Chapter 10: Creating Effective Organizational Designs

Exam Study Notes - Strategic Management (Dess, McNamara, Eisner, Lumpkin)

Study focus: know each structure's definition, when a firm would use it, and be ready to match advantages/disadvantages to the
right structure. The boxed Definition lines below are common short-answer material.

1. What Is Organizational Structure?

Organizational structure: the formalized pattern of interactions that link a firm's tasks, technologies, and people.

• Ensures resources are used effectively to accomplish the firm's mission.

• Balances two forces: (1) dividing tasks into meaningful groups, and (2) integrating those groups for efficiency and
effectiveness.

Growth Pattern of Large Corporations (4 Phases)

Phase Strategy Structure

1 Low revenue base; simple product-market scope Simple

2 Rising revenue; vertical integration Functional

3 Expand into new related products/markets or geographic areas Divisional

4 Expand into international markets Intl Division, Geographic Area, Worldwide

Product, Worldwide Functional, or Worldwide
Matrix

Dominant path for most U.S. firms: Simple -> Functional -> Divisional -> International

2. The Four Traditional Structures

2.1 Simple Structure

Definition: the owner-manager makes most decisions and controls activities; staff is an extension of the top executive.

Characteristics: highly informal; coordination through direct supervision; centralized decision making; little task specialization;
few rules/regulations; informal evaluation.

Advantages Disadvantages

• Fosters creativity and individualism (few rules/regulations). • Unclear responsibilities can cause conflict and confusion.

• Employees may act in self-interest, hurting motivation and

risking misuse of resources.

• Flat structure limits upward mobility, making it hard to

recruit/retain talent.

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 2.2 Functional Structure

Definition: the major functions of the firm (production, marketing, R&D, accounting) are grouped internally.

Typically found where there is a single or closely related product/service, high production volume, and some vertical
integration.

Advantages Disadvantages

• Pooling specialists improves coordination and control within • Differences across functional areas can impede communication
each area. and coordination.

• Centralized decisions give an organization-wide perspective. • Narrow, functional thinking can lead to short-term decisions.

• More efficient use of managerial and technical talent. • Conflicts get pushed up, overburdening top executives.

• Facilitates professional development. • Hard to set uniform performance standards firm-wide.

2.3 Divisional Structure

Definition: products, projects, or product markets are grouped internally into relatively autonomous units governed by a
central corporate office; each division has its own functional specialists.

Advantages Disadvantages

• Increases strategic and operational control; frees executives to • Duplication of personnel, operations, and investment raises
focus on strategy. costs.

• Quick response to environmental changes. • Dysfunctional competition among divisions can hurt overall
performance.

• Sharper focus on products and markets. • Difficult to maintain a uniform corporate image.

• Minimizes problems of sharing resources across functions. • Can overemphasize short-term performance.

• Develops general managers.

2.3a SBU Structure (Strategic Business Unit)

Definition: divisions with similar products, markets, and/or technologies are grouped into homogeneous units to capture
synergies; each SBU operates as a profit center.

Advantages Disadvantages

• Makes corporate-level planning and control more manageable. • Harder to achieve synergies across SBUs.

• Greater decentralization lets businesses react faster to • The extra management layer adds personnel and overhead
environmental change. costs.

• Puts the corporate office one step further from individual

divisions.

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 2.3b Holding Company Structure

Definition: a variation of the divisional structure in which divisions have a high degree of autonomy from both other divisions
and corporate headquarters; best suited to unrelated diversification.

Corporate office grants divisions significant autonomy and relies on financial controls and incentives rather than direct
oversight.

Advantages Disadvantages

• Cost savings from a small corporate office, fewer personnel, • Corporate executives have inherently limited control over, and
and fewer hierarchical levels. heavy dependence on, division execs.

• Division autonomy boosts executive motivation and speeds • Hard to turn around a struggling division given limited corporate
response to opportunities/threats. staff support.

2.4 Matrix Structure

Definition: multiple lines of authority exist and some individuals report to at least two managers; combines functional and
divisional structures.

Some MNCs use a matrix to combine product groups with geographic units (e.g., Starbucks). Others use it for flexibility:
employees keep a permanent functional home but also join temporary project teams (e.g., Cisco).

Advantages Disadvantages

• Increases market responsiveness through collaboration and • Dual reporting creates uncertainty about accountability.
synergy.

• More efficient use of resources. • Intense power struggles can raise conflict levels.

• Improves flexibility, coordination, and communication. • Relationships get more complex; resources can be duplicated.

• Broadens professional development through wider • Heavy reliance on teamwork can slow decision making.
responsibilities.

3. Quick-Glance Comparison

Structure Top Advantage Top Disadvantage

Functional Efficient use of specialists; strong central control. Functional silos slow cross-department coordination.

Divisional Fast response to market/environment; clear Duplicated costs; rivalry between divisions.
accountability.

Matrix Flexible, efficient sharing of resources across projects. Dual-authority reporting creates accountability
confusion.

(Full advantage/disadvantage lists for each structure are in Section 2 above.)

4. Going Global: International Structures

Three contingencies shape which structure a firm chooses for foreign operations:
• The strategy driving the firm's foreign operations.
• Product diversity.

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 • How dependent the firm is on foreign sales.

Structure What It Means

International Division Foreign operations sit in one separate, autonomous division; domestic ops stay elsewhere in the
firm.

Geographic-Area Division A divisional structure in which operations are grouped internally by geographic region.

Worldwide Functional A functional structure where every department has worldwide responsibility.

Worldwide Product Division A product-division structure where every division has worldwide responsibility.

Worldwide Matrix A matrix with one line of authority organized by geographic area.

Global start-up: a business that, from inception, seeks significant advantage from using resources and selling output in
multiple countries. Being global raises communication, coordination, and transportation costs - cross-time-zone, cross-culture
coordination is a constant challenge.

Structure and strategy are a two-way street: strategy dictates structural elements (task division, integration needs,
authority relationships) - but the resulting structure also shapes how the firm competes, its day-to-day operations, and its
performance.

5. Boundaryless Organizational Designs

Boundaryless organization: vertical, horizontal, external, and geographic boundaries are made permeable.

5.1 Barrier-Free Organization

Definition: firms bridge real differences in culture, function, and goals to find common ground that enables information
sharing and cooperation. Requires a high level of trust and shared interest across the organization.

Keys to success: keep the team small; staff it with top performers; fully fund it up front; empower it to spend the budget; hold it
accountable; keep a manager actively engaged.

Advantages Disadvantages

• Leverages the talents of all employees. • Hard to overcome political and authority boundaries inside and
outside the firm.

• Enhances cooperation, coordination, and info-sharing (internal • Weak leadership/vision can create coordination problems.
and external).

• Enables a quicker response to market changes. • Democratic processes are time-consuming and hard to
manage.

• Low trust can impede performance.

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 5.2 Modular Organization

Definition: non-vital functions are outsourced to outside suppliers while the firm keeps strategic control; the firm becomes a
hub surrounded by a network of suppliers/specialists that can be added or dropped.

Preconditions for success: work closely with suppliers so both sides' interests are met, and choose the right competencies to
keep in-house.

Strategic risks of outsourcing: losing critical skills (or building the wrong ones), losing cross-functional skills, and losing control
over a supplier.

Advantages Disadvantages

• Directs the firm to its critical activities. • Heavy reliance on outsiders can weaken a common vision.

• Maintains full strategic control over core competencies. • Outsourcing critical tech/competencies can hurt future
advantage.

• Achieves best in class performance across the value chain. • Hard to bring outsourced activities back in-house.

• Leverages core competencies with a smaller capital • Cross-functional skills may erode.
commitment.

• Speeds information-sharing and organizational learning. • Less operational control; possible loss of control over a supplier.

5.3 Virtual Organization

Definition: a continually evolving network of independent companies - suppliers, customers, even competitors - linked to
share skills, costs, and access to each other's markets. Not necessarily permanent; firms may join multiple alliances at once.

Advantages Disadvantages

• Enables sharing of costs, skills, and risks. • Hard to tell where one company ends and another begins.

• Enhances access to global markets. • Potential loss of operational control among partners.

• Increases market responsiveness. • Risk of losing strategic control over emerging technology.

• Creates a best of everything organization (each partner's core • Requires new, hard-to-acquire managerial skills.
competency).

• Accelerates individual and organizational learning.

6. Making Boundaryless Organizations Work

There is no single best structure. The most effective approach usually combines organizational types to fit the firm's
strategy, environment, and people.

Managers must watch for two issues:

• The need for mechanisms that ensure effective coordination and integration.
• The benefits and costs of building strong, long-term relationships.

Facilitating Coordination and Integration - key factors

• Common culture and shared values.
• Horizontal organizational structures - grouping related business units under common management to share
resources/infrastructure, exploit synergies, and build common purpose.

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 • Communication and information technologies.
• Human resource practices.

Benefits and Costs of Lasting Relationships

Benefits:
• Relational systems can dramatically cut agency costs within the firm.
• Reduces transaction costs between the firm and its suppliers/customers.
• Individuals and partner firms are more likely to seek win-win solutions.

Cost: the social capital of individuals and firms can end up driving (and limiting) their opportunities.

7. Ambidextrous Organizational Designs

Ambidextrous organizational design: a design that simultaneously pursues modest, incremental innovation and more
dramatic, breakthrough innovation.

Two guiding concepts

• Adaptability - exploring new opportunities and adjusting to volatile markets to avoid complacency.
• Alignment - having a clear sense of how value is created short-term and how activities are integrated and coordinated.

Four ways to organize for ambidexterity

• Carry out projects within the existing functional structure.
• Organize as cross-functional teams.
• Organize as non-supported (independent/spin-off) teams.
• Build a fully ambidextrous organization.

8. Key Terms - Rapid Review Glossary

Term Definition

Organizational structure Formalized pattern of interactions linking a firm's tasks, technology, and people.

Simple structure Owner-manager controls most decisions; minimal formal rules.

Functional structure Organized around major business functions (production, marketing, R&D, etc.).

Divisional structure Organized around products/markets; semi-autonomous units under a corporate office.

SBU structure Similar divisions grouped into homogeneous units, each run as a profit center.

Holding company structure Divisional variant with maximum divisional autonomy; fits unrelated diversification.

Matrix structure Dual lines of authority combining functional and divisional/project reporting.

International division A separate, autonomous unit that houses all foreign operations.

Geographic-area division Divisional structure organized by world region.

Worldwide functional structure Functional departments given global responsibility.

Worldwide product division Product divisions given global responsibility.

Worldwide matrix structure A matrix with one line of authority organized by geographic area.

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 Term Definition

Global start-up A new venture that draws resources from, and sells to, multiple countries from inception.

Boundaryless organization Vertical, horizontal, external, and geographic boundaries are made permeable.

Barrier-free organization Breaks down internal silos to enable information sharing and cooperation.

Modular organization Outsources non-core functions while keeping strategic control of core competencies.

Virtual organization A network of independent firms sharing skills, costs, and market access.

Horizontal organizational Groups related business units under common management to share resources.
structure

Ambidextrous organizational Simultaneously pursues incremental and breakthrough innovation.

design

Adaptability Exploring new opportunities and adjusting to volatile markets to avoid complacency.

Alignment Clarity on how value is created short-term and how activities are coordinated.

Agency costs Costs from misaligned interests between principals and agents; cut via relational systems.

Transaction costs Costs of doing business with outside parties; reduced through lasting relationships.

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