Incentive Conflicts and Contracts + Organizational Architecture + Decision Rights: The Level of Empowerment - Essay Example

s 4 July Incentive Conflicts and Contracts + Organizational Architecture + Decision Rights: The Levelof Empowerment Discussion Question 1: a) The first case is a perfect example of adverse selection problem. Adverse selection problem also known as pre-contractual problem is a phenomenon in which the purchaser or trader enters into a transaction with another party that possesses more information. The nature of information in such cases is asymmetric i.e. unbalanced - one party; may it be the buyer or seller has more information about subject under consideration.

In the case under consideration, though the buffet is being offered at a fixed price level, the clientele for this proposition differs from the routine set of consumers. The major reasons for this are that the consumers approaching the restaurant have a predetermined set of preferences, price range and consumption patterns. They don’t possess the relevant information and attributes that are required for all-you-can-eat buffet. The people approaching the buffet are aware regarding the fact that what is their food intake whereas restaurant isn’t.

The actual consumers who approach the buffet are the ones that have craving for variety of food and large scale consumption. This variation inflicts loss on the restaurant. This problem can be reduced by conducting a market research. The research regarding the buffet system will provide the restaurant that how this value offer should be marketed, who are the people to be marketed and the major reasons why there are different consumption patterns. Also, the pricing strategy can be revised i.e. the buffet can be priced according to the people with large appetite whereas small meals and deals should be offered at lower prices to retain the routine clientele.

As a result of these insights, the offer can be effectively marketed. b) In the second instance, the restaurant is facing the incentive problem. In this post-contractual problem, the owner of the firm initially is incentivized by the offer of manager working long hours. He doesn’t possess much information about the manager, but is driven for long hour performance. As a result he hires him. The manager shows persistent performance initially to attain a permanent status in restaurant. He performs efficiently to leave an impressive impact in the mind of the owner when the owner is around.

As soon as the owner is out of town and the incentive abate the manager’s performance declines and he doesn’t work long hours. This problem can be rectified by conducting a 360 degree feedback before and after hiring. The owner can extract information regarding the manager from different reference points like his employer, friends, and acquaintances etc. before hiring him. This would serve as an attestation for the owner’s decision. Information regarding his performance and timings can be attained in lateral stages from the waiters and staff working for restaurant.

He can also be offered attractive profit sharing plan as an incentive to abide by his promise. If a profit sharing plan is offered than the manager would make sure that he works long hours in order to have higher profit share. Discussion Question 2: The first and foremost step that Karl would require to take is to understand the nature of the business and its operations. As a leader it is essential to have a firm grip and thorough understanding of the business. This would enable him to understand the organizational structure, the delegated operations and the degree of empowerment.

On second level Karl would have to restructure the organizational architecture. Karl being a smart and qualified businessman has to understand the fact that the authoritarian mode of leadership doesn’t allow the employees enough space to perform at their maximum level of efficiency. For employees to perform at their best, they should be given confidence, delegation and encouragement to take initiatives. In order to revamp the organizational structure, Karl has to adopt the collective mode of decision making.

Karl can switch from a centralized system to a decentralized system by formation of different management tiers at different levels. The different operations of the entire restaurant chain can be fragmented to different managerial levels. The employees should be empowered with decision making authority to an optimum level and their suggestions should be taken into account. Formation of cross functional teams would bring all the staff on one common platform driven towards organizational objectives.

High level of employee motivation and satisfaction would yield positive results for the organization (Brickley, Smith and Zimmerman, 350-352). Work Cited Brickley, James A., Smith Jr., Clifford W. and Zimmerman, Jerold L. Managerial Economics and Organizational Architecture. 4th Ed. New Delhi, India: Tata McGraw-Hill Publishing Company Limited, 2007.