Corporate Governance - 250 words

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Creating Effective
Organizational Designs
Professor John Coy

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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

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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

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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

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Question

Most organizations begin very small and ______.

A) grow to become a medium sized organization

B) continually grow

C) remain small

D) often decrease in size

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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.

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Patterns of Growth of
Large Corporations

• 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

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Patterns of Growth of
Large Corporations

• Functional Structure

Adapted from Exhibit 10.2 Functional Organizational Structure

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Patterns of Growth
of Large Corporations

• 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

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Patterns of Growth
of Large Corporations

• 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

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Divisional Structure

Adapted from Exhibit 10.3 Divisional Organizational Structure

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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

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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

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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

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Divisional Structure

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

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Matrix Structure

Adapted from Exhibit 10.4 Matrix Organizational Structure

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Matrix Structure

• A combination of the functional and divisional structures
• Individuals who work in a matrix organization become responsible to two managers
• The project manager
• The functional area manager

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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
• Disadvantages
• Can cause uncertainty and lead to intense power struggles
• Working relationships become more complicated
• Decisions may take longer

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International Operations: Implications for Organizational Structure

• 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
• Structures used to manage international operations
• International division
• Geographic-area division
• Worldwide functional
• Worldwide product division
• Worldwide matrix

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Example

• Nike culture used to encourage local managers to focus on market share rather than profitability.
• This lead to Wall Street to comment on the lack of managerial control at Nike.
• Nike decided to implement a matrix structure to resolve this issue.
• This matrix structure clearly stated local managers’ responsibilities by region and product.
• Nike headquarters establishes which products to focus on and how to do it under the new matrix structure.

Source: “The New Nike,” Business Week. September 20, 2004

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Question

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

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Relationships between Rewards & Evaluation Systems and Business-level and Corporate-level Strategies

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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

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Making Boundaries More Permeable

• First approach
• Permeable internal boundaries
• 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

Barrier-free type of organization

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Pros and Cons of
Barrier-Free Structures

Adapted from Exhibit 10.7 Pros and Cons of Barrier-Free Structures

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Making Boundaries More Permeable

• Second approach
• Outsources nonvital functions, tapping

into knowledge and expertise of “best in class” suppliers but retains strategic control

• Three advantages
• Decrease overall costs, leverage capital
• Enables company to focus scarce resources on areas where it holds competitive advantage
• Adds critical skills and accelerates organizational learning

Modular type of organization

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Pros and Cons of Modular Structures

Adapted from Exhibit 10.8 Pros and Cons of Modular Structures

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Making Boundaries More Permeable

• Third approach
• Continually evolving network of

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

Virtual type of organization

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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.

Adapted from Exhibit 10.9 Pros and Cons of Virtual Structures

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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

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Creating Ambidextrous
Organizational Designs

• Two contradictory challenges faced by firms
• Adaptability
• Alignment
• Ambidextrous organizations
• Aligned and efficient in how they manage in today’s business
• Flexible enough to changes in the environment so they will prosper tomorrow

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Creating Effective
Organizational Designs
Professor John Coy