Organizational Design
Joe Mahoney
11–2
How to Organize for Competitive Advantage
• Organizational design

Goal is to translate strategies into realized ones
 Structure
 Processes
 Procedures
• Structure follows strategies
 Structure must be flexible
 Yahoo failed to make changes to
their organizational structure.

Jerry Young ousted in 2008.
11–3
11-10
Sources of
Bureaucratic Costs
Number of
Middle
Managers
Motivational
Problems
Coordination
Problem
Information
Distortion
Bureaucratic
Costs
Copyright  1998 by Houghton Mifflin Company. All rights reserved.
Organizational Inertia and the Failure
of Established Firms
• Organizational inertia
 Resistance to change

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.
11–6
The Key Elements of Organizational Structure
• Organizational structure determines
 Work efforts of individuals and teams
 Resource distribution
• Key building blocks
 Specialization
 Formalization
 Centralization
 Hierarchy
11–7
The Key Elements of Organizational Structure
• Specialization: degree to which a task is divided
 Division of labor

Example: U.S. Military (Army, Air Force, Navy, Marines)
• Formalization: codified rules and formal procedures
 Detailed written rules and policies

Examples: NASA, McDonald’s
11–8
The Key Elements of Organizational Structure
• Centralization: where the decision is made
 Centralized decision making  slow response time and
reduced customer satisfaction

Example: BP’s Mexican Gulf Oil Spill
• Hierarchy: formal, position-based reporting lines
 Tall structure vs. flat structure
Tall structure higher degree of centralization
 Flat structure  lower degree of centralization

 Span of control
11–9
Assembling the Pieces:
Mechanistic vs. Organic Organizations
• Organic organizations
 Low degree of specialization and formalization
 Flat structure
 Decentralized decision making
 Uses virtual team due to information
technology

Examples: Zappos, W. L. Gore,
and many high-tech firms
• Mechanistic organizations
 High degree of specialization and formalization
 Tall hierarchy
 Centralized decision making

Example: McDonald’s
Mechanistic vs. Organic Organization
Matching Strategy and Structure
• Simple structure
 Small firms with low complexity
 Top management makes all important strategic decisions
 Low degree of formalization and specialization
 A basic organizational structure

Examples: small advertising, consulting, accounting, and law firms
11–12
Changing Organizational Structures and Increasing
Complexity as Firms Grow
Functional Structure
• Functional structure
 Groups of employees with distinct functional areas
 The areas of expertise correspond to distinct stages
in the company value chain activities

Example: College of Business, Finance Department , … etc.
• Recommended with narrow products/services
 Matches well with business-level strategy
Cost leadership  Mechanistic organization
 Differentiation  Organic organization
 Integration strategy  Ambidextrous organization

Typical Functional Structure
11–15
Functional Strategy: Drawbacks
• Lacks effective communication channels
across departments
 Lack of linkage between functions
 Often solved the problems by having
cross-functional teams
• It cannot effectively address a higher level of
diversification
11–16
Multidivisional Structure
• Multidivisional structure
 Consists of several distinct SBUs
 Each SBU is operationally independent
 Each leader of SBUs report to the corporate office
 Examples:
Zappos is an SBU under Amazon
 Skype is an SBU under Microsoft
 Paypal is an SBU under eBay

 Companies using M-form structure

GE, Honda
11–17
Organizing the Diversified Firm
• The 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.
Organizing the Diversified Firm
• Three 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?)
11–20
Typical M-Form Structure
Functional Structure
Matrix Structure
11–21
11-19
Multidivisional Structure
Typical Chemical
Company
CEO
Corporate Headquarters Staff
Oil Division
(Functional
Structure)
Pharmaceuticals
Division (Product
Team Structure)
Plastics Division
(Matrix Structure)
Copyright  1998 by Houghton Mifflin Company. All rights reserved.
Multidivisional Structure
• Use with various corporate strategies
• Related diversification
 Co-opetition among SBUs
 Transfer core competences across SBUs
 Centralized decision making
• Unrelated diversification
 Decentralized decision making
 Competing for resources
11–23
Matching Corporate-Level Strategy
11–25
11–26
Evolutionary Stability of the Multidivisional Form
• Parable 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)
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.”
 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.
11–28
Effectiveness of Multidivisional Form
• Effective 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; and
 Performing strategic planning (diversification,
acquisition, and related activities).
11–29
Weaknesses of Multidivisional Form
• Dysfunctional 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; and
 Large conglomerates may have excessive
political power.
Matrix Structure
• A combination of functional and M-form structure
 Creation of dual line of authority and reporting lines
 Each SBU receives support both horizontally and
vertically
 Very versatile
 Enhanced learning from different SBUs
11–31
Typical (Global) Matrix Structure
11–32
Matching Global Strategy and Structure