Chapter 10

1. 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. 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 • 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 Advantages • 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

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. 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

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

14. Strategies leading to new structure Dominant growth path for U.S. firms Diversification into related products and markets Dominant Growth Patterns of Large Corporations Growth in revenues and employees Diversification in unrelated areas Vertical integration Increase relatedness of products and markets Related diversification International expansion International Expansion International expansion Increase relatedness of products and markets Related diversification

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. Barrier-free type of organization Making Boundaries More Permeable Three approaches • 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 • 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 Pros Cons • 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. Barrier-free type of organization Modular type of organization Making Boundaries More Permeable Three approaches • 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

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

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

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