Organizational Design

Joe Mahoney

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

11*

The Basic Tasks of Organization

ORGANIZATIONAL CHALLENGE: design structure & systems that:Permit specializationFacilitate coordination by grouping individuals & link groups with systems of communication, decision making, & controlDeploy incentives to align individual & firm goals

Achieving high levels of productivity requires SPECIALIZATION

Specialization by individuals necessitates COORDINATION

For coordination to be effective requires COOPERATION

But goals of employees = goals of ownersTHE AGENCY PROBLEM

How to Organize for Competitive AdvantageOrganizational designGoal is to translate strategies into realized ones

StructureProcessesProcedures

Structure follows strategiesStructure must be flexibleYahoo failed to make changes to their organizational structure.Jerry Young ousted in 2008.11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2000South-Western College PublishingCincinnati, OhioDaft, Organizational Theory and Design, 7/e

Choice Processes in the Carnegie Model

Hold joint discussionand interpret goals and problems

Share opinions

Establish problem priorities

Obtain social supportfor problem, solution

Adopt the firstalternativethat is acceptableto the coalition

Conduct a simple,local search

Use established procedures ifappropriate

Create a solutionif needed

Managers havediverse goals,opinions, values,experience

Information is limitedManagers havemany constraints

Uncertainty

Coalition Formation

Search

Satisficing

Conflict

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

11-*

Sources of Bureaucratic Costs

Number ofMiddleManagers

MotivationalProblems

CoordinationProblem

InformationDistortion

BureaucraticCosts

10

Organizational Inertia and the Failure of Established Firms Organizational inertiaResistance to changeOften leads to failure because of the environmental dynamics: competition, technology, strategyetc.

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.

11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The Key Elements of Organizational StructureOrganizational structure determines

Work efforts of individuals and teamsResource distribution

Key building blocks

SpecializationFormalizationCentralizationHierarchy

11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The Key Elements of Organizational Structure Specialization: degree to which a task is divided

Division of laborExample: U.S. Military (Army, Air Force, Navy, Marines)

Formalization: codified rules and formal procedures

Detailed written rules and policiesExamples: NASA, McDonalds11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

The Key Elements of Organizational Structure Centralization: where the decision is made

Centralized decision making slow response time and reduced customer satisfactionExample: BPs Mexican Gulf Oil Spill

Hierarchy: formal, position-based reporting lines

Tall structure vs. flat structureTall structure higher degree of centralizationFlat structure lower degree of centralization

Span of control

11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Assembling the Pieces: Mechanistic vs. Organic OrganizationsOrganic organizationsLow degree of specialization and formalizationFlat structureDecentralized decision makingUses virtual team due to information technologyExamples: Zappos, W. L. Gore, and many high-tech firms

Mechanistic organizationsHigh degree of specialization and formalizationTall hierarchyCentralized decision makingExample: McDonalds

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Mechanistic vs. Organic Organization

Matching Strategy and StructureSimple structure

Small firms with low complexity

Top management makes all important strategic decisions

Low degree of formalization and specialization

A basic organizational structureExamples: small advertising, consulting, accounting, and law firms11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Changing Organizational Structures and Increasing Complexity as Firms Grow

Functional StructureFunctional structureGroups of employees with distinct functional areasThe areas of expertise correspond to distinct stages in the company value chain activitiesExample: College of Business, Finance Department , etc.

Recommended with narrow products/servicesMatches well with business-level strategy

Cost leadership Mechanistic organizationDifferentiation Organic organizationIntegration strategy Ambidextrous organization

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Typical Functional Structure11*

Functional Strategy: DrawbacksLacks effective communication channels across departments

Lack of linkage between functionsOften solved the problems by having cross-functional teams

It cannot effectively address a higher level of diversification11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Multidivisional StructureMultidivisional structureConsists of several distinct SBUsEach SBU is operationally independentEach leader of SBUs report to the corporate officeExamples: Zappos is an SBU under AmazonSkype is an SBU under MicrosoftPaypal is an SBU under eBay

Companies using M-form structure GE, Honda

11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Organizing the Diversified FirmThe 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.

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Multidivisional Form

The multidivisional structure was an adaptive response to the strategy of diversification.

Unless (multidivisional) structure follows (diversification) strategy, inefficiency resultsAlfred D. Chandler, 1962, Strategy and Structure, p. 314

Dupont ---> multi-divisional

Organizing the Diversified FirmThree 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?)11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Typical M-Form StructureFunctional StructureMatrix Structure11*

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

11-*

Multidivisional Structure

Oil Division(Functional Structure)

PharmaceuticalsDivision (ProductTeam Structure)

Plastics Division(Matrix Structure)

Typical ChemicalCompany

19

Multidivisional Structure Use with various corporate strategies

Related diversification

Co-opetition among SBUsTransfer core competences across SBUsCentralized decision making

Unrelated diversificationDecentralized decision makingCompeting for resources

11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Matching Corporate-Level Strategy

11*

(a) Self Organizing Team:10 interactions

(b) Hierarchy:4 interactions

How Hierarchy Economizes on Coordination

11*

Tightly-coupled, integrated system: Change in any part of the system requires system-wide adaptation

Loose-coupled, modular hierarchy: organizing a complex system into sub-systems and components linked by standardized interfaces permits decentralized adaptation

Hierarchy Allows Flexible Adaptation

Evolutionary Stability of the Multidivisional FormParable 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)

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Evolutionary Stability of the Multidivisional FormHierarchical 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.

11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Effectiveness of Multidivisional FormEffective 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; andPerforming strategic planning (diversification, acquisition, and related activities).

11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Weaknesses of Multidivisional FormDysfunctional 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; andLarge conglomerates may have excessive political power.

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Matrix StructureA combination of functional and M-form structureCreation of dual line of authority and reporting linesEach SBU receives support both horizontally and verticallyVery versatileEnhanced learning from different SBUs

11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Dual-Authority Structure in a Matrix Organization

Product

Manager A

Product

Manager B

Product

Manager C

Product

Manager D

Director

of Product

Operations

Design

Vice President

Mfg

VicePresident

Marketing

Vice President

Controller

Procure-ment

Manager

President

Typical (Global) Matrix Structure11*

Strengths of Matrix structure

Achieves coordination necessary to meet dual demands from environmentFlexible sharing of human resources across productsSuited to complex decisions and frequent changes in unstable environmentProvides opportunity for functional and product skill developmentBest in medium-sized organizations with multiple products.

Weaknesses of Matrix structure

Causes participants to experience dual authority, which can be frustrating and confusing.Participants need to have good interpersonal skills and extensive training.Is time-consuming: involves frequent meetings and conflict resolution sessions.Will not work unless participants understand it and adopt collegial rather than vertical-type relationships.Requires dual pressure from environment to maintain power balance.

Matching Global Strategy and Structure

**INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3.

*INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3.

***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.

https://www.mckinseyquarterly.com/Business_Technology/BT_Strategy/How_Web_2_0_is_changing_the_way_we_work_An_interview_with_MITs_Andrew_McAfee_2468?gp=1

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

**

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

**

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

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

*