1. Creating Effective Organizational Designs
Chapter 10
Creating Effective Organizational Designs

2. 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

3. 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

4. Patterns of Growth of Large Corporations:
Functional Structure
Lower-level managers, specialists, and operating personnel

5. 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

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

7. 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

8. 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

9. 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

10. Matrix Structure
Adapted from Exhibit 10.4 Matrix Organizational Structure

11. 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

12. 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

13. 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

14. International Operations: Implications for Organizational Structure
Structures used to manage international operations
International division
Geographic-area division
Worldwide functional
Worldwide product division
Worldwide matrix

15. 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

16. 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

17. 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

18. 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

19. 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

20. 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

21. 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 ; R. E. Miles and C. C. Snow, “Causes of Failure in Network Organizations,” California Management Review, Summer 1999, pp ; and H. Bahrami, “The Emerging Flexible Organization: Perspectives from Silicon Valley,” California Management Review, Summer 1991, pp

22. 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