1. Creating Effective Organizational Designs
chapter 10

2. Organizational Structure
Organizational structure refers to formalized patterns of interactions linking
Tasks
Technologies
People
Structure provides a balance between
The need for division of tasks into meaningful groupings
The need to integrate these groupings for maximum efficiency and effectiveness
Organizational structure = the formalized patterns of interactions that link a firm’s tasks, technologies, and people. Structures help to ensure that resources are used effectively in accomplishing an organization’s mission. Structure provides a means of balancing two conflicting forces: a need for the division of tasks into meaningful groupings, and the need to integrate such groupings in order to ensure efficiency and effectiveness. Structure identifies the executive, managerial, and administrative organization of a firm and indicates responsibilities and hierarchical relationships. It also influences the flow of information as well as the context and nature of human interactions.

3. Organizational Structures
Exhibit 10.1 Dominant Growth Patterns of Large Corporations
Source: Adapted from J.R. Galbraith and R.K. Kazanjian. Strategy Implementation: Structure, Systems and Process, 2nd edition. Copyright © 1986.
A firm’s strategy and structure change as it increases in size, diversifies into new product markets, and expands its geographic scope. Exhibit 10.1 illustrates the common growth patterns of firms. The choice of structure has to do not only with the direction and magnitude of growth, but also with the degree of integration needed across businesses as this growth occurs.

4. Organizational Structures: Simple Structure
The simple organizational structure is the oldest & most common organizational form, where
The organization is small, with a single or very narrow product line
The owner-manager makes most of the decisions
The staff is an extension of the top executive’s personality
Simple organizational structure = an organizational form in which the owner–manager makes most of the decisions and controls activities, and the staff serves as an extension of the top executive.

5. Organizational Structures: Functional Structure
The functional organizational structure is where the major functions of the firm are grouped internally
The organization is small, with a single or closely related product or service, and high production volume
The owner-manager needs specialists in various functional areas
The chief executive has responsibility for coordination & integration of the functional areas
Functional organizational structure = an organizational form in which the major functions of the firm, such as production, marketing, R&D, and accounting, are grouped internally. When an organization is small (15 employees or less), it is not necessary to have a variety of formal arrangements and groupings of activities. However, as firms grow, excessive demands may be placed on the owner-manager in order to obtain and process all of the information necessary to run the business. Thus, he or she will need to hire specialists in the various functional areas. The coordination and integration of these functional areas becomes one of the most important responsibilities of the chief executive. See Exhibit 10.2 for an example.

6. Organizational Structures: Divisional Structure
The divisional organizational structure is where products, projects, or product markets are grouped internally
Divisions are relatively autonomous, consisting of products & services that are different from those of other divisions
Each division includes its own functional specialists typically organized into departments
Division executives help determine product- market & financial objectives
Divisional organizational structure = an organizational form in which products, projects, or product markets are grouped internally. Each of the divisions, in turn, includes its own functional specialists who are typically organized into departments. A divisional structure encompasses a set of relatively autonomous units governed by a central corporate office, and is sometimes called the multidivisional structure or M-form. The operating divisions are relatively independent and consist of products and services that are different from those of other divisions. Operational decision-making in a large business places excessive demands on the firm’s top management. In order to attend to broader, longer-term organizational issues, top level managers must delegate decision-making to lower-level managers. Divisional executives then help determine the product-market and financial objectives for the division. See Exhibit 10.3 for an example.

7. Organizational Structures: SBU Structure
The strategic business unit (SBU) structure is where similar products or markets are grouped into units to achieve synergy
Variation on the divisional structure
Synergies are achieved through related diversification – core competencies, shared infrastructures, market power
Each of the SBUs operates as a profit center
Strategic business unit (SBU) structure = an organizational form in which products, projects, or product market divisions are grouped into homogenous units. Highly diversified corporations may consist of dozens of different divisions. A purely divisional structure would make it nearly impossible for the corporate office to plan and coordinate activities, because the span of control would be too large. With an SBU structure, divisions with similar products, markets and/or technologies are grouped into homogenous units to achieve synergies, including those available through related diversification such as leveraging core competencies, sharing infrastructures, and market power. Generally the more related businesses are within a corporation, the fewer SBUs will be required. Each of the SBUs in the corporation operates as a profit center.

8. Organizational Structures: Holding Company Structure
The holding company structure is where businesses in a corporation’s portfolio are the result of unrelated diversification
Variation on the divisional structure
Similarities are few, so synergies are limited
Operating divisions have autonomy
Corporate staffs are small & have limited involvement, relying on financial controls & incentive programs to obtain performance
Holding company structure = an organizational form that is a variation of the divisional organizational structure in which the divisions have a high degree of autonomy both from other divisions and from corporate headquarters. The holding company structure is appropriate when the businesses in a corporation’s portfolio do not have much in common. Plus, the potential for synergies is limited. Holding company structures are most appropriate for firms with the strategy of unrelated diversification, such as with Berkshire Hathaway. Since there are few similarities across the businesses, the corporate offices in these companies provide a great deal of autonomy to operating divisions and rely on financial controls and incentive programs to obtain high levels of performance across the individual businesses. Corporate staffs at these firms tend to be small because of their limited involvement in the overall operation of their various businesses.

9. Organizational Structures: Matrix Structure
The matrix organizational structure is where functional departments are combined with product groups on a project basis
Functional departments, product groups & geographical units are combined
Individuals have two managers
Project managers & functional managers share responsibility
Matrix organizational structure = an organizational form in which there are multiple lines of authority and some individuals report to at least two managers. This approach strives to overcome the inadequacies inherent in the other structures. It is a combination of the functional and divisional structure. Most commonly, functional departments are combined with product groups on a project basis. Some large multinational corporations rely on a matrix structure to combine product groups and geographical units. Personnel may work under the manager of the group for the duration of the project. The individuals who work in a matrix organization become responsible to two managers: the project manager and the manager of their functional area. Product managers may have global responsibility for the development, manufacturing, and distribution of their own line, while managers of geographical regions have responsibility for the profitability of the businesses in their regions. See Exhibit 10.4 for an example.

10. Organizational Structures: International Operations
Multidomestic Strategies use…
Global Strategies use…
Worldwide functional structure
Worldwide product division structure
Worldwide holding company structure
International division structure
Geographic-area division structure
Worldwide matrix structure
A firm’s international strategy has implications for its chosen structure. Remember from Chapter 7 that a multidomestic strategy is based on a firm’ desire to differentiate its products and services to adapt to local markets, and is usually used in industries where the pressure for local adaptation is high and the pressure for lowering costs is low. The structures consistent with such a strategic orientation are the international division and geographic-area division structures. Here local managers are provided with a high level of autonomy to manage their operations within the constraints and demands of their geographic market. As a firm’s foreign sales increase as a percentage of its total sales, it’ll likely change from an international division to a geographic-area division structure, and, as a firm’s product and/or market diversity becomes large, it is likely to benefit from a worldwide matrix structure. International division structure = an organizational form in which international operations are in a separate, autonomous division. Most domestic operations are kept in other parts of the organization. Geographic-area division structure = a type of divisional organizational structure in which operations in geographical regions are grouped internally. Worldwide matrix structure = a type of matrix organizational structure that has one line of authority for geographic-area divisions and another line of authority for worldwide product divisions. Remember from chapter 7 that global strategies are based on a firm’s need for centralization and control by the corporate office, with the primary emphasis on controlling costs, usually used in industries where the pressure for local adaptation is low and the pressure for lowering costs is high. Economic pressures require managers to handle operations in different geographic areas with overall efficiency. The worldwide functional and worldwide product division structures are consistent with efficiency perspective. Here, division managers view the marketplace as homogenous and devote relatively little attention to local market factors. Firms with relatively low levels of product diversity may opt for a worldwide product division structure. However, if significant product market diversity results from highly unrelated international acquisitions, a worldwide holding company structure should be implemented. Such firms have very little commonality among products, markets, technologies, and have little need for integration. Worldwide functional structure = a functional structure in which all departments have worldwide responsibilities. Worldwide product division structure = a product division structure in which all divisions have worldwide responsibilities.

11. Organizational Structures: International Operations
A global start-up
Uses inputs from around the world
Sells its products & services to customers around the world
Has communication & coordination challenges
Has less resources than well-established corporations
Must use less costly administrative mechanisms
Frequently chooses a boundaryless organizational design
Global start-up = a business organization that, from inception, seeks to derive significant advantage from the use of resources and the sale of outputs in multiple countries. Many firms now expand internationally relatively early in their history, and some firms are “born global” – that is, from the very beginning, many start-ups are global in their activities. Right from the beginning, it uses inputs from around the world and sells its products and services to customers around the world. Geographical boundaries of nation states are irrelevant for a global start-up. Being global necessarily involves higher communication, coordination, and transportation costs. Most global start-ups have far less resources than well-established corporations, so must internalize only a few activities and outsource the rest. Managers of such firms must have considerable prior international experience so that they can successfully handle the inevitable communication problems and cultural conflicts. Another key to success is to keep the coordination and communication costs low. The only way to achieve this is by creating less costly administrative mechanisms. A boundaryless organizational design is particularly suitable for global start-ups because of its flexibility and low cost.

12. Organizational Structures: Boundaryless Designs
A boundaryless organizational design makes these boundaries more permeable:
Vertical boundaries between organizational levels
Horizontal boundaries between functional areas
External boundaries between the firm and its customers, suppliers, & regulators
Geographic boundaries between locations, cultures, & markets
Boundaryless designs include barrier-free, modular, & virtual organizations
Boundaryless organizational design = organizations in which the boundaries, including vertical, horizontal, external, and geographical boundaries, are permeable. Boundaryless does not imply that all internal and external boundaries vanish completely, but that they become more open and permeable. Boundaryless designs should not replace the traditional forms of organizational structure, but they should complement them. See Strategy Spotlight 10.4 for the four types of boundaries that place limits on organizations: (1) vertical boundaries between levels in the organization’s hierarchy that limit the flow of ideas from employees up to managers, (2) horizontal boundaries between functional areas such as marketing, operations, and customer service (silos), (3) external boundaries between the firm and its customers, suppliers, and regulators that limit flexibility in the value chain, (4) geographic boundaries between locations, cultures, and markets that reduce or inhibit the flow of communication. There are three approaches to making boundaries more permeable, that help to facilitate the widespread sharing of knowledge and information across both the internal and external boundaries of the organization: barrier-free, modular, and virtual types of organizations.

13. Organizational Structures: Boundaryless Designs
A barrier-free organization has permeable internal & external boundaries and requires:
Higher level of trust and shared interests
Shift in philosophy from executive development to organizational development
Greater use of teams
Flexible, porous organizational boundaries
Communication flows & mutually beneficial relationships with both internal and external constituencies
Barrier-free organization = an organizational design in which firms bridge real differences in culture, function, and goals to find common ground that facilitates information sharing and other forms of cooperative behavior. The barrier-free type of organization involves making all organizational boundaries – internal and external – more permeable. Eliminating the multiple boundaries that stifle productivity and innovation can enhance the potential of the entire organization. For barrier-free organizations to work effectively, the level of trust and shared interests among all parts of the organization must be raised. The organization needs to develop among its employees the skill level needed to work in a more democratic organization. Barrier-free organizations also require a shift in the organization’s philosophy from executive to organizational development, and from investments in high-potential individuals to investments in leveraging the talents of all individuals. Teams are a central building block for implementing a barrier-free organization. In barrier-free organizations, managers must also create flexible, porous organizational boundaries and establish communication flows and mutually beneficial relationships with internal (e.g. employees) and external (e.g. customers) constituencies, as well as potential cooperative relationships with competitors.

14. Organizational Structures: Boundaryless Designs
A modular organization requires seamless relationships with external organizations:
Outsources nonvital functions or non-core activities to outsiders
Activates knowledge & expertise of “best in class” suppliers but retains strategic control
Focuses scarce resources on key areas
Accelerates organizational learning
Decreases overall costs, leverages capital
Modular organization = an organization in which nonvital functions are outsourced, which uses the knowledge and expertise of outside suppliers while retaining strategic control. Outsiders may be used to manufacture parts, handle logistics, or perform accounting activities. The value chain can be used to identify the key primary and support activities performed by a firm to create value: which activities do we keep “in-house” and which activities do we outsource to suppliers? The organization becomes a central hub surrounded by networks of outside suppliers and specialists, and parts can be added or taken away. Outsourcing non-core functions allows a firm to decrease overall costs, stimulate new product development by hiring suppliers with superior talent to that of in-house personnel, avoid idle capacity, reduce inventory, and avoid being locked into a particular technology. A company can also focus scarce resources on the area where it holds a competitive advantage. Finally an organization can tap into the knowledge and expertise of its specialized supply chain partners, adding critical skills and accelerating organizational learning. Both manufacturing and service units may be modular. The modular type enables a company to leverage relatively small amounts of capital and a small management team to achieve seemingly unattainable strategic objectives. Nike and Reebok are given as examples.

15. Organizational Structures: Boundaryless Designs
A virtual organization requires forming alliances with multiple external partners:
Continually evolving network of independent companies
Linked together to share skills, costs, & access to one another’s markets
Coping with uncertainty through cooperative efforts
Each gains from resulting individual & organizational learning
May not be permanent
Virtual organization = a continually evolving network of independent companies that are linked together to share skills, costs, and access to one another’s markets. The members of a virtual organization, by pooling and sharing the knowledge and expertise of each of the component organizations, simultaneously “know” more and can “do” more than any one member of the group could do alone. By working closely together, each gains in the long run from individual and organizational learning. Virtual organizations need not be permanent and participating firms may be involved in multiple alliances. Each company that links up with others to create a virtual organization contributes only what it considers its core competencies. It will mix and match what it does best with the best of other firms by identifying its critical capabilities and the necessary links to other capabilities. Participating firms give up part of their control and accept interdependent destinies. They pursue a collective strategy that enables them to cope with uncertainty through cooperative efforts. Virtual organizations enhance the capacity or competitive advantage of participating firms.

16. Organizational Structures: Boundaryless Designs
A boundaryless organization requires
Mechanisms to ensure effective coordination and integration
Common culture and shared values
Horizontal organizational structures
Horizontal systems and processes
Communications and information technologies
Human resource practices
Awareness of the benefits and costs of developing lasting internal & external relationships
Designing an organization that simultaneously supports the requirements of an organization strategy, is consistent with the demands of the environment, and can be effectively implemented by the people around the manager is a tall order for any manager. The most effective solution is usually a combination of organizational types. That is, a firm may outsource many parts of its value chain to reduce costs and increase quality, engage simultaneously in multiple alliances to take advantage of technological developments or penetrate new markets, and break down barriers within the organization to enhance flexibility. When an organization faces external pressures, resource scarcity, and declining performance, it tends to become more internally focused, rather than directing its efforts toward managing and enhancing relationships with existing and potential external stakeholders. This may be the most opportune time for managers to carefully analyze their value chain activities and evaluate the potential for adopting elements of modular, virtual, and barrier-free organizational types. However managers must be aware of two key issues as they work to design an effective boundaryless organization. First, managers need to develop mechanisms to ensure effective coordination and integration. Second, managers need to be aware of the benefits and costs of developing strong and long-term relationships with both internal and external stakeholders. One mechanism for integration is to develop horizontal organizational structures = organizational forms that group similar or related business units under common management control and facilitate sharing resources and infrastructures to exploit synergies among operating units and help to create a sense of common purpose.

17. Organizational Structures: Ambidextrous Designs
Ambidextrous organizational designs address two contradictory challenges:
How to maintain adaptability
How to achieve alignment
Ambidextrous organizations
Are aligned and efficient while they pursue modest, incremental innovations
Are flexible enough to adapt to changes in the external environment and create dramatic, breakthrough innovations
In chapter 1, the concept of “ambidexterity” was introduced. This concept incorporates two contradictory challenges faced by today’s managers. First, managers must explore new opportunities and adjust to volatile markets in order to avoid complacency. They must ensure that they remain adaptable and proactive in expanding and/or modifying their product-market scope to anticipate and satisfy market conditions. Second, managers must also effectively exploit the value of their existing assets and competencies. They need to have an alignment, which is a clear sense of how value is being created in the short term and how activities are integrated and properly coordinated. Firms that achieve both adaptability and alignment are considered ambidextrous organizations. Ambidextrous organizational designs = organizational designs that attempt to simultaneously pursue modest, incremental innovations as well as more dramatic, breakthrough innovations. Adaptability = managers’ exploration of new opportunities and adjustment to volatile markets in order to avoid complacency. Alignment = managers’ clear sense of how value is being created in the short term and how activities are integrated and properly coordinated.