CHAPTER 11 Organizational Design Structure Culture and Control

CHAPTER 11 Organizational Design: Structure, Culture, and Control Mc. Graw-Hill/Irwin Copyright © 2013 by The Mc. Graw-Hill Companies, Inc. All rights reserved.

Part 3 Strategy Implementation 11– 2

Chapter Case 11 Zappos: An Organization Designed to Deliver Happiness • Zappos: Success through customer service Ø Customer service all in-house Ø No scripts or timed calls • Flat Organizational Structure = Flexibility Ø Job rotation = trained talent Ø 4 weeks of orientation training v Including 2 weeks on customer service phones. 11– 3

EXHIBIT 11. 1 Zappos’ Core Values 11– 4

11– 5

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– 6

How to Organize for Competitive Advantage • Organizational design v Goal is to translate strategies into realized ones Ø Structure Ø Processes Ø Procedures • Structure follows strategies Ø Structure must be flexible Ø Yahoo failed to make changes to their organizational structure. v Jerry Young ousted in 2008. 11– 7

Organizational Inertia and the Failure of Established Firms • Organizational inertia Ø Resistance to change v Often leads to failure because of the environmental dynamics: competition, technology, strategy…etc. • 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– 10

EXHIBIT 11. 2 Organizational Inertia 11– 11

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– 12

The Key Elements of Organizational Structure • Organizational structure determines Ø Work efforts of individuals and teams Ø Resource distribution • Key building blocks Ø Specialization Ø Formalization Ø Centralization Ø Hierarchy 11– 13

The Key Elements of Organizational Structure • Specialization: degree to which a task is divided Ø Division of labor v Example: U. S. Military (Army, Air Force, Navy, Marines) • Formalization: codified rules and formal procedures Ø Detailed written rules and policies v Examples: NASA, Mc. Donald’s 11– 14

The Key Elements of Organizational Structure • Centralization: where the decision is made Ø Centralized decision making slow response time and reduced customer satisfaction v Example: BP’s Mexican Gulf Oil Spill • Hierarchy: formal, position-based reporting lines Ø Tall structure vs. flat structure Tall structure higher degree of centralization v Flat structure lower degree of centralization v Ø Span of control 11– 15

STRATEGY HIGHLIGHT 11. 2 W. L. Gore & Associates: Informality and Innovation • Bill Gore articulated 4 core values Ø Fairness to each other Ø Freedom to grow knowledge and skills Ø Ability to make one's own commitments Ø Consult with others before taking action • W. L. Gore is organized in an informal and decentralized manner Ø Empowered employees (no job titles, no job descriptions, informal team organization, soft reporting lines) Ø Face-to-face communication Ø All associates are shareholders of the company 11– 16

Assembling the Pieces: Mechanistic vs. Organic Organizations • Organic organizations Ø Low degree of specialization and formalization Ø Flat structure Ø Decentralized decision making Ø Uses virtual team due to information technology v Examples: Zappos, W. L. Gore, and many high-tech firms • Mechanistic organizations Ø High degree of specialization and formalization Ø Tall hierarchy Ø Centralized decision making v Example: Mc. Donald’s Video on Web 2. 0 Changing workplace 11– 17

EXHIBIT 11. 3 Mechanistic 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– 19

Matching Strategy and Structure • Simple structure Ø Small firms with low complexity Ø Top management makes all important strategic decisions Ø Low degree of formalization and specialization Ø A basic organizational structure v Examples: small advertising, consulting, accounting, and law firms 11– 20

EXHIBIT 11. 4 Changing Organizational Structures and Increasing Complexity as Firms Grow

Functional Structure • Functional structure Ø Groups of employees with distinct functional areas Ø The areas of expertise correspond to distinct stages in the company value chain activities v Example: College of Business, Finance Department , … etc. • Recommended with narrow products/services Ø Matches well with business-level strategy Cost leadership Mechanistic organization v Differentiation Organic organization v Integration strategy Ambidextrous organization v

EXHIBIT 11. 5 Typical Functional Structure 11– 23

EXHIBIT 11. 6 Matching Business Level Strategy and Structure

STRATEGY HIGHLIGHT 11. 3 USA Today: Leveraging Ambidextrous Organizational Design • USA 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 1– 25

Functional Strategy: Drawbacks • Lacks effective communication channels across departments Ø Lack of linkage between functions Ø Often solved the problems by having cross-functional teams • It cannot effectively address a higher level of diversification 11– 26

Multidivisional Structure • Multidivisional structure Ø Consists of several distinct SBUs Ø Each SBU is operationally independent Ø Each leader of SBUs report to the corporate office Ø Examples: Zappos is an SBU under Amazon v Skype is an SBU under Microsoft v Paypal is an SBU under e. Bay v Ø Companies using M-form structure v GE, Honda 11– 27

Organizing the Diversified Firm • The multidivisional organization, as documented by Alfred D. Chandler in Strategy and Structure, was pioneered in the 1920 s by pioneering firms such as: Ø Du. Pont, General Motors, Sears and Standard Oil; Ø By 1967, two-thirds of Fortune 500 Companies are multidivisional.

Organizing the Diversified Firm • Three key features of organizational structure: Ø 1. The division of tasks; Ø 2. The depth of the hierarchy (span of control); Ø 3. The extent of authority delegation (how much decentralization? ) 11– 30

EXHIBIT 11. 7 Typical M-Form Structure Functional Structure Matrix Structure 11– 31

Multidivisional Structure • Use with various corporate strategies • Related diversification Ø Co-opetition among SBUs Ø Transfer core competences across SBUs Ø Centralized decision making • Unrelated diversification Ø Decentralized decision making Ø Competing for resources 11– 33

EXHIBIT 11. 8 Matching Corporate-Level Strategy

11– 35

11– 36

Evolutionary Stability of the Multidivisional Form • Parable of the Two Watchmakers Ø 10, 000 parts v 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. v 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)

Evolutionary Stability of the Multidivisional Form • Hierarchical 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. ” Ø 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– 38

Effectiveness of Multidivisional Form • Effective Divisionalization involves: Ø Identification of separable economic activities within the firm; Ø Giving quasi-autonomous standing to each division (usually of a profit center nature); Ø Monitoring the efficiency performance of each division; Ø Awarding incentives; Ø Allocating cash flow to high yield uses; and Ø Performing strategic planning (diversification, acquisition, and related activities). 11– 39

Weaknesses of Multidivisional Form • Dysfunctional Aspects of the Multidivisional: Ø Emphasis on short-term perspective; Ø Loss of economies of scope; Ø Duplication of R&D, marketing, etc. ; Ø Emphasis on financial manipulation instead of developing firm capabilities and resources; and Ø Large conglomerates may have excessive political power.

Matrix Structure • A combination of functional and M-form structure Ø Creation of dual line of authority and reporting lines Ø Each SBU receives support both horizontally and vertically Ø Very versatile Ø Enhanced learning from different SBUs 11– 41

EXHIBIT 11. 9 Typical (Global) Matrix Structure 11– 42

EXHIBIT 11. 10 Matching 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– 46

Organizational Culture: Values, Norms, and Artifacts • Organizational culture Ø Collectively shared values and norms Ø Value: what is considered important Ø Norms: appropriate employee behaviors and attitudes Ø Artifacts: expression of culture in items such as physical design, stories, and celebrations • Socialization Ø Internalize organization’s value and norms through interactions • Think of Zappos’ core values • GM’s culture became strategic liability 11– 47

Where Do Organizational Cultures Come From? • Founder imprinting Ø Founders defined and shaped the culture v Apple (Steve Jobs) v Disney (Walt Disney) v Microsoft (Bill Gates) • Wal-mart’s “low cost” culture by Sam Walton • Recruit people that fit the culture Ø Zappos vs. GE 11– 48

How Does Organizational Culture Change? • Core competency core rigidity Ø Culture no longer has good fit with the environment Ø Cultural change is needed • Cultural change Ø Brings new leadership Ø Mergers and acquisitions 11– 49

Organizational Culture • Culture must be valuable, rare, inimitable, and non -substitutable (RBV) Ø Causal ambiguity and social complexity • Organizational culture is an important resource Ø Southwest Airlines v Friendly and energized employees work collaboratively Ø Zappos v Deliver WOW through service 11– 50

STRATEGY HIGHLIGHT 11. 4 Carly Fiorina at HP: Cultural Change via Shock Therapy • Carly Fiorina appointed CEO of HP in 1999 • Engineered 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 2005 Ø Hired 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– 51

Organizational Culture • Cultural impact on employee behavior Ø Motivates employees by appealing to their ideas Ø Strengthen employee commitment, engagement, and effort • Culture is vital to an organization Ø Stronger founder imprinting leads to higher performance Ø Effective alignment allows development and refines organizational core competency How to Cut Costs Video 11– 52

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– 53

Strategic Control and Reward Systems • Internal governance mechanisms Ø Culture Ø Sanctions • Input controls Ø Rules and standard operating procedures Ø Budgets Ø Behavior guidelines • Output controls Ø Result-oriented Ø ROWEs (results only work environment) Dan Pink’s RSA Video 11– 54