For Eng.Kelvin Only

chapter 10

Creating Effective Organizational Designs

After reading this chapter, you should have a good understanding of the following learning objectives:

LO10.1    The growth patterns of major corporations and the relationship between a firm’s strategy and its structure.

LO10.2    Each of the traditional types of organizational structure: simple, functional, divisional, and matrix.

LO10.3    The implications of a firm’s international operations for organizational structure.

LO10.4    The different types of boundaryless organizations—barrier-free, modular, and virtual—and their relative advantages and disadvantages.

LO10.5    The need for creating ambidextrous organizational designs that enable firms to explore new opportunities and effectively integrate existing operations.

Learning from Mistakes

The Boeing 787 Dreamliner is a game changer in the aircraft market. 1 It is the first commercial airliner that doesn’t have an aluminum skin. Instead, Boeing designed it to have a composite exterior, which provides a weight savings that allows the plane to use 20 percent less fuel than the 767, the plane it is designed to replace. The increased fuel efficiency and other design advancements made the 787 very popular with airlines. Boeing received orders for over 900 Dreamliners before the first 787 ever took flight.

It was also a game changer for Boeing. In 2003, when Boeing announced the development of the new plane, they also decided to design and manufacture it differently than they ever had before. In the past, Boeing had internally designed and engineered the major components of its planes. Boeing would then provide detailed engineering designs and specifications to their key suppliers. The suppliers would then build the components to Boeing’s specifications. To limit the upfront investment they would need to make with the 787, Boeing moved to a modular structure and outsourced much of the engineering of the

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components to suppliers. Boeing provided them with basic specifications and left it to the suppliers to undertake the detailed design, engineering, and manufacturing of components and subsystems. Boeing’s operations in Seattle were then responsible for assembling the pieces into a completed aircraft.

Working with about 50 suppliers on four continents, Boeing found the coordination and integration of the work of suppliers to be very challenging. Some of the contracted suppliers didn’t have the engineering expertise needed to do the work and outsourced the engineering to subcontractors. This made it especially difficult to monitor the engineering work for the plane. Jim Albaugh, Boeing’s commercial aviation chief, identified a core issue with this change in responsibility and stated, “We gave work to people that had never really done this kind of technology before, and we didn’t provide the oversight that was necessary.” With the geographic stretch of the supplier set, Boeing also had difficulty monitoring the progress of the supplying firms. Boeing even ended up buying some of the suppliers once it became apparent they couldn’t deliver the designs and products on schedule. For example, Boeing spent about $1 billion to acquire the Vought Aircraft Industries unit responsible for the plane’s fuselage. When the suppliers finally delivered the parts, Boeing sometimes found they had difficulty assembling or combining the components. With their first 787, they found that the nose section and the fuselage didn’t initially fit together, leaving a sizable gap between the two sections. To address these issues, they were forced to co-locate many of their major suppliers together for six months to smooth out design and integration issues.

In the end, the decision to outsource cost Boeing dearly. The plane was three years behind schedule when the first 787 was delivered to a customer. The entire process took billions of dollars more than originally projected and also more than what it would have cost Boeing to design in house. And as of early 2013, all 49 of the 787s that had been delivered to customers had been grounded because of concerns about onboard fires in the lithium ion batteries used to power the plane—parts

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that were not designed by Boeing. As Boeing CEO Jim NcNerney concluded, “In retrospect, our 787 game plan may have been overly ambitious, incorporating too many firsts all at once–in the application of new technologies, in revolutionary design and build processes, and in increased global sourcing of engineering and manufacturing content.”

Discussion Questions

1.   A number of firms benefit from outsourcing design and manufacturing. What is different with Boeing that makes it so much harder to be successful?

2.   What lessons does their experience with the 787 offer Boeing for its next plane development effort?

One of the central concepts in this chapter is the importance of boundaryless organizations. Successful organizations create permeable boundaries among the internal activities as well as between the organization and its external customers, suppliers, and alliance partners. We introduced this idea in Chapter 3 in our discussion of the value-chain concept, which consisted of several primary (e.g., inbound logistics, marketing and sales) and support activities (e.g., procurement, human resource management). There are a number of possible benefits to outsourcing activities as part of becoming an effective boundaryless organization. However, outsourcing can also create challenges. As in the case of Boeing, the firm lost a large amount of control by using independent suppliers to design and manufacture key subsystems of the 787.

Today’s managers are faced with two ongoing and vital activities in structuring and designing their organizations. 2 First, they must decide on the most appropriate type of organizational structure. Second, they need to assess what mechanisms, processes, and techniques are most helpful in enhancing the permeability of both internal and external boundaries.

Traditional Forms of Organizational Structure

Organizational structure refers to the formalized patterns of interactions that link a firm’s tasks, technologies, and people. 3 Structures help to ensure that resources are used effectively in accomplishing an organization’s mission. Structure provides a means of balancing two conflicting forces: a need for the division of tasks into meaningful groupings and the need to integrate such groupings in order to ensure efficiency and effectiveness. 4 Structure identifies the executive, managerial, and administrative organization of a firm and indicates responsibilities and hierarchical relationships. It also influences the flow of information as well as the context and nature of human interactions. 5

organizational structure

the formalized patterns of interactions that link a firm’s tasks, technologies, and people.

Most organizations begin very small and either die or remain small. Those that survive and prosper embark on strategies designed to increase the overall scope of operations and enable them to enter new product-market domains. Such growth places additional pressure on executives to control and coordinate the firm’s increasing size and diversity. The most appropriate type of structure depends on the nature and magnitude of growth.

LO10.1

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

Patterns of Growth of Large Corporations: Strategy-Structure Relationships

A firm’s strategy and structure change as it increases in size, diversifies into new product markets, and expands its geographic scope. 6 Exhibit 10.1 illustrates common growth patterns of firms.

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EXHIBIT 10.1   Dominant Growth Patterns of Large Corporations

Source: Adapted from J. R. Galbraith and R. K. Kazanjian. Strategy Implementation: Structure, Systems and Process, 2nd ed. Copyright © 1986.

A new firm with a simple structure typically increases its sales revenue and volume of outputs over time. It may also engage in some vertical integration to secure sources of supply (backward integration) as well as channels of distribution (forward integration). The simple-structure firm then implements a functional structure to concentrate efforts on both increasing efficiency and enhancing its operations and products. This structure enables the firm to group its operations into either functions, departments, or geographic areas. As its initial markets mature, a firm looks beyond its present products and markets for possible expansion.

A strategy of related diversification requires a need to reorganize around product lines or geographic markets. This leads to a divisional structure. As the business expands in terms of sales revenues, and domestic growth opportunities become somewhat limited, a firm may seek opportunities in international markets. A firm has a wide variety of structures to choose from. These include international division, geographic area, worldwide product division, worldwide functional, and worldwide matrix. Deciding upon the most appropriate structure when a firm has international operations depends on three primary factors: the extent of international expansion, type of strategy (global, multidomestic, or transnational), and the degree of product diversity. 7

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Some firms may find it advantageous to diversify into several product lines rather than focus their efforts on strengthening distributor and supplier relationships through vertical integration. They would organize themselves according to product lines by implementing a divisional structure. Also, some firms may choose to move into unrelated product areas, typically by acquiring existing businesses. Frequently, their rationale is that acquiring assets and competencies is more economical or expedient than developing them internally. Such an unrelated, or conglomerate, strategy requires relatively little integration across businesses and sharing of resources. Thus, a holding company structure becomes appropriate. There are many other growth patterns, but these are the most common. *

Now we will discuss some of the most common types of organizational structures—simple, functional, divisional (including two variants: strategic business unit and holding company), and matrix and their advantages and disadvantages. We will close the section with a discussion of the structural implications when a firm expands its operations into international markets. 8

LO10.2

Each of the traditional types of organizational structure: simple, functional, divisional, and matrix.

Simple Structure

The simple organizational structure is the oldest, and most common, organizational form. Most organizations are very small and have a single or very narrow product line in which the owner-manager (or top executive) makes most of the decisions. The owner-manager controls all activities, and the staff serves as an extension of the top executive.

simple organizational structure

an organizational form in which the owner-manager makes most of the decisions and controls activities, and the staff serves as an extension of the top executive.

Advantages The simple structure is highly informal and the coordination of tasks is accomplished by direct supervision. Decision making is highly centralized, there is little specialization of tasks, few rules and regulations, and an informal evaluation and reward system. Although the owner-manager is intimately involved in almost all phases of the business, a manager is often employed to oversee day-to-day operations.

Disadvantages A simple structure may foster creativity and individualism since there are generally few rules and regulations. However, such “informality” may lead to problems. Employees may not clearly understand their responsibilities, which can lead to conflict and confusion. Employees may take advantage of the lack of regulations, act in their own self-interest, which can erode motivation and satisfaction and lead to the possible misuse of organizational resources. Small organizations have flat structures that limit opportunities for upward mobility. Without the potential for future advancement, recruiting and retaining talent may become very difficult.

Functional Structure

When an organization is small (15 employees or less), it is not necessary to have a variety of formal arrangements and groupings of activities. However, as firms grow, excessive demands may be placed on the owner-manager in order to obtain and process all of the information necessary to run the business. Chances are the owner will not be skilled in all specialties (e.g., accounting, engineering, production, marketing). Thus, he or she will need to hire specialists in the various functional areas. Such growth in the overall scope and complexity of the business necessitates a functional organizational structure wherein the major functions of the firm are grouped internally. The coordination and integration of the functional areas becomes one of the most important responsibilities of the chief executive of the firm (see Exhibit 10.2 ).

functional organizational structure

an organizational form in which the major functions of the firm, such as production, marketing, R&D, and accounting, are grouped internally.

 

* The lowering of transaction costs and globalization have led to some changes in the common historical patterns that we have discussed. Some firms are, in effect, bypassing the vertical integration stage. Instead, they focus on core competencies and outsource other value-creation activities. Also, even relatively young firms are going global early in their history because of lower communication and transportation costs. For an interesting perspective on global start-ups, see McDougall, P. P. & Oviatt, B. M. 1996. New Venture Internationalization, Strategic Change and Performance: A Follow-Up Study. Journal of Business Venturing, 11: 23–40; and McDougall, P. P. & Oviatt, B. M. (Eds.). 2000. The Special Research Forum on International Entrepreneurship. Academy of Management Journal, October: 902–1003.

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EXHIBIT 10.2   Functional Organizational Structure

Functional structures are generally found in organizations in which there is a single or closely related product or service, high production volume, and some vertical integration. Initially, firms tend to expand the overall scope of their operations by penetrating existing markets, introducing similar products in additional markets, or increasing the level of vertical integration. Such expansion activities clearly increase the scope and complexity of the operations. The functional structure provides for a high level of centralization that helps to ensure integration and control over the related product-market activities or multiple primary activities (from inbound logistics to operations to marketing, sales, and service) in the value chain (addressed in Chapters 3 and 4 ). Strategy Spotlight 10.1 provides an example of an effective functional organization structure—Parkdale Mills.

Advantages By bringing together specialists into functional departments, a firm is able to enhance its coordination and control within each of the functional areas. Decision making in the firm will be centralized at the top of the organization. This enhances the organizational-level (as opposed to functional area) perspective across the various functions in the organization. In addition, the functional structure provides for a more efficient use of managerial and technical talent since functional area expertise is pooled in a single department (e.g., marketing) instead of being spread across a variety of product-market areas. Finally, career paths and professional development in specialized areas are facilitated.

Disadvantages The differences in values and orientations among functional areas may impede communication and coordination. Edgar Schein of MIT has argued that shared assumptions, often based on similar backgrounds and experiences of members, form around functional units in an organization. This leads to what are often called “stove pipes” or “silos,” in which departments view themselves as isolated, self-contained units with little need for interaction and coordination with other departments. This erodes communication because functional groups may have not only different goals but also differing meanings of words and concepts. According to Schein:

The word “marketing” will mean product development to the engineer, studying customers through market research to the product manager, merchandising to the salesperson, and constant change in design to the manufacturing manager. When they try to work together, they will often attribute disagreements to personalities and fail to notice the deeper, shared assumptions that color how each function thinks. 9

Such narrow functional orientations also may lead to short-term thinking based largely upon what is best for the functional area, not the entire organization. In a manufacturing firm, sales may want to offer a wide range of customized products to appeal to the firm’s

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customers; R&D may overdesign products and components to achieve technical elegance; and manufacturing may favor no-frills products that can be produced at low cost by means of long production runs. Functional structures may overburden the top executives in the firm because conflicts have a tendency to be “pushed up” to the top of the organization since there are no managers who are responsible for the specific product lines. Functional structures make it difficult to establish uniform performance standards across the entire organization. It may be relatively easy to evaluate production managers on the basis of production volume and cost control, but establishing performance measures for engineering, R&D, and accounting become more problematic.

STRATEGY SPOTLIGHT

10.1

PARKDALE MILLS: A SUCCESSFUL FUNCTIONAL ORGANIZATIONAL STRUCTURE

For more than 80 years, Parkdale Mills, with approximately $1 billion in revenues, has been the industry leader in the production of cotton and cotton blend yarns. Their expertise comes by concentrating on a single product line, perfecting processes, and welcoming innovation. According to CEO Andy Warlick, “I think we’ve probably spent more than any two competitors combined on new equipment and robotics. We do this because we have to compete in a global market where a lot of the competition has a lower wage structure and gets subsidies that we don’t receive, so we really have to focus on consistency and cost control.” Yarn making is generally considered to be a commodity business, and Parkdale is the industry’s low-cost producer.

Tasks are highly standardized and authority is centralized with Duke Kimbrell, founder and chairman, and CEO Andy Warlick. The firm operates a bare-bones staff with a small staff of top executives. Kimbrell and Warlick are considered shrewd about the cotton market, technology, customer loyalty, and incentive pay.

Sources: Stewart, C. 2003. The Perfect Yarn. The Manufacturer.com , July 31; www.parkdalemills.com ; Berman, P. 1987. The Fast Track Isn’t Always the Best Track. Forbes, November 2: 60–64; and personal communication with Duke Kimbrell, March 11, 2005.

Divisional Structure

The divisional organizational structure (sometimes called the multidivisional structure or M-Form) is organized around products, projects, or markets. Each of the divisions, in turn, includes its own functional specialists who are typically organized into departments. 10 A divisional structure encompasses a set of relatively autonomous units governed by a central corporate office. The operating divisions are relatively independent and consist of products and services that are different from those of the other divisions. 11 Operational decision making in a large business places excessive demands on the firm’s top management. In order to attend to broader, longer-term organizational issues, top-level managers must delegate decision making to lower-level managers. Divisional executives play a key role: they help to determine the product-market and financial objectives for the division as well as their division’s contribution to overall corporate performance. 12 The rewards are based largely on measures of financial performance such as net income and revenue. Exhibit 10.3 illustrates a divisional structure.

divisional organizational structure

an organizational form in which products, projects, or product markets are grouped internally.

General Motors was among the earliest firms to adopt the divisional organizational structure. 13 In the 1920s the company formed five major product divisions (Cadillac, Buick, Oldsmobile, Pontiac, and Chevrolet) as well as several industrial divisions. Since then, many firms have discovered that as they diversified into new product-market activities, functional structures—with their emphasis on single functional departments—were unable to manage the increased complexity of the entire business.

Advantages By creating separate divisions to manage individual product markets, there is a separation of strategic and operating control. Divisional managers can focus

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their efforts on improving operations in the product markets for which they are responsible, and corporate officers can devote their time to overall strategic issues for the entire corporation. The focus on a division’s products and markets—by the divisional executives—provides the corporation with an enhanced ability to respond quickly to important changes. Since there are functional departments within each division of the corporation, the problems associated with sharing resources across functional departments are minimized. Because there are multiple levels of general managers (executives responsible for integrating and coordinating all functional areas), the development of general management talent is enhanced.

EXHIBIT 10.3   Divisional Organizational Structure

Disadvantages It can be very expensive; there can be increased costs due to the duplication of personnel, operations, and investment since each division must staff multiple functional departments. There also can be dysfunctional competition among divisions since each division tends to become concerned solely about its own operations. Divisional managers are often evaluated on common measures such as return on assets and sales growth. If goals are conflicting, there can be a sense of a “zero-sum” game that would discourage sharing ideas and resources among the divisions for the common good of the corporation. Ghoshal and Bartlett, two leading strategy scholars, note:

As their label clearly warns, divisions divide. The divisional model fragmented companies’ resources; it created vertical communication channels that insulated business units and prevented them from sharing their strengths with one another. Consequently, the whole of the corporation was often less than the sum of its parts. 14

With many divisions providing different products and services, there is the chance that differences in image and quality may occur across divisions. One division may offer no-frills products of lower quality that may erode the brand reputation of another division that has top quality, highly differentiated offerings. Since each division is evaluated in terms of financial measures such as return on investment and revenue growth, there is often an urge to focus on short-term performance. If corporate management uses quarterly profits as the key performance indicator, divisional management may tend to put significant emphasis

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on “making the numbers” and minimizing activities, such as advertising, maintenance, and capital investments, which would detract from short-term performance measures. Strategy Spotlight 10.2 discusses how ArcelorMittal works to overcome some of the disadvantages of the divisional structure by “twinning” its plants.

STRATEGY SPOTLIGHT

10.2

BREAKING DOWN DIVISIONAL BOUNDARIES: LEARNING FROM YOUR TWIN

On the edge of Lake Michigan in Burns Harbor, Indiana, sits a 50-year-old steel mill that produces steel for the automotive, appliance, and other industries with midwestern production plants. The steel mill struggled through the 1980s and 1990s and went bankrupt in 2002. It was bought out of bankruptcy and has been owned by ArcelorMittal Steel, the world’s largest steel producer, since 2005. However, the plant faced a another crisis in 2007 when it was threatened with closure unless it became more productive and efficient.

Today, this plant requires 1.32 man hours per ton of steel produced, which is 34 percent more efficient than the average in U.S. steel mills. Further, in 2011, the plant was 19 percent more efficient than it was in 2007 and produced twice the quantity of steel it produced in 2009. Its future as a productive steel plant is now secure.

How did ArcelorMittal achieve these gains and rejuvenate an old steel mill? It did it by breaking down the barriers between organization units to facilitate knowledge transfer and learning. One of the disadvantages of a divisional structure is that the divisions often perceive themselves as being in competition with each other and are therefore unwilling to share information to help other divisions improve. ArcelorMittal has overcome this by “twinning” different steel mills, one efficient and one struggling, and challenging the efficient plant to help out its twin. The Burns Harbor mill was paired with a mill in Ghent, Belgium. Over 100 engineers and managers from Burns Harbor traveled to Belgium to tour the Ghent plant and learn from their colleagues there how to improve operations. They copied routines from that plant, implemented an advanced computer control system used in the Belgian mill, and employed automated machines similar to the ones used in Belgium. ArcelorMittal also provided $150 million in capital investments to upgrade the operations to bring the facilities up to par with the Ghent plant. These changes resulted in dramatic improvements in the efficiency of the Burns Harbor mill. The Belgians take pride in the improvements in Burns Harbor and now find themselves striving to improve their own operations to stay ahead of the Americans. The Ghent plant now produces 950 tons of steel per employee each year, only 50 tons per employee more than Burns Harbor, but the Ghent managers boast they will soon increase productivity to 1100 tons per employee. Thus, Ghent cooperates and is willing to help Burns Harbor, but the managers and employees at Ghent have a competitive streak as well.

The experience of ArcelorMittal demonstrates how firms can act to overcome the typical disadvantages of their divisional structure.

Source: Miller, J. 2012. Indiana steel mill revived with lessons from abroad. WSJ.com , May 21: np; www.nishp.org/bh-history.htm ; and Markovich, S. 2012. Morning brief: Foreign investment revives Indiana steel mill. blogs.cfr.org , May 21: np.

We’ll discuss two variations of the divisional form: the strategic business unit (SBU) and holding company structures.

Strategic Business Unit (SBU) Structure Highly diversified corporations such as ConAgra, a $13 billion food producer, may consist of dozens of different divisions. 15 If ConAgra were to use a purely divisional structure, it would be nearly impossible for the corporate office to plan and coordinate activities, because the span of control would be too large. To attain synergies, ConAgra has put its diverse businesses into three primary SBUs: food service (restaurants), retail (grocery stores), and agricultural products.

strategic business unit (SBU) structure

an organizational form in which products, projects, or product market divisions are grouped into homogeneous units.

With an SBU structure, divisions with similar products, markets, and/or technologies are grouped into homogeneous units to achieve some synergies. These include those discussed in Chapter 6 for related diversification, such as leveraging core competencies, sharing infrastructures, and market power. Generally the more related businesses are within a corporation, the fewer SBUs will be required. Each of the SBUs in the corporation operates as a profit center.

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Advantages The SBU structure makes the task of planning and control by the corporate office more manageable. Also, with greater decentralization of authority, individual businesses can react more quickly to important changes in the environment than if all divisions had to report directly to the corporate office.

Disadvantages Since the divisions are grouped into SBUs, it may become difficult to achieve synergies across SBUs. If divisions in different SBUs have potential sources of synergy, it may become difficult for them to be realized. The additional level of management increases the number of personnel and overhead expenses, while the additional hierarchical level removes the corporate office further from the individual divisions. The corporate office may become unaware of key developments that could have a major impact on the corporation.

Holding Company Structure The holding company structure (sometimes referred to as a conglomerate) is also a variation of the divisional structure. Whereas the SBU structure is often used when similarities exist between the individual businesses (or divisions), the holding company structure is appropriate when the businesses in a corporation’s portfolio do not have much in common. Thus, the potential for synergies is limited.

holding company structure

an organizational form that is a variation of the divisional organizational structure in which the divisions have a high degree of autonomy both from other divisions and from corporate headquarters.

Holding company structures are most appropriate for firms with a strategy of unrelated diversification. Companies such as Berkshire Hathaway and Loews use a holding company structure to implement their unrelated diversification strategies. Since there are few similarities across the businesses, the corporate offices in these companies provide a great deal of autonomy to operating divisions and rely on financial controls and incentive programs to obtain high levels of performance from the individual businesses. Corporate staffs at these firms tend to be small because of their limited involvement in the overall operation of their various businesses. 16

Advantages The holding company structure has the cost savings associated with fewer personnel and the lower overhead resulting from a small corporate office and fewer hierarchical levels. The autonomy of the holding company structure increases the motivational level of divisional executives and enables them to respond quickly to market opportunities and threats.

Disadvantages There is an inherent lack of control and dependence that corporate-level executives have on divisional executives. Major problems could arise if key divisional executives leave the firm, because the corporate office has very little “bench strength”—additional managerial talent ready to quickly fill key positions. If problems arise in a division, it may become very difficult to turn around individual businesses because of limited staff support in the corporate office.

Matrix Structure

One approach that tries to overcome the inadequacies inherent in the other structures is the matrix organizational structure. It is a combination of the functional and divisional structures. Most commonly, functional departments are combined with product groups on a project basis. For example, a product group may want to develop a new addition to its line; for this project, it obtains personnel from functional departments such as marketing, production, and engineering. These personnel work under the manager of the product group for the duration of the project, which can vary from a few weeks to an open-ended period of time. The individuals who work in a matrix organization become responsible to two managers: the project manager and the manager of their functional area. Exhibit 10.4 illustrates a matrix structure.

matrix organizational structure

an organizational form in which there are multiple lines of authority and some individuals report to at least two managers.

Some large multinational corporations rely on a matrix structure to combine product groups and geographical units. Product managers have global responsibility for the

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development, manufacturing, and distribution of their own line, while managers of geographical regions have responsibility for the profitability of the businesses in their regions. In the mid-1990s, Caterpillar, Inc., implemented this type of structure.

EXHIBIT 10.4   Matrix Organizational Structure

Other organizations, such as Cisco, use a matrix structure to try to maintain flexibility. In these firms, individual workers have a permanent functional home but also are assigned to and work within temporary project teams. 17

Advantages The matrix structure facilitates the use of specialized personnel, equipment, and facilities. Instead of duplicating functions, as would be the case in a divisional structure based on products, the resources are shared. Individuals with high expertise can divide their time among multiple projects. Such resource sharing and collaboration enable a firm to use resources more efficiently and to respond more quickly and effectively to changes in the competitive environment. The flexibility inherent in a matrix structure provides professionals with a broader range of responsibility. Such experience enables them to develop their skills and competencies.

Disadvantages The dual-reporting structures can result in uncertainty and lead to intense power struggles and conflict over the allocation of personnel and other resources. Working relationships become more complicated. This may result in excessive reliance on group processes and teamwork, along with a diffusion of responsibility, which in turn may erode timely decision making.

Let’s look at Procter & Gamble (P&G) to see some of the disadvantages associated with a matrix structure:

After 50 years with a divisional structure, P&G went to a matrix structure in 1987. In this structure, they had product categories, such as soaps and detergents, on one dimension and functional managers on the other dimension. Within each product category, country managers reported to regional managers who then reported to product managers. The structure became complex to manage, with 13 layers of management and significant power struggles as the functional managers developed their own strategic agendas that often were

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at odds with the product managers’ agendas. After seeing their growth rate decline from 8.5 percent in the 1980s to 2.6 percent in the late 1990s, P&G scrapped the matrix structure to go to a global product structure with three major product categories to offer unity in direction and more responsive decision making. 18

EXHIBIT 10.5   Functional, Divisional, and Matrix Organizational Structures: Advantages and Disadvantages

Functional Structure
Advantages	Disadvantages
•   Pooling of specialists enhances coordination and control.	•   Differences in functional area orientation impede communication and coordination.
•   Centralized decision making enhances an organizational perspective across functions.	•   Tendency for specialists to develop short-term perspective and narrow functional orientation.
•   Efficient use of managerial and technical talent.	•   Functional area conflicts may overburden top-level decision makers.
•   Facilitates career paths and professional development in specialized areas.	•   Difficult to establish uniform performance standards.
Divisional Structure
Advantages	Disadvantages
•   Increases strategic and operational control, permitting corporate-level executives to address strategic issues.	•   Increased costs incurred through duplication of personnel, operations, and investment.
•   Quick response to environmental changes.	•   Dysfunctional competition among divisions may detract from overall corporate performance.
•   Increases focus on products and markets.	•   Difficult to maintain uniform corporate image.
•   Minimizes problems associated with sharing resources across functional areas.	•   Overemphasis on short-term performance.
•   Facilitates development of general managers.
Matrix Structure
Advantages	Disadvantages
•   Increases market responsiveness through collaboration and synergies among professional colleagues.	•   Dual-reporting relationships can result in uncertainty regarding accountability.
•   Allows more efficient utilization of resources.	•   Intense power struggles may lead to increased levels of conflict.
•   Improves flexibility, coordination, and communication.	•   Working relationships may be more complicated and human resources duplicated
•   Increases professional development through a broader range of responsibility.	•   Excessive reliance on group processes and teamwork may impede timely decision making.

Exhibit 10.5 briefly summarizes the advantages and disadvantages of the functional, divisional, and matrix organizational structures.

LO10.3

The implications of a firm’s international operations for organizational structure.

International Operations: Implications for Organizational Structure

Today’s managers must maintain an international outlook on their firm’s businesses and competitive strategies. In the global marketplace, managers must ensure consistency between their strategies (at the business, corporate, and international levels) and the structure of their organization. As firms expand into foreign markets, they generally follow

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a pattern of change in structure that parallels the changes in their strategies. 19 Three major contingencies that influence the chosen structure are (1) the type of strategy that is driving a firm’s foreign operations, (2) product diversity, and (3) the extent to which a firm is dependent on foreign sales. 20

As international operations become an important part of a firm’s overall operations, managers must make changes that are consistent with their firm’s structure. The primary types of structures used to manage a firm’s international operations are: 21

•   International division

•   Geographic-area division

•   Worldwide functional

•   Worldwide product division

•   Worldwide matrix

Multidomestic strategies are driven by political and cultural imperatives requiring managers within each country to respond to local conditions. The structures consistent with such a strategic orientation are the international division and geographic-area division structures . Here local managers are provided with a high level of autonomy to manage their operations within the constraints and demands of their geographic market. As a firm’s foreign sales increase as a percentage of its total sales, it will likely change from an international division to a geographic-area division structure. And, as a firm’s product and/or market diversity becomes large, it is likely to benefit from a worldwide matrix structure .

international division structure

an organizational form in which international operations are in a separate, autonomous division. Most domestic operations are kept in other parts of the organization.

geographic-area division structure

a type of divisional organizational structure in which operations in geographical regions are grouped internally.

worldwide matrix structure

a type of matrix organizational structure that has one line of authority for geographic-area divisions and another line of authority for worldwide product divisions.

Global strategies are driven by economic pressures that require managers to view operations in different geographic areas to be managed for overall efficiency. The structures consistent with the efficiency perspective are the worldwide functional and worldwide product division structures . Here, division managers view the marketplace as homogeneous and devote relatively little attention to local market, political, and economic factors. The choice between these two types of structures is guided largely by the extent of product diversity. Firms with relatively low levels of product diversity may opt for a worldwide product division structure. However, if significant product–market diversity results from highly unrelated international acquisitions, a worldwide holding company structure should be implemented. Such firms have very little commonality among products, markets, or technologies, and have little need for integration.

worldwide functional structure

a functional structure in which all departments have worldwide reponsibilities.

worldwide product division structure

a product division structure in which all divisions have worldwide responsibilities.

Global Start-Ups: A Recent Phenomenon

International expansion occurs rather late for most corporations, typically after possibilities of domestic growth are exhausted. Increasingly, we are seeing two interrelated phenomena. First, many firms now expand internationally relatively early in their history. Second, some firms are “born global”—that is, from the very beginning, many start-ups are global in their activities. For example, Logitech Inc., a leading producer of personal computer accessories, was global from day one. Founded in 1982 by a Swiss national and two Italians, the company was headquartered both in California and Switzerland. R&D and manufacturing were also conducted in both locations and, subsequently, in Taiwan and Ireland. 22

The success of companies such as Logitech challenges the conventional wisdom that a company must first build up assets, internal processes, and experience before venturing into faraway lands. It also raises a number of questions: What exactly is a global start-up? Under what conditions should a company start out as a global start-up? What does it take to succeed as a global start-up?

A global start-up has been defined as a business organization that, from inception, seeks to derive significant competitive advantage from the use of resources and the sale of outputs in multiple countries. Right from the beginning, it uses in-puts from around the world and sells its products and services to customers around the world. Geographical boundaries of nation-states are irrelevant for a global start-up.

global start-up

a business organization that, from inception, seeks to derive significant advantage from the use of resources and the sale of outputs in multiple countries.

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STRATEGY SPOTLIGHT

10.3    ENVIRONMENTAL SUSTAINABILITY

GLOBAL START-UP AIMING TO BRING A CHARGE TO THE WORLD

Buffalo Grid is a firm that has yet to fully roll out its service offerings, but it has already positioned itself as a truly global firm. Buffalo Grid aims to bring inexpensive electrical charging stations to rural markets in Africa and India. In these markets, millions of individuals have mobile phones and other portable electronic devices but live off the grid and have no electrical service in their homes. They charge up their devices in convenience stores, restaurants, and bars, often at very high prices. Buffalo Grid aims to address this issue with an environmentally sustainable and cost-effective solution.

Buffalo Grid has developed zero carbon emission microgenerators for the developing world that can be used for pennies an hour. The generators are mounted on bikes and run on pedal power. Thus, they are environmentally friendly and can easily move through the neighborhoods they serve.

The global orientation of Buffalo Grid is evident in its management core, the geographic spread of its operations, and the location of its partners. Looking at its management core, we see the foundation of its global mindset. The business is the brainchild of six entrepreneurs who have diverse global backgrounds. The founders of the firm include an individual who spent his early childhood years in Kenya and helped run a business that works with suppliers in Africa. Another of the founders grew up in Mexico. Another has lived in Guatemala and Peru. A fourth founder lived in a number of developing countries in his youth. A fifth of the founders grew up in Northern Ireland but also spent time living in India. The geographic scope of the firm is also notable. Its headquarters is set in in Britain, but the firm aims to serve customers thousands of miles away in India and Africa. The firm has also enlisted a global partner and has signed an agreement with Infosys, the Indian IT firm. Infosys will provide a mentor to Buffalo Grid who will support them and provide contacts and business advice to exploit opportunities in India.

Sources: Anonymous. 2013. Infosys to mentor 16 British start-ups locally in the UK. Economictimes.indiatimes.com , February 12: np; and Buffalogrid.com .

There is no reason for every start-up to be global. Being global necessarily involves higher communication, coordination, and transportation costs. Therefore, it is important to identify the circumstances under which going global from the beginning is advantageous. 23 First, if the required human resources are globally dispersed, going global may be the best way to access those resources. For example, Italians are masters in fine leather and Europeans in ergonomics. Second, in many cases foreign financing may be easier to obtain and more suitable. Traditionally, U.S. venture capitalists have shown greater willingness to bear risk, but they have shorter time horizons in their expectations for return. If a U.S. start-up is looking for patient capital, it may be better off looking overseas. Third, the target customers in many specialized industries are located in other parts of the world. Fourth, in many industries a gradual move from domestic markets to foreign markets is no longer possible because, if a product is successful, foreign competitors may immediately imitate it. Therefore, preemptive entry into foreign markets may be the only option. Finally, because of high up-front development costs, a global market is often necessary to recover the costs. This is particularly true for start-ups from smaller nations that do not have access to large domestic markets.

Successful management of a global start-up presents many challenges. Communication and coordination across time zones and cultures are always problematic. Since most global start-ups have far less resources than well-established corporations, one key for success is to internalize few activities and outsource the rest. Managers of such firms must have considerable prior international experience so that they can successfully handle the inevitable communication problems and cultural conflicts. Another key for success is to keep the communication and coordination costs low. The only way to achieve this is by creating less costly administrative mechanisms. The boundaryless organizational designs that we discuss in the next section are particularly suitable for global start-ups because of their flexibility and low cost.

Strategy Spotlight 10.3 discusses a British start-up with a global vision and scope of operations.

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How an Organization’s Structure Can Influence Strategy Formulation

Discussions of the relationship between strategy and structure usually strongly imply that structure follows strategy. The strategy that a firm chooses (e.g., related diversification) dictates such structural elements as the division of tasks, the need for integration of activities, and authority relationships within the organization. However, an existing structure can influence strategy formulation. Once a firm’s structure is in place, it is very difficult and expensive to change. 24 Executives may not be able to modify their duties and responsibilities greatly, or may not welcome the disruption associated with a transfer to a new location. There are costs associated with hiring, training, and replacing executive, managerial, and operating personnel. Strategy cannot be formulated without considering structural elements.

An organization’s structure can also have an important influence on how it competes in the marketplace. It can also strongly influence a firm’s strategy, day-to-day operations, and performance. 25

LO10.4

The different types of boundaryless organizations—barrier-free, modular, and virtual—and their relative advantages and disadvantages.

Boundaryless Organizational Designs

The term boundaryless may bring to mind a chaotic organizational reality in which “anything goes.” This is not the case. As Jack Welch, GE’s former CEO, has suggested, boundaryless does not imply that all internal and external boundaries vanish completely, but that they become more open and permeable. 26 Strategy Spotlight 10.4 discusses four types of boundaries.

We are not suggesting that boundaryless organizational designs replace the traditional forms of organizational structure, but they should complement them. Sharp Corp. has implemented a functional structure to attain economies of scale with its applied research and manufacturing skills. However, to bring about this key objective, Sharp has relied on several integrating mechanisms and processes:

boundaryless organizational designs

organizations in which the boundaries, including vertical, horizontal, external, and geographic boundaries, are permeable.

To prevent functional groups from becoming vertical chimneys that obstruct product development, Sharp’s product managers have responsibility—but not authority—for coordinating the entire set of value-chain activities. And the company convenes enormous numbers of cross-unit and corporate committees to ensure that shared activities, including the corporate R&D unit and sales forces, are optimally configured and allocated among the different product lines. Sharp invests in such time-intensive coordination to minimize the inevitable conflicts that arise when units share important activities. 27

We will discuss three approaches to making boundaries more permeable, that help to facilitate the widespread sharing of knowledge and information across both the internal and external boundaries of the organization. The barrier-free type involves making all organizational boundaries—internal and external—more permeable. Teams are a central building block for implementing the boundaryless organization. The modular and virtual types of organizations focus on the need to create seamless relationships with external organizations such as customers or suppliers. While the modular type emphasizes the outsourcing of noncore activities, the virtual (or network) organization focuses on alliances among independent entities formed to exploit specific market opportunities.

The Barrier-Free Organization

The “boundary” mind-set is ingrained deeply into bureaucracies. It is evidenced by such clichés as “That’s not my job,” “I’m here from corporate to help,” or endless battles over transfer pricing. In the traditional company, boundaries are clearly delineated in the design

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of an organization’s structure. Their basic advantage is that the roles of managers and employees are simple, clear, well-defined, and long-lived. A major shortcoming was pointed out to the authors during an interview with a high-tech executive: “Structure tends to be divisive; it leads to territorial fights.”

STRATEGY SPOTLIGHT

10.4

BOUNDARY TYPES

There are primarily four types of boundaries that place limits on organizations. In today’s dynamic business environment, different types of boundaries are needed to foster high degrees of interaction with outside influences and varying levels of permeability.

1.   Vertical boundaries between levels in the organization’s hierarchy. SmithKline Beecham asks employees at different hierarchical levels to brainstorm ideas for managing clinical trial data. The ideas are incorporated into action plans that significantly cut the new product approval time of its pharmaceuticals. This would not have been possible if the barriers between levels of individuals in the organization had been too high.

2.   Horizontal boundaries between functional areas. Fidelity Investments makes the functional barriers more porous and flexible among divisions, such as marketing, operations, and customer service, in order to offer customers a more integrated experience when conducting business with the company. Customers can take their questions to one person, reducing the chance that customers will “get the run-around” from employees who feel customer service is not their responsibility. At Fidelity, customer service is everyone’s business, regardless of functional area.

3.   External boundaries between the firm and its customers, suppliers, and regulators. GE Lighting, by working closely with retailers, functions throughout the value chain as a single operation. This allows GE to track point-of-sale purchases, giving it better control over inventory management.

4.   Geographic boundaries between locations, cultures, and markets. The global nature of today’s business environment spurred PricewaterhouseCoopers to use a global groupware system. This allows the company to instantly connect to its 26 worldwide offices.

Source: Ashkenas, R. 1997. The organization’s New Clothes. In Hesselbein, F., Goldsmith, M., and Beckhard, R. (Eds.). The Organization of the Future: 104–106. San Francisco: Jossey Bass.

Such structures are being replaced by fluid, ambiguous, and deliberately ill-defined tasks and roles. Just because work roles are no longer clearly defined, however, does not mean that differences in skills, authority, and talent disappear. A barrier-free organization enables a firm to bridge real differences in culture, function, and goals to find common ground that facilitates information sharing and other forms of cooperative behavior. Eliminating the multiple boundaries that stifle productivity and innovation can enhance the potential of the entire organization.

barrier-free organization

an organizational design in which firms bridge real differences in culture, function, and goals to find common ground that facilitates information sharing and other forms of cooperative behavior.

Creating Permeable Internal Boundaries For barrier-free organizations to work effectively, the level of trust and shared interests among all parts of the organization must be raised. 28 The organization needs to develop among its employees the skill level needed to work in a more democratic organization. Barrier-free organizations also require a shift in the organization’s philosophy from executive to organizational development, and from investments in high-potential individuals to investments in leveraging the talents of all individuals.

Teams can be an important aspect of barrier-free structures. 29 Jeffrey Pfeffer, author of several insightful books, including The Human Equation, suggests that teams have three primary advantages. 30 First, teams substitute peer-based control for hierarchical control of work activities. Employees control themselves, reducing the time and energy management needs to devote to control. Second, teams frequently develop more creative solutions to problems because they encourage the sharing of the tacit knowledge held by individuals. 31

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Brainstorming, or group problem solving, involves the pooling of ideas and expertise to enhance the chances that at least one group member will think of a way to solve the problems at hand. Third, by substituting peer control for hierarchical control, teams permit the removal of layers of hierarchy and absorption of administrative tasks previously performed by specialists. This avoids the costs of having people whose sole job is to watch the people who watch other people do the work.

Effective barrier-free organizations must go beyond achieving close integration and coordination within divisions in a corporation. Research on multidivisional organizations has stressed the importance of interdivisional coordination and resource sharing. 32 This requires interdivisional task forces and committees, reward and incentive systems that emphasize interdivisional cooperation, and common training programs.

Frank Carruba (former head of Hewlett-Packard’s labs) found that the difference between mediocre teams and good teams was generally varying levels of motivation and talent. 33 But what explained the difference between good teams and truly superior teams? The key difference—and this explained a 40 percent overall difference in performance—was the way members treated each other: the degree to which they believed in one another and created an atmosphere of encouragement rather than competition. Vision, talent, and motivation could carry a team only so far. What clearly stood out in the “super” teams were higher levels of authenticity and caring, which allowed the full synergy of their individual talents, motivation, and vision.

Developing Effective Relationships with External Constituencies In barrier-free organizations, managers must also create flexible, porous organizational boundaries and establish communication flows and mutually beneficial relationships with internal (e.g., employees) and external (e.g., customers) constituencies. 34 IBM has worked to develop a long-standing cooperative relationship with the Mayo Clinic. The clinic is a customer but more importantly a research partner. IBM has placed staff at the Mayo Clinic, and the two organizations have worked together on technology for the early identification of aneurysms, the mining of data in electronic health records to develop customized treatment plans for patients, and other medical issues. Having worked collaboratively for over a dozen years, the IBM and Mayo researchers have built strong relationships. 35

Barrier-free organizations create successful relationships between both internal and external constituencies, but there is one additional constituency—competitors—with whom some organizations have benefited as they developed cooperative relationships. For example, after struggling on their own to develop the technology, Ford, Renault-Nissan, and Daimler have agreed to cooperate with each other to develop zero emission, hydrogen fuel cell systems to power automobiles. 36

By joining and actively participating in the Business Roundtable—an organization consisting of CEOs of leading U.S. corporations—Walmart has been able to learn about cutting-edge sustainable initiatives of other major firms. This free flow of information has enabled Walmart to undertake a number of steps that increased the energy efficiency of its operations. These are described in Strategy Spotlight 10.5 .

Risks, Challenges, and Potential Downsides Many firms find that creating and managing a barrier-free organization can be frustrating. 37 Puritan-Bennett Corporation, a manufacturer of respiratory equipment, found that its product development time more than doubled after it adopted team management. Roger J. Dolida, director of R&D, attributed this failure to a lack of top management commitment, high turnover among team members, and infrequent meetings. Often, managers trained in rigid hierarchies find it difficult to make the transition to the more democratic, participative style that teamwork requires.

Christopher Barnes, a consultant with PricewaterhouseCoopers, previously worked as an industrial engineer for Challenger Electrical Distribution (a subsidiary of Westinghouse,

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now part of CBS) at a plant which produced circuit-breaker boxes. His assignment was to lead a team of workers from the plant’s troubled final-assembly operation with the mission: “Make things better.” That vague notion set the team up for failure. After a year of futility, the team was disbanded. In retrospect, Barnes identified several reasons for the debacle: (1) limited personal credibility—he was viewed as an “outsider”; (2) a lack of commitment to the team—everyone involved was forced to be on the team; (3) poor communications—nobody was told why the team was important; (4) limited autonomy—line managers refused to give up control over team members; and (5) misaligned incentives—the culture rewarded individual performance over team performance. Barnes’s experience has implications for all types of teams, whether they are composed of managerial, professional, clerical, or production personnel. 38 The pros and cons of barrier-free structures are summarized in Exhibit 10.6 .

STRATEGY SPOTLIGHT

10.5    ENVIRONMENTAL SUSTAINABILITY

THE BUSINESS ROUNDTABLE: A FORUM FOR SHARING BEST ENVIRONMENTAL SUSTAINABILITY PRACTICES

The Business Roundtable is a group of chief executive officers of major U.S. corporations that was created to promote probusiness public policy. It was formed in 1972 through the merger of three existing organizations: The March Group, the Construction Users Anti-Inflation Roundtable, and the Labor Law Study Committee. The group has been called President Obama’s “closest ally in the business community.”

The Business Roundtable became the first broad-based business group to agree on the need to address climate change through collective action, and it remains committed to limiting greenhouse gas emissions and setting the United States on a more sustainable path. The organization considers that threats to water quality and quantity, rising greenhouse gas emissions, and the risk of climate change—along with increasing energy prices and growing demand—are of great concern.

Its recent report “Create, Grow, Sustain” provides best practices and metrics from Business Roundtable member companies that represent nearly all sectors of the economy with $6 trillion in annual revenues. CEOs from Walmart, FedEx, PepsiCo, Whirlpool, and Verizon are among the 126 executives from leading U.S. companies that shared some of their best sustainability initiatives in this report. These companies are committed to reducing emissions, increasing energy efficiency, and developing more sustainable business practices.

Let’s look, for example, at some of Walmart’s initiatives. The firm’s CEO, Mike Duke, says it is working with suppliers, partners, and consumers to drive its sustainability program. It has helped establish the Sustainability Consortium to drive metrics for measuring the environmental effects of consumer products across their life cycle. The retailer also helped lead the creation of a Sustainable Product Index to provide product information to consumers about the environmental impact of the products they purchase.

As part of its sustainability efforts, Walmart had either initiated or was in the process of developing over 180 renewable energy projects. Combined, these efforts resulted in more than 1 billion kilowatt hours of renewable energy production each year, enough power to provide the electrical needs of 78,000 homes.

Walmart’s renewable energy efforts have focused on three general initiatives.

•   It has invested in developing distributed electrical generation systems on its property. As part of this effort, Walmart has installed rooftop solar panels on 127 locations in seven countries. It also has 26 fuel cell installations, 11 micro-wind projects, and seven solar thermal projects.

•   Expanding its contracts with suppliers for renewable energy has also been a focus of Walmart. Thus, Walmart bypasses the local utility to go directly to renewable energy suppliers to sign long-term contracts for renewable energy. With long-term contracts, Walmart has found that providers will give them more favorable terms. Walmart also believes that the long-term contracts give suppliers the incentive to invest in their generation systems, increasing the availability of renewable power for other users.

•   In regions where going directly to renewable energy suppliers is difficult or impossible, Walmart has engaged the local utilities to increase their investment in renewable energy.

Sources: Anonymous. 2010. Leading CEOs Share Best Sustainability Practices. www.environmentalleader.com , April 26: np; Hopkins, M. No date. Sustainable Growth. www.businessroundtable , np; Anonymous. 2012. Create, grow, sustain. www.businessroundtable.org , April 18: 120; and Business Roundtable. www.en.wikipedia.org .

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EXHIBIT 10.6   Pros and Cons of Barrier-Free Structures

Pros	Cons
•   Leverages the talents of all employees.	•   Difficult to overcome political and authority boundaries inside and outside the organization.
•   Enhances cooperation, coordination, and information sharing among functions, divisions, SBUs, and external constituencies.	•   Lacks strong leadership and common vision, which can lead to coordination problems.
•   Enables a quicker response to market changes through a single-goal focus.	•   Time-consuming and difficult-to-manage democratic processes.
•   Can lead to coordinated win–win initiatives with key suppliers, customers, and alliance partners.	•   Lacks high levels of trust, which can impede performance.

The Modular Organization

As Charles Handy, author of The Age of Unreason, has noted:

While it may be convenient to have everyone around all the time, having all of your workforce’s time at your command is an extravagant way of marshaling the necessary resources. It is cheaper to keep them outside the organization … and to buy their services when you need them. 39

The modular organization outsources nonvital functions, tapping into the knowledge and expertise of “best in class” suppliers, but retains strategic control. Outsiders may be used to manufacture parts, handle logistics, or perform accounting activities. 40 The value chain can be used to identify the key primary and support activities performed by a firm to create value: Which activities do we keep “in-house” and which activities do we outsource to suppliers? 41 The organization becomes a central hub surrounded by networks of outside suppliers and specialists and parts can be added or taken away. Both manufacturing and service units may be modular. 42

modular organization

an organization in which nonvital functions are outsourced, which uses the knowledge and expertise of outside suppliers while retaining strategic control.

Apparel is an industry in which the modular type has been widely adopted. Nike and Reebok, for example, concentrate on their strengths: designing and marketing high-tech, fashionable footwear. Nike has few production facilities and Reebok owns no plants. These two companies contract virtually all their footwear production to suppliers in China, Vietnam, and other countries with low-cost labor. Avoiding large investments in fixed assets helps them derive large profits on minor sales increases. Nike and Reebok can keep pace with changing tastes in the marketplace because their suppliers have become expert at rapidly retooling to produce new products. 43

In a modular company, outsourcing the noncore functions offers three advantages.

1.   A firm can decrease overall costs, stimulate new product development by hiring suppliers with superior talent to that of in-house personnel, avoid idle capacity, reduce inventories, and avoid being locked into a particular technology.

2.   A company can focus scarce resources on the areas where it holds a competitive advantage. These benefits can translate into more funding for R&D hiring the best engineers, and providing continuous training for sales and service staff.

3.   An organization can tap into the knowledge and expertise of its specialized supply-chain partners, adding critical skills and accelerating organizational learning. 44

The modular type enables a company to leverage relatively small amounts of capital and a small management team to achieve seemingly unattainable strategic objectives. 45 Certain preconditions are necessary before the modular approach can be successful. First, the company must work closely with suppliers to ensure that the interests of each party are being fulfilled. Companies need to find loyal, reliable vendors who can be trusted with trade secrets. They also need assurances that suppliers will dedicate their financial,

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physical, and human resources to satisfy strategic objectives such as lowering costs or being first to market.

Second, the modular company must be sure that it selects the proper competencies to keep in-house. For Nike and Reebok, the core competencies are design and marketing, not shoe manufacturing; for Honda, the core competence is engine technology. An organization must avoid outsourcing components that may compromise its long-term competitive advantages.

Strategic Risks of Outsourcing The main strategic concerns are (1) loss of critical skills or developing the wrong skills, (2) loss of cross-functional skills, and (3) loss of control over a supplier. 46

Too much outsourcing can result in a firm “giving away” too much skill and control. 47 Outsourcing relieves companies of the requirement to maintain skill levels needed to manufacture essential components. 48 At one time, semiconductor chips seemed like a simple technology to outsource, but they have now become a critical component of a wide variety of products. Companies that have outsourced the manufacture of these chips run the risk of losing the ability to manufacture them as the technology escalates. They become more dependent upon their suppliers.

Cross-functional skills refer to the skills acquired through the interaction of individuals in various departments within a company. 49 Such interaction assists a department in solving problems as employees interface with others across functional units. However, if a firm outsources key functional responsibilities, such as manufacturing, communication across departments can become more difficult. A firm and its employees must now integrate their activities with a new, outside supplier.

The outsourced products may give suppliers too much power over the manufacturer. Suppliers that are key to a manufacturer’s success can, in essence, hold the manufacturer “hostage.” Nike manages this potential problem by sending full-time “product expatriates” to work at the plants of its suppliers. Also, Nike often brings top members of supplier management and technical teams to its headquarters. This way, Nike keeps close tabs on the pulse of new developments, builds rapport and trust with suppliers, and develops long-term relationships with suppliers to prevent hostage situations.

Exhibit 10.7 summarizes the pros and cons of modular structures. 50

The Virtual Organization

In contrast to the “self-reliant” thinking that guided traditional organizational designs, the strategic challenge today has become doing more with less and looking outside the firm for opportunities and solutions to problems. The virtual organization provides a new means of leveraging resources and exploiting opportunities. 51

The virtual organization can be viewed as a continually evolving network of independent companies—suppliers, customers, even competitors—linked together to share skills, costs, and access to one another’s markets. 52 The members of a virtual organization, by pooling and sharing the knowledge and expertise of each of the component organizations, simultaneously “know” more and can “do” more than any one member of the group could do alone. By working closely together, each gains in the long run from individual and organizational learning. 53 The term virtual, meaning “being in effect but not actually so,” is commonly used in the computer industry. A computer’s ability to appear to have more storage capacity than it really possesses is called virtual memory. Similarly, by assembling resources from a variety of entities, a virtual organization may seem to have more capabilities than it really possesses. 54

virtual organization

a continually evolving network of independent companies that are linked together to share skills, costs, and access to one another’s markets.

Virtual organizations need not be permanent and participating firms may be involved in multiple alliances. Virtual organizations may involve different firms performing complementary value activities, or different firms involved jointly in the same value activities,

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such as production, R&D, and distribution. The percentage of activities that are jointly performed with partners may vary significantly from alliance to alliance. 55

EXHIBIT 10.7   Pros and Cons of Modular Structures

Pros	Cons
•   Directs a firm’s managerial and technical talent to the most critical activities.	•   Inhibits common vision through reliance on outsiders.
•   Maintains full strategic control over most critical activities—core competencies.	•   Diminishes future competitive advantages if critical technologies or other competencies are outsourced.
•   Achieves “best in class” performance at each link in the value chain.	•   Increases the difficulty of bringing back into the firm activities that now add value due to market shifts
•   Leverages core competencies by outsourcing with smaller capital commitment.	•   Leads to an erosion of cross-functional skills.
•   Encourages information sharing and accelerates organizational learning.	•   Decreases operational control and potential loss of control over a supplier.

How does the virtual type of structure differ from the modular type? Unlike the modular type, in which the focal firm maintains full strategic control, the virtual organization is characterized by participating firms that give up part of their control and accept interdependent destinies. Participating firms pursue a collective strategy that enables them to cope with uncertainty through cooperative efforts. The benefit is that, just as virtual memory increases storage capacity, the virtual organizations enhance the capacity or competitive advantage of participating firms.

Strategy Spotlight 10.6 discusses the collaboration between firms from apparently unrelated industries to develop a technology that could potentially affect all products that use plastic as a component, a container, or a package.

Each company that links up with others to create a virtual organization contributes only what it considers its core competencies. It will mix and match what it does best with the best of other firms by identifying its critical capabilities and the necessary links to other capabilities. 56

Challenges and Risks Such alliances often fail to meet expectations: In the 1980s, several competing U.S. computing firms set up a consortium, US Memories, to design and manufacture memory chips for computers. The purpose of the consortium was to allow the firms to better compete with Japanese and Taiwanese competitors. But the consortium collapsed as a result of differences in the interests and objectives of the firms involved.

The virtual organization demands that managers build relationships with other companies, negotiate win–win deals for all parties find the right partners with compatible goals and values, and provide the right balance of freedom and control. Information systems must be designed and integrated to facilitate communication with current and potential partners.

Managers must be clear about the strategic objectives while forming alliances. Some objectives are time bound, and those alliances need to be dissolved once the objective is fulfilled. Some alliances may have relatively long-term objectives and will need to be clearly monitored and nurtured to produce mutual commitment and avoid bitter fights for control. The highly dynamic personal computer industry is characterized by multiple temporary alliances among hardware, operating systems, and software producers. 57 But alliances in the more stable automobile industry, such as those involving Nissan and Volkswagen have long-term objectives and tend to be relatively stable.

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STRATEGY SPOTLIGHT

10.6    ENVIRONMENTAL SUSTAINABILITY

PLANT PLASTICS 2.0: A COLLABORATIVE INITIATIVE AMONG 5 GLOBAL FIRMS

Coca-Cola, Ford Motor Company, H.J. Heinz, Nike, and Procter & Gamble are five firms that are typically neither competitors, suppliers, or customers, but they have come together to address a joint concern. They are working together to develop plant-based plastics. Coca-Cola has been at the forefront of this technology and has developed a plastic bottle that includes 30 percent plant-based plastic. Heinz had already licensed this technology, but these two firms, along with the other three partners, have created the Plant PET Technology Collaborative (PTC) to jointly develop the plant-based plastic technology further, with the goal of creating 100 percent plant-based plastics that can be used in a range of products across a number of industries. As the spokesperson of the PTC stated, “PTC members are committed to supporting and championing research, expanding knowledge and accelerating technology development to enable commercially viable, more sustainably sourced, 100 percent plant-based PET plastic while reducing the use of fossil fuels.”

This cooperative is important for these firms to achieve the sustainability goals that they have laid out. For example, P&G has targeted a 25 percent reduction in the amount of petroleum-based products the firm uses by 2020, with a long-term goal of completely replacing petroleum-based materials with sustainable sources. Ed Sawiki, associate director of global business development, asserted that the collaborative R&D effort is important since it allows P&G to “work with others to advance the pace of technical learning and commercial availability of 100 percent plant-based PET faster than any one party can do alone. This enables us to deliver products and packages that consumers want in a sustainable fashion. It creates a win-win situation for the company, consumers, and the environment.” The members of the PTC hope to have a marketable 100 percent plant-based plastic by 2016 or 2017.

The collaborative also serves a second goal for the firms. That is the development of common methods, standards, and terminology for sustainable plastics. The brands will then promote these standards to facilitate both customer acceptance and preference and use worldwide by other corporations. These standards could also be used in regulatory efforts by governments to incentivize the use of sustainable packaging.

Sources: Caliendo, H. 2012. Five major brands collaborating on plant-based PET. Plasticstoday.com , June 5: np; and Siemers, E. 2012. Nike joins Coke, Ford, Heinz, and P&G to develop plant-based plastics. Sustainablebusinessoregon.com , June 5: np.

The virtual organization is a logical culmination of joint-venture strategies of the past. Shared risks, costs, and rewards are the facts of life in a virtual organization. 58 When virtual organizations are formed, they involve tremendous challenges for strategic planning. As with the modular corporation, it is essential to identify core competencies. However, for virtual structures to be successful, a strategic plan is also needed to determine the effectiveness of combining core competencies.

The strategic plan must address the diminished operational control and overwhelming need for trust and common vision among the partners. This new structure may be appropriate for firms whose strategies require merging technologies (e.g., computing and communication) or for firms exploiting shrinking product life cycles that require simultaneous entry into multiple geographical markets. It may be effective for firms that desire to be quick to the market with a new product or service. The recent profusion of alliances among airlines was primarily motivated by the need to provide seamless travel demanded by the full-fare paying business traveler. Exhibit 10.8 summarizes the advantages and disadvantages.

Boundaryless Organizations: Making Them Work

Designing an organization that simultaneously supports the requirements of an organization’s strategy, is consistent with the demands of the environment, and can be effectively implemented by the people around the manager is a tall order for any manager. 59 The most effective solution is usually a combination of organizational types. That is, a firm may outsource many parts of its value chain to reduce costs and increase quality, engage simultaneously in multiple alliances to take advantage of technological developments or penetrate new markets, and break down barriers within the organization to enhance flexibility.

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EXHIBIT 10.8   Pros and Cons of Virtual Structures

Pros	Cons
•   Enables the sharing of costs and skills.	•   Harder to determine where one company ends and another begins, due to close interdependencies among players.
•   Enhances access to global markets.	•   Leads to potential loss of operational control among partners.
•   Increases market responsiveness.	•   Results in loss of strategic control over emerging technology.
•   Creates a “best of everything” organization since each partner brings core competencies to the alliance.	•   Requires new and difficult-to-acquire managerial skills.
•   Encourages both individual and organizational knowledge sharing and accelerates organizational learning.

 

Source: Miles, R. E., & Snow, C. C. 1986. Organizations: New Concepts for New Forms. California Management Review, Spring: 62–73; Miles & Snow. 1999. Causes of Failure in Network Organizations. California Management Review, Summer: 53–72; and Bahrami, H. 1991. The Emerging Flexible Organization: Perspectives from Silicon Valley. California Management Review, Summer: 33–52.

When an organization faces external pressures, resource scarcity, and declining performance, it tends to become more internally focused, rather than directing its efforts toward managing and enhancing relationships with existing and potential external stakeholders. This may be the most opportune time for managers to carefully analyze their value-chain activities and evaluate the potential for adopting elements of modular, virtual, and barrier-free organizational types.

In this section, we will address two issues managers need to be aware of as they work to design an effective boundaryless organization. First, managers need to develop mechanisms to ensure effective coordination and integration. Second, managers need to be aware of the benefits and costs of developing strong and long-term relationships with both internal and external stakeholders.

Facilitating Coordination and Integration Achieving the coordination and integration necessary to maximize the potential of an organization’s human capital involves much more than just creating a new structure. Techniques and processes to ensure the coordination and integration of an organization’s key value-chain activities are critical. Teams are key building blocks of the new organizational forms, and teamwork requires new and flexible approaches to coordination and integration.

Managers trained in rigid hierarchies may find it difficult to make the transition to the more democratic, participative style that teamwork requires. As Douglas K. Smith, coauthor of The Wisdom of Teams, pointed out, “A completely diverse group must agree on a goal, put the notion of individual accountability aside and figure out how to work with each other. Most of all, they must learn that if the team fails, it’s everyone’s fault.” 60 Within the framework of an appropriate organizational design, managers must select a mix and balance of tools and techniques to facilitate the effective coordination and integration of key activities. Some of the factors that must be considered include:

•   Common culture and shared values.

•   Horizontal organizational structures.

•   Horizontal systems and processes.

•   Communications and information technologies.

•   Human resource practices.

Common Culture and Shared Values Shared goals, mutual objectives, and a high degree of trust are essential to the success of boundaryless organizations. In the fluid and flexible environments of the new organizational architectures, common cultures, shared values, and carefully aligned incentives are often less expensive to implement and are often

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a more effective means of strategic control than rules, boundaries, and formal procedures. Tony Hsieh, the founder of Zappos, echoes this need for a shared culture and values when as he describes his role this way. “I think of myself less as a leader and more of being an architect of an environment that enables employees to come up with their own ideas.” 61

Horizontal Organizational Structures These structures, which group similar or related business units under common management control, facilitate sharing resources and infrastructures to exploit synergies among operating units and help to create a sense of common purpose. Consistency in training and the development of similar structures across business units facilitates job rotation and cross training and enhances understanding of common problems and opportunities. Cross-functional teams and inter-divisional committees and task groups represent important opportunities to improve understanding and foster cooperation among operating units.

horizontal organizational structures

organizational forms that group similar or related business units under common management control and facilitate sharing resources and infrastructures to exploit synergies among operating units and help to create a sense of common purpose.

Horizontal Systems and Processes Organizational systems, policies, and procedures are the traditional mechanisms for achieving integration among functional units. Existing policies and procedures often do little more than institutionalize the barriers that exist from years of managing within the framework of the traditional model. Beginning with an understanding of basic business processes in the context of “a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer,” Michael Hammer and James Champy’s 1993 best-selling Reengineering the Corporation outlined a methodology for redesigning internal systems and procedures that has been embraced by many organizations. 62 Successful reengineering lowers costs, reduces inventories and cycle times, improves quality, speeds response times, and enhances organizational flexibility. Others advocate similar benefits through the reduction of cycle times, total quality management, and the like.

Communications and Information Technologies (IT) The effective use of IT can play an important role in bridging gaps and breaking down barriers between organizations. Electronic mail and videoconferencing can improve lateral communications across long distances and multiple time zones and circumvent many of the barriers of the traditional model. IT can be a powerful ally in the redesign and streamlining of internal business processes and in improving coordination and integration between suppliers and customers. Internet technologies have eliminated the paperwork in many buyer–supplier relationships, enabling cooperating organizations to reduce inventories, shorten delivery cycles, and reduce operating costs. IT must be viewed more as a prime component of an organization’s overall strategy than simply in terms of administrative support.

Human Resource Practices Change always involves and affects the human dimension of organizations. The attraction, development, and retention of human capital are vital to value creation. As boundaryless structures are implemented, processes are reengineered, and organizations become increasingly dependent on sophisticated ITs, the skills of workers and managers alike must be upgraded to realize the full benefits.

Strategy Spotlight 10.7 discusses Procter & Gamble’s successful introduction of Crest Whitestrips. This example shows how P&G’s tools and techniques, such as communities of practice, information technology, and human resource practices, help to achieve effective collaboration and integration across the firm’s different business units.

The Benefits and Costs of Developing Lasting Internal and External Relationships Successful boundaryless organizations rely heavily on the relational aspects of organizations. Rather than relying on strict hierarchical and bureaucratic systems, these firms are flexible and coordinate action by leveraging shared social norms and strong social

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relationships between both internal and external stakeholders. 63 At the same time, it is important to acknowledge that relying on relationships can have both positive and negative effects. To successfully move to a more boundaryless organization, managers need to acknowledge and attend to both the costs and benefits of relying on relationships and social norms to guide behavior.

STRATEGY SPOTLIGHT

10.7

CREST’S WHITESTRIPS: AN EXAMPLE OF HOW P&G CREATES AND DERIVES BENEFITS FROM A BOUNDARYLESS ORGANIZATION

Given its breadth of products—soaps, diapers, toothpaste, potato chips, lotions, detergent—Procter & Gamble (P&G) has an enormous pool of resources it can integrate in various ways to launch exciting new products. For example, the company created a new category, teeth-whitening systems, with Crest Whitestrips. Teeth whitening done at a dentist’s office can brighten one’s smile in as little as one visit, but it can cost hundreds of dollars. On the other hand, over-the-counter home whitening kits like Crest Whitestrips cost far less and are nearly equally effective.

Whitestrip was created through a combined effort of product developers from three different units in P&G. People at the oral-care division provided teeth-whitening expertise; experts from the fabric and home-care division supplied bleach expertise; and scientists at corporate research and development provided a novel film technology. Three separate units, by collaborating and combining their technologies, succeeded in developing an affordable product to brighten smiles and, according to the website, bring “greater success in work and love.” With $300 million in annual retail sales, the launch of the Whitestrips product has been a big success for P&G, one that would not have been possible without the firm’s collaborative ability.

Such collaborations are the outcome of well-established organizational mechanisms. P&G has created more than 20 communities of practice, with 8,000 participants. Each group comprises volunteers from different parts of the company and focuses on an area of expertise (fragrance, packaging, polymer chemistry, skin science, and so on). The groups solve specific problems that are brought to them, and they meet to share best practices. The company also has posted an “ask me” feature on its intranet, where employees can describe a business problem, which is directed to those people with appropriate expertise. At a more fundamental level, P&G promotes from within and rotates people across countries and business units. As a result, its employees build powerful cross-unit networks.

Sources: Hansen, M. T. 2009. Collaboration: How Leaders Avoid the Traps, Create Unity, and Reap Big Results. Boston: Harvard Business Press, 24–25; Anonymous. 2004. At P&G, It’s 360-Degree Innovation. www.businessweek.com , October 11: np; www.whitestrips.com ; Anonymous. 2009. The Price of a Whiter, Brighter Smile. www.washingtonpost.com , July 21: np; Hansen, M. T. & Birkinshaw, J. 2007. The Innovation Value Chain. Harvard Business Review, June: 85(6): 121–130.

There are three primary benefits that organizations accrue when relying on relationships.

•   Agency costs within the firm can be dramatically cut through the use of relational systems. Managers and employees in relationship-oriented firms are guided by social norms and relationships they have with other managers and employees. As a result, the firm can reduce the degree to which it relies on monitoring, rules and regulations, and financial incentives to ensure that workers put in a strong effort and work in the firm’s interests. A relational view leads managers and employees to act in a supportive manner and makes them more willing to step out of their formal roles when needed to accomplish tasks for others and for the organization. They are also less likely to shirk their responsibilities.

•   There is also likely to be a reduction in the transaction costs between a firm and its suppliers and customers. If firms have built strong relationships with partnering firms, they are more likely to work cooperatively with these firms and build trust that their partners will work in the best interests of the alliance. This will reduce the need for the firms to write detailed contracts and set up strict bureaucratic rules to outline the responsibilities and define the behavior of each firm. Additionally, partnering firms with strong relationships are more likely to invest in assets that specifically support the partnership. Finally, they will have much less fear that their partner will try to take advantage of them or seize the bulk of the benefits from the partnership.

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•   Since they feel a sense of shared ownership and goals, individuals within the firm as well as partnering firms will be more likely to search for win-win rather than win-lose solutions. When taking a relational view, individuals are less likely to look out solely for their personal best interests. They will also be considerate of the benefits and costs to other individuals in the firm and to the overall firm. The same is true at the organizational level. Firms with strong relationships with their partners are going to look for solutions that not only benefit themselves but also provide equitable benefits and limited downside for the partnering firms. Such a situation was evident with a number of German firms during the economic crisis of 2008–2010. The German government, corporations, and unions worked together to find the fairest way to respond to the crisis. The firms agreed not to lay off workers. The unions agreed to reduced workweeks. The government kicked in a subsidy to make up for some of the lost wages. In other words, they negotiated a shared sacrifice to address the challenge. This positioned the German firms to bounce back quickly once the crisis passed.

While there are a number of benefits with using a relational view, there can also be some substantial costs.

•   As the relationships between individuals and firms strengthen, they are also more likely to fall prey to suboptimal lock-in effects. The problem here is that as decisions become driven by concerns about relationships, economic factors become less important. As a result, firms become less likely to make decisions that could benefit the firm since those decisions may harm employees or partnering firms. For example, firms may see the economic logic in exiting a market, but the ties they feel with employees that work in that division and partnering firms in that market may reduce their willingness to make the hard decision to exit the market. This can be debilitating to firms in rapidly changing markets where successful firms add, reorganize, and sometimes exit operations and relationships regularly.

•   Since there are no formal guidelines, conflicts between individuals and units within firms as well as between partnering firms are typically resolved through ad hoc negotiations and processes. In these circumstances, there are no legal means or bureaucratic rules to guide decision making. Thus, when firms face a difficult decision where there are differences of opinion about the best course of action, the ultimate choices made are often driven by the inherent power of the individuals or firms involved. This power use may be unintentional and subconscious, but it can result in outcomes that are deemed unfair by one or more of the parties.

•   The social capital of individuals and firms can drive their opportunities. Thus, rather than identifying the best person to put in a leadership role or the optimal supplier to contract with, these choices are more strongly driven by the level of social connection the person or supplier has. This also increases the entry barriers for potential new suppliers or employees with whom a firm can contract since new firms likely don’t have the social connections needed to be chosen as a worthy partner with whom to contract. This also may limit the likelihood that new innovative ideas will enter into the conversations at the firm.

As mentioned earlier in the chapter, the solution may be to effectively integrate elements of formal structure and reward systems with stronger relationships. This may influence specific relationships so that a manager will want employees to build relationships while still maintaining some managerial oversight and reward systems that motivate the desired behavior. This may also result in different emphases with different relationships. For example, there may be some units, such as accounting, where a stronger role for traditional structures and forms of evaluation may be optimal. However, in new product development units, a greater emphasis on relational systems may be more appropriate.

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LO10.5

The need for creating ambidextrous organizational designs that enable firms to explore new opportunities and effectively integrate existing operations.

Creating Ambidextrous Organizational Designs

In Chapter 1 , we introduced the concept of “ambidexterity,” which incorporates two contradictory challenges faced by today’s managers. 64 First, managers must explore new opportunities and adjust to volatile markets in order to avoid complacency. They must ensure that they maintain adaptability and remain proactive in expanding and/or modifying their product–market scope to anticipate and satisfy market conditions. Such competencies are especially challenging when change is rapid and unpredictable.

adaptibility

managers’ exploration of new opportunities and adjustment to volatile markets in order to avoid complacency.

Second, managers must also effectively exploit the value of their existing assets and competencies. They need to have alignment , which is a clear sense of how value is being created in the short term and how activities are integrated and properly coordinated. 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.

alignment

managers’ clear sense of how value is being created in the short term and how activities are integrated and properly coordinated.

Handling such opposing demands is difficult because there will always be some degree of conflict. Firms often suffer when they place too strong a priority on either adaptability or alignment. If it places too much focus on adaptability, the firm will suffer low profitability in the short term. If managers direct their efforts primarily at alignment, they will likely miss out on promising business opportunities.

Ambidextrous Organizations: Key Design Attributes

A study by Charles O’Reilly and Michael Tushman 65 provides some insights into how some firms were able to create successful ambidextrous organizational designs . They investigated companies that attempted to simultaneously pursue modest, incremental innovations as well as more dramatic, breakthrough innovations. The team investigated 35 attempts to launch breakthrough innovations undertaken by 15 business units in nine different industries. They studied the organizational designs and the processes, systems, and cultures associated with the breakthrough projects as well as their impact on the operations and performance of the traditional businesses.

ambidextrous organizational designs

organizational designs that attempt to simultaneously pursue modest, incremental innovations as well as more dramatic, breakthrough innovations.

Companies structured their breakthrough projects in one of four primary ways:

•   Seven were carried out within existing functional organizational structures. The projects were completely integrated into the regular organizational and management structure.

•   Nine were organized as cross-functional teams. The groups operated within the established organization but outside of the existing management structure.

•   Four were organized as unsupported teams. Here, they became independent units set up outside the established organization and management hierarchy.

•   Fifteen were conducted within ambidextrous organizations. Here, the breakthrough efforts were organized within structurally independent units, each having its own processes, structures, and cultures. However, they were integrated into the existing senior management structure.

The performance results of the 35 initiatives were tracked along two dimensions:

•   Their success in creating desired innovations was measured by either the actual commercial results of the new product or the application of practical market or technical learning.

•   The performance of the existing business was evaluated.

The study found that the organizational structure and management practices employed had a direct and significant impact on the performance of both the breakthrough initiative and the traditional business. The ambidextrous organizational designs were more effective

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than the other three designs on both dimensions: launching breakthrough products or services (i.e., adaptation) and improving the performance of the existing business (i.e., alignment).

Why Was the Ambidextrous Organization the Most Effective Structure?

The study found that there were many factors. A clear and compelling vision, consistently communicated by the company’s senior management team was critical in building the ambidextrous designs. The structure enabled cross-fertilization while avoiding cross-contamination. The tight coordination and integration at the managerial levels enabled the newer units to share important resources from the traditional units such as cash, talent, and expertise. Such sharing was encouraged and facilitated by effective reward systems that emphasized overall company goals. The organizational separation ensured that the new units’ distinctive processes, structures, and cultures were not overwhelmed by the forces of “business as usual.” The established units were shielded from the distractions of launching new businesses, and they continued to focus all of their attention and energy on refining their operations, enhancing their products, and serving their customers.

ISSUE FOR DEBATE

Nearly half of the hotel rooms booked in the United States are booked through online travel agents (OTAs), such as Priceline.com and Travelocity.com . These online sites grew from handling $2 billion to $15 billion worth of reservations from 2001 to 2011. Initially, these sites were viewed favorably by the major hotel chains. They gave easy access to customers at a lower cost than traditional travel agents.

Over time, the hotel chains’ perspective regarding the OTAs changed. The fees they charge have grown over time and now account for up to 30 percent of the cost of hotel rooms. This put a real squeeze on the hotel chains. The margins in the hotel industry are fairly low to begin with, and with the OTAs taking a bigger slice, there was little left for the chains. Additionally, they altered the dynamics between hotels and customers. Customers increasingly viewed their preferred OTA as the firm they interacted with and saw less value in the individual brands of hotels. As a result, they became more price-focused and less loyal to a given hotel chain.

Six major chains of hotels, including Hilton, Hyatt, and Choice Hotels, responded to this issue by deciding to cooperate with each other in developing their own joint hotel booking website, Roomkey.com . This site was designed to offer similar pricing as the other OTAs but do so with much lower fees, leaving more of the customers’ payments in the pockets of the hotels. Also, the site would allow the hotels to provide more information and more up-to-date information on the individual hotels than the OTAs typically offered. Finally, the hotel chains guaranteed that customers on Roomkey.com would receive full loyalty program benefits for their stays that were booked on the site.

Whether Roomkey.com is the answer to the hotel chains problems with the OTAs is unclear at this point. There are signs that it is off to a nice start. Launched in January 2012, the site was up to 14 million monthly visitors by September 2012. The site also signed up additional chains, including the La Quinta, Millenium, and Vantage Hospitality chains. The system now includes over 50,000 individual hotel locations. On the other hand, it isn’t

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yet clear whether Roomkey.com is eating into the OTA business. While Roomkey.com has generated significant traffic, most of the visitors started at the chains’ own websites and responded to an ad there to get to Roomkey.com . Few of the visitors, only 10 percent according to an analysis by Compete.com , went to Roomkey.com without being prompted by one of the hotel chains’ sites.

Discussion Questions

1.   Do you think Roomkey.com will be successful? Why or why not?

2.   What actions can Roomkey.com take to try to pull more business away from the OTAs?

3.   How can the chains use Roomkey.com to improve their position relative to OTAs even while it is unclear whether or not Roomkey.com will take off?

Sources: Robinson-Jacobs, K. 2012. Hotels unite to take on dot-coms. Dallas Morning News, January 23: 1D, 4D; Solinsky, S. 2012. The curious identity of Roomkey.com . compete.com , September 18: np; DeLollis, B. 2012. Roomkey.com hotel chain adds more chains. usatoday.com , September 24: np; and Bilbao, R. 2012. Five minutes with John Davis, SEO, Roomkey.com . bizjournals.com . May 25: np.

Reflecting on Career Implications …

   Boundaryless Organizational Designs: Does your firm have structural mechanisms (e.g., culture, human resources practices) that facilitate sharing information across boundaries? Regardless of the level of boundarylessness of your organization, a key issue for your career is the extent to which you are able to cut across boundaries within your organization. Such boundaryless behavior on your part will enable you to enhance and leverage your human capital. Evaluate how boundaryless you are within your organizational context. What actions can you take to become even more boundaryless?

   Horizontal Systems and Processes: One of the approaches suggested in the chapter to improve boundarylessness within organizations is reengineering. Analyze the work you are currently doing and think of ways in which it can be reengineered to improve quality, accelerate response time, and lower cost. Consider presenting the results of your analysis to your immediate superiors. Do you think they will be receptive to your suggestions?

   Ambidextrous Organizations: Firms that achieve adaptability and alignment are considered ambidextrous. As an individual, you can also strive to be ambidextrous. Evaluate your own ambidexterity by assessing your adaptability (your ability to change in response to changes around you) and alignment (how good you are at exploiting your existing competencies). What steps can you take to improve your ambidexterity?

summary

Successful organizations must ensure that they have the proper type of organizational structure. Furthermore, they must ensure that their firms incorporate the necessary integration and processes so that the internal and external boundaries of their firms are flexible and permeable. Such a need is increasingly important as the environments of firms become more complex, rapidly changing, and unpredictable.

In the first section of the chapter, we discussed the growth patterns of large corporations. Although most organizations remain small or die, some firms continue to grow in terms of revenues, vertical integration, and diversity of products and services. In addition, their geographical scope may increase to include international operations. We traced the dominant pattern of growth, which evolves from a simple structure to a functional structure as a firm grows in terms of size and increases its level of vertical integration. After a firm expands into related products and services, its structure changes from a functional to a divisional form of organization. Finally, when the firm enters international markets, its structure again changes to accommodate the change in strategy.

We also addressed the different types of organizational structure—simple, functional, divisional (including two variations—strategic business unit and holding company), and matrix—as well as their relative advantages and disadvantages. We closed the section with a discussion of the implications for structure when a firm enters international markets. The three primary factors to take into account when determining the appropriate structure are type of international strategy, product diversity, and the extent to which a firm is dependent on foreign sales.

The second section of the chapter introduced the concept of the boundaryless organization. We did not suggest that the concept of the boundaryless organization

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replaces the traditional forms of organizational structure. Rather, it should complement them. This is necessary to cope with the increasing complexity and change in the competitive environment. We addressed three types of boundaryless organizations. The barrier-free type focuses on the need for the internal and external boundaries of a firm to be more flexible and permeable. The modular type emphasizes the strategic outsourcing of noncore activities. The virtual type centers on the strategic benefits of alliances and the forming of network organizations. We discussed both the advantages and disadvantages of each type of boundaryless organization as well as suggested some techniques and processes that are necessary to successfully implement them. These are common culture and values, horizontal organizational structures, horizontal systems and processes, communications and information technologies, and human resource practices.

The final section addresses the need for managers to develop ambidextrous organizations. In today’s rapidly changing global environment, managers must be responsive and proactive in order to take advantage of new opportunities. At the same time, they must effectively integrate and coordinate existing operations. Such requirements call for organizational designs that establish project teams that are structurally independent units, with each having its own processes, structures, and cultures. But, at the same time, each unit needs to be effectively integrated into the existing management hierarchy.

SUMMARY REVIEW QUESTIONS

1.   Why is it important for managers to carefully consider the type of organizational structure that they use to implement their strategies?

2.   Briefly trace the dominant growth pattern of major corporations from simple structure to functional structure to divisional structure. Discuss the relationship between a firm’s strategy and its structure.

3.   What are the relative advantages and disadvantages of the types of organizational structure—simple, functional, divisional, matrix—discussed in the chapter?

4.   When a firm expands its operations into foreign markets, what are the three most important factors to take into account in deciding what type of structure is most appropriate? What are the types of international structures discussed in the text and what are the relationships between strategy and structure?

5.   Briefly describe the three different types of boundaryless organizations: barrier-free, modular, and virtual.

6.   What are some of the key attributes of effective groups? Ineffective groups?

7.   What are the advantages and disadvantages of the three types of boundaryless organizations: barrier-free, modular, and virtual?

8.   When are ambidextrous organizational designs necessary? What are some of their key attributes?

key terms

organizational structure

simple organizational structure

functional organizational structure

divisional organizational structure

strategic business unit (SBU) structure

holding company structure

matrix organizational structure

international division structure

geographic-area division structure

worldwide matrix structure

worldwide functional structure

worldwide product division structure

global start-up

boundaryless organizational designs

barrier-free organization

modular organization

virtual organization

horizontal organizational structures

adaptability

alignment

ambidextrous organizational designs

experiential exercise

Many firms have recently moved toward a modular structure. For example, they have increasingly outsourced many of their information technology (IT) activities. Identify three such organizations. Using secondary sources, evaluate (1) the firm’s rationale for IT outsourcing and (2) the implications for performance.

	Firm	Rationale	Implication(s) for Performance
1.
2.
3.

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application questions & exercises

1.   Select an organization that competes in an industry in which you are particularly interested. Go on the Internet and determine what type of organizational structure this organization has. In your view, is it consistent with the strategy that it has chosen to implement? Why? Why not?

2.   Choose an article from Bloomberg Businessweek, Fortune, Forbes, Fast Company, or any other well-known publication that deals with a corporation that has undergone a significant change in its strategic direction. What are the implications for the structure of this organization?

3.   Go on the Internet and look up some of the public statements or speeches of an executive in a major corporation about a significant initiative such as entering into a joint venture or launching a new product line. What do you feel are the implications for making the internal and external barriers of the firm more flexible and permeable? Does the executive discuss processes, procedures, integrating mechanisms, or cultural issues that should serve this purpose? Or are other issues discussed that enable a firm to become more boundaryless?

4.   Look up a recent article in the publications listed in question 2 above that addresses a firm’s involvement in outsourcing (modular organization) or in strategic alliance or network organizations (virtual organization). Was the firm successful or unsuccessful in this endeavor? Why? Why not?

ethics questions

1.   If a firm has a divisional structure and places extreme pressures on its divisional executives to meet short-term profitability goals (e.g., quarterly income), could this raise some ethical considerations? Why? Why not?

2.   If a firm enters into a strategic alliance but does not exercise appropriate behavioral control of its employees (in terms of culture, rewards and incentives, and boundaries—as discussed in Chapter 9 ) that are involved in the alliance, what ethical issues could arise? What could be the potential long-term and short-term downside for the firm?

references

1 .      Wilson, K. & Doz, Y. 2012. 10 rules for managing global innovation. Harvard Business Review, 90(10): 84–92; Wallace, J. 2007. Update on problems joining 787 fuselage sections. Seattlepi.com , June 7: np; Peterson, K. 2011. Special report: A wing and a prayer: Outsourcing at Boeing. Reuters.com , January 20: np; Hiltzik, M. 2011. 787 Dreamliner teaches Boeing costly lesson on outsourcing. Latimes.com , February 15: np; and Gates, D. 2013. Boeing 787’s problems blamed on outsourcing, lack of oversight. Seattletimes.com , February 2: np.

2 .      For a unique perspective on organization design, see: Rao, R. 2010. What 17th century pirates can teach us about job design. Harvard Business Review, 88(10): 44.

3 .      This introductory discussion draws upon Hall, R. H. 2002. Organizations: Structures, processes, and outcomes (8th ed.). Upper Saddle River, NJ: Prentice Hall; and Duncan, R. E. 1979. What is the right organization structure? Decision-tree analysis provides the right answer. Organizational Dynamics, 7(3): 59–80. For an insightful discussion of strategy-structure relationships in the organization theory and strategic management literatures, refer to Keats, B. & O’Neill, H. M. 2001. Organization structure: Looking through a strategy lens. In Hitt, M. A., Freeman, R. E., & Harrison, J. S. 2001. The Blackwell handbook of strategic management: 520–542. Malden, MA: Blackwell.

4 .      Gratton, L. 2011. The end of the middle manager. Harvard Business Review, 89(1/2): 36.

5 .      An interesting discussion on the role of organizational design in strategy execution is in: Neilson, G. L., Martin, K. L., & Powers, E. 2009. The secrets to successful strategy execution. Harvard Business Review, 87(2): 60–70.

6 .      This discussion draws upon Chandler, A. D. 1962. Strategy and structure. Cambridge, MA: MIT Press; Galbraith J. R. & Kazanjian, R. K. 1986. Strategy implementation: The role of structure and process. St. Paul, MN: West Publishing; and Scott, B. R. 1971. Stages of corporate development. Intercollegiate Case Clearing House, 9-371-294, BP 998. Harvard Business School.

7 .      Our discussion of the different types of organizational structures draws on a variety of sources, including Galbraith & Kazanjian, op. cit.; Hrebiniak, L. G. & Joyce, W. F. 1984. Implementing strategy. New York: Macmillan; Distelzweig, H. 2000. Organizational structure. In Helms, M. M. (Ed.). Encyclopedia of management: 692–699. Farmington Hills, MI: Gale; and Dess, G. G. & Miller, A. 1993. Strategic management. New York: McGraw-Hill.

8 .      A discussion of an innovative organizational design is in: Garvin, D. A. & Levesque, L. C. 2009. The multiunit enterprise. Harvard Business Review, 87(2): 106–117.

9 .      Schein, E. H. 1996. Three cultures of management: The key to organizational learning. Sloan Management Review, 38(1): 9–20.

10 .    Insights on governance implications for multidivisional forms are in: Verbeke, A. & Kenworthy, T. P. 2008. Multidivisional vs. metanational governance. Journal of International Business, 39(6): 940–956.

11 .    Martin, J. A. & Eisenhardt, K. 2010. Rewiring: Cross-business-unit collaborations in multibusiness organizations. Academy of Management Journal, 53(2): 265–301.

12 .    For a discussion of performance implications, refer to Hoskisson, R. E. 1987. Multidivisional structure and performance: The contingency of diversification strategy. Academy of Management Journal, 29: 625–644.

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13 .    For a thorough and seminal discussion of the evolution toward the divisional form of organizational structure in the United States, refer to Chandler, op. cit. A rigorous empirical study of the strategy and structure relationship is found in Rumelt, R. P. 1974. Strategy, structure, and economic performance. Cambridge, MA: Harvard Business School Press.

14 .    Ghoshal S. & Bartlett, C. A. 1995. Changing the role of management: Beyond structure to processes. Harvard Business Review, 73(1): 88.

15 .    Koppel, B. 2000. Synergy in ketchup? Forbes, February 7: 68–69; and Hitt, M. A., Ireland, R. D., & Hoskisson, R. E. 2001. Strategic management: Competitiveness and globalization (4th ed.). Cincinnati, OH: Southwestern Publishing.

16 .    Pitts, R. A. 1977. Strategies and structures for diversification. Academy of Management Journal, 20(2): 197–208.

17 .    Silvestri, L. 2012. The evolution of organizational structure. footnote 1.com , June 6: np.

18 .    Andersen, M. M., Froholdt, M., Poulfelt, F. 2010. Return on strategy: How to achieve it. New York: Routledge.

19 .    Haas, M. R. 2010. The double-edged swords of autonomy and external knowledge: Analyzing team effectiveness in a multinational organization. Academy of Management Journal, 53(5): 989–1008.

20 .    Daniels, J. D., Pitts, R. A., & Tretter, M. J. 1984. Strategy and structure of U.S. multinationals: An exploratory study. Academy of Management Journal, 27(2): 292–307.

21 .    Habib, M. M. & Victor, B. 1991. Strategy, structure, and performance of U.S. manufacturing and service MNCs: A comparative analysis. Strategic Management Journal, 12(8): 589–606.

22 .    Our discussion of global startups draws from Oviatt, B. M. & McDougall, P. P. 2005. The internationalization of entrepreneurship. Journal of International Business Studies, 36(1): 2–8; Oviatt, B. M. & McDougall, P. P. 1994. Toward a theory of international new ventures. Journal of International Business Studies, 25(1): 45–64; and Oviatt, B. M. & McDougall, P. P. 1995. Global start-ups: Entrepreneurs on a worldwide stage. Academy of Management Executive, 9(2): 30–43.

23 .    Some useful guidelines for global start-ups are provided in Kuemmerle, W. 2005. The entrepreneur’s path for global expansion. MIT Sloan Management Review, 46(2): 42–50.

24 .    See, for example, Miller, D. & Friesen, P. H. 1980. Momentum and revolution in organizational structure. Administrative Science Quarterly, 13: 65–91.

25 .    Many authors have argued that a firm’s structure can influence its strategy and performance. These include Amburgey, T. L. & Dacin, T. 1995. As the left foot follows the right? The dynamics of strategic and structural change. Academy of Management Journal, 37: 1427–1452; Dawn, K. & Amburgey, T. L. 1991. Organizational inertia and momentum: A dynamic model of strategic change. Academy of Management Journal, 34: 591–612; Fredrickson, J. W. 1986. The strategic decision process and organization structure. Academy of Management Review, 11: 280–297; Hall, D. J. & Saias, M. A. 1980. Strategy follows structure! Strategic Management Journal, 1: 149–164; and Burgelman, R. A. 1983. A model of the interaction of strategic behavior, corporate context, and the concept of strategy. Academy of Management Review, 8: 61–70.

26 .    An interesting discussion on how the Internet has affected the boundaries of firms can be found in Afuah, A. 2003. Redefining firm boundaries in the face of the Internet: Are firms really shrinking? Academy of Management Review, 28(1): 34–53.

27 .    Collis & Montgomery, op. cit.

28 .    Govindarajan, V. G. & Trimble, C. 2010. Stop the innovation wars. Harvard Business Review, 88(7/8): 76–83.

29 .    For a discussion of the role of coaching on developing high performance teams, refer to Kets de Vries, M. F. R. 2005. Leadership group coaching in action: The zen of creating high performance teams. Academy of Management Executive, 19(1): 77–89.

30 .    Pfeffer, J. 1998. The human equation: Building profits by putting people first. Cambridge, MA: Harvard Business School Press.

31 .    For a discussion on how functional area diversity affects performance, see Bunderson, J. S. & Sutcliffe, K. M. 2002.   Academy of Management Journal, 45(5): 875–893.

32 .    See, for example, Hoskisson, R. E., Hill, C. W. L., & Kim, H. 1993. The multidivisional structure: Organizational fossil or source of value? Journal of Management, 19(2): 269–298.

33 .    Pottruck, D. A. 1997. Speech delivered by the co-CEO of Charles Schwab Co., Inc., to the Retail Leadership Meeting, San Francisco, CA, January 30; and Miller, W. 1999. Building the ultimate resource. Management Review, January: 42–45.

34 .    Public-private partnerships are addressed in: Engardio, P. 2009. State capitalism. BusinessWeek, February 9: 38–43.

35 .    Aller, R., Weiner, H., & Weilart, M. 2005.   IBM and Mayo collaborating to customize patient treatment plans. cap.org , January: np; and McGee, M. 2010. IBM, Mayo partner on aneurysm diagnostics. informationweek.com , January 25: np.

36 .    Anonymous. 2013. Automakers in alliance to speed fuel-cell development. latimes.com , January 29: np.

37 .    Dess, G. G., Rasheed, A. M. A., McLaughlin, K. J., & Priem, R. 1995. The new corporate architecture. Academy of Management Executive, 9(3): 7–20.

38 .    Barnes, C. 1998. A fatal case. Fast Company, February–March: 173.

39 .    Handy, C. 1989. The age of unreason. Boston: Harvard Business School Press; Ramstead, E. 1997. APC maker’s low-tech formula: Start with the box. The Wall Street Journal, December 29: B1; Mussberg, W. 1997. Thin screen PCs are looking good but still fall flat. The Wall Street Journal, January 2: 9; Brown, E. 1997. Monorail: Low cost PCs. Fortune, July 7: 106–108; and Young, M. 1996. Ex-Compaq executives start new company. Computer Reseller News, November 11: 181.

40 .    An original discussion on how open-sourcing could help the Big 3 automobile companies is in: Jarvis, J. 2009. How the Google model could help Detroit. BusinessWeek, February 9: 32–36.

41 .    For a discussion of some of the downsides of outsourcing, refer to Rossetti, C. & Choi, T. Y. 2005. On the dark side of strategic sourcing: Experiences from the aerospace industry. Academy of Management Executive, 19(1): 46–60.

42 .    Tully, S. 1993. The modular corporation. Fortune, February 8: 196.

43 .    Offshoring in manufacturing firms is addressed in: Coucke, K. & Sleuwaegen, L. 2008. Offshoring as a survival strategy: Evidence from manufacturing firms in Belgium. Journal of International Business Studies, 39(8): 1261–1277.

342

44 .    Quinn, J. B. 1992. Intelligent enterprise: A knowledge and service based paradigm for industry. New York: Free Press.

45 .    For an insightful perspective on outsourcing and its role in developing capabilities, read Gottfredson, M., Puryear, R., & Phillips, C. 2005. Strategic sourcing: From periphery to the core. Harvard Business Review, 83(4): 132–139.

46 .    This discussion draws upon Quinn, J. B. & Hilmer, F. C. 1994. Strategic outsourcing. Sloan Management Review, 35(4): 43–55.

47 .    Reitzig, M. & Wagner, S. 2010. The hidden costs of outsourcing: Evidence from patent data. Strategic Management Journal. 31(11): 1183–1201.

48 .    Insights on outsourcing and private branding can be found in: Cehn, S-F. S. 2009. A transaction cost rationale for private branding and its implications for the choice of domestic vs. offshore outsourcing. Journal of International Business Strategy, 40(1): 156–175.

49 .    For an insightful perspective on the use of outsourcing for decision analysis, read: Davenport, T. H. & Iyer, B. 2009. Should you outsource your brain? Harvard Business Review, 87(2): 38.

50 .    See also Stuckey, J. & White, D. 1993. When and when not to vertically integrate. Sloan Management Review, Spring: 71–81; Harrar, G. 1993. Outsource tales. Forbes ASAP, June 7: 37–39, 42; and Davis, E. W. 1992. Global outsourcing: Have U.S. managers thrown the baby out with the bath water? Business Horizons, July–August: 58–64.

51 .    For a discussion of knowledge creation through alliances, refer to Inkpen, A. C. 1996. Creating knowledge through collaboration. California Management Review, 39(1): 123–140; and Mowery, D. C., Oxley, J. E., & Silverman, B. S. 1996. Strategic alliances and interfirm knowledge transfer. Strategic Management Journal, 17 (Special Issue, Winter): 77–92.

52 .    Doz, Y. & Hamel, G. 1998. Alliance advantage: The art of creating value through partnering. Boston: Harvard Business School Press.

53 .    DeSanctis, G., Glass, J. T., & Ensing, I. M. 2002. Organizational designs for R&D. Academy of Management Executive, 16(3): 55–66.

54 .    Barringer, B. R. & Harrison, J. S. 2000. Walking a tightrope: Creating value through interorganizational alliances. Journal of Management, 26: 367–403.

55 .    One contemporary example of virtual organizations is R&D consortia. For an insightful discussion, refer to Sakaibara, M. 2002. Formation of R&D consortia: Industry and company effects. Strategic Management Journal, 23(11): 1033–1050.

56 .    Bartness, A. & Cerny, K. 1993. Building competitive advantage through a global network of capabilities. California Management Review, Winter: 78–103. For an insightful historical discussion of the usefulness of alliances in the computer industry, see Moore, J. F. 1993. Predators and prey: A new ecology of competition. Harvard Business Review, 71(3): 75–86.

57 .    See Lorange, P. & Roos, J. 1991. Why some strategic alliances succeed and others fail. Journal of Business Strategy, January–February: 25–30; and Slowinski, G. 1992. The human touch in strategic alliances. Mergers and Acquisitions, July–August: 44–47. A compelling argument for strategic alliances is provided by Ohmae, K. 1989. The global logic of strategic alliances. Harvard Business Review, 67(2): 143–154.

58 .    Some of the downsides of alliances are discussed in Das, T. K. & Teng, B. S. 2000. Instabilities of strategic alliances: An internal tensions perspective. Organization Science, 11: 77–106.

59 .    This section draws upon Dess, G. G. & Picken, J. C. 1997. Mission critical. Burr Ridge, IL: Irwin Professional Publishing.

60 .    Katzenbach, J. R. & Smith, D. K. 1994. The wisdom of teams: Creating the high performance organization. New York: HarperBusiness.

61 .    Bryant, A. 2011. The corner office. New York: St. Martin’s Griffin, 230.

62 .    Hammer, M. & Champy, J. 1993. Reengineering the corporation: A manifesto for business revolution. New York: HarperCollins.

63 .    Gupta, A. 2011. The relational perspective and east meets west. Academy of Management Perspectives, 25(3): 19–27.

64 .    This section draws on Birkinshaw, J. & Gibson, C. 2004. Building ambidexterity into an organization. MIT Sloan Management Review, 45(4): 47–55; and Gibson, C. B. & Birkinshaw, J. 2004. The antecedents, consequences, and mediating role of organizational ambidexterity. Academy of Management Journal, 47(2): 209–226. Robert Duncan is generally credited with being the first to coin the term “ambidextrous organizations” in his article entitled: Designing dual structures for innovation. In Kilmann, R. H., Pondy, L. R., & Slevin, D. (Eds.). 1976. The management of organizations, vol. 1: 167–188. For a seminal academic discussion of the concept of exploration and exploitation, which parallels adaptation and alignment, refer to: March, J. G. 1991. Exploration and exploitation in organizational learning. Organization Science, 2: 71–86.

65 .    This section is based on O’Reilly, C. A. & Tushman, M. L. 2004. The ambidextrous organization. Harvard Business Review, 82(4): 74–81.