11 CHAPTER McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Organizational Design: Structure, Culture, and Control

Part 3 Strategy Implementation

Chapter Case 11 Zappos: An Organization Designed to Deliver Happiness 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.

EXHIBIT 11.1 Zappos’ Core Values

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.

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.

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.

EXHIBIT 11.2 Organizational Inertia

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.

The Key Elements of Organizational Structure Organizational structure determines   Work efforts of individuals and teams   Resource distribution Key building blocks   Specialization   Formalization   Centralization   Hierarchy

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

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

1–16 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

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

EXHIBIT 11.3 Mechanistic vs. Organic Organization

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.

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

EXHIBIT 11.4 Changing Organizational Structures and Increasing Complexity as Firms Grow

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

EXHIBIT 11.5 Typical Functional Structure

EXHIBIT 11.6 Matching Business Level Strategy and Structure

1–25 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 GannettToday.com Although attracted readers and advertising dollars, USA Today.com lost key editorial talent due to uneven resource distribution Today.com Integration of USA Today and USA Today.com to eliminate duplication of resources and reduce wasteToday.com

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

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

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.

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?)

EXHIBIT 11.7 Typical M-Form Structure Functional Structure Matrix Structure

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

EXHIBIT 11.8 Matching Corporate-Level Strategy

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)

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.

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)

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.

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

EXHIBIT 11.9 Typical (Global) Matrix Structure

EXHIBIT Matching Global Strategy and Structure

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.

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

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

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

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

1–51 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).

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 How to Cut Costs Video

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.

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) Dan Pink’s RSA Video

Take-Away Concepts LO 11-1Define organizational design and list its three components. Organizational design is the process of creating, implementing, monitoring, and modifying the structure, process, and procedures of an organization. The key components of organizational design are structure, culture, and control. The goal is to design an organization that allows mangers to effectively translate their chosen strategy into a realized one. LO 11-2Explain how organizational inertia can lead to the failure of established firms. Organizational inertia can lead to the failure of established firms when a tightly coupled system of strategy and structure experiences internal or external shifts. Firm failure happens through a dynamic, four-step process (see Exhibit 11.2).

Take-Away Concepts LO 11-3Define organizational structure and describe its four elements. An organizational structure determines how firms orchestrate employees’ work efforts and distribute resources. It defines how firms divide and integrate tasks, delineates the reporting relationships up and down the hierarchy, defines formal communication channels, and prescribes how employees coordinate work efforts. The four building blocks of an organizational structure are specialization, formalization, centralization, and hierarchy (see Exhibit 11.3). LO 11-4Compare and contrast mechanistic versus organic organizations. Organic organizations are characterized by a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making. Mechanistic organizations are described by a high degree of specialization and formalization, and a tall hierarchy that relies on centralized decision making. The comparative effectiveness of mechanistic versus organic organizational forms depends on the context.

Take-Away Concepts LO 11-5Describe different organizational structures and match them with appropriate strategies. To gain and sustain competitive advantage, not only must structure follow strategy, but also the chosen organizational form must match the firm’s business strategy. The strategy–structure relationship is dynamic, changing in a predictable pattern – from simple to functional structure, then to multidivisional (M-form) and matrix structure – as firms grow in size and complexity. In a simple structure, the founder tends to make all the important strategic decisions as well as run the day-to-day operations. A functional structure groups employees into distinct functional areas based on domain expertise. Its different variations are matched with different business strategies: cost-leadership, differentiation, and integration (see Exhibit 11.6). The multidivisional (M-form) structure consists of several distinct SBUs, each with its own profit-and-loss responsibility. Each SBU operates more or less independently from one another, led by a CEO responsible for the business strategy or the unit and its day-to-day operations (see Exhibit 11.7).

Take-Away Concepts LO 11-5 Describe different organizational structures and match them with appropriate strategies. The matrix structure is a mixture of two organizational forms: the M-form and the functional structure (see Exhibit 11.10). Exhibits 11.8 and show how best to match different corporate and global strategies with respective organizational structures. LO 11-6Describe the elements of organizational culture, and explain where organizational cultures can come from and how they can be changed. Organizational culture describes the collectively shared values and norms of its members. Values define what is considered important, and norms define appropriate employee attitudes and behaviors. Corporate culture finds its expression in artifacts, which are observable expressions of an organization’s culture.

Take-Away Concepts LO 11-7 Compare and contrast different strategic control and reward systems. Strategic control and reward systems are internal governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees). Strategic control and reward systems allow managers to specify goals, measure progress, and provide performance feedback. Besides the balanced-scorecard framework, managers can use organizational culture, input controls, and output controls as part of the firm’s strategic control and reward systems. Input controls define and direct employee behavior through explicit and codified rules and standard operating procedures. Output control guides employee behavior by defining expected results, but leaves the means to those results open to individual employees, groups, or SBUs.