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. -this is the stage where firms find it effective to evolve and adopt a multidivisional or matrix structure -to overcome lack of cross-departmental collaboration in functional structure, firm can set up cross functional teams, different members of departments come together for specific product or project -each team member reports to two supervisors: team leader and department head
disadvantages of matrix structure
- Difficult to implement: implementing two layers of organizational structure creates significant organizational complexity and increases administrative costs - Reporting structures often not clear→ employees can have trouble reconciling goals presented by two or more supervisors→ can undermine accountability by creating multiple principal-agent relationships, which can make performance appraisals more difficult - Adding layer can slow decision making/ increase bureaucratic costs
disadvantages of multidivisional form
-added layers creates bureaucracy, red tape, and sometimes duplication of efforts -slows decision making because in many instances a CEO of an SBU must get approval from corporate headquarters when making major decisions that might affect a second SBU or the corporation as a whole -since each SBU in M-form is evaluated as a standalone profit and loss center, SBUs frequently end up competing with each other -high performing SBU may be rewarded with greater capital budgets and strategic freedoms, lower ones may be spun off -SBUs compete with one another for resources such as capital and managerial talent, but tend to cooperate by sharing competencies
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)
closed and open innovation models
-closed innovation model the firm conducts R&D in-house, using traditional funnel approach, boundaries of firm impenetrable, outside ideas and projects cannot enter, nor does firm allow own R&D projects to leave firm, extremely protective of intellectual property, preventing competitors from benefiting from it, profit from R&D comes from own discoveries, develop them on their own, and control distribution channels, benefit from first-mover advantages. However, prone to the not-invented-here syndrome, if not done in-house it cannot be good ex. Merck -open innovation model the firm attempts to commercialize both its own ideas and research from other firms. Also finds external alternatives such as spin-out ventures or strategic alliances to commercialize its internally developed R&D, boundary of firm has become porous, allowing firm to spin out some R&D projects while insourcing other promising projects, great ideas can come from inside and outside the company, the focus is on building a more effective business model to commercialize both internal and external R&D, rather than focusing on being first to market
matrix structure and global strategy
-international strategy (company leverages its home-based core competency by moving foreign markets. An international strategy is advantageous when company faces low pressure for cost reductions and local responsiveness. Pursue international strategy through differentiation strategy at business level, best match for it is functional organizational structure, allows company to leverage core competency most effectively - multi-domestic strategy (MNEs that pursue this strategy attempt to maximize local responsiveness in face of low pressures for cost reductions, best match is multi-divisional structure, enabling MNE to set up different divisions based on geographic regions, different geographic divisions operate more or less as standalone SBUs to maximize local responsiveness, decisions making decentralized) -global-standardization strategy (MNE attempts to reap significant economies of scale as well as location economies by pursuing a global division of labor based on wherever best-of-class capabilities reside at lowest cost. Product more or less an undifferentiated commodity, MNE pursues cost leadership strategy, optimal organizational structure is a multi-divisional structure. The focus is on driving down costs due to consolidation of activities across different geographic regions)
Results Only Work Environment (ROWE)
-more and more work requires creativity and innovation in highly developed economies -output controls that attempt to tap intrinsic rather than extrinsic employee motivation, which is driven by employee's interest in and meaning of work itself -in contrast, extrinsic motivation is driven by external factors such as awards and higher compensation, or punishments like demotions and layoffs
goal of blue ocean strategy
-requires reconciliation of trade-offs between differentiation and low cost -to be successful, firm must be both efficient and flexible -balance centralization to control costs with decentralization to foster creativity and innovation -managers attempt to combine advantages of functional structure variations used for cost leadership and differentiation while mitigating their disadvantages -firm needs to develop several distinct core competencies to both drive up perceived value and lower cost -must pursue both product and process innovations in an attempt to reap economies of scale and scope. -difficult to implement given the trade-offs that must be addressed
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 (short-term performance) 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
four types of corporate diversification...
1. single business or dominant business strategy generally employs functional structure 2. related or unrelated diversification, multidivisional is preferred organizational structure 3. M-form for related diversification strategy tends to concentrate decision making at top of organization, allowing high level of integration, also helps corporate headquarters leverage and transfer across different SBUs the core competencies that form basis for related diversification 4. M-form for unrelated diversification strategy often decentralize decision making, allowing general managers to respond to specific circumstances, and leads to low-level of integration at corporate headquarters
several factors led to shift in knowledge landscape from closed innovation to open innovation:
1. the increasing supply and mobility of skilled workers 2. the exponential growth of venture capital 3. the increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and invention 4. the increasing capability of external suppliers globally -have led to more companies to adopt an open innovation approach to R&D
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.
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. The sharing goes both ways: some external ideas and inventions are insourced while others are spun out. -external sources can be customers, suppliers, universities, start-up companies, and competitors -some R&D insourced while firm may spin out internal R&D that does not fit its strategy to allow others to commercialize it
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. -the culture that founders initially imprint is reinforced by their strong preference to recruit, retain, and promote employees who subscribe to same values
groupthink
A situation in which group members seek unanimous agreement despite their individual doubts -cohesive, non-diverse groups are highly susceptible to groupthink, which in turn can lead to flawed decision making with potentially disastrous consequences
organic organization
Characterized by a low degree of specialization and formalization, a flat organizational structure, and decentralized decision making.
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. -organizational culture can be an effective control system -values and norms also provide control by helping employees address unpredictable and irregular situations and problems common in service businesses -rules and procedures can address only circumstances that can be predicted
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. -firms frequently tie employee compensation and rewards to predetermined goals, such as a specific sales target or return on invested capital -when factors internal to firm determine relationship between effort and expected performance, outcome controls especially effective -outcome controls on corporate level discourage collaboration among different strategic business units. They are best applied when a firm focuses on single line of business or pursues unrelated diversification
the primary means of cultural change is for the...
corporate board of directors to bring in new leadership at top, which is then charged to make changes in strategy and structure.
Absorpative Capacity
a firm's ability to understand external technology development, evaluate them, and integrate them into current products or create new ones -key assumption of open innovation model is that combining best of internal and external R&D will more likely lead to a competitive advantage.
inertia
a firm's resistance to change the status quo, which 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 in action.
organizational structure
a key to determining how the work efforts of individuals and teams are orchestrated and how resources are distributed -key building blocks: specialization, formalization, centralization, and hierarchy
overtime as a firm diversifies into different product lines and geographies, it generally implements...
a multidivisional or matrix structure
ambidextrous organization
an organization able to balance and harness different activities in trade-off situations -for managers who want to pursue a blue-ocean strategy -management practices that companies use to resolve trade-off of low cost and differentiation strategies is including flexible and lean manufacturing systems, TQM, JIT inventory management, and Six Sigma, also use of team in production process, and decentralized decision making at level of the individual customer
formalization
an organizational element that captures the extent to which employee behavior is steered by explicit and codified rules and procedures
specialization
an organizational element that describes the degree to which a task is divided into separate jobs (i.e. the division of labor)
hierarchy
an organizational element that determines the formal, position-based reporting lines and thus stipulates who reports to whom -flat structure (few levels of hierarchy) -tall structure (many levels of hierarchy)
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 organization -planned emergence is found in more decentralized organizations
holocracy
an organizational structure in which decision-making authority is distributed through loose collections or circles of self-organizing teams
exploitation
applying current knowledge to enhance firm performance in the short term
corporate culture finds its expression in...
artifacts. Artifacts include elements such as design and layout of physical space, symbols, vocabulary, what stories are told, what events are celebrated and highlighted, and how they are celebrated.
mechanistic organization
characterized by a high degree of specialization and formalization and by a tall hierarchy that relies on centralized decision making
a firm's corporate office is supported by...
company-wide staff functions such as HR, finance, and corporate R&D. These staff functions support all of the company's SBUs, but are centralized at corporate headquarters to benefit from economies of scale and to avoid duplication within each SBU -since most of large enterprises are publicly held stock companies, president reports to BOD who represents interests of shareholders -the president with corporate headquarters staff, monitors performance of each SBU and determines how to allocate resources across units -corporate headquarters adds value by functioning as an internal capital market. The goal is to be more efficient at allocating capital through its budgeting process than what can be achieved in external capital markets -especially effective if corporation overall can access capital at a lower cost than competitors due to favorable debt rating -corporate headquarters can also add value through restructuring company's portfolio of SBUs by selling low-performing businesses and adding promising businesses through acquisitions
co-opetition
competition and cooperation at the same time--among SBUs is both inevitable and necessary. Sometimes it can be detrimental when a corporate process such as resource or transfer pricing between SBUs become riddled with turf wars and corporate politics -in some instances, spinning out SBUs to make them independent companies is beneficial
in ambidextrous organizations managers must...
constantly analyze their existing business processes and routines, looking for ways to change them in order to resolve trade-offs across internal value chain activities and time -top-level manager, like CEO, must take on necessary coordination and integration work
the design of an organization, the matching of strategy and structure and its control-and-reward systems...
determine whether or not an organization that has chosen an effective strategy will be able to gain and sustain a competitive advantage
business leaders find it much easier to create and manage within...
developed structures than to restructure their organizations to be where they will need to be in future.
successful socialization in turn allows...
employees to function productively and to take on specific roles within organization. -Strong cultures emerge when the company's core values are widely shared among firm's employees and when norms have been internalized
though strategy formulation (what to do) is distinct from strategy implementation (how to do it)...
formulation and implementation must be part of an interdependent, reciprocal process to ensure continued success
effective strategy implementation is critical to...
gaining and sustaining competitive advantage
a positive culture motivates and energizes employees by appealing to their...
higher ideals. Internalizing the firm's values and norms, employees feel that they are part of a larger, meaningful community attempting to accomplish important things. In this way, firm can rely on fewer levels of hierarchy
a functional structure allows for a higher degree of specialization and deeper domain expertise than a simple structure.
higher specialization also allows for a greater division of labor, which is linked to higher productivity, centrally coordinated by CEO -allows for an efficient top-down and bottom-up communication chain between CEO and functional departments, and thus relies on relatively flat structure
for organizational culture to have competitive advantage, the firm's unique culture must help in some way to...
increase its economic value creation (V-C). Increase perceived value of product and/or lower its cost of production/delivery -must be rare, valuable, and difficult to imitate
an organization's culture can be one of its strongest assets, but also its greatest liability...
it 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 firm and environment change. Overtime, original core competency is no longer a good fit and turns from an asset into a liability, which is a time a culture needs to change
because implementation transform strategy into actions and business models...
it often requires changes within the organization. However, strategy implementation often fails because managers are unable to make the necessary changes due to the effects on resource allocation and power distribution within an organization. Strategic leaders are leery about disturbing the status quo
matrix structure is versatile because...
managers can assign different groupings along vertical and horizontal axes. A common form of the matrix structure uses different projects or products on the vertical axis and different functional areas on the horizontal axis. -cross functional teams work together on different projects. Teams tend to be permanent rather than project-based with a predetermined horizon -some firms have replaced more rigid matrix structure with network structure -network structure allows firm to connect centers of excellence, whatever their global location. The firm benefits from communities of practice, which store important organizational learning and expertise -to avoid undue complexity, these network structures need to be supported by corporate-wide procedures and policies to streamline communication, collaboration, and the allocation of resources
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 prior to the value-creating activities -firms use input controls when goal is to define ways and means to reach a strategic goal and to ensure a predictable outcome. -called input controls because management designs mechanisms so they are considered before employees make any business decisions -use of budgets is key to input controls, managers sets budgets before employees define and undertake business activities -standard operating procedures also frequently used mechanism when relying on input controls -goal is to specify conversion process from beginning to end in great detail to guarantee standardization and minimize deviation. This is important when a company operates in different geographies and with different human capital throughout globe but needs to deliver a standardized product or service
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
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...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
matrix structure
organizational structure that combines the functional structure with the M-form -in it, the firm is organized according to SBUs along a horizontal axis, but also has a second dimension of organizational structure along a vertical axis -second dimension consists of different geographic areas, each would house full set of functional activities -idea is to combine benefits of M-form (domain expertise, economies of scale, and efficient processing of information) with those of functional structure (responsiveness and decentralized focus)
multidivisional structure
organizational structure that consists of several distinct strategic business units, each with its own profit and loss responsibility -each SBU operated more or less independently from one another and led by a CEO who is responsible for unit's business strategy and day to day operations -CEOs of each division report to corporate office led by the company's highest ranking executive -M structure is widely adopted structure because most large firms are diversified to some extent across different product lines and geographies
functional structure
organizational structure that groups employees into distinct functional areas based on domain expertise -areas often correspond to distinct stages in value chain such as R&D, engineering and manufacturing, and marketing and sales, as well as supporting areas such as human resources, finance, and accounting
corporations may use SBUs to...
organize around different businesses and product lines or around different geographic regions -each SBU represents a self-contained business with its hierarchy and organizational structure
goal of cost leadership strategy
reduce the firm's cost below that of its competitors while offering acceptable value -standardized product or service to the mainstream customer -managers must create a functional structure that contains mechanistic structure (centralized, well defined lines of authority up and down hierarchy) -using functional structure allows cost leader to nurture and constantly upgrade necessary core competencies in manufacturing logistics -cost leader needs to create incentives to foster process innovation in order to drive down cost -because firm services average customer and largest market segment possible, focus on leveraging economies of scale to drive down costs
exploration
searching for new knowledge that may enhance a firm's future performance
organizational culture is the...
second building block when designing organization for competitive advantage
organizational culture
the collectively shared values and norms of an organization's members, a key building block of organizational design -values define what is considered important -norms define appropriate employee attitudes and behaviors -employees learn about organization's culture through socialization, a process whereby employees internalize an organization's values and norms through immersion in day to day operations.
span of control
the number of employees who directly report to a manager -span of control is narrow in tall organizational structures -span of control is wide, meaning one manager supervises many employees -firms have de-layered by reducing the headcount, making the organizations flatter and more nimble. Puts pressure on 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
organizational design
the process of creating, implementing, monitoring, and modifying the structure, processes, and procedures of an organization -the goal is to design an organization that allows managers to effectively translate their chosen strategy into a realized one
inside the oval of organizational inertia, the longer internal arrows show firm's tightly coupled organizational design over time...
the shorter internal arrows indicate pressures radiating from internal shifts such as accelerated growth, a change in the business model, entry into new markets, a change in top management team or mergers and acquisitions.
successful firms often plant the seed of subsequent failure:
they optimize their organizational structure to the current situation. The tightly coupled system can break apart when internal or external pressures occur
goal of differentiation strategy
to create a competitive advantage by offering products or services at a higher perceived value, while controlling costs -sells non-standardized product or service to specific market segments in which customers are willing to pay a higher price -in functional structure, managers rely on an organic organization (decision making decentralized to foster and incentivize continuous innovation and creativity as well as flexibility and mutual adjustment across areas -functional structure allows with organic org. allows differentiator to nurture and constantly upgrade necessary core competencies, such as leveraging brand name across different products or technology across different devices
firms tend to use a global matrix structure to pursue...
transnational strategy, in which firm combines benefits of a multi-domestic strategy (high local responsiveness) with those of a global-standardization strategy (low-cost position attainable) -in global matrix structure, geographic divisions are charged with local responsiveness and learning -each SBU charged with driving down costs through economies of scale and other efficiencies. -global matrix structure also allows firm to feed local learning back to different SBUs and thus diffuse it throughout organization
the most important yet least visible element of organizational culture...
values is in the center. As move out from values to norms and to artifacts culture becomes more observable. Understanding what organizational culture is, how it is created, maintained, and changed can help you be a more effective manager. Unique culture can be source of competitive advantage
during the 20th century, the closed innovation approach...
was the dominant research and development approach for most firms: they tended to discover, develop, and commercialize new products internally, though approach was costly and time consuming, it allowed for firms to fully capture returns to their own innovations
when is functional structure recommended?
when a firm has a fairly narrow focus in terms of product/service offerings (low level diversification) combined with small geographic footprint. -matches well with cost-leadership, differentiation, and blue ocean