Two Specific Organizational Forms of Business and the Possible Implica Assignment

Two Specific Organizational Forms of Business and the Possible Implications of the Principal-Agent Problem - Assignment Example Two specific organizational forms are the product-based organizational form and the functional form. The functional form is structured according to different functional departments in the organization, such as the finance, sales, marketing, product development, accounting, and human resources. On the other hand, a product based organizational form is structured according to the organization’s product lines: electronics, appliances, consumer products, and others. A principal-agent relationship is defined as a relationship which â€Å"occurs whenever one person acts in the interests of another† (Garger, 2010, p. 1). As emphasized by McGuigan, Moyer and Harris (2014), the principal-agent model ensues when â€Å"owner-principals hire manager-agents to stand in and conduct their business affairs† (p. 559). Accordingly, â€Å"in a functional organization, the firm is divided into functional divisions, and a division manager has responsibility for a single functionâ₠¬â„¢s activities on behalf of all products. In a product-based organization, the firm is organized into product divisions, and a division manager has responsibility for all functional activities in behalf of a single product† (Besanko, Regibeau, & Rockett, 2005, p. 461). The possible implications of a principal agent relationship in a functional organization versus product-based organizations are summed as follows: (1) measuring profitability in a product-based organization is easier due to the ease of offering incentives according to products; (2) when functions are deemed more significant in a functional organization, the latter is allegedly favored due to the ability to offer and apply incentive sensitivity principle; (3) in the presence of cross-product externalities within functional departments, findings revealed preference for favoring functional organizations due to  the ability of function managers to imbibe externalities in their decision-making processes; and (4) â€Å"diseconomies of span generally favor the functional organization when one product is significantly more important to firm profitability than the other and favors the product organization when one function is significantly more important than the other†.