Chapter 11: Organizational Design:

Structure, Culture, and Control

 Chapter Case 11:
Zappos: From Happiness to Holacracy

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 3

Zappos: From Happiness to Holacracy

• An online shoe and clothing store

– The world’s largest shoe store
– Also offers handbags, clothing items, eyewear, and
accessories
– Mission: deliver happiness
• Zappo’s has also made investors happy
– 10 years after founding, has achieved $1 billion in
annual sales
– Amazon.com acquired the company for $1.2 billion

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 Zappos: From Happiness to Holacracy

• Zappo’s has experienced rapid growth.

– 20 million unique visitors a month
• It is reorganizing to a “Holacracy”
– To offer the best customer service possible
– Employees self-direct their work instead of reporting to
a manager who tells them what to do.
• This structure can be difficult to implement.
– Zappo’s is the first large corporation to try it.

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Zappos’ Core Values

11–5
 6

Zappos: From Happiness to Holacracy

• Zappos – online shoe retailer

• Implementation of holacracy is not going well.
– Holacracy distributes power to self-managed teams.
• Reasons why the implementation was difficult:
– Removed paths for clear advancement
– The grouping of its over 1,500 employees in some
400 circles, with each employee in two or more circles
(distributing power and authority) introduced paralysis
– Made the organization more political
– 200 employees quit.

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 Zappos: From Happiness to Holacracy

• What is a holocracy and how does this organizational

form differ from more traditional structures?

• Why is Zappos experiencing significant

implementation problems with holacracy?

• What else could Zappos do to

implement the new organizational
structure more effectively?

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 8

Organizational Design and Competitive Advantage

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11–9
 How to Organize for Competitive Advantage

• Organizational design
➢ Structure
➢ Processes
➢ Procedures

• Key components:
➢ Structure
➢ Culture
➢ Control

• Structure follows strategy (or inefficiency results)

➢ Consider the inefficiency of Pepsi Restaurants decentralized
structure, which did not follow their related diversification strategy.
 11-10

Sources of
Bureaucratic Costs

Number of
Motivational Coordination Information
Middle
Problems Problem Distortion
Managers

Bureaucratic
Costs

Copyright  1998 by Houghton Mifflin Company. All rights reserved.

 13

Organizational Inertia

• A firm’s resistance to change the status quo

• Can lead to the firm’s subsequent failure
• The pattern of a firm:
– Mastery of the current environment
– Success as measured by financial measurements
– Structures, measures, and systems to manage size
– Organizational inertia results from shifts
in the internal and external environment.

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Failure of Firms to Respond to Shifts in the External
or Internal Environments

Exhibit 11.2

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 15

The Premature Death of a Google-like

Search Engine at Microsoft

•Microsoft had a prototype called Keywords.

– More than a decade earlier than Google that was shut down
because managers did not see it as a viable business model.
•Microsoft almost acquired this capability.
– But determined Overture Services was overpriced
•Launched their own, Bing, in 2009
•The CEO has admitted impatience.
– Was replaced in 2014
• How did problems in Microsoft’s structure and culture
contribute to strategic mistakes concerning
their search engine decisions?
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The Key Elements of Organizational Structure

• Organizational structure determines

➢ Work efforts of individuals and teams

➢ Resource distribution

• Key building blocks

➢ Specialization
➢ Formalization
➢ Centralization
➢ Hierarchy
 17

Specialization

• Describes the degree to which a task is divided into

separate jobs (i.e., the division of labor)
• Larger firms: high degree of specialization
– Ex: Large-firm accountant might do internal auditing
• Smaller ventures: low degree of specialization
– Example: Small-firm accountant might do:
• Internal auditing
• Payroll
• Accounts receivable
• Financial planning
• Taxes
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 Formalization

• Captures the extent to which employee behavior is

steered by explicit and codified rules and procedures
• Is not necessarily negative
• Often can be necessary for consistent and predictable
results
– Example. Pilot training
– Example. Customer service call centers
• Can slow decision making, reduce
innovation, and hinder customer service

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 19

Centralization

• Refers to the degree to which decision making is

concentrated at the top of the organization
• Example: BP oil spill in 2010 (Deepwater Horizon)
– Decisions made in UK HQ and not on site
– Centralization reduced response time and led to a
prolonged crisis.
• Affects strategic planning:
– Top-down strategic planning takes place in highly
centralized organizations.
– Planned emergence is found in more
decentralized organizations.
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 Hierarchy

• Determines the formal, position-based reporting lines

• Stipulates who reports to whom
• Span of control:
– The number of employees who directly report to a manager
– In tall structures: the span of control is narrow.
– In flat structures: the span of control is wide.
• Meaning one manager supervises
many employees

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 21

Mechanistic vs. Organic Organizations

• Mechanistic Organization
– High degree of specialization and formalization
– Tall hierarchies
– Rely on centralized decision making
• e.g., McDonald’s detailed instructions to franchisees

• Organic Organization
– Low degree of specialization and formalization
– Flat organizational structure
– Decentralized decision making
• e.g., Zappos
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W. L. Gore & Associates: Informality and Innovation

• Inventor of path-breaking new products

– GORE-TEX fabrics, Glide dental floss,
and Elixir guitar strings
– Devoted to innovation, imagination and initiative
– No formal job titles, job descriptions, chains of
command, formal communication channels, written rules
or standard operating procedures

• Uses a boundryless organization form

– Everyone is empowered

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 23

W. L. Gore & Associates: Informality and Innovation

•Organized in project-based teams

– Led by sponsors, not bosses
– Peer control enhances productivity
– Group members evaluate each other’s performance

•This type of culture has been linked to:

– Greater employee satisfaction and retention
– Higher personal initiative & creativity
– Innovation at the firm level

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W. L. Gore & Associates: Informality and Innovation

• What management lessons can be taken from

the W. L. Gore & Associates (informal)
organization structure?

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 25

Mechanistic vs. Organic Organizations

Exhibit 11.3

Mechanistic Organizations Organic Organizations

• High degree of specialization • Low degree of specialization

Specialization • Rigid division of labor • Flexible division of labor
• Employees focus on narrowly defined tasks • Employees focus on “bigger picture”

• Intimate familiarity with rules, policies, and • Clear understanding of organization’s core
Formalization processes necessary competencies and strategic intent
• Deep expertise in narrowly defined domain • Domain expertise in different areas
required • Generalized knowledge of how to accomplish
• Task-specific knowledge valued strategic goals valued

• Decision power centralized at top • Distributed decision making

Centralization • Vertical (top-down) communication • Vertical (top-down and bottom-up) as well as
horizontal communication

• Tall structures • Flat structures

Hierarchy • Low span of control • High span of control
• Clear lines of authority • Horizontal as well as two-way vertical
• Command and control communication
• Mutual adjustment

• Cost-leadership strategy • Differentiation strategy

Business Strategy • Examples:
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McDonald’s; Walmart instructor use. Not authorized •
for sale or distribution W.L. Gore, Zappos
Examples:
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 Strategy and Structure

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 27

Firm Strategy and Structure

• Are interdependent
• Impact a firm’s performance
• Changes over time as the firm grow in:
– Size and complexity
• Successful new ventures generally grow:
– First by increasing sales
– Then by obtaining larger geographic reach
– Finally by diversifying
• Through vertical integration
• Entering into related and unrelated businesses

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 Types of Organizational Structure
Exhibit 11.4

• Simple

• Functional

• Multidivisional

• Matrix

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 29

Simple Structure

• Generally used by small firms with low organizational

complexity

• Founders make all the strategic decisions.

• Founders run day-to-day operations.

• Professional managers/sophisticated systems

are not usually in place.

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 Functional Structure

• Employees are grouped into functional areas.

– Based on domain expertise
– Often correspond to distinct stages in the value chain
• R&D, engineering, manufacturing, marketing and sales
• Supporting areas such as HR, finance, and accounting
• Leaders of functional areas report to the CEO.
• Influenced by strategy:
– Cost leadership: Mechanistic organization
– Differentiation: Organic organization
– Blue ocean: Ambidextrous organization

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 31

Typical Functional Structure

Exhibit 11.5

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 Business Strategy and Functional Structure

• Cost Leadership Strategy

– Using a functional structure allows the cost leader to:
• Nurture and constantly upgrade core competencies
• Differentiation Strategy
– Using a functional structure allows a differentiator to:
• Incorporate decentralized decision making
• Foster and incentivize continuous innovation and creativity
• Blue Ocean Strategy
– To implement a functional blue ocean strategy:
• The firm must be both efficient and flexible
• The firm must control costs and foster creativity
• Mitigate the disadvantages of this approach
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 33

Disadvantages of Functional Structure

• Frequently lacks effective communication channels

across departments.

• The top-level manager must take on the coordination

and integration work.

• It cannot effectively address a higher level of

diversification, which often stems from further growth.

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 Multidivisional Structure

• Consists of several distinct strategic business units

(SBUs)
– Each with its own profit-and-loss (P&L) responsibility

• Each SBU is operated (quasi-)independently.

• Each is led by a divisional manager

– Responsible for the unit’s business strategy
– Responsible for day-to-day operations

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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.
 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?)

11–37
 38

Typical Multidivisional Structure

Exhibit 11.7

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 11-19

Multidivisional Structure
Typical Chemical
Company CEO

Corporate Headquarters Staff

Oil Division
(Functional
Structure)
Pharmaceuticals
Division (Product
Team Structure)
Plastics Division
(Matrix Structure)
Copyright  1998 by Houghton Mifflin Company. All rights reserved.
 40

Business Strategy and Multidivisional Structure

• Related Diversification
– Cooperative M-Form
• Centralized decision making
• High level of integration at
corporate headquarters
• Co-opetition among SBUs

• Unrelated Diversification
– Competitive M-Form
• Decentralized decision making
• Low level of integration at corporate headquarters
• Competition among SBUs for resources

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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)
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.

11–44
 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).

11–45
 Disadvantages of the Multidivisional Structure

• Dysfunctional Aspects of the Multidivisional:

➢ Emphasis on short-term perspective;

➢ Loss of economies of scope;
➢ Duplication of R&D, marketing, etc.;
➢ Divisions can end up (dysfunctionally competing with
each other; e.g., Pepsi Restaurants)
➢ Emphasis on financial manipulation instead of
developing firm capabilities and resources;
➢ Large conglomerates may have excessive
political power.
 47

Matrix Structure

• Firm is organized according to SBUs

– Like in the M-form
• Also has a second dimension of organizational structure
– Consists of different geographic areas
• Purpose:
– Combine the benefits of the M-form
• Domain expertise, economies of scale, and the efficient
processing of information
– With benefits of the functional structure
• Responsiveness and decentralized focus

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 Typical (Global) Matrix Structure

Exhibit 11.9

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Matching Global Strategy and Structure
Organizational Culture: Values, Norms, and Artifacts

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 53

Organizational Culture

• The collectively shared values and norms of an

organization’s members
• Values: define what is considered important
• Norms: define appropriate employee attitudes
and behaviors
• Expressed through artifacts:
– The design and layout of space: cubicles vs. offices
– Symbols: the type of clothing worn by employees
– Events: what is celebrated and highlighted
– Vocabulary: what stories are told
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 The Elements of Organizational Culture

Exhibit 11.11

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 55

Where Do Organizational Cultures Come From?

• Founder imprinting
– The founder defines and shapes the culture.
– Can persist for decades after his or her departure
– Examples: Steve Jobs (Apple), Walt Disney (Disney),
Sergey Brin & Larry Page (Google),Michael Dell (Dell),
Oprah Winfrey (Harpo), Martha Stewart (Living Omnimedia),
Bill Gates (Microsoft), Larry Ellison (Oracle),
Herb Kelleher (Southwest Airlines), and Sam Walton (Wal-mart)
• Groupthink
– When opinions combine
– Results when individuals do not critically
evaluate and challenge a leader’s opinions
and assumptions
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 How Does Organizational Culture Change?

• Culture can turn from core competencies into

core rigidities (e.g., GM’s bureaucratic culture).
• A firm must hone, refine, and upgrade.
– Because the firm and the environment change
• The primary means of cultural change:
– The board of directors brings in new leadership.
– Leadership is charged to make changes in strategy and
structure.
• Culture is shaped through:
– Organizational structure
– Resource allocation and reward systems
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 57

Organizational Culture and

Competitive Advantage

• Can organizational culture help a firm gain and

sustain competitive advantage? Yes, IF:
– The culture makes a positive contribution to the firm’s
economic value creation.
– If the culture follows the VRIO(N) principles
• It can be an effective lever for new ventures:
– It is malleable.
– Firm founders, early-stage CEOs, and venture
capitalists should be proactive:
• Create a culture that supports a firm’s
economic value creation

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 Two Examples of Culture Affecting
Employee Behavior

• Example #1: Zappo’s

– Someone called up Zappo’s to ask where a local pizza
could be delivered to her hotel.
– This type of action can increase the company’s perceived
value and economic value creation.
– Provided “wow” through service!
• Example #2: Southwest Airlines
– Friendly and highly energized employees (e.g., sing songs)
– Work across functional and hierarchical levels
– Turn time between flights is only 15 minutes

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Strategic Control-and-Reward Systems

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 60

Strategic Control and Reward Systems

• Internal-governance mechanisms

• Put in place to align the incentives of:

– Principals (shareholders)
– Agents (employees)

• Allow managers to:

– Specify goals
– Measure progress
– Provide performance feedback

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 Input Controls

• Seeks to define and direct employee behavior through:

– Explicit, codified rules
– Standard operating procedures

• Considered prior to the value-creating activities

• Example: a budget
– Managers allocate money to R&D projects before
they begin.

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 62

Output Controls

• Seek to guide employee behavior by:

– Defining expected results (outputs), but
– Leaving the means to those results open to individual employees,
groups, or SBUs

• “ROWE” = Results Only Work Environment (see e.g.,

3M Corporation’s use of ROWE)
• Intrinsic task motivation is highest when an employee has:
– Autonomy (what to do)
– Mastery (how to do it)
– Purpose (why to do it)

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