Essay on The Economics of Organizational Architecture

What are the three aspects of corporate organization according to the article? Which one is in your view most important to the success of the firm? Explain.

According to Brickley, Smith and Zimmerman (1995), three critical aspects of corporate organization include “the assignment of decision rights within the firm”, “the structure of the system to evaluate the performance of both individuals and business units”, “the methods of rewarding individuals” (pp.21-22). Each of these aspects is needed for organizational functioning and, moreover, these aspects are interdependent and form a “three-legged stool” so it is difficult to choose one most important aspect.

If it is essential to choose one of these aspects, then the most important is, in my opinion, the assignment of decision rights within the firm. If the decision rights are distributed in a right way (and the persons responsible for the decision-making are competent), then these people might introduce a reasonable system for evaluating performance and adopt efficient methods of rewarding individuals. However, without a reasonable assignment of decision rights within the firm the company’s operations might suffer and the remaining critical aspects of corporate organization are not likely to be maintained.

Explain in which industries franchising has established itself as a more successful form of business organization (compared to small independently owned companies) and why.

Franchising established itself as a more successful form of business organization in such industries as fast food, hospitality, auto repair, retail (such as clothes, specialty items and foods, etc.), fitness, child care, spa services, tutoring. These industries have several things in common – customers might use them in different places and locations, customers are willing to see the same standards of quality and service, customers want to know what to expect from the company, customers want to use loyalty programs and want to be rewarded for frequent use of services or purchase of products. The businesses with the above-mentioned characteristics are likely to have more franchises compared to other types of businesses.

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