Organizational Structures and Decision-Making in Businesses

Institutional Unit 5: Forms of Organizations

Six Models of Organizations

Organizations can be categorized based on whether momentous decisions are restricted to holders of the residual claim.

First Category: Decision-Making Concentrated in Ownership

In this category, owners do not delegate decisions to others, thus minimizing control costs. Property is not separated, and a single person or a small group bears the consequences of their decisions. This structure mitigates the agency problem or issues with common assets.

A) Sole Proprietorship

A single individual owns and operates the business.

Disadvantages:

• Limited investment horizon
• Lack of diversification

B) Partnerships

Several individuals, known as partners, share ownership and decision-making. This structure reduces individual risk and allows for greater input. However, membership is typically restricted by statutes. This can introduce the phenomenon of the "common resource" problem, potentially increasing shirking.

C) Closed Corporations

Ownership is limited to a small group of individuals, often with close relationships, such as family members. Owner-managers are common, but the agency problem may increase as the business grows. This structure can exacerbate the "common property" issue, particularly in family businesses.

Second Category: Decision-Making Delegated Beyond Ownership

In this category, decision-making is not restricted to the holders of the residual claim.

A) Open Corporations

Open corporations are the predominant form for large-scale production. They have publicly traded shares (limited liability companies). The market exerts control over managers. This structure eliminates constraints on equity capital and facilitates diversification but increases the potential for conflicts of interest.

B) Mutual Funds

Mutual funds are created to meet the needs of individuals and organizations seeking mutual benefits. The residual claimants are typically the recipients of the products or services offered. Professional managers are often employed to lead these organizations.

C) Cooperatives

Cooperatives are social solidarity enterprises formed by groups of individuals or organizations. Control is exercised by the workers themselves through the cooperative's governing bodies, adhering to cooperative principles. They have internal regulations governing agency relationships.

D) Non-Profit Organizations

Non-profit organizations aim to develop activities for the benefit of their associates or to provide services to other groups (e.g., NGOs, trade unions, neighborhood associations). Control problems can arise between those who finance the organization and those who direct it.

Organizational Design Unit

Organizational design is a management process that crystallizes in the organizational structure. It encompasses essential aspects of the production team, including:

• Division of labor
• Formation of units
• Definition of the framework of authority and decision-making

Formal and Informal Structures

The organizational structure comprises both formal (permanent aspects) and informal structures. Together, these form the real structure of the organization.

Organizational Design Decisions

These decisions define tasks, create procedures, and allocate resources. They involve three key aspects:

A) Differentiation

The degree to which tasks are broken down and organizational units are created. Differentiation can be:

• Vertical
• Horizontal
• Spatial

B) Formation

(Further details on formation are needed in the original text)

C) Centralization

(Further details on centralization are needed in the original text)