1. Organizational Design
Joe Mahoney

3. 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.

6. Organizational Inertia and the Failure of Established Firms
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.
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3.

7. The Key Elements of Organizational Structure
Organizational structure determines
Work efforts of individuals and teams
Resource distribution
Key building blocks
Specialization
Formalization
Centralization
Hierarchy
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3. 7

8. 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 8

9. 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 9

10. Assembling the Pieces: Mechanistic vs. 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
INSTRUCTOR: Embedded at the bottom of this slide is a link to a 10-minute video by MIT professor Andrew McAfee on how Web 2.0 may change the workplace. 10

11. Mechanistic vs. Organic Organization

12. 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
INSTRUCTOR: An interactive exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.5. 12

13. Changing Organizational Structures and Increasing Complexity as Firms Grow

14. 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 14

15. Typical Functional Structure

16. 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 16

17. 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 17

18. 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.

20. 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?)

21. Typical M-Form Structure
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.5.
Functional Structure
Matrix Structure

23. 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 23

24. Matching Corporate-Level Strategy

27. 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)

28. 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.

29. 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).

30. 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.

31. 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 31

32. Typical (Global) Matrix Structure
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.5.

35. Matching Global Strategy and Structure
INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hill’s Connect, which is available with this textbook. It covers Learning Objective 11.5.