Organizational Design

1. Organizational Design Joe Mahoney

3. How to Organize for Competitive Advantage • Organizational design • Goal is to translate strategies into realized ones • Structure • Processes • Procedures • Structure follows strategies • Structure must be flexible • Yahoo failed to make changes to their organizational structure. • Jerry Young ousted in 2008.

6. Organizational Inertia and the Failure of Established Firms • Organizational inertia • Resistance to change • Often leads to failure because of the environmental dynamics: competition, technology, strategy…etc. • Organizational strategy and structure are not static… But rather are dynamic! • A tightly-coupled and coherent activity system that works well in a static environment may be subject to problems of inertia in a dynamic environment.

7. The Key Elements of Organizational Structure Organizational structure determines Work efforts of individuals and teams Resource distribution Key building blocks Specialization Formalization Centralization Hierarchy

8. The Key Elements of Organizational Structure Specialization: degree to which a task is divided Division of labor Example: U.S. Military (Army, Air Force, Navy, Marines) Formalization: codified rules and formal procedures Detailed written rules and policies Examples: NASA, McDonald’s

9. The Key Elements of Organizational Structure Centralization: where the decision is made Centralized decision making  slow response time and reduced customer satisfaction Example: BP’s Mexican Gulf Oil Spill Hierarchy: formal, position-based reporting lines Tall structure vs. flat structure Tall structure higher degree of centralization Flat structure  lower degree of centralization Span of control

10. Assembling the Pieces: Mechanistic vs. Organic Organizations Organic organizations Low degree of specialization and formalization Flat structure Decentralized decision making Uses virtual team due to information technology Examples: Zappos, W. L. Gore, and many high-tech firms Mechanistic organizations High degree of specialization and formalization Tall hierarchy Centralized decision making Example: McDonald’s

11. Mechanistic vs. Organic Organization

12. Matching Strategy and Structure Simple structure Small firms with low complexity Top management makes all important strategic decisions Low degree of formalization and specialization A basic organizational structure Examples: small advertising, consulting, accounting, and law firms

13. Changing Organizational Structures and Increasing Complexity as Firms Grow

14. Functional Structure Functional structure Groups of employees with distinct functional areas The areas of expertise correspond to distinct stages in the company value chain activities Example: College of Business, Finance Department , … etc. Recommended with narrow products/services Matches well with business-level strategy Cost leadership  Mechanistic organization Differentiation  Organic organization Integration strategy  Ambidextrous organization

15. Typical Functional Structure

16. Functional Strategy: Drawbacks Lacks effective communication channels across departments Lack of linkage between functions Often solved the problems by having cross-functional teams It cannot effectively address a higher level of diversification

17. Multidivisional Structure Multidivisional structure Consists of several distinct SBUs Each SBU is operationally independent Each leader of SBUs report to the corporate office Examples: Zappos is an SBU under Amazon Skype is an SBU under Microsoft Paypal is an SBU under eBay Companies using M-form structure GE, Honda

18. Organizing the Diversified Firm • The multidivisional organization, as documented by Alfred D. Chandler in Strategy and Structure, was pioneered in the 1920s by pioneering firms such as: • DuPont, General Motors, Sears and Standard Oil; • By 1967, two-thirds of Fortune 500 Companies are multidivisional.

20. Organizing the Diversified Firm • Three key features of organizational structure: • 1. The division of tasks; • 2. The depth of the hierarchy (span of control); • 3. The extent of authority delegation (how much decentralization?)

21. Typical M-Form Structure Functional Structure Matrix Structure

23. Multidivisional Structure Use with various corporate strategies Related diversification Co-opetition among SBUs Transfer core competences across SBUs Centralized decision making Unrelated diversification Decentralized decision making Competing for resources

24. Matching Corporate-Level Strategy

27. Evolutionary Stability of the Multidivisional Form • Parable of the Two Watchmakers • 10,000 parts • Watchmaker #1 needs to put all parts together or the watch falls apart and he needs to start all over with his 10,000 parts. • Watchmaker #2 has developed 100 subsystems of 100 parts. This is the “principle of near-decomposability” (I.e., a system that contains localized sub-systems)

28. Evolutionary Stability of the Multidivisional Form • Hierarchical systems (containing sub-systems) will evolve much more rapidly from elementary constituents than will non-hierarchic systems containing the same number of elements. • In organization theory this is called the effectiveness of “loose coupling.” • The advantage of “loose coupling” is that if there is poor performance in division 2 it does not lead to failure of the entire system.

29. Effectiveness of Multidivisional Form • Effective Divisionalization involves: • Identification of separable economic activities within the firm; • Giving quasi-autonomous standing to each division (usually of a profit center nature); • Monitoring the efficiency performance of each division; • Awarding incentives; • Allocating cash flow to high yield uses; and • Performing strategic planning (diversification, acquisition, and related activities).

30. Weaknesses of Multidivisional Form • Dysfunctional Aspects of the Multidivisional: • Emphasis on short-term perspective; • Loss of economies of scope; • Duplication of R&D, marketing, etc.; • Emphasis on financial manipulation instead of developing firm capabilities and resources; and • Large conglomerates may have excessive political power.

31. Matrix Structure A combination of functional and M-form structure Creation of dual line of authority and reporting lines Each SBU receives support both horizontally and vertically Very versatile Enhanced learning from different SBUs

32. Typical (Global) Matrix Structure

35. Matching Global Strategy and Structure