Advantages and disadvantages matrix structure

CHAPTER 10

Creating Effective Organizational Designs

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Learning Objectives

After reading this chapter, you should have a good understanding of:

10-1 The growth patterns of major corporations and the relationship between the firm’s strategy and its structure.

10-2 Each of the traditional types of organizational structure: simple, functional, divisional, and matrix.

10-3 The implication of a firm’s international operations for organizational structure.

10-4 The different types of boundaryless organizations – barrier-free, modular, and virtual – and their relative advantages and disadvantages.

10-5 The need for creating ambidextrous organizational designs that enable firms to explore new opportunities and effectively integrate existing operations.

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Organizational Designs

Consider . . .

To implement strategy successfully, firms must have appropriate organizational designs.

How should a firm coordinate internal operations? And how should a firm integrate its operations with external parties?

How can these internal & external boundaries be made both flexible and permeable?

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To implement strategy successfully, firms must have appropriate organizational designs. These include the processes and integrating mechanisms necessary to ensure that boundaries among internal activities and external parties, such as suppliers, customers, and alliance partners, are flexible and permeable. A firm’s performance will suffer if its managers don’t carefully consider both of these organizational design attributes. Today’s managers are faced with two ongoing and vital activities in structuring and designing their organizations. First, they must decide on the most appropriate type of organizational structure. Second, they need to assess what mechanisms, processes, and techniques are most helpful in enhancing the permeability of both internal and external boundaries.

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Organizational Structure

Organizational structure refers to formalized patterns of interactions linking.

Tasks

Technologies

People

Structure provides a balance between:

The need for division of tasks into meaningful groupings

The need to integrate these groupings for maximum efficiency and effectiveness

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Organizational structure = the formalized patterns of interactions that link a firm’s tasks, technologies, and people. Structures help to ensure that resources are used effectively in accomplishing an organization’s mission. Structure provides a means of balancing two conflicting forces: a need for the division of tasks into meaningful groupings, and the need to integrate such groupings in order to ensure efficiency and effectiveness. Structure identifies the executive, managerial, and administrative organization of a firm and indicates responsibilities and hierarchical relationships. It also influences the flow of information as well as the context and nature of human interactions.

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Question (1 of 3)

Generally speaking, discussions of the relationship between strategy and structure strongly imply that

strategy follows structure.

structure follows strategy.

strategy can effectively be formulated without considering structural elements.

structure typically has a very small influence on a firm’s strategy.

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Answer: B. A firm’s strategy has implications for how managers need to control and coordinate the firm’s scope of operations, especially as it grows to enter new product-market domains. Such growth places additional pressure on executives to manage the firm’s increasing size and diversity. The most appropriate type of structure that a firm adopts depends on the nature and magnitude of growth.

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Organizational Structures: Growth Patterns

Exhibit 10.1 Dominant Growth Patterns of Large Corporations

Source: Adapted from J.R. Galbraith and R.K. Kazanjian. Strategy Implementation: Structure, Systems and Process, 2nd ed.,1986,St Paul, MN: West Publishing Company.

Jump to Appendix 1 for long description.

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A firm’s strategy and structure change as it increases in size, diversifies into new product markets, and expands its geographic scope. Exhibit 10.1 illustrates the common growth patterns of firms. The choice of structure has to do not only with the direction and magnitude of growth, but also with the degree of integration needed across businesses as this growth occurs.

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Organizational Structures: Simple Structure

The simple organizational structure is the oldest & most common organizational form.

The organization is small, with a single or very narrow product line.

The owner-manager makes most of the decisions.

The staff serves as an extension of the top executive.

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Simple organizational structure = an organizational form in which the owner–manager makes most of the decisions and controls activities, and the staff serves as an extension of the top executive.

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Simple Structure Advantages & Disadvantages

Advantages

Highly informal

Coordination of tasks by direct supervision

Centralized decision making

Little specialization of tasks

Few rules & regulations; informal reward systems

Disadvantages

Responsibilities not understood

Self-interest, employees taking advantage of lack of regulations

Limited opportunities for upward mobility

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The simple structure is highly informal and the coordination of tasks is accomplished by direct supervision. Decision making is highly centralized, there is little specialization of tasks, few rules and regulations, and an informal evaluation and reward system. A simple structure may foster creativity and individualism; however, such informality may lead to problems. Employees may not clearly understand their responsibilities, which can lead to conflict and confusion. Employees may also take advantage of the lack of regulations, act in their own self-interest, which can erode motivation and satisfaction and lead to the possible misuse of organizational resources. Small organizations have flat structures that limit opportunities for upward mobility. Without the potential for future advancement, recruiting and retaining talent may become difficult.

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Organizational Structures: Functional Structure

The functional organizational structure is where the major functions of the firm are grouped internally.

The organization is small, with a single or closely related product or service, high production volume, perhaps some vertical integration.

The owner-manager needs specialists in various functional areas.

The chief executive has responsibility for coordination & integration of the functional areas.

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Functional organizational structure = an organizational form in which the major functions of the firm, such as production, marketing, R&D, and accounting, are grouped internally. When an organization is small (15 employees or less), it is not necessary to have a variety of formal arrangements and groupings of activities. However, as firms grow, excessive demands may be placed on the owner-manager in order to obtain and process all of the information necessary to run the business. Thus, he or she will need to hire specialists in the various functional areas. The coordination and integration of these functional areas becomes one of the most important responsibilities of the chief executive.

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Functional Structure Example

Exhibit 10.2 Functional Organizational Structure

Jump to Appendix 2 for long description.

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Growth in the overall scope and complexity of the business necessitates a functional organizational structure wherein the major functions of the firm are grouped internally.

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Functional Structure Advantages & Disadvantages

Advantages

Enhanced coordination & control

Centralized decision making

Enhanced organizational-level perspective

More efficient use of managerial & technical talent

Facilitated career paths in specialized areas

Disadvantages

Impeded communication & coordination due differences in values & orientations – “silos”

May lead to short-term thinking

Difficult to establish uniform performance standards

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By bringing together specialists into functional departments, a firm is able to enhance its coordination and control within each of the functional areas. Decision making in the firm will be centralized at the top of the organization. This enhances the organizational level (as opposed to functional area) perspective across the various functions. In addition, the functional structure provides for more efficient use of managerial and technical talent since functional area expertise is pooled in a single department (e.g. marketing) instead of being spread across a variety of product-market areas. Finally, career paths and professional development in specialized areas are facilitated. However, the differences in values and orientations among functional areas may impede communication and coordination, causing the development of “stovepipes” or “functional silos,” in which departments view themselves as isolated, self-contained units with little need for interaction and coordination with other departments. This can erode communication and lead to short-term thinking, and overburden the top executives because they now have to deal with conflicts, due to the lack of managers who are responsible for the specific product lines. Functional structures also make it difficult to establish uniform performance standards across the entire organization.

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Organizational Structures: Divisional Structure

The divisional organizational structure is where products, projects, or product markets are grouped internally.

Divisions are relatively autonomous, consisting of products & services that are different from those of other divisions.

Although governed by a central corporate office, each division includes its own functional specialists.

Division executives help determine product-market & financial objectives; decision making is delegated to lower-level managers.

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Divisional organizational structure = an organizational form in which products, projects, or product markets are grouped internally. Each of the divisions, in turn, includes its own functional specialists who are typically organized into departments. A divisional structure encompasses a set of relatively autonomous units governed by a central corporate office, and is sometimes called the multidivisional structure or M-form. The operating divisions are relatively independent and consist of products and services that are different from those of other divisions. Operational decision making in a large business places excessive demands on the firm’s top management. In order to attend to broader, longer-term organizational issues, top level managers must delegate decision making to lower-level managers. Divisional executives then help determine the product-market and financial objectives for the division as well as their division’s contribution to overall corporate performance.

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Divisional Structure Example

Exhibit 10.3 Divisional Organizational Structure

Jump to Appendix 3 for long description.

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Increased complexity of the business necessitates a divisional organizational structure wherein the firm is organized around products, projects, or markets. Each of the divisions, in turn, then has its own functional specialists who are typically organized into departments within each division, similar to the functional structure.

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Divisional Structure Advantages & Disadvantages

Advantages

Separation of strategic & operating control

Quicker response to changes in the market environment

Fewer problems sharing resources across functions

Development of general management talent is enhanced

Disadvantages

Very expensive duplication of functions possible

Dysfunctional competition among divisions

Differences in image & quality possible across divisions

Too much focus on short-term performance

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By creating separate divisions to manage individual product markets, there is a separation of strategic and operating control. Divisional managers can focus their efforts on improving operations in the product markets for which they are responsible, and corporate officers can devote their time to overall strategic issues for the entire corporation. This focus on the division’s products and markets gives the firm an enhanced ability to respond quickly to changes in the market environment. Because there are functional departments within each division, the problems associated with sharing resources across functional departments are minimized. Because there are multiple levels of management, the development of talent is enhanced. However, there can be increased costs due to the duplication of personnel, operations, and investment since each division must staff multiple functional departments. There could also be dysfunctional competition among divisions since each division tends to become concerned solely about its own operations. With many divisions providing different products and services, there is the chance that differences in image and quality may occur across divisions. Because each division is evaluated in terms of financial measures such as return on investment and revenue growth, there is often an urge to focus on short-term performance.

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Organizational Structures: SBU Structure

The strategic business unit (SBU) structure is where similar products or markets are grouped into units to achieve synergy.

Variation on the divisional structure

Similar divisions grouped into homogeneous units

Synergies achieved through related diversification – leveraging core competencies, sharing infrastructures, using market power

Each SBU operates as a profit center

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Strategic business unit (SBU) structure = an organizational form in which products, projects, or product-market divisions are grouped into homogenous units. Highly diversified corporations may consist of dozens of different divisions. A purely divisional structure would make it nearly impossible for the corporate office to plan and coordinate activities because the span of control would be too large. With an SBU structure, divisions with similar products, markets and/or technologies are grouped into homogenous units to achieve some synergies, including those available through related diversification such as leveraging core competencies, sharing infrastructures, and market power. Generally the more related businesses are within a corporation, the fewer SBUs will be required. Each of the SBUs in the corporation operates as a profit center.

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SBU Structure Advantages & Disadvantages

Advantages

Planning & control by the corporate office

Decentralization of authority

Quicker response to changes in the market environment

Synergies through sharing core competencies, infrastructures, & market power

Disadvantages

Possible difficulty in achieving synergies

Increased personnel & overhead expenses

Corporate office further removed from the divisions

Corporate unaware of key changes in market conditions

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The SBU structure makes the task of planning and control by the corporate office more manageable. Also, with greater decentralization of authority, individual businesses can react more quickly to important changes in the environment than if all divisions had to report directly to the corporate office. However, because the divisions are grouped into SBUs it may become difficult to achieve synergies across SBUs: if divisions in different SBUs have different potential sources of synergy, it may become difficult for them to be realized. The additional level of management increases the number of personnel and overhead expenses, while the additional hierarchical level removes the corporate office further from the individual divisions. The corporate office may become unaware of key developments that could have a major impact on the corporation.

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Organizational Structures: Holding Company Structure

The holding company structure is where businesses in a corporation’s portfolio are the result of unrelated diversification.

Variation on the divisional structure

Similarities are few, synergies are limited

Autonomous operating divisions

Small corporate staffs, with limited involvement, relying on financial controls & incentive programs to obtain performance

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Holding company structure = an organizational form that is a variation of the divisional organizational structure in which the divisions have a high degree of autonomy both from other divisions and from corporate headquarters. The holding company structure is appropriate when the businesses in a corporation’s portfolio do not have much in common. Plus, the potential for synergies is limited. Holding company structures are most appropriate for firms with the strategy of unrelated diversification, such as with Berkshire Hathaway. Because there are few similarities across the businesses, the corporate offices in these companies provide a great deal of autonomy to operating divisions and rely on financial controls and incentive programs to obtain high levels of performance across the individual businesses. Corporate staffs at these firms tend to be small because of their limited involvement in the overall operation of their various businesses.

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Holding Company Structure Advantages & Disadvantages

Advantages

Cost savings due to fewer personnel and lower overhead

Divisional autonomy increases motivation level of divisional executives

Quicker response to changes in the market environment

Disadvantages

Potential for synergies is very limited

Corporate office has little control

Difficult to replace key divisional executives if they leave

Turnaround may be difficult due to limited corporate staff support

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The holding company structure has cost savings associated with fewer personnel and a lower overhead resulting from a small corporate office and fewer hierarchical levels. The autonomy of the holding company structure increases the motivational level of divisional executives and enables them to respond quickly to market opportunities and threats. However, there is an inherent lack of control, and a dependence that corporate level executives have on divisional executives. Major problems could arise if key divisional executives leave the firm, because the corporate office has very little additional managerial talent ready to quickly fill key positions. If problems arise in the division, it may become very difficult to turn around individual businesses because of limited staff support in the corporate office.

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Organizational Structures: Matrix Structure

The matrix organizational structure is where functional departments are combined with product groups on a project basis.

Functional departments, product groups & geographical units can be combined.

Individuals have two managers.

Project managers & functional managers share responsibility.

Product managers handle development, manufacturing & distribution of their own line.

Geographic managers are responsible for profitability of the business in their regions.

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Matrix organizational structure = an organizational form in which there are multiple lines of authority and some individuals report to at least two managers. This approach strives to overcome the inadequacies inherent in the other structures. It is a combination of the functional and divisional structures. Most commonly, functional departments are combined with product groups on a project basis. Some large multinational corporations rely on a matrix structure to combine product groups and geographical units. Personnel may work under the manager of the group for the duration of the project. The individuals who work in a matrix organization become responsible to two managers: the project manager and the manager of their functional area. Product managers may have global responsibility for the development, manufacturing, and distribution of their own line, while managers of geographical regions have responsibility for the profitability of the businesses in their regions.

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Matrix Structure Example

Exhibit 10.4 Matrix Organizational Structure

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The matrix structure facilitates the use of specialized personnel, equipment, and facilities. It tries to overcome the inadequacies inherent in the other structures by combining functional and divisional structures on a project basis, under the guidance of a project manager. Employees have dual reporting relationships: they report to the project manager and to the manager of their functional area.

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Matrix Structure Advantages & Disadvantages

Advantages

Increases market responsiveness, collaboration & synergies

Allows more efficient utilization of resources

Improves flexibility, coordination & communication

Increases professional development

Disadvantages

Dual reporting relationships lead to uncertainty regarding accountability

Can lead to power struggles & conflict

Relationships are complicated, need teamwork

Decision making takes longer

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The matrix structure allows for shared resources instead of duplicating functions, as would be the case in a divisional structure based on products. Individuals with high expertise can divide their time among multiple projects. Such resource sharing and collaboration enables the firm to use resources more efficiently and to respond more quickly and effectively to changes in market conditions. The flexibility inherent in the matrix structure provides professionals with a broader range of responsibility which enables them to develop their skills and competencies. However, the dual reporting structures can result in uncertainty and lead to intense power struggles and conflict over the allocation of personnel and other resources. Working relationships become more complicated. This may result in excessive reliance on group processes and teamwork, along with the diffusion of responsibility, which in turn may erode timely decision making.

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Organizational Structures: International Operations

Firms with international operations must consider a structure based on the following:

Type of strategy driving the firm’s foreign operations

Degree of product diversity

The extent to which a firm is dependent on foreign sales

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In the global marketplace, managers must ensure consistency between their strategies (at the business, corporate, and international levels) and the structure of their organization. As firms expand into foreign markets, they generally follow a pattern of change in structure that parallels the changes in their strategies. The three major contingencies that influence the chosen strategy are (1) the type of strategy that is driving the firm’s foreign operations, (2) product diversity, and 3) the extent to which a firm is dependent on foreign sales. As international operations become an important part of a firm’s overall operations, managers must make changes that are consistent with their firm’s structure.

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International Operations Multidomestic vs. Global

Multidomestic strategies use…

International division structure

Geographic-area division structure

Worldwide matrix structure

Global strategies use…

Worldwide functional structure

Worldwide product division structure

Worldwide holding company structure

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A firm’s international strategy has implications for its chosen structure. Remember from Chapter 7 that a multidomestic strategy is based on a firm’s desire to differentiate its products and services to adapt to local markets, and is usually used in industries where the pressure for local adaptation is high and the pressure for lowering costs is low. The structures consistent with such a strategic orientation are the international division and geographic-area division structures. Here local managers are provided with a high level of autonomy to manage their operations within the constraints and demands of their geographic market. As a firm’s foreign sales increase as a percentage of its total sales, it’ll likely change from an international division to a geographic-area division structure, and, as a firm’s product and/or market diversity becomes large, it is likely to benefit from a worldwide matrix structure. International division structure = an organizational form in which international operations are in a separate, autonomous division. Most domestic operations are kept in other parts of the organization. Geographic-area division structure = a type of divisional organizational structure in which operations in geographical regions are grouped internally. Worldwide matrix structure = a type of matrix organizational structure that has one line of authority for geographic-area divisions and another line of authority for worldwide product divisions. Remember from Chapter 7 that global strategies are based on a firm’s need for centralization and control by the corporate office, with the primary emphasis on controlling costs, usually used in industries where the pressure for local adaptation is low and the pressure for lowering costs is high. Economic pressures require managers to handle operations in different geographic areas with overall efficiency. The worldwide functional and worldwide product division structures are consistent with efficiency perspective. Here, division managers view the marketplace as homogenous and devote relatively little attention to local market factors. Firms with relatively low levels of product diversity may opt for a worldwide product division structure. However, if significant product market diversity results from highly unrelated international acquisitions, a worldwide holding company structure should be implemented. Such firms have very little commonality among products, markets, technologies, and have little need for integration. Worldwide functional structure = a functional structure in which all departments have worldwide responsibilities. Worldwide product division structure = a product division structure in which all divisions have worldwide responsibilities.

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International Operations Global Startup

A global start-up:

Uses inputs from around the world

Sells its products & services to customers around the world

Has communication & coordination challenges

Has fewer resources than well-established corporations

Must use less costly administrative mechanisms

Frequently chooses a boundaryless organizational design

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Global start-up = a business organization that, from inception, seeks to derive significant advantage from the use of resources and the sale of outputs in multiple countries. Many firms now expand internationally relatively early in their history, and some firms are “born global” – that is, from the very beginning, many startups are global in their activities. Right from the beginning, it uses inputs from around the world and sells its products and services to customers around the world. Geographical boundaries of nation states are irrelevant for a global startup. Being global necessarily involves higher communication, coordination, and transportation costs. Most global start-ups have far fewer resources than well-established corporations, so must internalize only a few activities and outsource the rest. Managers of such firms must have considerable prior international experience so that they can successfully handle the inevitable communication problems and cultural conflicts. Another key to success is to keep the coordination and communication costs low. The only way to achieve this is by creating less costly administrative mechanisms. A boundaryless organizational design is particularly suitable for global startups because of its flexibility and low cost. Boundaryless organizational design = organizations in which the boundaries, including vertical, horizontal, external, and geographic boundaries, are permeable.

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Organizational Structures: Boundaryless Designs

A boundaryless organizational design makes these boundaries more permeable:

Vertical boundaries between organizational levels

Horizontal boundaries between functional areas

External boundaries between the firm and its customers, suppliers, & regulators

Geographic boundaries between locations, cultures, & markets

Boundaryless designs include barrier-free, modular, & virtual organizations.

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Boundaryless organizational design = organizations in which the boundaries, including vertical, horizontal, external, and geographical boundaries, are permeable. Boundaryless does not imply that all internal and external boundaries vanish completely, but that they become more open and permeable. Boundaryless designs should not replace the traditional forms of organizational structure, but they should complement them. [Not in the text] According to Ashkenas, R. 1997. The organization’s new clothes, (In Hesselbein, F., Goldsmith, M., and Beckhard, R. (Eds.), The organization of the future: 104–106. San Francisco: Jossey-Bass) there are four types of boundaries that place limits on organizations: (1) vertical boundaries between levels in the organization’s hierarchy that limit the flow of ideas from employees up to managers, (2) horizontal boundaries between functional areas such as marketing, operations, and customer service (silos), (3) external boundaries between the firm and its customers, suppliers, and regulators that limit flexibility in the value chain, (4) geographic boundaries between locations, cultures, and markets that reduce or inhibit the flow of communication. There are three approaches to making boundaries more permeable that help to facilitate the widespread sharing of knowledge and information across both the internal and external boundaries of the organization: barrier-free, modular, and virtual types of organizations.

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Boundaryless Designs: Barrier-Free Organizations

A barrier-free organization has permeable internal & external boundaries and requires:

Higher level of trust and shared interests

Shift in philosophy from executive development to organizational development

Greater use of teams

Flexible, porous organizational boundaries

Communication flows & mutually beneficial relationships with both internal and external constituencies

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Barrier-free organization = an organizational design in which firms bridge real differences in culture, function, and goals to find common ground that facilitates information sharing and other forms of cooperative behavior. The barrier-free type of organization involves making all organizational boundaries – internal and external – more permeable. Eliminating the multiple boundaries that stifle productivity and innovation can enhance the potential of the entire organization. For barrier-free organizations to work effectively, the level of trust and shared interests among all parts of the organization must be raised. The organization needs to develop among its employees the skill level needed to work in a more democratic organization. Barrier-free organizations also require a shift in the organization’s philosophy from executive to organizational development, and from investments in high-potential individuals to investments in leveraging the talents of all individuals. Teams are a central building block for implementing a barrier-free organization. In barrier-free organizations, managers must also create flexible, porous organizational boundaries and establish communication flows and mutually beneficial relationships with internal (e.g. employees) and external (e.g. customers) constituencies, as well as potential cooperative relationships with competitors.

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Barrier-Free Structures Pros & Cons

Pros Cons
Leverages the talents of all employees. Difficult to overcome political and authority boundaries inside and outside the organization.
Enhances cooperation, coordination, and information sharing among functions, divisions, SBUs, and external constituencies. Lacks strong leadership and common vision, which can lead to coordination problems.
Enables a quicker response to market changes through single-goal focus. Time-consuming and difficult-to-manager democratic processes.
Can lead to coordinated win-win initiatives with key suppliers. Lacks high levels of trust, which can impede performance.
Exhibit 10.6 Pros and Cons of Barrier-Free Structures

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Although a barrier-free structure can enhance productivity and innovation, creating and managing this type of organization can be frustrating. For instance, product development time might double as a result of team management, and managers trained in rigid hierarchies might find it difficult to make the transition to the more democratic, participative style that this teamwork requires.

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Question (2 of 3)

What advantages does outsourcing provide an organization?

access to the best-in-class goods and services

the ability to expand rapidly with a relatively low capital investment

the opportunity to focus scarce resources on existing core competencies

All of the above.

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Answer: D. In some circumstances, firms have received bad press for outsourcing, or more often offshoring. However an organizational design that allows for outsourcing can provide some significant advantages. A modular design allows the firm to outsource noncore functions, thereby, decreasing overall costs and focusing scarce resources on the area where it holds a competitive advantage.

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Boundaryless Designs: Modular Organizations

A modular organization requires seamless relationships with external organizations.

Outsources nonvital functions or non-core activities to outsiders

Activates knowledge & expertise of “best in class” suppliers but retains strategic control

Focuses scarce resources on key areas

Accelerates organizational learning

Decreases overall costs, leverages capital

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Modular organization = an organization in which nonvital functions are outsourced, using the knowledge and expertise of outside suppliers while retaining strategic control. Outsiders may be used to manufacture parts, handle logistics, or perform accounting activities. The value chain can be used to identify the key primary and support activities performed by a firm to create value: which activities do we keep “in-house” and which activities do we outsource to suppliers? The organization becomes a central hub surrounded by networks of outside suppliers and specialists, and parts can be added or taken away. Outsourcing noncore functions allows a firm to decrease overall costs, stimulate new product development by hiring suppliers with superior talent to that of in-house personnel, avoid idle capacity, reduce inventory, and avoid being locked into a particular technology. A company can also focus scarce resources on the area where it holds a competitive advantage. Finally an organization can tap into the knowledge and expertise of its specialized supply chain partners, adding critical skills and accelerating organizational learning. Both manufacturing and service units may be modular. The modular type enables a company to leverage relatively small amounts of capital and a small management team to achieve seemingly unattainable strategic objectives. Adidas is given as an example.

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Modular Structures Pros & Cons

Pros Cons
Directs a firm’s managerial and technical talent to the most critical activities. Inhibits common vision through reliance on outsiders.
Maintains full strategic control over most critical activities  core competencies. Diminishes future competitive advantages if critical technologies or other competencies are outsourced.
Achieves “best in class” performance at each link in the value chain. Increased the difficulty of bringing back into the firm activities that now add value due to market skills.
Leverages core competencies by outsourcing with smaller capital commitment. Leads to an erosion of cross-functional skills.
Encourages information sharing and accelerates organizational learning. Decreases operational control and potential loss of control over a supplier.
Exhibit 10.7 Pros and Cons of Modular Structures

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Although a modular structure can help a firm be effective through efficient use of outside suppliers and specialists, it does require that the company finds loyal, reliable vendors who can be trusted with trade secrets. Firms also need assurances that suppliers will dedicate their financial, physical, and human resources to satisfy strategic objectives such as lowering costs or being first to market. In addition, the modular company must make sure that it selects the proper competencies to keep in-house. An organization must avoid outsourcing components that may compromise its long-term competitive advantage. The main strategic concerns are loss of critical skills or developing the wrong skills, the loss of cross-functional skills, and the loss of control over a supplier.

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Boundaryless Designs: Virtual Organizations

A virtual organization requires forming alliances with multiple external partners.

Continually evolving network of independent companies

Linked together to share skills, costs, & access to one another’s markets

Coping with uncertainty through cooperative efforts

Each gains from resulting individual & organizational learning

May not be permanent

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Virtual organization = a continually evolving network of independent companies that are linked together to share skills, costs, and access to one another’s markets. The members of a virtual organization, by pooling and sharing the knowledge and expertise of each of the component organizations, simultaneously “know” more and can “do” more than any one member of the group could do alone. By working closely together, each gains in the long run from individual and organizational learning. Virtual organizations need not be permanent and participating firms may be involved in multiple alliances. Each company that links up with others to create a virtual organization contributes only what it considers its core competencies. It will mix and match what it does best with the best of other firms by identifying its critical capabilities and the necessary links to other capabilities. Participating firms give up part of their control and accept interdependent destinies. They pursue a collective strategy that enables them to cope with uncertainty through cooperative efforts. Virtual organizations enhance the capacity or competitive advantage of participating firms.

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Virtual Structures Pros & Cons

Pros Cons
Enables the sharing of costs and skills. Harder to determine where one company ends and another begins, due to close interdependencies among players.
Enhances access to global markets. Leads to potential loss of operational control among partners.
Increases market responsiveness. Results in loss of strategic control over emerging technology.
Creates a “best of everything” organization since each partner brings core competencies to the alliance. Requires new and difficult-to-acquire managerial skills.
Encourages both individual and organizational knowledge sharing and accelerates organizational learning.
Exhibit 10.8 Pros and Cons of Virtual Structures

Source: Miles, R.E. & Snow, C.C. 1986. Organizations: New Concepts for New Forms. California Management Review, Spring: 62-73; Miles & Snow. 1999. Causes of Failure in Network Organizations, California Management Review, Summer: 53-72; and Bahrami, H. 1991. The Emerging Flexible Organization: Perspectives from Silicon Valley. California Management Review, Summer: 33-52.

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The virtual organization demands that managers build relationships with other companies, negotiating win-win deals for all parties by finding the right partners with compatible goals and values, and providing the right balance of freedom and control. Information systems must be designed and integrated to facilitate communication with current and potential partners. Managers must also be clear about the strategic objectives while forming alliances. The virtual organization is a logical culmination of joint venture strategies of the past. Shared risks, costs, and rewards are the facts of life in a virtual organization. When virtual organizations are formed, they involve tremendous challenges for strategic planning. As with the modular corporation, it is essential to identify core competencies. However, for virtual structures to be successful, a strategic plan is also needed to determine the effectiveness of combining core competencies. The strategic plan must address the diminished operational control and overwhelming need for trust and common vision among the partners.

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Boundaryless Designs: Making Them Work

A “virtual” boundaryless organization requires:

Mechanisms to ensure effective coordination and integration

Common culture and shared values

Horizontal organizational structures

Communications and information technologies

Human resource practices

Awareness of the benefits and costs of developing lasting internal & external relationships

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Designing an organization that simultaneously supports the requirements of an organization strategy, is consistent with the demands of the environment, and can be effectively implemented by the people around the manager is a tall order for any manager. The most effective solution is usually a combination of organizational types. That is, a firm may outsource many parts of its value chain to reduce costs and increase quality, engage simultaneously in multiple alliances to take advantage of technological developments or penetrate new markets, and break down barriers within the organization to enhance flexibility. When an organization faces external pressures, resource scarcity, and declining performance, it tends to become more internally focused, rather than directing its efforts toward managing and enhancing relationships with existing and potential external stakeholders. This may be the most opportune time for managers to carefully analyze their value-chain activities and evaluate the potential for adopting elements of modular, virtual, and barrier-free organizational types. However, managers must be aware of two key issues as they work to design an effective boundaryless organization. First, managers need to develop mechanisms to ensure effective coordination and integration. Second, managers need to be aware of the benefits and costs of developing strong and long-term relationships with both internal and external stakeholders. One mechanism for integration is to develop horizontal organizational structures = organizational forms that group similar or related business units under common management control and facilitate sharing resources and infrastructures to exploit synergies among operating units and help to create a sense of common purpose.

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Boundaryless Designs: Benefits & Costs

Benefits

Agency costs are reduced through the use of relational systems.

Transaction costs between the firm and its suppliers are reduced.

Individual participants are less likely to perceive a conflict of interest.

Costs

Relationships between individuals become more important than profits.

Conflicts are resolved through ad hoc negotiations & processes.

Relationships are driven more by social connections than by needed competencies.

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Managers must become aware of the costs and benefits of developing lasting internal and external relationships. Rather than relying on strict hierarchical and bureaucratic systems, boundaryless organizations are flexible and coordinate action by leveraging shared social norms and strong social relationships between both internal and external stakeholders. Some of the benefits of relying on relationships and social norms to guide behavior include: (1) agency costs are reduced because managers and employees in relationship-oriented firms are guided more by social norms rather than rules, regulations, and financial incentives; (2) transaction costs between the firm and its suppliers and customers will be reduced because the level of trust that’s built up means less need to write detailed contracts or set up strict bureaucratic rules to outline the responsibilities and define the behavior of each firm; (3) since they feel a sense of shared ownership and goals, individuals within the firm as well as partnering firms will be more likely to search for win-win rather than win-lose solutions – firms with strong relationships with their partners are going to look for solutions that not only benefit themselves but also provide equitable benefits and limited downside for the partnering firms. There are also some substantial costs: (1) as the relationships between individuals and firms strengthen, they are also more likely to fall prey to suboptimal lock-in effects. The problem here is that as decisions become driven by concerns about relationships, economic factors become less important. As a result, firms become less likely to make decisions that could benefit the firm since those decisions may harm employees or partnering firms. (2) Since there are no formal guidelines, conflicts between individuals and units within firms, as well as between partnering firms, are typically resolved through ad hoc negotiations and processes, rather than legal means or bureaucratic rules that may more effectively guide decision-making. (3) The social capital of individuals and firms can drive their opportunities. For instance, rather than identifying the best person to put in a leadership role or the optimal supplier to contract with, these choices are more strongly driven by the level of social connection the person or supplier has. The solution to these costs may be to effectively integrate elements of formal structure and reward systems with stronger relationships.

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Organizational Structures: Ambidextrous Designs

Ambidextrous organizational designs address two contradictory challenges.

How to maintain adaptability

How to achieve alignment

Ambidextrous organizations

Aligned and efficient while they pursue modest, incremental innovations

Flexible enough to adapt to changes in the external environment and create dramatic, breakthrough innovations

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In Chapter 1, the concept of “ambidexterity” was introduced. This concept incorporates two contradictory challenges faced by today’s managers. First, managers must explore new opportunities and adjust to volatile markets in order to avoid complacency. They must ensure that they remain adaptable and proactive in expanding and/or modifying their product-market scope to anticipate and satisfy market conditions. Second, managers must also effectively exploit the value of their existing assets and competencies. They need to have alignment, which is a clear sense of how value is being created in the short term and how activities are integrated and properly coordinated. Firms that achieve both adaptability and alignment are considered ambidextrous organizations. Ambidextrous organizational designs = organizational designs that attempt to simultaneously pursue modest, incremental innovations as well as more dramatic, breakthrough innovations. Adaptability = managers’ exploration of new opportunities and adjustment to volatile markets in order to avoid complacency. Alignment = managers’ clear sense of how value is being created in the short term and how activities are integrated and properly coordinated.

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Question (3 of 3)

According to a study by O’Reilly and Tushman, effective ambidextrous structures had all of the following attributes except

a clear and compelling vision.

managerial efforts that were highly focused on revenue enhancement.

cross-fertilization among business units.

established units that were shielded from the distractions of launching new businesses.

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Answer: B. Charles O’Reilly and Michael Tushman investigated companies that attempted to simultaneously pursue modest, incremental innovations as well as more dramatic, breakthrough innovations. The study found that the organizational structure and management practices employed had a direct and significant impact on the performance of both the breakthrough initiative and traditional business. The ambidextrous organizational designs were more effective than either functional organizational structures or team structures. The factors contributing to success included (1) a clear and compelling vision, consistently communicated by the company’s senior management team; (2) the existence of cross-fertilization while avoiding cross-contamination, achieved by tight coordination and integration at the managerial levels, enabling newer units to share important resources derived from the traditional units such as cash, talent, and expertisesuch sharing was encouraged and facilitated by effective reward systems that emphasized overall company goals; (3) the organizational separation ensured that the new units’ distinctive processes, structures, and cultures were not overwhelmed by the forces of “business as usual.” The established units were shielded from the distraction of launching new businesses, and they continued to focus all of their attention and energy on refining their operations, enhancing their products, and serving their customers.

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Ambidextrous Designs: Effectiveness

Ambidextrous organizational designs:

Effectively integrate and coordinate existing operations

Establish project teams that are structurally independent units

Pay attention to each unit’s processes, structures, & cultures

Effectively integrate each unit into the existing management hierarchy

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Successful organizations must ensure that they have the proper type of organizational structure. Furthermore, they must ensure that their firms incorporate the necessary integration and processes so that the internal and external boundaries of their firms are flexible and permeable. Such a need is increasingly important as the environments of firms become more complex, rapidly changing, and unpredictable. In today’s rapidly changing global environment, managers must be responsive and proactive in order to take advantage of new opportunities. At the same time, they must effectively integrate and coordinate existing operations. Such requirements call for organizational designs that establish project teams that are structurally independent units, with each having its own processes, structures, and cultures. But, at the same time, each unit needs to be effectively integrated into the existing management hierarchy.

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ADA APPENDICES

Description of Images

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Appendix 1 Organizational Structures: Growth Patterns

Return to slide.

The graphic depicts four major structures and their growth patterns.

The graphic lists Simple, Functional, Divisional, and International structures in boxes down the middle.

Between simple and functional is growth in revenues and employees. Between functional and divisional is diversification into related products and markets. Between divisional and international is international expansion.

In a functional structure diversification into unrelated areas as strategy can lead to a holding company structure. Increased relatedness of products and markets, can lead to a divisional structure.

Or a holding company structure, through international expansion can develop into a worldwide holding company structure.

With increase relatedness of products and markets, a worldwide holding structure leads to international structures.

Through vertical integration and related diversification, a functional structure can become a divisional structure. Or it might expand internationally to become a worldwide functional structure.

A worldwide functional structure might use a related diversification strategy to become an international structure.

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Appendix 2 Functional Structure Example

Return to slide.

An organizational chart with the C E O or president at the head. Reporting to that position are manager of production, manager of marketing, manager of R & D, manager of personnel, and manager of accounting. Reporting to them are lower-level managers, specialists, and operating personnel.

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Appendix 3 Divisional Structure Example

Return to slide.

An organizational chart with the C E O or president at the head of the organization.

Next, underneath, in the hierarchy is the corporate staff.

There are three divisions led by general managers.

Division A has managers for production, engineering, marketing, R & D, personnel, and accounting. Beneath these managers are lower-level managers, specialists, and operating personnel. Both Division B and C have similar organizations.