11 Organizational Design

Organizational Design

Joe Mahoney

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The Basic Tasks of Organization

ORGANIZATIONAL CHALLENGE: design structure & systems that:

Permit specialization

Facilitate coordination by grouping individuals & link groups with systems of communication, decision making, & control

Deploy incentives to align individual & firm goals

Achieving high levels of productivity requires SPECIALIZATION

Specialization by individuals necessitates COORDINATION

For coordination to be effective requires COOPERATION

But goals of employees = goals of owners

THE AGENCY PROBLEM

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ORGANIZATIONAL CHALLENGE

: design structure & systems

that:


Facilitate coordination by grouping individuals & link

groups with systems of communication, decision making,

& control






THE AGENCY PROBLEM

How to Organize for Competitive Advantage

Organizational design

Goal is to translate strategies into realized ones

Structure

Processes

Procedures

Structure follows strategies

Structure must be flexible

Yahoo failed to make changes to their organizational structure.

Jerry Young ousted in 2008.

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2000South-Western College PublishingCincinnati, OhioDaft, Organizational Theory and Design, 7/e

Choice Processes in the Carnegie Model

Hold joint discussion

and interpret goals

and problems

Share opinions

Establish problem

priorities

Obtain social support

for problem, solution

Adopt the first

alternative

that is acceptable

to the coalition

Conduct a simple,

local search

Use established

procedures if

appropriate

Create a solution

if needed

Managers have

diverse goals,

opinions, values,

experience

Information is

limited

Managers have

many constraints

Uncertainty

Coalition Formation

Search

Satisficing

Conflict

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Copyright 1998 by Houghton Mifflin Company. All rights reserved.

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Sources of

Bureaucratic Costs

Number of

Middle

Managers

Motivational

Problems

Coordination

Problem

Information

Distortion

Bureaucratic

Costs

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10

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Organizational Inertia and the Failure of Established Firms

Organizational inertia

Resistance to change

Often leads to failure because of the environmental dynamics: competition, technology, strategyetc.

Organizational strategy and structure are not static But rather are dynamic!

A tightly-coupled and coherent activity system that works well in a static environment may be subject to problems of inertia in a dynamic environment.

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INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3.

The Key Elements of Organizational Structure

Organizational structure determines

Work efforts of individuals and teams

Resource distribution

Key building blocks

Specialization

Formalization

Centralization

Hierarchy

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Specialization: degree to which a task is divided

Division of labor

Example: U.S. Military (Army, Air Force, Navy, Marines)

Formalization: codified rules and formal procedures

Detailed written rules and policies

Examples: NASA, McDonalds

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Centralization: where the decision is made

Centralized decision making slow response time and reduced customer satisfaction

Example: BPs Mexican Gulf Oil Spill

Hierarchy: formal, position-based reporting lines

Tall structure vs. flat structure

Tall structure higher degree of centralization

Flat structure lower degree of centralization

Span of control

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Assembling the Pieces: Mechanistic vs. Organic Organizations

Organic organizations

Low degree of specialization and formalization

Flat structure

Decentralized decision making

Uses virtual team due to information technology

Examples: Zappos, W. L. Gore, and many high-tech firms

Mechanistic organizations

High degree of specialization and formalization

Tall hierarchy

Centralized decision making

Example: McDonalds

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INSTRUCTOR: Embedded at the bottom of this slide is a link to a 10-minute video by MIT professor Andrew McAfee on how Web 2.0 may change the workplace.

https://www.mckinseyquarterly.com/Business_Technology/BT_Strategy/How_Web_2_0_is_changing_the_way_we_work_An_interview_with_MITs_Andrew_McAfee_2468?gp=1

Mechanistic vs. Organic Organization

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Matching Strategy and Structure

Simple structure

Small firms with low complexity

Top management makes all important strategic decisions

Low degree of formalization and specialization

A basic organizational structure

Examples: small advertising, consulting, accounting, and law firms

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INSTRUCTOR: An interactive exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.5.

Changing Organizational Structures and Increasing Complexity as Firms Grow

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Functional Structure

Functional structure

Groups of employees with distinct functional areas

The areas of expertise correspond to distinct stages in the company value chain activities

Example: College of Business, Finance Department , etc.

Recommended with narrow products/services

Matches well with business-level strategy

Cost leadership Mechanistic organization

Differentiation Organic organization

Integration strategy Ambidextrous organization

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Typical Functional Structure

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Functional Strategy: Drawbacks

Lacks effective communication channels across departments

Lack of linkage between functions

Often solved the problems by having

cross-functional teams

It cannot effectively address a higher level of diversification

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Multidivisional Structure

Multidivisional structure

Consists of several distinct SBUs

Each SBU is operationally independent

Each leader of SBUs report to the corporate office

Examples:

Zappos is an SBU under Amazon

Skype is an SBU under Microsoft

Paypal is an SBU under eBay

Companies using M-form structure

GE, Honda

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Organizing the Diversified Firm

The multidivisional organization, as documented by Alfred D. Chandler in Strategy and Structure, was pioneered in the 1920s by pioneering firms such as:

DuPont, General Motors, Sears and Standard Oil;

By 1967, two-thirds of Fortune 500 Companies are multidivisional.

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Multidivisional Form

The multidivisional structure was an adaptive response to the strategy of diversification.

Unless (multidivisional) structure follows (diversification) strategy, inefficiency results

Alfred D. Chandler, 1962, Strategy and Structure, p. 314

Dupont ---> multi-divisional

Organizing the Diversified Firm

Three key features of organizational structure:

1. The division of tasks;

2. The depth of the hierarchy (span of control);

3. The extent of authority delegation (how much decentralization?)

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Typical M-Form Structure

Functional Structure

Matrix Structure

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INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.5.

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Copyright 1998 by Houghton Mifflin Company. All rights reserved.

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Oil Division

(Functional

Structure)

Pharmaceuticals

Division (Product

Team Structure)

Plastics Division

(Matrix Structure)

Typical Chemical

Company

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Use with various corporate strategies

Related diversification

Co-opetition among SBUs

Transfer core competences across SBUs

Centralized decision making

Unrelated diversification

Decentralized decision making

Competing for resources

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Matching Corporate-Level Strategy

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(a) Self Organizing Team:

10 interactions

(b) Hierarchy:

4 interactions

How Hierarchy Economizes on Coordination

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Tightly-coupled, integrated system: Change in any part of the system requires system-wide adaptation

Loose-coupled, modular hierarchy: organizing a complex system into sub-systems and components linked by standardized interfaces permits decentralized adaptation

Hierarchy Allows Flexible Adaptation

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Evolutionary Stability of the Multidivisional Form

Parable of the Two Watchmakers

10,000 parts

Watchmaker #1 needs to put all parts together or the watch falls apart and he needs to start all over with his 10,000 parts.

Watchmaker #2 has developed 100 subsystems of 100 parts. This is the principle of near-decomposability (I.e., a system that contains localized sub-systems)

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Evolutionary Stability of the Multidivisional Form

Hierarchical systems (containing sub-systems) will evolve much more rapidly from elementary constituents than will non-hierarchic systems containing the same number of elements.

In organization theory this is called the effectiveness of loose coupling.

The advantage of loose coupling is that if there is poor performance in division 2 it does not lead to failure of the entire system.

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Effectiveness of Multidivisional Form

Effective Divisionalization involves:

Identification of separable economic activities within the firm;

Giving quasi-autonomous standing to each division (usually of a profit center nature);

Monitoring the efficiency performance of each division;

Awarding incentives;

Allocating cash flow to high yield uses; and

Performing strategic planning (diversification, acquisition, and related activities).

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Weaknesses of Multidivisional Form

Dysfunctional Aspects of the Multidivisional:

Emphasis on short-term perspective;

Loss of economies of scope;

Duplication of R&D, marketing, etc.;

Emphasis on financial manipulation instead of developing firm capabilities and resources; and

Large conglomerates may have excessive political power.

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Matrix Structure

A combination of functional and M-form structure

Creation of dual line of authority and reporting lines

Each SBU receives support both horizontally and vertically

Very versatile

Enhanced learning from different SBUs

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Dual-Authority Structure in a Matrix Organization

Product

Manager A

Product

Manager B

Product

Manager C

Product

Manager D

Director

of Product

Operations

Design

Vice

President

Mfg

Vice

President

Marketing

Vice

President

Controller

Procure-

ment

Manager

President

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Typical (Global) Matrix Structure

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Strengths of Matrix structure

Achieves coordination necessary to meet dual demands from environment

Flexible sharing of human resources across products

Suited to complex decisions and frequent changes in unstable environment

Provides opportunity for functional and product skill development

Best in medium-sized organizations with multiple products.

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Weaknesses of Matrix structure

Causes participants to experience dual authority, which can be frustrating and confusing.

Participants need to have good interpersonal skills and extensive training.

Is time-consuming: involves frequent meetings and conflict resolution sessions.

Will not work unless participants understand it and adopt collegial rather than vertical-type relationships.

Requires dual pressure from environment to maintain power balance.

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Matching Global Strategy and Structure


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INSTRUCTOR: Embedded at the bottom of this slide is a link to a 10-minute video by MIT professor Andrew McAfee on how Web 2.0 may change the workplace.

https://www.mckinseyquarterly.com/Business_Technology/BT_Strategy/How_Web_2_0_is_changing_the_way_we_work_An_interview_with_MITs_Andrew_McAfee_2468?gp=1

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INSTRUCTOR: An interactive exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.5.

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ORGANIZATIONAL CHALLENGE

: design structure & systems

that:


Facilitate coordination by grouping individuals & link

groups with systems of communication, decision making,

& control






THE AGENCY PROBLEM

2000

South

-

Western College Publishing

Cincinnati, Ohio

Daft, Organizational Theory and Design, 7/e

11

-

7

Choice Processes in the

Choice Processes in the

Carnegie Model

Carnegie Model

Hold joint discussion

and interpret goals

and problems

Share opinions

Establish problem

priorities

Obtain social support

for problem, solution

Adopt the first

alternative

that is acceptable

to the coalition

Conduct a simple,

local search

Use established

procedures if

appropriate

Create a solution

if needed

Managers have

diverse goals,

opinions, values,

experience

Information is

limited

Managers have

many constraints

Uncertainty

Coalition Formation

Search

Satisficing

Conflict

Copyright

1998 by Houghton Mifflin Company. All rights reserved.

11

-

10

Sources of

Sources of

Bureaucratic Costs

Bureaucratic Costs

Number of

Middle

Managers

Motivational

Problems

Coordination

Problem

Information

Distortion

Bureaucratic

Costs

Multidivisional Form

The multidivisional structure was an adaptive

response to the strategy of diversification.

Unless (multidivisional) structure follows (diversification)

strategy, inefficiency results

Alfred D. Chandler, 1962,

Strategy and Structure

, p. 314

Dupont

---

> multi

-

divisional

Documents

11 Organizational Design