1. Organizational Design: Structure, Culture, and Control

2. Part 3 Strategy Implementation

3. Zappos: An Organization Designed to Deliver Happiness
Chapter Case 11
Zappos: Success through customer service
Customer service all in-house
No scripts or timed calls
Flat Organizational Structure = Flexibility
Job rotation = trained talent
4 weeks of orientation training
Including 2 weeks on customer service phones.

4. Zappos’ Core Values EXHIBIT 11.1
INSTRUCTOR: An interactive video exercise about Zappos culture is found online in McGraw-Hill’s Connect available with this textbook. It covers Learning Objective 11.6.

6. LO 11-1 Define organizational design and list its three components.
LO Explain how organizational inertia can lead established firms to failure.
LO Define organizational structure and describe its four elements.
LO Compare and contrast mechanistic versus organic organizations.
LO Describe different organizational structures and match them with appropriate strategies.
LO Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed.
LO Compare and contrast different strategic control and reward systems.

7. How to Organize for Competitive Advantage
Organizational design
Goal is to translate strategies into realized ones
Structure
Processes
Procedures
Structure follows strategies
Structure must be flexible
Yahoo failed to make changes to their organizational structure.
Jerry Young ousted in 2008.

10. Organizational Inertia and the Failure of Established Firms
Resistance to change
Often leads to failure because of the environmental dynamics: competition, technology, strategy…etc.
Organizational strategy and structure are not static… But rather are dynamic!
A tightly-coupled and coherent activity system that works well in a static environment may be subject to problems of inertia in a dynamic environment.
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3.

11. Organizational Inertia
EXHIBIT 11.2
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3.

12. LO 11-1 Define organizational design and list its three components.
LO Explain how organizational inertia can lead established firms to failure.
LO Define organizational structure and describe its four elements.
LO Compare and contrast mechanistic versus organic organizations.
LO Describe different organizational structures and match them with appropriate strategies.
LO Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed.
LO Compare and contrast different strategic control and reward systems.

13. The Key Elements of Organizational Structure
Organizational structure determines
Work efforts of individuals and teams
Resource distribution
Key building blocks
Specialization
Formalization
Centralization
Hierarchy
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3. 13

14. The Key Elements of Organizational Structure
Specialization: degree to which a task is divided
Division of labor
Example: U.S. Military (Army, Air Force, Navy, Marines)
Formalization: codified rules and formal procedures
Detailed written rules and policies
Examples: NASA, McDonald’s 14

15. The Key Elements of Organizational Structure
Centralization: where the decision is made
Centralized decision making  slow response time and reduced customer satisfaction
Example: BP’s Mexican Gulf Oil Spill
Hierarchy: formal, position-based reporting lines
Tall structure vs. flat structure
Tall structure higher degree of centralization
Flat structure  lower degree of centralization
Span of control 15

16. W. L. Gore & Associates: Informality and Innovation
STRATEGY HIGHLIGHT 11.2
W. L. Gore & Associates: Informality and Innovation
Bill Gore articulated 4 core values
Fairness to each other
Freedom to grow knowledge and skills
Ability to make one's own commitments
Consult with others before taking action
W. L. Gore is organized in an informal and decentralized manner
Empowered employees (no job titles, no job descriptions, informal team organization, soft reporting lines)
Face-to-face communication
All associates are shareholders of the company
1–16 16

17. Assembling the Pieces: Mechanistic vs. Organic Organizations
Low degree of specialization and formalization
Flat structure
Decentralized decision making
Uses virtual team due to information technology
Examples: Zappos, W. L. Gore, and many high-tech firms
Mechanistic organizations
High degree of specialization and formalization
Tall hierarchy
Centralized decision making
Example: McDonald’s
INSTRUCTOR: Embedded at the bottom of this slide is a link to a 10-minute video by MIT professor Andrew McAfee on how Web 2.0 may change the workplace.
Video on Web 2.0
Changing workplace 17

18. Mechanistic vs. Organic Organization
EXHIBIT 11.3

19. LO 11-1 Define organizational design and list its three components.
LO Explain how organizational inertia can lead established firms to failure.
LO Define organizational structure and describe its four elements.
LO Compare and contrast mechanistic versus organic organizations.
LO Describe different organizational structures and match them
with appropriate strategies.
LO Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed.
LO Compare and contrast different strategic control and reward systems.

20. Matching Strategy and Structure
Simple structure
Small firms with low complexity
Top management makes all important strategic decisions
Low degree of formalization and specialization
A basic organizational structure
Examples: small advertising, consulting, accounting, and law firms
INSTRUCTOR: An interactive exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.5. 20

21. Changing Organizational Structures and Increasing Complexity as Firms Grow
EXHIBIT 11.4

22. Functional Structure Functional structure
Groups of employees with distinct functional areas
The areas of expertise correspond to distinct stages in the company value chain activities
Example: College of Business, Finance Department , … etc.
Recommended with narrow products/services
Matches well with business-level strategy
Cost leadership  Mechanistic organization
Differentiation  Organic organization
Integration strategy  Ambidextrous organization 22

23. Typical Functional Structure
EXHIBIT 11.5

24. Matching Business Level Strategy and Structure
EXHIBIT 11.6
Matching Business Level Strategy and Structure
INSTRUCTOR: An interactive exercise is available on this portion of the text through McGraw-Hill’s Connect which is available with this textbook. It covers Learning Objective 11.5.

25. USA Today: Leveraging Ambidextrous Organizational Design
STRATEGY HIGHLIGHT 11.3
USA Today: Leveraging Ambidextrous Organizational Design
USA Today: one of the widest print circulations in U.S.
USA Today.com, a new independent SBU under Gannett
Although attracted readers and advertising dollars, USA Today.com lost key editorial talent due to uneven resource distribution
Integration of USA Today and USA Today.com to eliminate duplication of resources and reduce waste
1–25 25

26. Functional Strategy: Drawbacks
Lacks effective communication channels across departments
Lack of linkage between functions
Often solved the problems by having
cross-functional teams
It cannot effectively address a higher level of diversification 26

27. Multidivisional Structure
Consists of several distinct SBUs
Each SBU is operationally independent
Each leader of SBUs report to the corporate office
Examples:
Zappos is an SBU under Amazon
Skype is an SBU under Microsoft
Paypal is an SBU under eBay
Companies using M-form structure
GE, Honda 27

28. Organizing the Diversified Firm
The multidivisional organization, as documented by Alfred D. Chandler in Strategy and Structure, was pioneered in the 1920s by pioneering firms such as:
DuPont, General Motors, Sears and Standard Oil;
By 1967, two-thirds of Fortune 500 Companies are multidivisional.

30. Organizing the Diversified Firm
Three key features of organizational structure:
1. The division of tasks;
2. The depth of the hierarchy (span of control);
3. The extent of authority delegation (how much decentralization?)

31. Typical M-Form Structure
EXHIBIT 11.7
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.5.
Functional Structure
Matrix Structure

33. Multidivisional Structure
Use with various corporate strategies
Related diversification
Co-opetition among SBUs
Transfer core competences across SBUs
Centralized decision making
Unrelated diversification
Decentralized decision making
Competing for resources 33

34. Matching Corporate-Level Strategy
EXHIBIT 11.8

37. Evolutionary Stability of the Multidivisional Form
Parable of the Two Watchmakers
10,000 parts
Watchmaker #1 needs to put all parts together or the watch falls apart and he needs to start all over with his 10,000 parts.
Watchmaker #2 has developed 100 subsystems of 100 parts. This is the “principle of near-decomposability” (I.e., a system that contains localized sub-systems)

38. Evolutionary Stability of the Multidivisional Form
Hierarchical systems (containing sub-systems) will evolve much more rapidly from elementary constituents than will non-hierarchic systems containing the same number of elements.
In organization theory this is called the effectiveness of “loose coupling.”
The advantage of “loose coupling” is that if there is poor performance in division 2 it does not lead to failure of the entire system.

39. Effectiveness of Multidivisional Form
Effective Divisionalization involves:
Identification of separable economic activities within the firm;
Giving quasi-autonomous standing to each division (usually of a profit center nature);
Monitoring the efficiency performance of each division;
Awarding incentives;
Allocating cash flow to high yield uses; and
Performing strategic planning (diversification, acquisition, and related activities).

40. Weaknesses of Multidivisional Form
Dysfunctional Aspects of the Multidivisional:
Emphasis on short-term perspective;
Loss of economies of scope;
Duplication of R&D, marketing, etc.;
Emphasis on financial manipulation instead of developing firm capabilities and resources; and
Large conglomerates may have excessive political power.

41. Matrix Structure A combination of functional and M-form structure
Creation of dual line of authority and reporting lines
Each SBU receives support both horizontally and vertically
Very versatile
Enhanced learning from different SBUs 41

42. Typical (Global) Matrix Structure
EXHIBIT 11.9
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.5.

45. Matching Global Strategy and Structure
EXHIBIT 11.10
Matching Global Strategy and Structure
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.5.

46. LO 11-1 Define organizational design and list its three components.
LO Explain how organizational inertia can lead established firms to
failure.
LO Define organizational structure and describe its four elements.
LO Compare and contrast mechanistic versus organic organizations.
LO Describe different organizational structures and match them with
appropriate strategies.
LO Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed.
LO Compare and contrast different strategic control and reward systems.

47. Organizational Culture: Values, Norms, and Artifacts
Collectively shared values and norms
Value: what is considered important
Norms: appropriate employee behaviors and attitudes
Artifacts: expression of culture in items such as physical design, stories, and celebrations
Socialization
Internalize organization’s value and norms through interactions
Think of Zappos’ core values
GM’s culture became strategic liability
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.6.

48. Where Do Organizational Cultures Come From?
Founder imprinting
Founders defined and shaped the culture
Apple (Steve Jobs)
Disney (Walt Disney)
Microsoft (Bill Gates)
Wal-mart’s “low cost” culture by Sam Walton
Recruit people that fit the culture
Zappos vs. GE
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.6.

49. How Does Organizational Culture Change?
Core competency core rigidity
Culture no longer has good fit with the environment
Cultural change is needed
Cultural change
Brings new leadership
Mergers and acquisitions

50. Organizational Culture
Culture must be valuable, rare, inimitable, and non-substitutable (RBV)
Causal ambiguity and social complexity
Organizational culture is an important resource
Southwest Airlines
Friendly and energized employees work collaboratively
Zappos
Deliver WOW through service

51. Carly Fiorina at HP: Cultural Change via Shock Therapy
STRATEGY HIGHLIGHT 11.4
Carly Fiorina at HP: Cultural Change via Shock Therapy
Carly Fiorina appointed CEO of HP in 1999
Engineered acquisition of Compaq in 2002
Carly Fiorina needed the acquisition to initiate structural and cultural change in HP to overcome inertia
Board of Directors fired her in 2005
Hired Mark Hurd who was himself fired in 2010…
Continued turnover at top of HP; Mark Hurd was replaced by Leo Apotheker, who in turn was replaced by Meg Whitman in September 2011 (see Chapter Case 12).
UPDATE: HP replaced Leo Apotheker (who himself was brought in from outside HP in Nov. 2010) with Meg Whitman as CEO in September of 2011.
1–51 51

52. Organizational Culture
Cultural impact on employee behavior
Motivates employees by appealing to their ideas
Strengthen employee commitment, engagement, and effort
Culture is vital to an organization
Stronger founder imprinting leads to higher performance
Effective alignment allows development and refines organizational core competency
INSTRUCTOR: Embedded at the bottom of this slide is a 4-minute video by Professor Michael Beer on how high-commitment high-performance companies approach economic downturns.
How to Cut
Costs Video

53. LO 11-1 Define organizational design and list its three components.
LO Explain how organizational inertia can lead established firms to failure.
LO Define organizational structure and describe its four elements.
LO Compare and contrast mechanistic versus organic organizations.
LO Describe different organizational structures and match them with appropriate strategies.
LO Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed.
LO Compare and contrast different strategic control and reward systems.

54. Strategic Control and Reward Systems
Internal governance mechanisms
Culture
Sanctions
Input controls
Rules and standard operating procedures
Budgets
Behavior guidelines
Output controls
Result-oriented
ROWEs (results only work environment)
INSTRUCTOR: Embedded at the bottom of this slide is a 10-minute video by RSA about Daniel Pink’s work on motivation and the surprising results that paying more actually yields lower performance…The video is referenced in the text at the top of page RSA Animate is well worth a look if you have not explored their video library yet. It can be found at: or their home website: and searching for “Animate”.
Dan Pink’s
RSA Video