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
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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
