Creating

Effective
Organizational
Designs

chapter 10

Copyright © 2014 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education .
 Learning Objectives
10-2

After reading this chapter, you should have a

good understanding of:
LO10.1 The growth patterns of major corporations
and the relationship between the firm’s strategy and
its structure.
LO10.2 Each of the traditional types of
organizational structure: simple, functional,
divisional, and matrix.
LO10.3 The implication of a firm’s international
operations for organizational structure.
 Learning Objectives
10-3

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.
 Organizational Structure
10-4

Consider…
To implement strategy successfully, firms
must have appropriate organizational
designs.
How should a firm coordinate internal
operations? And how should a firm integrate
its operations with external parties?
How can these internal & external boundaries
be made both flexible and permeable?
 Organizational Structure
10-5

 Organizationalstructure refers to
formalized patterns of interactions linking
 Tasks
 Technologies
 People

 Structure provides a balance between

 The need for division of tasks into
meaningful groupings
 The need to integrate these groupings for
maximum efficiency and effectiveness
 Question?
10-6

 Generally speaking, discussions of the

relationship between strategy and structure
strongly imply that
A. strategy follows structure.
B. structure follows strategy.
C. strategy can effectively be formulated without
considering structural elements.
D. structure typically has a very small influence on a
firm’s strategy.
 Organizational Structures
10-7

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 edition.
Copyright © 1986.
 Organizational Structures:
Simple Structure
10-8

 Thesimple organizational structure is the

oldest & most common organizational
form, where
 The organization is small, with a single or
very narrow product line
 The owner-manager makes most of the
decisions
 The staff is an extension of the top
executive’s personality
 Organizational Structures:
Simple Structure
10-9

Advantages Disadvantages
 Highly informal  Employees may not
 Coordination of tasks understand their
by direct supervision responsibilities
 Centralized decision-  Employees may take
making advantage of lack of
regulations
 Little specialization
Limited
Few rules &


opportunities for
regulations; informal
upward mobility
reward systems
 Organizational Structures:
Functional Structure
10-10

 Thefunctional organizational structure is

where the major functions of the firm are
grouped internally
 The organization is small, with a single or
closely related product or service, and high
production volume
 The owner-manager needs specialists in
various functional areas
 The chief executive has responsibility for
coordination & integration of the functional
areas
 Organizational Structures:
Functional Structure
10-11

Exhibit 10.2 Functional Organizational Structure

 Organizational Structures:
Functional Structure
10-12

Advantages Disadvantages
 Enhanced coordination  Impeded
& control communication &
 Centralized decision- coordination due
making differences in values &
 Enhanced orientations – “silos”
organizational-level
perspective  May lead to short-
 More efficient use of term thinking
managerial & technical  Difficult to establish
talent
uniform performance
Facilitated career paths
standards

in specialized areas
 Organizational Structures:
Divisional Structure
10-13

 The
divisional organizational structure is
where products, projects, or product
markets are grouped internally
 Divisions are relatively autonomous,
consisting of products & services that are
different from those of other divisions
 Each division includes its own functional
specialists typically organized into
departments
 Division executives help determine product-
market & financial objectives
 Organizational Structures:
Divisional Structure
10-14

Exhibit 10.3 Divisional Organizational Structure

 Organizational Structures:
Divisional Structure
10-15

Advantages Disadvantages
 Separation of strategic  Can be very expensive
& operating control  Can lead to
 Quicker response to dysfunctional
changes in the market competition among
environment divisions
 Minimal problems  Differences in image &
sharing resources quality may occur
across divisions
 Development of general
management talent is  Can focus on short-
enhanced term performance
 Organizational Structures:
SBU Structure
10-16

 Thestrategic business unit (SBU) structure

is where similar products or markets are
grouped into units to achieve synergy
 Variation on the divisional structure
 Synergies are achieved through related
diversification – core competencies, shared
infrastructures, market power
 Each of the SBUs operates as a profit center
 Organizational Structures:
SBU Structure
10-17

Advantages Disadvantages
 Planning & control done  Can be difficult to
by the corporate office achieve synergies
 Decentralization of  Increased personnel &
authority
overhead expenses
 Quicker response to
changes in the market  Corporate office
environment further removed from
 Synergies through the divisions
sharing core
competencies,  Corporate unaware of
infrastructures, & key changes in market
market power conditions
 Example:
Challenges of a Divisional Structure
10-18

 Johnson & Johnson has more than 275 operating

companies located in 60 countries, and sells
products in virtually all countries around the world.
 J&J is organized into three business segments:
Consumer, Pharmaceutical, and Medical Devices
and Diagnostics - a decentralized SBU divisional
structure

 How to keep autonomy while also developing

synergies between the business units?
 How to extend control mechanisms across divisions
to better monitor performance?
 Organizational Structures:
Holding Company Structure
10-19

 The holding company structure is where

businesses in a corporation’s portfolio are
the result of unrelated diversification
 Variation on the divisional structure
 Similarities are few, so synergies are limited
 Operating divisions have autonomy
 Corporate staffs are small & have limited
involvement, relying on financial controls &
incentive programs to obtain performance
 Organizational Structures:
Holding Company Structure
10-20

Advantages Disadvantages
 Cost savings due to  Potential for synergies
fewer personnel and is very limited
lower overhead  Corporate office has
 Divisional autonomy little control
increases motivation
level of divisional  Difficult to replace key
executives divisional executives if
they leave
 Quicker response to
changes in the market  Turnaround may be
environment difficult due to limited
corporate staff support
 Organizational Structures:
Matrix Structure
10-21

 Thematrix organizational structure is

where functional departments are
combined with product groups on a
project basis
 Functional departments, product groups &
geographical units are combined
 Individuals have two managers
 Project managers & functional managers
share responsibility
 Organizational Structures:
Matrix Structure
10-22

Exhibit 10.4 Matrix Organizational Structure

 Organizational Structures:
Matrix Structure
10-23

Advantages Disadvantages
 Increases market  Dual reporting
responsiveness, relationships lead to
collaboration & uncertainty regarding
synergies accountability
 Allows more efficient  Can lead to power
utilization of resources struggles & conflict
 Improves flexibility,
Human resources are
coordination &


communication duplicated
 Increases professional  Decision-making
development takes longer
 Organizational Structures:
International Operations
10-24

 Firmswith international operations must

consider a structure based on the
following:
 The type of strategy that is driving the firm’s
foreign operations
 The degree of product diversity
 The extent to which a firm is dependent on
foreign sales
 Organizational Structures:
International Operations
10-25

Multidomestic
Global Strategies use…
Strategies use…

 International  Worldwide
division structure functional
 Geographic-area
structure
division structure  Worldwide product

 Worldwide matrix
division structure
structure  Worldwide holding
company structure
 Organizational Structures:
International Operations
10-26

A global start-up
 Uses inputs from around the world
 Sells its products & services to customers
around the world
 Has communication & coordination challenges
 Has less resources than well-established
corporations
 Must use less costly administrative
mechanisms
 Frequently chooses a boundaryless
organizational design
 Organizational Structures:
Boundaryless Designs
10-27

 A boundaryless organizational design makes

these boundaries more permeable:
 Verticalboundaries between organizational levels
 Horizontal boundaries between functional areas
 External boundaries between the firm and its
customers, suppliers, & regulators
 Geographic boundaries between locations,
cultures, & markets
 Boundaryless designs include barrier-free,
modular, & virtual organizations
 Organizational Structures:
Boundaryless Designs
10-28

A barrier-free organization has permeable

internal & external boundaries and requires:
 Higher level of trust and shared interests
 Shift in philosophy from executive
development to organizational development
 Greater use of teams
 Flexible, porous organizational boundaries
 Communication flows & mutually beneficial
relationships with both internal and external
constituencies
 Organizational Structures:
Boundaryless Designs
10-29

Exhibit 10.6 Pros and Cons of Barrier-Free Structures

 Question?
10-30

 What advantages does outsourcing provide an

organization?
A. Access to the best-in-class goods and services.
B. The ability to expand rapidly with a relatively low
capital investment.
C. The opportunity to focus scarce resources on
existing core competencies.
D. All of the above.
 Organizational Structures:
Boundaryless Designs
10-31

A modular organization requires seamless

relationships with external organizations:
 Outsources nonvital functions or non-core
activities to outsiders
 Activates knowledge & expertise of “best in
class” suppliers but retains strategic control
 Focuses scarce resources on key areas
 Accelerates organizational learning
 Decreases overall costs, leverages capital
 Organizational Structures:
Boundaryless Designs
10-32

Exhibit 10.7 Pros and Cons of Modular Structures

 Organizational Structures:
Boundaryless Designs
10-33

A virtual organization requires forming

alliances with multiple external partners:
 Continually evolving network of independent
companies
 Linked together to share skills, costs, & access
to one another’s markets
 Coping with uncertainty through cooperative
efforts
 Each gains from resulting individual &
organizational learning
 May not be permanent
 Organizational Structures:
Boundaryless Designs
10-34

Exhibit 10.8 Pros and Cons of Virtual Structures

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.
 Example:
10-35
A Virtual Organization
 This textbook is published by McGraw-Hill
Education
 Putting the textbook and supplemental material
together is done by a virtual team
 The authors live in Texas, Michigan, and New York
 The editors work in Illinois
 The text compositors are in India
 The PowerPoint & Case Teaching Notes author
works out of her home in Connecticut
 Deadlines are coordinated by the MH editors in Illinois,
to pull the book together and arrange for distribution
 Organizational Structures:
Boundaryless Designs
10-36

A boundaryless organization requires

 Mechanisms to ensure effective coordination
and integration
◼ Common culture and shared values
◼ Horizontal organizational structures
◼ Horizontal systems and processes
◼ Communications and information technologies
◼ Human resource practices

 Awareness of the benefits and costs of

developing lasting internal & external
relationships
 Organizational Structures:
Boundaryless Designs
10-37

Benefits Costs

 Agency costs are  Relationships between

reduced through the use individuals become more
of relational systems important than profits
 Transaction costs  Conflicts are resolved
between the firm and its through ad hoc
suppliers are reduced negotiations & processes
 Individual participants  Relationships are driven
are less likely to more by social
perceive a conflict of connections than by
interest needed competencies
 Organizational Structures:
Ambidextrous Designs
10-38

 Ambidextrous organizational designs

address two contradictory challenges:
 How to maintain adaptability
 How to achieve alignment

 Ambidextrous organizations
 Are aligned and efficient while they pursue
modest, incremental innovations
 Are flexible enough to adapt to changes in the
external environment and create dramatic,
breakthrough innovations
 Question?
10-39

 According to a study by O’Reilly and Tushman,

effective ambidextrous structures had all of the
following attributes except
A. a clear and compelling vision.
B. managerial efforts that were highly focused on
revenue enhancement.
C. cross-fertilization among business units.
D. established units that were shielded from the
distractions of launching new businesses.
 Organizational Structures:
Ambidextrous Designs
10-40

 Ambidextrous organizational designs

 Effectively integrate and coordinate existing
operations
 Establish project teams that are structurally
independent units
 Pay attention to each unit’s processes,
structures, & cultures
 Effectively integrate each unit into the existing
management hierarchy