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Organizational Designs Chapter 13 1 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible.

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Presentation on theme: "Organizational Designs Chapter 13 1 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible."— Presentation transcript:

1 Organizational Designs Chapter 13 1 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

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3 The Animal Refiner (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 3 Risk management today is so complex and so important for Tyson’s competitive success that the company has changed its structure to better oversee those risks.

4 What’s Next (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 4 This chapter is about business organizations, why they take the shapes they do, and how they change with their environments.

5 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 5

6 It Takes More than a Mousetrap (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 6 Contrary to the proverb, if you want to bring the world to your door you need to do more than invent a better mousetrap. This chapter asks who in an organization would best be given authority to make different decisions, and why. Doing so requires understanding how information originates within a firm, how it is transferred, and who can put it to the most effective use. The firm does not just process material, financial, and human inputs. It also processes information, and its ability to do this well depends on its organizational design.

7 Centralization (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 7 Some decisions will best be centralized, that is, one person (department) uses information from different sources to set a policy that may affect those who provided the information. Decisions are better made centrally under the following conditions: 1.They require information from more than one source. 2.They require decision-making skills (e.g., knowledge of forecasting techniques) that those who produced the information do not have. 3.The decision maker’s incentives are aligned with those of the principals, in this case the firm’s shareholders.

8 Centralization - Transmitting Information and Commands (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 8 It seems obvious that better information makes for better performance, but what is meant by good information is far less obvious. Exactly who has that data and how it gets to the decision maker are both critical questions in organizational design.

9 Decentralization - Management (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 9 The second industrial revolution marked the emergence of management as a defined occupation. Organizational design is the study of who can best decide what, and the best design depends on the organization’s purpose— what it produces and what markets it operates in.

10 Decentralization - Principals and Agents Everywhere (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 10 Many members of an organization are simultaneously principals attempting to obtain performance from subordinates and agents expected to perform for their supervisors. Contracts determine methods of payment that a principal can use to elicit effort from an agent.

11 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 11

12 A “Tree” without Roots or Branches (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 12 What sort of business might have an organization chart like the one depicted here? It consists of a single row of Xs that represent individuals. No important authority relationships are shown above or below them. One possibility is that it describes a group medical (or possibly a law or accounting) practice.

13 A Simple Hierarchy (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 13 Limits on the abilities of individuals to process information suggest a basic principle: Put the decision where the information is. If a person at a low level of the organization has all of the information that is relevant to a decision, assigning responsibility for that decision to person at a higher level will not improve the quality of the decision that gets made.

14 A Simple Hierarchy (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 14 In this simple organization there are two possible reasons to keep A and B separate rather than combine them. First, they might provide HQ with dissimilar information like financial data and sales statistics. Second, separate paths to A and B allow HQ to avoid overloading each manager with irrelevant information and makes it more likely that orders will be sent to those best positioned to carry them out as HQ wishes.

15 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 15

16 Functionalization and Divisionalization (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 16 There are two broad ways to categorize the activities that take place in A and B. The first is functionalization, where each box contains only specialists in some aspect of the firm’s operations. Box A might be the purchasing department, responsible for buying all of the firm’s inputs. Box B might be the sales department, which markets all the company’s products and is in charge of both its sales force and its advertising campaigns. The second way to fill the boxes is to divisionalize along product or geographic lines. Box A might contain all the company’s North American activities, including production, input procurement, and sales, while Box B contains the corresponding activities for Europe. Geographic divisionalization is growing with globalization.

17 U-form Organizations – Green Bay Packers (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 17

18 U-form Organizations – Green Bay Packers (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 18 In a U-form organization headquarters makes decisions using information submitted by various departments, and possibly itself as well. A well-known U-form firm is the National Football League’s Green Bay Packers. Specialized functions such as public relations, ticketing, security, and building (stadium) supervision are each departments staffed by specialists who report to the president and chief executive officer (CEO).

19 U-form Organizations – Green Bay Packers (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 19 A U-form organization should serve the Packers well for several reasons: The firm produces a single product—football—in a single location. The operating environment changes little from year to year. The Packers face hardly any direct competition from other teams for customers.

20 U-form Organizations - Problems of U- form Organizations (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 20 There are limits to the information a firm’s headquarters can use effectively in making decisions. If a U-form firm makes several different products or sells the same product in different markets, information from functional departments will be less helpful to its management. Whether a larger staff at headquarters improves top-level decision making depends on the types of information it must evaluate and the criteria for accepting or rejecting a proposed project.

21 M-form Organizations (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 21 A divisionalized firm is often called M-form, where the “M” stands for multidivisional. An M-form firm like the one shown engages in activities A, B, and C. These might be different products it produces or units it operates in different locations.

22 M-form Organizations (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 22 Activities A, B, and C each resemble a stand-alone U-form firm. If management chose to divest C, it could possibly remain intact and viable as a U-form firm that now had its own management. The M-form keeps decisions at the divisional level that would be sent to headquarters in a U- form firm. The headquarters of an M-form firm, however, must be able to identify, measure, and compare a division’s performance (and its future prospects) with other divisions.

23 M-form Organizations - Product Divisions: Microsoft (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 23 Microsoft Corporation is divisionalized into six business segments: The Client segment is responsible for the Windows operating systems and relations with personal computer (PC) manufacturers. Server and Tools handles the Windows Server Operating System. Platform Products and Services produces programming tools and server software. Online Services is in charge of the Microsoft Network (MSN), , and related services. The Business division produces application software, most importantly the Office suite. The Entertainment and Devices division produces the Xbox game console, Zune player, and operating systems for personal digital Assistants.

24 M-form Organizations - Geographic Divisions: Ingram Micro (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 24 Ingram Micro is the world’s largest ($35 billion sales in 2008) wholesale distributor of computer hardware and software, with staff in 34 countries and sales in 140. The company’s four divisions cover North America, Europe and the Middle East, the Asia-Pacific region, and Latin America.

25 From U-form to M-form: Ford and General Motors (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 25 The origins and early development of the U.S. automobile industry offer a comparison of the competitive advantages of U-form and M-form firms. Both GM and Ford Motor Company began as U-form organizations, and both became M-form when U-forms became unmanageable.

26 From U-form to M-form: Ford and General Motors - U-form: Ford (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 26 Henry Ford made history by turning the automobile into a mass-consumption good. Unlike other manufacturers whose production runs were small, Ford standardized his Model T and produced it in volumes that drastically lowered costs. Introduced in 1908, the Model T was built on assembly lines (themselves largely Ford’s invention) with interchangeable parts and workers specialized to particular steps. A concern with dependable supplies and predictable quality led Ford to vertically integrate into production of raw materials. Ford’s production environment changed little over two decades.

27 From U-form to M-form: Ford and General Motors - M-form: General Motors (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 27 General Motors’ William C. Durant had a quite different strategy. Believing buyers wanted choices that Ford would not offer, Durant (originally president of the independent Buick company) chose to make acquisitions in order to produce a wider variety of cars. By the 1920s, GM was producing nine different makes of cars and trucks, each in several body styles. Operated as a U-form, the company had become unmanageable. By the 1920s, GM was producing nine different makes of cars and trucks, each in several body styles. Operated as a U-form, the company had become unmanageable. In 1923, Alfred P. Sloan became president of GM and designed reporting procedures to compare divisional performance to meet the goal of better allocating capital by using the then-novel concept of return on investment.

28 From U-form to M-form: Ford and General Motors - The Competitive Consequences (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 28 Over the 1920s General Motors cemented its lead over Ford. Historian Chandler argues that Ford’s U-form and its concentration on a single product generated information flows to management that favored the status quo, and that Ford’s organization itself was an important reason for its failure to see and adapt to market changes GM had in large part caused. Logistical problems and management’s reluctance to abandon the old system left Ford with a mix of U-form and M-form activities. Today, GM’s management is concerned that the company cannot compete because it is over- divisionalized, and it is attempting to standardize its various brands around the world.

29 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 29

30 Matrix Organizations (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 30 Here is the 2008 organization chart of ABB Group. ABB produces and sells five major product lines worldwide. ABB is doubly divisionalized into superimposed M-form organizations. It is called a “matrix organization,” or sometimes an “MX-form.”

31 Matrix Organizations (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 31 The matrix form has advantages and disadvantages and is more likely to be found in firms that produce diverse goods that are sold in diverse markets. A country unit can use its accumulated experience to reduce the costs of dealing with government for all of ABB’s products sold there. Likewise, all of ABB’s product divisions can use a country unit to manage risks denominated in that country’s currency. If several product divisions manufacture in a country there may be advantages in procuring inputs for them jointly. ABB’s MX-form also has potential advantages when broken down by product. If it produces and markets a certain good in several countries, the various plants may be able to share innovations or learn better operating practices from one another.

32 Matrix Organizations (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 32 On the downside, ABB’s employees ultimately have two bosses—the country or regional manager and the business area manager—and their interests may be in conflict. A country manager may want to begin manufacturing a certain product there while a product manager favors continued transshipment to the country. A country manager might want to discourage information transfer from an efficient plant in her domain to an inefficient one elsewhere that will lower the local plant’s relative performance.

33 Self-Contained Units - Why Redesign an Organization? (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 33 Tyson redesigned itself to better adapt to the new importance and complexity of risk management in the markets for many of its inputs and outputs. The financial revolution that began in the 1970s changed risk management from a relatively simple and standardized activity to an essential element of corporate strategy. The revolution had two consequences for a business like Tyson. First, risk management at the divisional level became inadequate. Second, specialists like Jean Beach, however, could not do the entire job. They would have to interact with people in the divisions who were experts in operations.

34 Self-Contained Units (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 34 Here is an organization before and after the creation of a self-contained unit. In this figure the company has reorganized its risk management into an SCU that reports only to headquarters. It has final authority in that area, but doing its job requires contact with employees who have expertise in division-level risks.

35 Self-Contained Units (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 35 The benefits and drawbacks of a self-contained unit mirror those of the matrix organization. Ideally, people with different expertise will combine their knowledge to produce better policies than any subset of them could produce. There is, however, no guarantee that the relationship between the SCU and the operating employees will turn out this way.

36 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 36

37 Who Really Decides? (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 37 An expert once called an organizational diagram “an optimistic chart of expectations about relationships.” A graph of relationships may differ greatly in practice from their actual implementation. A line that links higher employees or divisions with lower ones portrays formal authority. Their real relationships often play out in accordance with informal authority. A chart can also fail to reveal important relationships. A vice president’s administrative assistant may not even appear on it, but the vice president may have given her authority to issue certain orders under the vice president’s name without his active involvement.

38 Informal Authority, Contingencies, and Competition (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 38 In Chapter 12 we compared transactional governance by organizations with governance by markets or contracts. Problems encountered in contracts are mirrored in organizations. In both, negotiations over an unforeseen problem may take place outside the formal relationship outlined in the contract or chart. Situations might arise within an organization that are incompatible with existing authority relationships. In response, members of the organization may negotiate new relationships whose authority characteristics do not appear on the chart but are generally acknowledged to exist.

39 Informal Authority, Contingencies, and Competition (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part. 39 The stories of GM and Ford show the potential importance of organizational form as a competitive tool. An inappropriate form can obstruct a firm that would otherwise be competitive. Many companies treat their organization charts as confidential documents that must not fall into the hands of competitors. Charts can provide information about strategies.


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