MANAGEMENT 1ST PARTIAL – Rodolfo Passeri BIEF 22 – Prof.

Misani

AN INTRODUCTION TO ECONOMIC ACTIVITY (Airoldi 1.1)

MANAGEMNT: A range of decisions associated with the acquisition, allocation, and integration of
resources (human, physical, financial, etc.) required to perform a certain economic activity

INTRODUCTION
People aspire to a variety of goals, the pursuit of these gives rise to needs. This needs are satisfied
trough economic activity (producing and consuming goods).
A large part of economic activity takes place in social bodies such as firms, families and PA and is
carried out from individuals for individuals.

NEEDS AND GOODS

Economic activity is carried out in order to satisfy needs, a necessity of a good which can be a
product or a service, essential to one aim in life born from a dissatisfaction owing to the lack of
something.
Needs are divided into two categories:
• Natural needs: product of human biology (food, shelter, sleep) and are universal, shared by
everyone
• Social needs: wide range of social, religious, aesthetic and ethical needs.

Both categories of needs can be classified into:

• Essential or primary needs.
• Non-essential or secondary needs. This can be influenced trough targeted communication
Generally people satisfy at first the primary needs and then, depending on their incomes,
secondary needs.
The theory of needs is essential to gather knowledge about peoples needs and understand the
choice people make.
Needs are highly dynamic: new needs and new goods have a reciprocal influence on one another.
There are two large categories of goods:
• Economic goods: goods and services that are scarce with respect to people’s demand.
• Free goods: goods that are unlimited in supply
MASLOW’S HIERARCHY OF NEEDS
Maslow was the father of the humanistic psychology, very
optimistic, believed in happiness.
The pyramid shows the relationship between different
human needs.
There are certain level of needs, you can satisfy a need of
a certain level only if you have already satisfied the
previous one.
This model has many application in marketing and
economics in general—you cannot sell the same
products to all countries because people stands at
different levels of the pyramid.
KEY CATEGORIZATION OF GOODS
1. Complementary goods: goods that usually are combined, you need both to satisfy need.
2. Substitute goods
3. Differentiable goods: unique product for some features
4. No differentiable goods: commodities
5. Consumer goods: goods used directly by people
6. Industrial goods: goods used to product other goods
7. Goods for individual consumption (private goods)
8. Goods for collective consumption (public goods)
All goods can be disposable or durable.

PRODUCTION AND CONSUMPTION

Economic activity involves processes of production and consumption of economic goods. Producing
of course involves several technical transformation. The whole process happens within various
organizations not economically isolated one another. Along with activities, all organization take
part to transactions which can involve other goods or financial resources.
Summarizing: economic activity involving production and consumption can be broken down into
various processes:
1. Technical transformation (physical, spatial, logical)
2. Transactions (link between organizations, need them to buy input from suppliers and sell
output to customers)
3. Institutional structure design (founding and giving shape to the organization), organization and
HR management and accounting.
PS: not all companies produce goods and services such as credit institutions. Their activity consist in
transactions involving goods, credit ext.
Economic production, for what regards firms, is not the purpose of the firms but only the
characteristic function while the purpose is producing revenues for workers and shareholders.

PRODUCTION FACTORS
Economic production activity is undertaken by combining certain factors:
1. Raw materials
2. Buildings and equipment
3. Land
4. Public goods
5. Free goods
Labour and equity capital (or risk capital, originated by savings) are called primary production
factors. Both are provided by people which should be in charge of govern it.
WHY FIRMS EXIST, ORGANIZATION AND ECONOMIC SPECIALIZATION (Airoldi 2)

2.1 ORGANIZATION, FAMILIES AND ECONOMIC ACTIVITY

2.1.1 – HUMAN SOCIETY, THE COMMON GOOD, INSTITUTIONS AND ORGANIZATIONS

Myriad social groups merge to form society. Every individual takes part in several social bodies at
the same time. This social bodies take on various forms such as families, firms, civil and political
bodies like the State and its various branches (PA ext.), international communities, religious
organization and associations operating in different fields.

People have a natural inclination to join social entities

• to achieve results that cannot be attained with individual resources
• to fulfill the need of relationship

Every social body strives for a common good (outcome of the cooperation). In economic terms,
coordinated actions in organizations give raise to:
• Organizational rent: the product of intelligent cooperation among several people who are
pursuing the same goal. Therefore the rent generates economic advantages .
• Residual result.

Life in human society is typified by the emergence and evolution of various types of institutions
codified in laws and norms, dynamically connected with the society.
Social bodies can be divided into two big groups:
• Families which are natural social bodies
• Organizations, communities which purpose is to reach specific goals, with a formalized set of
rules of conduct
PS: institutionalization: process through which certain rules and models come into common use and
are standardized

2.1.2 – ORGANIZATIONS, FAMILIES AND ECONOMIC ACTIVITY

Economic activity mainly takes place in organizations and families, and in the relationship among
them. Economic activity is vital for 4 main types of social bodies:
• Families, which goal is to satisfy the needs of the family members
• Firms, which aim is producing rewards for employee and shareholders
• State and PA, that aims to produce public goods as well as generating rewards for employee
• Nonprofit organizations, that usually have a various combination of goals.

2.1.3 – FAMILIES

The family is the basic social entity in society, it’s prevailing purpose it’s social, ethical and religious
while it’s social goals are procreate, and raise, and educate and help the other members of the
family and human beings in general. The family is also an economic unity since it carries out
economic activity to fulfill the needs of its members. To do this, families must draw on some
forms of income through external work in firms, in the PA or by self-employment. The quality
and quantity of the consumption depends on how big the income is. Moreover, the younger
 members of a family study and this impact the future economy of the family. A family can be in
relationship with other families who share some common assets.

2.1.4 – FIRMS

A firm is a social-economic organization (and therefore a social body) with predominantly economic
aims. It’s primarily and organization for the production of private economic goods that aims to
produce monetary reward for its shareholders and employee (in the form of salaries or
dividends). Firms achieve their goal implementing differentiated economic processes that
involving physical transformations and exchange (purchase and sale) of goods (primary
economic goal).
The relationship inside the firm and between different firms in the society are not only economic.

2.1.5 – STATE AND PUBLIC ADMINISTRATION

Families and other social bodies together make up national political communities. The state is a
political social and economic system that pursuits the common good of a nation and also
promotes the moral and social progress of the international community.
It’s divided into various administrative branches. One of this is the PA. In the PA priority is given to
economic processes involving the production of public goods and their consumption: the
citizens consume public goods and pay tariffs, taxes or duties for their consumption.
The primary economic goal of public administration are:
1. Satisfy needs of people who belong to the community through the production and
consumption of goods
2. To reward employees
The core economic interest are represented by the members of the community while the non core
one are suppliers and financial means.

2.1.6 - NON PROFIT ORGANIZATIONS

An organization qualifies as a nonprofit because it’s private, and it’s not allowed to distribute
earnings or assets among the shareholders. A wide range of organizations are classified as
nonprofit but their differ for various aspects such as the economic activity the carry out.
Generally the aims of this organization center on social, moral and cultural concerns.
In the case of nonprofit, can happen that those who pay for producing goods and services are
different from those who use them such as for the Hospitals.
The primary economic goal is to satisfy the needs of certain groups of people.
Process commonly undertaken in nonprofits include producing goal and collecting private
contribution ore volunteer to carry out the activities.
SUMMARY
FAMILIES FIRMS STATE&PA NONPROFIT
FUNDAMENTAL Social, ethical, religious economic Social and moral Social, moral,
PURPOSES cultural
PRIMARY ECONOMIC Fulfilling family needs Producing monetary Produce and Fulfill needs of
GOAL reward for consume public members of
stakeholders goods a certain
community
or status
CORE STAKEHOLDERS All family members Employee and Members of the Mixed members
shareholders community
MAIN NON-CORE Other families Suppliers, clients, Suppliers, capital Suppliers, capital
STAKEHOLDERS capital provider provider
provider
TYPICAL ECONOMIC Consumption, asset Transaction of Production and Production of
PROCESSES management, goods, credit consumption of goods
work and study transactions public goods,
tax collection

2.1.7 – ALTERNATIVE ECONOMIC MODELS

• The self consumption model: made exclusively of basic groups of people, all production and
consumption of goods takes place within this groups which are then essentially autonomous to
other similar groups
• The atomistic market model: here there are only individuals who perform their specialized
work independently (not in firms). Individual work is coordinated by market mechanisms
• The absolute hierarchy model: the state plans economic activity and no independent firms
exist, there are just operatives units that execute the order coming from the State (socialist
economies)
• The plurality of specialized organizations model: the social and economic system is made up of
many social entities performing different activities. Within firms, behavior is established by a
central corporate body and each individual must conform to it. The relationship among firms
are regulated basically by the market

2.2 – ECONOMIC SPECIALIZATION

2.1.1 – THE THREE LEVES OF SPECIALIZATION

One of the main aspects of modern economy is specialization. We can identify three different levels
of specialization:
• Specialization by micro classes: for instance, firm produce private goods, families mostly
consume goods, the State produced and consumes goods.
• Specialization within each micro classes: For instance one single firm doesn’t produce all the
goods required but it specializes in the production of specific goods targeting a certain number
of clients
• Specialization within single organizations: various organizational units and individuals perform
specific task, tapping into special skills and resources.
2.2.2 – SPECIALIZATION ECONOMIES

There are clear advantages inherent to specialization economies: activities take place with more
speed and efficiency, with less efforts and with higher quality results. Basically they derive from
the following circumstances:
• Learning process: the result of repeating the same activity leads to developing manual
dexterity, discovering more efficient ways to perform the activity in question, creating an
inventory of problematic situations and their solutions, the result being that less time and
energy is spent on decision making and problem solving.
• The limitations and non-uniform distribution of individual skills: Some skills are very complex
and require unique individual talents. In this case different division of labor produce different
results. Here, interpersonal differences give raise to specialization economies.
• Technical and managerial orientation: someone is particularly skilled at manual work and
therefore will perform a technical work while whose better at managing people will perhaps
manage people.
• Setting/set up costs: if the same person has to handle more than one phase of a given
production process loses time when he has to shift from one task to another and re-focused on
the new situation. The outcomes of this are called setting/set-up costs.
o If you adopt an unspecialized solution workers have to shift continuously making
setting costs high
o If you adopt a specialized solution workers perform always the same task therefore
setting cost are reduce (non eliminated)
• Facilities and equipment: Specialized facilities and equipment have the same benefits as
specialized work. They also combine well with specialized work as specialized workers may be
required to run them.
• Job identification and motivation: A high degree of labor specialization can impact individual
motivation in a positive way. Very specialized people tend to identify with their job and enjoy a
sense of command over their work situation, feeling to be irreplaceable.

2.2.3 – DISADVANTAGES OF SPECIALIZATION

Specialization can also result in disadvantages, therefore the optimal degree of specialization can
be found by striking a balance between pros and cons. This are the cons:
• Cost of coordination: the greater the degree of specialization, the greater the number of
interfaces to manage between the various actors who carry out economic activity. If the
activity in question is complex, the correlation between contribution and reward is difficult to
establish and someone can take an opportunistic behavior. All this coordination problems
generate two types of costs:
o The cost of implementing coordination tools
o The cost of residual dysfunctionalities
• Cost of rigidity and specific investments: Typically, extremely specialized people and facilities
are inflexible and therefore when a certain activity needs to be modified, the times and cost of
change could be very high.
• Demotivation: job specialization can impact demotivation also in a negative way. When
specialization lead to assigning very isolated, simple and repetitive tasks, the effect is negative.
2.2.4 – 2.2.5 – GENERAL CONSIDERATION ABOUT SPECIALIZATION

The phenomenon of specialization has tremendous repercussion on the optimal production volume
of goods.
• The family is where we find self-consumption economies and because it’s basically to small
and doesn’t consume a big amount of goods, specialization inside it is not high. Moreover
families are not created for economic reasons
• The firms are effective forms of organization: a firm is an entity that organizes the
production of goods by specializing and coordinating a plurality of human activity and
tangible/intangible resources. The broader the market are and the more they expand, the
more specialization can escalate. On the other hand, if a market is small and stagnant, it’s
difficult to promote specialization at a level that maximizes benefits. If a firm gets to big,
specialized unit can turn out to be very complicated and require a more complex and
wider coordination, even if technology helps.
The bigger the expected market and potential for specialization economies, the greater the
availability of resources and incentives for investing in R&D. This investments generate deeper
knowledge and enable the firm to develop new forms of specialization, making larger firm and
market size more convenient
WHAT IS A CORPORATION?, STAKEHOLDERS VS STHAREHOLDERS VIEW (Friedman 1970; Freeman
2009)

SHAREHOLDERS VIEW: THE SOCIAL RESPONSIBILITY OF BUSINESS IS TO INCREASE ITS PROFITS

(Milton Friedman, the Shareholders view)

The business man believes that business is not concerned merely with profit but also with
promoting social ends, so that business has a social responsibility for providing employment,
eliminating pollution and so on. However, according to Milton Friedman, only people can have
responsibilities, not business. In a free-enterprise, private property system, a corporate
executive is an employee of the owners of the business and therefore is responsibility is to
conduct the business in accordance with their desire and the established law, and this is
generally making as much profit as possible. Of course can happen that his employer have
different desires, also committed to social ends.
Of course the corporate executive is also a person in his own rights. He may have many others
responsibilities that he recognize voluntary and he can perhaps devote part of his income to
causes he regards worthy. But in this situation is acting as a principal and using his own money,
while as a manager he would be the agent and he would therefore use the company’s money,
energy and employees. If an executive has a social responsibility, it means that he acts in some
way that is not in the interest of his employer (making expenditures to reduce pollution even
under what the law requires ext.)
In all these cases, the manager would be spending someone else’s money for a general social
interestreducing return to stockholders. Moreover his actions may raise the price to customers
and therefore he’s also using their money and may reduce the employees’ wages. Actually
stakeholders, employees and customers could have spend their own money on the particular
action if they wished to and so in some way the executive, pursuing social causes, is in effect
imposing taxes and deciding how tax incomes should be spent.
On the level of political principle, the business man is acting at the same time as a legislator,
executive and jurist without being appointed or elected by anyone: executive is an agent
serving the interest of his principal, when he imposes taxes and spends the proceeds for social
purposes he becomes in effect a public employee.

The situation of the individual proprietor is different because, in order to exercise his “social
responsibilities” he’s using only his own money and he has the right to do so.

In some situation, pursuing social responsibilities could be in the long run interest of a corporation
for several reasons (marketing). In this case, since the action is carried out in order to increase
the profit of the firm in the long term, is something that the manager can do but admitting that
it’s done for business and profit reasons.

In an ideal free market resting on private property, no individual can coerce any other, all
cooperation is voluntary. There are no “values”, no social responsibilities in any sense other
than shared valued and responsibilities of the individual. There one and only social
responsibility of business is to increase its profit without committing fraud.
The shareholders view, which was dominant in the 80s, became gradually less popular due to
increased public concern with social and environmental issues. Managers however may adopt
it even when keeping a different appearance.
STAKEHOLDERS VIEW, BY EDWARD FREEMAN

Edward Freeman theorized a new conceptualization of business and the role of executive, called
“managing for stakeholders”. The basic idea is that business can be understood as a set of
relationships among groups that have a stake in the activity that makes up the business
(customers, suppliers, employees and financiers and community).
This implies that we need to pay attention to the relationships among stakeholders so that they can
all win continuously during a long time, and this is the job of the executive.
Even assuming that the purpose of business is to maximize shareholders’ profits, the only way to do
it is to create products or services that customers want to buy. Therefore managers must pay
attention to all stakeholders and to the relationship between this groups. For instance, paying
attention to community can help to prevent activists or regulators. The company that manages
for shareholders at the expenses of other stakeholders cannot survive long, even because,
nowadays, many businesses include creating values for at least customers and employees, or
they even fight for “noble causes” trying to change society.
Following this view, capitalism is primarily a cooperative system of innovation, value creation and
exchange.

Stakeholders can be divided into two main groups:

• Primary stakeholders: the one that define most of the business and so managers need to pay a
special attention to them. This group includes customers, employees, suppliers, financiers and
community. Also community play a key role because a company to operate in a specific place
needs an operating license. If local communities don’t like the company, it will be much more
difficult to carry out good business.
• Secondary stakeholders: are not key but they can affect (or being affected by) the business of
the corporation. For instance this entities can influence the relationship between the
corporation and the primary stakeholders and include medias, government, competitors,
special-interest groups and consumer advocate groups.

During the last past years, mainly four major trends have produced effects on business:
• liberalization of markets: a group of people argues that government should put constrains on
private business, planning and controlling more. Around the world in the past decades
governments have been deregulating more and more the market which has generally became
more open and liberal
• liberalization of political institutions: the failure of communism and the pressure for more
market-orientated reform in countries have all had a strong impact on the opportunities
available for business
• Concern in our environment: during the past years we have discovered that we need to take
better care of our environment. Therefore, the most modern idea is that business must pay
attention to this issues, making huge investments to reduce pollution.
• Technology: the information revolution has made it possible for business around the world to
see vast improvements in productivity and innovation, changing the way we work.
In general, managers nowadays need a way of thinking that easily integrates the many changes
that we face. Focusing only on shareholders values is not helpful anymore.
 Stakeholder Expectation contribution

Shareholders and banks ¨ dividends ¨ risk capital (money gave by

¨ capital gain shareholders)
¨ freedom to buy and sell ¨ competence
¨ participate to decisions ¨ loan capital (banks)
¨ Interests (banks)
employees ¨ wages ¨ labor
¨ job security ¨ devotion
¨ participation to some ¨ responsibility
decisions ¨ efficiency
¨ recognition ¨ skills and ideas
¨ career ¨ personality
¨ nice environment ¨ innovation
¨ fairness ¨ harmony
¨ ethical treatment ¨ respect
clients ¨ quality ¨ money
¨ variety ¨ feedback
¨ good price ¨ loyalty
¨ reliability ¨ good publicity (if you speak
¨ service well of a company it’s
¨ customers care basically free advertising)
¨ exclusivity (some goods)
¨ ethical production
¨ methods
government ¨ taxes ¨ public services
¨ respect of law ¨ loans
¨ employment ¨ infrastructure
¨ economic growth ¨ law enforcement (if customer
¨ support for national policies doesn’t pay you can send
police to him)
¨ guarantee competition
¨ subsidies
competitors ¨ fair play ¨ fair play
¨ instructive examples ¨ instructive examples
¨ cooperation in government ¨ cooperation in government
relationships (Confindustria) relationships
¨ collusion ¨ collusion
¨ joint development of joint development of technologies
technologies
Communities ¨ respect of moral standard ¨ labor
¨ employment ¨ consumption
¨ respect for the environment ¨ image
¨ respect for local activities ¨ support
¨ respect for traditions ¨ respect for property
(companies must adapt their
system to the general
traditions of the country they
are established in)

Adopting the shareholders mindset

Business isn’t just creating values for shareholders and it only works when all stakeholders (primary
especially) get their needs and desire satisfied over time. The problem is that our current way
of thinking about business and management asks how should we distribute the burdens and
benefit among stakeholders, while the right question should be how we can create as much
value as possible for all our stakeholder.
Even if there is no conflict between serving all stakeholders and providing excellent return for
shareholders, all this process requires discipline, vision, ethics, values and committed
leadership.
Ethics, values and purposes in business
Ethics and values are at the core of managing for stakeholders and it actually aims to change the
way we think about business and so that we could be sure that ethics gets built into the very
foundation and isn’t just something forced inside it. Nowadays corporate leaders must be
engaged in the conversation about how business can make society better

Managing for stakeholders should be included in everyday business processes. companies should
demonstrate that they are aware of the necessities of the community and of the problems of
the world such as climate change, environment. During the last decades many companies
started also adopting “codes of conduct” for their suppliers because if a company is ethic,
people would trust it in the long term

Moreover a business must have a clear purpose a sense of what they stand for; this includes
creating value for at least customers and employees. This purpose is sometimes stated in
“mission statement. When they ask suppliers for sacrifice is better to speak having a “mission
statement” which will bring profit to everyone but in the long term

The role of leadership

There are mainly three types of leaders:
• the amoral leader: focuses on the aspects of leadership that emphasize getting things done,
the most important things are the result and they are not really concerned about ethics and
values
• the values-based leader: recognizes that values are an important part of the task of leadership,
Believes that true leaders must stand for values such as honesty, integrity. The right thing for
them must be also ethic.
• the ethical leader: is committed to a process of examining values, harms and benefits of the
decision taken. The task of ethical leader requires both curiosity and humility and such leader
must be able to articulate how the business makes each stakeholder better off. Managing for
stakeholders requires that ethics and leadership go together.

Alternative processes for dealing with stakeholders

• “Do nothing”: self-explaining. (represents Friedman’s view, companies are for profit and
managers must pursue only this goal)
• “Public relations approach”: managers try to convince the public, by using communication.
Basically managers decide what to do without taking advice from stakeholders and then try to
convince them through communication that what they did was the right thing.
• “Implicit negotiation”: take the position of stakeholders into account but do not interact or
openly negotiate with them. Managers try to understand what stakeholders want without
speaking to them.
• Stakeholder engagement”: explicit negotiation with stakeholders. It’s the most modern
approach but at the same time could bring to difficulties.

SUMMARY

Shareholder-based view stakeholders-based view

Purpose of the firm Maximize profit Satisfy key stakeholders
Accountability of top managers To shareholders To key stakeholders
Role of profit end Means (profit allows companies to
develop new technologies ext)
Role of stakeholders’ satisfaction mean end
OPPORTUNISM, FAIRNESS AND COOPERATION: ASSUMPTION ON THE BEHAVIORS OF INDIVIDUALS
ANG GROUPS (Airoldi 1.2)

PEOPLE AND SOCIAL GROUPS

1.2.1 - Human being and Homo oeconomicus

Economic sciences study social bodies by isolating and analyzing their economic features,
distinguishing them from biological, sociological, psychological, political and ethical features.
For the past centuries the model used was called Homo oeconomicus.
• Homo oeconomicus is autonomous and egoistical, his sole interest is to maximize his own
income and wealth. At the same time he’s always capable of perfect rationality while
evaluating his choices. This interpretation ignores some essential features of economic reality.
Another, more modern, interpretation used by economists is the one of human being as a whole.
The fundamental hypothesis are the following:
o People carry out economic activity not as an end but as a mean to achieve personal
ends
o People are members of groups and social bodies in general and this has an impact
on their goals, values and individual needs. Moreover, economic choices are never
made by an individual in a strict sense, but instead by an individual who belongs to a
number of social bodies
o People and social groups make rational economic choices but their rationality is
bounded.
o Human beings share values of solidarity, loyalty and progress.

1.2.2 – the principle of maximizing personal well-being

People act in such a way as to maximize their personal well being. Moreover, people do their best
to foresee the uncertain consequences of their actions. Therefore, behavior is rational.
People’s actions are subject to restrictions such as income, time, memory as well as other
limitations associated with available resources and opportunities. Lastly, people’s choices are
influenced by their preferences and tastes, which are shaped by the following factors:
• Basic human needs for food, drink, shelter, fun
• Personal capital (experiences, habits ext.)
• Social capital (set of values and rules which can be referred to as a culture. Seen in
this light, an individual has little ability to impact his social capital.

1.2.3 - The concept of perfect and bounded rationality:

The model of perfect rationality is the basis of the majority of economic theories. According to this
model, an actor who has to make a decision finds himself in a situation which can be summed
up as follows:

• The problem the individual faces is perfectly clear, as is the objective to be achieved in the
best possible way
• All information relating to possible options is immediately and freely available
• All the possible future “state of the world” are known and defined
• All alternatives can be compared simultaneously
• There is only one, isolated decision maker
• The person chooses the best alternative
Regarding what happens in reality, all the above hypothesis are only partially true and in conclusion
actually in real life people make choices which are based on rationality, which however is not
perfect and therefore bounded.

Is the nobel price Herbert Simon who has introduced the concept of bounded rationality.
Individuals look for satisfactory solutions (“satisficing”) to their problems, given constraints on
time, available information and resources. Expectations drive initial search, but are adjusted
according to results until a solution appears acceptable.

(6)
unacceptable

(1) Set goal or (3)Employ (5b)

(2)Establish level
define problem heuristic Appraise
of aspiration
programs alternatives
to identify
feasible
(7a)
alternative acceptable
e

(4b) adjust (4a) No

aspiration level feasible (7b)
alternative act
identified

this does not guarantee

that this was the best
apartment or the best
offer in Milan, but is
surely the best you have
found
1.2.4 – social groups, norms, and roles

To achieve their goals, human being interact with each other forming what are generally called
social bodies.
A social group is a set of people, it’s generally:
• Made up of a small number of members (from 3 to 7)
• It’s formed spontaneously with members who share the same basic values
• It’s orientated towards achieving a common goal
• Has its internal order, with norms that emerge usually spontaneously and that everyone must
respect
• It’s united and will endure over the time if an essential equilibrium is created between what
each member brings to the group and what each member takes from it.
In true social group, each person has a strong, solid relationship with every other member and this
is why social groups are that small. The group must have a leader to direct it and a weak
leadership makes also the group weaker.
When a person is member of the group he or she becomes the focal point of a system of behavioral
expectations held by the other group members. A role is so created and it perhaps represent
the system of expectations of behavior which converge on a person who holds a certain position
 in a given group. Since most adults are members of various social bodies at the same time, the
behavior of each person is affected by several sets of behavioral expectation at the same time.

1.2.5 – collective decision making

Decision making process often occurs in social bodies, especially in companies where countless
decisions are being made about many issues with many potential repercussions. To avoid risks,
there must be coordination among various decision, but there is also competition:
• Competition among decisions: in every decision making process, the person who has to
make the decision must expend resources, such as time and energy. However this resources
are scarce. As a result, not all decision making process that begin have and end and
therefore not all generate a choice. Even if they have and end, also the outcome of decision
making process needs resources which again are limited. Consequently, one choice might be
incompatible with other choices which are then in competition
• Competition among solutions: the same problem might have a several number of different
solutions promoted by people who have different interests and mental maps. Usually the
idea proposed by the most charismatic guy is the one that is accepted as the best, even if is
not always the best choice. Therefore, groups’ decisions can be rational or not completely
rational

To explain how decisions are taken the “garbage can model” was developed. Basically choices
opportunities are depicted as containers in which three ingredients are mixed together. The
ingredients combine and the outcome is the final choice:
1. Participants bring problems to decision situations, and each participant assigns different
priorities to each problem. If all participants consider a given problem sufficiently critical,
then concrete steps to find a solution are taken. Certain problems that require urgent
attention might not be solved simply because people who should take action are not aware
of the importance and the urgency of the situation.
2. People also bring solution to decision situations. Sometimes this solution are even not linked
in an explicit way to the problems, so they are just solutions looking for a problem. Or, in
other cases, it can happen that taken choices do not solve problems.
A given choice is made if a solution is presented in a definitive and convincing way as an
answer to a problem which is seen as critical and urgent.
PS: Usually the big difficult problems are never discussed because is more difficult to find solution.
Find solution is something nice and we want to find them, not important how difficult is the
problem

1.2.6 – cooperation, opportunism, trust and altruism

Cooperation allows people to attain results which can not ne achieved by individuals acting
independently. Cooperation produces a rent that can be variable and that must be distributed
among the participants. Theoretically every individual should be compensated according to his
contribution. In actual practice, however, neither individual contribution nor overall result can
truly be known. This leaves room for opportunistic behavior.
Opportunistic behavior is at once cause and effect of mistrust between parties, it deteriorate the
relationship and prompt the other party to take on opportunistic behavior. Transactions in this
context are expensive and inefficient.
THEORY X: A sizeable portion of organizational theory is based on the assumption that employee
tend to fall short of behavioral expectations set down by their employers. According to this
perspective, people consider work simply has a way to attain a reward and they look for
loopholes in the organizational structure that would allow for opportunist behavior. This line of
reasoning rejects the hypothesis that people see work as a duty and that employees identify
with their companies. An organizational structure based on this notion of human being causes
precisely the behavior predicted by the same notion: people who have to work in a constrictive
context, and who are never delegated any responsibility, adopt restricted and opportunistic
behavior.
If a boss doesn’t trust employees, he tends to create more rules and be more constrictive. As a
consequence employees become more opportunistic

THEORY Y: it’s based on the fact that people spontaneously tend to take responsibilities and that
thy identify with their company, with it’s goal and profession. Theory Y is an essential for
creating a corporate structure which foster the attainment of efficiency and satisfaction.

Interpersonal relationships may also be characterized by altruistic behavior, which basically brings
out benefits for others at the price of some sacrifice for the actor. In this sense it might seem
to be not aiming to maximize personal well being. However, it’s entirely consistent with that
principle because such behavior allows people to fulfill an important set of personal prospects.
GOVERNANCE AND MANAGEMENT, AGENCY THEORY, CORPORATE GOVERNANCE MECHANISMS TO
PROTECT SHAREHOLDER’S INTERESTS (Tricker Chapter 2; Baker&Anderson Chapter 8)

What is corporate governance

Operational perspective: Corporate governance is the system by which companies are directed and
controlled. Board of Directors are responsible for the governance of their companies, while the
shareholders’ role in governance is to appoint the directors and the auditors, and to satisfy
themselves that an appropriate governance structure is in place. The Board’s key role is to
ensure that corporate management is continuously and effectively striving for above average
performance, taking account of risk.

Relationship perspective: basically the corporate governance structure specifies the distribution of
rights and responsibilities among the different participants in the organization. This main
participants are shareholders, company management (led by a CEO), external auditors,
regulators, the main stakeholders and the BoD itself.

Financial perspective: Corporate Governance deals with the way suppliers of finance assure
themselves of getting a return on their investment.

Societal perspective: Corporate governance is concerned with holding the balance between the
economic and social goals and between individual and communal goals and must encourage
the efficient use of resources.

Difference between management and governance: a CEO has overall managerial responsibility,
with other managers reporting to him and so on down the management hierarchy. Authority
and responsibilities are delegated downwards. The Board is not part of the management
structure, nor it has a hierarchy since each director has similar responsibilities power and
duties under the law. However often a part of the Board is superimposed on the managerial
structure and therefore there are director that also hold a managerial. In this case, as
executives, they are employees of the company and covered by employment law. Another
distinction can be made between non-executive directors who are independent entities and
those who have some links with the company

What are companies

Companies are legal entities (not a synonym of firms) made up of an association of members
(people or other companies). Members share resources to carry out economic activity. The law
and the company’s “constitution” (or charter), can be written under a law or informal, and
define the rights and duties of members, such as how company shares can be sold to others or
profits are distributed. Some rights and duties are written also by the government (company
laws).
There are two big types of companies:

Parterships Corporations
Unlimited liability of member, everyone Limited liability of members (shareholders)
potentially can became partner
Partners deal directly with stakeholders and Shareholder in corporations are not entitled to
banks. All partners can access to the participate to the business. The management is in
company and participate directly to the charge of this.
business
It’s difficult to transfer ownership because It’s easy to transfer ownership since it’s done just selling a
there are dominant big partners and certain amount of shares
acquiring a small partnership is not
really profitable, so no one is interested
in buying your part of ownership
Decisions are taken by the majority of Decision are taken by the management structure
consensus partners following a hierarchy or by the BoD
Ends when partners quit or die Corporations go on even after a shareholders quits or
dies
If the company cannot pay salaries or if you are a corporation, who gives you money or goods
suppliers, this can require money and such as raw materials (shareholders which can be
they have the right to do this. If the privates, banks, suppliers) must trust the
manager refuses, police and tribunal corporation. Usually some guarantees are required
intervenes. If a company has difficulties, such as special agreements in which someone
partners can lose the money they have assumes personal financial responsibility in front of
invested but also their personal money the financial suppliers for the corporation. However,
so partners have direct financial If a corporation has economic problems and cannot
responsibilities pay, they don’t have the duty to pay anyone. The
only risk for a shareholder is that all the money can
be lost. Only the money given to the company can be
lost, used to pay suppliers ext. The personal capital of
partners, that in this case are the shareholders,
cannot be taken.
Generally:
• Partnerships are used by small businesses. When business grows, risk becomes too large for
members to accept unlimited liability. No serious corporate governance problem for
partnerships, except for personal conflict among members.
• Corporations are large firms (the legal entity is usually too costly and complex for small
businesses) and do have corporate governance issues.
The evolution of companies: generally at the beginning he owner is also the manager. Then, the
company grows and owners hire professional managers. At a certain point, new investors enter
the company and ownership becomes very fragmented. At the end the bigger shareholder
(usually) has more than 15-20%. Or the rest belongs to many other shareholders. When
ownership becomes very fragmented, managers can escape owners’ control (separation
between ownership and control). Agency theory is the traditional way of looking at these
companies.
Companies at a certain point, for several reasons, can become public companies, which means that
are listed in the stock exchange market and at that point everyone can buy shares
Agency theory
The agency theory describes the principal-agent relationships

Principal

Gives the agent the power to

perform a service for the principal
Basically the principal (that maybe at the
beginning was running the company) hires someone else (agent or
manager) and gives him the decision-making power to perform an activity
Agent
that he knows he wouldn’t able to carry out by himself.
The principal is the one who needs the service, the agent it the one hired
trough different types of contracts by the principals to carry out a specific activity

Board of
Directors

Non executive
Directors
(independent Executive directors (CEO)
or not)

Management and
executives

Board of Directors: the overall task is to direct the company and this activity involves four basic
elements:
• Strategy formulation (the Board works with top managers but at a very broad level)
• Policymaking (future focused, the Board approves relevant proposals by CEO and other
executives)
• Supervision of executive management (inward looking in the company)
• Accountability to shareholders and others (outward looking, the Board must report financial
information and any event that deserves attention and since its members sign financial
statement they are legally responsible for them)
To fulfill their duties, Directors have to consider both the present position and the future of the
company. Generally the board is formed by 7-8 people, some of the members are also
independent (and therefore also non-executive) directors and are there just to provide their
knowledge, while others have executive tasks and work with managers.
Inside the Board various groups are generally formed, named committees, to discuss about specific
topics. For instance, the audit committee checks the financial statement, the compensation
committee which decides the salaries of the top managers and of the other members of the
board are all examples of possible committees.
The president of the Board writes the agenda and has a very important rule in periods of crises.
Even for this reason usually the CEO and the President are not the same person.
Moreover, member of the Board mustn’t have conflict of interest of no type with other companies.
How managers try to escape owner’s control:
When there is a strong separation of ownership:
• Small shareholders tend to walk away (they sell shares) when they do not like managers,
instead of trying and replace them.
• Board of directors collect proxies from existing shareholders who are not interested in
control and propose directors. Specifically, before the general meeting of shareholders, the
Board sends letter to the shareholders about the meeting agenda. The board can advice the
shareholders how to vote, including for choosing managers. The shareholders can also
delegate this choice with proxies to the board (not legal in all countries)
• When things go really bad, the board tends to intervene before shareholders could form
coalitions.

Firms don’t have this type of problem, same for concentrated ownerships and companies where
the government has “golden shares”. In this situation, the government has shares of company
and, even if it doesn’t have the majority, it a lot of power and can block the decisions of the
board. An example is Volkswagen.

Problems with agency theory: when we talk about agency problems, we are referring to the
difficulties faced by financiers in ensuring that their founds are not expropriated or wasted in
anyway. Within this framework shareholders are assumed to derive purely financial benefits
from ownership of their equity investments. All agency problems must be avoided and the
procedure needed is not costless. Therefore two main types of agency cost arise from conflicts
between the parties:
Type I agency costs: They arise because managers enjoy advantages that put them in the position
to pursue their own interest instead of the interest of shareholders (conflict of interest,
misalignment). Basically managers enjoy:

• managerial discretion (shareholders are not supposed to tell managers what you do, they
appoint them and then managers take their own decisions)
• information asymmetries (managers know everything of the company, shareholders don’t).
Therefore managers can hide even relevant information to shareholders)
• compensation not strictly linked to outcomes (managers receive their salary even if the
company is not going well, and at the same time the shareholders loose their money. To
avoid this, usually managers receive shares of the company they work for so that if the
company has financial crises they also loose money)

The source of conflict are the following:

• moral hazard: problem that rises when a manager undertakes operations for personal benefits,
including overcompensation, fringe (not money but high value goods such as a jet), benefits,
related-party transactions (hires people who has a relationship with, such has friendship or
family ties, instead of following a meritocratic criterion), insider trading (using or revealing
restricted and confidential information to buy stocks in very good moments), window dressing
(hiding information). Moral hazard problems are likely to be more extensive in larger
companies because their large structure makes them difficult to be monitored and way more
complex.
• Earning retention: when there is a big surplus, managers can decide if to pay dividends (good
for shareholders) or retain the surplus in order to let the company grow (usually the managers
decide for the second). CEOs generally benefit from retained earnings because size growth
grants them a larger power base and more control over the Board and therefore it’s easier for
 them to increase their revenues (executive remuneration is usually and increasing function).
When a company retains and reinvest the proceeds, a relevant negative action occurs.
However when the company returns proceeds to financiers, announcement causes a positive
stock price reaction. Moreover, usually company’s managers overpay when they make
acquisitions because they pursue private objectives of size, growth and unrelated
diversification over the goal of shareholders wealth maximization. Such acquisitions reduce
shareholder wealth, as is reflected in the negative stock price reactions.
• Time horizon: conflicts between shareholders and managers may arise also regarding the
timing of cash flow. Shareholders are assumed to be concerned with all future cash flow of the
company, as these are reflected in the price of the shares, while managers may only be
concerned with company cash-flow for the term of their employment, leading to a bias in favor
of short terms investments that can maximize their profits and avoid risks. This occupier even
more when managers are about to retire or they are planning to leave the company. Focusing
only on the short terms leads to reduce several expenses important for the long term such as
R&D which in the short term doesn’t bring any advantage but it’s still very expensive
• Risk aversion: conflicts of this type arise because of portfolio diversification. Shareholders are
considered only with systematic risk, whereas company managers are concerned with both
systematic and unsystematic risks. Since the income of top managers is largely dependent on
the firm’s financial results (stock options, bonus), usually they tend to pursue investment and
financing policies that minimize the risks of their company’s equity

Type II agency costs: Just like Type I, with shareholders and their associates (managers who are
loyal to them) in the role of agents of minority shareholders, so basically the problems are the
same but is who causes that that differs. Information asymmetries are especially important in
this situation. Related-party transactions, overcompensation, fringe benefits and also
appropriation of assets very common. This causes the company to be used just as an asset for
the biggest shareholders at the expenses of the minority ones.

In what agency cost consist: there are different agency costs;

• Monitoring costs: expenditures paid by the principal to control agent’s behavior. These costs
may include audits, writing executive compensation contracts, and ultimately the cost of hiring
and firing top managers. Initially the principal pays these costs, but the agent will ultimately
bear monitoring costs because his compensation will be adjusted to cover this costs. However,
excessive monitoring costs will constrain managerial initiative and reduce entrepreneurship. It
follows that monitoring costs will be costly because a reduction in managerial discretion will
harm outside shareholders who don’t have the human capital to exploit arising opportunities.
• Bonding costs: If agents ultimately bear monitoring costs, they are also likely to set up
structures that will see them acting in shareholders’ best interests. The cost of doing so are
called bonding costs. For example, bonding costs may include the effort of providing timely and
accurate information to external shareholders. Theoretically, the best solution to avoid this
costs would be provide managers with contracts to bond them to do what shareholders want
in every moment, but of course this is unfeasible due to the impossibility of contracting for all
possible future states
• Residual loss: even an optimal level of contracting will produce a residual loss. Residual loss is
defined as the net loss resulting from enforcing suboptimal incentives contracts.
Corporate governance should minimize the sum of all these costs
How can agency cost be reduced:

• Board composition: make sure that non-executive directors monitor managers (independence,
professionalism, ...) and the responsibilities as directors are clearly specified. It’s important that
independent director are really independent and good professionals.
• Concentration of ownership (blockholding): reduces managerial discretion. However
concentrating the ownership could also be a negative aspect because you create the risk of
type 2 costs. With fragmented ownership high risk of Type 1 costs.
• Active ownership: investors who try to use ownership rights to change managers’ behavior,
putting pressure in several ways on the Board
• Incentives: connect managerial pay to outcomes (bonuses, stock options, stock grants);
powerful but risky because they could lead to excessive risk taking, short-termism, self-dealing.
One very common example is stock options: the company gives managers the right to buy
stock after x years at the price it was x years before. This are very powerful tools but also risky
since managers can increase profit easily in the short term (to make stocks going up) by cutting
expenses in order to make profit with stock options but this causes problems to the company
in the long term.
• Control mechanisms: internal auditing (including board committees), external auditing,
financial markets regulation, ... or procedures adopted by the company to avoid bad behaviors
(double check on financial statement ect.)
• Reputation: name and shame managers who behave improperly (including codes of conduct).
Because a top manager remains in the company not so long, they are in some ways incentivize
to maintain a good behavior so that you can easily find a job.
• Market for corporate control: the stock price of underperforming companies drops, making
easy for other companies or investors to buy them, concentrate ownership and remove
inefficient managers. Very important mechanism in the US.
WHAT IS A BUSINESS FIRM?, ECONOMIC ACTIVITIES IN ORGANIZATIONS: FUNCTIONS AND
BUSINESS AREAS (Airoldi 3.1-3.2)

3.2 – The economic processes of a firm

3.2.1 – internal functions and external transactions

Economic activities carried out in firms can be grouped into functional areas, that is, a subset of
processes characterized by a function and by a specialized skill sets used in carrying out this
processes. For every firm, functional areas can be classified as follows:
• Institutional structure
• Operations
o Core operations
§ Research and development
§ Purchasing
§ Manufacturing
§ Sales and marketing
§ Logistics
§ Debt and equity research
o Management of non-core investments
o Tax management
o Insurance management
• Organization
• Information

Organization: it involves many processes classified into two groups:

o Organizational design: designing the organizational structure of the firm. Tasks are defined
and assigned to units that make up the structure of the organization
o Human resource management: all organizational systems pertaining to personal (e.g.
selection, compensation, careers, motivation, training, ...)
Information: involves providing data and information to firm’s decision makers (or to firm's
stakeholders). Extreme variety and complexity of recipients, purposes, rules, and technologies
involved. Many functional areas are becoming very data- intensive (e.g. marketing). A central
component of a firm’s information system is given by financial statements, which measure a
firm’s performance.

3.2.2 – institutional structure design

Activities related to ISD revolve around the creation, basic configuration, transformation, and
termination of organization (founding an organization, defining and converting its legal status,
designing governance bodies). In a given moment of the life of a firm, the institutional
structure emerges from the configuration of
• Founding the organization
• Defining or changing its legal status
• Designing governing bodies
• Defining shareholder structure
• Mergers, acquisitions, break-ups (when you have a business unit and you think it won’t be
profitable so you turn it into a isolated legal entity to sell it)
• Partnerships and alliances
• Terminating the organization
A crucial decision for the firms is how to structure equity capital (who will primarily take the risk
and provide the risk capital). Equally crucial are the choices regarding who the firm will hire and
 how employees will participate to firm’s decisions and profit sharing. Since all other types of
processes are highly impacted by the choices in ISD, all decision taken are always critical and
involve very complex processes.

3.2.3 – Core operations

Core operations consist of operational processes that identify the technical/economic functions of
each company (purchasing production factors, carrying out technical transformation, selling,
paying…). Core operations for a manufacturing firm are the following:
• R&D: they research and establish product features as well as production methods.
Technical and engineering skills are required
• Purchasing: we can distinguish between 1)buying buildings, machineries and equipment, 2)
buying raw materials, 3)buying various types of services (consultancy, security…)
• Manufacturing: This centers on processing and assembling raw material however also
other parts such as quality control or production planning are important
• Sales and marketing: this involves selling the firm’s products while optimizing economic
profitability. It’s important to analyze current and potential customers’ expectations, as
well as competitor’s offerings
• Logistical process: this terms cover the set of operation executed in order to transport,
store, move raw materials and finished products. In a broader sense, logistic also
includes purchasing and production planning.
All this functional areas are interdependent.
Core operations give raise to various sets of transactions involving goods, labor, and coverage for
specific risks. Transactions for private goods entail buying and selling goods to private entities
and involves monetary exchange. This could be done using cash or a settlement credit.

3.2.4 – debt and equity management

Debt an equity management (also called “finance”) consists of that set of activities undertaken by
the firm in order to cover its financial needs. Financial needs derive from the fact that a firm
have to incur expenses and make payments before actually being able to sell products. A firm’s
financial needs can be covered using two resources: equity (risk capital) and debt (loans,
bonds). Decisions about equity are related to the design of the institutional structure.
Finance basically consists of the following sets of activities:
• Forecasting and analyzing financial needs
• Economic evaluation of the optimal mix of equity capital and debt capital
• Planning and executing transactions
• Handling contract, including liquidating dividends.
When there are profits, shareholders decide which percentage to distribute in dividends and how
much to reinvest. When shares are sold, shareholders make profit in capital gains. Summing
up, shareholders expect returns from both dividends and capital gains.

3.2.5 – management on non-core investments

If the company has big surplus (surplus funds), leaving the money in the bank account has no sense,
so they can decide if to invest it for something about the company, pay dividends, or invest it in
other goods (buy derivatives, buildings, stcoks ext.) in order to make it profitable and turn it
back to money easily (liquid investment) when needed. The goal, again, is to create investment
revenue, that can be easily turned in cash when needed.
3.2.6 – insurance management

Organizations are subject to general economic risk (inherent and non- transferable such as “people
stops for several reasons to buy the firm’s goods) & specific risks (accidents…). Specific risks
can be covered by insurance. We have an insurance contract when the firm pays a premium
and the insurance company provide coverage for damages (with a maximum level of coverage)
from the events as specified in the contract.

3.2.7 – tax management

The need for tax management arises from the fact that all firms are required to pay various kinds of
taxes in exchange for the right to use public goods provided by the State. In a very simple way,
we can distinguish by the following:

• Taxed linked directly to the goods one acquires

• Taxes unrelated top the use of specific public goods (income tax, VAT, IVA)

3.2.10 - Business areas

Many firms, larger ones in particular, compete in several different business areas. Such
organizations, in the course of their development, opt to undertake a diversification strategy.
This may include expanding their product range or entering in new markets with different
characteristics. In summary, a business area is a product/market area, with its own distinctive
features. It differs from other product/market areas in which the same firms operate. Firms
that compete in several business areas at the same time are called diversified companies (or
multi-business, in contrast with the mono-business ones. Cost and revenues, assets and
liabilities, cash flow and outflow are generated in a way that is unique to each business area
(differently from functional areas that only have costs) and so that then can be analyzed
separately.
ORGANIZATIONAN DESIGN: ORGANIZATIONAL STRUCTURES (McShane & Von Glinow 13)
Organizational structure: organizational structure refers to the division of labor as well as the
patterns of coordination, communication and formal power that direct organizational activities.
The organizational structure is an important instrument for organizational changes because it
establish new communication patterns and aligns employee behavior with the firm’s vision.

Division of labor
Division of labor refers to the subdivision of work into separate jobs assigned to different people.
Subdivided work leads to job specialization. As a company gets larger, the horizontal division of
labor is accompanied with a vertical division of labor. Some people are assigned the task of
supervising employees and other are responsible for managing this supervisors.

Coordination of work activities

When people divide work among themselves, they require coordination mechanisms to ensure that
everyone works in concert. Coordination is therefore linked to division of labor. If coordination
is not efficient, it leads to misalignment of tasks between different departments, duplication of
efforts and mistiming on activities. Coordination also tends to become more expensive as the
division of labor increases. There are three main form of coordination:
• Coordination through informal communication: all organizations rely on this form of
communication. This process includes sharing information as well as forming common mental
maps and it’s based on face-to-face interaction. Although coordination through informal
communication is easier into small firms, technology has made it possible also in large
organizations. In this case, larger organization encourage communication through informal
communication by assigning liaison roles (among units) to employee , who are expected to
communicate and share information with coworkers in other work units. Where coordination is
required within each work units, integrator roles are created. Integrators are responsible for
encouraging employees in each work unit to share information. Integrators however do not
have authority over the people involved in the process. Another way to encourage
coordination is by organizing employees from several departments into temporary teams.
• Coordination through formal hierarchy: As organizations grow, formal hierarchy is established.
Hierarchy assigned legitimate power to individuals to direct work processes and allocate
resources. Although still important, formal hierarchy is much less common since
communication through the chain is not that fast and it’s also costly
• Coordination through standardization: it involves creating routines partner of behavior and
takes three distinct forms:
o Standardized process: standardizing work activity through job description and
procedures
o Standardized outputs: involves ensuring that individuals and work units have clearly
defined their goals and output measures (customer satisfaction, production
efficiency…)
o Standardized skills: when work activities are too complex, companies often
coordinate work effort by ensuring that job incumbents have the necessary
knowledge and skills

Elements of organizational structure

Span of control: also known as span of management, represents the number of people directly
reporting to the next level above in the hierarchy. It’s wide if there is just one manager for
many employees while it’s narrow if one manager supervises a few workers. The best-
 performing manufacturing plants have an average of 38 production employees per supervisor.
We have:
• Wide span of control when workers are self-managing and coordinate mainly through
standardized skills, or when employee perform routine jobs with simple skills required.
• Narrow span of control when workers perform complex tasks or for highly independent
people since they tend to experience more conflict within a group.
A company with a wide span of control is associated to a more flat structure while the one with a
narrow span of control to a taller structure. As company become bigger usually a taller
hierarchy is built, however this can create problems. Executive tend to receive lower quality
and filtered information and taller structures have higher costs since more manager are
needed. Moreover, with taller structure employees feel less empowered and engaged in their
work; in fact more levels of hierarchy tend to draw power away from the people at the
bottom.

Centralization: is the degree at which formal decision authority is held by a small group of people,
typically those at the top of the hierarchy. Most organization begin with centralized structure
and while the become bigger they decentralized (i.e. disperse decision authority and power
throughout the organization). Anyway, a different degree of centralization can occur in
different parts of organizations. Theoretically, decision power in general should be located at
the level with the best information. A boss cannot always have plenty of information regarding
everything and therefore he should delegate. The level of centralization may vary in different
areas of the organization, depending on sources and nature of information.

Formalization: it’s the degree at which organizations standardize the behavior of their employees
through rules, procedures, mechanisms and formal training. When we have high degrees of
formalizations, employees have well defined task to carry out. Older companies tend to
become more formalized because their work activity becomes routinized. Also big companies
tend to be formalize because of the lack of communication. Rules and procedures reduce
organizational flexibility, so employees follow prescribed behaviors. High levels of formalization
reduce creativity and increase stress.

Mechanistic and organic structure: depending on the degree of formalization and centralization
and on the span of control an organization can be:

• Mechanistic: narrow span of control and high degree of formalization and centralization. Many
rules and procedures and limited decision making at lower levels, tall hierarchies of people in
specialized roles and vertical communication flow. They tend to work better in stable
environments because they rely on efficiency and routine. Applied when companies are not
profitable
• Organic: wide span of control, decentralized decision making and little formalization. Tasks are
fluid, adjusting to new situations and organizational needs. Little degree of specialization. This
organizations tend to work better in dynamic environment because they are more flexible and
emphasize information sharing.

Organizational design

Organizational design is about choosing a proper way of dividing labor and ensuring coordination
(including incentives, planning, information systems, HRM)
Proper design should be in line with:

• The environment (dynamism, complexity, diversity, munificence)

• The size of the organization
• Technologies (task variability, task analyzability)
• The strategy of the firm (e.g. innovation vs low cost)

Forms of departmentalization

Departmentalization specifies how employees and their activities are grouped together. It’s a
fundamental strategy for coordinating organizational activities because it influences behavior
in the following way:

• Establishes the chain of command among. Typically it also determines which position and units
must use resources
• Focuses people around ways of thinking, such as serving clients, developing products…
• Encourages specific people and work units to coordinate through informal communication
within units.

Simple structure: most companies begin with this structure, they employ a few workers and offer
them one distinct product or service. There is a minimal hierarchy and employees perform
broadly defined roles.

Functional structure: an organizational structure in which employees are organized around specific
knowledge or other resources (marketing unit, manufacturing unit…). It therefore creates
specialized pools of talents that serve everyone in the
organization. Pooling talents into one group increase
economy of scale and employee identity with the
profession. Moreover it’s easier for managers to manage
people with common issues and expertise. It works well
in small organizations, in stable markets and in mono-
product business or related products lines. This
organization has many limitations since it produces
conflicts and makes communication and coordination
more difficult (people of different departments have to
work together and since they have different mental
maps tend to be in conflict). Finally, employees focus
only on their skills and don’t develop a broader
understanding of the company.
Divisional structure: an organizational structure in which employees are organized around
geographic areas, outputs or clients. If organizations have only one type of product sold to
people across the country, customers have
different needs across regions and
governments impose different regulation a
divisional structure (geographic in this
situation) could be the best choice.

The divisional structure accommodates

growth easily since it’s not difficult to add
new divisions (which basically work each as
a small firm). Moreover, it directs employee
attention to customers and product rather
than on specialized knowledge and
decentralizes decision making. In general,
its’ good for large companies in different
markets with different products. This
advantages are offset by a number of
limitations. It tends to duplicate resources (and costs) and employees are not used as
efficiently as they are in the functional structure where resources are pooled across the entire
organization. The divisional structure also lacks in communication since expertise are spread
across different countries (silos of knowledge) and don’t share information with counterparts
in other divisions.

Matrix structure: an organization that overlays two structures (such as geographic division and
product structure) in order to leverage the benefits of both. Theoretically, the dots represent
the managers who have two bosses,
who however don’t share the same
power. Product-geographic matrix
structure is one of the most common
(Nestlè, P&G). Since organizations tend
to have different and complex
structures, a pure matrix structure is
uncommon or maybe it’s applied only to
some regions. A second type of matrix
structure overlays a functional structure
with a project structure. One manager
leads the specific projects to which
employees are assigned and the other is
the head of the employees’ functional
specialization. This type of matrix usually
makes very good use of resources and
expertise, making it ideal for project-
based organizations. When properly
managed, it improves communication
efficiency, knowledge sharing, project
flexibility and innovation and avoids
duplication of functions. Matrix
structures for global organizations are also logical when two different dimensions (regions and
 products) are equally important. Executive also have more freedom because their two bosses
are more advisory.

However this organizational structure has several drawbacks. It increases conflicts among managers
who share equally power. For instance, project leaders might argue with functional leaders
regarding the assignment of specific employees. Moreover bosses are in divisional or functional
structure are responsible for everything so if something wrong occurs it’s their blame while
with two bosses is almost impossible to understand whose fault is it and usually no one take
ownership of challenging problems. Due to this ambiguous accountability, matrix structure
have been blame for corporate unethical misconduct.

SUMMARY

advantages
Functional • Scale economies (concentrate
structure similar activities in one
department),
• learning and capability building
(people within a department
become more and more expert),
• allows standardized control system
Divisional • good for large companies with
structure diverse product/clients/regions
• decentralized decision making
(giver power to the lower regions)
• building block structure,
accommodates growth
disadvantages
• cannot manage diverse businesses
• functions develop their own goals,
values and goals making cross-
functional coordination difficult
(different mindsets)
• duplication of functions (many
marketing divisions, many finance
division and therefore higher costs)
• divisions compete for HQ resources,
silos of knowledge, no synergies
(different business units don’t really
speak to the others, loose possibilities
of reducing costs by synergy and share
knowledge)

Matrix structure • no duplication of functions • two bosses dilutes accountability (Two

• potentially better communication, bosses, that actually means no bosses,
flexibility, innovation when something wrong happens, it’s
• focuses specialists on outputs easy to blame someone else. It’s very
• knowledge sharing within specialty important for people in this structure
to be professional)
• more conflict, organizational politics,
and stress

Other types of structures: there are many other types of structures such as:

• Team-based: employees are assigned to self- directed teams who are responsible for specific
activities (developing a software, running a manufacturing plant, ...). Usually part of broader
functional or divisional structures. There are basically no bosses and people, based on
standardization and informal communication can achieve optimal results
• Network: single activities are carried out by external organizations closely linked to the firm. An
example is Nike since the company just designs products and advertised them, the rest of the
manufacturing process is done by network companies.
CASE STUDIES

PATAGONIA
Patagonia’s business – a “dirtybag” business
• The beginning of a business man: A world-class mountaineer known as Chouinard desired to
make stronger and better climbing equipment and therefore started a small business, in
partnership with Frost brothers, called Chouinard Equipment in 1957. Chouinard Equipment
became the largest supplier of climbing hardware in the USA by 1970, but Chouinard and his
fellows never saw the business as an end itself.
• Patagonia’s early years: in 1972 Chouinard Equipment added a line called Patagonia and when
the partnership with Frosts came to an end, Patagonia was established as Chouinard company
and Kristine Tompkins was appointed first CEO. During the following years, while Chouinard
Equipment had problems and was sold, Patagonia experienced a growth of sales, from 20 to
100 millions $, and expanded internationally.
• Business philosophy: Chouinard saw business as responsible for many of the environmental
problems of the world and he believed that the same business had however the potentials to
alleviate this problems and inspire positive change. He applied Zen philosophy to Patagonia and
oriented his goal away from profits and toward doing things right. He asserted that he learned
to make business decisions “as risk-free as possible” through climbing, which he saw as
inherent to risk management: you can’t control the event of an avalanche. But you can study
the conditions of your climb, prepare and train for it.
Patagonia’s principles are expressed in its mission statement: build the best products, cause no
unnecessary harms, and use business to inspire and implement solutions to the environmental
crisis.
• Governance: Patagonia remained private from 2010 (Yvon and Malinda Chouinard are the
shareholders, it’s basically a family business based on the stakeholders view) and this allowed it
to pursue environmental sustainability easily, arguing that its sustainability agenda was at the
expenses of its growth. After Kristine Tompkins’s retirement in 1993, the CEO positions
changed hands multiple times until 2005, when it was taken by Casey Sheahan. Although
Chouinard didn’t play anymore chairman positions, he continued to play a large role in the
company decision. He practiced his MBA theorem of management (management by absence).
He dedicate his time to climbing and testing his equipment and brought new ideas while
Sheahan turned his vision into a business.
Throughout the late 2000s, Patagonia grew its sale at an average rate of 6% a year and looking to
the future Sheahan expressed the target goal of 10% annual growth in sales.

BUSINESS OF PATAGONIA
• Product line and product development: Patagonia’s competitors included The North Face, Inc. ;
Marmot Mountain Ltd. ; Mountain Hardware and Columbia Sportswear. Patagonia’s product
line was composed of four categories:
§ Sportswear: casual clothing, 42% of the revenues
§ Technical outwear: insulations garments, 30% of the revenues
§ Technical Knits: 12% of the revenues
§ Hard goods: 6% of the revenues
As a percentage of sales, the gross margin for Patagonia’s product lines ranged from 50% to 55%.
In developing its products, Patagonia focused on three criteria:
§ Quality
§ Environmental impact
§ Innovation
Patagonia claimed that these three elements allowed it to charge prices roughly 50% higher than
markets brands for comparable products. Patagonia’s average consumer was 38 years old with
an annual income of $160000.
• Emphasis on quality: to create quality products the company developed products that were
simple, functional and multifunctional. Simplicity was Patagonia’s principal design concept.
Chouinard explained that the goal of the company was to offer only viable, excellent products
that are as multifunctional as possible so that the customers can consume less but better. In
order to ensure this high standards, the company spent annually 100000$ on field-testing
performed by some ambassadors.
Patagonia updated models every couple of year to be sure that each new product represented a
significant improvement from older models.
• Environmental impact: The company was committed in reducing the environmental impact of
its products, from choosing less environmentally damaging dye to reduce packaging. For some
years they also stopped using anti-odor chemicals. From 1996 Patagonia manufactured its
cotton products only using organically produced cotton and this lead to an increase in the cost
of its products.
• Innovation: As a leader in the technological innovation, the company spent 3 millions dollars a
year in research and development, creating more durable clothes and making zippers 100%
recyclable. Over the years, Patagonia had patented numerous technologies and designs.
• Production and logistics: Patagonia’s chose of business partners was driven by values; the
company held its suppliers to its own standards of quality and environmental responsibility.
§ 1/3 of the cost of Patagonia’s goods came from manufacturing
§ 2/3 of the cost of Patagonia’s goods came from raw materials. The 80% of
the cost of raw materials was accounted by fabric while the other 20% by
accessories.
Suppliers shipped products to distribution center in Reno, Nevada, a location chosen for its access
to outdoors recreation opportunities. Patagonia has only long-term relationship with suppliers
in order to invest and have a better service and quality.
Patagonia offered and Ironclad Guarantee to repair, refund, and replace any product that didn’t
met the customer’s expectations.
• Sales: In all markets Patagonia pursued fours sales channels:
o Wholesale: 44% of the sales (145 millions of $, with a Gross Margin around 45%),
Patagonia distributed to 1000 dealers or franchiser (far less than other competitors)
which received about 50% of the suggested retail price.
o Retail: 33% (100 millions of $, Gross Margin of over 65%), the company owned 26
retails stores in the USA and 52 worldwide. They weren’t just place where to buy
goods but also physical representation of the brand, aimed to link customers to the
company.
o Catalog and internet: 23%, the company’s catalog where different from the one of
the competitors because only 60% of them was devoted to selling space while the
remainder was advocated to lifestyle
• Marketing: Patagonia spent less than 1% of sales on marketing and advertising and considered
its channels and social medias as platform to communicate its vision to the public,
incorporating educational messages in many of them. Patagonia was against using the
 company’s environmental position as a tool to make consumers consume more. An interactive
guide on its website (The Footprint Chronicles) tracked the environmental impact of more than
150 products showing all the company’s operations.
The environmental position of the company attracted much attention from the media and often
press or other companies provided free publicity. However not all the attention Patagonia
received was positive
Human resources: Patagonia considered essential that the employees shared the values of the
company and aimed to create a big family more than just a firm. Employees were chosen based
on “dirtbag” characteristics, environmental concern and entrepreneurial spirit. Every building
of the company was engineered in an environmentally efficient way. The cafeteria in Ventura
showcased organic, mostly vegetarian options for its staff. The company also offers unusual
benefits to its employees, such as paid sabbatical for up to two month to work for
environmental organizations of a 2000$ subsidy for choosing hybrid cars.
Low employee turnover, both maternity and paternity.

PATAGONIA’S ENVIROMENTAL COMMITEMENT

All the business decision of the company were driven by a final object, which was implementing
solutions for environmental crisis, even if this policy was often very expensive, difficult and
time consuming.
• Patagonia environmental philosophy: Patagonia’s environmental initiative responded to a five-
pronged philosophy:
o Lead an examined life
o Clean up our own act
o Do our penance
o Support civil democracy
o Influence other companies
• Product life initiative: In 2010 Patagonia was planning to launch the “product lifecycle
initiative”, which represented a holistic commitment to lengthen the lifecycle of each product
and reduce landfill waste. This initiative should have been based on a kind of membership,
between the company and its customers to “reduce, repair, reuse and recycle” the goods.
Most radically, the company aimed to encourage customers to limit their consumption, buying
less but choosing well made garments with the smaller possible footprint.
Customers were asked to repair their products and once they no longer wanted it, to facilitate its
reuse selling or swapping it. In order to fully support this initiative, Patagonia was planning to
establish a second-hand online market. Finally, once an item was worn out, customers were
asked to return it to Patagonia’s stores to recycle it in the most efficient way.
This initiative was of course very difficult to put in practice: it would increase the costs and
furthermore it required big investments in structures to make the service efficient for
customers. On the other hand there could be advantages in terms of visibility thanks to medias
and an improvement in brand’s reputation. Anyway, it was important to keep sales growing
together with profit. Chouinard himself said: “If we wish to lead corporate America by example,
we have to be profitable. No company will respect us if we are not profitable. It’s okay to be
eccentric, as long as you are rich, otherwise you are just crazy.”
In general:
1. Interest for social media (pro)
2. Improve brand and reputation (pro)
3. Reduce sales (con)
4. Increase cost to manage returns and repairs (con)
 PARMALAT
Parmalat history: Parmalat group was created by Calisto Tanzi, a self made entrepreneur. In 1961
he inherited the business from his father, at the time the company was based in Parma and
was mainly engaged in local trading of tomato, with revenues around $100’000.
Calisto, when at age of 22 took control of the business, decided to follow three main guidelines:
1. The company needed a more appealing brand, something its customers could associate
with genuine diet
2. The company’s product offering was to narrow and Tanzi thought that the milk business
could benefit of the established reputation of the Parma area.
3. The Parma area was to small and the company
So, Mr. Tanzi entered the milk business by founding Dietalat latte, and expanded his company in
Tuscany and Liguria. The real turning point took place in 1968 when he noticed, entering a
supermarket in Sweden, that milk wasn’t sold in glass bottles but in plastic bricks produced by a
company named Tetra-Pack. This packaging innovation, together with the new “UHT
technology” discovered, where the foundations of Mr. Tanzi’s empire. The company changed
name in Parmalat. And started producing and distributing “UHT milk”. This technology
guaranteed a longer conservation of milk without refrigeration.
In 1970, Parmalat revenues reached $3 millions. Mr. Tanzi embarked on an aggressive growth and
diversification strategy, entering also in other businesses (desserts and juices) and conducting
an expensive marketing strategy. Parmalat started sponsoring numerous sportsman and
Formula 1 teams and this made company well known everywhere. In 1980 Parmalat reached a
turnover of $180. During the following years Mr. Tanzi consolidated the company presence in
Brazil, US, Germany and France, acquiring numerous brands in the juice and bakery business
(Santal, Grisbi). Consolidated turnover reached $480 millions in 1987.
Parmalat also tried to enter in the TV business acquiring ODEON, with the aim to create and
alternative to RAI and Fininvest. This proved to be unsuccessful.
Parmalat’s first financial troubles started appearing in the late Eighties: the group appeared to be
undercapitalized and the reasons where mainly the low margin on milk and the high level of
dept, used to finance the growth strategy. Parmalat passive interest where actually more than
twice its cash flow.
Mr. Tanzi was approached by the American company Kraft which was interested in acquiring
Parmalat, however he decide not to sell, encouraged by banks and political connections.
Mr. Tanzi’s plan to overcome the crisis consisted in taking the company public. In 1989, through the
family holding Coloniale, Mr. Tanzi acquired 51% of Fcn, a listed company. He then sold to Fcn
50% of Parmalat. Finally Fcn changed name to Parmalat Finanziaria and the company obtained
the access to the financial market, avoiding and IPO and the publication of a detailed financial
report.
The fact of being listed on the Italian stock exchange granted Parmalat access to international
financial markets and capitals. While the company was growing, its corporate structure became
increasingly complicated troubling investors
with lack of transparency.
During the Nineties, Parmalat’s debt raising
capacity was also used to enter in the tourism
business (led by Calisto’s daughter) and
acquire a football team, Parma Calcio, that
had as president Calisto’s son.
Despite the many concerns being raised, the
financial markets continued supporting
Parmalat.
The financial scheme behind the Scandal: The usual mechanism which led to the collapse of the
group was quite simple: Parmalat issued debt to its own subsidiaries in order to cover their
losses, or issued debt to shell companies that transferred those founds to the Tanzi family
companies. The issued debt so appeared on Parmalat’s balance sheet. However, subsequently,
the debt was transferred to some other fake subsidiaries in exchange for cash payment which
was completely fake. The cash presumably paid was also transferred to offshore companies
and the documentation proving the existence of this founds was again falsified.
In the first nine month of 2003, more than $14 billion had disappeared from Parmalat’s accounts.

Needs cash
Lend real
Parmalat money
Subsidiaries with real
operations
Sell Make fake Le
nd Offshore companies
credits payments re
al
m
on
e y
Fake Bank
subsidiaries bondholders

Calisto Tanzi: His public image, before 2003, contrasts sharply with the fraudulent events that
underlay his company. A smart but aggressive entrepreneur, for years Mr. Tanzi commanded
enormous respect in the Italian business community. Moreover, he presented a public image of
a devote catholic and always supported charitable.
Parmalat however was managed in a very patriarchal manner. In fact, Mr. Tanzi surrounded himself
with managers often born in the Parma area. Moreover, Parmalat’s Board of Director was
mainly made up of family members.
Mr. Tanzi always had connections with the Italian banking and political scene, and he also financed
several political parties.

Fausto Tonna: Mr. Tonna was the CFO of the company and Mr. Tanzi’s right-hand. He is seen as the
main architect of the financial engineering operations which led to the collapse of Parmalat.
Moreover, he was the author of numerous illegal activities and the person who best knew the
financial scheme that the company used to cover its financial crises.
In March 2003, Mr. Tonna resigned but kept his seat on Parmalat’s board.

Gianpaolo Zinni: He had a firm in New York, Zini&Associates and Parmalat was his most important
client. He created numerous companies in his offices, most based in Delaware, which officially
had nothing to do with Parmalat, but which were actually used by the Group to raise debt and
redirect founds towards some of the Tanzi families companies. Zini&Associates is also
suspected of being at the center of the forgery of Parmalat’s invented bills, invoices, false bank
account and most of the transactions regarding the Cayman Island subsidiaries of Parmalat
(Epicurum, Bonlat…)

The role of the auditors: Grant Tornton, together with Deloitte&Touche, were the two auditors of
Parmalat. Basically, according to Mr. Tonna’s declarations, Parmalat had established a new
Cayman-based subsidiary, called Bonlat, to which the group would transfer all of the balance
sheet anomalies, and to retain Grant Tornton for the certification of the financial statements of
 this subsidiaries. In this way Grant Tornton could legally certify Parmalat’s anomalies.
Investigation then showed that auditors from Grant Tornton collaborated to the fraud.
The role of the Banks: According to Mr. Tonna declarations, many banks were aware of Parmalat’s
real financial situation and despite that, kept assisting the group. In particular, international
and Italian banks like Bank of America and JP Morgan Chase, Intesa San Paolo and many others
where supporting the group finances with bonds that amounted at $8 billions at the end of
2003.

Parmalat’s corporate governance: The ownership and control structure of Italian listed companies is
characterized by a high level of concentration and by the presence of limited number of
shareholders, all linked by either family ties or contractual agreements. From this point of view
Parmalat was a very Italian company. However it failed with regard to the following aspects:
• Effectiveness of the board of statutory auditors: Parmalat Finanziaria’s board of statutory
auditors never reported anything wrong about the company financial statements.
• Composition of the BoD: the BoD of Parmalat Finanziaria was composed of 13 members; 4 of
them were linked by family ties and only 5 could be considered non-executive directors.
• Independent directors: Parmalat Finanziaria had only three independent directors, far below
the Italian average
• Appointment of directors at the Nomination Committee: Parmalat Finanziaria did not have a
nomination committee and this could clearly prevent minority shareholders from being
adequately represented in the BoD.
• Internal Control Committee: it was composed by three members, and two of them (Mr. Tonna
and Mr. Giuffredi) were also members of the Executive Committee.
• Transactions with related parties

The scandal becomes public: The fraud of Parmalat began to emerge on Friday, December 19,
2003, when Bank of America informed Parmalat’s auditors that a $3.9 billions account the
company claimed to hold was fake. While this happened, Mr. Tanzi was in Ecuador and the
Italian press suspected he was on the run. The first to be summoned was Mr. Bocchi,
accountant of the financial department. After the interrogation, he met Mr. Del Soldato (CFO)
and started destroying the evidence. However after some days Mr. Bocchi started talking and
therefore Mr. Del Soldato was interrogated too.
The day after Mr. Tonna was interrogated and, by the way, he explained how they were forging
false bank accounts in their offices, it became clear that the Group could not repay its bonds
and therefore Parmalat filed bankruptcy. This led to Mr. Tanzi’s arrest.
Also a terrible suicide occurred, a close collaborator of Mr. Del Soldato killed himself.
Mr. Bondi and Parmalat: Mr. Bondi was appointed new CEO of the company and together with
banks started analyzing Parmalat’s financial situation. In 2004 he presented a rescue plan. The
workforce was spilt almost by a half and the company concentrated only on the Italian,
European, Canadian and Australian markets.
PROCTER AND GAMBLE

History

P&G was founded in Cincinnati, Ohio, in 1837 by and English and an Irish immigrants who where
candle-maker and soap-maker. That area allowed inexpensive access to animal fat and
therefore there was a lot of competition in that field. On the rise of the Civil War they built a
large factory and sold their products to the army. Their innovation was producing a high quality
products and placing it into a well done packaging with the name of the brand printed. All this
helped to develop a national reputation and after the end of the war there was an high
demand for P&G products. New plant was built to satisfy the increasing demand.
Innovation for the company was key:
• They applied the scientific method to the soap-making process developing Ivory, the first
American soap comparable with the finest European ones and created the first centralized R&D
department.
• They introduce sales-people (direct sales) to sale this products directly to supermarkets
avoiding wholesales (direct relationship with stores and supermarket). Moreover they could
have a better feedback about their products directly from the supermarkets.
• They started paying dividends to employees
• They introduced soap-opera: advertising messages, radio fictions all associated to the brand
• 1924: established one of the first market-research departments
• 1931: institutionalized competitive brand management: brand managers could manage their
brands as individual companies and compete with other brand managers. Therefore they were
in charge for cost and revenues (sort of divisional structure). But R&D and manufacturing
remained centralized. They so created two competitive brand of soaps but with the same
manufacturing and R&D.
• 1948: established the international sales division (thanks to the liberalization of markets that
followed to Marcial Plan). They entered the European market and they established the
headquarter in Brussels

P&G dimensions and structures

Possible dimension for P&G business where:
1. Products
2. Brands
3. Functions
4. Regions
5. Countries
And therefore in any structure chosen there had to be people who take care of each dimension.

From 1955 to 2005, P&G experienced six different organizational structures:

• US structure in 1955
• US structure in 1987
• EU structure in the ‘50s
• EU structure in the ‘80s
• Global structure in the ’90s
• Organization 2005
1. US divisional structure in 1955
they used products categories, led by VPs (with brands inside) to divide the structure adding two
departments (Basic research, Corporate Functions). Each products category had brand
managers, an R&D (actually it was development because research was held at an higher level,
Basic Research), manufacturing and sales departments with direct report to the VP (and not to
the brand manager).
During this period they launched Tide, an innovative synthetic product. This was developed outside
the products categories.

1. US structure in 1987
Two dimensions, centralized functional structures (Sales, R&D, Manufacturing, all led by a VP) and
larger product categories (Laundry
division, led by a VP) under which
there were the category business
units (Detergents ext, led by General
Managers). Matrix structure
with two bosses. Brand managers
had a budget and where now in
charge of marketing.

2. EU structure in the ‘50s

Divisional structure based on countries. After the IIWW, there was a President for overseas
operations at the head of two dimensions: functions (R&D, Process design, Finance,
Engineering) and countries (with inside
country's specific functions managed locally
such as sales, marketing, market research
ect. Country were like small companies inside
P&G Europe each led by a Country Manager.
Basically each country reported to the bosses
in Brussels but were quite independent).
The problems were that products weren't
launched simultaneously in the various
countries and there ware high losses due to
low optimization. Therefore it was difficult to globalize a product.
3. EU structure in the ‘80s
Not anymore about countries but about general Continental categories, each led by a VP (Europe
Laundry division, under it there were category business regions such as Germany Detergent,
led by a GM and under it Brand
managers., so specific GM for
specific products reporting to the
boss of their products, so the VP of
the laundry division) and Brussels
Corporate Functions ( Corporate
R&D, Corporate Finance,
Corporate Manufacturing).

4. Global structure at the end of the ‘90s

It only lasted 3 years, responsible for the
profit warning. A single structure for all
the world. A the head there was a CEO.
There structure was divided in Global
Functions (located in Cincinnati, like R&D,
Sales all led by a SVP) and Global
Categories (at the head there was the
Global X Category Leader, in Cincinnati)
that overlap regions.

5. Organization 2005
Launched in 1998, they changed the portfolio brands (selling many brands) and changed the
structure. In the first two years the new organization didn't work and they had, for two
quarters, four profit warnings (i.e. didn't reach the level of expected profits) and therefore the
CEO (Jagger) left. He was replaced by Laffley.

The matrix structure was replaced by

an amalgam of interdependent
organizations:
• Global business units (GBUs)
with primary responsibilities for
products
• Market development
Organizations (MDOs) with primary
responsibilities for markets
• Global business services (GBSs),
units responsible for managing
internal business processes.
.
The whole organization was designed to reduce cost and improve the speed with which P&G
innovated and globalized its innovations. They had autonomies at countries only for marketing
 while for manufacturing and R&D they centralized. Each general product had a functional
activity.

P&G in 2018

P&G organizational structure is comprised of Global Business Units, Selling and Market Operations,
Global Business Services and Corporate Functions. It combines global scale benefits with a local
focus on consumers and retail customers in each country where P&G products are sold.
Global business units (GBUs): P&G’s portfolio is organized around 10 category-based Global
Business Units (GBUs), and this category business leaders have full decision-making authority
for their businesses. GBUs are responsible for developing overall brand strategy, new product
upgrades and innovations, and marketing plans.
Selling and market operations (SMOs): responsible for developing and executing go-to-market plans
at the local level. Their focus is effective and efficient selling, distribution, shelving, pricing
execution and merchandising for consumers, channels, customers and markets in six regions:
Global Business Services (GBS): operates and supports the infrastructure, operations, systems, and
shared services that run P&G. GBS also discovers, develops, and implements technologies to
accelerate and advance the work of P&G brands.