2. 10 - 2
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 implications of a firm’s international operations for
organizational structure
3. 10 - 3
Learning Objectives
• After reading this chapter, you should have a good
understanding of:
- Why there is no “one best way” to design strategic reward and
evaluation systems, and the important contingent roles of
business- and corporate-level strategies.
- The different types of boundaryless organizations—barrier-
free, modular, and virtual—and their relative advantages and
disadvantages
- The need for creating ambidextrous organizational designs that
enable firms to explore new opportunities and effectively
integrate existing operations
4. 10 - 4
Learning from Mistakes - Airbus
• We lead off this chapter with the opening case of Airbus’s failure to
integrate its A380 double-decker jet manufacturing operations at two
locations in two countries—Germany and France.
• At the root of the problem were incompatible software designs:
engineers in Germany were working on a two-dimensional computer
program and, unfortunately, France’s engineers were working in 3-D.
• As noted by a consultant: “The various Airbus locations had their
own legacy software, methods, procedures, and Airbus never
succeeded in unifying all of those efforts.”
• The bottom line: The A380 is two years behind schedule, resulting in
$6 billion in lost profits (and penalties) and an erosion of its market
position vis a vis its global rival—Boeing.
5. 10 - 5
Learning Points:
• The case points out the value of what are called “boundary-less
organizations.”
• These are organizational forms in which there are permeable
boundaries among the value creating activities in the
organization as well as with the value creating activities of
suppliers, customers, and alliance partners.
• Clearly, in the case of the A380, there were insufficient
working relationships between the European countries
involved in its design and production.
6. 10 - 6
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
- Need for the division of tasks into meaningful groupings
- Need to integrate the groupings for efficiency and
effectiveness
7. 10 - 7
Traditional Forms of
Organizational Structure
• This section emphasizes the relationship
between strategy and structure and addresses
the importance of flexibility and permeability
in the context of four traditional forms of
organizational structure — simple, functional,
divisional, and matrix — as well as structures
for firms with international operation..
8. 10 - 8
Patterns of Growth of Large
Corporations
• In this section, we discuss how a firm’s strategy
and structure change as it increases in size,
diversifies into new product-markets, and
expands its geographic scope.
• EXHIBIT 10.1 depicts Galbraith and
Kazanjian’s model of dominant growth patterns
of large corporations.
9. 10 - 9
Dominant Growth Patterns
of Large Corporations
Adapted from Exhibit 10.1 Dominant Growth Patterns of Large Corporations
Source: Adapted from J. R. Galbraith and R. K. Kazanjian, Strategy Implementation: The Role
of Structure and Process, 2nd ed. (St. Paul, MN: West Publishing Company, 1986), p. 139.
10. 10 - 10
Patterns of Growth of
Large Corporations
• The dominant pattern of growth is first from a simple structure
to a functional structure as sales and volume increase.
• A functional structure enhances efficiency and effectiveness by
structuring according to specialized functions.
• When firms grow beyond existing markets or regions, the
decision-making burden is too great and a divisional structure is
needed to organize around products, projects, or markets.
• As firms grow into international markets and/or enjoy
expanding sales revenues, international structures are needed.
There are several types of international structures as will be
discussed below.
11. 10 - 11
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
12. 10 - 12
Functional Structure
• As firms grow, excessive demands may be placed on the
owner-manager in order to process all the information
necessary to run the business. Specialists are needed in various
functional areas (such as accounting, marketing, and
engineering). Thus, a functional structure often develops in
which functions are managed by specialists. Then, the chief
executive’s job shifts to coordinating and managing the
departments.
• EXHIBIT 10.2 depicts a diagram of a typical functional
organizational structure.
14. 10 - 14
Functional Structure
• Functional Structure
- Found where there is a single or closely related product or
service, high production volume, and some vertical
integration
• 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
15. 10 - 15
Functional Structure
• Disadvantages
- A disadvantage of functional organizations is that the beliefs,
assumptions, and goals associated with different functional
activities may vary across functions. MIT Professor Edgar Schein
suggests that such different orientations may even cause certain
words to hold different meanings in different groups. This, in
turn, leads to functional biases or “silo” thinking that may
impede communication and coordination.
- Other disadvantages of a functional structure include short-term
thinking due to excessive concern for the function rather than
the whole organization, a heavier burden for top management
who must resolve conflicts between functions, and difficulty
establishing policies that apply uniformly to all functional areas.
-
16. 10 - 16
Divisional Structure
• The divisional structure is organized around products, projects,
or markets. Each division has its own functional specialists
organized into departments. Divisions are independent units
managed by a central corporate office. Divisional executives
manage divisional performance to achieve corporate financial
objectives.
• EXHIBIT 10.3 presents a diagram of a typical divisional
organizational structure.
18. 10 - 18
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
19. 10 - 19
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
20. 10 - 20
Divisional Structure
• Disadvantages
- A tendency to duplicate activities such as personnel
management, which makes overall costs higher,
dysfunctional competition between divisions, conflicting
goals, and uneven performance comparisons that inhibit
resource sharing.
- Another potential disadvantage is that with many divisions
providing different products and services, there is the
chance that differences in image and quality may occur
across divisions.
- Finally, since financial success is valued so highly, there
may be too much focus on short-term performance.
21. 10 - 21
Strategic Business Unit Structure
• Highly diversified corporations often combine similar divisions
into strategic business units (SBUs).
• Divisions with similar products, markets, and/or technologies
are grouped into homogenous SBUs
• This helps coordinate activities and attain synergies.
• Appropriate when the businesses in a corporation’s portfolio do
not have much in common
• Lower expenses and overhead, fewer levels in the
hierarchy
• ConAgra is presented as an example of a company with dozens
of divisions grouped into three SBUs — food service, retail,
and agricultural products. SBUs are typically run as profit
centers.
22. 10 - 22
Advantages and Disadvantages of SBUs
• The primary advantage of the SBU structure is
that it makes planning and control more
manageable.
• The disadvantages include it may be difficult to
realize synergies even among similar divisions
and the additional hierarchical level of an SBU
adds personnel and overhead expenses.
23. 10 - 23
Holding Company Structure
• The holding company structure (also referred to as a
conglomerate) is another type of divisional structure.
• Whereas SBUs are used to group similar divisions, the
holding company structure is used to manage a
portfolio of unrelated businesses.
• Since the businesses are unrelated, most management
decisions, controls, and incentives are left to the
operating divisions.
• As a result, corporate staffs are small.
24. 10 - 24
Advantages and Disadvantages of
Holding Company Structures
• An advantage of the holding company structure
is the cost savings from having a small
corporate office. Additionally, autonomy at the
division level enhances motivation.
• The disadvantage relates to the dependence that
corporate executives have on divisional
executives to achieve financial goals.
25. 10 - 25
Matrix Structures
• A matrix structure is, in essence, a combination of a divisional
and functional structure. Most commonly, functional
departments are combined with product groups on a project
basis.
• As a result, personnel from functional departments work under
a product group manager for the duration of a project.
• Multinational corporations combine product groups and
geographical units — an alternative to the product/function
matrix.
• In both cases, personnel become responsible to two managers.
• EXHIBIT 10.4 portrays a diagram of a typical matrix
organizational structure.
27. 10 - 27
Matrix Structure
• Advantages
- An advantage of the matrix structure is that it facilitates the
use of specialized personnel, equipment, and facilities.
- This reduces duplication and allows individuals with a high
level of expertise to divide their efforts among multiple
projects at one time.
- Such sharing and collaboration leads to more efficient use
of resources.
- It also provides professionals with greater responsibilities
and enhances the use of their skills.
28. 10 - 28
Matrix Structure
• Disadvantages:
- Are related to dual reporting requirements. This
can lead to power struggles and conflict.
- Further, matrix structures are often used in
situations that are complex which may lead to
excessive reliance on group processes and
teamwork, and erode timely decision making.
29. 10 - 29
EXHIBIT 10.5 outlines the advantages and disadvantages of the three different
organizational structures discussed above — functional, divisional, and matrix.
30. 10 - 30
EXHIBIT 10.5 outlines the advantages and disadvantages of the three different
organizational structures discussed above — functional, divisional, and matrix.
31. 10 - 31
EXHIBIT 10.5 outlines the advantages and disadvantages of the three different
organizational structures discussed above — functional, divisional, and matrix.
32. 10 - 32
International Operations: Implications
for Organizational Structure
• Consistency between strategy and structure is required
to be successful in global markets. As firms expand
into foreign markets, changes in structure follow
changes in strategy.
• 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
33. 10 - 33
International Operations: Implications
for Organizational Structure
• Firms that pursue multidomestic strategies (as
discussed in Chapter 7) would most likely use
international division or geographic-area division
structures. With these, local managers have high
autonomy to manage within the demands and
constraints of the local market. If product diversity
becomes large, firms may benefit from a worldwide
matrix structure.
34. 10 - 34
International Operations: Implications
for Organizational Structure
• Global strategies, by contrast, typically have more
centralized operations in order to manage for overall
efficiency. Here, worldwide functional and
worldwide product division structures are more
likely because the market is more homogeneous and
requires less local attention. Once firms with global
strategies become highly diversified, they are likely to
shift to a worldwide holding company structure.
35. 10 - 35
Global Start-Ups: A New Phenomenon
• Up to this point in this section, we have suggested that
international expansion occurs primarily after the
potential of domestic growth is exhausted. However,
there are two interrelated trends which have given rise
to “global start-ups:”
1. many firms now decide to expand internationally
relatively early in their history, and,
2. some firms are “born global”— that is from the
very beginning many startups are global in their
activities.
36. 10 - 36
Global Start-Ups: A New Phenomenon
• There is no reason for all startups to be global; global startups
require a higher level of communication, coordination, and
transportation costs. Some of the circumstances under which
going global from the beginning is advantageous are:
- the required human resources are globally dispersed, going
global may be the best way to access those resources,
- foreign financing may be easier to obtain and more suitable
for the project,
37. 10 - 37
Global Start-Ups: A New Phenomenon
- the target customers in many specialized industries are
located in other parts of the world,
- there is a gradual move from domestic markets to foreign
markets and if a product (or service) is successful, it may be
immediately imitated by firms in other countries, and,
- high up-front development costs; a global market is
necessary to recover the costs.
38. 10 - 38
How an Organization’s Structure Can
Influence Strategy Formulation
• Typically, in discussing the relationship
between strategy and structure, we strongly
imply that structure follows strategy.
• However, in this section we stress the caveat
that structure can influence a firm’s strategy.
• Given that a firm’s structure can be rather
difficult to change, strategy cannot realistically
be formulated without taking structure into
account.
39. 10 - 39
Linking Strategic Reward and Evaluation Systems
to Business-Level and Corporate-Level Strategies
• There is not a “one best way” to set up a
reward and evaluation system for an
organization.
• As with other elements of strategy, are
contingent on many factors.
• In this section, we discuss how business-level
and corporate-level strategies create needs
for different strategic reward and evaluation
systems
40. 10 - 40
A. Business-Level Strategy: Reward
and Evaluation Systems
• Two generic strategies — overall cost
leadership and differentiation — require
fundamentally different approaches to
reward and evaluation systems
41. 10 - 41
Rewards and Evaluation System:
Overall Cost Leadership
• Cost leadership requires that firms pay close attention
to every element of cost.
• They also work best in stable environments where the
rate of innovation is low and efficiencies are attained
in the production processes.
• Thus, firms competing on the basis of cost rely on
tight cost controls, frequent and comprehensive reports
in order to monitor the cost of inputs and outputs, and
highly structured tasks and responsibilities.
• Incentives are based on financial targets.
42. 10 - 42
Rewards and Evaluation System:
Differentiation
• Differentiation involves the development of unique product and
service offerings, often involving innovation and creativity.
• As a result, it may be hard to evaluate success using hard
financial indicators.
• Instead qualitative and intangible incentives may be required
to reward the kind of specialized design work and/or scientific
expertise that is necessary to successfully differentiation
products and services.
• The text uses the example of 3M to describe a system in which
experimentation is encouraged and managers are not penalized
for product failures.
43. 10 - 43
B. Corporate-Level Strategy: Reward
and Evaluation Systems
• The type of diversification strategy that a firm follows has
implications for the type of controls it should use.
• Related diversification often involves coordination across
multiple product lines in order to enjoy the synergies of
relatedness. Rewards need to be linked to overall
behaviors such as teamwork and communication rather
than short-term objectives only.
• The text uses the example of Sharp Corporation where
promotions are tied to teamwork skills and seniority that
encourages employees to pursue what is best for the firm
and keeps turnover low.
44. 10 - 44
B. Corporate-Level Strategy: Reward
and Evaluation Systems
• Unrelated diversification, on the other hand, is most
successful when each division in a portfolio of businesses
is entrepreneurial and competes with others for resources
and rewards.
• Corporate policy usually involves top-down budgeting.
Reward and evaluation systems focus division presidents
on financial performance and the reward system is linked
to attaining outstanding results.
• The text uses the example of Hanson plc to demonstrate
how corporate strategies are rewarded.
45. 10 - 45
An Important Caveat
• In actual practice there is a need for organizations to
have combinations of financial and behavioral
rewards.
• Both overall cost leadership and differentiation require
collaboration and sharing of ideas, for example.
• And, with regard to corporate-level strategies, even
firms following unrelated diversification strategies, the
sharing of best practices across both value-creating
activities and business units.
46. 10 - 46
EXHIBIT 10.6 summarizes our discussion of the relationship
between strategies and reward and evaluation systems
47. 10 - 47
Boundaryless Organizational Designs
• Organizations that become boundaryless become more
open and permeable, not “chaotic.”
• STRATEGY SPOTLIGHT 10.5 discusses four types
of boundaries — vertical boundaries, horizontal
boundaries, external boundaries, and geographic
boundaries — and provides examples of how
organizations have made them more permeable.
48. 10 - 48
Boundaryless Organizational Designs
• Boundaryless approaches should be considered a
complement to, not a replacement for, traditional
forms of organizing.
• Several types of structure can be used to make
organizations more boundaryless.
• Barrier-free approaches involve removing internal
boundaries to encourage teamwork and widespread
sharing of information.
• Virtual and modular organizational forms are used to
make external relations more permeable and create
seamless
49. 10 - 49
Making Boundaries More Permeable
• First approach Barrier-
Barrier-free type
of organization
• Permeable internal boundaries
- Teams are an important part of barrier free
structures because they
1) substitute peer-based for hierarchical control;
2) often develop more creative solutions via
brainstorming and other group problem solving
techniques; and
3) absorb administrative tasks previously handled
by specialists.
50. 10 - 50
Making Boundaries More Permeable
• Developing Effective Relationships with External
Constituencies
- Barrier-free relationships must also extend to other
divisions of a corporation and to external
stakeholders.
- To promote interdivisional coordination and resource
sharing, firms often use interdivisional task forces and
common training programs, and create reward and
incentive systems that foster cooperation.
- Boundaries between organizations and external
constituencies such as customers also need to be more
flexible and porous.
51. 10 - 51
Risks, Challenges, and Potential
Downsides
• Not all efforts to create barrier-free structures have been
successful.
• Examples are given of companies whose process times
increased rather than decreased or broke down because rewards
and incentives were not aligned with the objectives of the
boundaryless system.
• An example of team failure by Challenger Electrical
Distribution in Jackson, Mississippi identified 5 reasons for
failure: 1) limited personal credibility; 2) lack of
commitment to the team; 3) poor communications; 4)
limited autonomy; and 5) misaligned incentives.
52. 10 - 52
Pros and Cons of
Barrier-Free Structures (Exhibit 10.7)
53. 10 - 53
Making Boundaries More Permeable
• Second approach : Modular Modular type of
organization
Organization and Outsourcing
• The modular type of organization allows a company to
leverage relatively small amounts of capital and a
small management team. By minimizing the need to
make big investments, it can promote rapid growth.
Firms taking this approach, however, must 1) identify
the best suppliers and establish mutually beneficial
working relationships; and 2) avoid outsourcing
critical components of its business in ways that
compromise it long-term competitive advantage.
•
54. 10 - 54
Advantages of outsourcing the non-core
functions
1. It can decrease overall costs, quicken new product
development by hiring suppliers whose talent may be superior
to that of in-house personnel, avoid idle capacity, realize
inventory savings, and avoid becoming locked into a
particular technology.
2. It enables a company to focus scarce resources on the areas
where they hold a competitive advantage. These benefits can
translate into more funding for research and development,
hiring the best engineers, and providing continuous training
for sales and service staff.
3. By enabling an organization to tap into the knowledge and
expertise of its specialized supply chain partners, it adds
critical skills and accelerates organization learning.
55. 10 - 55
Strategic Risks of Outsourcing
• Potential disadvantages of the modular form include
1) loss of critical skills or developing the wrong skills;
2) loss of cross-functional skills; and
3) loss of control over a supplier.
57. 10 - 57
Making Boundaries More Permeable
• Third approach Virtual type of
organization
• The virtual type of organization is an evolving network of
independent companies – suppliers, customers, even
competitors — linked together to share skills, costs, and access
to one another’s markets. By pooling and sharing resources
and working together in a cooperative effort, each gains in the
long run.
• Virtual organizations are a type of strategic alliance in which
complementary skills are used to pursue common objectives.
58. 10 - 58
Virtual Organization
• Virtual organizations may not be permanent. And, participating
firms may be involved in multiple alliances at once.
• Unlike the modular type, virtual organization firms give up part
of their control and participate in a collective strategy that
enhances their own capacity, makes them better able to cope
with uncertainty, and enhances their competitive advantages.
• STRATEGY SPOTLIGHT 10.8 describes how collaborative
relationships have benefited the biotechnology industry.
Companies work on joint marketing projects, bring R&D
scientists together, and contribute technical assistance and
financial clout.
59. 10 - 59
Challenges and Risks of Virtual
Organizations
• Despite their many advantages, alliances often fail to
meet expectations. One reason is that unique
managerial skills are required — managers who can
find good partners, build win-win relationships, and
achieve the right balance of freedom and control.
• Some alliances are short-term only and may be
dissolved once the objective is fulfilled. Others may
have long-term objectives. The key to managing both
is to be clear about the overall strategic objectives at
the time the alliance is being formed.
60. 10 - 60
Challenges and Risks of Virtual
Organizations
•
The virtual organization is the culmination of joint
venture strategies of the past.
• To form effective virtual organizations, strategic
planning is needed to determine what synergies exist
and how to capitalize on them by combining core
competencies.
• As such, the virtual form may work better for some
types of organizations than others.
61. 10 - 61
Exhibit 10.9: Pros and Cons of Virtual
Structures
Source: R. E. Miles and C. C. Snow, “Organizations: New Concepts for New Forms,” California Management Review,” Spring 1986, pp. 62-73; R. E. Miles and C. C.
Snow, “Causes of Failure in Network Organizations,” California Management Review, Summer 1999, pp. 53-72; and H. Bahrami, “The Emerging Flexible Organization:
Perspectives from Silicon Valley,” California Management Review, Summer 1991, pp. 33-52.
62. 10 - 62
Boundaryless Organizations:
Making Them Work
• Often, when firms face external pressures, resource scarcity,
and declining performance, they tend to become more internally
focused.
• This may actually be the best time to reexamine value chain
activities and determine how to better manage relationships
both internally and externally.
• By so doing, organizations may find that they can solve some
of their problems by turning to boundaryless forms of
organizing.
• In making the transition to more democratic, participative styles
of management and greater reliance on teamwork, managers
must select a balance of tools and techniques to facilitate the
effective coordination and integration of key activities
63. 10 - 63
Five factors that must be considered in any transition
from traditional to boundaryless organization forms.
1. Common Culture and Shared Values
2. Horizontal Organization Structures
3. Horizontal Systems and Processes
4. Communications and Information Technologies
5. Human Resources Practices
64. 10 - 64
Creating Ambidextrous
Organizational Designs
• In this section the text addresses the challenge that
organizations face in rapidly changing and complex
competitive environments: exploring for new
opportunities (adaptability) and effectively exploiting
the value of their existing assets and competencies
(alignment).
• Firms that achieve both adaptability and alignment are
considered ambidextrous organizations — aligned and
efficient in how they manage today’s business but
flexible enough to changes in the environment so that
they will prosper tomorrow.
65. 10 - 65
A. Ambidextrous Organizations: Key
Design Attributes
• Here, we focus on a study by O’Reilly and Tushman
that investigated 35 efforts to launch breakthrough
innovations undertaken by 15 business units in nine
different industries.
• They studied the organizational designs as well as the
processes, systems, and cultures associated with the
innovative projects and their impact on the operations
and performance of the traditional businesses.
66. 10 - 66
A. Ambidextrous Organizations: Key
Design Attributes
• The firms organized their breakthrough projects into
one of four primary ways:
1. functional organizational structures
2. cross-functional teams
3. unsupported teams
4. ambidextrous organizations (structurally
independent units integrated into the existing
senior management structure)
67. 10 - 67
B. Why Was the Ambidextrous
Organization the Most Effective Structure?
• The ambidextrous organizational form was most effective on
both dimensions: success in creating desired innovations and
the performance of the existing business. The study found that
there were many factors which explained the superior
performance. Among these were:
- a clear and compelling vision,
- cross-fertilization among business units,
- tight coordination and integration at the managerial levels,
- sharing was encouraged and facilitated by effective reward
systems, and,
- established units were shielded from the distractions of launching
new businesse
