Chapter 10

Creating Effective Organizational Designs

SUMMARY/OBJECTIVES

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.

LECTURE/DISCUSSION OUTLINE

The opening case in this chapter discusses National Health Services (NHS), which was created to provide healthcare for all British citizens, based on need, not the ability to pay. Despite establishing a “NHS Modernization Agency” to modernize services and develop leadership within NHS, there were many problems which detracted from the organization’s efficiency. These include a lack of communication between catering services and wards which resulted in a significant waste of money. In addition, patient referral letters were sent via first-class mail despite an internal delivery system.

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The case points out the value of what are called “boundary-less organizations.” These are organizational forms in which there are permeable boundaries among the value creating activities in the organization as well as with the value creating activities of suppliers, customers, and alliance partners. Clearly, in the case of the NHS, there were insufficient working relationships between its internal activites, including catering and the wards.

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Are you aware of other organizations that have effective (or ineffective) working relationships among value creating activities? If positive, how are such relationships developed and fostered?

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.

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.

EXHIBIT 10.1 depicts Galbraith and Kazanjian’s model of dominant growth patterns of large corporations.

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.

Have you ever worked for an organization with a simple structure? How were decisions made?

What are some examples of companies that operate with a simple structure?

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

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often develops in which functions are managed by specialists. Then, the chief executive’s job shifts to coordinating and managing the departments.

EXHIBIT 10.2 depicts a diagram of a typical functional organizational structure.

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. Sharp Corporation is provided as an example of a major corporation that successfully uses a functional structure.

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.

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.

STRATEGY SPOTLIGHT 10.1 provides two examples of effective functional organization structures – Sharp Corporation and Parkdale Mills.

The SUPPLEMENT below addresses another kind of problem that Professor Schein has identified with organizational structures that emphasize differences in function. It is related to the culture that emerges around different levels of hierarchy.

PROFESSOR SCHEIN COMMENTS ON HIERARCHICAL SUBCULTURES

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Several management authors, including Edgar Schein of MIT, have warned about the potential problems that can occur because of the shared assumptions that form around the functional units of an organization. These beliefs form a type of culture that can inhibit cross-functional activities such as communication and consensus building. Schein is also concerned about another cultural bias:

“Another kind of subculture, less often acknowledged, reflects the common experience of given levels within a hierarchy. Culture arises through shared experiences of success. If first-line supervisors discover ways of managing their subordinates that are consistently successful, they gradually build up shared assumptions about how to do their job that can be thought of as the “culture of first-line supervision.” In the same way, middle management and higher levels will develop their own shared assumptions and, at each level, will teach those assumptions to newcomers as they get promoted. These hierarchically-based cultures create the communication problems associated with ‘selling senior management on a new way of doing things,’ or ‘getting budget approval for a new piece of equipment,’ or ‘getting a personnel requisition through.’ As each cultural boundary is crossed, the proposal has to be put into the appropriate language for the next higher level and has to reflect the values and assumptions of that level. Or, from the viewpoint of the higher levels, decisions have to be put into a form that lower levels can understand, often resulting in ‘translations’ that actually distort and sometimes even subvert what the higher levels wanted.”

Source: Schein, E. H. 1996. Three cultures of management: The key to organizational learning. Sloan Management Review, Fall: 12.

Have you ever experienced the type of hierarchical “bias” that Professor Schein is describing?

Teaching Tip: Ask students how hierarchical subcultures can differ in the various parts of an organization. This is, production and operations may be very formalized and “bureaucratic,” whereas research and development (especially primary R&D) may be rather loosely structured. Ask how such “cultural differences” may create challenges in bringing about major change in an organization (i.e., require the use of different incentives, different procedures, etc.)

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.

Have you ever worked for an organization with a functional structure? How were decisions made?

What are some examples of companies that operate with a functional structure?

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.

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EXHIBIT 10.3 presents a diagram of a typical divisional organizational structure.

General Motors is presented as an example of a divisional structure. Emphasize that a divisional structure is needed as organizations become large and more complex.

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 means that rewards and career paths are linked to the development of general management talent.

STRATEGY SPOTLIGHT 10.2 describes why Brinker International, owner of multiple restaurant chains and bakeries, changed from a traditional structure to a divisional structure. As the markets it served became more diversified, a divisional approach was needed to better serve each market niche.

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. Have you ever worked for an organization with a divisional structure? How

were decisions made?

What are some examples of companies that operate with a divisional structure?

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The SUPPLEMENT below addresses how 3M took steps to coordinate the various activities among its divisions in order to present a unified and positive corporate image.

COMMUNICATING A UNIFORM CORPORATE IMAGE AT 3M

The 3M Corporation once had over 1200 distinct brands but its market research indicated that most consumers did not really understand what 3M did or what it stood for. Although divisional autonomy and an entrepreneurial spirit had contributed to 3M’s success, it had also created a diffuse corporate image.

The process of developing a uniform and positive worldwide image began by defining 3M as a corporation. Ultimately, research in this area led to the development of a list of descriptors of 3M that was pared from 13 adjectives to a critical two: innovative and reliable. With these in hand, three communication objectives were established:

1. Use the 3M corporate personality as the foundation for an effective, active identity strategy.

2. Make 3M the master brand, link it to all the company’s values and products, and leverage it in all markets.

3. Establish worldwide communication standards.

The result of this campaign was the emergence of a single, unified 3M image. The number of 3M brand names shrank from 1200 to fewer than 600. Advertising in more than 40 countries now focuses on reinforcing the innovation theme. And most important, awareness of 3M has jumped by 10 percent or more in Japan, Australia, Europe, and even the United States.

Source: Olson, E. M., Cooper, R. & Slater, S. F. 1998. Design strategy and competitive advantage. Business Horizons, March-April: 57.

What are some examples of other companies that use brand image and corporate messages to coordinate the activities of its various divisions?

1. STRATEGIC BUSINESS UNIT STRUCTURE

Highly diversified corporations often combine similar divisions into strategic business units (SBUs). This helps coordinate activities and attain synergies. ConAgra is presented as an example of 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.

What are some examples of companies that operate with an SBU structure?

What factors might prevent companies from attaining synergies among divisions within an SBU?

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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.

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.

What are some examples of companies that operate with a holding company structure?

What factors might contribute to poor performance by the divisions of a holding company?

The SUPPLEMENT below addresses another extension of the divisional form of organizational structure identified by strategy expert Gary Hamel — growth by “cell division.”

HOW ITW GROWS BY CELL DIVISION

A human embryo grows through a process of cell division. A single cell becomes two, then four, then eight, and so on. Division and differentiation are the essence of growth. When companies stop dividing and differentiating, innovation dies and growth slows.

Illinois Tools Works (ITW) is a $6-billion a year company that grew twice as fast as the S&P 500 during the last half of the 1990s. Although located in Glenview, Illinois, it has over 400 business units around the world with average revenues of just $15 million each. When a business gets to $50 million in revenues, it is split into two or three units. For example, the company’s Deltar business, which sells plastic fasteners to the auto market, was split off from the Fastex division and given its own manufacturing facility and dedicated sales force. Its revenues grew 700 percent in four years and Deltar has split again and again. The original business now has 26 “children” with combined sales of $300 million.

Source: Hamel, G. 2000. Leading the revolution. Boston, MA: Harvard Business School Press.

What are the advantages of this type of growth by “cell division?” What are the disadvantages?

What are some examples of other companies that have used this approach to organizing growth?

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.

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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.

EXHIBIT 10.4 portrays a diagram of a typical matrix organizational structure.

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.

Teaching Tip: When discussing the concept of the matrix organization with the class, you have the opportunity to address, in effect, the difference between “theory” and “practice.” That is, the matrix organization has many potential benefits (e.g., flexibility, quick adaptation to change) that may be very difficult to realize in practice (e.g., the structure can become very cumbersome, lead to turf wars, etc.). Ask students if any of them have had experience with a matrix structure and see if any of these problems were experienced. Also, ask what managers should do to effectively implement matrix structures. What are some examples of companies that operate with a matrix structure?

EXHIBIT 10.5 outlines the advantages and disadvantages of the three different organizational structures discussed above — functional, divisional, and matrix.

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 (as discussed in Chapter 7) 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

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attention. Once firms with global strategies become highly diversified, they are likely to shift to a worldwide holding company structure.

What are some examples of international companies that use worldwide, international, and geographic-area structures?

The SUPPLEMENT below addresses how John Browne, CEO of international giant British Petroleum, simplified the company’s organizational structure from a complex matrix to a strategic business unit approach that is a better fit for BP’s goals and strategies.

CHANGING STRUCTURES TO FOCUS ON LEARNING AND PERFORMANCE AT BRITISH PETROLEUM

“[Our new organizational structure] is a far cry from the complicated structure we used to have, which included enormous regional organizations, matrix management, and huge staffs in the headquarters of the company and of the business groups. Excluding the people in the financial- and oil-trading organizations, the headquarters of the company and of the business groups now employ only 350 people – an incredibly small number for a company with revenues of $70 billion. In 1989, the total was about 4000.”

“We have built a very flat team-based organization that is designed to motivate and help people to learn. We’ve divided the company up into lots of business units, and there is nothing between them and the nine-member executive group to whom they report, which consists of the three managing directors of our business groups and their six deputies. The organization is even flatter than my description makes it sound because each of the managing directors and his deputies work as a team in dealing with the business units.”

Source: Prokesch, S. E. 1997. Unleashing the power of learning: An interview with British Petroleum’s John Browne. Harvard Business Review, 75(5): 147-168.

What advantages might be expected to result from the kind of re-organization that British Petroleum conducted? What are the possible disadvantages?

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.

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:

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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.

STRATEGY SPOTLIGHT 10.3 discusses two global startups that are based in Israel.

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.

We also provide the example of how Sharp’s functional structure minimizes the potential for a high level of diversification initiatives and Brinker International’s move to a divisional structure should enhance their strategy of innovation.

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

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the example of Nucor to illustrate how this approach to reward and evaluation systems contributes to successful cost leadership.

The SUPPLEMENT below provides additional information and detail about Nucor’s production incentive plan to illustrate how reward and evaluation systems are linked to culture and strategy.

NUCOR’S INCENTIVE PLAN: HIGH STANDARDS REQUIRE TOUGH RULES

Nucor uses a performance-related compensation system. Under this plan, employees directly involved in manufacturing are paid weekly bonuses based on actual output in relation to anticipated production tonnages produced. The bonuses pay only for work that meets quality standards. They are not pegged to individual output but to that of work groups of 25-40 employees.

Once the standard output is determined, it is not revised unless there is a significant change in the way a production process is performed due to a source other than the workers in the bonus group. Bonuses are also tied to attendance and tardiness standards. If one worker’s tardiness or attendance problems cause the group to miss its weekly output target, every group member is denied a bonus for that week.

“The bonus system is very tough,” says Ken Iverson. “If you are late, only five minutes, you lose your bonus for the day. If you are thirty minutes late or you are absent for sickness or anything else, you lose your bonus for a week. Now, we have four forgiveness days per year when you might need to close on a house or your wife is having a baby, but only four.”

Source: Anonymous. 1986. Steel man Ken Iverson. Inc., April: 44-45.

What do you think of the incentive program at Nucor? Would you find it depressing or energizing to work under a system such as this?

What other types of business processes could benefit from this type of reward and evaluation system?

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.

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

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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.

EXHIBIT 10.6 summarizes our discussion of the relationship between strategies and reward and evaluation systems.

Transparency XX (Ex. 10.6) Summary of Relationships…

The SUPPLEMENT below illustrates the importance of having a proper “fit” among multiple elements of an organization’s design. These include strategy, structure, compensation systems, culture, and training. The firm is Kellogg’s — the giant food producer with annual sales of $10 billion.

KELLOGG’S EFFECTIVE ORGANIZATIONAL DESIGN

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Kellogg’s had not been structurally aligned in a way that would help employees understand that track both their own and their team’s impact on profitability. Thus, structural change became a major priority. Rather than have separate divisions organized around such disciplines as brand, supply chain and innovation, Kellogg now has fully integrated business units in which a brand’s sales staff, innovation team, marketers, managers and other relevant personnel were all focused on attaining the same realistic targets for net sales, cash flow, and operating profits.

Meanwhile, the firm redesigned its reward and evaluation system so that performance incentives would be primarily tied to an employee’s business unit, rather than to overall corporate results (as had previously been the case). With realistic targets in place, CEO Carlos Gutierrez sought to create a culture in which meeting goals was essential. According to John Renwick, Kellogg’s vice president for investor relations and corporate planning: “It used to be, if you had a good year, you got 120% of your salary. In a bad year, you got 80%. Now it can be anywhere from zero to 200%.

Winning the hearts and minds of employees took time. A new training program for salespeople spanned the course of a year. Input was received from executives and experts throughout the company. “Our sales force originally had been focused on volume. Now we effectively gave them all P&Ls,” explained CFO John Bryant. “That helped them to think about the cost of goods, the profitability of different products. Effectively, we enabled them to operate like small businesses.”

Source: Fraser, J. A. 2004. A return to basics at Kellogg. MIT Sloan Management Review, 45 (4): 27-30.

III. BOUNDARY-LESS ORGANIZATIONAL DESIGNS

Organizations that become boundaryless become more open and permeable, not “chaotic.”

STRATEGY SPOTLIGHT 10.4 discusses 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.

The SUPPLEMENT below draws on statements made by Jack Welch, former chairman of General Electric, who was one of the earliest proponents of organizational boundarylessness.

JACK WELCH ON “BOUNDARYLESSNESS”

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“Boundaryless behavior is the soul of today’s GE...Simply put, people seem compelled to build layers and walls between themselves and others, and that human tendency tends to be magnified in large, old institutions like ours. These walls cramp people, inhibit creativity, waste time, restrict vision, smother dreams and, above all, slow things down.”

“The removal of those walls means we involve suppliers as participants in our design and manufacturing processes rather than treat them like vendors, left to cool their heels in waiting rooms. Internally, boundaryless behavior means piercing the walls of 100-year old fiefdoms and empires called finance, engineering, manufacturing, marketing, and gathering teams from all those functions in one room, with one shared coffee pot, one shared vision, and one consuming passion—to design the world’s best jet engine, or ultrasound machine, or refrigerator.”

Source: General Electric. 1993. Annual Report, p. 2.

Based on your experience, do you think it would be more difficult to break down internal boundaries or external boundaries?

What are some examples of other companies that have implemented more flexible and permeable organizational structures?

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.

STRATEGY SPOTLIGHT 10.5 discusses how GE has used the boundaryless concept to develop its wind energy business – drawing on its expertise in transportation and jet engines.

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.

The SUPPLEMENT below addresses top management teams (TMTs) and the elements of a TMT approach to team building that is critical for a TMT to be effective.

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CREATING EFFECTIVE TOP MANAGEMENT TEAMS

McKinsey & Company consultant and author Jon R. Katzenbach has seen both effective and unsuccessful TMTs. According to Katzenbach, “There is little doubt that many senior executives and CEOs become frustrated in their efforts to form teams at the top. Too often, they see few gains in performance from their attempts to become more teamlike. Indeed, trying to shoehorn a group of top-level executives into a team can be frustrating. More important it can be pointless. But it’s also true that when the conditions are right, a team effort at the top can be essential to capturing the highest performance results possible.”

To achieve high performance, according to Katzenbach, teams must convene and deploy themselves in a precise and disciplined manner with a clear understanding of their purpose: “A real team is a small number of people with complementary skills who are committed to a common purpose, performance goals, and an approach for which they hold themselves mutually accountable. Each phrase in that definition represents an explicit element of a discipline that is absolutely essential if a group at any level is to obtain the extra measure of performance results that real teams can deliver.”

Source: Katzenbach, J. R. 1997. The myth of the top management team. Harvard Business Review, 75(6): 84.

How could the elements from the definition of top management teams be applied to other types of organizational teams? Would the requirements be the same or different? Explain.

2. DEVELOPING EFFECTIVE RELATIONSHIPS WITH EXTERNAL CONSTITUTENCIES

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.

Have you ever worked for a barrier-free organization? How were relationships among participants in barrier free transactions and/or projects managed?

The SUPPLEMENT below addresses the example of Wiremold, a company that benefits from interacting with customers in barrier-free relationships throughout the product development process.

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TALKING WITH CUSTOMERS AT EVERY STAGE

At Wiremold, a West Hartford, Connecticut electrical goods manufacturer, product design teams consist of only three members — a marketer, a design/product engineer, and a production engineer. The teams routinely interview the architects and electrical contractors who are their customers about their needs in order to reach a preliminary broad definition of the product. This definition is refined again and again through interviews with other customers as the product gradually takes shape in the team members’ minds and on their computer screens.

This approach enabled Wiremold to reduce the design process from three years to less than six months. Customers’ acceptance of new products climbed. Sales increased by 150 percent, both by creating new market niches and by capturing sales from Wiremold’s competitors.

Source: Goodstein, L. D., & Butz, H. E. 1998. Customer value: The linchpin of organizational change. Organizational Dynamics, 27(1): 27.

How might approaches such as Wiremold’s be used to accomplish other organizational tasks or deal with other external stakeholders?

Some organizations have even benefited from breaking down barriers with competitors by creating cooperative relationships that benefit groups of competitors in an industry.

In what ways might competitors work together cooperatively to mutually benefit all participants?

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.

What other types of organizational systems might be utilized to ensure the success of a barrier-free approach?

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.

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Teaching Tip: Virtually all students have worked in teams — either in “real world organizations” or on projects for their college courses. Ask them what they felt the characteristics were of both effective and ineffective teams that they worked on. And, ask them how the teams that they worked on could have been made more effective.

EXHIBIT 10.7 outlines the pros and cons of the barrier free type of organization.

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.

The SUPPLEMENT below addresses the benefits of outsourcing payroll and benefits administration via application service providers (ASPs).

THE BENEFITS OF OUTSOURCING PAYROLL AND BENEFITS ADMINISTRATION— APPLICATION SERVICE PROVIDERS (ASPs)

In many cases, application service providers (ASPs) are the best choice for outsourcing functions such as human resources, payroll, and employee-benefits management. ASPs provide their services through software applications delivered via the Internet, and can offer several benefits. Among them are:

Clients can concentrate IT and other resources on revenue-generating activitiesClients can transfer risk and responsibility for outsourced activities to expertsClients have immediate manager/employee access to records, reports, and payroll and benefits updatesClients have reduced internal workloadsClients can obtain superior performance at the least cost.

A recent study of the financial impact of ASPs, conducted by IDC, an international business research firm, shows that “application hosting customers” have measured significant bottom-line benefits from ASP services, with greater than half of the organizations experiencing a return on investment (ROI) greater than 100 percent.

Nearly as important as the financial benefits is the peace of mind that comes to clients because of an ASP’s expertise, security, and reliability.

Source: Banham, R. 2002. The HR outsourcing supernova. HRO Today, October: 35-37.

For 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

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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.

Have you ever worked for a modular organization? What criteria were used to choose outsourcing partners? What should be the criteria? Explain.

1. 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.

STRATEGY SPOTLIGHT 10.6 discusses how Sony outsources for talent to develop games for its highly successful video game business.

EXHIBIT 10.8 addresses the pros and cons of the modular form of organizational structure.

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 gains 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.

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STRATEGY SPOTLIGHT 10.7 describes how collaborative relationships have benefited the biotechnology industry. Companies work on joint marketing projects, bring R&D scientists together, and contribute technical assistance and financial clout.

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.

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.

What types of contingencies are likely to influence whether a virtual organizational type will be a successful form for pursuing a venture or strategic goal?

EXHIBIT 10.9 summarizes the pros and cons of the virtual form of organizational structure.

The SUPPLEMENT below discusses how a high school student was able to co-lead a virtual team that earned $400,000 for web design work.

A VIRTUAL TEAM OF TWELVE “GEEKS” THAT SPANS NATIONAL BOUNDARIES

Max Oshman, a high school junior in the United States, took in $400,000 for his Web design work that only took three months. Actually, it was Max and 11 fellow geeks — a virtual team of twelve. Says Max: “Some of them live in the U. K., two in Croatia, two in Sweden and the rest are scattered around Southern California, New York, Texas, and Amsterdam.” The leaders of this e-gang — called pLotdev Multimedia Developers LLC — are Max and Yves Darbouze, a 30-year old Miami resident. The e-gang’s average age is 23.

Max has never met any of his collaborators in person. How does the team communicate? According to Max: “Mostly by e-mail. When we have a big project, we communicate via phone. We also have group talks using MSN Messenger.”

Max and Yves joined forces (by e-mail) after Max completed his first book, Macromedia Flash: Super Samurai, when he was 15. Max’s co-author introduced him to Yves, who needed some Web design work done, thinking Max would be good for the job. “We spoke about the industry and where it was going, and we shared many of the same beliefs,” says Max. “We decided that we would start a company.” At the time Yves had no idea that Max was 17.

Max and Yves are convinced that a pair of Macromedia’s software programs will change the world. One is Flash, a 3-D graphics program. The other is ColdFusion, which lets people update Web sites without a programmer. Rich

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Karlgaard, the writer, was very impressed when Max explained the software to him. Mr. Karlgaard felt that it made perfect sense: cheap, off-the-rack software that will open up Web design to artists, the way Adobe opened up page design 15 years ago. Max, of course, probably missed the analogy — fifteen years ago, he was only two!

Source: Karlgaard, R. 2003. Flash kid. Forbes. March 17: 39.

D. MOVING TOWARD THE BOUNDARYLESS ORGANIZATION

Many times, the most effective way to design an organization is by using a combination of organizational types.

STRATEGY SPOTLIGHT 10.8 describes how Technical Computer Graphics effectively combined both barrier-free and virtual forms into an innovative organization.

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

III. CREATING AMBIDEXTROUS ORGANIZATIONS

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. THE CHALLENGE OF ACHIEVING AMBIDEXTERITY: SOME EXAMPLES FROM BUSINESS PRACTICE

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In this section, we first discuss two firms that focused two much on one of the challenges (Lloyds TSB Bank Plc — where too much focus was on efficiency or alignment; and, Sweden’s Ericsson — where too much focus was directed at developing new products or adaptability).

We then provide two brief examples of how firms (Finland’s Nokia Corp. and GlaxoSmithKlinePLC) have an appropriate balance of adaptability and alignment.

B. AMBIDEXTROUS ORGANIZATIONS: KEY DESIGN ATTRIBUTES

Here, we focus on a study by O’Reilly and Tushman that investigated 35 efforts to launch breakthrough innovations undertaken by 15 business units in nine different industries. They studied the 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)

These four organizational designs are depicted in EXHIBIT 10.10.

Transparency XX (Ex. 10.10) Organizational Designs for…

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.

STRATEGY SPOTLIGHT 10.9 discusses how USA Today was able to enhance it success via its ambidextrous organization. This example serves to illustrate many of the points in this section.

The SUPPLEMENT below provides some of the attributes of ambidextrous behaviors of individuals. It was based on research which involved interviews with a wide variety of people from front-line workers to senior executives.

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THE BEHAVIORS OF “AMBIDEXTROUS INDIVIDUALS”

Based on a study by Julian Birkinshaw and Cristina Gibson (that was published in the Summer 2004 issue of the MIT Sloan Management Review), ambidextrous individuals:

take the initiative and are alert to opportunities beyond the confines of their own jobs. are cooperative and seek out opportunities to combine their efforts with others. are brokers, always looking to build internal linkages. are multitaskers who are comfortable wearing more than one hat.

Source: Birkinshaw, J. & Gibson, C. 2004. Building ambidexterity into an organization. MIT Sloan Management Review, 45 (4): 47-55.

Teaching Tip: The above behaviors would appear to have important career implications. You might consider asking students questions such as the following: First of all, you might ask them what type of behaviors would be conducive to ambidexterity — prior to discussing the four bulleted items. Then, consider asking them how important they feel these behaviors are for career success as well as how to develop such behaviors (e.g., taking the initiative to develop social networks, being open to new opportunities, being comfortable taking on multiple projects, and improving one’s ability to be a valuable “team player,” and so on).

III. 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.

Chapter 10: Creating Effective Organizational Designs

Select an organization with which you are familiar — preferably one that you have worked in. To what extent is this organization “boundaryless,” that is, are the boundaries across departments and hierarchical levels rather permeable or are they fixed and rigid? How is this aspect of organizational design affecting its performance? How could it be improved?

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Teaching suggestions:

The opening case about the NHS (page 354) in England serves the purpose of explaining the importance of communicating across departments and divisions. The key points to be emphasized here are:

*When and under what kind of industry environments is boundarylessness more important and when would it not work?

Clearly, organizations operating in dynamic environments would need greater permeability across boundaries than those that operate in stable and predictable environments. Boundarylessness is a higher concept than mere communication and coordination across departments. Not all organizations can afford to be boundaryless. Consider a bank. Tight controls and rigidity are very critical for maintaining the integrity and efficiency in a banking system.

Also, the strategy a firm pursues will have a determining impact on its structure. A tight cost control strategy would require a rigid organization structure with strict controls than a more flexible system as envisaged by a boundaryless organization. The importance of keeping the structure aligned with the strategy needs to be driven home strongly.

You can then raise discussion on the various forms of boundarylessness.

Barrier-free type involves making both internal and external organizational boundaries (with outside organizations such as supplier organizations, buyer organizations etc.,) permeable.

Modular organizations and virtual types of organizations focus on the need to create seamless relationships with external organizations. Outsourcing non-core activities is at the core of a modular organization. (The students may be particularly interested in Strategy Spotlight 10.6 on page 378 that addresses how Sony “outsources” for talent in its development of video games). Forging alliances among independent entities to exploit specific market opportunities is the essence of a virtual organization. (On page 380—Strategy Spotlight 10.7--we provide the example of collaborative relationships in biotechnology.)

Organizations such as Dell can be used as examples of organizations that balance between the need for tight control and creating boundarylessness. Dell has extremely tight controls on its assembling operations and supply chain management. On the other hand, it made its boundaries extremely permeable with its suppliers. Suppliers own the inventory facility on the Dell campus in Austin, Texas. Creating effective partnerships with various stakeholder groups reflects itself in the structure and control at Dell.

You can draw attention to the kind of culture, communication, investment in information technologies and human resource practices that are necessary to support a boundaryless

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organization. (We address these issues on pages 381 to 383).

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