Organizational Design : Structure, Culture, and Control

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

6. LO 11-1Define organizational design and list its three components. LO 11-2Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 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 • Organizational inertia • 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.

11. Organizational Inertia EXHIBIT 11.2

12. LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3Define organizational structure and describe its four elements. LO 11-4Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 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

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

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

16. 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

17. Assembling the Pieces: Mechanistic vs. Organic Organizations 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 Video on Web 2.0 Changing workplace

18. EXHIBIT 11.3 Mechanistic vs. Organic Organization

19. LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 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

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

23. Typical Functional Structure EXHIBIT 11.5

24. Matching Business Level Strategy and Structure EXHIBIT 11.6

25. 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

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

27. Multidivisional Structure 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

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 Functional Structure Matrix Structure

32. 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. Matching Corporate-Level Strategy EXHIBIT 11.8

36. 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)

37. 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.

38. 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)

39. 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

42. Typical (Global) Matrix Structure EXHIBIT11.9

45. EXHIBIT 11.10 Matching Global Strategy and Structure

46. LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 Compare and contrast different strategic control and reward systems.

47. Organizational Culture: Values, Norms, and Artifacts Organizational culture 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

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

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