Creating Effective Organizational Designs

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Chapter 10

• Creating Effective Organizational Designs

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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

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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

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Patterns of Growth of Large Corporations
Functional Structure
Lower-level managers, specialists, and operating
personnel
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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
  talent
• 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
  standards

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Divisional Structure
Lower-level managers, specialists, and operating
personnel
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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

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Divisional Structure

• Advantages
• Separation of strategic and operating control
• Quick response to important changes in external
  environment
• Minimal problems of sharing resources across
  functional departments
• Development of general management talent is
  enhanced

• 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
  divisions
• Differences in image and quality may occur across
  divisions
• Can focus on short-term performance

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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
  SBUs
• Holding company structure (conglomerate)
• Appropriate when the businesses in a
  corporations portfolio do not have much in
  common
• Lower expenses and overhead, fewer levels in the
  hierarchy
• Inherent lack of control and dependence of
  CEO-level executives on divisional executives

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Matrix Structure
Adapted from Exhibit 10.4 Matrix Organizational
Structure
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Matrix Structure

• A combination of the functional and divisional
  structures
• 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
  struggles
• Working relationships become more complicated
• Decisions may take longer

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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
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International Operations Implications for
Organizational Structure

• Three major contingencies influence structure
  adopted by firms with international operations
• Type of strategy driving the firms foreign
  operations
• Product diversity
• Extent to which the firm is dependent on foreign
  sales

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International Operations Implications for
Organizational Structure

• Structures used to manage international
  operations
• International division
• Geographic-area division
• Worldwide functional
• Worldwide product division
• Worldwide matrix

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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

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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
  Constituencies
• Flexible porous organizational boundaries
• Communication flows and mutually beneficial
  relationships with internal and external
  constituencies

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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
  processes
• Lacks high levels of trust, which can impede
  performance

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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

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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
  outsiders
• Diminishes future competitive advantages if
  critical technologies or other competences are
  outsourced
• 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

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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

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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
  alliance
• Encourages both individual and organizational
  knowledge sharing and accelerates organizational
  learning

• 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
  skills

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.
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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