2. Creating Effective Organizational Designs10
Creating Effective Organizational Designs
McGraw-Hill/Irwin
Strategic Management: Text and Cases, 4e
Copyright © 2008 The McGraw-Hill Companies, Inc. All rights reserved.

3. Learning Objectives
After reading this chapter, you should have a good understanding of:
The importance of organizational structure and the concept of the “boundaryless” organization in implementing strategies.
The growth patterns of major corporations and the relationship between a firm’s strategy and its structure.
Each of the traditional types of organizational structure: simple, functional, divisional, and matrix
The relative advantages and disadvantages of traditional organizational structure
The implications of a firm’s international operations for organizational structure

4. Learning Objectives
After reading this chapter, you should have a good understanding of:
Why there is no “one best way” to design strategic reward and evaluation systems, and the important contingent roles of business- and corporate-level strategies.
The different types of boundaryless organizations—barrier-free, modular, and virtual—and their relative advantages and disadvantages
The need for creating ambidextrous organizational designs that enable firms to explore new opportunities and effectively integrate existing operations

5. 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
Need for the division of tasks into meaningful groupings
Need to integrate the groupings for efficiency and effectiveness

6. Question Most organizations begin very small and ______.
A) grow to become a medium sized organization
B) continually grow
C) remain small
D) often decrease in size
Answer: C

7. Dominant Growth Patterns of Large Corporations
Adapted from Exhibit 10.1 Dominant Growth Patterns of Large Corporations
Source: Adapted from J. R. Galbraith and R. K. Kazanjian, Strategy Implementation: The Role of Structure and Process, 2nd ed. (St. Paul, MN: West Publishing Company, 1986), p. 139.

8. 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

9. Patterns of Growth of Large Corporations
Functional Structure
Adapted from Exhibit 10.2 Functional Organizational Structure

10. 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

11. Patterns of Growth of Large Corporations
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

12. Divisional Structure
Adapted from Exhibit 10.3 Divisional Organizational Structure

13. 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

14. Divisional Structure Advantages
Strategic business unit (SBU) structure
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

15. Divisional Structure 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

16. 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
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

17. Matrix Structure
Adapted from Exhibit 10.4 Matrix Organizational Structure

18. 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

19. Matrix Structure Advantages Disadvantages
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

20. 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
Structures used to manage international operations
International division
Geographic-area division
Worldwide functional
Worldwide product division
Worldwide matrix

21. Source: “The New Nike,” Business Week. September 20, 2004
Example
Nike culture used to encourage local managers to focus on market share rather than profitability.
This lead to Wall Street to comment on the lack of managerial control at Nike.
Nike decided to implement a matrix structure to resolve this issue.
This matrix structure clearly stated local managers’ responsibilities by region and product.
Nike headquarters establishes which products to focus on and how to do it under the new matrix structure.
Source: “The New Nike,” Business Week. September 20, 2004

22. Question
Does the relationship between strategy and structure imply that structure follows strategy? Explain.
The strategy of a firm influences their structural elements as the division of tasks. It is also true that existing structures can influence the formulation of strategies of a firm. Ultimately, strategy cannot be developed without the consideration of a firm’s structural elements.

23. Relationships between Rewards & Evaluation Systems and Business-level and Corporate-level Strategies

24. 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

25. Making Boundaries More Permeable
Barrier-free type of organization
First approach
Permeable internal boundaries
Higher level of trust and shared interests
Shift in philosophy from executive development of organizational development
Greater use of teams
Flexible, porous organizational boundaries
Communication flows and mutually beneficial relationships with internal and external constituencies

26. Pros and Cons of Barrier-Free Structures
Adapted from Exhibit 10.7 Pros and Cons of Barrier-Free Structures

27. Making Boundaries More Permeable
Modular type of organization
Second approach
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

28. Pros and Cons of Modular Structures
Adapted from Exhibit 10.8 Pros and Cons of Modular Structures

29. Making Boundaries More Permeable
Virtual type of organization
Third approach
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

30. Pros and Cons of Virtual Structures
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
Adapted from Exhibit 10.9 Pros and Cons of Virtual Structures

31. 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

32. Creating Ambidextrous Organizational Designs
Two contradictory challenges faced by firms
Adaptability
Alignment
Ambidextrous organizations
Aligned and efficient in how they manage in today’s business
Flexible enough to changes in the environment so they will prosper tomorrow