour, Mohmed Ayimadu, Daniel Balagopal,
Shanthala Chen, Yan-Lung Cicen, Ali Hong, Kee Yong
Kaskyrbekova, Aigerim Kusaka, Hiroyuki Lin,
Yao-Chen Muttayasuwan, Pongsathorn Tangka-Aree,
Siri Yang, Wen-Wen