McGraw-Hill/Irwin Copyright © 2009 by The McGraw-Hill Companies, Inc. All rights reserved.

Chapter 7

Creating Effective Organizational Designs

Learning Objectives

     After reading this chapter, you should have a good understanding of: The importance of organizational structure and the concept of the “boundaryless” organization in implementing strategies.

The growth patterns of major corporations and the relationship between a firm’s strategy and its structure.

Each of the traditional types of organizational structure: simple, functional, divisional, and matrix The relative advantages and disadvantages of traditional organizational structure The different types of boundaryless organizations — barrier-free, modular, and virtual —and their relative advantages and disadvantages 7-3

Traditional Forms of Organizational Structure

 Organizational structure refers to formalized patterns of interactions that link a firm’s  Tasks  Technologies  People  Structures help to ensure that resources are used effectively in accomplishing an organization’s mission  Structure follows strategy!!!

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Traditional Forms of Organizational Structure

 Structure provides a means of balancing two conflicting forces  Division of tasks into meaningful groupings  Integrate the groupings for efficiency and effectiveness  Structure identifies executive, managerial, and administrative organization of a firm  Indicates responsibilities and hierarchical relationships 7-5

Question

Most organizations begin very small and ______.

a) grow to become a large sized organizations b) continually grow c) remain small d) often decrease in size 7-6

Simple Structure

 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  Fosters creativity and individualism 7-7

Simple Structure

 Problems may arise due to “informality” in simple structure  Responsibilities may be unclear  Conflict and confusion  Employees may take advantage of lack of regulations  Erodes motivation and satisfaction 7-8

Functional Organizational Structure

Adapted from Exhibit 10.2 Functional Organizational Structure 7-9

Functional Structure

 Demands may be placed on owner/ manager to obtain and process information to run business  Owners generally are not skilled in all specialties  Accounting  Engineering  Production  Marketing  Found where there is a single or closely related product or service, high production volume, and some vertical integration 7-10

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 7-11

Functional Structure

 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 7-12

Example: Structure

 Organizational Structure – firm’s formal role configuration, procedures, governance, and control mechanisms, and authority and decision-making processes  Simple Structure –organizational form which owner-manager makes all major decisions directly and monitors all activities; staff serves as an extension of the manager’s supervisory authority  Functional Structure – consists of a CEO and limited corporate staff, with functional line managers in dominant organizational areas such as production, accounting, marketing, R&D, engineering, and human resources www.albany.edu/faculty/ja0754/bmgt481/lecture7.html

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Divisional Structure

 Organized around products, projects, or markets  Each division includes functional specialists organized into departments  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 7-14

Divisional Organizational Structure

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Divisional Structure

 Advantages  Strategic business unit (SBU) structure  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 7-16

Divisional Structure

 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 7-17

Divisional Structure

 Strategic business unit (SBU) structure  Divisions with similar products, markets, and/or technologies are grouped into homogenous groups  Task of planning and control at corporate office is more manageable  May become difficult to achieve synergies across SBUs 7-18

Divisional Structure

 Holding Company structure  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 7-19

Example: HBO’s change

 HBOS PLC tweaking its divisional structure  HBOS' European corporate business will become part of the wider corporate division  Previously a standalone unit  Clients increasingly want one point of contact within HBOS  Alignment of management is designed to aid the further development of both businesses www.forbes.com/afxnewslimited/feeds/afx/2007/03/28/afx3558999.html

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Question

A matrix structure is a combination of what two other structures?

a) b) c) d) Divisional and SBU Functional and Divisional Virtual and Functional Modular and SBU 7-21

Matrix Structure

 Combination of functional and divisional structures  Responsible to two managers  The project manager  The functional area manager Violates the Unity of Command principle 7-22

Matrix Organizational Structure

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Matrix Structure

 Advantages  Facilitates the use of specialized personnel, equipment and facilities  Provides professionals with a broader range of responsibility and experience  Experience develops skills and competencies 7-24

Matrix Structure

 Disadvantages  Can cause uncertainty and lead to intense power struggles  Working relationships become more complicated  Decisions may take longer 7-25

Example

 Nike culture used to encourage local managers to focus on market share rather than profitability  Wall Street commented on lack of managerial control at Nike  Implemented a matrix structure to resolve issue  Matrix structure stated local managers’ responsibilities by region and product  Headquarters establishes which products to focus on and how to do it under new matrix structure Source: “The New Nike,”

Business Week

. September 20, 2004 7-26

Question

Does the relationship between strategy and structure imply that structure follows strategy? Explain.

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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 7-28

Making Boundaries More Permeable

 First approach  Permeable internal boundaries

Barrier-free type of organization

 Higher level of trust and shared interests  Shift in philosophy from executive development of organizational development  Greater use of teams  Flexible, porous organizational boundaries  Communication flows and mutually beneficial relationships with internal and external constituencies 7-29

Pros and Cons of Barrier-Free Structures

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Making Boundaries More Permeable

 Second approach

Modular type of organization

 Outsources non-vital functions, tapping into knowledge and expertise of “best in class” suppliers but retains strategic control  Three advantages  Decrease overall costs, leverage capital  Focus scarce resources on areas where it holds competitive advantage  Adds critical skills and accelerates organizational learning 7-31

Pros and Cons of Modular Structures

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Making Boundaries More Permeable

 Third approach  Continually evolving network of

Virtual type of organization

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 7-33

Pros and Cons of Virtual Structures

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Question

What factors facilitate in allowing boundaryless organizations to work?

a) b) c) d) Common culture and shared values Horizontal systems and processes Communications and information technologies All of the above 7-35

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 7-36