The biggest advantage to a virtual network approach is

Notes from readings

In a functional structure , also called a U-form (unitary structure), activities are grouped together by common function from the bottom to the top of the organization.33 The functional structure groups positions into departments based on similar skills, expertise, work activities, and resource use. A functional structure can be thought of as departmentalization by organizational resources because each type of functional activity—accounting, human resources, engineering, and manufacturing—represents specific resources for performing the organization's task. People, facilities, and other resources representing a common function are grouped into a single department. One example is Blue Bell Creameries, which relies on in-depth expertise in its various functional departments to produce high-quality ice cream for a limited regional market. The quality control department, for example, tests all incoming ingredients and ensures that only the best go into Blue Bell's ice cream. Quality inspectors also test outgoing products and, because of their years of experience, can detect the slightest deviation from expected quality. Blue Bell also has functional departments such as sales, production, maintenance, distribution, research and development, and finance.34

The functional structure is a strong vertical design. Information flows up and down the vertical hierarchy, and the chain of command converges at the top of the organization. In a functional structure, people within a department communicate primarily with others in the same department to coordinate work and accomplish tasks or implement decisions that are passed down the hierarchy. Managers and employees are compatible because of similar training and expertise. Typically, rules and procedures govern the duties and responsibilities of each employee, and employees at lower hierarchical levels accept the right of those higher in the hierarchy to make decisions and issue orders.

Functional Advantages and Disadvantages

Grouping employees by common task permits economies of scale and efficient resource use. For example, at American Airlines, all information technology people work in the same large department. They have the expertise and skills to handle almost any issue related to information technology for the organization. Large, functionally based departments enhance the development of in-depth skills because people work on a variety of related problems and are associated with other experts within their own department. Because the chain of command converges at the top, the functional structure also offers a way to centralize decision making and provide unified direction from top managers. The primary disadvantages reflect barriers that exist across departments. Because people are separated into distinct departments, communication and coordination across functions are often poor, causing a slow response to environmental changes. Innovation and change require involvement of several departments. Another problem is that decisions involving more than one department may pile up at the top of the organization and be delayed.

In contrast to the functional approach, in which people are grouped by common skills and resources, the divisional structure occurs when departments are grouped together based on similar organizational outputs. With a divisional structure, also called an M-form (multidivisional) or a decentralized form, separate divisions can be organized with responsibility for individual products, services, product groups, major projects or programs, divisions, businesses, or profit centers. 35 The divisional structure is also sometimes called a product structure, program structure, or selfcontained unit structure. Each of these terms means essentially the same thing: Diverse departments are brought together to produce a single organizational output, whether it is a product, a program, or service to a single customer.

A maker of products used for the prevention, diagnosis, and treatment of diseases, the health science company Nordion Inc. recently split into two new business units: one called Targeted Therapies and the other Specialty Isotopes. Nordion's CEO Steve West explained that the new divisional structure is strategically designed to “take into account the unique product life cycles and the needs of our customers in each of our businesses.” Based in Ottawa, Ontario, Canada, Nordion does business in 60 countries around the world.

Most large corporations have separate divisions that perform different tasks, use different technologies, or serve different customers. When a huge organization produces products for different markets, the divisional structure works because each division is an autonomous business. For example, Walmart uses divisions for Wal-Mart Stores, Sam's Club (U.S.), and International Stores. Each of these large divisions is further subdivided into smaller geographical divisions to better serve customers in different regions.36

The primary difference between divisional and functional structures is that in a divisional structure, the chain of command from each function converges lower in the hierarchy. In a divisional structure, differences of opinion among R&D, marketing, manufacturing, and finance would be resolved at the divisional level rather than by the president. Thus, the divisional structure encourages decentralization. Decision making is pushed down at least one level in the hierarchy, freeing the president and other top managers for strategic planning.

Geographic- or Customer-Based Divisions

An alternative for assigning divisional responsibility is to group company activities by geographic region or customer group. For example, the Internal Revenue Service (IRS) shifted to a structure focused on four distinct taxpayer (customer) groups: individuals, small businesses, corporations, and nonprofit or government agencies.37 A global geographic structure is illustrated in Exhibit 10.5 . In a geographic-based structure, all functions in a specific country or region report to the same division manager. The structure focuses company activities on local market conditions. Competitive advantage may come from the production or sale of a product or service adapted to a given country or region. Walt Disney Company CEO Bob Iger reorganized the Disney Channel into geographic divisions because what appeals to people in different countries varies. Studio executives in Burbank, California, were miffed at the reorganization, but it has paid off. Iger learned that the Number 1 program on Italy's Disney Channel was one he had never heard of—“Il Mondo di Patty,” an inexpensive, telenovela-style show about an Argentine girl. “It's important that Disney's products are presented in ways that are culturally relevant,” Iger said about the geographic reorganization.38 Large nonprofit organizations such as the National Council of YMCAs, Habitat for Humanity International, and the Girl Scouts of the USA also frequently use a type of geographical structure, with a central headquarters and semiautonomous local units.39

Divisional Advantages and Disadvantages

By dividing employees and resources along divisional lines, the organization will be flexible and responsive to change because each unit is small and tuned in to its environment. By having employees working on a single product line, the concern for customers' needs is high. Coordination across functional departments is better because employees are grouped together in a single location and committed to one product line. Great coordination exists within divisions; however, coordination

across divisions is often poor. Problems occurred at Hewlett-Packard (HP), for example, when autonomous divisions went in opposite directions. The software produced in one division did not fit the hardware produced in another. Thus, the divisional structure was realigned to establish adequate coordination across divisions. Another major disadvantage is duplication of resources and the high cost of running separate divisions. Instead of a single research department in which all research people use a single facility, each division may have its own research facility. The organization loses efficiency and economies of scale. In addition, the small size of departments within each division may result in a lack of technical specialization, expertise, and training.

MATRIX APPROACH

What It Is

The matrix approach combines aspects of both functional and divisional structures simultaneously, in the same part of the organization. The matrix structure evolved as a way to improve horizontal coordination and information sharing.40 One unique feature of the matrix is that it has dual lines of authority. In Exhibit 10.6 , the functional hierarchy of authority runs vertically, and the divisional hierarchy of authority runs horizontally. The vertical structure provides traditional control within functional departments, and the horizontal structure provides coordination across departments. The U.S. operation of Starbucks, for example, uses geographic divisions for Western/Pacific, Northwest/Mountain, Southeast/ Plains, and Northeast/Atlantic. Functional departments including finance, marketing, and so forth are centralized and operate as their own vertical units, as well as supporting the horizontal divisions.41 The matrix structure therefore supports a formal chain of command for both functional (vertical) and divisional (horizontal) relationships. As a result of this dual structure, some employees actually report to two supervisors simultaneously.

How It Works

The dual lines of authority make the matrix unique. To see how the matrix works, consider the global matrix structure illustrated in Exhibit 10.7 . The two lines of authority are geographic and product. The geographic boss in Germany coordinates all subsidiaries in Germany, and the plastics products boss coordinates the manufacturing and sale of plastics products around the world. Managers of local subsidiary companies in Germany would report to two superiors, both the country boss and the product boss. The dual authority structure violates the unity-of-command concept described earlier in this chapter, but that is necessary to give equal emphasis to both functional and divisional lines of authority. Dual lines of authority can be confusing, but after managers learn to use this structure, the matrix provides excellent coordination simultaneously for each geographic region and each product line.

Matrix Advantages and Disadvantages

The matrix can be highly effective in a complex, rapidly changing environment in which the organization needs to be flexible, innovative, and adaptable.42 The conflict and frequent meetings generated by the matrix allow new issues to be raised and resolved. The matrix structure makes efficient use of human resources because specialists can be transferred from one division to another. A major problem with the matrix is the confusion and frustration caused by the dual chain of command.43 Matrix bosses and two-boss employees have difficulty with the dual reporting relationships. The matrix structure also can generate high conflict because it pits divisional against functional goals in a domestic structure, or product line versus country goals in a global structure. Rivalry between the two sides of the matrix can be exceedingly difficult for two-boss employees to manage. This problem leads to the third disadvantage: time lost to meetings and discussions devoted to resolving this conflict. Often the matrix structure leads to more discussion than action because different goals and points of view are being addressed. Managers may spend a great deal of time coordinating meetings and assignments, which takes time away from core work activities.

Remember This

1. • Departmentalization is the basis for grouping individual positions into departments and departments into the total organization.

2. • Three traditional approaches to departmentalization are functional, divisional, and matrix.

3. • A functional structure groups employees into departments based on similar skills, tasks, and use of resources.

• The divisional structure groups employees and departments based on similar organizational outputs (products or services), such that each division has a mix of functional skills and tasks.

4. • An alternative approach to divisional structure is to group employees and departments based on geographic region or customer group.

5. • The Disney Channel is structured into geographic divisions to better address the interests of children and teens in different parts of the world.

6. • The matrix approach uses both functional and divisional chains of command simultaneously, in the same part of the organization.

7. • In a matrix structure, some employees, called two-boss employees, report to two supervisors simultaneously.

8. • A matrix boss is a functional or product supervisor responsible for one side of the matrix.

9. • In a matrix structure, the top leader oversees both the product and the functional chains of command and is responsible for the entire matrix.

• Each approach to departmentalization has distinct advantages and disadvantages.

With a team-based structure , the entire organization is made up of horizontal teams that coordinate their work and work directly with customers to accomplish the organization's goals. At Whole Foods Market, a team structure is considered a major contributor to the company's success. Each Whole Foods store is made up of eight or so self-directed teams that oversee departments such as fresh produce, prepared foods, dairy, or checkout. Teams are responsible for all key operating decisions, such as product selection, pricing, ordering, hiring, and in-store promotions, and they are accountable for their performance.

Hospitals and other health care providers face a great need for coordination because medical care needs to be integrated. For instance, collaborative care, like this cross-functional team of a nurse, doctor, and dietitian, helps patients with chronic illnesses require fewer emergency department visits. Rush University Medical Center in Chicago started its Virtual Integrated Practice (VIP) project to give physicians in private practice access to teams of physicians, dieticians, pharmacists, and social workers. VIP replicates the collaboration that can occur in a hospital setting by enabling members to share information via e-mail, phone, and fax.

Team Advantages and Disadvantages

The team approach breaks down barriers across departments and improves coordination and cooperation. Team members know one another's problems and compromise rather than blindly pursue their own goals. The team concept also enables the organization to adapt more quickly to customer requests and environmental changes and speeds decision making because decisions need not go to the top of the hierarchy for approval. Another big advantage is the morale boost. Employees are typically enthusiastic about their involvement in bigger projects rather than narrow departmental tasks. At video games company Ubisoft, for example, each studio is set up so that teams of employees and managers work collaboratively to develop new games. Employees don't make a lot of money, but they're motivated by the freedom they have to propose new ideas and put them into action.46

Yet the team approach has disadvantages as well. Employees may be enthusiastic about team participation, but they may also experience conflicts and dual loyalties. A cross-functional team may make different work demands on members than do their department managers, and members who participate in more than one team must resolve these conflicts. A large amount of time is devoted to meetings, thus increasing coordination time. Unless the organization truly needs teams to coordinate complex projects and adapt to the environment, it will lose production efficiency with them. Finally, the team approach may cause too much decentralization. Senior department managers who traditionally made decisions might feel left out when a team moves ahead on its own. Team members often do not see the big picture of the corporation and may make decisions that are good for their group but bad for the organization as a whole.

ome organizations take this networking approach to the extreme to create an innovative structure. The virtual network structure means that the firm subcontracts most of its major functions to separate companies and coordinates their activities from a small headquarters organization. 50 Philip Rosedale runs LoveMachine from his home and coffee shops around San Francisco. LoveMachine makes software that lets employees send Twitter-like messages to say “Thank you,” or “Great job!” When the message is sent, everyone in the company gets a copy, which builds morale, and the basic software is free to companies that want to use it. LoveMachine has no full-time development staff but instead works with a network of freelancers who bid on jobs such as creating new features, fixing glitches, and so forth. Rosedale also contracts out payroll and other administrative tasks.51 How would you feel about working as a freelance employee for a virtual company? The Shoptalk describes some pros and cons of “never having to go to the office.”

How It Works

The organization may be viewed as a central hub surrounded by a network of outside specialists, sometimes spread all over the world, as illustrated in Exhibit 10.8 . Rather than being housed under one roof, services such as accounting, design, manufacturing, and distribution are outsourced to separate organizations that are connected electronically to the central office.52 Networked computer systems, collaborative software, and the Internet enable organizations to exchange data and information so rapidly and smoothly that a loosely connected network of suppliers, manufacturers, assemblers, and distributors can look and act like one seamless company.

Virtual Network Advantages and Disadvantages

The biggest advantages to a virtual network approach are flexibility and competitiveness on a global scale. The extreme flexibility of a network approach is illustrated by recent antigovernment protests and the overthrow of leaders in Tunisia and Egypt, for instance.57 A far-flung collection of groups that share a similar mission and goals but are free to act on their own joined together to mastermind the “Arab Spring” uprisings, much in the same way terrorist groups have masterminded attacks against the United States and other countries. “Attack any single part of it, and the rest carries on largely untouched,” wrote one journalist about the terrorist network. “It cannot be decapitated, because the insurgency, for the most part, has no head.”58

Similarly, today's business organizations can benefit from a flexible network approach that lets them shift resources and respond quickly. A network organization can draw on resources and expertise worldwide to achieve the best quality and price and can sell its products and services worldwide. Flexibility comes from the ability to hire whatever services are needed and to change a few months later without constraints from owning plants, equipment, and facilities. The organization can redefine itself continually to fit new product and market opportunities. This structure is perhaps the leanest of all organization forms because little supervision is required. Large teams of staff specialists and administrators are not needed. A network organization may have only two or three levels of hierarchy, compared with ten or more in traditional organizations.59

One of the major disadvantages is lack of hands-on control.60 Managers do not have all operations under one roof and must rely on contracts, coordination, negotiation, and electronic linkages to hold things together. Each partner in the network necessarily acts in its own self-interest. The weak and ambiguous boundaries create higher uncertainty and greater demands on managers for defining shared goals, managing relationships, keeping people focused and motivated, and coordinating activities so that everything functions as intended. Consider, for instance, that production of Boeing's 787 Dreamliner fell two years behind schedule because the “modules” from various contractors that were supposed to be snapped together didn't always fit.61 Customer service and loyalty can also suffer if outsourcing partners fail to perform as expected.62 The reputation of United Airlines was severely damaged when the employee assigned by an outsourcing contractor to supervise an unaccompanied 10-year-old at Chicago's busy O'Hare Airport didn't show up. The story made the national news when United's own employees failed to respond appropriately and the parents couldn't locate their missing child for nearly an hour.63 Finally, in this type of organization, employee loyalty can weaken. Employees might feel they can be replaced by contract services. A cohesive corporate culture is less likely to develop, and turnover tends to be higher because emotional commitment between organization and employee is fragile.

10. • Popular contemporary approaches to departmentalization include team and virtual network structures.

11. • A cross-functional team is a group of employees from various functional departments that meet as a team to resolve mutual problems.

12. • Total Attorneys uses cross-functional teams to improve coordination on software and services projects for small law firm clients.

13. • A permanent team is a group of employees from all functional areas permanently assigned to focus on a specific task or activity.

14. • A team-based structure is one in which the entire organization is made up of horizontal teams that coordinate their activities and work directly with customers to accomplish organizational goals.

15. • Whole Foods Market uses a team-based structure.

16. • With a virtual network structure, the organization subcontracts most of its major functions to separate companies and coordinates their activities from a small headquarters organization.

17. • The modular approach is one in which a manufacturing company uses outside suppliers to provide large chunks of a product such as an automobile, which are then assembled into a final product by a few employees.

• Both the team and the network approach have distinct advantages and disadvantages.