Organization Structure, Design and Change

PGCBM-22

Professor – Dr. Gloryson ChabilSubmitted by – Group 8 members

Meghna Govil 2224276Saurabh Singhal 2224364

Sachin Suri 2224214Manoj Kumar 2224302

Ravi Pratap Singh Tomar 2224997Esha Kalia 2224236

20/11/2012

Chapter 1 – Organizations and Organization Effectiveness

Q1 – How do organizations create value? What is the role of entrepreneurship in this process?

Answer:

Organizations create value at three stages – input, conversion and output.

Inputs to an organization can comprise of raw materials, money and capital, human resources, information and knowledge etc. Outputs can be finished goods, services, dividends, salaries etc and conversion process can be machinery, computers and human skills.

The way an organization chooses and obtains from its environment the inputs it needs to produce goods and services determines how much value the organization creates at the input stage. The way the organization uses human resources and technology to transform inputs into outputs determines how much value is created at the conversion stage. The amount of value the organization creates is a function of the quality of its skills, including its ability to learn from and respond to the environment.

The result of the conversion process is an output of finished goods and services that the organization releases to its environment, where they are purchased and used by customers to satisfy their needs. The organization uses the money earned from the sale of its output to obtain new supplies of inputs, and the cycle begins again.

Each stage is affected by the organizational environment which is a set of forces and conditions that operate beyond an organization’s boundaries but affect its ability to acquire and use resources to create value.

An organization that continues to satisfy people’s needs would be able to obtain increasing amounts of resources over time and will be able to create more and more value as it adds to its stock of skills and capabilities.

A value creation model is useful in describing how organizations create value. It has 4 steps –

Organization’s Inputs

Organization obtains inputs from its environment.

Organization’s Conversion Process

Organization transforms inputs and adds value to them.

Entrepreneurship is about bringing value in by being flexibility and focusing toward customer oriented value addition in either of stage to satisfy needs and gather and use resources to meet those needs. This is how organizations are born by one or more enterprising persons who believe that they possess the necessary skill and resources to produce goods and services. Sometimes several people form a group to respond to a perceived need by creating an organization. Therefore role of entrepreneurship in value creation process is that it gives rise to organizations that, in turn, create further value as described above.

In more flexible / entrepreneurship or startup business exhibits more readiness in changes at any stage of resource utilization and / or output generation. Core focus of such organization is based on resource acquisition at all levels, but more on output stage, where customer is easily able to distinguish the superior value.

Q2 – What is the relationship among organizational theory, design, change, and organizational structure and culture?

Answer:

.Organizational structure can be defined as two broad compositions of it one is formal part of it where the skeleton of organization hierarchy , divisions the authority and task relations are presented by RACI (Responsible ,accountable , consulted and Informed) flow / charts , which are jointly committed to achieve the common , and other is the Informal part of it where set of shared values way of interactions , cross functional relations with internal and external resources are shared and directed to achieve the overall win-win situation and the common goal.

The Formal part can be classified as the Organization structure and the Informal part can be nominated as Organizational culture , Design of any organization is done in composition and balancing both the formal and informal component of it.

Organization’s Outputs

Organization releases outputs to its environment.

Organization’s Environment

Sales of outputs allow organization to obtain new supplies of inputs.

As any organization needs to change its shape and strategy to compete with dynamic forces of the external and internal environment it becomes very vital to clearly distinguish the formal and informal part of organization and the change in both results the required and most competent to maintain the progressive growth stated Mission / vision under change.

Bigger changes are observed when organization is becoming more flexible and more oriented toward specialized talent utilization.

The relationship among organizational theory and organizational structure, culture and design and change can be depicted by the following diagram

Organizational Theory

The study of how organizations function and how they affect and are affected by the environment in which they operate.

Organizational Structure

The formal system of task and authority relationships that controls how people are to cooperate and use resources to achieve the organization’s goals

Controls coordination and motivation; shapes behavior of people and the organization

Is a response to contingencies involving environment, technology and human resources

Evolves as organization grows and differentiates

Can be changed through Organizational design

Organizational Design and Change

The process by which managers select and manage various dimensions and components of organizational structure and culture so that an organization can control the activities necessary to achieve its goals

Balances the need of the organization to manage external and internal pressures so that it can survive in the long run

Allows the organization to continually redesign and transform its structure and culture to respond to a changing global environment.

Organizational Culture

The set of shared values and norms that controls organizational members’ interactions with each other and the people outside the organization

Controls coordination and motivation; shapes behavior of people and organization

Is shaped by people, ethics, and organizational structure

Evolves as organization grows and differentiates

Can be managed and changed through the process of organizational design

Q3 – What is organizational effectiveness? Discuss three approaches to evaluating effectiveness and the problems associated with each approach.

Answer:

Organizational effectiveness is the concept of how effective an organization is in achieving the

Outcomes it intends to produce. An organization is said to be effective if it can

1. Secure scarce and valued skills and resources from outside the organization (external resource approach)

2. Coordinate resources with employee skills creatively to innovate products and adapt to changing customer needs(internal systems approach)

3. Convert skills and resources efficiently into finished goods and services (technical approach).

Control, Innovation and Efficiency are the 3 important processes to measure organizational effectiveness.

Control means having control over the external environment and having the ability to attract customers and resources.

Innovation means developing an organization’s skills and abilities so the organization can discover new products and processes. It also means designing and creating new organizational structures and cultures that enhance a company’s ability to change, adapt, and improve the way it functions.

Efficiency means developing modern production facilities using new information technologies that can produce and distribute a company’s products in a timely and cost-effective manner.

There are 3 approaches to measuring organizational effectiveness:-

1. External resource approach – Evaluates the organization’s ability to secure, manage, and control scarce and valued skills and resources.Problems –

a) Taking a strictly external resource approach could lead to too much focus on stock price and market share, and lead to inefficiencies and missed market opportunities that would have been discovered using a technical or internal systems approach.

b) In many not-for-profit organizations it is hard to measure output goals or internal efficiency.

c) In a fast changing organizational environment, companies have to focus closely on customers and decide how best to meet their changing needs.

2. Internal Systems approach – Evaluates the organization’s ability to innovate and function quickly and responsively.Problems –

a) In inflexible organizations, with a long decision making process and long length of time to market a product can lead to internal conflicts and the organization’s effectiveness is reduced if measured using this approach.

b) No improvements to internal systems that influence employee coordination or motivation can have a direct impact on an organization’s ability to respond to its environment.

3. Technical approach – Evaluates the organization’s ability to convert skills and resources into goods and services efficiently.Problems –

a) Reduced product qualityb) Lot of defects in the productc) High production costsd) Poor customer service

e) High delivery time to customerf) Involvement of more Non value added works then value added

works.g) Lack of technology renewal / advancement.

Chapter 02

Chapter 2 - Question 1

Draw a stakeholder map that identifies your organization’s major stakeholder groups. What kind of conflicts between its stakeholder groups would you expect to occur the most?

Answer:

The stakeholder’s at American Express can be classified into two main groups: Inside Stakeholders and Outside Stakeholders.

Map of Inside Stakeholders at AMEX

Map of Outside Stakeholders at AMEX

The conflicts can possibly occur within the inside stake holders group and outside stakeholder groups and also between various groups between the inside the and outside stakeholder groups.

There could be various reasons and sources of conflict in any organization. However the most likely conflicts occur where the business, organizational, personal goals of groups and or individuals are conflicting in nature. The following examples below further illustrate the point about conflicts between different groups.

1. There is always conflict expected between the customers and the company as a whole. In this particular case, the expectations of the customers are always high and keep on increasing even if the previous expectations are met.

Customers Vendors/Suppliers Channel Partners Corporate Partners

Government

Educational Institutions

Auditors Various Communities

Employee Families

Shareholders Business Units Management Team

Local/Global Operations

Employees

Board of Directors

2. There is possibly tremendous amount of conflict between the Board of Directors and the Management team. The board of director’s alwys expects the best performance from the company management executives in terms of financial results, increase in share holder values, branding and employee motivation etc. The management team always tries to deliver the best against the promises and business goals however sometimes the results are not as per the expectations which creates conflicts.

3. There are often conflicts between the management team/managers and the vendors and suppliers of the company. One reason of the conflict is the perceived quality of products and services delivered by vendors and suppliers to the company. Other source of conflict is commercial in nature due to pricing and payment terms and timely release of payments.

Q3 - What is the agency problem? What steps can be taken to solve it?

Ans- When Shareholders(Principal) appoints Top management (agency) and delegates its power to using, control and monitor the resources effectively and efficiently . The Shareholders expect the top management being expert would help them to maximize its wealth. But sometimes top management has its own goals and interest which may not be in line with shareholders goal and interest. Shareholder through Board of directors judges the actions and its effectiveness of Top management. But many a times , the important information are not made available to Board of Directors and thus actions and decisions of top management on overall operation , health and wealth of company is unkown to Shareholders . In order to avoid such kind of situation, a proper managerial accountability of top management needs to be decided while delegating the authority. This is known as Agency Problem

The Agency problem can be overcome by using governance mechanism or forms of control that align the interest of principal and agent so that both parties have the incentive to work together to maximis the organization effectiveness.

Few such governance mechanism are:-

1. Stock based Compensation schemes :- One way of aligning the agent interest is to award them contingent on their outcomes of their decision that results in improvement in organizational performance. The top management is given large stock as a part of their remuneration. If company does well , then the value of stock options and monetary compensation is much enhanced. This helps in aligning the agent goal to organizational gaol.

2. Promotion Tournaments an career Paths :- The board Of directors has the power of promoting the managers to rise to CEO and its demoting too. This spreads a competition among the managers to work within organizational interest

Chapter 03

Draw a chart of your organization's domain. List the organization's products and customers and the forces in the specific and general environments that have an effect on it. Which are the most important forces that the organization has to deal with?

(For answering this Keeping ABB as Organization, but for Ques 3 we are answering keeping Amex as company, for which Mr. Susanta)

2) ABB Summary

ABB (www.abb.com) is a leader in power and automation technologies that enable utility and industry customers to improve performance while lowering environmental impact. The ABB Group of companies operates in around 100 countries and employs about 145,000 people.

History :

The history of ABB goes back to the late nineteenth century, and is a long and illustrious record of innovation and technological leadership in many industries.

Having helped countries all over the world to build, develop and maintain their infrastructures, ABB has in recent years gone over from large-scale solutions to alternative energy and the advanced products and technologies in power and automation that constitute its Industrial IT offering.

As Introduced ABB is Technological Driven Company, where technology and operational excellence is the key growth factors, the spread is very wide in terms of product / service offerings, geographical presence and human resources, organization is resourceful and continuously investing in R&D as well as changing dynamics of customer demand and competitiveness hence if we try to classify in corporate matrix it can be:-

General And Specific forces:-

ABB is a conglomerate of power and automation products and services, having various industries and government utilities to serve (Customers), shareholders. channel partners , technology partner , suppliers / vendors for which Marketing , sales, business development, Engineering , supply chain , logistics , operational excellence , project planning are the vital governing forces which are giving the momentum of growth in dynamic situations.

Broadly Specific Forces are :-

Technology, Supply chain, logistics, planning and Operational excellence.

General Forces are:-

Shareholders, power and automation policy makers, planning commissioning of individual territory, competitors and vendors / channel partners.

Uncertainty Environment:-

Since company has wide reach since 100 + years hence reputation is well established. And the policy of creating channel partners with long-term contracts for critical / high value items are done. Company is growing from one small manufacturing in 1859 to more than 109,

Mergers, take overs and Joint Ventures.

As mentioned above company is more formal and professional in mitigating the risk and keeping individuality by inventing and exceling in planning and operational which indicates more sustainable and stable growth.

Organization chart :-

ABB :-

Technology Core Team :-

Business Division and Busines unit Verticals :-

Functional and Administrative classifications:-

Q2. Analyze the effect of the forces on the complexity, dynamism and rich ness of the environment. From this analysis, how would you characterize the level of uncertainty in your organization’s environment?

A. The Company we are discussing is American Express, a global financial Giant which is operating in multiple continents offering a range of Financial Products for the Premium segment of customer. Let’s understand the environment of American Express;

The Organizational Environment: American Express primarily deals in financial products like Credit Cards, Travel and Traveler’s checks and offers service like Risk Management to other Companies.

American Express has established itself as a Premium brand by offering premium services only to the premium Customers in the segment. American Express associates itself to the high earning high spending segment of the society and offers premium value to its customers. It operates in a Niche Environment as far as its Credit Card products are concerned. This enable American Express to generate a high revenue through lesser but high value transactions compared to the competitors like Visa and Mastercard who offer free credit cards to who so ever is willing to have it. The Target market for American Express is high value customers and it charges a fee to offer the brand product and services.

For its travel business American Express targets the Corporates where people travel on business frequently and require travel arrangements to be made. This helps American Express to capture a large number of corporate clients who have huge annual budgets for International Travel.

The Specific Environment: American Express is an American Company and has always maintained a Niche market for itself, targeting only the premium customers. Now it wants to penetrate deeper into the market however is facing a lot of challenges. Because of the “premium” tag and therefore the associated fee that American Express charges from its Merchants (Discount Rate on every Credit Card Transaction) the Acceptance of American Express is low compared to its competitors, which means the Merchants Prefer other cards over American Express, due to which a considerable volume of revenue goes to the competitors. Till now American Express used to get a huge revenue through 5 star hotels where international travelers generally stay, however since it wants to penetrate into the Indian market, it is critical for American Express to increase its acceptance.

The General Environment: American Express is primarily an American Company with global footprint is riding the wave of Outsourcing. Lately all companies have been impacted by rising costs, high interest rates and exchange rates and all companies want to expand their portfolio by reaching out to other markets and expanding their customer base. While most of the cpmpanies start to outsource most of their back office operations American Express is opening its own business centers across the globe. This helps American Express to maintain substantial control yet gives the benefit of lower costs of operations. Due to the increasing costs American Express is shifting a huge volume of Customer Servicing operations other centers across the globe. This helps American Express in considerable reduction of operating costs since the centers in India, Kuala Lumpur and Philippines etc one third the cost compared to United States and one fourth the cost compared to UK and Australia.

The Level of Uncertainty in American Express’s Environment: American Express is large organization and is focused on growth and increases its footprint. At the same time it wants to lower its costs as well. Therefore it is continuously on the lookout of newer markets for growth and destinations to set up centers from where it can service its customers at a lower cost. At present India is a huge market which offers growth potential as well low cost of operations, however if the company gets the same quality of service at a yet lower cost in some other country then American Express would need to consider shifting to that part of the world.

With continuous change in environment American Express has to be ready to embrace change, With more companies coming in there is a certain threat of Attrition of good resources to Competitors, which means American Express has to keep on investing in training and retaining its workforce.

Chapter 3 Quest 3:

Draw a chart of the main inter organizational linkage mechanisms (e.g. long-term contracts, strategic alliances, mergers) that your organization uses to manage its symbiotic resource interdependencies. Using resource dependence theory and transaction cost theory, discuss why the organization chose to manage its interdependencies in this way. Do you think the

organization has selected the most appropriate linkage mechanisms? Why or why not?

American Express is well known as organization serving in to multinational financial services. As evolution of organization was in 1850 in US and which has spreader its presence across the globe. This growth was Impossible without collective mechanism of Multi-cultural and multifunctional organization linkages with various terms and its melodies, depending upon business environment, general and specific forces , opportunities, geographical locations and local and global economies.

Core competency of American Express is in to Credit cards, Charge cards and traveler`s cheques. Emex it has been a deliberate part of DOW 30 since year 1896, company has always recognized as “Heavy Industry” and the service is financing and has been growing with growth of lenders from it hence company has identified the potential and growing company information and linkages to offer.

As described below , at times and demand Amex has been taking vital decisions of Purchasing, meregers, Joint ventures , co-options, networking, and reputation building things, With the below histogram (Sourced from Web and Amex Informations) ,one can clearly observe that Amex had taken more flexible methodology and to expand in all dimensions with keeping all general and specific market forces which is helping Amex to still survive after 162 Years of existence and continuous growth.

The only part we found can be improved upon is Networking , since in more financial transection this firm is more possibilities of growth are open to be claimed.as company in general is very open and having wide offerings in their sector, External Networking (to be précised) is more valuable to American Express to grow up in market.

Since American Express is into financial service provider hence Purchase and merger has much larger Impact than going in to alliance strategy, since they are cash rich company.

Let’s have a brief on Policies American Express has adopted:-

A . Mergers and Acquisitions:-

American Express extended its presence nationwide by arranging affiliations with other express companies (including Wells Fargo – the replacement for the two former companies that merged to form American Express), railroads, and steamship companies.

Railroad express businessDuring the winter of 1917, the US suffered a severe coal shortage and on December 26 President Woodrow Wilson commandeered the railroads on behalf of the US government to move US troops, their supplies, and coal. This ended American Express's express business, and removed them from the ICC’s interest. The result was that a new company called the American Railway Express Agency formed in July 1918. The new entity took custody of all the pooled equipment and property of existing express companies (the largest share of which, 40%, came from American Express, who had owned the rights to the express business over 71,280 miles (114,710 km) of railroad lines, and had 10,000 offices, with over 30,000 employees)

Investment banking

As a major focus change in 1980s, A remarkable effort to become a financial services super company and made a number of acquisitions to create an investment banking arm. In mid-1981 it purchased Sanford I. Weill's Shearson Loeb Rhoades, the second largest securities firm in the United States to form Shearson/American Express.

In 1984, American Express acquired the investment banking and trading firm, Lehman Brothers, Kuhn Loeb, and added it to the Shearson family, creating Shearson Lehman/American Express.

In 1984 Shearson/American Express purchased the 90-year-old Investors Diversified Services, bringing with it a fleet of financial advisors and investment products. In 1988, Shearson Lehman acquired E.F. Hutton & Co., a brokerage firm founded in 1904, this was merged with the investment banking business and the investment banking arm was renamed Shearson Lehman Hutton, Inc. [16]

American Express in 1993, American Express decided to get out of the investment banking business and negotiated the sale of Shearson's retail

brokerage and asset management business to Primerica. The Shearson business was merged with Primerica's Smith Barney to create Smith Barney Shearson. Ultimately, the Shearson name was dropped in 1994.]

In 1994, American Express spun off of the remaining investment banking and institutional businesses as Lehman Brothers Holdings Inc which after almost fifteen years of independence would file for bankruptcy protection in 2008 as part of the Late-2000s financial crisis.

B. Sunning of subsidiaries:-

Charge card services

In April 1992, American Express spun off its subsidiary, First Data Corp . , in an IPO. Then, in October 1996, the company distributed the remaining majority of its holdings in First Data Corp., reducing its ownership to less than 5%.

C .Strategic alliance:-

American Express believes in earning by making people spend on money transections and keeping media as Emex , hence it was needed to have border channelization in to organizations , where buyers and sellers are meeting at one point and rotating the funds.

"Boston Fee Party"

From early 1980s until the early 1990s, American Express was known for cutting its merchant fees (also known as a "discount rate") to merchants and restaurants if they accepted only American Express and no other credit or charge cards. This prompted competitors such as Visa and MasterCard to cry foul for a while as the tactics "locked" restaurants into American Express. The scheme ended in 1991, as several restaurants in Boston started accepting and encouraging the use of Visa and MasterCard because of their far lower fees as compared to American Express' fees at the time (which were about 4% for each transaction versus around 1.2% at the time for Visa and MasterCard). A few even stopped accepting American Express credit and charge cards. The revolt, known as the "Boston Fee Party" (in reference to the Boston Tea Party), was orchestrated by a PR firm hired and paid by Discover Card. The campaign spread to over 250 restaurants across the United States, including restaurants in other cities such as New York City, Chicago, and Los Angeles. In response, American Express reduced its discount rate gradually to compete more effectively and add new merchants such as supermarkets and drugstores to its network. Many elements of the exclusive acceptance program were also phased out so American Express

could effectively encourage businesses to add American Express cards to their existing list of payment options.

Cable TV

American Express formed a joint venture with Warner Communications in 1979 called Warner-Amex Satellite Entertainment, which created MTV, Nickelodeon, and The Movie Channel . The partnership only lasted until 1984. The properties were sold to Viacom soon after.

D . Reputation and Co optation:-

Cobranding :

American Express has several co-branded credit cards, with most falling into one of three categories:

Airlines: e.g., Air Canada, Air France, Alitalia, British Airways, Cathay Pacific, Delta Air Lines, JetBlue Airways, Qantas, Singapore Airlines, Virgin Atlantic, among others.

Hotels: e.g., Hilton Hotels. Starwood Hotels & Resorts Worldwide

Retailers: e.g., Costco, David Jones, Holt Renfrew, Harrods, Macys, Bloomingdales, Lowes, Mercedes Benz, and others.

In 2006, the UK division of American Express joined the Product Red coalition and began to issue a Red Card. With each card member purchase the company contributes to good causes through The Global Fund to Fight AIDS, Tuberculosis and Malaria to help African women and children suffering from HIV/AIDS, malaria, and other diseases.