Part 3 Strategy Implementation11*

Chapter Case 11 Zappos: An Organization Designed to Deliver HappinessZappos: Success through customer service

Customer service all in-houseNo scripts or timed calls

Flat Organizational Structure = FlexibilityJob rotation = trained talent4 weeks of orientation training Including 2 weeks on customer service phones.

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EXHIBIT 11.1 Zappos Core Values11*

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11*

The Basic Tasks of Organization

ORGANIZATIONAL CHALLENGE: design structure & systems that:Permit specializationFacilitate coordination by grouping individuals & link groups with systems of communication, decision making, & controlDeploy incentives to align individual & firm goals

Achieving high levels of productivity requires SPECIALIZATION

Specialization by individuals necessitates COORDINATION

For coordination to be effective requires COOPERATION

But goals of employees = goals of ownersTHE AGENCY PROBLEM

LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 Compare and contrast different strategic control and reward systems.11*

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How to Organize for Competitive AdvantageOrganizational designGoal is to translate strategies into realized ones

StructureProcessesProcedures

Structure follows strategiesStructure must be flexibleYahoo failed to make changes to their organizational structure.Jerry Young ousted in 2008.11*

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2000South-Western College PublishingCincinnati, OhioDaft, Organizational Theory and Design, 7/e

Choice Processes in the Carnegie Model

Hold joint discussionand interpret goals and problems

Share opinions

Establish problem priorities

Obtain social supportfor problem, solution

Adopt the firstalternativethat is acceptableto the coalition

Conduct a simple,local search

Use established procedures ifappropriate

Create a solutionif needed

Managers havediverse goals,opinions, values,experience

Information is limitedManagers havemany constraints

Uncertainty

Coalition Formation

Search

Satisficing

Conflict

Copyright 1998 by Houghton Mifflin Company. All rights reserved.

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Sources of Bureaucratic Costs

Number ofMiddleManagers

MotivationalProblems

CoordinationProblem

InformationDistortion

BureaucraticCosts

10

Organizational Inertia and the Failure of Established Firms Organizational inertiaResistance to changeOften leads to failure because of the environmental dynamics: competition, technology, strategyetc.

Organizational strategy and structure are not static But rather are dynamic!

A tightly-coupled and coherent activity system that works well in a static environment may be subject to problems of inertia in a dynamic environment.

11*

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EXHIBIT 11.2Organizational Inertia11*

LO 11-1 Define organizational design and list its three components. LO 11-2 Explain how organizational inertia can lead established firms to failure. LO 11-3 Define organizational structure and describe its four elements. LO 11-4 Compare and contrast mechanistic versus organic organizations. LO 11-5 Describe different organizational structures and match them with appropriate strategies. LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed. LO 11-7 Compare and contrast different strategic control and reward systems.11*

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The Key Elements of Organizational StructureOrganizational structure determines

Work efforts of individuals and teamsResource distribution

Key building blocks

SpecializationFormalizationCentralizationHierarchy

11*

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The Key Elements of Organizational Structure Specialization: degree to which a task is divided

Division of laborExample: U.S. Military (Army, Air Force, Navy, Marines)

Formalization: codified rules and formal procedures

Detailed written rules and policiesExamples: NASA, McDonalds11*

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The Key Elements of Organizational Structure Centralization: where the decision is made

Centralized decision making slow response time and reduced customer satisfactionExample: BPs Mexican Gulf Oil Spill

Hierarchy: formal, position-based reporting lines

Tall structure vs. flat structureTall structure higher degree of centralizationFlat structure lower degree of centralization

Span of control

11*

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1*STRATEGY HIGHLIGHT 11.2W. L. Gore & Associates: Informality and InnovationBill Gore articulated 4 core valuesFairness to each otherFreedom to grow knowledge and skillsAbility to make one's own commitmentsConsult with others before taking action

W. L. Gore is organized in an informal and decentralized manner

Empowered employees (no job titles, no job descriptions, informal team organization, soft reporting lines)

Face-to-face communication

All associates are shareholders of the company11*

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Assembling the Pieces: Mechanistic vs. Organic OrganizationsOrganic organizationsLow degree of specialization and formalizationFlat structureDecentralized decision makingUses virtual team due to information technologyExamples: Zappos, W. L. Gore, and many high-tech firms

Mechanistic organizationsHigh degree of specialization and formalizationTall hierarchyCentralized decision makingExample: McDonaldsVideo on Web 2.0Changing workplace11*

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EXHIBIT 11.3Mechanistic vs. Organic Organization

LO 11-1 Define organizational design and list its three components.LO 11-2 Explain how organizational inertia can lead established firms to failure.LO 11-3 Define organizational structure and describe its four elements.LO 11-4 Compare and contrast mechanistic versus organic organizations.LO 11-5 Describe different organizational structures and match them with appropriate strategies.LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed.LO 11-7 Compare and contrast different strategic control and reward systems.11*

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Matching Strategy and StructureSimple structure

Small firms with low complexity

Top management makes all important strategic decisions

Low degree of formalization and specialization

A basic organizational structureExamples: small advertising, consulting, accounting, and law firms11*

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EXHIBIT 11.4Changing Organizational Structures and Increasing Complexity as Firms Grow

Functional StructureFunctional structureGroups of employees with distinct functional areasThe areas of expertise correspond to distinct stages in the company value chain activitiesExample: College of Business, Finance Department , etc.

Recommended with narrow products/servicesMatches well with business-level strategy

Cost leadership Mechanistic organizationDifferentiation Organic organizationIntegration strategy Ambidextrous organization

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EXHIBIT 11.5Typical Functional Structure11*

EXHIBIT 11.6Matching Business Level Strategy and Structure

1*STRATEGY HIGHLIGHT 11.3USA Today: Leveraging Ambidextrous Organizational DesignUSA Today: one of the widest print circulations in U.S.

USA Today.com, a new independent SBU under Gannett

Although attracted readers and advertising dollars, USA Today.com lost key editorial talent due to uneven resource distribution

Integration of USA Today and USA Today.com to eliminate duplication of resources and reduce waste

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Functional Strategy: DrawbacksLacks effective communication channels across departments

Lack of linkage between functionsOften solved the problems by having cross-functional teams

It cannot effectively address a higher level of diversification11*

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Multidivisional StructureMultidivisional structureConsists of several distinct SBUsEach SBU is operationally independentEach leader of SBUs report to the corporate officeExamples: Zappos is an SBU under AmazonSkype is an SBU under MicrosoftPaypal is an SBU under eBay

Companies using M-form structure GE, Honda

11*

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Organizing the Diversified FirmThe multidivisional organization, as documented by Alfred D. Chandler in Strategy and Structure, was pioneered in the 1920s by pioneering firms such as:

DuPont, General Motors, Sears and Standard Oil;By 1967, two-thirds of Fortune 500 Companies are multidivisional.

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Multidivisional Form

The multidivisional structure was an adaptive response to the strategy of diversification.

Unless (multidivisional) structure follows (diversification) strategy, inefficiency resultsAlfred D. Chandler, 1962, Strategy and Structure, p. 314

Dupont ---> multi-divisional

Organizing the Diversified FirmThree key features of organizational structure:

1. The division of tasks;

2. The depth of the hierarchy (span of control);

3. The extent of authority delegation (how much decentralization?)11*

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EXHIBIT 11.7Typical M-Form StructureFunctional StructureMatrix Structure11*

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Multidivisional Structure

Oil Division(Functional Structure)

PharmaceuticalsDivision (ProductTeam Structure)

Plastics Division(Matrix Structure)

Typical ChemicalCompany

19

Multidivisional Structure Use with various corporate strategies

Related diversification

Co-opetition among SBUsTransfer core competences across SBUsCentralized decision making

Unrelated diversificationDecentralized decision makingCompeting for resources

11*

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EXHIBIT 11.8Matching Corporate-Level Strategy

11*

(a) Self Organizing Team:10 interactions

(b) Hierarchy:4 interactions

How Hierarchy Economizes on Coordination

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Tightly-coupled, integrated system: Change in any part of the system requires system-wide adaptation

Loose-coupled, modular hierarchy: organizing a complex system into sub-systems and components linked by standardized interfaces permits decentralized adaptation

Hierarchy Allows Flexible Adaptation

Evolutionary Stability of the Multidivisional FormParable of the Two Watchmakers

10,000 parts

Watchmaker #1 needs to put all parts together or the watch falls apart and he needs to start all over with his 10,000 parts.

Watchmaker #2 has developed 100 subsystems of 100 parts. This is the principle of near-decomposability (I.e., a system that contains localized sub-systems)

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Evolutionary Stability of the Multidivisional FormHierarchical systems (containing sub-systems) will evolve much more rapidly from elementary constituents than will non-hierarchic systems containing the same number of elements.

In organization theory this is called the effectiveness of loose coupling.

The advantage of loose coupling is that if there is poor performance in division 2 it does not lead to failure of the entire system.

11*

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Effectiveness of Multidivisional FormEffective Divisionalization involves:

Identification of separable economic activities within the firm;Giving quasi-autonomous standing to each division (usually of a profit center nature);Monitoring the efficiency performance of each division;Awarding incentives;Allocating cash flow to high yield uses; andPerforming strategic planning (diversification, acquisition, and related activities).

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Weaknesses of Multidivisional FormDysfunctional Aspects of the Multidivisional:

Emphasis on short-term perspective;Loss of economies of scope;Duplication of R&D, marketing, etc.;Emphasis on financial manipulation instead of developing firm capabilities and resources; andLarge conglomerates may have excessive political power.

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Matrix StructureA combination of functional and M-form structureCreation of dual line of authority and reporting linesEach SBU receives support both horizontally and verticallyVery versatileEnhanced learning from different SBUs

11*

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Dual-Authority Structure in a Matrix Organization

Product

Manager A

Product

Manager B

Product

Manager C

Product

Manager D

Director

of Product

Operations

Design

Vice President

Mfg

VicePresident

Marketing

Vice President

Controller

Procure-ment

Manager

President

EXHIBIT 11.9Typical (Global) Matrix Structure11*

Strengths of Matrix structure

Achieves coordination necessary to meet dual demands from environmentFlexible sharing of human resources across productsSuited to complex decisions and frequent changes in unstable environmentProvides opportunity for functional and product skill developmentBest in medium-sized organizations with multiple products.

Weaknesses of Matrix structure

Causes participants to experience dual authority, which can be frustrating and confusing.Participants need to have good interpersonal skills and extensive training.Is time-consuming: involves frequent meetings and conflict resolution sessions.Will not work unless participants understand it and adopt collegial rather than vertical-type relationships.Requires dual pressure from environment to maintain power balance.

EXHIBIT 11.10Matching Global Strategy and Structure

LO 11-1 Define organizational design and list its three components.

LO 11-2 Explain how organizational inertia can lead established firms to failure.LO 11-3 Define organizational structure and describe its four elements.LO 11-4 Compare and contrast mechanistic versus organic organizations.

LO 11-5 Describe different organizational structures and match them with appropriate strategies.LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed.LO 11-7 Compare and contrast different strategic control and reward systems.11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Organizational Culture: Values, Norms, and ArtifactsOrganizational cultureCollectively shared values and normsValue: what is considered importantNorms: appropriate employee behaviors and attitudesArtifacts: expression of culture in items such as physical design, stories, and celebrationsSocializationInternalize organizations value and norms through interactionsThink of Zappos core valuesGMs culture became strategic liability11*

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Where Do Organizational Cultures Come From?Founder imprinting

Founders defined and shaped the cultureApple (Steve Jobs)Disney (Walt Disney)Microsoft (Bill Gates)

Wal-marts low cost culture by Sam Walton

Recruit people that fit the cultureZappos vs. GE11*

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How Does Organizational Culture Change?Core competency core rigidity

Culture no longer has good fit with the environmentCultural change is needed

Cultural change

Brings new leadershipMergers and acquisitions11*

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Organizational CultureCulture must be valuable, rare, inimitable, and non-substitutable (RBV)Causal ambiguity and social complexity

Organizational culture is an important resource

Southwest AirlinesFriendly and energized employees work collaboratively

ZapposDeliver WOW through service11*

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1*STRATEGY HIGHLIGHT 11.4Carly Fiorina at HP: Cultural Change via Shock TherapyCarly Fiorina appointed CEO of HP in 1999Engineered acquisition of Compaq in 2002

Carly Fiorina needed the acquisition to initiate structural and cultural change in HP to overcome inertia

Board of Directors fired her in 2005Hired Mark Hurd who was himself fired in 2010

Continued turnover at top of HP; Mark Hurd was replaced by Leo Apotheker, who in turn was replaced by Meg Whitman in September 2011 (see Chapter Case 12).

11*

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Organizational Culture Cultural impact on employee behavior

Motivates employees by appealing to their ideasStrengthen employee commitment, engagement, and effort

Culture is vital to an organization

Stronger founder imprinting leads to higher performanceEffective alignment allows development and refines organizational core competencyHow to CutCosts Video11*

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LO 11-1 Define organizational design and list its three components.LO 11-2 Explain how organizational inertia can lead established firms to failure.LO 11-3 Define organizational structure and describe its four elements.LO 11-4 Compare and contrast mechanistic versus organic organizations.LO 11-5 Describe different organizational structures and match them with appropriate strategies.LO 11-6 Describe the elements of organizational culture and explain where organizational cultures can come from the how they can be changed.LO 11-7 Compare and contrast different strategic control and reward systems.11*

2013 by The McGraw-Hill Companies, Inc. All rights reserved.

Strategic Control and Reward SystemsInternal governance mechanismsCultureSanctions

Input controlsRules and standard operating proceduresBudgetsBehavior guidelines

Output controlsResult-orientedROWEs (results only work environment)Dan Pinks RSA Video11*

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***INSTRUCTOR: An interactive video exercise about Zappos culture is found online in McGraw-Hills Connect available with this textbook. It covers Learning Objective 11.6. ***INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3.

INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3. **INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.2 and 11.3.

**

**INSTRUCTOR: Embedded at the bottom of this slide is a link to a 10-minute video by MIT professor Andrew McAfee on how Web 2.0 may change the workplace.

https://www.mckinseyquarterly.com/Business_Technology/BT_Strategy/How_Web_2_0_is_changing_the_way_we_work_An_interview_with_MITs_Andrew_McAfee_2468?gp=1

**INSTRUCTOR: An interactive exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.5.

**

*INSTRUCTOR: An interactive exercise is available on this portion of the text through McGraw-Hills Connect which is available with this textbook. It covers Learning Objective 11.5.

*

*****INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.5.

**

**INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.5.

*INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.5.

*INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.6.

*INSTRUCTOR: An interactive video exercise is available on this portion of the text online through McGraw-Hills Connect, which is available with this textbook. It covers Learning Objective 11.6.

*UPDATE: HP replaced Leo Apotheker (who himself was brought in from outside HP in Nov. 2010) with Meg Whitman as CEO in September of 2011.

*INSTRUCTOR: Embedded at the bottom of this slide is a 4-minute video by Professor Michael Beer on how high-commitment high-performance companies approach economic downturns.

http://bigthink.com/ideas/14909 *INSTRUCTOR: Embedded at the bottom of this slide is a 10-minute video by RSA about Daniel Pinks work on motivation and the surprising results that paying more actually yields lower performanceThe video is referenced in the text at the top of page 323. RSA Animate is well worth a look if you have not explored their video library yet. It can be found at: http://comment.rsablogs.org.uk/videos/ or their home website: http://www.thersa.org/ and searching for Animate.

http://www.youtube.com/watch?v=u6XAPnuFjJc *