The primary disadvantage of customer departmentalization is:

9-1. Departmentalization

Organizational structure is the vertical and horizontal configuration of departments, authority, and jobs within a company. Organizational structure is concerned with questions such as, “Who reports to whom?” and “Who does what?” and “Where is the work done?” In their 2016 letter to shareholders, Chairman David Thomson and CEO James Smith described the core businesses of Thomson Reuters (“the answer company”) like this: “We help investors make smarter investments. We help lawyers practice better law. We help accounting professionals craft the best advice. We do this for some of the biggest companies in the world, as well as some of the smallest.” * Thomson Reuters is organized into three business units: Financial & Risk ($6 billion in annual revenues), which provides information to traders, investors, and marketplaces;Legal ($3.4 billion), which provides information to global businesses, law firms, governments, and universities; and Tax & Accounting ($1.5 billion), which provides information to tax professionals, companies, and governments. Those three business units are supported by the Corporate & Other division ($304 million), which provides each business unit help with strategy, funding, technology, and human resources. The “other” in this division is Reuters News, which generates news stories for print, Internet, and TV media outlets.

You can see Thomson Reuters’s organizational structure in Exhibit 9.1. In the first half of the chapter, you will learn about the traditional vertical and horizontal approaches to organizational structure, including departmentalization, organizational authority, and job design.

An organizational process is the collection of activities that transform inputs into outputs that customers value. * Organizational process asks, “How do things get done?” For example, Microsoft uses basic internal and external processes, to write computer software. The process starts when Microsoft gets feedback from customers through the Windows Insider Program and the Windows Insider Program for Business. This information helps Microsoft understand customers’ needs and problems and identify important software issues and needed changes. Microsoft then rewrites the software, testing it internally at the company and then externally through its beta testing process in which customers in its Windows Insider programs provide extensive feedback used to improve the software. Ten million people, from every country on earth but two (Cuba and North Korea), participate as Microsoft Insiders. Using the Feedback Hub App they report bugs that crash programs and indicate what changes and functionality they want. After final corrections are made, Microsoft distributes the officially updated version to its broader base of 400 million customers. The feedback process never ends, however, because as soon as Microsoft releases a new version of Windows, that release is followed by a beta version for testing and feedback from Microsoft’s 10 million Windows Insiders.

This process view of Microsoft, which focuses on how things get done, is very different from the hierarchical view of Thomson Reuters, which focuses on accountability, responsibility, and positions within the chain of command. In the second half of the chapter, you will learn how companies use reengineering and empowerment to redesign their internal organizational processes. The chapter ends with a discussion about the ways in which companies are redesigning their external processes, that is, how they are changing to improve their interactions with those outside the company. In that discussion, you will explore the basics of modular and virtual organizations.

Traditionally, organizational structures have been based on some form of departmentalization. Departmentalization is a method of subdividing work and workers into separate organizational units that take responsibility for completing particular tasks. * EBay has separate departments or divisions for payment systems, warehousing and logistics, and marketplaces and selling. *

Not all functionally departmentalized companies have the same functions. The insurance company and the advertising agency both have sales, accounting, human resources, and information systems departments, as indicated by the pale orange boxes. The purple and green boxes indicate the functions that are different. As would be expected, the insurance company has separate departments for life, auto, home, and health insurance. The advertising agency has departments for artwork, creative work, print advertising, and Internet advertising. So the functional departments in a company that uses functional structure depend, in part, on the business or industry a company is in.

Functional departmentalization has some advantages. First, it allows work to be done by highly qualified specialists. While the accountants in the accounting department take responsibility for producing accurate revenue and expense figures, the engineers in research and development can focus their efforts on designing a product that is reliable and simple to manufacture. Second, it lowers costs by reducing duplication. When the engineers in research and development come up with a fantastic new product, they don’t have to worry about creating an aggressive advertising campaign to sell it. That task belongs to the advertising experts and sales representatives in marketing. Third, with everyone in the same department having similar work experience or training, communication and coordination are less problematic for departmental managers.

At the same time, functional departmentalization has a number of disadvantages. To start, cross-department coordination can be difficult. Managers and employees are often more interested in doing what’s right for their function than in doing what’s right for the entire organization. A good example is the traditional conflict between marketing and manufacturing. Marketing typically pushes for spending more money to make more products with more capabilities to meet customer needs. By contrast, manufacturing pushes for fewer products with simpler designs so that manufacturing facilities can ship finished products on time and keep costs within expense budgets. As companies grow, functional departmentalization may also lead to slower decision making and produce managers and workers with narrow experience and expertise.

9-1b. Product Departmentalization

Product departmentalization organizes work and workers into separate units responsible for

producing particular products or services. Exhibit 9.4 shows the product departmentalization

structure used by United Technologies Corporation (UTC), which is organized along four

different areas each with its own product line: Climate, Controls & Security (Carrier heating,

ventilating, and air-conditioning; Fire safety, security products and services; and

food/transport refrigeration), Pratt & Whitney jet engines (Pratt & Whitney Commercial

Engines, Pratt & Whitney Military Engines, Pratt & Whitney Canada, and Pratt & Whitney

Aero-Power), UTC Aerospace Systems (wing and cockpit controls, landing systems and

sensors, aerostructures, electric power systems, and plane interiors), and Otis (elevators,

escalators, and moving walkways). *

One of the advantages of product departmentalization is that, like functional departmentalization, it allows managers and workers to specialize in one area of expertise. Unlike the narrow expertise and experiences in functional departmentalization, however, managers and workers develop a broader set of experiences and expertise related to an entire product line. Likewise, product departmentalization makes it easier for top managers to assess work-unit performance. Because of the clear separation of their four different product divisions, UTC’s top managers can easily compare the performance of UTC Aerospace Systems division and the Pratt & Whitney aircraft engines division. In 2016, Pratt & Whitney’s sales ($15.1 billion) were slightly larger than UTC Aerospace’s ($14.5 billion), but UTC Aerospace had a profit of $2.3 billion (a 15.9% margin) compared to Pratt & Whitney’s profit of $1.8 billion (11.9% margin). *

Finally, decision making should be faster because managers and workers are responsible for the entire product line rather than for separate functional departments; in other words, there are fewer conflicts compared to functional departmentalization.

The primary disadvantage of product departmentalization is duplication. You can see in Exhibit 9.4 that both the UTC Climate, Controls & Security division and the Pratt & Whitney division have customer service, engineering, human resources, legal, manufacturing, and procurement (similar to sourcing and logistics) departments. Duplication like this often results in higher costs. If UTC was organized by function, one legal department would handle matters related to both air conditioners and aircraft engines rather than working on only one or the other.

A second disadvantage is the challenge of coordinating across the different product departments. UTC would probably have difficulty standardizing its policies and procedures in product departments as different as the Carrier (heating, ventilating, and air-conditioning) and UTC Aerospace (cockpit controls and landing systems) divisions.

9-1c. Customer Departmentalization

Customer departmentalization organizes work and workers into separate units responsible

for particular kinds of customers. For example, Swisscom AG, Switzerland’s leading

telecommunications provider, is organized into departments by type of customer: residential

customers (mobile, Internet, TV and fixed network, and accessories), small- and medium-

sized businesses (Internet, landline and TV, mobile, and digital solutions), enterprise

customers (banking and industries, network and cloud, mobile business solutions, and digital

enterprise solutions), and IT network and infrastructure (technical strategy and enterprise

architecture, operations, rollout and access, and wholesale). *

The primary advantage of customer departmentalization is that it focuses the organization on customer needs rather than on products or business functions. Furthermore, creating separate departments to serve specific kinds of customers allows companies to specialize and adapt their products and services to customer needs and problems. The primary disadvantage of customer departmentalization is that, like product departmentalization, it leads to duplication of resources. This is why Swisscom AG also has five “group” functions—communication, strategy, security, business steering, and human resources—that support each of its four customer departments, and avoids the disadvantage of duplication common to customer departmentalization structures. It can be difficult to achieve coordination across different customer departments, as is also the case with product departmentalization. Finally, the emphasis on meeting customers’ needs may lead workers to make decisions that please customers but hurt the business.

9-1d. Geographic Departmentalization

Geographic departmentalization organizes work and workers into separate units

responsible for doing business in particular geographic areas. AB InBev has operations in 50

countries, 200,000 employees, and annual revenue of $45.5 billion. AB InBev has nine

regional groups: North America, Middle Americas, Latin America North, Latin America South,

Latin America COPEC, Europe, Asia Pacific North, Asia Pacific South, and Africa. Each of

these regions would be a sizable company by itself. The smallest region, Latin America

COPEC, for instance, sold 30 million hectoliters of beverages for an estimate annual revenue

of $5.5 billion.

The primary advantage of geographic departmentalization is that it helps companies respond to the demands of different markets. This can be especially important when the company sells in different countries. For example, while AB InBev has three brands sold worldwide (Budweiser, Stella Artois, and Corona), and three sold in multiple countries (Beck’s, Hoegaarden, and Leffe), most of its brands are local. You’ll find the Antarctica and Brahma brands in Brazil, the Belle-Vue and Jupiler brands in Belgium, and the Sibirskaya Korona and Klinskoye brands in Russia. *

Another advantage is that geographic departmentalization can reduce costs by locating unique organizational resources closer to customers. For instance, it is cheaper in the long run for AB InBev to build bottling plants in each region than to, for example, transport beer to Mexico, where it has seven beverage plants, after it has been brewed and bottled in Brazil, where it has 25 beverage plants. *

The primary disadvantage of geographic departmentalization is that it can lead to duplication of resources. For example, while it may be necessary to adapt products and marketing to different geographic locations, it’s doubtful that AB InBev needs significantly different inventory tracking systems from location to location. Also, even more than with the other forms of departmentalization, it can be difficult to coordinate departments that are literally thousands of miles from each other and whose managers have very limited contact with each other.

9-1e. Matrix Departmentalization

Matrix departmentalization is a hybrid structure in which two or more forms of departmentalization are used together. The most common matrix combines the product and functional forms of departmentalization, but other forms may also be used. Procter & Gamble, which has 105,000 employees working in 70 different countries. * Across the top of Exhibit 9.7, you can see that the company uses a product structure where it groups its 22 billion-dollar brands (Pampers, Bounty, Tampax, Crest, Vicks, Gillette, Swiffer, Pantene, and Old Spice are shown for illustration) into four business units: Baby, Feminine & Family Care; Health & Grooming; Fabric & Home Care; and Beauty, Hair & Personal Care. Each of these units is responsible for developing, manufacturing, and marketing its brands to consumers. As such, each unit operates its own research and development department and product supply initiative. The left side of the figure shows that the company also uses a functional structure based on five functions—finance, human resources (HR), communications, legal, and information technology (IT)—and a set of shared global business services including payroll, purchases, data analytics, benefits, and facilities management. The right side of the figure shows that the selling and market operation functions (SMOs) are external to the brand units but are not part of the other functional groups. SMOs make sure that a product is sold, distributed, shelved, and priced well within a particular region of the world. P&G’s SMO regions include Asia Pacific; Europe; Greater China; Latin America; North America; and India, the Middle East, and Africa (IMEA). *

 P&G’s Gillette Group (Gillette is a global brand for men’s grooming products within the Shave Care segment of the Health & Grooming unit) would work with SMOs to sell, market, and distribute Gillette products worldwide; use global business services to work with suppliers and keep costs down; and then rely on corporate functions for assistance in hiring employees, billing customers, and paying suppliers. Similar matrix combinations are shown for Pampers, Bounty, Tampax, Crest, Vicks, Tide, Swiffer, Pantene, and Old Spice within each of the segments of P&G’s four global business units. As shown in Exhibit 9.8, P&G envisions its complex matrix as a set of concentric circles: the business functions at the core, then the brands, then the selling and market operations on the circle closest to the customer.

Several things distinguish matrix departmentalization from the other traditional forms of departmentalization. * First, most employees report to two bosses, one from each core part of the matrix. For example, in Exhibit 9.7 a manager on the Pampers team responsible for marketing would report to a boss in the baby care segment of the Baby, Feminine, & Family Care global business unit as well as to a manager in Selling and Market Operations. Second, by virtue of their hybrid design, matrix structures lead to much more cross-functional interaction than other forms of departmentalization. In fact, while matrix workers are typically members of only one functional department (based on their work experience and expertise), they are also commonly members of several ongoing project, product, or customer groups. Third, because of the high level of cross-functional interaction, matrix departmentalization requires significant coordination between managers in the different parts of the matrix. In particular, managers have the complex job of tracking and managing the multiple demands (project, product, customer, or functional) on employees’ time.

The primary advantage of matrix departmentalization is that it allows companies to manage in an efficient manner large, complex tasks such as researching, developing, and marketing pharmaceuticals or carrying out complex global businesses. Efficiency comes from avoiding duplication. For example, rather than having an entire information technology function for each project, the company simply assigns and reassigns workers from the information technology department at P&G as they are needed at various stages of product completion. More specifically, an employee may simultaneously be part of five different ongoing projects but may be actively completing work on only a few projects at a time. Another advantage is the pool of resources available to carry out large, complex tasks. Because of the ability to quickly pull in expert help from all the functional areas of the company, matrix project managers have a much more diverse set of expertise and experience at their disposal than managers in the other forms of departmentalization.

The primary disadvantage of matrix departmentalization is the high level of coordination required to manage the complexity involve than individuals in two important steps of the decision-making process: defining the problem and generating alternative solutions.d in running large, ongoing projects at various levels of completion. Matrix structures are notorious for confusion and conflict between project bosses in different parts of the matrix. Disagreements or misunderstandings about schedules, budgets, available resources, and the availability of employees with particular functional expertise are common in matrix structures. Because of these problems, many matrix structures evolve from a simple matrix, in which managers in different parts of the matrix negotiate conflicts and resources directly, to a complex matrix, in which specialized matrix managers and departments are added to the organizational structure. In a complex matrix, managers from different parts of the matrix might report to the same matrix manager, who helps them sort out conflicts and problems.

9-2. Organizational Authority

The second part of traditional organizational structures is authority. Authority is the right to give commands, take action, and make decisions to achieve organizational objectives. *

Traditionally, organizational authority has been characterized by the following dimensions: 9-2a chain of command, 9-2b line versus staff authority, 9-2c delegation of authority, and 9-2d degree of centralization.