Chapter 11 B 200 Reader 4 Organizational Structuring

Chapter 11 B 200 – Reader 4 Organizational Structuring and Restructuring Mabey, Salaman, Storey Zaher Charara B 200 AOU 1

Introduction n Organizational structuring and re-structuring have great impact on strategic human resource management. Re-structuring has been creating alternative organizational forms like strategic business units (SBU), privatization, outsourcing de -layering, re-engineering, empowering, etc. Large organizations have multi-divisional structures and strategic issues are handled at a central ‘corporate’ level. Managerial control involves mainly direct command or budgetary accountability. Zaher Charara B 200 AOU 2

Background on Organizational Structure & Strategic HRM n n Human Resource management (HRM) deals with the issues of flexibility, responsiveness, empowerment. To enhance customer focus, Strategic Business Units (SBUs) have been created, resulting in flexibility through cross-functional teams. There have been efforts to ‘slim’ the organization and to lessen the bureaucracies. There is widespread experience in many firms of downsizing, mergers, acquisitions and divestitures. Zaher Charara B 200 AOU 3

n n n Downsizing and outsourcing are part of the “hard” aspects of restructuring. The “soft” aspects include issues like empowerment, learning, teamwork. ‘Bureaucratic control’ system is a strategy for internal labor markets which includes long-term career advancement, job security, pension packages and Training & development. Bureaucracies helped HRM in recruitment, performance appraisal, and other systems. Restructuring is necessary because bureaucracies were unable to respond quickly to changes in the market and to help companies stay close to the customer. Zaher Charara B 200 AOU 4

Analytical Framework n n There have been mergers and de-mergers, takeover and break-ups, networking and outsourcing, as well as other forms of re-structuring. Figure 11. 1 page 159 shows types of restructuring inside organizations: directive or autonomous command rules, centralized or decentralized control, small or large firm. n Figure 11. 2 page 159 shows restructuring types outside organizational boundaries: internal or external relationships, task-based or performance-based control, command hierarchy or open market relations. Zaher Charara B 200 AOU 5

Bureaucracy in perspective n 1. 2. 3. 4. 5. From social sciences perspective, the key attributes of bureaucracy are: Clear division of work with boundaries to responsibilities. Formal (written) rules and procedures resulting in predictability and routinization. A well-defined hierarchy of authority. Appointments to posts based on technical competence. Formal (written) documentation of actions and decisions. Zaher Charara B 200 AOU 6

Some of the dysfunctions of bureaucracy are: 1. The emphasis on control can prompt rigidity of behavior and defensive routines. 2. Division of task and responsibility can elevate departmental goals above whole system goals, resulting in sub-optimizing behavior. 3. Minimal acceptable standards can become transformed into targets and behavioral norms. Rules and procedures can become ends in themselves. Throughout the world, many large companies are still bureaucracies. The primacy of the market along with de-regulations have put pressure on large companies. There is a shift from internal labor market techniques to external methods. n Zaher Charara B 200 AOU 7

1. Downsizing and lean production n The first major form of restructuring is downsizing and ‘lean organization’. Downsizing involves a reduction in company size by reducing the number of employees and reducing some middle management layers. ‘Lean organization’ concept refers to cutting back on non value added activities, and downsizing to a point where activities smoothly interconnect in a more efficient way. Zaher Charara B 200 AOU 8

n n Many organizations downsized but did not progress to next stages like JIT or TQM. Stephen Roach, The ‘downsizing guru’, argued that competitive employees may not want to share knowledge, information and ways of working. This results in lack of trust and commitment, and therefore reliance on externalization. Zaher Charara B 200 AOU 9

2. Devolved management: divisions and SBUs n n n Decentralization and SBU is a second major form of restructuring. Some synergies of the large corporation can be lost under this structure. Hamel and Prahalad argue that senior managers should exploit inter-linkages across units that could add value to the whole company. Corporate effort should be rewarded, not only business unit goal achievement. De-layering can result in devolving of HR responsibilities to the line managers. Zaher Charara B 200 AOU 10

3. ‘De-structured’ organizations n n n Structural innovations have resulted in ‘de-structured’ companies: knowledge creating companies, empowered teams, process-based companies. This celebrates getting away from bureaucracies and rigid rules, and breaking down internal barriers and formal structures. An example is the creation of cross-functional teams. Companies have been able to reduce their product development cycle by several years, by using crossfunctional teams composed of engineers, marketers, manufacturing experts, financial analysts. Zaher Charara B 200 AOU 11

n n n In the 21 st century, companies will not use boundaries to separate people, tasks and processes. They will try to permeate these boundaries to move ideas, information and resources where they are most needed. This is a ‘paradigm shift’ towards boundary-less structures. Some boundaries are necessary to give focus. Permeability of boundaries will increase. Companies like General Motors and IBM lacked the flexibility to respond to changes in the market. Their structures were too rigid. Zaher Charara B 200 AOU 12

Old Success Factors: New Success Factors: Size Role clarity Specialization Control Speed Flexibility Integration Innovation Zaher Charara B 200 AOU 13

n n n ‘Knowledge-based’ companies create new knowledge and disseminate it throughout the organization, and embody it in new products and services. Subjective insights and intuitions of employees are important. Managers should articulate a vision. What counts is the value added to the knowledge-creating system. The ‘principle of redundancy’: sharing overlapping information across different activities, where competing groups develop different approaches to the same product idea. Zaher Charara B 200 AOU 14

Knowledge-based organization To create a knowledge-based organization: 1. Personal knowledge needs to be available to everyone in the organization; 2. Use figurative language; 3. Share information across activities; 4. Rotate managers; 5. Allow free access to company information. Zaher Charara B 200 AOU 15

Making choices about organizational structure n n n Structure can be changed to meet organizational goals. Structure is seen as not only a pattern of relationships between roles and sub-units, and as a means of co-ordination. It is also a framework for planning, organizing, directing and controlling. Strategy describes what to do. Organizing defines how to do it. Zaher Charara B 200 AOU 16

The major factors influencing choice are: 1. ‘Rational’ considerations: holding individuals and sub-units accountable for use of resources and achievement of targets. Upward and downward communication should be ensured. Some autonomy is needed to facilitate learning and build capabilities. Cross-functional teams can ensure that parts of the organizations can learn from other parts. 2. Non-technological considerations: top managers may follow the normal pattern of their industry sector. Prevailing fashion might be in favor of merger or downsizing. SBUs might have power struggles. Zaher Charara B 200 AOU 17

3. Contingent factors (such as technology or company size): these factors can influence organizational structure. In recent years, new technologies have emerged: mobile phone; laptops; networked databases; tele-working and home-working. Also, global marketplace necessitate acting locally while taking advantage of international organizational resources. Larger organizations will have more complex and formal structures. We have both differentiation and integration in formal organizations. Zaher Charara B 200 AOU 18

Structure and Management n n n Structures that are based on management: different functional departments with a hierarchy in each. There is ‘economies of scale’ and goal achievement, but such structure is not very conducive to innovations. Product-based structures are more likely to be found in large organizations operating in high uncertainty. They are more able to respond to unstable environments. Globalization will cause organizational structures in different countries to look alike. This has been called the ‘convergence thesis’. Zaher Charara B 200 AOU 19

n n Figure 11. 3 page 168 shows the fit between structure and environment: Organic structures are suitable for unstable environment. Mechanistic structures are suitable for stable environment. Matrix structure allows some balance between these types, where the focus is on economies of scale and product development. It also balances between the demands of customer focus and functional specialization. The weaknesses in matrix structure are: (a) the dual authority and the confusion it can bring, (b) frequent timeconsuming meetings, and (c) large coalitions slow the decision making process. Zaher Charara B 200 AOU 20

Conclusions n n n Types of structures have different dimensions: large/small, centralized/decentralized, autonomous/directive. Four main types of structures were identified: bureaucracy, divisionalized structures, strategic business units (SBU), and ‘de-structured’ forms. Structure change can happen in many ways: in reporting relationships, in distribution of authority, in line and staff configurations, in coordination mechanisms, and in the human resource management system. Zaher Charara B 200 AOU 21

Chapter 12 B 200 – reader 4 Beyond Organizational Structure: The End of Classical Forms? Mabey, Salaman, Storey Zaher Charara B 200 AOU 22

Introduction n n In this chapter the forms of organizational restructuring which cross organizational boundaries will be examined. Examples are joint ventures, strategic alliances, networks and outsourcing arrangements. The focus will be on connections made across company boundaries. Information and communication technologies is allowing work to be done in new ways. Zaher Charara B 200 AOU 23

Analytical Framework n n n Figure 12. 1 page 172 is very important: It shows four key dimensions: (1) command/hierarchy versus open market; (2) focused versus diversified; (3) task-based versus performance-based control; (4) internal versus external. The most classical form (bureaucracy) is command/hierarch, focused, task-based and internal structure. The most modern form (networks & virtual organizations) is open market, diversified, performance-based, external. Zaher Charara B 200 AOU 24

n n n The relationship structures that transcend from bureaucracy to networks & virtual organizations are in order: re-engineering & supply chain management; strategic outsourcing; joint ventures (see figure 12. 1 reader 4 on page 172). There is progression towards increasing externalization of relations between organizations; to diversified activities; to performance based control; and to open market regulation. Companies are in general moving away from bureaucracy, and going towards re-engineering, outsourcing, joint ventures, or even networks. The rest of the chapter will discuss these 4 forms (bureaucracy has been discussed in previous chapters). Zaher Charara B 200 AOU 25

Process Re-engineering & Supply Chain Management n n n Value-adding activities are analyzed first. Then the organization identifies and eliminates non value-adding components. Hammer and Champy (1992) prescribed the total displacement of classical structures. The central idea of re-engineering is that in order to survive under the new competitive conditions, companies must focus on core processes (the activities which create customer value). Re-engineering puts an end to narrow jobs and traditional career paths. Zaher Charara B 200 AOU 26

n n n There are fundamental changes in the nature of competition, changes in information technology, more discriminating consumers, and more flexible firms. All this necessitate re-engineering. Continuous improvements under TQM can give 10% improvements, but what’s needed is 50% or 100% improvement (Davenport, 1993). Process innovations are needed to reduce costs and improve quality & service levels while keeping flexibility. Zaher Charara B 200 AOU 27

The Key elements of process innovation are: n Have a ‘fresh start’. n Look at processes rather than having a functional view of the organization. n Solutions are cross-functional. n Exploit information technology. n Adopt a customer’s view. Produce value for customers. n Processes must have owners. Zaher Charara B 200 AOU 28

n n n Hammer (1996) in his book “Beyond Re-engineering” showed success stories of re-engineering from major companies (like Ford, Texas Instruments). Aetna Life Insurance company found that applications which took 28 days to process had only 26 minutes of real productive time. The key is to switch the focus from task improvement to a focus on process. A task is an activity performed by one person. A process is a related group of tasks that together create value to the customer. A process puts emphasis on how work is done. Process has beginning, end, inputs, outputs: a structure for action. Examples of major processes: product development, customer order fulfillment, and financial asset management. Zaher Charara B 200 AOU 29

HRM Considerations for Reengineering n n Employees fear that re-engineering might mean job losses and extensive change. HR needs to help change mind-sets and behaviors. Task specialization is to be abandoned. In a process, a worker should see himself as contributor to the ‘order fulfillment process’. The worker should resolve any problem. The worker is a “process performer”. Process measures help in tracking performance and in planning improvements. Zaher Charara B 200 AOU 30

n n There is a need for process leaders, process owners, and process managers to design processes and coach others. A ‘process council’ is a forum of process owners. These processes need autonomy, decision making, low supervision and very little hierarchy. These are “centers of excellence”. There is skill formation and continual development where knowledge and expertise are shared. Employees can take initiative, and ‘customer value’ is most important. Coaching is very important. People should be well-selected and well-trained. Zaher Charara B 200 AOU 31

Strategic Outsourcing n n Outsourcing happens when the company subcontracts to another supplier work that was previously performed in-house. Outsourcing entails externalizing of production and services (classic ‘make or buy’ decision). Outsourcing is done to cut costs and to refocus on core competencies. Outsourcing decision results from analysis of the value chain (strategic use of outsourcing). Nike outsourced all of its manufacturing. GM outsourced its car-body painting activities. Zaher Charara B 200 AOU 32

n n Advances in information and communication technologies mean that companies can outsource routine billing to remote stations anywhere in the world. Companies, through outsourcing, can clear -out peripheral distracting activities, in order to focus on core functions and core competencies. Zaher Charara B 200 AOU 33

HRM Considerations for Outsourcing n n n The most frequently outsourced functions have been: catering, security, IT services. HR functions can themselves be outsourced. IBM created a company called “Workforce Solutions” in 1992: IBM and other companies outsourced their HR staff functions to this company. There are issues in outsourcing like negotiating the contract, confidentiality of what’s being outsourced, and risk sharing. The company risks losing specific expertise for the activity that is outsourced. Other things that may be in jeopardy are: organizational learning, corporate culture and shared visions. Zaher Charara B 200 AOU 34

n n In outsourcing, HR usually plays a critical role as facilitator and coordinator, mainly because of communication and administrative expertise. Identification and protection of core competencies are crucial. Drucker (1993) argued that companies will eventually outsource all functions that do not have career ladder up to senior management. He also suggested that information will replace authority as the executive’s primary tool. Zaher Charara B 200 AOU 35

Joint Ventures, Mergers, Alliances n n n Joint ventures and alliances have been very popular in the USA and UK. British Telecom has more than 70 international joint ventures. Some pharmaceutical companies form 20 to 30 new alliances per year. Large companies can put products in the market faster than small companies. It can also gain expertise from the other company or enter a new product market. An other reason for joint ventures is to pool resources together. Some countries also require foreign companies to operate jointly with a local company. Failure rate is high in joint ventures. 36

HRM Considerations for Joint Ventures n n n Staffing solutions, procedures & policies, and good communication & education are needed. HRM challenges include blending corporate cultures, compensation schemes and staffing problems. Some companies might share common services by establishing a Shared Service Center (SSC). Zaher Charara B 200 AOU 37

Networks & Virtual Organizations n n n Benetton has a network of market relations based on contracting. With information and communication technologies, companies can operate with a minimum of stock. Some companies don’t have fixed assets and are virtual organizations. A ‘networked organization’ is defined as: an economic entity that operates through business units, driven by the market, with few levels of decision making. It outsources whatever can be better done elsewhere. Zaher Charara B 200 AOU 38

HRM Considerations for Networks n n n HRM should identify the parties and bring them together. Scarce resources should be identified and developed. Contracts in networks are of a commercial nature. Trust, reputation and repeat business are very important. When the boundaries are dissolved, customers and suppliers may be treated as joint partners. Companies should involve customers and suppliers in planning and key decisions. Zaher Charara B 200 AOU 39

n n n The new value chain is based on win-win situations. Value chains create services and products of value to the end user. Business partners, customers and suppliers work together to co-produce value (cooperate in both strategic and operational business planning). Information should be shared within the network, and problems should be solved jointly. Sharing of expertise is also important. A core organization can manage the network. Strategies are increasingly being built around core service skills, rather than products. Zaher Charara B 200 AOU 40

Conclusions n n n Corporate restructuring has been widespread, especially in large organizations. The new forms of restructuring discussed in this chapter have been used differently in different countries (there are variations between countries). There have been examples of firms which restructured in a way to exploit knowledge effectively and to use it as strategic resource. On the other hand, a great deal of restructuring has been taking place for simple cost-cutting and for externalizing risks and costs. Zaher Charara B 200 AOU 41

n n The new organization is placing emphasis on responsiveness, speed and flexibility, the primacy of knowledge, learning and intellectual capital, and boundary-breaking. Outsourcing may cause the company to reduce long-term skill formation activities, with the possible loss of intellectual capital. Internal labor markets have been dismantled and replaced with part-time workers, and this might have negative implications. Bureaucracy still has positive effects, and is not expected to completely disappear anytime soon. Zaher Charara B 200 AOU 42