organizational structure and innovation
TRANSCRIPT
ESSAY
On the topic
ORGANIZATIONAL STRUCTURE AND INNOVATION
Integrated Management
SS 2015
Prof. Dr. Andreas Gerlach
Dr. Kai Neuschaefer
Siva Srinivas Anand Selvarajan
Matr. -No. 10048364
Table of Contents
1. Introduction .......................................................................................................................... 1
1.1 Organizational Structure ................................................................................................... 1
1.2 Organizational Innovation ................................................................................................ 1
2. Building Blocks of Organization Structure ........................................................................ 2
2.1 Centralization .................................................................................................................... 2
2.1.1 Case in Point – Caterpillar ......................................................................................... 2
2.1.2 Case in Point – McDonald’s ...................................................................................... 2
2.2 Decentralization ................................................................................................................ 3
2.2.1 Case in Point – Urban Outfitters ................................................................................ 3
2.3 Departmentalization .......................................................................................................... 4
3. Burns and Stalker’s Organizational Model ....................................................................... 4
3.1 Mechanistic Structure ....................................................................................................... 4
3.2 Organic Structure .............................................................................................................. 4
3.2.1 Case in Point – 3M ..................................................................................................... 5
4. Modern Organizational Structure ...................................................................................... 5
4.1 Matrix Organizational Structure ....................................................................................... 5
4.2 Managing the Matrix Structure ......................................................................................... 6
4.3 Unclear Roles and Responsibilities .................................................................................. 6
4.4 Matrix Structure Innovativeness ....................................................................................... 7
4.4.1 Case in Point – Ford ................................................................................................... 7
4.5 Case in Point – Oticon ...................................................................................................... 8
5. Strategic Structural Innovative firm .................................................................................. 8
5.1 Autonomous Innovation ................................................................................................... 9
5.2 Systematic Innovation..................................................................................................... 10
6. Conclusion ........................................................................................................................... 10
References ................................................................................................................................ 11
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1. Introduction
1.1 Organizational Structure
Organizational structure is defined as the coordination of individual and team work within an
organization to accomplish the goals and objectives of the organization (Mason Carpenter, et
al., Dec. 2012, p.336). Structure is meant to support the functions and process of the
organization flows smoothly and as intended. The Community Tool Box at KU’s Work Group
(Community Tool Box, n.d, ch. 9) says that suitable structure should be designed at the initial
stage of organizational development. Also one should be aware of the possible changes in the
structure as the organization grows.
Thus Structure provides the steadiness for the organization. The organizational design
history shows that structures are easier to put in place than to modify, disintegrate or reshuffle.
The main problem with organizational design is to reconcile the qualities like flexibility,
dynamism and alertness, and the technology and experience, with the need for endurance, order
and stability (Richard Pettinger, 2002, pp. 382f).
1.2 Organizational Innovation
John Locke said that “New opinions are always suspected and usually opposed, without any
other reason but because they are not already common”. According to (Daft (1978), Damanpour
and Evan (1984), Damanpour (1996) as cited in Lam, A., 2004, p.3), the term ‘Organizational
Innovation refers to the creation or adoption of an idea or behaviour’ new to the organization.
Thus Innovation is defined as the emergence of new concept, ideas and creating new
economical, effective process. Innovation is a crucial factor for organizational growth and
regarded as competitive advantages for a lots of organizations. Organizational design remains
the key for the process of innovation.
Thus the ability of an organization to innovate is the pre-condition for successful
resource and new technology utilization (Lam, A., 2010, p.163). There are diverse theories of
organizational innovation. In this paper we are going to discuss about the theories of
organizational design focuses on the link between structural forms and the organizational
propensity to innovate.
Problem Statement & Research Question
The purpose of this paper is to observe the complex relationship between organization and
innovation from the viewpoint of different organizational structure and its ability to innovate.
Also this paper is concerned on the question of,
How do an organization can cope with the change and adjust to turbulent environment
and technological shifts? What is the relationship between the organizational structure
and innovation?
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This is studied in reference to the adaptation of different types of organizational
structure by the companies and its innovativeness. Also this paper argues that organizational
structure plays a key role in enabling innovation.
2. Building Blocks of Organization Structure
In this chapter we will discuss about the building elements of the company’s structure and see
how the basic elements converges to two main types of organizational structure along with its
ability to innovate.
2.1 Centralization
The organization in which most of the decision making happens at upper levels of the hierarchy
are known as centralized organization. Thus the authority lies at the top level of the
organization. So, for a company with centralized decision making, the success solely depends
on the skills of CEOs and top level managers. Many companies encounter inefficiencies in
decision making due to centralized power (Bauer, T., et al., Dec. 2012, p.336).
Association with innovativeness: The centralized decision making of a company poorly
supports the innovation. It is only suitable for small scale industries and companies which have
a stable and predictable environment.
2.1.1 Case in Point – Caterpillar
Nelson, G.L argues that (Nelson, G.L, & Pasternack, B.A, 2005, Ch. 14) Caterpillar, the
construction machinery and equipment manufacturer suffered the consequences of centralized
decision making. During 1980’s all the pricing decision of the company came from
headquarters located in Peoria, Illinois. So a sales representative from Africa had to contact the
headquarters for any updated information regarding discounts or offers. As a result of delay in
information flow within the caterpillar, the competitors like Komatsu (Japanese firm) utilized
this as an opportunity and entered the African market with timely offers and promotions. After
this incident the caterpillar have gone for decentralized approach to compete the globalization.
Results: Keep what’s good, fix what’s wrong, and unlock great performance.
2.1.2 Case in Point – McDonald’s
Also centralization has its own advantages also. For instance, McDonald’s follows
centralization to maintain and standardize its product quality all over the world. In accordance
to the top level management decision, all the McDonald outlets practises standard steps in
purchasing and packing products (Ebert, R.J., & Griffin, R.W, 2012, p. 180).
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Span of control: Span of control refers to the number of people under the control of single
manager in an organization. Higher the span of control, becomes more difficult for a manager
to control. Span of control is directly proportional to the innovation.
Tall Organizational Structure: The tall structure tend to have several layers of management
and has the characteristics of centralization. Tall structures have narrow span of control and the
tasks are similar and repetitive. Tall organizational structures are less likely to innovate.
2.2 Decentralization
According to Jack Welch, former CEO of General Electric, “If you don’t let managers make
their own decisions, you’re never going to be anything more than a one-person business”
The organization in which the crucial decisions can also be made at lower levels of the
hierarchy are known as decentralized organization. Thus the authority lies at the lower level of
the organization. So, the decision making and problem solving can be done by the employees
who has the better knowledge of the issue. Nowadays, companies are embracing
decentralization more rather than centralization. One of the reason is that the decentralized
environment are more employee friendly and has efficient flow of information.
Association with innovativeness: Decentralization makes the company more innovative and
increases its responsiveness to the market change. It is suitable for larger companies having
complex and unpredictable environment.
2.2.1 Case in Point – Urban Outfitters
Ronald Ebert states that (Ebert, R.J., & Griffin, R.W., 2012, pp. 181) Urban Outfitters, Inc. is
an American multinational clothing corporation follows decentralized pattern which gave
managers significant freedom to make product displays to attract customers and to choose
which product to display near the door and so on
Sometimes decentralization also leads to organizational confusion. Many organizations
experience problem in figuring out a right balance between the centralization and
decentralization.
Flat Organizational Structure: The flat structure tend to have fewer layers of management
and has the characteristics of decentralization. Flat structures have wide span of control. Flat
organizational structures are more likely to innovate.
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2.3 Departmentalization
Departmentalization is the process of grouping together of people performing same tasks. It is
classified broadly as either functional or divisional (Erdogan, B., et al., 2012, pp. 339f).
Functional Structures are found in companies with fewer product line and the departments
represents functional groups such as Finance, Marketing, and accounting. These type of
structures are less prone to change and results in reduced innovativeness.
Divisional Structures are found in companies with diverse product lines and each department
represents unique products, services etc. Each department has its own functional departments
such as marketing, finance etc. Thus departmentalization by product may increase the ability
of the company to innovate but it lowers the response time.
3. Burns and Stalker’s Organizational Model
According to Burns and Stalker (Burns & Stalker, 1961, Ch.8), the two main types of
organizational configuration based on the environmental factors such as predictability, stability
as Mechanistic (Predictable & Stable) & Organic (Non-predictable and unstable). These models
are highly helpful in understanding the challenges faced by organizations due to their efforts to
shift from mechanistic to organic form, as the pace of environment change accelerates and
innovation becomes more important.
3.1 Mechanistic Structure
This type of structure is more firm, hierarchical and formalised in nature which is resistant to
change. These forms lack entrepreneurial behaviour. But these forms are suitable for stable
environment because of its increased efficiency and uniformity attained through a well-
established rules and structure. Moreover, the mechanistic structure is clear and void of
uncertainty, it is beneficial for new businesses.
Association with innovativeness: These type of structures are not suitable for innovation and
also it inhibits individual initiative.
3.2 Organic Structure
This type of structure is volatile, flat, decentralized, and flexible in nature and has the potential
to change according to the market demand and shifts. Employee job satisfaction levels are
higher in organic form. These type of structure encourages entrepreneurial action and self-
determination of the employee.
Association with innovativeness: Basically organic structures are fluidic and act as a catalyst
for innovation.
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3.2.1 Case in Point – 3M
In reference to (Adair, J., 2007, as cited in (Mason Carpenter, et al., 2012, p.342), 3M known
as the Minnesota Mining and Manufacturing Company, is an American multinational
conglomerate corporation has an organic structure. The company follows decentralization as its
core principle. 3M has a total of nearly 100 profit centres with each divisions operates like a
small independent company. Every single division manager activities are autonomous and
responsible for his or her action. Thus when products produced by a division becomes large in
number and profitable, initiates the spun off to generate separate small units. Through this
process the company dexterity, individual initiative, autonomy and innovativeness are
maintained.
4. Modern Organizational Structure
The beginning of the 19th century witnessed faster pace of technological advancement. From
the telegraph to telephone to the computer to the Internet, each advancement demanded
structural change and adaptation of respective organizations.
During the late 19th century business became global and envisaged the quest for
alternative organizational structure. In the meantime, management experts also created new
organizational designs for companies to keep abreast with technological shifts and changes.
Each structure has its unique feature to handle their business in specific situations. Out of the
various structures in practise we are going to look first into the Matrix Structure.
4.1 Matrix Organizational Structure
Some companies find that none of the previous structures match their requirements. So they
went for a structure with combined qualities of both functional and divisional structure. When
the traditional functional structure superimposing divisional on top of it gives the structure of
matrix-like appearance. NASA pioneered this type of structure. Due to its flexibility nature, it
is extensively used by the organizations having unstable surroundings. According to the
PMBOK Guide 4th Ed., (William Duncan R., 1996, pp.21f) the matrix structure can be classified
into three types depending on the level of power of Project manager as Strong, Balanced and
Weak Structure.
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Fig. 1: Balanced Organizational Structure. (William Duncan R., 1996, p.21)
Thus the (Fig. 1) shows the typical balanced matrix structure of an organization.
Although the matrix structures are more innovative and good for rapidly changing environment
it has a challenge of managing its complex structure. The above figure depicts that the staffs
represented by black boxes are the ones who are responsible to report both the Project and
Functional Manager (Dual reporting) of the organization. Thus when a matrix organization
grows the structure will become more and more complex.
4.2 Managing the Matrix Structure
Companies are facing problems in the adoption of matrix structure (Bartlett & Ghoshal, 1990;
Burns & Whorley, 1993). Though each companies had unique issues, most of the issues were
common to all. The top five problems reported by them were misaligned goals, unclear roles &
responsibilities, ambiguous authority, silo-focused employees and lack of matrix guardian.
4.3 Unclear Roles and Responsibilities
Mostly of the matrix structure has problem with roles and responsibilities. Usually in a matrix
structures an employee has to report one or more bosses. This results in confusion among both
the employees and managers. According to Thomas sy (Thomas sy, 2005, vol.28.1, p.44)
companies must have four fundamental elements when establishing roles and responsibilities:
1. Well defined guidelines and descriptions in the areas of roles and responsibilities
2. Assignment of responsibility for business objectives
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3. Approval for tasks should be from single person/contact
4. Communication and information sharing should be planned through Periodic meetings
or circulation of newsletters.
Apart following these four fundamental elements, companies can make use of RASIC(R=
Responsible, A=Approval, S=Support, I=Inform, C= Consult) tool to help employees clarify
their roles (Galbraith, 2002; Gilmore & McCann, 1983). So, for a company which is new to
matrix structure uses RASIC tool to solve the challenge. But when the companies got used to
matrix structure its dependency on RASIC chart reduces and employees begin to function with
a “Mental” RASIC. From this we can conclude that RASIC is one of the fundamental tool of
matrix organization. In a similar way, companies resolve most of the problems in the matrix
structure.
4.4 Matrix Structure Innovativeness
As said by Martti Mäkimattila (Mäkimattila M., 2014, pp. 131-132) it has been claimed that
MO (Matrix Organization) is flexible and supports innovation (Galbraith, 1971; Van der Panne,
et al., 2003). Communication, openness, intra and inter organizational environment, are the
important things considered to gain innovation in today’s organized, networked, and fast-paced
world (Chesbrough, 2003 & Johannessen, 2009). When a matrix is launched to support this,
then correcting and reframing the innovation process is an essential task for successful
accomplishments and to get the maximum benefit from it.
Some companies make use of matrix structure as a temporary measure to accomplish a
specific project in certain part of organization. In these companies matrix structure ends with
the end of specific project. Companies like Nike, Unilever, Ford and General Motors uses
matrix structure as either temporary or permanent form.
4.4.1 Case in Point – Ford
As stated by Ronald Elbert (Ronald Ebert, J & Ricky Griffin, W, 2012, p.181) Ford, is an
American multinational automaker employs matrix structure to produce new models like its
newest Mustang. It creates a new design team composed of members from all the departments
such as marketing, engineering, finance and manufacturing to design its new car. After the
successful completion of the project the members are reassigned to their previous positions
inside the company.
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From the above examples, we can infer that matrix structures are embedded with
innovativeness but with the expense of complexity. So to get the best innovation practise out of
the matrix structure one has to find the perfect balance between different kinds of matrix
structure.
4.5 Case in Point – Oticon
In this case study we are going to discuss about Oticon, a Danish electronics producer’s rise
and decline due to its ‘Spaghetti Organization’ during the early 1990’s. Verona and Ravasi
(Verona & Ravasi, 2003, pp.557-606) argued that the company got the world attention for its
radical organizational transformation and innovative benefits. The ‘spaghetti organization’, is
nothing but a flat, loosely arranged project-based organization categorised by extensive
allocation of tasks and project duties to autonomous teams. The restructuring of the organization
occurred in 1990 from the traditional, functional based structure that the company had relied
upon from its establishment. This restructuring happened in response to the loss of its
competitive advantage during 1980s. Though the company were the market leaders of hearing
aids industry, the late 80’s saw the shift in technological paradigm and the Oticon began to lose
its market to the rival companies. In response to the crisis during 1990, the Oticon underwent
series of changes in the structure to make the company more creative and entrepreneurial in
nature. The radical restructuring leads to series of remarkable innovations and gave
extraordinary performance results. Despite its shine in 1990, the radical structure was
abandoned partially in 1996 and then slowly superseded by more stable and traditional matrix
structure. Foss (Foss, 2003, pp.331-349) argues that the spaghetti structure was partly unstable
because of the motivational problem due to ‘Selective Intervention’. Also it created frustration
among the employees and resulted in partial retreat of the spaghetti structure. However, the
spaghetti structure is considered as the successful innovation, the partial retreat of spaghetti
remains us the inherent difficulties of maintaining a complete adhocracy.
5. Strategic Structural Innovative firm
The work of economist in the field of strategy reflects the structure as both cause and effect of
managerial strategic choice in reaction to market potentials. Two variables ‘strategy’ and
‘structure’ are responsible in building the organizational form. The core concept is that certain
organizational archetypes enable superior innovative performance in a particular environment
than others because they are compatible to lower operation cost and manage the so-called
capital market failures. Some forms like matrix or multi-divisional form, has emerged due to
the increase in manufacturing capacity and complexity of the companies and is associated with
a strategy of diversification into related product and technological areas (Chandler, 1962 as
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cited in (Lam, A., 2010, p.166) . It may seem as an efficient innovator for a specific market
condition, but they have limitations in developing new competencies.
The ‘innovative firm’ theory developed by Lazonick and West (Lazonick & West, 1998, pp.1-
47) is rooted in the chandlerian framework, focuses on how strategy and structure determine
the competitive advantage of the companies. This theory suggests that companies in the
developed nations should embrace high level of ‘Organizational Integration’ to withstand its
competitive lead over others. It is believed that Japanese organizations have competitive
advantage in the fields of automobile and electronics over USA because of their unique capacity
of integrating shop-floor workers and enterprise networks, which paves way for them to work
out new innovative strategies. Lazonick and West argues that US firms like Motorola and IBM
also maintained their competitive advantages over others through organizational integration.
Thus this theory points out the structure of the companies and its internal cohesiveness as an
important factor in innovative performance. But this understanding also is not enough because
the Japanese companies works well in established technological field where the incremental
innovation is important, but not necessary in fields of rapid development where radical
innovation plays a crucial role. Teece (Teece, 1998 as cited in (Lam, A., 2010, p.166) explains
the link between the strategy, structure and innovation nature in relation to the innovation
properties and suggesting some organizational needs to achieve innovation. According to his
framework governance and non-governance structures of organization and the external links
strongly influences the rate and direction of the organizations innovation. He also argues that
different organizational structures such as conglomerate, virtual structure etc., works wel l with
different environment to produce several types of innovation. Teece (Teece, 1998 as cited in
(Lam, A., 2010, p.166) further argued that the two main types of innovation ‘autonomous’ and
‘systematic’ innovation matches with different organizational structures.
5.1 Autonomous Innovation
An autonomous innovation is something which do not require huge modifications of linked
products and processes of an organization. For example, at first, the installation of power
steering did not require any massive modification to the car or engine. Simple technical change
in the arm’s length of the steering arrangements were made to accomplish the autonomous
innovation.
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5.2 Systematic Innovation
In contrast to the autonomous innovation, systematic innovation required total redesign of
related parts or complete change of the production process. For example, the switch to front
wheel drive in early 1980’s demands complete redesign of the car and its related parts such as
suspension and brake system. This type of modification is known as systematic innovation.
This type of innovation requires structures like matrix because it involves complex coordination
among various departments of the organization. Yet these suggestions are to be empirically
verified (Teece, 1998 as cited in (Lam, A., 2010, p.166). Many of the empirical propositions
within this chapter in relation to structure, strategy and innovation are yet to be verified and
show interesting opportunities for further research.
6. Conclusion
In this paper we have discussed about the various organizational structural forms, evolution of
company’s adoption to structure, structural problems, abandonment, and organizational
innovation. From this we can conclude that organization structure remains as a key factor for
any given company to cope up according to ever-changing environmental needs and
technology. So, through partial organizational restructuring, company can clearly withstand the
unstable environment to some extent. Moreover, complete restructuring works well at the
beginning producing new product innovativeness but eventually led to confusions. There are
also several other factors like organizational culture, learning, and geographical area affects the
organizations response to the fast-paced and highly competitive world.
The relationship between the organization structure and innovation is quite difficult to explain
because there is no single clear framework for understanding the phenomenon of
‘Organizational Innovation’. From our study we can say to some extent that loose structures
tends to be more innovative but that kind of structures getting unstable/abandoned in a long
run. Moreover, extreme or complete decentralization of structure can lead to collapse of the
organization. Finding a balance between the structure and innovation remains a mystery. Since
the structure and innovation depends on various factors we cannot give away a defined answer.
Even some authors remain coy about stating definitions of organizational innovation. Thus the
evolution of structure is a non-ending process and the relationship between the structures also
keeps changing according to the technological shifts and innovation.
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Name Siva Srinivas Anand Selvarajan Signature _____________________ Date 30/06/2015