Strategic Management-Chapter 10

Creating
Effective
Organizational
Designs
chapter 10
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Learning Objectives
10-2
After reading this chapter, you should have a good

understanding of:
LO10.1 The growth patterns of major corporations
and the relationship between the firm’s strategy
and its structure.
LO10.2 Each of the traditional types of
organizational structure: simple, functional,
divisional, and matrix.
LO10.3 The implication of a firm’s international
operations for organizational structure.
Copyright © 2016 by McGraw-Hill Education. This is proprietary material solely for authorized instructor use. Not authorized for sale or distribution in any manner.
This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a website, in whole or part.
Learning Objectives
10-3
LO10.4 The different types of boundaryless

organizations – barrier-free, modular, and virtual –
and their relative advantages and disadvantages.
LO10.5 The need for creating ambidextrous
organizational designs that enable firms to explore
new opportunities and effectively integrate existing
operations.
Organizational Structure
10-4
Consider . . .
To implement strategy successfully, firms must
have appropriate organizational designs.
How should a firm coordinate internal operations?
And how should a firm integrate its operations with
external parties?
How can these internal & external boundaries be
made both flexible and permeable?
Organizational Structure
10-5
▪ Organizational structure refers to formalized

patterns of interactions linking:
▪ Tasks
▪ Technologies
▪ People
▪ Structure provides a balance between:
▪ The need for division of tasks into meaningful
groupings
▪ The need to integrate these groupings for
maximum efficiency and effectiveness
Question?
10-6
▪ Generally speaking, discussions of the

relationship between strategy and structure
strongly imply that
A. strategy follows structure.
B. structure follows strategy.
C. strategy can effectively be formulated without
considering structural elements.
D. structure typically has a very small influence on
a firm’s strategy.
Organizational Structures
10-7
Exhibit 10.1
Dominant Growth
Patterns of Large
Corporations
Source: Adapted from J.R.
Galbraith and R.K. Kazanjian.
Strategy Implementation:
Structure, Systems and
Process, 2nd edition.
Copyright © 1986.
Organizational Structures:
Simple Structure
10-8
▪ The simple organizational structure is the

oldest & most common organizational form,
where:
▪ The organization is small, with a single or very
narrow product line
▪ The owner-manager makes most of the decisions
▪ The staff serves as an extension of the top
executive
Simple Structure
10-9
Advantages Advantages
Disadvantages Disadvantages
▪ Highly informal ▪ Employees may not

▪ Coordination of tasks by understand their
direct supervision responsibilities
▪ Centralized decision- ▪ Employees may take
making advantage of lack of
regulations, act in
▪ Little specialization of
their own self-interest
tasks
▪ Limited opportunities
▪ Few rules & regulations;
for upward mobility
informal reward systems
Functional Structure
10-10
▪ The functional organizational structure is

where the major functions of the firm are
grouped internally:
▪ The organization is small, with a single or closely
related product or service, high production
volume, perhaps some vertical integration
▪ The owner-manager needs specialists in various
functional areas
▪ The chief executive has responsibility for
coordination & integration of the functional areas
10-11
Exhibit 10.2 Functional Organizational Structure
10-12
Advantages Disadvantages
Disadvantages
Advantages
▪ Enhanced coordination ▪ Impeded

& control communication &
▪ Centralized decision- coordination due
making
differences in values &
▪ Enhanced orientations – “silos”
organizational-level
perspective ▪ May lead to short-term
▪ More efficient use of thinking
managerial & technical
talent ▪ Difficult to establish
▪ Facilitated career paths uniform performance
in specialized areas standards
Divisional Structure
10-13
▪ The divisional organizational structure is

where products, projects, or product markets are
grouped internally:
▪ Divisions are relatively autonomous, consisting of
products & services that are different from those of
other divisions
▪ Although governed by a central corporate office,
each division includes its own functional specialists
▪ Division executives help determine product-market
& financial objectives; decision making is
delegated to lower-level managers
10-14
Exhibit 10.3 Divisional Organizational Structure

10-15
DisadvantagesDisadvantages
▪ Separation of strategic ▪ Duplication of functions

& operating control can be very expensive
▪ Quicker response to ▪ Can lead to
changes in the market dysfunctional
environment competition among
▪ Fewer problems sharing divisions
resources across ▪ Differences in image &
functions quality may occur
▪ Development of general across divisions
management talent is ▪ Can focus too much on
enhanced short-term performance
SBU Structure
10-16
▪ The strategic business unit (SBU) structure

is where similar products or markets are
grouped into units to achieve synergy:
▪ Variation on the divisional structure
▪ Similar divisions are grouped into homogeneous
units
▪ Synergies are achieved through related
diversification – leveraging core competencies,
sharing infrastructures, using market power
▪ Each of the SBUs operates as a profit center
SBU Structure
10-17
Disadvantages
Disadvantages
▪ Planning & control done by ▪ Can be difficult to

the corporate office achieve synergies
▪ Decentralization of ▪ Increased personnel &
authority overhead expenses
▪ Quicker response to ▪ Corporate office further
changes in the market removed from the
environment divisions
▪ Synergies through sharing ▪ Corporate unaware of
core competencies, key changes in market
infrastructures, & market conditions
power
Example:
Challenges of an SBU Divisional Structure
10-18
▪ Hewlett-Packard (HP) multiple divisions, multiple markets:

personal computers, enterprise servers, storage devices,
printers
▪ 1999/2001: CEO Carly Fiorino created four major operating
groups: services, imaging & printing, access devices,
information technology infrastructure; from this created a sales
& marketing division, and an R&D & manufacturing division
▪ Although there were synergies, this lead to difficult strategic
decision making, incompatibility among products, customer
confusion
▪ 2014: CEO Meg Whitman created the Printing & Personal
Services Group and the HP Enterprise Group, then announced
they would spin-off into separate companies, regardless of the
“dis-synergies”
▪ Can companies with a narrower focus perform better?
Holding Company Structure
10-19
▪ The holding company structure is where

businesses in a corporation’s portfolio are the
result of unrelated diversification:
▪ Variation on the divisional structure
▪ Similarities are few, so synergies are limited
▪ Operating divisions have autonomy
▪ Corporate staffs are small & have limited
involvement, relying on financial controls &
incentive programs to obtain performance
Holding Company Structure
10-20
▪ Cost savings due to ▪ Potential for synergies is

fewer personnel and very limited
lower overhead ▪ Corporate office has little
▪ Divisional autonomy control
increases motivation ▪ Difficult to replace key
level of divisional divisional executives if
executives they leave
▪ Quicker response to ▪ Turnaround may be
changes in the market difficult due to limited
environment corporate staff support
Matrix Structure
10-21
▪ The matrix organizational structure is where

functional departments are combined with
product groups on a project basis:
▪ Functional departments, product groups &
geographical units can be combined
▪ Individuals have two managers
▪ Project managers & functional managers share
responsibility
▪ Product managers handle development,
manufacturing & distribution of their own line
▪ Geographic managers are responsible for
profitability of the business in their regions
Matrix Structure
10-22
Exhibit 10.4 Matrix Organizational Structure

Matrix Structure
10-23
Disadvantages Disadvantages
▪ Increases market ▪ Dual reporting

responsiveness, relationships lead to
collaboration & synergies uncertainty regarding
▪ Allows more efficient accountability
utilization of resources ▪ Can lead to power
▪ Improves flexibility, struggles & conflict
coordination & ▪ Relationships are
communication complicated, need
▪ Increases professional teamwork
development ▪ Decision-making takes
longer
International Operations
10-24
▪ Firms with international operations must

consider a structure based on the following:
▪ The type of strategy that is driving the firm’s
foreign operations
▪ The degree of product diversity
▪ The extent to which a firm is dependent on
foreign sales
10-25
Multidomestic Global Strategies

Strategies use… use…
Multidomestic Strategies use… Global Strategies use…
▪ International ▪ Worldwide
division structure functional structure
▪ Geographic-area ▪ Worldwide product
division structure division structure
▪ Worldwide matrix ▪ Worldwide holding
structure company structure
10-26
▪ A global start-up:
▪ Uses inputs from around the world
▪ Sells its products & services to customers around
the world
▪ Has communication & coordination challenges
▪ Has fewer resources than well-established
corporations
▪ Must use less costly administrative mechanisms
▪ Frequently chooses a boundaryless
organizational design
Boundaryless Designs
10-27
▪ A boundaryless organizational design

makes these boundaries more permeable:
▪ Vertical boundaries between organizational levels
▪ Horizontal boundaries between functional areas
▪ External boundaries between the firm and its
customers, suppliers, & regulators
▪ Geographic boundaries between locations,
cultures, & markets
▪ Boundaryless designs include barrier-free,
modular, & virtual organizations
10-28
▪ A barrier-free organization has permeable

internal & external boundaries and requires:
▪ Higher level of trust and shared interests
▪ Shift in philosophy from executive development to
organizational development
▪ Greater use of teams
▪ Flexible, porous organizational boundaries
▪ Communication flows & mutually beneficial
relationships with both internal and external
constituencies
10-29
Exhibit 10.6 Pros and Cons of Barrier-Free Structures

Question?
10-30
▪ What advantages does outsourcing provide an

organization?
A. Access to the best-in-class goods and services
B. The ability to expand rapidly with a relatively low
capital investment
C. The opportunity to focus scarce resources on
existing core competencies
D. All of the above
10-31
▪ A modular organization requires seamless

relationships with external organizations:
▪ Outsources nonvital functions or non-core
activities to outsiders
▪ Activates knowledge & expertise of “best in class”
suppliers but retains strategic control
▪ Focuses scarce resources on key areas
▪ Accelerates organizational learning
▪ Decreases overall costs, leverages capital
10-32
Exhibit 10.7 Pros and Cons of Modular Structures
10-33
▪ A virtual organization requires forming

alliances with multiple external partners:
▪ Continually evolving network of independent
companies
▪ Linked together to share skills, costs, & access to
one another’s markets
▪ Coping with uncertainty through cooperative
efforts
▪ Each gains from resulting individual &
organizational learning
▪ May not be permanent
10-34
Exhibit 10.8 Pros and Cons of Virtual Structures

Source: Miles, R.E. & Snow, C.C. 1986. Organizations: New Concepts for New Forms. California Management Review, Spring: 62-73; Miles & Snow. 1999.
Causes of Failure in Network Organizations, California Management Review, Summer: 53-72; and Bahrami, H. 1991. The Emerging Flexible Organization:
Perspectives from Silicon Valley. California Management Review, Summer: 33-52.
Example:
A Virtual Organization
10-35
▪ This textbook is published by McGraw-Hill

Education
▪ Putting the textbook and supplemental
material together is done by a virtual team
▪ The authors live in Texas, Michigan, and New York
▪ The editors work in Illinois, with outsourced
support
▪ The text compositors are in India
▪ The PowerPoint & Case Teaching Notes author
works out of her home in Connecticut
▪ Deadlines are coordinated by the MH editors in
Illinois and New York, to pull the book together
and arrange for distribution
Insights from Research:
Leading Virtual Teams
10-36
▪ Virtual teams’ members are in different locations, so

traditional leadership styles are less effective:
▪ No face-to-face interaction means formal leaders can’t use
personal influence or mentoring
▪ A single leader may lack information to effectively monitor
behaviors
▪ Coordination & communication is increasingly done via electronic
means, requiring technological acumen
▪ What works instead?
▪ Shared leadership, substitute leadership, empowerment
▪ Structural supports such as a fair performance appraisal system,
clear information about tasks, clear goals & rewards
▪ Good technological support
▪ How many of you would like to work “virtually”?
10-37
▪ A “virtual” boundaryless organization

requires:
▪ Mechanisms to ensure effective coordination and
integration
▪ Common culture and shared values
▪ Horizontal organizational structures
▪ Horizontal systems and processes
▪ Communications and information technologies
▪ Human resource practices
▪ Awareness of the benefits and costs of developing
lasting internal & external relationships
10-38
Benefits
Benefits
Costs Costs
▪ Agency costs are reduced ▪ Relationships between

through the use of individuals become more
relational systems important than profits
▪ Transaction costs ▪ Conflicts are resolved
between the firm and its through ad hoc
suppliers are reduced negotiations & processes
▪ Individual participants ▪ Relationships are driven
are less likely to perceive more by social connections
a conflict of interest than by needed
competencies
Ambidextrous Designs
10-39
▪ Ambidextrous organizational designs

address two contradictory challenges:
▪ How to maintain adaptability
▪ How to achieve alignment
▪ Ambidextrous organizations
▪ Are aligned and efficient while they pursue
modest, incremental innovations
▪ Are flexible enough to adapt to changes in the
external environment and create dramatic,
breakthrough innovations
Question?
10-40
▪ According to a study by O’Reilly and Tushman,

effective ambidextrous structures had all of the
following attributes except
A. a clear and compelling vision.
B. managerial efforts that were highly focused on
revenue enhancement.
C. cross-fertilization among business units.
D. established units that were shielded from the
distractions of launching new businesses.
Ambidextrous Designs
10-41
▪ Ambidextrous organizational designs:

▪ Effectively integrate and coordinate existing
operations
▪ Establish project teams that are structurally
independent units
▪ Pay attention to each unit’s processes,
structures, & cultures
▪ Effectively integrate each unit into the existing
management hierarchy

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Creating

After reading this chapter, you should have a good

LO10.4 The different types of boundaryless

▪ Organizational structure refers to formalized

▪ Generally speaking, discussions of the

▪ The simple organizational structure is the

▪ Highly informal ▪ Employees may not

▪ The functional organizational structure is

Exhibit 10.2 Functional Organizational Structure

▪ Enhanced coordination ▪ Impeded

▪ The divisional organizational structure is

Exhibit 10.3 Divisional Organizational Structure

▪ Separation of strategic ▪ Duplication of functions

▪ The strategic business unit (SBU) structure

▪ Planning & control done by ▪ Can be difficult to

▪ Hewlett-Packard (HP) multiple divisions, multiple markets:

▪ The holding company structure is where

▪ Cost savings due to ▪ Potential for synergies is

▪ The matrix organizational structure is where

Exhibit 10.4 Matrix Organizational Structure

▪ Increases market ▪ Dual reporting

▪ Firms with international operations must

Multidomestic Global Strategies

▪ A boundaryless organizational design

▪ A barrier-free organization has permeable

Exhibit 10.6 Pros and Cons of Barrier-Free Structures

▪ What advantages does outsourcing provide an

▪ A modular organization requires seamless

Exhibit 10.7 Pros and Cons of Modular Structures

▪ A virtual organization requires forming

Exhibit 10.8 Pros and Cons of Virtual Structures

▪ This textbook is published by McGraw-Hill

▪ Virtual teams’ members are in different locations, so

▪ A “virtual” boundaryless organization

▪ Agency costs are reduced ▪ Relationships between

▪ Ambidextrous organizational designs

▪ According to a study by O’Reilly and Tushman,

▪ Ambidextrous organizational designs:

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