Miles A. Zachary

MGT 4380

Executing Strategy through Organizational Design

Chapter 9

Executives able to skillfully orchestrate structure and control are likely to lead their firms to greater levels of success

Development of a strong structure and control system begins with the building blocks of organizational structureDivision of laborOrganizational chartVertical and Horizontal linkagesInformal linkagesUnity of command principle

Organizational Design

Division of labor is the process by which a task is split into a series of smaller tasks, each performed by a specialist

The oldest record of management practices parables the importance of the division of laborJethro teaches Moses to establish a hierarchy of

authority to better manage the freed HebrewsA hierarchy of authority is an arrangement of

individuals based on rank (e.g., the military)Greek philosopher and contemporary of Socrates,

Xenophon, noted the increased efficiency of shoemakers who divide the task of making shoes

Division of Labor

Later scholars such as Duhamel du Monceau (1761) and Smith (1776) write about the benefits of the division of labor more explicitly

Others were much more critical of the division of laborKarl Marx (1844) suggested that it alienates works

who become “depressed spiritually and physically to the condition of a machine”

Henry David Thoreau (1854) believes that it removes a workers sense of connectedness with society

Adam Smith (1776), while championing its efficiency, does discuss how it can be monotonous and lead to depressing work environments

Division of Labor

While division of labor can create efficiencies, determining how to coordinate the tasks and people who perform them is challenging

The solution is organizational structure—how tasks are assigned and grouped together with formal reporting relationships

Adequate structure increases a firm’s likelihood of success

A firm’s structure is often a function of environmental fitFor example, Burns & Stalker (1961) suggested that in

static environments, a firm can gain efficiencies from having a rigid hierarchy; however, in dynamic environments, a firm benefits from greater flexibility

Division of Labor

Many firms use organizational charts to diagram their structure: show the various vertical and horizontal linkages

A vertical linkage tie supervisors to subordinates and show the lines through which supervisors delegate authority, oversee activities, evaluate performance, and administer feedback

When mapping vertical linkages in an organizational structure, most executives rely on the unity of command principleEach employee should report to only one

supervisor; multiple bosses can be confusing

Vertical & Horizontal Linkages

A horizontal linkage is a relationship between equals in an organizations; sometimes called committees, teams, task forces, etc. depending on the extent of the relationship

Important when close coordination is needed across the organization

Informal linkages do not appear in the formal organizational chart and refer to an unofficial relationship between employees based on personal friendships, rivalries, and politics

Vertical & Horizontal Linkages

The vertical and horizontal linkages among employees forms the foundation of organizational structure

Executives may use a variety of combinations of vertical and horizontal linkages to design an effective structure

Four (4) common types of structureSimpleFunctionalMultidivisionalMatrix

Organizational Structures

Executives must weight the benefits and costs of different structures because, once formed, structure can either aid or constrain strategy

Early strategy scholars (e.g., Chandler, 1962; Pierce, 1974) conceptualized the S-C-P model

Organizational Structure

StructureConduct

(Strategy)Performance

In a simple organizational structure, an organizational chart is usually not needed

Most firms begin with a simple structureWhen a firm is owned and operated by a single individual

or a small group of peopleIn organizations composed of more than a single person,

tasks are usually assigned informally rather than formally; strategic decisions are highly centralized (owner)

The flexibility of a simple structure encourages creativity and individualism and high responsiveness

Without a formal structure, informally-assigned duties may not be accomplished; lack of clear guidance; confusing when more employees are hired

Simple Structure

Simple Structure

As a small organization grows, simple structure begins to become ineffective thanks to added complexity

Complexities need to be managed by formalized structures with emphasis on hierarch and vertical links

A functional structure divides employees into departments that handle activities related to a functional area of the business (e.g., marketing, production, customer service, human resources, etc.)

Each area is often headed up by a manager with all employees reporting to their respective manager

Functional Structure

An important benefit of the functional structure is that each person tends to learn much about their particular function (specialization)Tends to create highly skilled specialists

Grouping functional areas decreases costs by creating efficiencies and employees with similar training backgrounds tend to get along better on average

Increased hierarchical levels can be slow to disseminate information and execute changes

Functional structures are often useful in situations where a firm has limited products or services (e.g., single offerings)

Functional Structure

Functional Structure

Functional Structure

When a firm begins to offer more than a few products or services (often across a wide geographical area), they often require a more responsive organizational structure

Naturally, firms often move from a functional form to a multidivisional structure in which employees are divided into departments based on product areas and/or geographic regions

Multidivisional Structure

One of the big advantages of the multidivisional form is that it allows firms to act quickly

This can backfire when divisions are loosely-coupled and are generally unaware and/or unmotivated to align with the firms overarching strategy

Also, since multidivisional structures are basically coupled functional structures, they do not benefit from the efficiency of single departments across the entire company

Instead, they need individual departments within each division

Multidivisional Structure

Multidivisional Structure

While functional and multidivisional structures rely primarily on vertical linkages, matrix structures rely more on horizontal linkages

Creates cross-functional teams that work on different projects

Advantages include maximizing organizational flexibilities, enhancing communication across functional lines, and creating a spirit of teamwork and collaboration

Violates the unity of command principle potentially creating confusion and/or conflict between managers

Good for organizations that need to maximize flexibility such as high technology, engineering, and consulting firms

Matrix Structure

Matrix Structure

Boundaryless organizations are ones that remove the usual barriers between parts of the organization and between them and other organizations

While absolute state is improbable, moving toward that state can help an organization become more flexible and responsive

E.g., W. L. GoreNo formal titles allows leaders to emerge based on

performance, attracting followers to new innovative ideas

Structural boundaries can inhibit and constrain firms, but can also provided needed order

Boundaryless Organizations

An organization’s structure is not a static choice, but rather should be revisited as the organization evolves

Managers and executives should be cognizant of “danger signs” (e.g., slow response time, poor performance)

Finding structural balance is difficult but desirable

Changing Structures

Effective structure and strategy depends on skillful use of organizational control systems

Control systems allow executives to track organizational performance, identify concern areas, and then take action to address concerns

Three (3) basic types of control systemsOutput controlBehavioral controlClan control

Most firms use a combination of control systems

Controlling the System

Output control focuses on measurable results within an organizationE.g., website hits per day, cars produced per

week, sales orders per month, etc.Executives decide what output (performance)

level is acceptable, communicate their expectations to employees, track performance, then make changes to either the goals or employees (feedback) as needed

Output Control

Behavioral controls focus on controlling the actions of individuals that ultimately lead to a resultE.g., company dress policy, firm purchase

procedures, etc.Reflect policies and procedures that are often

communicated to employees through a rules and regulations handbook

Can be difficult to implement; proper motivation/incentives is key

Behavioral Control

Clan control relies on traditions, expectations, values, and norms to lead individuals to work toward the good of the organizationE.g. “the way we do things here…”

An informal type of controlBased largely on organizational cultureWhile effective, it can be extremely hard to

change as culture is inertial

Clan Control

Many management fads have come and gone in business including:MBO (management by objectives): goal-setting between

supervisor and subordinate to provide structure and motivation

Sensitivity training: group discussions leading to greater self-awareness and/or self-actualization

Quality circles: employee groups formed to innovate new methods or processes to improve quality

Strong culture: interest in Japanese management systems, firms tried to develop strong collectivist cultures

While most fads fade away with time, they remind us to be true to our roots; contingency theory is no fad

Management Fads

Extremely important decision that determines how organizations structure resources, assets, and liabilities, what strategy a business should use, and how performance can be dispersed and taxed

Three (3) basic forms:Sole proprietorshipPartnershipCorporation

Many derivatives exist that have specialized purposes

Legal Business Forms

A firm owned by one individualLegally, an individual and their sole

proprietorship are one in the sameAn advantage of this unity is that after taxes

are paid, all the profits are theirs to keep or divide at will

However, the individual has unlimited liability and any losses in the business transfer to the individual

Most sole proprietors are small businesses that try to minimize overhead and other direct costs

Sole Proprietorship

Two or more individuals enter into a partnership and share ownership of an organization

Similar to sole proprietorship in that partners are beneficiaries of profits (and losses)

Can be beneficial when partners complement each other

However, partnerships often break up and adding or subtracting partners requires rewriting the partnership agreement

Many partnerships are professional organizations that combine a group of traditionally independent contractors (e.g., law firms, engineering firms, etc.)

Partnership

Corporations are distinct entities which are viewed as legally separate from their owners (two tax returns—one for the corporation and one for the owner)

Separation distinction limits liability of owners

Profits and losses are attributed to the firm and must be dispensed by owners (double-taxation)

Book error: corporations DO NOT have to issue stock or be professionally-managed, although many are

Are the most expensive basic legal form to start, but have considerable benefits for many

Corporation

S-corporations: avoids double-taxation since profits and losses flow directly to the owner(s) tax return; however, limits on # of shareholders (<100) discourage large firms

Limited liability company (LLC): granted by state, not federal, laws; owners have limited liabilities, but must choose to be taxed as one of the basic forms; very flexible

http://www.inc.com/articles/2000/06/19438.html

Other Legal Forms