Executing Strategy through Organizational Design Chapter 9

1. Executing Strategy through Organizational DesignChapter 9 Miles A. Zachary MGT 4380

2. Organizational Design • Executives able to skillfully orchestrate structure and control are likely to lead their firms to greater levels of success • Development of a strong structure and control system begins with the building blocks of organizational structure • Division of labor • Organizational chart • Vertical and Horizontal linkages • Informal linkages • Unity of command principle

3. Division of Labor • Division of labor is the process by which a task is split into a series of smaller tasks, each performed by a specialist • The oldest record of management practices parables the importance of the division of labor • Jethro teaches Moses to establish a hierarchy of authority to better manage the freed Hebrews • A hierarchy of authority is an arrangement of individuals based on rank (e.g., the military) • Greek philosopher and contemporary of Socrates, Xenophon, noted the increased efficiency of shoemakers who divide the task of making shoes

4. Division of Labor • Later scholars such as Duhamel du Monceau (1761) and Smith (1776) write about the benefits of the division of labor more explicitly • Others were much more critical of the division of labor • Karl Marx (1844) suggested that it alienates works who become “depressed spiritually and physically to the condition of a machine” • Henry David Thoreau (1854) believes that it removes a workers sense of connectedness with society • Adam Smith (1776), while championing its efficiency, does discuss how it can be monotonous and lead to depressing work environments

5. Division of Labor • While division of labor can create efficiencies, determining how to coordinate the tasks and people who perform them is challenging • The solution is organizational structure—how tasks are assigned and grouped together with formal reporting relationships • Adequate structure increases a firm’s likelihood of success • A firm’s structure is often a function of environmental fit • For example, Burns & Stalker (1961) suggested that in static environments, a firm can gain efficiencies from having a rigid hierarchy; however, in dynamic environments, a firm benefits from greater flexibility

6. Vertical & Horizontal Linkages • Many firms use organizational charts to diagram their structure: show the various vertical and horizontal linkages • A vertical linkage tie supervisors to subordinates and show the lines through which supervisors delegate authority, oversee activities, evaluate performance, and administer feedback • When mapping vertical linkages in an organizational structure, most executives rely on the unity of command principle • Each employee should report to only one supervisor; multiple bosses can be confusing

7. Vertical & Horizontal Linkages • A horizontal linkage is a relationship between equals in an organizations; sometimes called committees, teams, task forces, etc. depending on the extent of the relationship • Important when close coordination is needed across the organization • Informal linkages do not appear in the formal organizational chart and refer to an unofficial relationship between employees based on personal friendships, rivalries, and politics

8. Organizational Structures • The vertical and horizontal linkages among employees forms the foundation of organizational structure • Executives may use a variety of combinations of vertical and horizontal linkages to design an effective structure • Four (4) common types of structure • Simple • Functional • Multidivisional • Matrix

9. Organizational Structure • Executives must weight the benefits and costs of different structures because, once formed, structure can either aid or constrain strategy • Early strategy scholars (e.g., Chandler, 1962; Pierce, 1974) conceptualized the S-C-P model

10. Simple Structure • In a simple organizational structure, an organizational chart is usually not needed • Most firms begin with a simple structure • When a firm is owned and operated by a single individual or a small group of people • In organizations composed of more than a single person, tasks are usually assigned informally rather than formally; strategic decisions are highly centralized (owner) • The flexibility of a simple structure encourages creativity and individualism and high responsiveness • Without a formal structure, informally-assigned duties may not be accomplished; lack of clear guidance; confusing when more employees are hired

11. Simple Structure

12. Functional Structure • As a small organization grows, simple structure begins to become ineffective thanks to added complexity • Complexities need to be managed by formalized structures with emphasis on hierarch and vertical links • A functional structure divides employees into departments that handle activities related to a functional area of the business (e.g., marketing, production, customer service, human resources, etc.) • Each area is often headed up by a manager with all employees reporting to their respective manager

13. Functional Structure • An important benefit of the functional structure is that each person tends to learn much about their particular function (specialization) • Tends to create highly skilled specialists • Grouping functional areas decreases costs by creating efficiencies and employees with similar training backgrounds tend to get along better on average • Increased hierarchical levels can be slow to disseminate information and execute changes • Functional structures are often useful in situations where a firm has limited products or services (e.g., single offerings)

14. Functional Structure

15. Functional Structure

16. Multidivisional Structure • When a firm begins to offer more than a few products or services (often across a wide geographical area), they often require a more responsive organizational structure • Naturally, firms often move from a functional form to a multidivisional structure in which employees are divided into departments based on product areas and/or geographic regions

17. Multidivisional Structure • One of the big advantages of the multidivisional form is that it allows firms to act quickly • This can backfire when divisions are loosely-coupled and are generally unaware and/or unmotivated to align with the firms overarching strategy • Also, since multidivisional structures are basically coupled functional structures, they do not benefit from the efficiency of single departments across the entire company • Instead, they need individual departments within each division

18. Multidivisional Structure

19. Matrix Structure • While functional and multidivisional structures rely primarily on vertical linkages, matrix structures rely more on horizontal linkages • Creates cross-functional teams that work on different projects • Advantages include maximizing organizational flexibilities, enhancing communication across functional lines, and creating a spirit of teamwork and collaboration • Violates the unity of command principle potentially creating confusion and/or conflict between managers • Good for organizations that need to maximize flexibility such as high technology, engineering, and consulting firms

20. Matrix Structure

21. Boundaryless Organizations • Boundaryless organizations are ones that remove the usual barriers between parts of the organization and between them and other organizations • While absolute state is improbable, moving toward that state can help an organization become more flexible and responsive • E.g., W. L. Gore • No formal titles allows leaders to emerge based on performance, attracting followers to new innovative ideas • Structural boundaries can inhibit and constrain firms, but can also provided needed order

22. Changing Structures • An organization’s structure is not a static choice, but rather should be revisited as the organization evolves • Managers and executives should be cognizant of “danger signs” (e.g., slow response time, poor performance) • Finding structural balance is difficult but desirable

23. Controlling the System • Effective structure and strategy depends on skillful use of organizational control systems • Control systems allow executives to track organizational performance, identify concern areas, and then take action to address concerns • Three (3) basic types of control systems • Output control • Behavioral control • Clan control • Most firms use a combination of control systems

24. Output Control • Output control focuses on measurable results within an organization • E.g., website hits per day, cars produced per week, sales orders per month, etc. • Executives decide what output (performance) level is acceptable, communicate their expectations to employees, track performance, then make changes to either the goals or employees (feedback) as needed

25. Behavioral Control • Behavioral controls focus on controlling the actions of individuals that ultimately lead to a result • E.g., company dress policy, firm purchase procedures, etc. • Reflect policies and procedures that are often communicated to employees through a rules and regulations handbook • Can be difficult to implement; proper motivation/incentives is key

26. Clan Control • Clan control relies on traditions, expectations, values, and norms to lead individuals to work toward the good of the organization • E.g. “the way we do things here…” • An informal type of control • Based largely on organizational culture • While effective, it can be extremely hard to change as culture is inertial

27. Management Fads • Many management fads have come and gone in business including: • MBO (management by objectives): goal-setting between supervisor and subordinate to provide structure and motivation • Sensitivity training: group discussions leading to greater self-awareness and/or self-actualization • Quality circles: employee groups formed to innovate new methods or processes to improve quality • Strong culture: interest in Japanese management systems, firms tried to develop strong collectivist cultures • While most fads fade away with time, they remind us to be true to our roots; contingency theory is no fad

28. Legal Business Forms • Extremely important decision that determines how organizations structure resources, assets, and liabilities, what strategy a business should use, and how performance can be dispersed and taxed • Three (3) basic forms: • Sole proprietorship • Partnership • Corporation • Many derivatives exist that have specialized purposes

29. Sole Proprietorship • A firm owned by one individual • Legally, an individual and their sole proprietorship are one in the same • An advantage of this unity is that after taxes are paid, all the profits are theirs to keep or divide at will • However, the individual has unlimited liability and any losses in the business transfer to the individual • Most sole proprietors are small businesses that try to minimize overhead and other direct costs

30. Partnership • Two or more individuals enter into a partnership and share ownership of an organization • Similar to sole proprietorship in that partners are beneficiaries of profits (and losses) • Can be beneficial when partners complement each other • However, partnerships often break up and adding or subtracting partners requires rewriting the partnership agreement • Many partnerships are professional organizations that combine a group of traditionally independent contractors (e.g., law firms, engineering firms, etc.)

31. Corporation • Corporations are distinct entities which are viewed as legally separate from their owners (two tax returns—one for the corporation and one for the owner) • Separation distinction limits liability of owners • Profits and losses are attributed to the firm and must be dispensed by owners (double-taxation) • Book error: corporations DO NOT have to issue stock or be professionally-managed, although many are • Are the most expensive basic legal form to start, but have considerable benefits for many

32. Other Legal Forms • S-corporations: avoids double-taxation since profits and losses flow directly to the owner(s) tax return; however, limits on # of shareholders (<100) discourage large firms • Limited liability company (LLC): granted by state, not federal, laws; owners have limited liabilities, but must choose to be taxed as one of the basic forms; very flexible • http://www.inc.com/articles/2000/06/19438.html