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Study Guide in (CBMEC 102 Strategic Management)

Module No. 01

STUDY GUIDE FOR MODULE NO. 10

Creating Effective Organizational Designs

MODULE OVERVIEW

Overview
Organizational structures and integrating systems are necessary to manage the
relationships between internal processes and external parties such as suppliers, customers,
and alliance partners. The challenge to managers is to create systems that both maintain
order and provide flexibility and permeability. The purpose of this chapter is to describe the
different types of organizational structures and how they contribute to organizational
performance. The chapter is divided into four sections.
1. The first section uses a “patterns of organizational growth” framework to describe
how structure relates to strategy. Then, four different types of organizational
structure — simple, functional, divisional, and matrix — are discussed in terms of
important contingencies and relative advantages and disadvantages. The
implications of international operations on organizational structure are also
discussed.
2. We address the role of contingencies in determining which reward and evaluation
system is appropriate. Emphasize that there is no “one best way” and that various
approaches (financial or behavioral) are likely to be more effective depending on
conditions. Different business-level and corporate-level strategies may require
alternate approaches to designing reward and evaluation systems.
3. The second section addresses the “boundary-less” approach to organizing. This
discussion emphasizes the importance of flexibility and permeability in
environments of unpredictability and rapid change. Three different types of
boundary-less approaches are described — barrier-free, modular, and virtual.
4. The fourth section suggests the need for ambidextrous organizations. Here,
managers must address two opposing challenges: (1) being proactive in taking
advantage of new opportunities; and (2) ensuring the effective coordination and
integration of existing operations.

MODULE LEARNING OBJECTIVES

After reading this module, the students are able to:

1. Understand the growth patterns of major corporations and the relationships between
the firm’s strategy and its structure.
2. Determine the implications of a firm’s international operations for organizational
structure.
3. Recognize why there is no “one best way” to design strategic reward and evaluation
systems, and the important contingent roles of business-and corporate-level
strategies.

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Design
LEARNING CONTENTS (Strategic Management: Creating Competitive Advantage)

I. Traditional Forms of Organizational Structure

This section emphasizes the relationship between strategy and structure and addresses
the importance of flexibility and permeability in the context of four traditional forms of
organizational structure — simple, functional, divisional, and matrix — as well as
structures for firms with international operation.
The importance of organizational design and structure. Globalization and the recent
economic crisis have forced organizations to rethink their strategies and change they way
they operate. When organizational strategy changes, its structures, roles, and functions
should be realigned with the new objectives.
A. Patterns of Growth of Large Corporations
In this section, we discuss how a firm’s strategy and structure change as it increases in
size, diversifies into new product-markets, and expands its geographic scope.
The dominant pattern of growth is first from a simple structure to a functional structure as
sales and volume increase. A functional structure enhances efficiency and effectiveness
by structuring according to specialized functions. When firms grow beyond existing
markets or regions, the decision-making burden is too great and a divisional structure is
needed to organize around products, projects, or markets. As firms grow into international
markets and/or enjoy expanding sales revenues, international structures are needed.
There are several types of international structures as will be discussed below.
B. Simple Structure
Because most organizations are very small, they need only a simple structure. Simple
structures are usually highly centralized because the founder or a top executive makes
nearly all of the decisions. Emphasize that the simple structure is the oldest and most
common. It also tends to be the most informal with little specialization. This may enhance
creativity since employees are often not bound by many rules, but may lead to
management problems if employees do not understand their responsibilities. Simple
organizations often offer few chances for career advancement.
C. Functional Structure
As firms grow, excessive demands may be placed on the owner-manager in order to
process all the information necessary to run the business. Specialists are needed in
various functional areas (such as accounting, marketing, and engineering). Thus, a
functional structure often develops in which functions are managed by specialists. Then,
the chief executive’s job shifts to coordinating and managing the departments.
Functional structures are generally found in organizations in which there are single or
closely related products or services, high production volume, and some vertical
integration. In these areas, which correspond to the dominant pattern of growth (i.e., into
new markets, new product lines, or via vertical integration), centralized decision-making
is still needed to coordinate activities.
Functional organizations have advantages and disadvantages. One advantage is
enhanced coordination and control. Also, managerial and technical talent is used more
efficiently. In a functional structure, there are more opportunities for professional
development and career advancement.

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A disadvantage of functional organizations is that the beliefs, assumptions, and goals

associated with different functional activities may vary across functions. MIT Professor
Edgar Schein suggests that such different orientations may even cause certain words to
hold different meanings in different groups. This, in turn, leads to functional biases or
“silo” thinking that may impede communication and coordination.
Other disadvantages of a functional structure include short-term thinking due to
excessive concern for the function rather than the whole organization, a heavier burden
for top management who must resolve conflicts between functions, and difficulty
establishing policies that apply uniformly to all functional areas.
D. Divisional Structure
The divisional structure is organized around products, projects, or markets. Each division
has its own functional specialists organized into departments. Divisions are independent
units managed by a central corporate office. Divisional executives manage divisional
performance to achieve corporate financial objectives.
Advantages of a divisional structure include separation of strategic and operational
control. That is, the divisions focus on managing operations and the corporate office
addresses strategic issues. Also, a divisional structure makes it easier to respond quickly
to changes in the business environment. Multiple management levels mean that rewards
and career paths are linked to the development of general management talent.
Disadvantages include a tendency to duplicate activities such as personnel
management, which makes overall costs higher, dysfunctional competition between
divisions, conflicting goals, and uneven performance comparisons that inhibit resource
sharing. Another potential disadvantage is that with many divisions providing different
products and services, there is the chance that differences in image and quality may
occur across divisions. Finally, since financial success is valued so highly, there may be
too much focus on short-term performance.
1. Strategic Business Unit Structure
Highly diversified corporations often combine similar divisions into strategic business
units (SBUs). This helps coordinate activities and attain synergies. A company with
dozens of divisions grouped into three SBUs — food service, retail, and agricultural
products. SBUs are typically run as profit centers.
The primary advantage of the SBU structure is that it makes planning and control more
manageable. The disadvantages include it may be difficult to realize synergies even
among similar divisions and the additional hierarchical level of an SBU adds personnel
and overhead expenses.
2. Holding Company Structure
The holding company structure (also referred to as a conglomerate) is another type
of divisional structure. Whereas SBUs are used to group similar divisions, the holding
company structure is used to manage a portfolio of unrelated businesses. Since the
businesses are unrelated, most management decisions, controls, and incentives are
left to the operating divisions. As a result, corporate staffs are small.

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An advantage of the holding company structure is the cost savings from having a
small corporate office. Additionally, autonomy at the division level enhances
motivation. The disadvantage relates to the dependence that corporate executives
have on divisional executives to achieve financial goals.
E. Matrix Structure
A matrix structure is, in essence, a combination of a divisional and functional
structure. Most commonly, functional departments are combined with product groups
on a project basis. As a result, personnel from functional departments work under a
product group manager for the duration of a project. Multinational corporations
combine product groups and geographical units — an alternative to the
product/function matrix. In both cases, personnel become responsible to two
managers.
An advantage of the matrix structure is that it facilitates the use of specialized
personnel, equipment, and facilities. This reduces duplication and allows individuals
with a high level of expertise to divide their efforts among multiple projects at one
time. Such sharing and collaboration leads to more efficient use of resources. It also
provides professionals with greater responsibilities and enhances the use of their
skills.
Disadvantages of a matrix structure are related to dual reporting requirements. This
can lead to power struggles and conflict. Further, matrix structures are often used in
situations that are complex which may lead to excessive reliance on group processes
and teamwork, and erode timely decision making.
F. International Operations: Implications for Organizational Structure
Consistency between strategy and structure is required to be successful in global
markets. As firms expand into foreign markets, changes in structure follow changes
in strategy.
Firms that pursue multidomestic strategies would most likely use international
division or geographic-area division structures. With these, local managers have
high autonomy to manage within the demands and constraints of the local market. If
product diversity becomes large, firms may benefit from a worldwide matrix structure.
Global strategies, by contrast, typically have more centralized operations in order to
manage for overall efficiency. Here, worldwide functional and worldwide product
division structures are more likely because the market is more homogeneous and
requires less local attention. Once firms with global strategies become highly
diversified, they are likely to shift to a worldwide holding company structure.
G. Global Start-Ups: A New Phenomenon
Up to this point in this section, we have suggested that international expansion occurs
primarily after the potential of domestic growth is exhausted. However, there are two
interrelated trends which have given rise to “global start-ups:”
• many firms now decide to 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.

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There is no reason for all startups to be global; global startups require a higher level
of communication, coordination, and transportation costs. Some of the
circumstances under which going global from the beginning is advantageous are:
• the required human resources are globally dispersed, going global may be
the best way to access those resources,
• foreign financing may be easier to obtain and more suitable for the project,
• the target customers in many specialized industries are located in other
parts of the world,
• there is a gradual move from domestic markets to foreign markets and if a
product (or service) is successful, it may be immediately imitated by firms in
other countries, and,
• high up-front development costs; a global market is necessary to recover
the costs.
H. How an Organization’s Structure Can Influence Strategy Formulation
Typically, in discussing the relationship between strategy and structure, we strongly
imply that structure follows strategy. However, in this section we stress the caveat that
structure can influence a firm’s strategy. Given that a firm’s structure can be rather
difficult to change, strategy cannot realistically be formulated without taking structure
into account.
II. Linking Strategic Reward and Evaluation Systems to Business-Level and
Corporate-Level Strategies
There is not a “one best way” to set up a reward and evaluation system for an
organization. Point out that effective systems, as with other elements of strategy, are
contingent on many factors. In this section, we discuss how business-level and
corporate-level strategies create needs for different strategic reward and evaluation
systems.
A. Business-Level Strategy: Reward and Evaluation Systems
Two generic strategies — overall cost leadership and differentiation — require
fundamentally different approaches to reward and evaluation systems.
1. Overall Cost Leadership
Cost leadership requires that firms pay close attention to every element of cost. They
also work best in stable environments where the rate of innovation is low and
efficiencies are attained in the production processes. Thus, firms competing on the
basis of cost rely on tight cost controls, frequent and comprehensive reports in order
to monitor the cost of inputs and outputs, and highly structured tasks and
responsibilities. Incentives are based on financial targets. We use the example of
Nucor to illustrate how this approach to reward and evaluation systems contributes to
successful cost leadership.
2. Differentiation
Differentiation involves the development of unique product and service offerings, often
involving innovation and creativity. As a result, it may be hard to evaluate success
using hard financial indicators. Instead qualitative and intangible incentives may be
required to reward the kind of specialized design work and/or scientific expertise that
is necessary to successfully differentiation products and services. We use the example
of 3M to describe a system in which experimentation is encouraged and managers
are not penalized for product failures.

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B. Corporate-Level Strategy: Reward and Evaluation Systems

The type of diversification strategy that a firm follows has implications for the type of
controls it should use.
Related diversification often involves coordination across multiple product lines in
order to enjoy the synergies of relatedness. Rewards need to be linked to overall
behaviors such as teamwork and communication rather than short-term objectives
only. We use the example of Sharp Corporation where promotions are tied to
teamwork skills and seniority that encourages employees to pursue what is best for
the firm and keeps turnover low.
Unrelated diversification, on the other hand, is most successful when each division in
a portfolio of businesses is entrepreneurial and competes with others for resources
and rewards. Corporate policy usually involves top-down budgeting. Reward and
evaluation systems focus division presidents on financial performance and the reward
system is linked to attaining outstanding results. We use the example of Hanson PLC
to demonstrate how corporate strategies are rewarded.
We add an important caveat. In actual practice there is a need for organizations to
have combinations of financial and behavioral rewards. Both overall cost leadership
and differentiation require collaboration and sharing of ideas, for example. And, with
regard to corporate-level strategies, even firms following unrelated diversification
strategies, the sharing of best practices across both value-creating activities and
business units. For example, General Electric has developed many integrating
mechanisms to enhance the sharing of “best practices” across what would appear to
be rather unrelated businesses such as jet engines, appliances, and network
television.
III. Boundary-Less Organizational Designs
Organizations that become boundaryless become more open and permeable, not
“chaotic.”
Four types of boundaries — vertical boundaries, horizontal boundaries, external
boundaries, and geographic boundaries — and provides examples of how
organizations have made them more permeable.
Boundaryless approaches should be considered a complement to, not a replacement
for, traditional forms of organizing. Several types of structure can be used to make
organizations more boundaryless. Barrier-free approaches involve removing internal
boundaries to encourage teamwork and widespread sharing of information. Virtual and
modular organizational forms are used to make external relations more permeable
and create seamless knowledge systems across organizations.
Big challenges faced by firms in today’s global economy associated with coordinating
activities among diverse professionals spread across the world. It states that, among
other initiatives, many multinationals are hiring sociologists to help unlock the secrets
of teamwork among colleagues who have never met.

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A. The Barrier-Free Organization

Traditional organizations had boundaries intended to maintain order by making the role
of managers and employees clearly defined. But these boundaries also stifled
communication and created a “not my job” mindset. A barrier free organization enables
a firm to bridge differences in culture, function, and goals to find common ground that
facilitates information sharing and cooperation.
1. Creating Permeable Internal Boundaries
Teams are an important part of barrier free structures because they 1) substitute peer-
based for hierarchical control; 2) often develop more creative solutions via
brainstorming and other group problem solving techniques; and 3) absorb
administrative tasks previously handled by specialists.
2. Developing Effective Relationships with External Constituencies
Emphasize that barrier-free relationships must also extend to other divisions of a
corporation and to external stakeholders. To promote interdivisional coordination and
resource sharing, firms often use interdivisional task forces and common training
programs, and create reward and incentive systems that foster cooperation.
Boundaries between organizations and external constituencies such as customers
also need to be more flexible and porous. Dell’s customer relations practices are
provided as an example.
Some organizations have even benefited from breaking down barriers with
competitors by creating cooperative relationships that benefit groups of competitors in
an industry.
Point out that barrier-free approaches can be difficult to implement and maintain. The
type of democratic processes that emerge in a boundaryless approach often need to
be carefully managed. The entire organization — goals and strategies — must support
the effort. One way to enhance a barrier-free approach is to utilize well-designed and
effectively implemented information technology systems that support knowledge
gathering and sharing.
3. Risks, Challenges, and Potential Downsides
Not all efforts to create barrier-free structures have been successful. Examples are
given of companies whose process times increased rather than decreased or broke
down because rewards and incentives were not aligned with the objectives of the
boundaryless system. An example of team failure by Challenger Electrical Distribution
in Jackson, Mississippi identified 5 reasons for failure: 1) limited personal credibility;
2) lack of commitment to the team; 3) poor communications; 4) limited autonomy; and
5) misaligned incentives.
B. The Modular Organization
The modular organization type is actually a central hub surrounded by networks of
outside suppliers and specialists that perform non-vital functions. Such outsourcing
allows the firm to tap into the knowledge and expertise of “best in class” suppliers but
retain full strategic control.

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Modular companies, outsourcing the non-core functions offers three advantages:

1. It can decrease overall costs, quicken new product development by hiring suppliers
whose talent may be superior to that of in-house personnel, avoid idle capacity,
realize inventory savings, and avoid becoming locked into a particular technology.
2. It enables a company to focus scarce resources on the areas where they hold a
competitive advantage. These benefits can translate into more funding for research
and development, hiring the best engineers, and providing continuous training for
sales and service staff.
3. By enabling an organization to tap into the knowledge and expertise of its
specialized supply chain partners, it adds critical skills and accelerates
organization learning.
The modular type of organization allows a company to leverage relatively small
amounts of capital and a small management team. By minimizing the need to make
big investments, it can promote rapid growth. Firms taking this approach, however,
must 1) identify the best suppliers and establish mutually beneficial working
relationships; and 2) avoid outsourcing critical components of its business in ways
that compromise it long-term competitive advantage.
Strategic Risks of Outsourcing
Potential disadvantages of the modular form include 1) loss of critical skills or
developing the wrong skills; 2) loss of cross-functional skills; and 3) loss of control
over a supplier.
C. The Virtual Organization
The virtual type of organization is an evolving network of independent companies –
suppliers, customers, even competitors — linked together to share skills, costs, and
access to one another’s markets. By pooling and sharing resources and working
together in a cooperative effort, each gain in the long run.
Virtual organizations are a type of strategic alliance in which complementary skills
are used to pursue common objectives. Lockheed Martin is presented as an example
of a unique alliance of a company with academia and government.
Virtual organizations may not be permanent. And, participating firms may be
involved in multiple alliances at once.
Unlike the modular type, virtual organization firms give up part of their control and
participate in a collective strategy that enhances their own capacity, makes them
better able to cope with uncertainty, and enhances their competitive advantages.
1. Challenges and Risks
Despite their many advantages, alliances often fail to meet expectations. One reason
is that unique managerial skills are required — managers who can find good
partners, build win-win relationships, and achieve the right balance of freedom and
control. Point out that some alliances are short-term only and may be dissolved once
the objective is fulfilled. Others may have long-term objectives. The key to managing
both is to be clear about the overall strategic objectives at the time the alliance is
being formed.

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The virtual organization is the culmination of joint venture strategies of the past. To
form effective virtual organizations, strategic planning is needed to determine what
synergies exist and how to capitalize on them by combining core competencies. As
such, the virtual form may work better for some types of organizations than others.

D. Boundaryless Organizations: Making them Work

Many times, the most effective way to design an organization is by using a
combination of organizational types.
Often, when firms face external pressures, resource scarcity, and declining
performance, they tend to become more internally focused. Point out that this may
actually be the best time to reexamine value chain activities and determine how to
better manage relationships both internally and externally. By so doing,
organizations may find that they can solve some of their problems by turning to
boundaryless forms of organizing.
In making the transition to more democratic, participative styles of management and
greater reliance on teamwork, managers must select a balance of tools and
techniques to facilitate the effective coordination and integration of key activities. The
next five subsections address factors that must be considered in any transition from
traditional to boundaryless organization forms.
1. Common Culture and Shared Values
2. Horizontal Organization Structures
3. Horizontal Systems and Processes
4. Communications and Information Technologies
5. Human Resources Practices
IV. Creating Ambidextrous Organizational Designs
In this section we address the challenge that organizations face in rapidly changing and
complex competitive environments: exploring for new opportunities (adaptability) and
effectively exploiting the value of their existing assets and competencies (alignment).
Firms that achieve both adaptability and alignment are considered ambidextrous
organizations — aligned and efficient in how they manage today’s business but flexible
enough to changes in the environment so that they will prosper tomorrow.
A. Ambidextrous Organizations: Key Design Attributes
Organizational designs as well as the processes, systems, and cultures associated
with the innovative projects and their impact on the operations and performance of the
traditional businesses.

The firms organized their breakthrough projects into one of four primary ways:
• functional organizational structures
• cross-functional teams
• unsupported teams
• ambidextrous organizations (structurally independent units integrated into the
existing senior management structure)

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B. Why Was the Ambidextrous Organization the Most Effective Structure?

The ambidextrous organizational form was most effective on both dimensions:
success in creating desired innovations and the performance of the existing business.
The study found that there were many factors which explained the superior
performance. Among these were:
• a clear and compelling vision,
• cross-fertilization among business units,
• tight coordination and integration at the managerial levels,
• sharing was encouraged and facilitated by effective reward systems, and,
• established units were shielded from the distractions of launching new businesses.

LEARNING ACTIVITY

Application Exercise
1. Select an organization that competes in an industry in which you are particularly
interested. Go on the Internet and determine what type of organizational structure
this organization has. In your view, is it consistent with the strategy that it has chosen
to implement? Why? Why not?
2. If a firm enters into a strategic alliance but does not exercise appropriate behavioral
control of its employees (in terms of culture, rewards and incentives, and boundaries
that are involved in the alliance, what ethical issues could arise? What could be the
potential long-term and short-term downside for the firm?

SUMMARY

Successful organizations must ensure that they have the proper type of organizational
structure. Furthermore, they must ensure that their firms incorporate the necessary
integrating and processes so that the internal and external boundaries of the firm are flexible
and permeable. Such a need is increasingly important, as the environments of firms become
more complex, rapidly changing, and unpredictable.
In the first section of the chapter, we discussed the growth patterns of large
corporations. Although most organizations remain small or die, some firms continue to grow
in terms of revenues, vertical integration, and diversity of products and services. In addition,
their geographical scope may increase to include international operations. We traced the
dominant pattern of growth, which evolves from a simple structure to a functional structure
as a firm grows in terms of size and increases its level of vertical integration. After a firm
expands into related products and services its structure changes from a functional to a
divisional form of organization. Finally, when the firm enters international markets its structure
again changes to accommodate the change in strategy.
We also addressed the different types of organization structure — simple, functional,
divisional (including two variations: strategic business unit and holding company), and matrix
as well as their relative advantages and disadvantages. We closed the section with a
discussion of the implications for structure when a firm enters international markets. The three
primary factors to take into account when determining the appropriate structure are type of
international strategy, product diversity, and the extent to which a firm is dependent on foreign
sales.

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In the second section, we took a contingency approach to the topic of reward and
evaluation systems. That is, we suggested that there is no “one best way” to design a reward
and evaluation system. Rather, the primary approach to be used is dependent on a variety
of factors. The two factors that we considered were the firm’s business- and corporate-level
strategies. We argued that overall cost leadership strategies rely on cultures and reward
systems that emphasize the production outcomes of the organization because it is relatively
easy to quantify such indicators. On the other hand, differentiation strategies require that
reward and evaluation systems must encourage creativity initiatives as well as cooperation
among professionals in many different functional areas. Here, it becomes more difficult to
measure and accurately assess each individual’s contribution and a primary focus on more
subjective (and behavioral) indicators is necessary.
With regard to corporate-level strategies, we discussed the need for firms following
related diversification strategies to develop cultures and incentives that reward information
and resource sharing as well as the overall goals of the firm. However, in the case of
unrelated diversification, where there is less need for opportunity for resource sharing and
collaboration, cultures and incentives that are primarily based on a manager’s individual
business-unit performance will generally suffice.
The third section of the chapter introduced the concept of the boundaryless
organization. We did not suggest that the concept of the boundaryless organization replaces
the traditional forms of organization structure. Rather, it should complement them. This is
necessary to cope with the increasing complexity and change in the competitive environment.
We addressed three types of boundaryless organizations. The barrier-free type focuses on
the need for the internal and external boundaries of a firm to be more flexible and permeable.
The modular type emphasizes the strategic outsourcing of noncore activities. The virtual type
centers on the strategic benefits of alliances and the forming of network organizations. We
discussed both the advantages and disadvantages of each type of boundaryless organization
as well as suggested some techniques and processes that are necessary to successfully
implement them. These are common culture and values, horizontal organization structures,
horizontal systems and processes, communications and information technologies, and
human resource practices.
The fourth section addresses the need for managers to recognize two opposing
challenges. These include (1) being proactive in taking advantage of new opportunities, and
(2) ensuring the effective coordination and integration of existing operations. Such challenges
suggest the need for ambidextrous organizations. Such organizations are both efficient in
how they manage existing assets and competencies as well as take advantage of
opportunities in rapidly changing and unpredictable environments. We discussed several
attributes of effective ambidextrous organizations.

REFERENCES

Dess, Gregory G., Lumpkin G.T. Eisner, Alan B., eBook Online Access for Strategic
Management: Text and Cases 2019 Edition
Dess, Gregory G., eBook Online Access for Strategic Management: Creating
Competitive Advantage, 2019 Edition
Gamble, John, Thompson, Arthur, and Peteraf, Essentials of Strategic Management 4th
Edition

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Clerc, Strategic Intelligence For The Future 1: A New Strategic and Operational
Approach
Yjone, Gareth. And Hill Charles W.L. Strategic Management Theory and Cases,
Cengage Asia Pte. 10th Edition
Ireland Duane R., Hoskisson Robert E., & Hitt, Michael E., The Management of Strategy
Concepts and Cases, Cengage Learning Asia Pte Ltd. 12th Edition
David, Fred R., Strategic Management An Integrated Approach, Pearson Education
South Asia Pte Ltd. 2018 Edition

Prepared By:

NARCISO F. CASTRO, DBA

Associate Professor V

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