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 organizations 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.
The case points out the value of what are called boundary-less organizations. These are
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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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I.

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?
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 firms 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 Kazanjians 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.

C.

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

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:
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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.

D.

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?
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.
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.
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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 3Ms 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 companys 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 companys 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.

E.

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?
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. 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
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 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
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,

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international, and geographic-area structures?

The SUPPLEMENT below addresses how John Browne, CEO of international giant
British Petroleum, simplified the companys organizational structure from a complex matrix to a
strategic business unit approach that is a better fit for BPs 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. Weve
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 Petroleums John
Browne. Harvard Business Review, 75(5): 147-168.

What advantages might be expected to result from the kind of reorganization 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:

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,

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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 ORGANIZATIONS 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 firms strategy. Given that a firms structure can be rather difficult to change, strategy
cannot realistically be formulated without taking structure into account.
We also provide the example of how Sharps functional structure minimizes the potential
for a high level of diversification initiatives and Brinker Internationals 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 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 Nucors
production incentive plan to illustrate how reward and evaluation systems are linked to culture
and strategy.
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NUCORS 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 workers 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.

2.

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?
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
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
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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 organizations design. These include strategy, structure, compensation
systems, culture, and training. The firm is Kelloggs the giant food producer with annual sales
of $10 billion.

KELLOGGS EFFECTIVE ORGANIZATIONAL DESIGN

Kelloggs had not been structurally aligned in a way that would help employees understand that track both
their own and their teams 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 brands 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 employees 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
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essential. According to John Renwick, Kelloggs 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

Boundaryless behavior is the soul of todays 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 passionto design the worlds best jet engine, or ultrasound machine, or refrigerator.
Source: General Electric. 1993. Annual Report, p. 2.

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A.

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?
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 peerbased 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 its 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. Dells
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.

TALKING WITH CUSTOMERS AT EVERY STAGE

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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 Wiremolds 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 Wiremolds 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,
CHALLENG
ES, AND
POTENTIAL
DOWNSIDE
S

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.
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
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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 activities
Clients can transfer risk and responsibility for outsourced activities to experts
Clients have immediate manager/employee access to records, reports, and payroll and benefits updates
Clients have reduced internal workloads
Clients 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 ASPs
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 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.
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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
anothers 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.
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
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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 longterm 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-gangs 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. Maxs 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 Macromedias 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
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.
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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.

III.

1.

COMMON CULTURE AND SHARED VALUES

2.

HORIZONTAL ORGANIZATION STRUCTURES

3.

HORIZONTAL SYSTEMS AND PROCESSES

4.

COMMUNICATIONS AND INFORMATION TECHNOLOGIES

5.

HUMAN RESOURCES PRACTICES

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 todays 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
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, Swedens
Ericsson where too much focus was directed at developing new products or adaptability).
We then provide two brief examples of how firms (Finlands 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 OReilly 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
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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.

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.

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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 ones 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.
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 firms 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
individuals 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
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diversification, where there is less need for opportunity for resource sharing and collaboration,
cultures and incentives that are primarily based on a managers 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?
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.
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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
organization. (We address these issues on pages 381 to 383).

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