Chapter 11

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.

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

Organizational Structure

A key building block of organizational design Determines how the work efforts of individuals and teams are orchestrated Determines how resources are distributed Includes four building blocks: -Specialization -Formalization -Centralization -Hierarchy

Disadvantages of the Multidivisional Structure

Adds another layer of corporate hierarchy -Increases bureaucracy, red tape, & duplication of efforts -Can slow down decision making SBUs can end up competing with each other -Corporate politics and turf wars over resources

Firm Strategy & Structure

Are interdependent Impact a firm's performance Changes over time as the firm grow in: -Size -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

Organizational Culture and Competitive Advantage

Can organizational culture can 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 obeys the VRIO 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

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 Ex. Pilot training Ex. Customer service call centers Can slow decision making, reduce innovation, and hinder customer service

Organizational Structures Evolve

Companies grow and become more complex. Different organizational structures get adopted. -Beginning with a simple structure -Then a functional structure -Followed by a multi-divisional or matrix structure Organizing for competitive advantage: -Is a dynamic, not static

Unrelated Diversification

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

Multidivisional Structure

Consists of several distinct strategic business units (SBUs) -Each with its own profit-and-loss (P&L) responsibility Each SBU is operated independently. Each is led by a CEO. -Responsible for the unit's business strategy -Responsible for day-to-day operations

Related Diversification

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

How Does Organizational Culture Change

Culture can turn from a core competency into a core rigidity. 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 & reward systems

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 Ex: Small-firm accountant might do: -Internal auditing -Payroll -Accounts receivable -Financial planning -Taxes

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

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 -Integration strategy Ambidextrous organization

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

Where Do Organizational Cultures Come From?

Founder imprinting -The founder defines & shapes the culture. -Can persist for decades after his or her departure Examples: Steve Jobs, Walt Disney, Michael Dell, Oprah Winfrey, Martha Stewart, Bill Gates Groupthink -When opinions combine Results when individuals don't critically evaluate and challenge a leader's opinions and assumptions

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.

Strategic Control & 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

Matrix Structure & Global Strategy

International Multidomestic -Multidivisional -Geographic areas -Decentralized decision making Global Standardization -Multidivisional -Product divisions -Centralized decision making Transnational -Global Matrix -Centralized and decentralized decision making -Coordinate geography & products

Mechanistic vs. Organic Organizations

Mechanistic Organization -High degree of specialization and formalization -Tall hierarchies -Rely on centralized decision making Organic Organization -Low degree of specialization and formalization -Flat organizational structure -Decentralized decision making

Centralization

Refers to the degree to which decision making is concentrated at the top of the organization Example: BP oil spill in 2010 -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.

Strategy Implementation

Requires managers to design and shape: -Structure -Culture -Control mechanisms Is iterative and interdependent with strategy formulation Is just as important as strategy formulation

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 Intrinsic motivation in a task is highest when an employee has -Autonomy (what to do) -Mastery (how to do it) -Purpose (why to do it)

Input Controls

Seeks to define & 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

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

Organizational Design

The process of: Creating, implementing, monitoring, and modifying... The structure, processes, and procedures of an organization Key components: Structure Culture Control

Disadvantages of the Matrix Structure

Usually difficult to implement Creates additional organizational complexity Increases administrative costs Reporting structures are often not clear. Employees can have trouble reconciling goals. -They have two or more supervisors Accountability can be undermined. -Increased principal-agent problems Performance appraisals more difficult Can slow decision-making