chapter 10 organizational structure and the implementation of strategy copyright © 1999 by harcourt...

Chapter 10Chapter 10Organizational Structure and Organizational Structure and

the Implementation of the Implementation of StrategyStrategy

Chapter 10Chapter 10Organizational Structure and Organizational Structure and

the Implementation of the Implementation of StrategyStrategy

Copyright © 1999 by Harcourt Brace & Company

All rights reserved. Requests for permission to make copies of any part of the work should be mailed to the following address: Permissions Department, Harcourt Brace & Company, 6277 Sea Harbor Drive, Orlando, Florida 32887-6777.

Bourgeois, Duhaime,

& Stimpert

Copyright © 1999 by Harcourt Brace & CompanyAll rights reserved

Chapter ObjectivesChapter ObjectivesChapter ObjectivesChapter Objectives

Define structure and describe its role in the implementation of strategy.

Identify and describe the different components of organizational structure.

Identify some of the problems associated with organizing. Describe how the various components of

organizational structure can be used to overcome these problems that are common to all firms and businesses.


Chapter Objectives Chapter Objectives (cont.)(cont.)Chapter Objectives Chapter Objectives (cont.)(cont.)

Discuss some of the emerging issues that are likely to have an impact on organizing and organizational structures in the future.


Historical OverviewHistorical OverviewHistorical OverviewHistorical Overview

Large, complex business organizations began to emerge in USA in mid-1800s. Railroad construction projects required large

organizations. New administrative and organizational structures

needed to handle decision-making and resource allocation tasks.


Characteristics of Characteristics of BusinessBusiness OrganizationsOrganizationsCharacteristics of Characteristics of BusinessBusiness OrganizationsOrganizations

Division of labor Employee specialists

Hierarchy “Tall” or “flat” Span of control: number of subordinates reporting

to a manager.


Characteristics of Characteristics of BusinessBusiness Organizations Organizations (cont.)(cont.)

Characteristics of Characteristics of BusinessBusiness Organizations Organizations (cont.)(cont.)

Decisions based on rules, policies, and standard operating procedures that seek to promote efficiency. Employees may not do whatever they want in any

way they wish. Organizations tend to become inflexible and resist

change. Rigid adherence to rules and policies. Most are hostile to innovation and tend to resist

change.


Definition of Definition of Organizational StructureOrganizational StructureDefinition of Definition of Organizational StructureOrganizational Structure

Includes any mechanisms which facilitate the formulation and implementation of strategy and the overall coordination of the business. Hierarchical reporting relationships. Policies, standard operating procedures, and

control systems. Information systems and flows of information

moving through organizations. Culture.


Definition of Definition of Organizational Structure Organizational Structure (cont.)(cont.)

Definition of Definition of Organizational Structure Organizational Structure (cont.)(cont.)

Challenge confronting general managers is to combine these mechanisms into organizational structures that: Effectively implement chosen strategies; and Make their firms responsive to leadership of

owners and managers, as well as to changes in the larger competitive environments in which firms operate.


Exhibit 10.1:Exhibit 10.1: Model of Model of Strategic ManagementStrategic ManagementExhibit 10.1:Exhibit 10.1: Model of Model of Strategic ManagementStrategic Management

Feedbackreinforces or

suggests changes

in managers'

mental models

Managers' Mental Models

+ Industry environments

+ How to compete

+ Appropriate size/diversity,

how businesses are related,

how diversification should

be managed

+ How to organize

Decisions about

Business Definition

Decisions about

Organizational

Structure

Decisions about

Business Strategy

Decisions about

Corporate Strategy

and Diversification

Market Position,Resources, and

Capabilities

Performance

and

Competitive

Advantage


Components of Components of Organizational StructureOrganizational StructureComponents of Components of Organizational StructureOrganizational Structure

Hierarchy Functional structure

• Organizes activities around functional departments.

• Advantage is that it allows employees to specialize and become increasingly adept at what they do.

• Problems– Communication and motivation can be problematic

(information must flow up before it can flow across).

– Profit centers without revenue-generating responsibility.

– Tend to overload top managers.


Shareholders

LegalMarketing Operations

CEO

Exhibit 10.2: Functional Structure


Components of Components of Organizational StructureOrganizational Structure (cont.)(cont.)


Multidivisional (product, geographical) structure• based on reality that many firms consist of several

distinct operating segments.– This structure divides those segments into autonomous

units or divisions.

• Advantages– Decentralizes decision-making so top managers can focus

on strategic issues.

– Improves accountability -- corporate staff holds division managers responsible for their units.

– Can improve allocation of resources (ROA, ROS).




Multidivisional (product, geographical) structure (cont.)

• Disadvantages– Duplication of functional activities.

– Top managers become very far removed from divisional activities.

– Transfer pricing dilemma.

– Can result in short-term focus and an undesirable level of competition for resources among divisions.


Exhibit 10.3:Exhibit 10.3: Multidivisional Multidivisional Structure (Product)Structure (Product)Exhibit 10.3:Exhibit 10.3: Multidivisional Multidivisional Structure (Product)Structure (Product)

Mfg R&D Mkt Mfg

CEO

R&D Mkt Mfg R&D

Corporate

Staff

Finance Marketing Operations

Mkt


Mfg R&D Mkt Mfg R&D Mkt Mfg R&D

CEO

North

AmericaFar EastEurope

Corporate

Staff

Mkt

Exhibit 10.4: Multidivisional Structure

(Geographical)




Matrix structure• Functional structure is overlaid or placed on top of a

multidivisional structure.

• Major advantage: Information distributed more efficiently throughout organization.

• Disadvantages– “Two boss problem”– Tendency for cross-functional team members to believe that

every decision needs to be made as a group.– Specialist working on a product team become so involved in

working on that product that they lose touch with their specialty area.


Small Car

Large Car

Minivan

Jeep/Truck

EngineeringSales &

MarketingProduction

Exhibit 10.5: Matrix Structure




Policies, standard operating procedures, and control systems. Organizations strive to standardize many activities

and functions in order to increase efficiency and reduce variability.

• High performance is almost always associated with an effective set of policies, procedures, or systems.

• At the same time, highly routinized policies and procedures can limit organizational flexibility and can increase resistance to change.




• Policies and procedures can also reward the wrong types of behaviors.

– Dexter Corp. was growing at 20% annually while market was growing at v30% -- they were losing market share and didn’t know it because (1) they had no system for gauging company performance against the competitive environment, and (2) their compensation incentives were not geared for higher growth rates.




Information systems and information flows. Implementation of strategy is becoming

increasingly dependent on acquisition, storage, distribution, and application of information.

• Can be source of competitive advantage.– Wal-Mart: inventory management.

– IT can handle flow of materials and labor through manufacturing process.

– Airlines: yield management.




Organizational culture More informal than policies and procedures. Transmitted to new employees through stories and

myths from veteran employees, company signs, and training programs.

Can be source of competitive advantage.• Provide employees with sense of meaning and

purposefulness.

• Motivates types of behaviors that are important to organizational success.




Organizational culture (cont.) Negative aspects of culture

• Can retard organizational adaptation to change.


Central Central Issues/Problems in Issues/Problems in Organizing Organizing

Central Central Issues/Problems in Issues/Problems in Organizing Organizing

Centralization vs. decentralization Centralized decision-making facilitate rapid

implementation of strategies, improves coordination, and provides effective management of related diversification strategies.

Decentralization allows lower-level managers/employees more opportunities to participate in decision-making, generally leads to better decisions and can improve organizational flexibility and responsiveness to environmental change.


Central Central Issues/Problems in Issues/Problems in OrganizingOrganizing (cont.)(cont.)


Communication and language problems. Organizations rarely have more than eight

hierarchical levels due to limits imposed by problems of communication.

• These problems intensify as organizational size and diversity increase.

It has not enabled firms to overcome these problems.• Self-interested employees will alter or slow-down bad

news or news that adversely affects that employee.




Many firms have adopted matrix structures to improve communication, coordination, and information flows.

Conflict Inevitable part of all organizations.

• Functional rivalries Evidence suggests that “superordinate goals” will

alleviate this problem.• Compensation plan designed to motivate employees to

work to achieve overall organizational objectives.




Conflict is not entirely negative.• Fosters different opinions.

Subordination of owners’ and managers’ interests and problems of motivation. “Agency problem:” tendency for interests of principals

(owners) and their agents (managers) to diverge.• Employees naturally work harder on those tasks which

benefit them.

• Firms must develop a sense of ownership among employees.


Emerging IssuesEmerging IssuesEmerging IssuesEmerging Issues

Changing nature of work Shift toward more knowledge-intensive

products/services requires a more educated and knowledgeable workforce.

Workers are increasingly becoming important for the knowledge and expertise they possess.


Emerging Issues Emerging Issues (cont.)(cont.)Emerging Issues Emerging Issues (cont.)(cont.)

Human resource management issues. How jobs are designed, how work is organized, and

how knowledge will be accumulated, stored, and shared with other employees, customers, and suppliers.

Organize work in such a way that employees become managers of their own processes, that they take responsibility for developing their skills, and that they have opportunities for sharing their knowledge.


Emerging Issues Emerging Issues (cont.)(cont.)Emerging Issues Emerging Issues (cont.)(cont.)

Human resource management issues (cont.)• Employees become 3 times more productive after 10

years with the same employer than when they started work.

– Their knowledge is key to keeping customers -- whose longevity is source of repeat sales and referrals.


New Types of New Types of Organizational Organizational StructureStructure

New Types of New Types of Organizational Organizational StructureStructure

New structures need to meet the information requirements of the new work. More cross-functional team and matrix structures. Outsource many activities now performed by

today’s workers.• Resulting virtual or modular organizations will

focus on the few activities which are critical to the firm’s success, while outsourcing nearly all other functional activities.


New Types of New Types of Organizational StructureOrganizational Structure (cont.)(cont.)

New Types of New Types of Organizational StructureOrganizational Structure (cont.)(cont.)

Rationale for outsourcing:• Service activities now occupy critical spots in most

companies’ value chains, and if they are not “best in world” at these activities, then they are sacrificing competitive advantage by performing those activities internally.

• Each company should focus its investments and attention on those activities where it can achieve and maintain “best in world” status.

• Strategically approached, outsourcing can decrease internal bureaucracies, flatten organizations, and improve competitive responsiveness.


ConclusionsConclusionsConclusionsConclusions Optimal organizational structure involves balancing

conflict, employee motivation, degree of centralization, and communication and language problems.

Managers will place ever greater pressure on their firms’ structures to acquire and disseminate information and to facilitate individual and organizational learning.

Managers will continue to rethink their value chains and respond to changes in their competitive environments.


Key Points Introduced Key Points Introduced in Chapter 10in Chapter 10Key Points Introduced Key Points Introduced in Chapter 10in Chapter 10

Organizational structure includes the mechanisms which facilitate the formulation and implementation of strategy and the overall coordination of the business enterprise.

The objectives of structure are: To implement strategies; and To make organizations responsive to their owners

(shareholders), managers, and the competitive environment.


Key Points Introduced Key Points Introduced in Chapter 10 in Chapter 10 (cont.)(cont.)


Structure includes hierarchical reporting relationships, formal organizational control systems, flows of information, and organizational culture.

Three traditional types of hierarchical structures are the functional, multidivisional, and matrix forms, each having some advantage as well as disadvantages and limitations.




Though less visible than hierarchical structures, organizational control system, flows of information, and organizational culture are important components of organizational structure.

Any structure will face a number of issues and problems, including communication and motivational problems, control loss, and the danger that owners’ interests will be subordinated to managers’ interests. Effective organizational structures can mitigate, but

not completely eliminate, these problems.




The competitive environment and the changing nature of work will lead companies to adapt new human resource management practices and to develop new structures, including virtual forms of organization.


Mfg R&D Mkt Mfg R&D Mkt Mfg R&D Mkt

CEONew York

Far EastHong Kong

EuropeLondon

North

AmericaNew York

Corporate

StaffNew York

Exhibit 10.6: Multidivisional Structure for

Hypothetical Global Company


CanadaLatin

AmericaFar EastEurope

United

States

Consumer

Products

Scientific

Products

Electronics

Products

Medical

Products

Television

Products

Opthalmic

Products

Refractory

Products

Lighting

Products

Exhibit 10.7: Matrix Structure Adoptedby One Global Company

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