4  Organisational architecture and decision making

The knowledge problem and absence of direct incentives in a firm create a challenge for firm design. Firms need to maximise the likelihood that a decision maker has:

This means that firms must trade-off:

They do this through:

4.1 Centralisation versus decentralisation

The question of how to assign decision rights is largely a question of centralisation versus decentralisation.

The benefits decentralisation include:

  • Effective use of local knowledge: Local managers are more likely to possess local knowledge to inform their decisions. They are able to make the decisions without the costs of information transfer to a more decentralised decision maker.
  • Preserve management time: Decentralised decision making preserves management time for more important decisions. Each decision that is centralised consumes time that cannot be used for other (more important, strategic) decisions. Decentralised decision making also speeds decisions in that the local manager does not have to wait for the decision to be processed and handed down.
  • Develop management skills: Firms need to attract talent and train them as eventual replacements for senior management.
  • Motivate managers: The power to make decisions provides an increased level of commitment to their work.

This, however, obviously comes with some costs:

  • Incentives: Local managers do not always have strong incentives to maximise the firm’s value. Developing control systems is not easy and can be expensive. Identifying the contribution of a local manager to a firm is not easy. The incentive problem extends to development of employees under a local manager if the manager perceives their subordinate as threatening.
  • Coordination costs and failures: When people are making independent decisions, they may ignore interaction effects. For example, if managers in each city can set prices, they might shift purchasing from one city to another.
  • Less effective use of central knowledge: Local managers do not necessarily have all of the information they need to make good decisions. Central decision makers can observe across multiple locations and subordinate decision makers through time.
  • Loss of economies of scale: Centralised decision making can have economies of scale. An example might be advertising across many markets, or centralised purchasing of a product.

4.1.1 An experiment at Google

David Garvin (2013) describes an experiment at Google :

Since the early days of Google, people throughout the company have questioned the value of managers. That skepticism stems from a highly technocratic culture. As one software engineer, Eric Flatt, puts it, “We are a company built by engineers for engineers.” And most engineers, not just those at Google, want to spend their time designing and debugging, not communicating with bosses or supervising other workers’ progress. In their hearts they’ve long believed that management is more destructive than beneficial, a distraction from “real work” and tangible, goal-directed tasks.

A few years into the company’s life, founders Larry Page and Sergey Brin actually wondered whether Google needed any managers at all. In 2002 they experimented with a completely flat organization, eliminating engineering managers in an effort to break down barriers to rapid idea development and to replicate the collegial environment they’d enjoyed in graduate school. That experiment lasted only a few months: They relented when too many people went directly to Page with questions about expense reports, interpersonal conflicts, and other nitty-gritty issues. And as the company grew, the founders soon realized that managers contributed in many other, important ways—for instance, by communicating strategy, helping employees prioritize projects, facilitating collaboration, supporting career development, and ensuring that processes and systems aligned with company goals.