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Creating Effective Organizational Designs


Title: Strategic Management: Text and Cases Subject: Chapter 10 PowerPoint Slides Last modified by: College of Business Created Date: 9/24/2001 5:55:57 PM – PowerPoint PPT presentation

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Title: Creating Effective Organizational Designs

Chapter 10
  • Creating Effective Organizational Designs

Traditional Forms of Organizational Structure
  • Organizational structure refers to formalized
    patterns of interactions that link a firms
  • Tasks
  • Technologies
  • People
  • Structure provides a means of balancing two
    conflicting forces
  • Specialization
  • Integration

Patterns of Growth of Large Corporations
Simple Structure
  • Simple structure is the oldest and most common
    organizational form
  • Staff serve as an extension of the top
    executives personality
  • Highly informal
  • Coordination of tasks by direct supervision
  • Decision making is highly centralized
  • Little specialization of tasks, few rules and
    regulations, informal evaluation and reward system

Patterns of Growth of Large Corporations
Functional Structure
Lower-level managers, specialists, and operating
Patterns of Growth of Large Corporations
Functional Structure
  • Found where there is a single or closely related
    product or service, high production volume, and
    some vertical integration
  • Advantages
  • Enhanced coordination and control
  • Centralized decision making
  • Enhanced organizational-level perspective
  • More efficient use of managerial and technical
  • Facilitated career paths and development in
    specialized areas
  • Disadvantages
  • Impeded communication and coordination due to
    differences in values and orientations
  • May lead to short-term thinking (functions vs.
    organization as a whole
  • Difficult to establish uniform performance

Divisional Structure
Lower-level managers, specialists, and operating
Divisional Structure
  • Organized around products, projects, or markets
  • Each division includes its own functional
    specialists typically organized into departments
  • Divisions are relatively autonomous and consist
    of products and services that are different from
    those of other divisions
  • Division executives help determine product-market
    and financial objectives

Divisional Structure
  • Advantages
  • Separation of strategic and operating control
  • Quick response to important changes in external
  • Minimal problems of sharing resources across
    functional departments
  • Development of general management talent is
  • Disadvantages
  • Can be very expensive
  • Can be dysfunctional competition among divisions
  • Can be a sense of a zero-sum game that
    discourages sharing ideas and resources among
  • Differences in image and quality may occur across
  • Can focus on short-term performance

Divisional Structure
  • Strategic business unit (SBU) structure
  • Divisions with similar products, markets, and/or
    technologies are grouped into homogenous SBUs
  • Task of planning and control at corporate office
    is more manageable
  • May become difficult to achieve synergies across
  • Holding company structure (conglomerate)
  • Appropriate when the businesses in a
    corporations portfolio do not have much in
  • Lower expenses and overhead, fewer levels in the
  • Inherent lack of control and dependence of
    CEO-level executives on divisional executives

Matrix Structure
Adapted from Exhibit 10.4 Matrix Organizational
Matrix Structure
  • A combination of the functional and divisional
  • Individuals who work in a matrix organization
    become responsible to two managers
  • The project manager
  • The functional area manager
  • Advantages
  • Facilitates the use of specialized personnel,
    equipment and facilities
  • Provides professionals with a broader range of
    responsibility and experience
  • Disadvantages
  • Can cause uncertainty and lead to intense power
  • Working relationships become more complicated
  • Decisions may take longer

Dominant Growth Patterns of Large Corporations
Growth in revenues and employees
Diversification in unrelated areas
Vertical integration
Increase relatedness of products and markets
Related diversification
International expansion
International Expansion
International expansion
Increase relatedness of products and markets
Related diversification
International Operations Implications for
Organizational Structure
  • Three major contingencies influence structure
    adopted by firms with international operations
  • Type of strategy driving the firms foreign
  • Product diversity
  • Extent to which the firm is dependent on foreign

International Operations Implications for
Organizational Structure
  • Structures used to manage international
  • International division
  • Geographic-area division
  • Worldwide functional
  • Worldwide product division
  • Worldwide matrix

Boundaryless Organizational Designs
  • Boundaries that place limits on organizations
  • Vertical boundaries between levels in the
    organizations hierarchy
  • Horizontal boundaries between functional areas
  • External boundaries between the firm and its
    customers, suppliers, and regulators
  • Geographic boundaries between locations, cultures
    and markets

Making Boundaries More Permeable
Three approaches
  • Permeable internal boundaries
  • Higher level of trust and shared interests
  • Shift in philosophy from executive development to
    organizational development
  • Greater use of teams
  • Effective Relationships with External
  • Flexible porous organizational boundaries
  • Communication flows and mutually beneficial
    relationships with internal and external

Pros and Cons of Barrier-Free Structures
Pros Cons
  • Leverages the talents of all employees
  • Enhances cooperation, coordination, and
    information sharing among functions, divisions,
    SBUs, and external constituencies
  • Enables a quicker response to market changes
    through a single-goal focus
  • Can lead to coordinated win-win initiatives with
    key suppliers, customers, and alliance partners
  • Difficult to overcome political and authority
    boundaries inside and outside the organization
  • Lacks strong leadership and common vision, which
    can lead to coordination problems
  • Time-consuming and difficult-to-manage democratic
  • Lacks high levels of trust, which can impede

Making Boundaries More Permeable
Three approaches
  • Outsources nonvital functions, tapping into
    knowledge and expertise of best in class
    suppliers but retains strategic control
  • Three advantages
  • Decrease overall costs, leverage capital
  • Enables company to focus scarce resources on
    areas where it holds competitive advantage
  • Adds critical skills and accelerates
    organizational learning

Pros and Cons of Modular Structures
Pros Cons
  • Directs a firms managerial and technical talent
    to the most critical activities
  • Maintains full strategic control over most
    critical activitiescore competencies
  • Achieves best in class performance at each link
    in the value chain
  • Leverages core competencies by outsourcing with
    smaller capital commitment
  • Encourages information sharing and accelerates
    organizational learning
  • Inhibits common vision through reliance on
  • Diminishes future competitive advantages if
    critical technologies or other competences are
  • Increases the difficulty of bringing back into
    the firm activities that now add value due to
    market shifts
  • May lead to an erosion of cross-functional skills
  • Decreases operational control and potential loss
    of control over a supplier

Making Boundaries More Permeable
Three approaches
  • Continually evolving network of independent
    companies linked together to share skills, costs,
    and access to one anothers markets
  • Suppliers
  • Customers
  • Competitors
  • Each gains from resulting individual and
    organizational learning
  • May not be permanent

Pros and Cons of Virtual Structures
Pros Cons
  • Enables the sharing of costs and skills
  • Enhances access to global markets
  • Increases market responsiveness
  • Creates a best of everything organization since
    each partner brings core competencies to the
  • Encourages both individual and organizational
    knowledge sharing and accelerates organizational
  • Harder to determine where one company ends and
    another begins, due to close interdependencies
    among players
  • Leads to potential loss of operational control
    among partners
  • Results in loss of strategic control over
    emerging technology
  • Requires new and difficult-to-acquire managerial

Source R. E. Miles and C. C. Snow,
Organizations New Concepts for New Forms,
California Management Review, Spring 1986, pp.
62-73 R. E. Miles and C. C. Snow, Causes of
Failure in Network Organizations, California
Management Review, Summer 1999, pp. 53-72 and H.
Bahrami, The Emerging Flexible Organization
Perspectives from Silicon Valley, California
Management Review, Summer 1991, pp. 33-52.
Boundaryless Organizations Making Them Work
  • Factors facilitating effective coordination and
    integration of key activities
  • Common culture and shared values
  • Horizontal organization structures
  • Horizontal systems and processes
  • Communications and information technologies
  • Human resource practices
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