Chapter 11

Organizational Structure

Chapter Summary

This chapter seeks to familiarize you with both perspectives on organizational structure and the major trends in structuring business organizations today. It starts by looking at what have been traditional ways to organize, along with the advantages and disadvantages of each organizational structure.

This chapter examines ways organizations are structured and ways to make those structures most effective. It describes five traditional organizational structures—simple organization, functional structure, divisional structure, matrix structure and product-team structure. The 21st century has seen an accelerating move away from traditional organizational structures toward hybrid adaptations that emphasize an external focus, flexible interaction, interdependency, and a bottom-up approach. Organizations have sought to adapt their traditional structures in this direction by redefining the role of corporate headquarters, rebalancing the need for control vs. coordination, adjusting and reengineering the structure to emphasize strategic activities, downsizing and moving toward self-managing operational activities. 21st century leaders increasingly speak about making their organizations boundaryless, absent internal and external boundaries between units, levels, and locations that lessen the company’s ability to generate and share knowledge.

Learning Objectives

1. Identify four traditional organizational structures, and the pros and cons of each. 2. Explain when one traditional structure is more likely to be used than another. 3. Describe the product-team structure and explain why it is a prototype for the more

open, agile organizational structures frequently called for in today’s global economy. 4. Characterize differences between views on traditional, twentieth-century

organizational structures and twenty-first-century organizational structure needs. 5. Explain five ways improvements have been sought in traditional organizational

structures.6. Describe what is meant by agile, virtual organizations.7. Explain how outsourcing can create agile, virtual organizations, along with its pros

and cons. 8. Explain strategic alliances, along with their basic pros and cons. 9. Explain what is meant by boundaryless organizations and why they are important. 10. Explain why organizations of the future need to be ambidextrous learning

organizations and how this fits into the global economy.

Lecture Outline

I. Traditional Organization Structures and Their Strategy-Related Pros and Cons

A. Organizational structure refers to the formalized arrangement of interaction between and responsibility for the tasks, people, and resources in an organization.

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1. It is most often seen as a chart, often a pyramidal chart, with positions or titles and roles in cascading fashion.

B. Simple Organizational Structure

1. In the smallest business enterprise, a simple structure usually prevails.

a) A simple organizational structure is one where there is an owner and, usually, a few employees and where the arrangement of tasks, responsibilities, and communication is highly informal and accomplished through direct supervision.

b) All strategic and operating decisions are made by the owner, or a small owner-partner team.

c) Because the scope of the firm’s activities is modest, there is little need to formalize roles, communications, and procedures.

d) With the strategic concern primarily being survival, and the likelihood that one bad decision could seriously threaten continued existence, this structure maximizes the owner’s(s’) control.

e) It can also allow rapid response to product/market shifts and the ability to accommodate unique customer demands without major coordination difficulties.

f) This is in part because the owner is directly involved with customers on a regular basis.

g) Simple structures encourage employees to multitask, and they are efficacious in businesses that serve a simple, local product/market or narrow niche.

2. The simple structure can be very demanding on the owner-manager.

a) If it is successful, and starts to grow, this can cause the owner-manager to give increased attention to day-to-day concerns, which may come at the expense of time invested in stepping back and examining strategic questions about the company’s future.

b) At the same time, the company’s reliance on the owner as the central point for all decisions can limit the development of future managers capable of assuming duties that allow the owner time to be a strategist.

c) And, this structure usually requires a multitalented, resourceful owner, good at producing and selling a product or service—and at controlling scarce funds.

3. Most businesses in this country and around the world are of this type.

a) Many survive for a period of time, then go out of business because of financial, owner, or market conditions.

b) Some grow, having been built on an idea or capability that taps a great need for what the company does.

c) As they grow, the need to “get organized” is increasingly heard among owners and a growing number of employees in the growing company.

d) That fortunate circumstance usually leads to the need for a functional organizational structure.

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C. Functional Organizational Structure

1. A functional organizational structure is one on which the tasks, people, and technologies necessary to do the work of the business are divided into separate “functional” groups (such as marketing, operations, and finance) with increasingly formal procedures for coordinating and integrating their activities to provide the business’s products and services.

2. Functional structures predominate in firms with a single or narrow product focus and that have experienced success in their marketplace, leading to increased sales and an increased number of people needed to do the work behind those sales.

a) Such firms require well-defined skills and areas of specialization to build competitive advantages in providing their products or services.

b) Dividing tasks into functional specialties enables the personnel of these firms to concentrate on only one aspect of the necessary work.

c) This allows use of the latest technical skills and develops a high level of efficiency.

3. Product, customer, or technology considerations determine the identity of the parts in a functional structure.

a) Two examples of functional organizations are illustrated in Exhibit 11.2, Functional Organization Structures.

4. The strategic challenge presented by the functional structure is effective coordination of the functional units.

a) The narrow technical expertise achieved through specialization can lead to limited perspectives and to differences in the priorities of the functional units.

b) Specialists may see the firm’s strategic issues primarily as “marketing” problems or “production” problems.

c) The potential conflict among functional units makes the coordinating role of the chief executive critical.

d) Integrating devises are frequently used in functionally organized firms to enhance coordination and to facilitate understanding across functional areas.

D. Divisional Structure

1. When a firm diversifies its product/service lines, covers broad geographic areas, utilizes unrelated market channels, or begins to serve heterogeneous customer groups, a functional structure rapidly becomes inadequate.

a) If a functional structure is retained under these circumstances, production managers may have to oversee the production of numerous and varied products or services, marketing managers may have to create sales programs for vastly different products or sell through vastly

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different distribution channels, and top management may be confronted with excessive coordination demands.

(1) A new organizational structure is often necessary to meet the increased coordination and decision-making requirements that result from increased diversity and size, and the divisional structure is the form often chose.

b) A divisional organizational structure is one in which a set of relatively autonomous units, or divisions, are governed by a central corporate office but where each operating division has its own functional specialists who provide products or services different from those of other divisions.

(1) For many years, global automobile companies have used divisional structures organized by product groups.

(2) Manufacturers often organize sales into divisions based on differences in distribution channels.

c) A divisional structure allows corporate management to delegate authority for the strategic management of distinct business entities—the division.

(1) This expedites decision making in response to varied competitive environments and enables corporate management to concentrate on corporate-level strategic decisions.

(2) The division usually is given profit responsibility, which facilitates accurate assessment of profit and loss.

(3) Exhibit 11.3, Divisional Organizational Structure, illustrates a divisional organizational structure and specifies the strategic advantages and disadvantages of such structures.

2. Strategic Business Unit

a) Some firms encounter difficulty in controlling their divisional operations as the diversity, size, and number of these units continues to increase.

(1) Corporate management may encounter difficulty in evaluating and controlling its numerous, often multi-industry divisions.

(2) Under these conditions, it may become necessary to add another layer of management in order to improve implementation, promote synergy and gain greater control over the diverse business interests.

(3) The strategic business unit (SBU) is an adaptation of the divisional structure whereby various divisions or parts of divisions are grouped together based on some common strategic elements, usually linked to distinct product/market differences.

b) The advantages and disadvantages of the SBU form are very similar to those identified for divisional structures in Exhibit 11.3.

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(1) Added to its potential disadvantages would be the increased costs of coordination with another “pricy” level of management.

3. Holding Company

a) A final form of the divisional organization is the holding company structure, where the corporate entity is a broad collection of often unrelated businesses and divisions such that it (the corporate entity) acts as financial overseer “holding” the ownership interest in the various parts of the company but has little direct managerial involvement.

b) This approach can provide a cost savings over the more active SBU approach since the additional level of “pricy” management is not that much.

(1) The negative, of course, becomes the degree to which the corporate officer is dependent on each business unit’s management team and the lack of control over the decisions those managers make in terms of being able to make timely adjustments or corrections.

4. Matrix Organizational Structure

a) In large companies, increased diversity leads to numerous product and project efforts of major strategic significance.

(1) The result is a need for an organizational form that provides skills and resources where and when they are most vital.

b) The matrix organizational structure is one in which functional and staff personnel are assigned to both a basic functional area and to a project or product manager.

(1) It provides dual channels of authority, performance responsibility, evaluation, and control, as shown in Exhibit 11.4, Matrix Organizational Structure.

(2) The matrix form is intended to make the best use of talented people within a firm by combining the advantages of functional specialization and product-project specialization.

c) The matrix structure also increases the number of middle managers who exercise general management responsibilities (through the project manager role) and, thus, broaden their exposure to organizationwide strategic concerns.

(1) In this way, the matrix structure overcomes a key deficiency of functional organizations while retaining the advantages of functional specialization.

d) Although the matrix structure is easy to design, it is difficult to implement.

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(1) Dual chains of command challenge fundamental organizational orientations.

(2) Negotiating shared responsibilities, the use of resources, and priorities can create misunderstanding or confusion among subordinates.

(3) These problems are heightened in an international context with the complications introduced by distance, language, time, and culture.

5. Product-Team Structure

a) To avoid the deficiencies that might arise from a permanent matrix structure, some firms are accomplishing particular strategic tasks, by means of a “temporary” or “flexible” overlay structure.

(1) This approach, used recently by such firms as NEC, Matsushita, Philips, and Unilever, is meant to take temporary advantage of a matrix-type team while preserving an underlying divisional structure.

(2) This adaptation of the matrix approach has become known as the “product-team structure.”

(3) The product-team structure seeks to simplify and amplify the focus of resources on a narrow but strategically important product, project, market, customer, or innovation.

(4) Exhibit 11.5, The Product-Team Structure, illustrates how the product-team structure looks.

b) The product-team structure assigns functional managers and specialists to a new product, project, or process team that is empowered to make major decisions about their product.

(1) The team is usually created at the inception of the new-product idea, and they stay with it indefinitely if it becomes a viable business.

(2) Instead of being assigned on a temporary basis, as in the matrix structure, team members are assigned permanently to that team in most cases.

(3) This results in much lower coordination costs and, because every function is represented, usually reduces the number of management levels above the team level needed to approve team decisions.

c) It appears that product teams formed at the beginning of product-development processes generate cross-functional understanding that irons out early product or process design problems.

(1) They also reduce costs associated with design, manufacturing, and marketing, while typically speeding up innovation and customer responsiveness because authority rests with the team allowing decisions to be made more quickly.

(2) That ability to make speedier, cost-saving decisions has the added advantage of eliminating the need of one or more management

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layers above the team level, which would traditionally have been in place to review and control these types of decisions.

(3) While seemingly obvious, it has only recently become apparent that those additional management layers were also making these decisions with less firsthand understanding of the issues involved than the cross-functional team members, brought to the product or process in the first place.

(4) Exhibit 11.6, Strategy in Action, gives examples of a product-team approach at several well-known companies and some of the advantages that appear to have accrued.

II. What a Difference a Century Makes

A. Exhibit 11.7, What a Difference a Century Makes, offers a useful perspective for designing effective organizational structures in tomorrow’s global economy.

1. In contrasting twentieth- and twenty-first century corporations on different characteristics, it offers a historical or evolutionary perspective on organizational attributes associated with successful strategy execution today and just a few years ago.

2. Successful organizations once required an internal focus, structured interaction, self-sufficiency, a top-down approach.

3. Today and tomorrow, organizational structure reflects an external focus, flexible interaction, interdependency, and a bottom-up approach.

4. Three fundamental trends are driving decisions about effective organizational structures in the twenty-first century: globalization, the Internet, and speed of decision making.

B. Globalization

1. More than two-thirds of all industry either operates globally or will soon do so. In the past 10 years, the percentage of sales from outside the home market for GE, Wal-Mart, McDonald’s, Nokia, and Toyota grew dramatically (see table in text on page 336).

2. The need for global coordination and innovation is forcing constant experimentation and adjustment to get the right mix of local initiative, information flow, leadership, and corporate culture.

3. Global once meant selling goods in overseas markets.

a) Next was locating operations in numerous countries. b) Today companies will call on talents and resources wherever they can

be found around the globe, just as they now sell worldwide. c) Such companies may be based in the United States, do the software

programming in New Delhi, their engineering in Germany, and their manufacturing in Indonesia.

d) The ramifications for organizational structures are revolutionary.

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C. The Internet

1. The Net fives everyone in the organization, or working with it—from the lowest clerk to the CEO to any supplier or customer—the ability to access a vast array of information—instantaneously, from anywhere.

2. Ideas, requests, and instructions zap around the globe in the blink of an eye.

3. The net allows the global enterprise with different functions, offices, and activities dispersed around the world to be seamlessly connected so that far-flung customers, employees, and suppliers can work together in real time.

4. The result—coordination, communication, and decision-making functions are accomplished quickly and easily, making traditional organizational structures look slow, inefficient, and noncompetitive.

D. Speed

1. Technology, or digitalization, means removing human minds and hands from an organization’s most routine tasks and replacing them with computers and networks.

a) Digitizing everything from employee benefits to accounts receivable to product design cuts cost, time, and payroll, resulting in cost savings and vast improvements in speed.

b) Leading-edge technologies will enable employees throughout the organization to seize opportunity as it arises.

c) These technologies will allow employees, suppliers, and freelancers anywhere in the world to converse in numerous languages online without need for a translator to develop markets, new products, new processes.

d) Again, the ramifications for organizational structures are revolutionary.

2. Whether technology assisted or not, globalization of business activity creates a potential velocity of decision making that challenges traditional hierarchical organizational structures.

3. Faced with major trends, what are managers doing to structure effective organizations?

a) First, we will summarize some key ways managers are changing traditional organizational structures to make them more responsive to this new reality.

b) Second, we will examine current ideas for creating agile, virtual organizations.

III. Initial Efforts to Improve the Effectiveness of Traditional Organizational Structures

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A. Major efforts to improve traditional organizational structures seek to reduce unnecessary control and focus on enhancing core competencies, reducing costs, and opening organizations more fully to outside involvement and influence.

1. One key emphasis in large organizations has been corporate headquarters.

B. Redefine the Role of Corporate Headquarters from Control to Support and Coordination

1. The role of corporate management in multibusiness and multinational companies increasingly face a common dilemma: How can the resource advantages of a large company be exploited, while ensuring the responsiveness and creativity found in the small companies against which each of their businesses compete?

a) Rigorous financial controls and reporting enable cost efficiency, resource deployment, and autonomy across different units; flexible controls are conducive to responsiveness, innovation and “boundary spanning.”

b) Multibusiness companies historically gain advantage by exploiting resources and capabilities across different businesses and markets, yet competitive advantage in the future increasingly depends on the creation of new resources and capabilities.

c) Aggressive portfolio management seeking maximum shareholder value is often best achieved through independent businesses; the creation of competitive advantage increasingly requires the management—recognition and coordination—of business interdependencies.

2. Increasingly, globally engaged, multibusiness companies are changing the role of corporate headquarters from one of control, resource allocation, and performance monitoring to one of coordinator of linkages across multiple businesses, supporter, and enabler of innovation and synergy.

a) One way this has been done is to create an executive council comprised of top managers from each business, usually including four to five of their key managers, with the council then serving as the critical forum for corporate decisions, discussions, and analysis.

b) Exhibit 11.1, Strategy in Action, at the beginning of this chapter showed this type of forum as central to HP’s attempt at radical restructuring.

c) These councils replace the traditional corporate staff function of overseeing and evaluating various business units, replacing it instead with a forum to share business unit plans, to discuss problems and issues, to seek assistance and expertise, and to foster cooperation and innovation.

C. Balance the Demands for Control/Differentiation with the Need for

Coordination/Integration

1. Specialization of work and effort allows a unit to develop greater expertise, focus, and efficiency.

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a) So it is that some organizations adopt functional, or similar, structures. b) Their strategy depends on dividing different activities within the firm

into logical, common groupings—sales, operations, administration, or geography—so that each set of activities can be done most efficiently.

2. The rise of a consumer culture around the world has led brand marketers to realize they need to take a multidomestic approach to be more responsive to local preferences.

D. Restructure to Emphasize and Support Strategically Critical Activities

1. Restructuring is redesigning an organizational structure with the intent of emphasizing and enabling activities most critical to the firm’s strategy to function at maximum effectiveness.

2. At the heart of the restructuring trend is the notion that some activities within a business’s value chain are more critical to the success of the business’s strategy than others.

3. Two developments that have become key ways many firms sought to improve their emphasis and support of strategic activities are business process reengineering, and downsizing/self-management.

E. Reengineer Strategic Business Processes

1. Business process reengineering (BPR), popularized by consultants Michael Hammer and James Champy, is one of the more popular methods by which organizations worldwide have been undergoing restructuring efforts to remain competitive in the twenty-first century.

a) BPR is intended to place the decision-making authority that is most relevant to the customer closer to the customer, in order to make the firm more responsive to the needs of the customer.

b) This is accomplished through a form of empowerment, facilitated by revamping organizational structure.

2. Business reengineering reduces fragmentation by crossing traditional departmental lines and reducing overhead to compress formerly separate steps and tasks that are strategically intertwined in the process of meeting customer needs.

a) This “process orientation,” rather than a traditional functional orientation, becomes the perspective around which various activities and tasks are then grouped to create the building blocks of the organization’s structure.

b) This is usually accomplished by assembling a multifunctional, multilevel team (the product-team approach) that begins by identifying customer needs and how the customer wants to deal with the firm.

c) Customer focus must permeate all phases.

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d) Companies that have successfully reengineered their operations around strategically critical business processes have pursued the following steps:

(1) Develop a flowchart of the total business process, including its interfaces with other value chain activities.

(2) Try to simplify the process first, eliminating tasks and steps where possible and analyzing how to streamline the performance of what remains.

(3) Determine which parts of the process can be automated; consider introducing advanced technologies that can be upgraded to achieve next-generation capability and provide a basis for further productivity gains down the road.

(4) Evaluate each activity in the process to determine whether it is strategy-critical or not. Strategy-critical activities are candidates for benchmarking to achieve best-in-industry or best-in-world performance status—and ones to emphasize in reengineered organizational structures.

(5) Weigh the pros and cons of outsourcing activities that are noncritical or that contribute little to organizational capabilities and core competencies.

(6) Design a structure for performing the activities that remain; reorganize the personnel and groups who perform these activities into the new structure.

e) Exhibit 11.8, Strategy in Action, shows how IBM is still in the process of reengineering.

F. Downsize and Self-Manage: Force Decisions to Operating Level

1. Reengineering, increased use of product-team structures, and the competitive reality of global markets quickly led managers to scrutinize even further the way their organizational structures are crucial to strategy implementation.

a) That scrutiny has led to aggressive downsizing and much greater emphasis on self-management as two important themes influencing the organizational structures of the twenty-first century.

b) Downsizing is eliminating the number of employees, particularly middle management, in a company.

c) The arrival of a global marketplace, information technology, and intense competition caused many companies to reevaluate middle management activities to determine just what value was really being added to the company’s products and services.

d) The result of this scrutiny, along with continuous improvements in information processing technology, has been widespread downsizing of the number of management personnel in thousands of companies worldwide.

e) These companies often eliminate whole levels of management. f) Former GE CEO Jack Welch’s observations about GE’s downsizing and

the results of BusinessWeek’s survey of companies worldwide that have been actively downsizing are shown in Strategy in Action Exhibit 11.9.

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2. One of the outcomes of downsizing was increased self-management at operating levels of the company.

a) Cutbacks in the number of management people left those who remained with more work to do.

b) The result that remained managers had to give up a good measure of control to workers, and they had to rely on those workers to help out.

c) Spans of control, traditionally thought to maximize under 10 people, have become much larger due to information technology, running “lean and mean,” and delegation to lower levels.

d) This delegation, also known as empowerment, is accomplished through concepts such as self-managed work groups, reengineering, and automation.

e) It is also seen through efforts to create distinct businesses within a business—conceiving a business as a confederation of many “small” businesses, rather than one large, interconnected business.

f) Whatever the terminology, the idea is to push decision making down in the organization by allowing major management decisions to be made at operating levels.

g) The result is often the elimination of up to half the levels of management previously existing in an organizational structure.

IV. Creating Agile, Virtual Organizations

A. Twenty-first century corporations will increasingly see their structure become an elaborate network of external and internal relationships.

1. This organizational phenomenon has been termed the virtual organization, which is defined as a temporary network of independent companies—suppliers, customers, subcontractors, even competitors—linked primarily by information technology to share skills, access to markets, and costs.

2. An agile organization is one that identifies a set of business capabilities central to high-profitability operations and then builds a virtual organization around those capabilities, allowing the agile firm to build its business around the core, high-profitability information, services, and products.

3. Creating an agile, virtual organization structure involves outsourcing, strategic alliances, a boundaryless structure, an ambidextrous learning approach, and web-based organization.

4. Let’s examine each of the approaches to creating a virtual organization in more detail.

B. Outsourcing—Creating a Modular Organization

1. Outsourcing was an early driving force for the virtual organization trend.

a) Outsourcing is simply obtaining work previously done by employees inside the companies from sources outside the company.

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(1) Managers have found that as they attempt to restructure their organizations, particularly if they do so from a business process orientation, numerous activities can often be found in their company that are not “strategically critical activities.”

(2) This has particularly been the case of numerous staff activities and administrative control processes previously the domain of various middle management levels in an organization.

(3) But it can also refer to primary activities that are steps in the business’s value chain—purchasing, shipping, manufacturing, and so on.

(4) Further scrutiny has led managers to conclude that these activities either add little or no value to the product or services, or that they can be done much more cost effectively (and competitively) by other businesses specializing in these activities.

(5) If this is so, then the business can enhance its competitive advantage by outsourcing the activities.

b) Choosing to outsource activities has been likened to creating a “modular” organization.

(1) A modular organization provides products or services using different, self-contained specialists or companies brought together—outsourced—to contribute their primary or support activity to result in a successful outcome.

c) Many organizations long ago starting outsourcing functions like payroll, benefits administration—routine administrative functions more easily and cost effectively done by a firm specializing in that activity.

(1) But outsourcing today has moved into virtually every aspect of what a business does to provide the products and services it exists to provide.

(2) Exhibit 11.10, Top Strategist, shows veteran entrepreneur and co-founder of Celestial Seasonings, Wyck Hay, coming back after several years and just recently building a new company, Kaboom Beverages in California.

d) Outsourcing IT services, call center services, and routine computer programming services—and managing a company’s IT systems—have become major industries unto themselves.

(1) IT outsourcing to companies in India alone reached $20 billion in 2005 and is projected to top $50 billion by 2008.

(2) India’s Infosys and Wipro (India’s GE) are multi-billion dollar revenue providers of IT outsourced services.

e) Business process outsourcing (BPO) is the most rapidly growing segment of the outsourcing services industry worldwide, and it is expected to reach more than $200 billion in revenues in 2008.

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f) Perhaps the more controversial trends involve product design and even innovation activities.

g) Outsourcing as a means to create an agile, virtual organization has many potential advantages:

(1) It can lower costs incurred when the activity outsourced is done in-house.

(2) It can reduce the amount of capital a firm must invest in production or service capacity.

(3) The firm’s managers and personnel can concentrate on mission-critical activities.

(4) This concentration and focus allows the firm to control and enhance the source of its core competitive advantage.

(5) Careful selection of outsourced partners allows the firm to potentially learn and develop its abilities through ideas and capabilities that emerge from the growing expertise and scope of work done by the outsource partner for several firms.

h) Outsourcing is not without its “cons,” however; there are several:

(1) Outsourcing involves loss of some control and reliance on “outsiders.”

(2) Outsourcing can create future competitors. (3) Skills important to a product or service are “lost.” (4) Negative reaction from the public and investors. (5) Crafting good legal agreements, especially for services, is difficult.(6) May get locked into long-term contracts at costs that are no longer

competitive.(7) Costs aren’t everything: What if my supplier underbids? (8) Outsourcing can lead to increasingly fragmented work cultures

where low-paid workers get the work done with little initiative or enthusiasm.

i) Its potential disadvantages not withstanding, outsourcing has become a key, standard means by which agile, virtual organization structures are built.

(1) It has become an essential building block, most firms in any market anywhere in the world structure some of their business activities to allow them to remain cost competitive, dynamic, and able to develop their future core competencies.

(2) As outsourcing moves from sourcing manufacturing and IT management to all business management processes, careful attention and efforts to build trust and cross-cultural understanding will be important as will effective contractual arrangements to govern multiyear, ongoing relationships.

C. Strategic Alliances

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1. Strategic alliances are arrangements between two or more companies in which they both contribute capabilities, resources, or expertise to a joint undertaking, usually with an identity of its own, with each firm giving up overall control in return for the potential to participate in and benefit from the joint venture relationship.

a) They are different from outsourcing relationships because the requesting company usually retains control when outsourcing, whereas strategic alliances involve firms giving up overall control to the joint entity, or alliance, in which they become a partner.

b) Strategic alliances can be for long-term or for very short periods.

c) Strategic alliances sometimes put competitors together as partners in some settings while they remain competitors in others.

(1) Exhibit 11.11, Strategy in Action, shows how General Motors, in its effort to become more competitive globally, has entered into numerous alliances with competitors.

e) Strategic alliances have the following pros and cons for firms seeking agile, responsive organizational structures.

2. Advantages

a) Leverages several firms’ core competencies.

(1) This allows alliance members to be more competitive in seeking certain project work; or input.

b) Limits capital investment.

(1) One partner firm does not have to have all the resources necessary to do the work of the alliance.

c) Flexible.

(1) Allows a firm to be involved yet continue to pursue its other, “regular” business opportunities.

d) Networking and relationship building.

(1) Alliances get companies together, sometimes even competitors. (2) It allows key players to build relationships that are valuable, even

if the present alliance doesn’t “pan out.” (3) Alliance partners learn more about each others’ capabilities and

gain advantage or benefit from referrals and other similar behaviors creating win-win situations.

3. Disadvantages

a) Loss of control.

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(1) A firm in an alliance by definition cedes ultimate control to the broader alliance for the undertaking for which the alliance is formed.

(2) This can prove problematic if the alliance doesn’t work out as planned—or is not well planned.

b) Can be hard to establish good management control of the project—loss of operational control.

(1) Where multiple firms have interrelated responsibilities for a sizable, joint project, it should not be difficult to imagine problems arising as the players go about implementing a major project.

(2) It requires good up-front planning and use of intercompany project team groups early on in the bidding process.

c) Can distract a participating company’s management and key players.

(1) One strategic alliance can consume the majority attention of strategic players essential to the overall success of the “home” company.

(2) Whether because of their technical skills, managerial skills, key roles, or all three, the potential for loss focus or time to devote to key responsibilities exists.

d) Control of proprietary information and intellectual property.

4. Where technology development is the focus of the alliance, or maybe part of it, firms partnered together may also compete in other circumstances.

a) Or they may have the potential to do so. b) So partnering together gives each the opportunity to learn much more

about the other, their contacts, capabilities, and unique skills or trade secrets.

5. Strategic alliances have proven a very popular mechanism for many companies seeking to become more agile competitors in today’s dynamic global economy.

a) It has proven a major way for small companies to become involved with large players to the benefit of both—allowing the small player to grow in a way that builds its future survival possibilities and the larger player to tap expertise and knowledge it can no longer afford to retain or develop in-house.

D. Toward Boundaryless Structures

1. Management icon Jack Welch coined the term boundaryless organization, to characterize his vision of what he wanted GE to become: to be able to generate knowledge, share knowledge, and get knowledge to the places it could be best used to provide superior value.

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2. Boundaries, or borders, arise in four “directions” based on the ways we traditionally structure and run organizations:

a) Horizontal boundaries—between different departments or functions in a firm. Salespeople are different from administrative people or operating people or engineering people. One division is separate from another.

b) Vertical boundaries—between operations and management, and levels of management, between “corporate” and “division,” in virtually every organization.

c) Geographic boundaries—between different physical locations; between different countries or regions of the world and between cultures.

d) External interface boundaries—between a company and its customers, suppliers, partners, regulators, and, indeed, its competitors.

3. Outsourcing, strategic alliances, product-team structures, reengineering, restructuring—all are ways to move toward boundaryless organization.

a) Culture and shared values across an organization that value boundaryless behavior and cooperation help enable these efforts to work.

4. As noted at the beginning of this section, globalization has accelerated many changes in the way organizations are structured, and that is certainly driving the recognition by many organizations of their need to become more boundaryless, to become an agile, virtual organization.

a) Technology, particularly driven by the Internet, has and will be a major driver of the boundaryless organization.

5. The Web’s contribution electronically has simultaneously become the best analogy in explaining the future boundaryless organization.

a) And it is not just the Web as in the Internet, but a weblike shape of successful organizational structures in the future.

b) If there are a pair of images that symbolize the vast changes at work, they are the pyramid and the web.

c) The organizational chart of large-scale enterprise had long been defined as a pyramid of ever-shrinking layers leading to an omnipotent CEO at its apex.

d) The twenty-first-century corporation, in contrast, is far more likely to look like a web: a flat, intricately woven form that links partners, employees, external contractors, suppliers, and customers in various collaborations.

e) The players will grow more and more interdependent. f) Fewer companies will try to master all the disciplines necessary to

produce and market their goods but will instead outsource skills—from research and development to manufacturing—to outsiders who can perform those functions with greater efficiency.

g) Exhibit 11.12, From Traditional Structure to B-Web Structure , illustrates this evolution in organization structure to what it calls the B-

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Web, a truly Internet-driven form of organization designed to deliver speedy, customized, service-enhanced products to savvy customers, from an integrated boundaryless B-Web organization, pulling together abundant, world-class resources digitally.

6. Managing this intricate network of partners, spin-off enterprises, contractors, and freelancers will be as important for managing internal operations.

a) Indeed, it will be hard to tell the difference. b) All of these constituents will be directly linked in ways that will make it

nearly impossible for outsiders to know where an individual firm begins and where it ends.

E. Ambidextrous Learning Organization

1. The evolution of the virtual organizational structure as an integral mechanism managers use to implement strategy has brought with it recognition of the central role knowledge plays in this process.

a) Knowledge may be in terms of operating know-how, relationships with knowledge of customer networks, technical knowledge upon which products or processes are based or will be, relationships with key people or a certain person that can get things done quickly, and so forth.

b) Exhibit 11.13, Strategy in Action, shares how McKinsey organizational expert Lowell Bryan sees this shaping future organizational structure with managers becoming knowledge “nodes” through which intricate networks of personal relationships—inside and outside the formal organization—are constantly coordinated to bring together relevant know-how and successful action.

2. A shift from what Subramanian Rangan calls exploitation to exploration indicates the growing importance of organizational structures that enable a learning organization to allow global companies the chance to build competitive advantage.

a) Rather than going to markets to exploit brands or for inexpensive resources, in Rangan’s view, the smart ones are going global to learn.

b) This shift in the intent of the structure, then, is to seek information, to create new competences.

c) Demand in another part of the world could be a new-product trend-setter at home.

d) So a firm’s structure needs to be organized to enable learning, to share knowledge, to create opportunities to create it.

e) Others look to companies like 3M or Procter & Gamble that allow slack time, new-product champions, manager mentors—all put in place in the structure to provide resources, support, and advocacy for cross-functional collaboration leading to innovation in new-product development, and the generation and use of new ideas.

f) This perspective is similar to the boundaryless notion—accommodate the speed of change and therefore opportunity by freeing up historical constraints found in traditional organizational approaches.

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g) So having structures that emphasize coordination over control, that allow flexibility (are ambidextrous), that emphasize the value and importance of informal relationships and interaction over formal systems, techniques, and controls are all characteristics associated with what are seen as effective structures for the twenty-first century.

Discussion Questions and Case

Questions for Discussion

1. Explain each traditional organizational structure.

A simple organization is a structure in which there is an owner and a few employees and where the arrangement of tasks, responsibilities, and communication is highly informal and accomplished through direct supervision. Growth of an organization with a simple structure leads to the need for a functional organizational structure. The functional organization is a structure in which the tasks, people, and technologies necessary to do the work of the business are divided into separate “functional” groups with increasingly formal procedures for coordinating and integrating their activities to provide the business’s products and services. When a firm diversifies its product/service lines, covers broad geographic areas, utilizes unrelated market channels, or begins to serve heterogeneous customer groups, a functional structure rapidly becomes inadequate. A divisional organizational structure is one in which a set of relatively autonomous units, or divisions, are governed by a central corporate office but where each operating division has its own functional specialists who provide products or services different from those of other divisions. A strategic business unit (SBU) is an adaptation of the divisional structure in which various divisions or parts of divisions are grouped together based on some common strategic elements, usually linked to distinct product/market differences. A holding company has a structure in which the corporate entity is a broad collection of often unrelated businesses and divisions such that it acts as financial overseer holding the ownership interest in the various parts of the company, but has little direct management involvement. The matrix organization is a structure in which functional and staff personnel are assigned to both a basic functional area and to a project or product manager. It provides dual channels of authority, performance responsibility, evaluation, and control. Lastly, a product-team structure seeks to simplify and amplify the focus of resources on a narrow but strategically important product, project, market, customer, or innovation. The team is usually created at the inception of the new product idea, and they stay with it indefinitely if it becomes a viable business. Team members are assigned permanently to their team in most cases. The traditional organization structures are discussed in the text on pages 328–334.

2. Select a company you have worked for or research one in the business press that uses one of these traditional structures. How well suited is the structure to the needs and strategy of the organization? What seems to work well, and what doesn’t?

Student responses will vary depending on the organizations in which they have worked or the businesses they choose to research. The student should demonstrate an understanding of the appropriate type of organization structure, which is discussed in the response to question one.

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3. What organizations do you think are most likely to use product-team structures? Why?

A firm that needs to be highly customer responsive would benefit from the product-team structure because changes to the product, process, or service could be made more rapidly in a product-team organization. The structure makes each team more agile and better accommodates the customer’s requests. Likewise, a firm that competes on innovation would benefit from the speed that this structure affords. This organization structure is discussed on pages 333-334 in the text.

4. Identify an organization that operated like a twentieth-century organization but has now adopted a structure that manifests twenty-first-century characteristics. Explain how you see or detect the differences.

General Electric is one organization that used to operate with a twentieth-century approach, focusing on its products and on innovation of those products, but having more of an internal focus, structured interaction, and more of a top-down approach than a horizontal one (a pyramid structure). Today, GE is web-like and has an external focus, interdependency on other firms throughout the world, and an international labor pool. The approach is more bottom-up. Former CEO Jack Welch ushered in this boundaryless organizational approach where the corporate headquarters was supposed to enable the business units to succeed—not to dictate their successes.

5. How would you use one or more of the ways to improve traditional structures to improve the company you last worked in? Explain what might result.

Student responses will vary depending on the last organizations they worked in. Still, every student should be able to offer at least one way to improve upon the traditional structure, or elements of a traditional structure, that were present at that organization.

6. What organization are you familiar with that you would consider the most agile, virtual organization? Why?

Student responses will vary based on personal experience and familiarity with today’s organizations. Students may have to do some research of the business press in order to elaborate on an example.

7. What situation have you personally seen outsourcing benefit?

Student responses will vary based on personal experience. Most students today will have either worked in an organization that used outsourcing or contracted services from other firms, or will be familiar with an example from the business world today.

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Discussion Case 1 – “A Crash Diet for Sara Lee”

Case Summary

This case discusses the recent events at Sara Lee that have brought the company into the twenty-first century. On February 10, the Chicago-based food and consumer-products giant replaced Chief Executive C. Steven McMillan with No. 2 exec, Brenda Barnes. Sara Lee also disclosed it would shed brands totaling 40% of revenues, including its apparel business with names such as Hanes, Champion, and Playtex. While Barnes had been perceived as McMillan’s successor, the transition occurred much sooner than expected. Wall Street reacted positively, with the shares up $1.32, or 5.7%, to $24.30 in midday trading on Feb. 10. The sudden change and scope of the reorganization underscored just how far behind Sara Lee is in having the leadership and business structure to cope with the increasing power of giant retailers such as Wal-Mart Stores. Sara Lee hired Barnes, 50, to bring the company focus. As part of the reorganization, Sara Lee disclosed it would structure its operations around distinct consumer, retail, and geographic markets. North American retail will target the company’s brands at major retailers. Another unit, North American Foodservice, will target food-service businesses such as restaurants and institutions. The third, Sara Lee International, will target brands outside of North America. Sara Lee will also pursue a spin-off of its branded apparel business as a separately traded public company. The unit accounts for nearly a quarter of total sales. It is also selling its European meats business.

The steps build on a plan McMillan put into place last summer to break Sara Lee’s brands into four segments, based on their growth potential. McMillan was late in trying to identify businesses with the most growth potential. Moves like this among other food companies reflect the new reality of global retail, where big players like Wal-Mart increasingly call the shots with suppliers. Those retailers increasingly look for items that sell well, jettisoning those that don’t. Moreover, they want more marketing help and sales information on their wares and increasingly efficient deliveries. The odds are long that Barnes will succeed in trimming brands because Sara Lee is so far behind rivals in taking these steps. The rapid pace in retail competition today makes it even harder to catch up.

Key Issues Addressed

Identify a specific traditional organizational structure and the associated advantages and disadvantages for Sara Lee. Please refer to the section titled “Divisional Structure” on pages 330-332.

Explain how globalization affects the need to structure an organization differently. Please refer to the section titled “Globalization” on pages 334-337.

Explain Sara Lee’s role as a corporation relative to its business units. Please refer to the section titled “Redefine the Role of Corporate Headquarters from Control to Support and Coordination” on pages 338-339.

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Discussion Case 2 – “Online Extra: Turning Two Tech Teams into One”

Case Summary

This case discusses IBM’s decision to sell its PC division to China’s Lenovo Group and the restructuring that came with that decision. When the 28-member transition team that’s integrating China’s Lenovo Group with IBM’s PC division met in Las Vegas in March, they posed for a group photograph. It looks like a portrait from the U.N. The group included 14 Chinese, 10 Americans, and folks from Australia, Singapore, India, and the Netherlands. It’s the responsibility of the management team to make sure that the Lenovans work together better than the U.N. does, however. They must coordinate a 19,000-person staff with outposts in more than 160 countries. It’s a lot of stress. Even basic communications are difficult. Within two months, however, the people working from both sides had an org chart. It was roughly half-Lenovo, half-IBM. The IBM-ers are running sales and marketing—which is what they’re good at, and the Lenovo folks are running procurement and manufacturing. Mary Ma, who spearheaded the negotiations from the Lenovo side, remains CFO. Steve Ward will be CEO, and Yang Yuanqing will be Chairman.

Not everything has gone exactly as Lenovo’s new leaders planned. Originally, the idea was that Yang would be a nonexecutive chairman—helping out with strategy but not playing a day-to-day management role. But after watching Yang conduct a brainstorming session about how to improve the plant’s performance during a joint visit to an IBM ThinkPad factory in Shenzhen, Ward asked Yang to take charge of the company’s supply-chain revamp. Ward had some reservations, too. He had argued for a single headquarters in New York—rather than dual headquarters in China and the U.S.—in part because he wanted no more confusion about who was the boss. Still, later that day, when the two were driving to a Lenovo plant in Huiyang, he went ahead and asked Yang to take on the job. Yang accepted. Both sides seem to be savvy enough o know when something isn’t working. But spotting it quickly and acting fast enough to avoid big trouble—and remaining friends afterwards—will be the key to knitting together the new Lenovo.

Key Issues Addressed

Explain how outsourcing can provide cost savings to a firm. Please refer to the section titled “Balance the Demands for Control/Differentiation with the Need for Coordination/Integration” on page 339.

Explain how restructuring can emphasize and enable activities most critical to the firm’s strategy to function at maximum effectiveness, particularly when combining the efforts of people from two different firms. Please refer to the section titled “Restructure to Emphasize and Support Strategically Critical Activities on page 340.

Show how outsourcing can affect IBM in its new arrangement with Lenovo—explain why it can be very beneficial to be a modular organization. Please refer to the section in the text titled “Outsourcing—Creating a Modular Organization,” on pages 343-347.

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Case Discussion Questions

1. What structural issues and changes were present at Sara Lee? Lenovo/IBM? How were their changes similar?

At Sara Lee, the firm needed to shed many of its businesses in order to remain competitive in today’s environment. Part of this was due to pressure from retail giants like Wal-Mart, that increasingly exercise control over their suppliers. Sara Lee was supplying food, apparel, and other branded products, but the corporate unit was not serving a clear purpose in the roles of its businesses. There was a poor management situation where the crucial moves necessary to make Sara Lee competitive were lagging behind the rest of the industry—and the decisions to divest some units and totally reorganize the rest came years after similar companies were doing the same thing.

At Lenovo and IBM, the changes were more focused as they dealt with the changes between one main division—the PC division—and “the rest.” The decision to sell the PC division came with IBM’s realization that they were not specialized in PC manufacture, and the actual development and production of PCs was not contributing to the company’s core competencies and competitive advantage. Lenovo, a Chinese company, was specialized in research, design, development, and manufacture of PCs, and there was a direct contribution to their competitive advantage by taking on this business unit from IBM. The people from IBM are contributing marketing and sales expertise—related to the company’s new focus on business process engineering, management consulting, and comprehensive business services—and they are doing “what they do well.” Lenovo’s people are doing what they do well also—working on the research and development and process design aspects of the business. The restructuring accommodated these realities, and so far things are going well post-change.

The similarities between these two cases lie in the restructuring itself and the motivations behind the reorganization. Sara Lee had to face facts regarding its many brands and businesses, and had to abandon those products or companies that were not making a direct contribution to competitive advantage, growth, and sales. Similarly, IBM made its choice because it realized its strengths, its current direction/vision, and its core capabilities. In an effort to maximize its capabilities in pursuit of strong competitive advantages, it realized it should sell the PC division to Lenovo because that division was not making a direct contribution to IBM’s strategic goals.

2. What is your opinion of the effectiveness of each company’s structural changes?

The responses from students will vary, but students should demonstrate a recognition of the positive impact of the reorganization by each firm. The benefits lie in the synergies produced and capitalized by IBM/Lenovo, as well as the honest way that the companies’ management looked at strategy, core competencies, and resources/capabilities at both Sara Lee and IBM. The companies have become “leaner” and are making better use of the organizational structure options that are available today through globalization, outsourcing, and under the pressure of customers (or in Sara Lee’s case, retailers).

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