Chapter 11 - Organizational Design: Structure, Culture, and Control

Why the sift to Organizing for Innovation

Why the shift? • Increase supply and mobility of skilled workers • Exponential growth of venture capital • Increase availability of external options (such as spinning out) to commercialize ideas • Increasing capability of external suppliers

Inertia

a firm's resistance to change the status quo, which can set the stage for the firm's subsequent failure

Group Think

a situation in which opinions coalesce around a leader without critically evaluating and challenging that leader's opinions and assumptions

Ambidextrous Organization

an organization able to balance and harness different activities in trade-off situations

Holacracy

an organizational structure in which decision-making authority is distributed through loose collections or circles of self-organizing teams

Explotation

applying current knowledge to enhance firm performance in the short term

Specialization (Organizational Structure)

Describes the degree to which a task is divided into separate jobs: • Larger Firms: high degree of specialization • Smaller Ventures: low degree of specialization High degree of the division of labor increases productivity • it can also reduce employee job satisfaction due to repetition of tasks

Disadvantages of the Matrix Structure

Difficult to implement • Organizational complexity • Administrative costs • Unclear reporting structures Accountability can be undermined. • Employees can have trouble reconciling goals. • Principal-agent problems • Slower decision-making

Functional (U-form) Structure (Firm Strategy) & Business Strategy

Employees are grouped into functional areas. • Based on domain expertise • Often correspond to distinct stages in the value chain Leaders of functional areas report to the CEO A functional structure works when a firm has • A narrow focus and small geographic footprint

Activities necessary to implement strategic choices:

• Collect information • Circulate information to appropriate people • Bring people together to make decisions • Carry out decisions * Are also costly to coordinate

A small group of employees within a firm can be organized in several ways (Simple Structure)

• Each member may be treated as an individual and is rewarded based on his/her output • The group can be a self managed team and individual rewards will be wholly or partly based on team performance • Hierarchy of authority may be used with one member of the group coordinating and monitoring the activities of others

Large Firms (Simple Structure)

• In large firms hierarchy of authority may be needed • Beyond a certain size, self managed teams may not perform well in coordination • Extent of control will depend on the severity of the agency problems and the attendant influence costs

Organic Organization Structure

• Little specialization and formalization • Flat organizational structure • Decentralized decision making

Mechanistic Organization Structure

• Much specialization and formalization • Tall hierarchies • Centralized decision making

Simple Structure (Firm Strategy)

• Used by small firms with low organizational complexity The founders usually - Make all the strategic decisions. - Run day-to-day operations. • Professional managers and sophisticated systems are not usually in place. • Different forms are effective in different situations depending on the nature of the tasks • When tasks do not require coordination employees can be treated as individuals • When coordination is essential and individual contribution is difficult to measure, team approach will be used

Organizing for Innovation

Firms have been shifting from closed innovation to open innovation A framework for R&D that proposes permeable firm boundaries to allow a firm to benefit not only from internal ideas and inventions, but also from external ones.

Where Do Organizational Cultures Come From?

Founder imprinting • Examples: Steve Jobs, Walt Disney, Michael Dell, Oprah Winfrey, Martha Stewart, Bill Gates • Beware of groupthink - When individuals don't challenge a leader's opinion Values • Specially when they are linked to a reward system

The pattern for successful firms often follows a particular path:

1. Mastery of, and fit with, the current environment. 2. Success, usually measured by financial measurements. 3. Structures, measures, and systems to accommodate and manage size. 4. A resulting organizational inertia that tends to minimize opportunities and challenges created by shifts in the internal and external environment.

Organizational Structure includes four building blocks:

1. Specialization 2. Formalization 3. Centralization 4. Hierarchy

Ambidexterity

A firm's ability to address trade-offs not only at one point but also over time. It encourages managers to balance exploitation with exploration.

Organizational Intertia

A firm's resistance to change the status quo, which can set the stage for the firm's subsequent failure. *It is hard to argue with success...

Founder Imprinting

A process by which the founder defines and shapes an organization's culture, which can persist for decades after his or her departure.

Optimal structure permits the firm to create the most value

Ability to organize in pursuit of strategic goals is a critical capability of the firm!!

Disadvantages of the Multi-Divisional Structure

Adds another layer of corporate hierarchy • Bureaucracy, red tape, & duplication of efforts • Slower decision making SBUs competing • Politics and turf wars over resources

Formalization (Organizational Structure)

An organizational element that captures the extent to which employee behavior is steered by explicit and codified rules and procedures. • Ensures consistent and predictable results • Slower decision making • Reduced innovation • Hindered customer service

Organizing for Innovation (Closed v. Open)

Closed Innovation • Products developed internally • Costly and time consuming • Not-invented-here syndrome Open Innovation • Ideas and innovation also arise from external sources - Customers, suppliers, universities, etc. • Leverages licensing agreements, strategic alliances, joint ventures, and acquisitions • Need to enhance absorptive capacity - Ability to understand, evaluate, and integrate external technology

Output Controls

Guides employee behavior by: • Defining expected results (outputs), but • Leaving the means to those results open to individual employees, groups, or SBUs Intrinsic motivation is highest when an employee has: • Autonomy (about what to do) • Mastery (how to do it) • Purpose (why to do it)

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 (Firm Strategy)

Leverages SBU (M-form) benefits: • Domain expertise • Economies of scale • Efficient processing of information Also leverages organizational structure benefits • Responsiveness • Decentralized focus

M-Form & Corporate Strategy

Related Diversification Cooperative M-Form: • Centralized decision making • Integrated 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

Input Controls

Seeks to define & direct employee behavior through: • Explicit, codified rules • Standard operating procedures Considered before employees make business decisions Example: a budget • Managers allocate money to R&D projects before they begin

Organizational Culture

Shared values and norms of an organization's members • Values: what is considered important • Norms: appropriate attitudes and behaviors Expressed through artifacts: • Physical space • Symbols • Events • Vocabulary

Disadvantages of a Functional Strategy

Suboptimal communication across departments • Solution: cross-functional teams Cannot effectively address greater diversification • This is needed to ensure firm growth. • Firms encountering this adopt a different structure.

Organizational Structure

The choice of organizational structure depends on the business strategy of the firm Organizations structure is about: • how critical tasks are divided up • how managers and employees make decisions • routines and information flows that support operations

Centralization (Organizational Structure)

The degree to which decision making is concentrated at the top of the organization Affects strategic planning: • Top-down strategic planning takes place in highly centralized organizations. • Planned emergence is found in more decentralized organizations.

Heirarchy (Organizational Structure)

The formal, position-based reporting lines • Who reports to whom

Multidivisional (M-form) Structure (Firm Strategy)

The multidivisional firm is organized along such dimensions as: • product line • geography or • type of customers Each strategic business unit (SBU): • Has profit-and-loss (P&L) responsibility • Operated independently • Led by a unique CEO who is: - Responsible for SBU strategy - Responsible for day-to-day operations

Span of Control (Organizational Structure)

The number of employees who directly report to a manager • If span of control is narrow = tall organization • If span of control is wide = flat organization

Organizational Design

The process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization. • Implementation transforms strategy into action and business models • These transformations often require organizational changes! • Structure follows strategy •Strategic choices do not implement themselves

Exploration

searching for new knowledge that may enhance a firm's future performance