Roth5_Ch11_W20_OrgDesign.pptxChapter 11
Organizational Design: Structure, Culture, and Control
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Because learning changes everything.®
1
The AFI Strategy Framework
2
Because learning changes everything.®
Learning Objectives
Define organizational design and list its three components.
Explain how organizational inertia can lead established firms to failure.
Define organizational structure and describe its four elements.
Compare and contrast mechanistic versus organic organizations.
Describe different organizational structures and match them with appropriate strategies.
Evaluate closed and open innovation, and derive implications for organizational structure.
Describe the elements of organizational culture, and explain where organizational cultures can come from and how they can be changed.
Compare and contrast different strategic control-and-reward systems.
© McGraw Hill
3
Case Study
4
© McGraw Hill
Zappos 10 Core Values
Deliver WOW Through Service
Embrace and Drive Change
Create Fun and A Little Weirdness
Be Adventurous, Creative, and Open-Minded
Pursue Growth and Learning
Build Open and Honest Relationships With Communication
Build a Positive Team and Family Spirit
Do More With Less
Be Passionate and Determined
Be Humble
5
© McGraw Hill
How specifically do these values support the strategy? Do they think that these values would be helpful in attracting the type of employee that Zappos needs to gain and sustain a competitive advantage?
5
Zappos
Designed to Deliver Happiness
Exceptional Customer Service → Core Competency
All customer service is done in-house.
No scripts or timed calls in the call centers
Keep its own stocked products… no drop-shipment
Flat Organizational Structure = Flexibility
Job rotation = widely trained talent
Internal promotion opportunities
Reorganized into 10 business units to manage growth
6
© McGraw Hill
Founder Tony Hsieh, (shay) created a culture of making customers and employees happy which helps drive success.
Acquired by Amazon in 2009 for $1.2B and acts as a separate business unit.
To achieve the strategic objective, Zappos developed a set of values and integrated them into the company’s culture. This culture can provide behavior guidelines once the employees internalize the culture. How does Zappos deliver WOW to customers? Zappos has a 365-day no-hassle return policy, free upgrades to express shipping, and courteous and helpful customer representatives, all of which help make customers very happy.
Flexibility…Unlike other online retailers, Zappos stocks everything it sells in its own warehouses—this is the only way to get the merchandise as quickly as possible with 100 percent accuracy to the customer. Strategy, therefore, is as much about deciding what to do as it is about deciding what not to do.
6
Organizational Design
The process of:
Creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization.
Key components:
Structure.
Culture.
Control.
© McGraw Hill
Google changed its organizational structure from functional (organized according to domain expertise) to multidivisional or M-form (composed of a number of independent strategic business units). Alphabet’s strategic leaders hope this new structure will allow them to drive future radical innovation. Moreover, since each SBU has profit and loss responsibility, the new structure allows Alphabet to provide leadership development opportunities for a number of its executives as they are being groomed for larger roles in the future.
7
Organizational Inertia and the Failure of Established Firms to Respond to Shifts in the External or Internal Environments
Exhibit 11.2
© McGraw Hill
Google changed its organizational structure from functional (organized according to domain expertise) to multidivisional or M-form (composed of a number of independent strategic business units). Alphabet’s strategic leaders hope this new structure will allow them to drive future radical innovation. Moreover, since each SBU has profit and loss responsibility, the new structure allows Alphabet to provide leadership development opportunities for a number of its executives as they are being groomed for larger roles in the future.
8
Organizational Structure
Determines how efforts of individuals and teams are orchestrated.
How resources are distributed.
Includes four building blocks:
Specialization.
Formalization.
Centralization.
Hierarchy.
© McGraw Hill
9
Specialization
Describes the degree to which a task is divided into separate jobs, (aka as Division of Labor).
Larger firms: high degree of specialization.
Smaller ventures: low degree of specialization.
Requires a tradeoff between depth and breadth of knowledge.
© McGraw Hill
An accountant for a large firm may specialize in only one area (e.g., internal audit), whereas an accountant in a small firm needs to be more of a generalist and take on many different things (e.g., internal auditing, plus payroll, accounts receivable, financial planning, and taxes).
U.S. military can be used as an example here because it has the Air Force, Army, Navy, and Marines, and all of them have their own specialties
https://www.nascar.com/video/franchise/monster-energy-nascar-cup-highlights/no-4-team-setting-new-standard-pit-stops/
10
Formalization
The extent to which employee behavior is guided by rules and procedures.
Pros:
Ensures consistent and predictable results.
Safety and reliability.
Cons:
Slower decision making.
Reduced innovation.
Hindered customer service.
© McGraw Hill
Airlines, for instance, must rely on a high degree of formalization to instruct pilots on how to fly their airplanes to ensure safety and reliability. Yet a high degree of formalization can slow decision making, reduce creativity and innovation, and hinder customer service. Most customer service reps in call centers, for example, follow a detailed script. This is especially true when call centers are outsourced to overseas locations. Zappos deliberately avoided this approach when it made customer service its core competency.
McDonald’s as the example for formalization because of the standardized operation process.
11
Centralization
The degree to which decision making is concentrated at the top of the organization.
Correlates to slow response time and reduced customer satisfaction.
Affects strategic planning:
Top-down strategic planning takes place in highly centralized organizations.
Planned emergence is found in more decentralized organizations.
© McGraw Hill
Whether centralization or decentralization is more effective depends on the specific situation. During the Gulf of Mexico oil spill in 2010, BP’s response was slow and cumbersome because key decisions were initially made in its UK headquarters and not onsite. In this case, centralization reduced response time and led to a prolonged crisis.
In contrast, the FBI and the CIA were faulted in the 9/11 Commission report for not being centralized enough.1 The report concluded that although each agency had different types of evidence that a terrorist strike in the United States was imminent, their decentralization made them unable to put together the pieces to prevent the 9/11 attacks.
12
Hierarchy
The formal, position-based reporting lines:
Who reports to whom.
Span of control:
The number of employees who directly report to a manager.
© McGraw Hill
In tall organizational structures, the span of control is narrow. In flat structures, the span of control is wide, meaning one manager supervises many employees. In recent years, firms have de-layered by reducing the headcount (often middle managers), making the organizations flatter and more nimble.
Verizon many, many layers. CMS is flat. Direct reports, owners. Which is most responsive?
13
Hierarchy reality on chain of command
14
© McGraw Hill
Mechanistic vs. Organic Organizations
Mechanistic Organization:
Much specialization and formalization.
Tall hierarchies.
Centralized decision making.
Organic Organization:
Little specialization and formalization.
Flat organizational structure.
Decentralized decision making.
© McGraw Hill
Within one industry Google is an organic organization, while Microsoft is more mechanistic.
Pixar is a more organic structure than the theme park organization is, both within Disney.
McDonald’s fits this description quite well. Each step of every job such as deep-frying fries is documented in minute detail (e.g., what kind of vat, the quantity of oil, how many fries, what temperature, how long, and so on). Decision power is centralized at the top of the organization: McDonald’s headquarters provides detailed instructions to each of its franchisees so that they provide comparable quality and service across the board although with some local menu variations. Communication and authority lines are top-down and well defined. To ensure standardized operating procedures and consistent food quality throughout the world, McDonald’s operates Hamburger University, a state-of-the-art teaching facility in a Chicago suburb, where 50 full-time instructors teach courses in chemistry, food preparation, and marketing. In 2010, McDonald’s opened a second Hamburger University campus in Shanghai, China.
Exhibit 11.3 summarizes the key features of mechanistic and organic structures.
15
Firm Strategy and Structure
The relationship between these is interdependent and dynamic.
Strategy and structure impact a firm’s performance.
Changes over time as the firm grows in size and complexity.
Different firm stages require different structures.
16
© McGraw Hill
Successful new ventures generally grow first by increasing sales, then by obtaining larger geographic reach, and finally by diversifying through vertical integration and entering into related and unrelated businesses.
16
Simple Structure
Used by small firms with low organizational complexity.
The founders usually:
Make all the strategic decisions.
Run day-to-day operations.
Professional managers and sophisticated systems are not usually in place.
Low degree of formalization and specialization.
© McGraw Hill
Examples include entrepreneurial ventures such as Facebook in 2004, when the startup operated out of Mark Zuckerberg’s dorm room, and professional service firms such as smaller advertising, consulting, accounting, and law firms, as well as family-owned businesses.
17
Functional Structure
Employees are grouped into functional areas:
Based on domain expertise.
Often correspond to distinct stages in the value chain.
Leaders of functional areas report to the CEO.
The CEO coordinates and integrates the work of each function.
© McGraw Hill
18
Benefits of Functional Structure and Business Strategy
A functional structure works when a firm has a narrow focus and small geographic footprint.
Cost Leadership Strategy:
Nurturing and upgrading core competencies.
Differentiation Strategy:
Incorporate decentralized decision making.
Foster innovation and creativity.
Blue Ocean Strategy:
Firm should be efficient and flexible.
Focus is on controlling costs and fostering creativity.
© McGraw Hill
Biggest disadvantage: Suboptimal communication across departments…Solution: cross-functional teams.
19
Multidivisional Structure
1. Used as a firm diversifies products and geography.
2. Each strategic business unit (SBU):
Has profit-and-loss (P&L) responsibility.
Operated independently.
Led by a unique CEO who is responsible for SBU strategy and operations.
3. Widely adopted organizational structure.
© McGraw Hill
Zappos is an SBU under Amazon, which employs a multidivisional structure.
W.L. Gore uses a multidivisional structure to administer its differentiation and related diversification strategies. It has four product divisions (electronic products, industrial products, medical products, and fabrics division) with manufacturing facilities in the United States, China, Germany, Japan, and Scotland, and business activities in 30 countries across the globe.
20
Typical Multidivisional (M-Form) Structure
Exhibit 11.7
© McGraw Hill
21
M-Form and Corporate Strategy
Related Diversification:
Cooperative M-Form.
Centralized decision making.
Integrated at corporate headquarters.
Co-opetition among SBUs.
Unrelated Diversification:
Competitive M-Form.
Decentralized decision making.
Low level of integration at corporate headquarters.
Competition among SBUs for resources.
© McGraw Hill
Co-opetition—competition and cooperation at the same time.
22
Disadvantages of the Multidivisional Structure
Adds another layer of corporate hierarchy.
Bureaucracy, red tape, & duplication of efforts.
Slower decision making.
SBUs competing.
Politics and turf wars over resources.
Cooperation is still needed at the same time.
© McGraw Hill
In some instances, spinning out SBUs to make them independent companies is beneficial. The BCG growth-share matrix helps corporate executives when making these types of decisions. In the last few years when owned by eBay, PayPal outperformed its parent company. PayPal’s executives (and investors) were tired of subsidizing eBay’s stagnant business. Investors also liked separating eBay and PayPal, giving it a valuation that is estimated to be as high as $100 billion; eBay’s standalone valuation is about $35 billion.
23
Matrix Structure
Leverages SBU (M-form) benefits:
Domain expertise.
Economies of scale.
Efficient processing of information.
Also leverages organizational structure benefits:
Responsiveness.
Decentralized focus.
© McGraw Hill
24
Typical Matrix Structure with Geographic and SBU Divisions
Exhibit 11.9
Access the text alternate for slide image.
© McGraw Hill
25
Matrix Structure and Global Strategy
This structure fits well with a transnational strategy.
International: functional structure.
Multi-domestic: multi-divisional structure.
Global standardization: multi-divisional structure.
Transnational: global matrix structure.
© McGraw Hill
Exhibit 11.11 shows how different global strategies best match with different organizational structures.
26
Disadvantages of the Matrix Structure
Difficult to implement.
Organizational complexity.
Administrative costs.
Unclear reporting structures, (reporting to 2 bosses)
Accountability can be undermined.
Employees can have trouble reconciling goals.
Principal-agent problems.
Slower decision-making.
© McGraw Hill
Who’s who in the zoo
27
Formal and Informal Building Blocks of Organizational Design
Exhibit 11.14
© McGraw Hill
28
Culture
29
© McGraw Hill
Organizational Culture
Defined as…the shared values and norms of an organization’s members and expressed through artifacts.
Values: what is considered important.
Norms: appropriate attitudes and behaviors in day-to-day work and interactions.
© McGraw Hill
Artifacts include elements such as the design and layout of physical space (e.g., cubicles or private offices),
symbols (pink car, Brown)
what events are celebrated and highlighted, and how they are celebrated (Zappos trivia nites, nerf gun battles, foosball, karaoke).
vocabulary, what stories are told (Nord returning tires, call me Walt)…Zappos pizza-ordering example in section 11.4)
Artifacts include elements such as the design and layout of physical space (e.g., cubicles or private offices), symbols (e.g., the type of clothing worn by employees), vocabulary, what stories are told, what events are celebrated and highlighted, and how they are celebrated (e.g., a formal dinner versus a casual barbecue when the firm reaches its sales target).
30
Organizational Culture - Artifacts
Physical space (cubicles).
Symbols (clothing).
Events (celebrations).
Vocabulary (stories that are told).
What do others perceive your culture to be through the artifacts you display?
© McGraw Hill
Artifacts include elements such as the design and layout of physical space (e.g., cubicles or private offices),
symbols (pink car, Brown)
what events are celebrated and highlighted, and how they are celebrated (Zappos trivia nites, nerf gun battles, foosball, karaoke).
vocabulary, what stories are told (Nord returning tires, call me Walt)…Zappos pizza-ordering example in section 11.4)
Artifacts include elements such as the design and layout of physical space (e.g., cubicles or private offices), symbols (e.g., the type of clothing worn by employees), vocabulary, what stories are told, what events are celebrated and highlighted, and how they are celebrated (e.g., a formal dinner versus a casual barbecue when the firm reaches its sales target).
31
Where Do Organizational Cultures Come From?
1. Founder imprinting
Founders defined and shaped the culture
2. Company values
Values are usually linked to a reward system, which can also lead to a bad culture
Uber, Wells Fargo, MCI, etc…
Recruit people that fit the culture
Zappos pays new hires if they want to quit!
© McGraw Hill
Walmart founder Sam Walton personified the retailer’s cost-leadership strategy. At one time the richest man in America, Sam Walton drove a beat-up Ford pickup truck, got $5 haircuts, went camping for vacations, and lived in a modest ranch home in Bentonville, Arkansas. Everything Walton did was consistent with the low-cost strategy.
32
How Does Organizational Culture Change?
Culture can be a strong asset, yet also a great liability.
When the environment changes:
A firm must hone, refine, and upgrade to ensure a core rigidity doesn’t emerge.
New leadership changes in strategy and structure.
When the original core competencies turn into a liability.
© McGraw Hill
GM’s bureaucratic culture, combined with its innovative M-form structure, was once hailed as the key to superior efficiency and management. However, that culture became a liability when the external environment changed following the oil-price shocks in the 1970s and the entry of Japanese carmakers into the United States. As a consequence, GM’s strong culture led to organizational inertia. This resulted in a failure to adapt to changing customer preferences for more fuel-efficient cars, and it prevented higher quality and more innovative designs. GM lost customers to foreign competitors that offered these features. Mary Barra
33
Culture Can Help a Firm’s Competitive Advantage If…
It makes a positive contribution to economic value creation.
It passes the VRIO principles:
Valuable, rare, difficult to imitate, the firm must be organized to capture value.
It can adapt as the business evolves.
© McGraw Hill
It is best to develop a strong and strategically relevant culture in the first few years of a firm’s existence. Strategy scholars have documented that the initial structure, culture, and control mechanisms established in a new firm can be a significant predictor of later success.
SWA’s unique culture helps it keep costs low by turning around its planes faster, thus keeping them flying longer hours.
Zappos’ “WOW” customer experience is accomplished by “going the extra mile.” Long-term superior experience does increase the company’s perceived value and its economic value creation.
34
A view from two companies
35
© McGraw Hill
Who’s ad seems to reflect a more exciting org culture?
35
Strategic Control and Reward Systems
© McGraw Hill
36
Strategic Control and Reward Systems
Internal-governance mechanisms are put in place to align the incentives of:
Principals (shareholders).
Agents (employees).
Allow managers to:
Specify goals.
Measure progress.
Provide performance feedback.
© McGraw Hill
37
Input Controls
Seeks to define and direct employee behavior through:
Explicit, codified rules.
Standard operating procedures.
Considered before employees make business decisions.
Example: The use of budgets is the key to input controls
Managers allocate money to R&D projects before they begin.
© McGraw Hill
In diversified companies using the M-form, corporate headquarters determines the budgets for each division. Public institutions, like some universities, also operate on budgets that must be balanced each year. Their funding often depends to a large extent on state appropriations and thus fluctuates depending on the economic cycle. During recessions, budgets tend to be cut, and they expand during boom periods.
38
Output Controls
Guide employee behavior by:
Defining expected results (outputs), but:
Leaving the means to those results open to individual employees, groups, or SBUs.
Intrinsic motivation is highest when an employee has:
Autonomy (about what to do).
Mastery (how to do it).
Purpose (why to do it).
© McGraw Hill
Today, 3M is best known for its adhesives and other consumer and industrial products. But its full name reflects its origins: 3M stands for Minnesota Mining and Manufacturing Company. Over time, 3M has relied on the ROWE framework and has morphed into a highly science-driven innovation company. At 3M, employees are encouraged to spend 15 percent of their time on projects of their own choosing. If any of these projects look promising, 3M provides financing through an internal venture capital fund and other resources to further develop their commercial potential. In fact, several of 3M’s flagship products, including Post-it Notes and Scotch Tape, were the results of serendipity. To foster continued innovation, moreover, 3M requires each of its divisions to derive at least 30 percent of their revenues from products introduced in the past four years.
39
Zappos walking the walk
What would you do if a programming error cost your firm $1.6 million?
Zappos put their money where their “WOW” is.
Zappos accidentally capped the price at $49.95 for all products sold on its subsidiary site at midnight, and the mistake was not discovered until 6 a.m.
Consistent with their “WOW” philosophy, Zappos honored all sales during this time period.
40
© McGraw Hill
Which strategic control-and-reward system discussed in the chapter would be most appropriate for Zappos? Output control seems to be the appropriate control mechanism for Zappos in this case. Customer satisfaction can be maximized, especially for a service-oriented company, by offering fast delivery, no-hassle returns, friendly and reasonable customer service, and product packaging.
Do you think Zappos’ decision to honor every sale, despite its explicit business terms and conditions that would allow it not to do so, was a sound one? Why or why not?
Apparently Zappos was able to transform this minor crisis (mislabeling the price tag) into a huge opportunity to maximize customer satisfaction and secure returning customers. Simply ask the students what they think about the way Zappos handled the situation. Do they like it or not? That said, posting a $1.6 million dollar sales loss from six hours (from midnight to 6 a.m.!) of sales is a major financial hit for any firm. What if the mistake had not been discovered for a full 24 hours?
40
Group Exercise
Your team has been brought in to analyze a business unit. You find significant excess headcount in accounting and purchasing.
Develop a plan to lay off 25% of those employees
You have 6 months to identify “who” and get the job done.
How do you downsize without hurting the morale of those remaining?
What steps will you take to treat with dignity those employees forced to leave?
41
© McGraw Hill
(If you have no personal experience with work-force reductions, use an Internet search engine and look up “successful layoffs” for some guidance.)
Make sure there is strong leadership and frequent communication with (and education of) the employees so the concept and message will be delivered clearly. One tendency is for senior leadership to hide or “circle the wagons” during times of layoffs. This sends a very poor signal to those remaining workers. As tough as it is, managers must be especially visible and walking the halls to look their employees in the eye and be honest with them on their future and the future of the organization. Even if that future is uncertain…
What steps do you take to treat with dignity those employees forced to leave?
Well-designed benefit packages, courteous communication from top management, and using a face-to-face approach.
41
End of Main Content
© 2021 McGraw Hill. All rights reserved. Authorized only for instructor use in the classroom.
No reproduction or further distribution permitted without the prior written consent of McGraw Hill.
Because learning changes everything.®
www.mheducation.com
