Organizational activities are of two types: structural and executional. Structural activitiesare activities that determine the underlying economic structure of the organization. Executional activities are activities that define the processes and capabilities of an organization and thus are directly related to the ability of an organization to execute successfully. Organizational cost drivers are structural and executional factors that determine the long-term cost structure of an organization. Thus, there are two types of organizational drivers: structural cost drivers and executional cost drivers. Possible structural and executional activities with their cost drivers are listed by category in Exhibit 11-2.
As the exhibit shows, it is possible (and perhaps common) that a given organizational activity can be driven by more than one driver. For example, the cost of building plants is affected by number of plants, scale, and degree of centralization. Firms that have a commitment to a high degree of centralization may build larger plants so th\ at there can be more geographic concentration and greater control. Similarly, complexity may be driven by number of different products, number of unique processes, and number of unique parts. Organizational drivers are factors that affect an organization’s long-term cost structure. This is readily understood by simply considering the various drivers shown in Exhibit 11-2. Among the structural drivers are the familiar drivers of scale, scope, experience, technology, and complexity. For example, economies and diseconomies of scale are well-known economic phenomena, and the learning curve effect (experience) is also well documented. An interesting property of structural cost drivers is that moreis not always better. Moreover, the efficiency level of a structural driver can change.
For example, changes in technology can affect the scale driver by changing the optimal size of a plant. In the steel industry, minimill technology has eliminated scale economies (in the form of megamills) as a competitive advantage. Plants of much smaller scale can now achieve the same level of efficiency once produced only by larger steel plants. Of more recent interest and emphasis are executional drivers. Considerable managerial effort is being expended to improve how things are done in an organization. Continuous improvement and its many faces (employee empowerment, total quality management, process value analysis, life-cycle assessment, etc.) are what executional efficiency is all about. Consider employee involvement and empowerment. The cost of using employees decreases as the degree of involvement increases. Employee or worker involvement refers to the culture, degree of participation, and commitment to the objective \ of continuous improvement.
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