Lecture 1: Organization Matters

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Lecture 1 Organization Matters

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A few examples

• Blitzkrieg The German army in WW II (Wilson,
  1989, Chapters 1 and 2)
• General Motors vs. Ford (Milgrom and Roberts,
  Chapter 1)
• Toyota and Just in Time Production (Milgrom and
  Roberts, Chapter 1)

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Blitzkrieg May 10-June 22 1940

• May 10, 1940 German army moves through
  Luxembourg, South of Belgium and attacks France
• June 22 France capitulates, the British army
  crosses the Channel in a disastrous way
• In 6 weeks, the German army had defeated the
  combined forces of Britain, France and Belgium

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• Was the attack really sudden and unexpected?
• NO!
• Was it size or superior technology?
• Not really!
• Was it the strategy?
• Well, yes, it helped but they chose a very risky
  strategy, that could have turned against them
• But mostly it was ORGANIZATION !

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• Infiltration warfare a quick and decisive
  offensive waged by numerically inferior forces
  was essential to success
• Organization was necessary to make this tactics
  work the army had to be equipped and organized
  in such a way as to permit independent action by
  its smallest units
• Squad divided in two sections with respective
  tasks

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Selection and Incentives

• The squad had to be capable of intelligent,
  aggressive, and independent action
• Place the best soldiers in the battle
• Provide the officers freedom of action
• Provide incentives rewarding fighting prowess and
  taking risks

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Organization to Serve Strategy

• Result a flexible organization, well adapted to
  the task of getting men to fight against heavy
  odds in a confused, fluid setting far from army
  headquarters and without precisely detailed
  instructions

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Another lesson

• Know your enemy and know yourself in a hundred
  battles, you will never be defeated.
• Sun Tzu, The Art of War
• Put under the wrong hands, this can lead to major
  catastrophes, as history taught us
• Similar lessons valid in the business world

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General Motors vs. Ford

• 1921 Sloan appointed as CEO of GM
• Company in a bad shape demand for cars had
  fallen in the 1920 recession
• Major competitor Ford- had cut price and gained
  considerable market share (Model T had 55 market
  share of US market, while all brands of GM had
  only 11...)

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The Old Organization

• Many brands (Cadillac, Buick, Oakland, Olds and
  Chevrolet) competing with each other
• Organization collection of car companies and
  suppliers operating without any central direction
• No coordination for buying parts

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New Strategy

• Design different cars for different segments of
  the market
• Cadillac luxury for high income
• Chevrolet low price
• Problem combination of diversity of products and
  close coordination
• Organization had to change

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The New Organization

• Multidivisional structure
• Autonomy for day-to-day operations, but central
  office responsible for planning and coordination
  of strategy, as well as auditing and evaluating
  performance

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Result

• From 1927 to 1937, Ford lost 200m while GM
  earned over 2bn
• GMs market share grew to 45 in 1940, while
  Fords shrunk to 16
• GM had won the competitive warfor a while

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Toyota and Just-In-Time Production

• In the early 50s, small company serving the
  Japanese market, lacking capital
• Toyota decided to adapt an organization more
  suited to its need
• JIT a system designed to eliminate inventories
  from the production process
• Safeguard against disruptions, but costly

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What is JIT?

• Closer communication and tighter coordination
  between successive stages of the production
  process
• Each stage in the vertical chain had to be
  informed just in time when it had to deliver
  the product to the next stage
• Key to success to avoid any disruption in the
  process

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Needs

• Tight and intensive relationship with suppliers
• Form the workforce to maintain and repair
  machinery (improving the detection of flaws)
• Improve the flexibility of the equipment, to
  allow multiple use, allowing more product variety