Lecture 1


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Lecture 1

  1. 1. Lecture 1: Organization Matters
  2. 2. A few examples <ul><li>Blitzkrieg: The German army in WW II (Wilson, 1989, Chapters 1 and 2) </li></ul><ul><li>General Motors vs. Ford (Milgrom and Roberts, Chapter 1) </li></ul><ul><li>Toyota and Just in Time Production (Milgrom and Roberts, Chapter 1) </li></ul>
  3. 3. Blitzkrieg: May 10-June 22 1940 <ul><li>May 10, 1940: German army moves through Luxembourg, South of Belgium and attacks France </li></ul><ul><li>June 22: France capitulates, the British army crosses the Channel in a disastrous way </li></ul><ul><li>In 6 weeks, the German army had defeated the combined forces of Britain, France and Belgium </li></ul>
  4. 4. <ul><li>Was the attack really sudden and unexpected? </li></ul><ul><li>NO! </li></ul><ul><li>Was it size or superior technology? </li></ul><ul><li>Not really! </li></ul><ul><li>Was it the strategy? </li></ul><ul><li>Well, yes, it helped; but they chose a very risky strategy, that could have turned against them </li></ul><ul><li>But mostly… it was ORGANIZATION ! </li></ul>
  5. 5. <ul><li>Infiltration warfare: “a quick and decisive offensive waged by numerically inferior forces was essential to success” </li></ul><ul><li>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” </li></ul><ul><li>Squad divided in two sections with respective tasks </li></ul>
  6. 6. Selection and Incentives <ul><li>The squad had to be capable of intelligent, aggressive, and independent action: </li></ul><ul><ul><ul><li>Place the best soldiers in the battle </li></ul></ul></ul><ul><ul><ul><li>Provide the officers freedom of action </li></ul></ul></ul><ul><ul><ul><li>Provide incentives rewarding fighting prowess and taking risks </li></ul></ul></ul>
  7. 7. Organization to Serve Strategy <ul><li>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” </li></ul>
  8. 8. Another lesson <ul><li>“ Know your enemy and know yourself; in a hundred battles, you will never be defeated. “ </li></ul><ul><li>Sun Tzu, The Art of War </li></ul><ul><li>Put under the wrong hands, this can lead to major catastrophes, as history taught us… </li></ul><ul><li>Similar lessons valid in the business world… </li></ul>
  9. 9. General Motors vs. Ford <ul><li>1921: Sloan appointed as CEO of GM </li></ul><ul><li>Company in a bad shape: demand for cars had fallen in the 1920 recession </li></ul><ul><li>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%...) </li></ul>
  10. 10. The Old Organization <ul><li>Many brands (Cadillac, Buick, Oakland, Olds and Chevrolet) competing with each other </li></ul><ul><li>Organization: collection of car companies and suppliers operating without any central direction </li></ul><ul><li>No coordination for buying parts </li></ul>
  11. 11. New Strategy <ul><li>Design different cars for different segments of the market: </li></ul><ul><ul><li>Cadillac: luxury for high income </li></ul></ul><ul><ul><li>Chevrolet: low price </li></ul></ul><ul><li>Problem: combination of diversity of products and close coordination </li></ul><ul><li>Organization had to change… </li></ul>
  12. 12. The New Organization <ul><li>Multidivisional structure </li></ul><ul><li>Autonomy for day-to-day operations, but central office responsible for planning and coordination of strategy, as well as auditing and evaluating performance </li></ul>
  13. 13. Result <ul><li>From 1927 to 1937, Ford lost $200m while GM earned over $2bn </li></ul><ul><li>GM’s market share grew to 45% in 1940, while Ford’s shrunk to 16% </li></ul><ul><li>GM had won the competitive war…for a while </li></ul>
  14. 14. Toyota and Just-In-Time Production <ul><li>In the early 50s, small company serving the Japanese market, lacking capital </li></ul><ul><li>Toyota decided to adapt an organization more suited to its need </li></ul><ul><li>JIT: a system designed to eliminate inventories from the production process </li></ul><ul><li>Safeguard against disruptions, but costly </li></ul>
  15. 15. What is JIT? <ul><li>Closer communication and tighter coordination between successive stages of the production process </li></ul><ul><li>Each stage in the vertical chain had to be informed “just in time” when it had to deliver the product to the next stage </li></ul><ul><li>Key to success: to avoid any disruption in the process </li></ul>
  16. 16. Needs <ul><li>Tight and intensive relationship with suppliers </li></ul><ul><li>Form the workforce to maintain and repair machinery (improving the detection of flaws) </li></ul><ul><li>Improve the flexibility of the equipment, to allow multiple use, allowing more product variety </li></ul>