Structuring a new business venture

Organizations and How They Grow

By Christina A. Hannah, Collegiate Faculty, University of Maryland University College

Once upon a time, there were organizations that produced few products in a geographically limited marketplace, operated in fairly stable environments, and could readily predict the challenges they would face year to year. When they were young and small, these organizations had relatively simple structures and often outsourced as much as they could (e.g., bookkeeping, payroll, marketing, etc.). Inside the organization, employees felt like they were part of a family, and their goals coincided with those of the organization. They were generalists that filled in for each other as the need arose. As the organization prospered, so did the employees.

As these organizations became successful and grew, it became apparent that they would need to take advantage of economies of scale to ensure efficient operations. Therefore, departments were set up so people performing the same function were physically together and reported to the same person. Thus, all the people in marketing (for example) reported to the director of marketing and became specialists in some aspect of marketing. Their rewards depended on the success of the marketing function. They started to identify themselves with marketing rather than with rest of the organization. And so it came to pass that the classic functional structure came into being. This structure was efficient at producing a homogeneous product or service, reduced redundancy, and tended to be cost effective.

Gradually, organizations grew and added new products. More and more competitors entered the marketplace, and the organizations expanded geographically to be closer to suppliers and customers. The poor functional structure had trouble keeping up with the new demands being placed on organizations. There was increasing conflict among functions that needed to interact as interdependent units, but couldn't. It was decided that a new type of structure was needed and that it might be a good idea to organize people according to geographic regions, products, or customers, rather than functions. The resulting structures enabled organizations to focus their efforts where it made the most sense competitively. Therefore, if consumer preferences differed significantly from region to region, then a geographic structure was preferable. Product structures were appropriate when numerous products were made. When the organization serviced different customers with widely varying needs, a customer structure was appropriate. Therefore these structures decentralized and became like several mini organizations, each responsible for generating profits and containing the required functional areas.

As luck would have it, it turned out that these structures worked in some cases, but in others, the different parts of the organization engaged in negative competition in the marketplace and maneuvered to obtain scarce organizational resources. It also turned out that decentralizing most functions was not efficient because of the inability to take advantage of economies of scale and specialization. Companies and their leaders struggled to find different ways to organize to deal with these problems. Their answer was the hybrid structure, in which certain functions were centralized to provide consistency, reduce redundancy, and efficiently service the decentralized geographic, product, or customer divisions.

As you might expect, this type of structure worked for many organizations but there were some that experienced lots of conflict between headquarters (corporate) and divisions. Additionally, the environment of organizations became increasingly uncertain and there was more and more pressure to achieve quality, speed, and a continuous stream of new products or services. As a result, some organizations tried what is called a matrix structure, in which employees are assigned to functional departments and work on projects as the need for their expertise arises. The use of a matrix was beneficial because it allowed the sharing of scarce human resources and built in incentives and mechanisms to ensure the exchange of ideas across the organization. The biggest problem with the matrix structure became apparent almost as soon as it was tried. People were confused and unhappy because they reported to two bosses, one who headed the functional department and one who headed the project. Plus, bosses did not know how to "share" their employees, and the organizations typically did not have incentives to encourage sharing.

With the coming of globalization and the information revolution, managers were faced with new requirements. They needed to design structures that allowed organizations to be flexible, lean, efficient, quick, and responsive and operate with a geographically dispersed workforce. They reengineered organizations to make their systems and processes more streamlined and efficient. They peeled off layers of management and created teams to try to make organizations more flexible and speedy. And they decentralized the workforce to bring organizations closer to their customers and to allow them to produce and deliver at lower costs. In some cases they also broke organizations apart and reorganized them into core business units so they could focus on doing one thing well. One consequence of these activities was the addition of a number of new structural types including horizontal organizations, modular corporations, and dynamic networks. Concepts such as "high performance work systems," "self - managed teams," and "learning organizations" became watchwords among those who were trying to find answers for the problems facing modern organizations. There was also much discussion of the importance of shared visions and values, empowered employees, continuous improvement, and adopting a "results oriented" approach.

As can be seen, managers and leaders of organizations have kept pretty busy just trying to figure out how to organize people, groups, and departments in order to maximize efficiency and productivity. Now, to make matters even more complicated, many must also try to find a structure that will serve their organizations well in a global marketplace. They may wish to start by setting up a separate international division to handle nondomestic operations. As they grow and prosper, however, it is quite likely they will turn to a global product or global geographic structure to ensure they can respond appropriately to customer demands in remote parts of the world. Some may turn to a global matrix structure in an attempt to realize some economies of scale and some may follow the example of Phillips, Heinz, and Procter and Gamble and evolve to a transnational model.

Whichever structure they choose to adopt, managers will continue to confront the need for a structure that accomplishes the following:

· ensures information flows in a timely manner to those who need it

· reduces conflicts among highly interdependent subunits

· maximizes cooperative activities among subunits/divisions

· uses scarce environmental and organizational resources efficiently

· allows a rapid and appropriate response to customers and changing market conditions