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 firm’s 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 executive’s 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 personnel

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

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

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 Disadvantages 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

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 corporation’s 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

Matrix Structure Adapted from Exhibit 10.4 Matrix Organizational Structure

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

Dominant Growth Patterns of Large Corporations Strategies leading to new structure Dominant growth path for U.S. firms Growth in revenues and employees Diversification in unrelated areas Vertical integration Diversification into related products and markets 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 firm’s foreign operations Product diversity Extent to which the firm is dependent on foreign sales

International Operations: Implications for Organizational Structure Structures used to manage international operations 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 organization’s 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 Barrier-free type of organization 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

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

Making Boundaries More Permeable Three approaches Barrier-free type of organization 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 Modular type of organization

Pros and Cons of Modular Structures Pros Cons Directs a firm’s managerial and technical talent to the most critical activities Maintains full strategic control over most critical activities—core 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

Making Boundaries More Permeable Three approaches Barrier-free type of organization Continually evolving network of independent companies linked together to share skills, costs, and access to one another’s markets Suppliers Customers Competitors Each gains from resulting individual and organizational learning May not be permanent Modular type of organization Virtual type of organization

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.

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