BUS 498 Ch 11
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
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.
LO 11-2 Explain how organizational inertia can lead established firms to failure.
Organizational inertia can lead to the failure of established firms when a tightly coupled system of strategy and structure experiences internal or external shifts. Firm failure happens through a dynamic, four-step process (see Exhibit 11.2).
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
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
LO 11-5 Describe different organizational structures and match them with appropriate strategies.
To gain and sustain competitive advantage, not only must structure follow strategy, but also the chosen organizational form must match the firm's business strategy. The strategy--structure relationship is dynamic, changing in a predictable pattern—from simple to functional structure, then to multidivisional (M-form) and matrix structure—as firms grow in size and complexity. In a simple structure, the founder tends to make all the important strategic decisions as well as run the day-to-day operations. A functional structure groups employees into distinct functional areas based on domain expertise. Its different variations are matched with different business strategies: cost leadership, differentiation, and blue ocean (see Exhibit 11.6). The multidivisional (M-form) structure consists of several distinct SBUs, each with its own profit-and-loss responsibility. Each SBU operates more or less independently from one another, led by a CEO responsible for the business strategy of the unit and its day-to-day operations (see Exhibit 11.7). The matrix structure is a mixture of two organizational forms: the M-form and the functional structure (see Exhibit 11.9). Exhibits 11.8 and 11.10 show how best to match different corporate and global strategies with respective organizational structures.
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 Groupthink
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.
Transnational
Global Matrix -Centralized and decentralized decision making -Coordinate geography & products
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
Global Standardization
Multidivisional -Product divisions -Centralized decision making
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
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
LO 11-3 Define organizational structure and describe its four elements.
An organizational structure determines how firms orchestrate employees' work efforts and distribute resources. It defines how firms divide and integrate tasks, delineates the reporting relationships up and down the hierarchy, defines formal communication channels, and prescribes how employees coordinate work efforts. The four building blocks of an organizational structure are specialization, formalization, centralization, and hierarchy (see Exhibit 11.3).
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
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
Mechanistic Organization
High degree of specialization and formalization Tall hierarchies Rely on centralized decision making
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
Organic Organization
Low degree of specialization and formalization Flat organizational structure Decentralized decision making
International Multidomestic
Multidivisional -Geographic areas -Decentralized decision making
LO 11-4 Compare and contrast mechanistic versus organic organizations.
Organic organizations are characterized by a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making. Mechanistic organizations are described by a high degree of specialization and formalization, and a tall hierarchy that relies on centralized decision making. The comparative effectiveness of mechanistic versus organic organizational forms depends on the context.
LO 11-6 Describe the elements of organizational culture, and explain where organizational cultures can come from and how they can be changed.
Organizational culture describes the collectively shared values and norms of its members. Values define what is considered important, and norms define appropriate employee attitudes and behaviors. Corporate culture finds its expression in artifacts, which are observable expressions of an organization's culture.
Define organizational design and list its three components.
Organizational design is the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization. The key components of organizational design are structure, culture, and control. The goal is to design an organization that allows managers to effectively translate their chosen strategy into a realized one.
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
Types of Organizational Structure
Simple Functional Multidivisional Matrix
LO 11-7 Compare and contrast different strategic control-and-reward systems.
Strategic control-and-reward systems are internal governance mechanisms put in place to align the incentives of principals (shareholders) and agents (employees). Strategic control-and-reward systems allow managers to specify goals, measure progress, and provide performance feedback. In addition to the balanced-scorecard framework, managers can use organizational culture, input controls, and output controls as part of the firm's strategic control-and-reward systems. Input controls define and direct employee behavior through explicit and codified rules and standard operating procedures. Output controls guide employee behavior by defining expected results, but leave the means to those results open to individual employees, groups, or SBUs.
Key components of Organizational Design:
Structure Culture Control
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
Organizational Design
The process of: Creating, implementing, monitoring, and modifying... The structure, processes, and procedures of an organization
Blue Ocean Strategy
To implement a functional blue ocean strategy: -The firm must be both efficient and flexible -The firm must control costs & foster creativity -Mitigate the disadvantages of this approach
Differentiation Strategy
Using a functional structure allows a differentiator to: -Incorporate decentralized decision making -Foster and incentivize continuous innovation and creativity
Cost Leadership Strategy
Using a functional structure allows the cost leader to: -Nurture and constantly upgrade core competencies
Groupthink
When opinions combine Results when individuals don't critically evaluate and challenge a leader's opinions and assumptions