Chapter 10Chapter 10

Creating Effective Organizational

Designs

10-2

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

10-3

Patterns of Growth of Large Corporations:

• 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

Simple Structure

10-4

Patterns of Growth of Large Corporations: Functional Structure

Lower-level managers, specialists, and operating personnel

10-5

Patterns of Growth of Large Corporations:

• Found where there is a single or closely related product or service, high production volume, and some vertical integration

Functional Structure

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

10-6

Divisional Structure

Lower-level managers, specialists, and operating personnel

10-7

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

10-8

Divisional Structure

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

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

10-9

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

10-10

Matrix Structure

Adapted from Exhibit 10.4 Matrix Organizational Structure

10-11

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

10-12

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

10-13

International Operations: Implications for Organizational Structure

• Structures used to manage international operations

• International division

• Geographic-area division

• Worldwide functional

• Worldwide product division

• Worldwide matrix

10-14

Dominant Growth Patterns of Large Corporations

International Expansion

Related diversification

Vertical integration

Growth in revenues and employees

International expansion

Related diversification

Increase relatedness of products and markets

Increase relatedness of products and markets

International expansion

Diversification in unrelated areas

Strategies leading to new structure

Dominant growth path for U.S. firms

Diversification into related products and markets

10-15

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

10-16

Making Boundaries More Permeable

• 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

Barrier-free type of organization

Three approaches

10-17

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

10-18

Making Boundaries More Permeable

• 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

Barrier-free type of organization

Modular type of organization

Three approaches

10-19

Pros and Cons of Modular Structures

• 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

Pros Cons

• 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

10-20

Making Boundaries More Permeable

• 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

Barrier-free type of organization

Modular type of organization

Virtual type of organization

Three approaches

10-21

Pros and Cons of Virtual Structures

• 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

Pros Cons

• 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

10-22

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