chapter 11

Organizational Structure determines

- How efforts of individuals and teams are orchestrated - How resources are distributed

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 -Cooperation is still needed at the same time

unrelated diversification

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

related diversification

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

Using a functional structure allows a differentiator to:

-Incorporate decentralized decision making. -Foster and incentivize continuous innovation and creativity.

Culture Can Help a Firm's Competitive Advantage If

-It makes a positive contribution to economic value creation. -It passes the VRIO principles. •Valuable, rare, difficult to imitate, the firm must be organized to capture value. -It can adapt as the business evolves.

what does the matrix structure do

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

Closed Innovation

-Products developed internally -Costly and time consuming

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.

Pros of Formalization

-ensures consistent and predictable results -safety and reliability

cons of formalization

-slower decision making -reduced innovation -hindered customer service

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.

A functional structure works when a firm has

A narrow focus and small geographic footprint

Why should managers using the M-form organizational structure to support a related- diversification strategy ideally concentrate decision making at the top of the organization? A) It allows a high level of integration. B) It helps contain the core competencies within a strategic business unit (SBU). C) It leads to competition between SBUs. D) It helps evaluate each SBU as a stand-alone profit-and-loss center.

A) It allows a high level of integration. -Managers using the M-form organizational structure to support a related-diversification strategy should ideally concentrate decision making at the top of the organization. Doing so allows a high level of integration. It also helps corporate headquarters leverage and transfer across different BUs the core competencies that form the basis for a related diversification.

Paper Street Soap Company, a cosmetics firm, has offices in New York, Texas, California, New Mexico, and New Jersey. Each of these offices is headed by a president who reports directly to Jennifer Watson, the CEO. The heads of the centralized HR, Finance, and Marketing teams report to Jennifer Watson as well. Managers in the various offices also report to the CEO directly. Based on this information, which of the following statements is most likely to be true? A) Jennifer Watson has a wide span of control. B) Paper Street Soap Company has a tall hierarchical structure. C) Jennifer Watson is underworked. D) Paper Street Soap Company is a mechanistic organization.

A) Jennifer Watson has a wide span of control. Based on this information, the statement that is most likely to be true is that Jennifer Watson has a wide span of control. Hierarchy determines the formal, position-based reporting lines and thus stipulates who reports to whom. The number of levels of hierarchy, in turn, determines the managers' span of control—how many employees directly report to a manager. In tall organizational structures, the span of control is narrow. In flat structures, the span of control is wide, meaning one manager supervises many employees.

Stratton Oakmont pursues a related diversification strategy, deriving less than 70 percent of revenues from its original business unit, Stratton Piedmont, and maintaining several related units including Stratton Wellmont and Stratton Fredmont. Which of the following structures is most likely to support this strategy? A) M-Form with centralized decision-making power (cooperative multidivisional) B) M-Form with decentralized decision-making power (competitive multidivisional) C) functional with centralized decision-making power D) functional with decentralized decision-making power

A) M-Form with centralized decision-making power (cooperative multidivisional) -For firms that pursue either related or unrelated diversification, the M-form is the preferred organizational structure. Firms using the M-form organizational structure to support a related-diversification strategy tend to concentrate decision making at the top of the organization. Doing so allows a high level of integration. It also helps corporate headquarters leverage and transfer across different SBUs the core competencies that form the basis for a related diversification.

Sarah, a recent fashion design school graduate, has received praise for her clothing designs from her peers and friends on social networking sites; this has inspired her to set up a store where she can design and sell apparel. After experiencing some success with sales, she recruits two employees to handle customers at the store. However, she handles other day-to-day affairs herself, while continuing to design clothes. Which of the following is likely to be a pitfall of this organizational structure established by Sarah? A) Once the firm starts growing and attracting more customers she is likely to feel overloaded. B) Hiring more employees will result in loss of intellectual property. C) People are highly unlikely to buy clothes from a store run by a fashion design student. D) The online admiration of her designs will not translate into sales.

A) Once the firm starts growing and attracting more customers she is likely to feel overloaded. -A likely pitfall of this organizational structure established by Sarahis that once the firm starts growing and attracting more customers she is likely to feel overloaded. A simple structure generally is used by small firms with low organizational complexity. In such firms, the founders tend to make all the important strategic decisions and run the day-to-day operations. Typically, neither professional managers nor sophisticated systems are in place, which often leads to an overload for the founder and/or CEO when the firms experience growth.

Why is it difficult to imitate the organizational culture of firms like Southwest Airlines and Zappos? A) Their culture reflects complex relationships with their employees, customers, and suppliers. B) They produce products that cannot be copied easily because of their complex designs. C) The employees in the organization themselves are unaware of the factors contributing to their organizational culture. D) It is not commercially viable for other companies to implement the same culture.

A) Their culture reflects complex relationships with their employees, customers, and suppliers. -Once it becomes clear that a firm's culture is a source of competitive advantage, some competitors will attempt to imitate that culture. Therefore, only a culture that cannot be easily copied can provide a competitive advantage. However, it can be difficult, at best. to imitate the cultures of successful firms, for two reasons: causal ambiguity and social complexity.

Vanessa just graduated from law school and wants to open her own law firm. Vanessa should probably adopt a(n) ______ structure for the firm. A) simple B) functional C) M-form D) matrix

A) simple Simple structures exhibit low formalization and specialization, which is suitable for new start-ups and small professional firms.

Fang and Bone Corp. is a successful drug manufacturer. Because the pharmaceutical industry features a high rate of change and the threat of disruption is high, Fang and Bone Corp. should A)be prepared to restructure as the landscape changes. B)stick with the structure that brought it success no matter what happens. C)attempt to implement an unstructured organization. D)switch to whichever structure is most common in the industry.

A)be prepared to restructure as the landscape changes. -Organizational inertia refers to a firm's resistance to change the status quo that can set the stage for the firm's subsequent failure. To avoid inertia and possible organizational failure, the firm needs a flexible and adaptive structure to effectively translate the formulated strategy into action. Ideally the firm would maintain a virtuous cycle of reconsidering organization, particularly in industries where the rate of change is high and potential disruption frequent.

Which of the following real-world scenarios best exemplifies formalization? A) Zappos' focus on allowing its customer service employees to use their own approach rather than depend on scripts B) McDonald's use of standard operating procedures across the world C) W. L. Gore's associates organizing themselves in project-based teams that are led by sponsors, not bosses D) Yahoo's decision to fire its CEO after incurring huge losses

B) McDonald's use of standard operating procedures across the world -McDonald's use of standard operating procedures across the world best exemplifies formalization. Formalization captures the extent to which employee behavior is controlled by explicit and codified rules and procedures.

Delos Inc. is an apparel manufacturer. The management at Delos Inc. prefers moderate control over the operations of the different departments such as R&D, design, marketing, and sales. It allocates a budget to each function at the beginning of each quarter. This is an example of implementing control through A) output controls. B) input controls. C) multidivisional strategy. D) centralization.

B) input controls. -This is an example of implementing control through input controls. Input controls seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures. Firms use input controls when the goal is to define the ways and means to reach a strategic goal and to ensure a predictable outcome. The use of budgets is a key to input controls.

Leslie has completed the organizational design of her firm but is now interested in the second key informal building block, which she believes will help her firm achieve a competitive advantage. Specifically, she's interested in how things will get done on a day-to-day basis and the intangible piece of her organization that cannot be easily codified. Leslie wants to build an effective A) employee handbook. B) organizational culture. C) list of standard operating procedures. D) innovation strategy.

B) organizational culture. -Organizational culture is the second key building block when designing organizations for competitive advantage. Culture is an informal, and thus an intangible, building block of organizational design that, unlike the formal structure, cannot be easily observed or codified.

Jerry is one of the SBU managers for a firm that has been in business for over 50 years. The external environment in which they have operated has changed significantly in the past decade, but this firm is still operating under a "business as usual" mantra. Jerry can't seem to convince the upper level executives to reorganize the firm's structure and formal reporting relationships. This firm is probably experiencing A) a failed strategy. B) organizational inertia. C) a change in leadership. D) increased morale due to their organizational culture.

B) organizational inertia. -Organizational inertia is a firm's resistance to change in the status quo.

Tom is the inventor of a personal fitness tracking device, and he is in the process of hiring employees after receiving investment funding. When considering how to structure his company, he should A)emulate the structure of the leading firm in the industry. B)first establish a strategy and let that be him guide. C)choose the structure that will give him the most control. D)ask employees what structure they are most comfortable with.

B)first establish a strategy and let that be him guide. -As demonstrated by business historian Alfred Chandler in his seminal book Strategy and Structure, organizational structure must follow strategy in order for firms to achieve superior performance: "Structure can be defined as the design of organization through which the enterprise is administered ... structure follows strategy."

Los Pollos Hermanos is a nationwide fast-food chain. Decision power resides at the top of the organization. Each job is documented in minute detail. The firm has many levels of supervision, including vice presidents and regional managers. The firm's headquarters provides detailed instructions to each of its franchisees so that they provide comparable quality and service across the board. Based on this scenario, which of the following is an accurate statement about Tony's? A) Los Pollos Hermanos has a low degree of specialization and formalization, a high degree of centralization, and relies on a flat hierarchy. B) Los Pollos Hermanos has a high degree of specialization and formalization, a low degree of centralization, and relies on a tall hierarchy. C) Los Pollos Hermanos has a high degree of specialization, formalization, and centralization and relies on a tall hierarchy. D) Los Pollos Hermanos has a low degree of specialization, formalization, and centralization and relies on a flat hierarchy.

C) Los Pollos Hermanos has a high degree of specialization, formalization, and centralization and relies on a tall hierarchy. -Los Pollos Hermanos has a high degree of specialization (employees are assigned specific tasks such as food prep, cook, cashier), formalization (each job documented in minute detail; detailed instructions to each of its franchisees), and centralization (decision power resides at the top) and relies on a tall hierarchy (many levels of supervision).

Two leading home appliance companies, Globex Inc. and Pug Tech, are in competition for market share. In their quest for exciting new products, Globex employs an open innovation model, while Pug Tech pursues a closed innovation model. Which of the following statements is most likely true? A) Globex has a greater chance of capturing market share. B) Pug Tech has a superior absorptive capacity. C) Pug Tech will protect its intellectual property with patents and trade secrets. D) Globex is most concerned with securing first-mover advantages.

C) Pug Tech will protect its intellectual property with patents and trade secrets. -Pug Tech is likely to protect its research and development findings with patents and trade secrets. Firms in the closed innovation model are extremely protective of their intellectual property. This not only allows the firm to capture all the benefits from its own R&D, but also prevents competitors from benefiting from it.

Hooli, a web development firm, wants to implement an organic structure to foster innovation and attract the most talented creative minds. Which of the following features will make it difficult to do so? A) decision-making power distributed throughout the organization B) a wide span of control for managers C) dedication to a cost-leadership business strategy D) flexible job descriptions for employees

C) dedication to a cost-leadership business strategy -A cost-leadership strategy is typically associated with mechanistic structures, which allow for standardization and economies of scale. A differentiation strategy is more commonly used by organic firms.

Aperture Science relies on its employees to provide innovative ideas for new educational products. To foster intrinsic motivation in its workforce, Aperture Science should A) offer bonuses to employees whose ideas go into production. B) threaten to fire employees who do not come up with at least one new idea per week. C) give employees a "free day" every two weeks to pursue ideas for new educational toys. D) distribute a list of standard operating procedures for employees to follow.

C) give employees a "free day" every two weeks to pursue ideas for new educational toys. -By giving employees a free day to pursue ideas relating to educational toys, Aperture Science provides intrinsic motivation for its employees. Intrinsic motivation 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 (the carrot-and-stick approach). Intrinsic motivation in a task is highest when an employee has autonomy (about what to do), mastery (how to do it), and purpose (why to do it).

PolyCon's, a large and successful retail chain on the East Coast, decides to expand its operations across the United States. Which of the following organizational structures should PolyCon's use? A) basic B)simple C) multidivisional D)functional

C) multidivisional -PolyCon's should use a multidivisional organizational structure. Over time, as a firm diversifies into different product lines and geographies, it implements a multidivisional or a matrix structure. The multidivisional structure (or M-form) consists of several distinct strategic business units (BUs), each with its own profit-and-loss (P&L) responsibility.

Why does a functional structure rely on a flat organizational structure? A)The work in the organization is centrally coordinated by the CEO. B)It allows for a higher degree of specialization and domain expertise. C)It allows for efficient bottom-up and top-down communication. D)It allows for the implementation of a differentiation strategy.

C)It allows for efficient bottom-up and top-down communication. -A functional structure 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.

In which of the following ways does Zappos achieve organizational control? A) It continually changes the organizational values that guide its employees. B) It refrains from monitoring its employees' calls. C) It encourages employees to be creative and innovate and to go the extra mile to deliver a wonderful customer experience. D) It enforces that each group member's compensation depends in part on the group's overall productivity

D) It enforces that each group member's compensation depends in part on the group's overall productivity -Norms, informal and tacit in nature, act as a social control mechanism. Zappos, for example, achieves organizational control partly through an employee's peer group: Each group member's compensation, including the supervisor's, depends in part on the group's overall productivity

Bill Lewis is the CEO of Nordic Technologies Inc., a firm that offers a limited line of standard products that competes in a similar manner with a narrow, local market focus and whose competitive advantage is a focus on low cost derived from gaining economies of scale. Bill should use a A) group of strategic business units that each have a geographic focus. B) matrix structure that combines functional departments with geographic divisions. C) simple structure. D) functional structure.

D) functional structure. -Nordic Technologies Inc. focuses on efficiency and achieving scale economies by producing limited lines of products to mainstream customers. Therefore, a functional structure is appropriate.

Paul runs an organization that implements a cost-leadership strategy. This business-level strategy supports both a _____ and _____ structure A) matrix; organic B) M-form; vertical C) simple; organic D) functional; mechanistic

D) functional; mechanistic -A cost-leadership strategy usually focuses on offering standardized products to mainstream customers. Usually a functional and mechanistic organizational structure is preferred here to promote scale economies.

E Corp is a pharmaceutical company that has many breakthroughs in medicine to its credit. Unlike many other pharmaceutical companies, E Corp has a relaxed work environment where employees are free to discuss projects with each other. Employees are encouraged to choose the projects that interest them; communication between team members and their supervisors is open and easy. Because of the company's work culture, its employees feel motivated to work harder and display more entrepreneurial behaviors. In this scenario, E Corp Inc. is most likely an organization that is A) formalized. B) mechanistic. C) centralized. D) organic.

D) organic. -In this scenario, E Corp is most likely an organic organization. Organic structures tend to be correlated with the following: a fluid and flexible information flow among employees in both horizontal and vertical directions; faster decision making; and higher employee motivation, retention, satisfaction, and creativity. Organic organizations also typically exhibit a higher rate of entrepreneurial behaviors and innovation.

Specialization describes

Describes the degree to which a task is divided into separate jobs.

disadvantages of 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

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. From company values. •Values are usually linked to a reward system.

Organizational Structure includes four building blocks

Includes four building blocks: 1.Specialization. 2.Formalization. 3.Centralization. 4.Hierarchy.

disadvantages of a functional structure

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.

formalization

The extent to which employee behavior is guided by rules and procedures

What is hierarchy?

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

matrix structure and global structure

This structure fits well with a transnational strategy. •International: functional structure. •Multi-domestic: multi-divisional structure. •Global standardization: multi-divisional structure. •Transnational: global matrix structure.

multidivisional structure (M-form)

Used as a firm diversifies products and geography. -widely adopted organizational structure

a simple structure is used by

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. Low degree of formalization and specialization.

how does organizational culture change?

When the environment changes •A firm must hone, refine, and upgrade •To ensure a core rigidity doesn't emerge New leadership •Changes in strategy and structure -when the original core competencies turn into a liability

specialization requires

a tradeoff between depth and breadth of knowledge

exploitation

applying current knowledge to enhance firm performance in the short term

norms:

appropriate attitudes and behaviors in day-to-day work and interactions

organizational culture can be expressed through

artifacts

what is co-opetition

competition and cooperation at the same time

functional structure

employees are grouped by the functions they perform for the organization •Based on domain expertise. •Often correspond to distinct stages in the value chain.

input controls are considered before

employees make business decisions. •Example: a budget. •Managers allocate money to R&D projects before they begin.

International: ______ structure

functional

•Transnational: _______ structure

global matrix structure.

output controls

guide employee behavior by defining expected results, but leave the means to those results open to individual employees, groups, or SBUs.

Specialization: larger firms have

high degree of Specialization

In tall organizational structures, the span of control

is narrow

In flat organizational structures, the span of control

is wide, meaning one manager supervises many employees

Specialization: smaller ventures have

low degree of specialization

Multi-domestic: __________ structure.

multi divisional

Global standardization: ________ structure.

multi-divisional structure.

using a functional structure allows the cost leader to

nurture and constantly upgrading core competencies

exploration

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

Input Controls

seek to define and direct employee behavior through a set of explicit, codified rules and standard operating procedures

in this structure there is low degree of formalization and specialization.

simple structure

centralization correlates to

slow response time and reduced customer satisfaction

Organizational design: key components

structure, culture, and control

Leaders of functional areas report to

the CEO. •The CEO coordinates and integrates the work of each function.

what is centralization

the degree to which decision making is concentrated at a single point in the organization

span of control

the number of subordinates who report directly to a manager

organizational culture

the shared values and norms of an organization's members

values:

what is considered important

open innovation

• Ideas and innovation also arise from external sources - Customers, suppliers, universities, etc. • Leverages licensing agreements, strategic alliances, joint ventures, and acquisitions

intrinsic motivation highest when an employee has

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

organization design is the process of:

•Creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization.

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 and operations.

Organic Organization:

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

Mechanistic Organization:

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

Artifacts include

•Physical space (cubicles). •Symbols (clothing). •Events (celebrations). •Vocabulary (stories that are told).

Internal-governance mechanisms are put in place to align the incentives of:

•Principals (shareholders). •Agents (employees).

Internal-governance mechanisms are put in place to align the incentives of: •Principals (shareholders). •Agents (employees). Allow managers to:

•Specify goals. •Measure progress. •Provide performance feedback.

Firm Strategy and Structure

•The relationship between these is interdependent and dynamic. •Strategy and structure impact a firm's performance. •Changes over time as the firm grows in size and complexity. •Different firm stages require different structures.

centralization affects strategic planning by

•Top-down strategic planning takes place in highly centralized organizations. •Planned emergence is found in more decentralized organizations.

Several factors led to a shift in the knowledge landscape from closed innovation to open innovation. They include:

▪ The increasing supply and mobility of skilled workers. ▪ The exponential growth of venture capital. ▪ The increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and inventions. ▪ The increasing capability of external suppliers globally.