4490 11 - Organizational Design: Structure, Culture, and Control

Zappos

"Delivering Happiness" - Amazon acquired them - Zappos acts as an independent company - implementing HOLACRACY -- control and coordination by distributing power and authority to self-organizing groups (CIRCLES) of people - circle self organize and own a specific task - "delivering WOW through SERVICE," providing a positive online shopping experience including free shipping to and from its customers, including a generous 365-day return policy.

Culture facts

- A positive culture motivates and energizes employees by appealing to their higher ideals. - Strong organizational cultures that are strategically relevant, therefore, align employees' behaviors more fully with the organization's strategic goals. - Positive organizational cultures better coordinate work efforts, and they make cooperation more effective. - They also strengthen employee commitment, engagement, and effort. - Effective alignment in turn allows the organization to develop and refine its core competencies, which can form the basis for competitive advantage.

Strategic Control and Reward Systems

- Internal-governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees). - These systems allow managers to specify goals, measure progress, and provide performance feedback.

Microsoft: Organizational Inertia

- Microsoft had a prototype called Keywords. - More than a decade earlier than Google - It was shut down because managers didn't see it as a viable business model. - Microsoft almost acquired this capability. - But determined Overture Services was overpriced Launched their own, Bing, in 2009

Disadvantages of moving to an M-structure

- adding another layer of corporate hierarchy - slows pace because CEO of SBU must get approval from corporate HQ - because SBUs are considered a standalone profit and loss center, SBUs often end up competing against eachother - co-opetition among SBUs is inevitable and necessary

Global Matrix Structure

- geographic divisions are charged with local responsiveness and learning - each SBU is charged with driving down costs through economies of scale/other efficiencies - allows sharing of learnings from abroad - fits well with a transnational strategy

Google 2015

- unrelated diversification - decentralized decision making - diversified multidivisional structure overseen by Alphabet, a new corporate entity

Matrix structure—disadvantages:

1) Creates additional organizational complexity -Can slow decision-making -Performance appraisals more difficult -Increases admin costs 2) Difficult to implement -Employees have trouble reconciling goals -Multiple supervisors

Organizational Inertia: The pattern for successful firms often follows a particular path:

1. Mastery of, and fit with, the current environment. (fit/alignment) 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.

(2) Functional Structure Drawbacks

1. communication within departments is good...BUT Frequently lacks effective communication channels ACROSS departments. - solve this with 'cross-functional" teams 2. Can't effectively address a higher level of diversification, which stems from further growth

Increasing Firm complexity as firms grow

1. simple structure 2. functional structure 3. multi-divisional structure, Matrix structure ** Different stages in a firm's growth require different organizational structures

Organizational Inertia

A firm's resistance to change the status quo, which can set the stage for the firm's subsequent failure - successful firms can plant a seed of subsequent failure: they try to optimize their organizational structure to the current situation - often the result of SUCCESS in a particular market during a particular time; it becomes difficult to argue with success

Organizational Structure

A key to determining how the work efforts of individuals and teams are orchestrated and how resources are distributed. Organizational Structure...: - defines how jobs and tasks are divided and integrated - delineates the reporting relationships up and down the hierarchy - defines formal communication channels - prescribes how individuals and teams coordinate their work efforts.

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. - Founders set the initial strategy, structure, and culture of an organization by transforming their vision into reality.

Fact

Although at first glance organic organizations may appear to be more attractive than mechanistic ones, their relative EFFECTIVENESS depends on CONTEXT. - McDonald's, with its over 36,000 restaurants across the globe, would not be successful with an organic structure. Similarly, a mechanistic structure would not allow Zappos or W.L. Gore to develop and hone their respective core competencies in customer service and product innovation. The key point is this: To gain and sustain competitive advantage, structure must follow strategy. Moreover, the chosen organizational form must match the firm's business strategy. ...the organizational form must MATCH the business strategy (in that order)

Ambidextrous Organization - define - simultaneous pursuit of... - encourages managers to balance..

An organization able to balance and harness different activities in trade-off situations. - "Ambidexterity" is a firm's ability to address trade-offs not only at one point but also OVER TIME - simultaneous pursuit of low-cost and differentiation - It encourages managers to balance exploitation with exploration

Formalization

An organizational element that captures "the extent to which employee behavior is steered by explicit and codified rules and procedures" - characterized by detailed written rules and policies of what to do in specific situations. - often codified in employee handbooks. McDonald's, for example, uses detailed standard operating procedures throughout the world to ensure consistent quality and service. Most customer service reps in call centers, for example, follow a detailed script. This is especially true when call centers are outsourced to overseas locations. - Zappos deliberately AVOIDED this approach when it made customer service its core competency. - can be very necessary in industries like airlines BUT can lead to lack of satisfaction, reduced creativity/innovation, and hinder customer service

Specialization

An organizational element that describes the degree to which a task is divided into separate jobs ..."the division of labor" - large companies are usually highly specialized while smaller companies require people to wear many hats - specialization requires a tradeoff between: DEPTH and BREADTH of knowledge - While a high degree of the division of labor increases productivity, it can also have unintended side-effects such as reduced satisfaction due to repetition of tasks.

Centralization

An organizational element that refers to the degree to which decision making is concentrated at the TOP of the organization. "Top-down" strategic planning takes place in highly CENTRALIZED organizations. VS. "Planned emergence" is found in more DECENTRALIZED organizations. - Centralized decision-making often correlates with SLOW response time and reduced customer satisfaction. - In decentralized organizations such as Zappos, decisions are made and problems solved by empowered lower-level employees who are closer to the sources of issues

Cost Leadership (structure)

GOAL: offer @ price that is LESS than competitors but with similar value Functional structure should be... - MECHANISTIC organization - centralized - command and control - competencies: efficient manufacturing and logistics - process innovation to drive cost down - focus on economies of scale

Differentiation (structure)

GOAL: offer product with a higher perceived VALUE while controlling costs Functional structure should be... - ORGANIC organization - decentralized - flexibility and mutual adjustment - core competencies: R&D, innovation, marketing - product innovations - focus on economies of scope

Span of Control

How many employees directly report to a manager. In TALL organizational structures (Firm A), the span of control is NARROW. In FLAT structures (Firm B), the span of control is WIDE, meaning one manager supervises many employees. Recently... firms have "de-layered" by reducing the headcount (often middle managers), making themselves FLATTER and more nimble. - This puts MORE pressure on the remaining managers who have to supervise and monitor more direct reports due to an INCREASED span of control. *** Recent research suggests that managers are most effective at an INTERMEDIATE point where the span of control is not too narrow or too wide.

Input Controls

Mechanisms in a strategic control-and reward system that seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures - that are considered BEFORE any business decisions/ the value-creating activities. i.e. BUDGETS are key to input controls. - Managers set budgets before employees define and undertake the actual business activities. For example, managers decide how much money to allocate to a certain R&D project before the project begins. - "Standard operating procedures", or policies and rules, are also a frequently used with input controls

Output Controls

Mechanisms in a strategic control-and reward system that seek to guide employee behavior by defining expected RESULTS (outputs), but leave the means to those results open to individual employees, groups, or SBUs. - tie employee compensation/rewards to predetermined goals - at the corporate level, output controls DISCOURAGE collaboration among different strategic business unit - best used for a single-line of business or with unrelated diversification - These days, more and more work requires creativity and innovation, especially in highly developed economies. "RESULTS ONLY WOK ENVIRONMENTS" (ROWEs) have attracted significant attention. ROWEs are output controls that attempt to tap INTRINSIC (rather than extrinsic) employee motivation, which is driven by the employee's interest in and the meaning of the work itself. (In contrast, extrinsic motivation is driven by external factors such as awards and higher compensation, or punishments like demotions and layoffs (CARROT-AND-STICK APPROACH).

Organizational Culture

Organizational culture describes the collectively shared values and norms of an organization's members. - key building block of organizational design Values define what is considered important. - Values are at the center-- MOST important, least visible Norms define appropriate employee attitudes and behaviors ** Employees learn about an organization's culture through SOCIALIZATION, a process whereby employees internalize an organization's values and norms through immersion in its day-to-day operations.38 Zappos' new-employee orientation and immersion is now a four-week extensive course. Successful socialization, in turn, allows employees to function productively and to take on specific roles within the organization. Strong cultures emerge when the company's core values are widely shared among the firm's employees and when the norms have been internalized.

Simple Structure

Organizational structure in which the FOUNDERS tend to MAKE all the important strategic DECISIONS as well as run the day-to-day operations. i.e. Facebook in 2004, when the startup operated out of Mark Zuckerberg's dorm room

Functional Structure

Organizational structure that GROUPS EMPLOYEES into distinct functional areas based on domain EXPERTISE i.e. A business school student generally majors in one of these "functional" areas such as finance, accounting, IT, marketing, operations, or human resources, and is then recruited into a corresponding functional group. - allows for an efficient top-down and bottom-up communication chain between the CEO and the functional departments, and thus relies on a relatively flat structure - recommended when a firm has a narrow focus of what is offers in products/services AND a small geographic footprint - this is the RECOMMENDED structure however there are variations to a "functional structure".... *see pic in slides*

Matrix Structure

Organizational structure that combines the functional structure AND the M-form. - firm is organized according to SBUs along the horizontal axis but also has a second dimension of organizational structure along the vertical axis *** - combine the benefits of the M-form (domain expertise, economies of scale, and the efficient processing of information) with those of the functional structure (responsiveness and decentralized focus). - teams tend to be more permanent rather than project-based

Multidivisional Structure" (M-Form)

Organizational structure that consists of several distinct strategic business units (SBUs), each with its own profit-and-loss (P&L) responsibility. - each SBU is operated independently from one another and each is led by a CEO who is responsible for the Unit's business strategy - popular structure - Zappos is a multidivisional structure under Amazon - can use SBUs to organize around different businesses/product lines or geographic areas - each SBU represents a self-contained business with its own hierarchy and organizational structure - company-wide staff functions are housed at the HQ to leverage economies of scale and avoid duplication of effort within SBUs (HR, finance, R&D) - HQs add value by acting as an internal capital market (distributing resources/assets) *see slide image

Corporate Strategy and Structure

SINGLE BUSINESS - "functional" structure DOMINANT BUSINESS - "functional" structure RELATED DIVERSIFICATION - "Cooperative multidivisional" (m-form) - centralized decision making - high level of integration at corporate HQ - co-opetition among SBUs - competition for resources - cooperation in competency sharing UNRELATED DIVERSIFICATION - "Competitive multidivisional" (m-form) - decentralized decsion making - low level of integration at HQ - competition among SBUs for resources

Exploration

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

a global matrix structure fits well with a "transnational strategy"

TRUE - To complete the strategy—structure relationships in the global context, we also need to consider the international, multidomestic, and standardization strategies.

An organization's culture can turn from a core competency into a "core rigidity"

TRUE - An organization's culture can be one of its strongest assets, but also its greatest liability. An organization's culture can turn from a core competency into a core rigidity if a firm relies too long on the competency without honing, refining, and upgrading as the firm and the environment change.

Organizational Design

The process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization.

Ambidexterity

ability to address tradeoffs not only @ one point but OVER TIME. - Balance of "exploitation" and "exploration"

Mechanistic Organizations - explain, examples, what strategy do they follow?

high degree of specialization and formalization, TALL hierarchy that relies on CENTRALIZED decision making ex: McDonald's, Walmart - decisions at the TOP - follow cost-leadership

zappo's #1 core value

"deliver WOW through service."

Network Structure

- A network structure allows the firm to connect centers of excellence, whatever their global location. - The firm benefits from COMMUNITIES OF PRACTICE, which store important organizational learning and expertise.

(output controls) intrinsic motivation in a task is HIGHEST when an employee has

- Autonomy (about what to do). - Mastery (how to do it). - Purpose (why to do it).

Mechanistic

- TALLER - low span of control - clear line of control - cost leadership strategy

Matching global strategy and structure

1. MULTIDOMESTIC - multidivisional - geographic areas - decentralized decision making 2. GLOBAL STANDARDIZATION - multidivisional - product divisions - centralized decision making 3. TRANSNATIONAL - balance of centralized and decentralized decision making - additional layer of hierarchy to coordinate both: geographic ares & product divisions

(4) Key building blocks of an ORGANIZATIONAL STRUCTURE:

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

Groupthink

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

Strategic Management

An integrative management field that combines analysis, formulation, and implementation in the quest for competitive advantage

Exploitation

Applying current knowledge to enhance firm performance in the short term.

#1 reason a board of directors will fire a CEO

CEO's inability to implement strategy effectively

Organizational Culture (cont)

Corporate culture finds its expression in ARTIFACTS Artifacts include: - elements such as the design and layout of physical space (e.g., cubicles or private offices) - symbols (e.g., the type of clothing worn by employees) - vocabulary - what stories are told (the Zappos pizza-ordering example).

Hierarchy

Determines the formal, POSITION-BASED reporting lines and thus stipulates "who reports to whom" - Can be a tall or flat structure - Let's assume two firms of roughly equal size: Firm A and Firm B. If many levels of hierarchy exist between the frontline employee and the CEO in Firm A, it has a TALL structure. In contrast, if there are few levels of hierarchy in Firm B, it has a FLAT structure. - the # of levels of the hierarchy determine the SPAN OF CONTROL

Can organizational culture be the basis of a firm's competitive advantage?

For this to occur, the firm's unique culture must help it in some way to increase its economic value creation (V—C). it must either help in increasing the perceived value of the product/service and/or lower its cost of production/delivery. - according to the resource-based view of the firm, the resource—in this case, organizational culture—must be valuable, rare, difficult to imitate, and the firm must be organized to capture the value created. The VRIO principles (see Chapter 4) must apply even as to organizational culture itself

Blue Ocean (structure)

TRADEOFFS between differentiation and low cost - ambidextrous organization - balance centralization and decentralization - competencies: r&d, manufacturing, logistics, marketing, etc - process and product innovation - economies of scale and scope

Formulating an effective strategy is a necessary but not sufficient condition for gaining and sustaining competitive advantage; strategy execution is at least as important for success

TRUE

Structure MUST accommodate strategy

TRUE

Firms tend to use a "global matrix structure" to pursue a transnational strategy

TRUE - Firms tend to use a global matrix structure to pursue a transnational strategy, in which the firm combines the benefits of a multidomestic strategy (high local responsiveness) with those of a global-standardization strategy (lowest-cost position attainable).

structure follows strategy

This tenet implies that to implement a strategy successfully, organizational design must be flexible enough to accommodate the formulated strategy and future growth and expansion

Zappos: values, norms, artifacts example

VALUES: zappos turned to employees to articulate company values, daily operations, and evaluation reviews NORMS: celebrate the norm of happiness, employees are encouraged to promote happiness in the workplace in creative ways ARTIFACTS: all employees, even CEO, work from cubicles

Organic Organizations - explain, examples, what strategy do they follow?

low specialization and formalization, a FLAT organizational structure, decentralized decision making - fluid, flexible information flow both vertically and horizontally, faster decision making, higher motivation, retention, and satisfaction - entrepreneurial and innovation - follow differentiation ex: Zappos, W.L. Gore

Strategy Implementation

organization, coordination, and integration of how work gets done

Holacracy

organizational structure in which decision making authority is distributed through loose collections/CIRCLES of self-organizing teams with dynamic roles

(3) key components of organizational design

structure, culture, and control. - This is a CONTINUAL process - The goal is to design an organization that allows managers to effectively translate their chosen strategy into a realized one.