Strama Module 9

MODULE IN
Strategic Management
9
EHM
SAMCIS
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“The greatest strategy is
doomed if it’s implemented
badly.”
-Bernard Reimann- STRAMA
COURSE LEARNING OUTCOMES

At the end of the module, you should
be able to:
1. Illustrate and discuss the growth
patterns of major corporations and
the relationship between a firm’s
strategy and its structure
2. Discuss each of the traditional types of
organizational structure: simple,
functional, divisional, and matrix.
3. Analyze the implications of a firm’s
international operations for
organizational structure
4. Descrbe the different types of
boundaryless organizations – barrier-
free, modular, and virtual – and their
relative advantages and
disadvantages
STRATEGIC 5. Evaluate the need for creating
MANAGEMENT ambidextrous organizational designs
that enable firms to explore new
opportunities and effectively integrate
existing operations.
means, electronic, mechanical, photocopying, recording, or otherwise of any part of this document, without the prior written permission of SLU, is strictly prohibited. 1
“The opportunities and threats existing in any
situation always exceed the resources needed
to exploit the opportunities or avoid the
threats. Thus, strategy is essentially a
problem of allocating resources. If strategy is
to be successful, it must allocate superior
resources against a decisive opportunity,”
-William Cohen-
Module 9: Creating Effective Organizational Designs
Discussion Outline
Module 9 is the take-off for the last step in the strama process. Once the first two
had been laid down as such strategy analysis (Modules 1-4, and strategy formulation
(modules 5-8), then strategy implementation follows suit (the last of the four modules.
Module 9 talks about organizational structures and integrating systems that 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 module is to describe the different types of organizational structures and how they
contribute to organizational performance. The module 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 “boundaryless” approach to organizing.
This discussion emphasizes the importance of flexibility and permeability in
environments of unpredictability and rapid change. Three different types of
boundaryless 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.
The opening case in LEARNING FROM MISTAKES illustrates the challenges of

managing a boundaryless organization. When it launched the development of the 787
Dreamliner aircraft, Boeing decided to outsource the bulk of both the design and
manufacturing of the plane. However, they found that many of the suppliers were unable
to complete their tasks or completed them after deadlines. Boeing also had difficulty
coordinating and integrating the work of suppliers. In the end, Boeing saw their delivery
schedule slip by three years, and the process was much more expensive than anticipated.
 Discussion Question 1: A number of firms benefit from outsourcing design and

manufacturing. What is different with Boeing that makes it so much harder to be
successful?
Boeing shows the complexity of Boeing’s operations. Fifty suppliers on multiple

continents are difficult to coordinate. While the suppliers have technological expertise, and
could collectively build some components better than what Boeing could do in-house,
they do not have experience working together. The suppliers also may have issues putting
their work for Boeing as the highest priority. Jet plane components are all interdependent,
and it may be very difficult to anticipate how the technologically advanced components
would function together. To sum up, Boeing’s outsourced design may have been harder
because:
• There were many suppliers

• The suppliers were geographically dispersed
• The suppliers may not be putting their work for Boeing at the highest priority
• The suppliers were using new technologies that had not been used together in the
same plane
• The components had to be assembled in a very complex, interdependent plane
Discussion Question 2: What lessons does their experience with the 787 offer Boeing
for its next plane development effort?
Boeing can explore different options —such as in-house manufacture, outsourced

manufacture, or mixed. The trade-offs may include:
Benefits of in-house manufacture:
• Control over operations

• All technologies developed in-house, so better expertise as to how they interact with
each other
• Better appreciation of the final customers’ expectations
• Less cost of monitoring and controlling suppliers’ operations
• Less cost of transporting components and working to solve problems with suppliers
Benefits of outsourcing:
• Access to better technologies

• Cost savings
• Political benefits from using suppliers in client countries
Possible that Boeing can opt for a mixed approach, where Boeing outsources the
production of “low-tech” components. For “high-tech” components, Boeing may want to
partner with firms in order to design the new components, but manufacture in-house.
I. 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—as well as
structures for firms with international operation.
The SUPPLEMENT/EXTRA EXAMPLE below illustrates the importance of organizational

design and structure. Globalization and the recent economic crisis have forced
organizations to rethink their strategies and change the way they operate. When
organizational strategy changes, its structures, roles, and functions should be realigned with
the new objectives.
 Extra Example: Importance of Organizational Design and Structure
Poor organizational design and structure can result in a bewildering mess of contradictions:
confusion about roles, a lack of coordination among functions, failure to share ideas, and
slow decision making. This can lead to unnecessary complexity, stress, and conflict. Often
those at the top of an organization are oblivious to these problems or, worse, pass them off
as challenges to overcome or opportunities to develop. Structure dictates the relationship
of roles in an organization, and therefore, how people function. An outdated structure can
result in unnecessary ambiguity, confusion, and a lack of accountability. Gill Corkindale, an
executive coach, shared some business and leadership challenges of executives to
illustrate the importance of updated and appropriate organizational design:
1. The “unworkable” job: A Swiss engineer’s boss had modified so many parts to his
original role that it was becoming impossible to do his work since one part of his role
contradicted the other. Moreover, he was stretched beyond his limits by the scope of the
role and the fact that he had to operate across several time zones.
2. Politics: A Hong Kong retail executive said his role was “schizophrenic” because
he was required to influence a group of internal stakeholders who had been instructed by
their boss not to cooperate with him. The anomaly was the result of historical turf wars
between his boss and his boss’s peer: the latter had used his influence to restructure the
department and bring it under his control.
3. Over-regulation: A British banker explained how he was required to get approval

from so
many people for a major project that he wasted six months trying to get it off the ground.
This severely limited his ability to compete effectively in the market.
Source: Corkindale, G. 2011. The importance of organizational design and structure.

blogs.hbr.org February 11: np.
 Discussion Question 3: What are some lessons learned from the examples Corkindale
suggested?
Discussion Question 4: At what level should organizational roles be designed to

ensure that all the relevant details are accounted for? Should individuals who
actually perform the job be consulted? Why/why not?
A. Patterns of Growth of Large Corporations: Strategy-Structure Relationships
In this section, we discuss how a firm’s strategy and structure change as it increases
in size, diversifies into new product-markets, and expands its geographic scope.
FIGURE 1 below depicts Galbraith and Kazanjian’s model of dominant growth

patterns of large corporations.
FIGURE 1. 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, which 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.
 Discussion Question 5: What are some examples of companies that operate with a
simple structure? How were decisions made?
C. 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 executive’s job shifts to coordinating and managing the departments.
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.
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.
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.
functional structure? How were decisions made?
D. 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.
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 mean that rewards and
career paths are linked to the development of general management talent.
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.
divisional structure? How were decisions made?
The SUPPLEMENT/EXTRA EXAMPLE below addresses how 3M took steps to coordinate

the various activities among its divisions in order to present a unified and positive corporate
image.
 Extra Example: Communicating a Uniform Corporate Image at 3M
The 3M Corporation once had over 1,200 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 3M’s 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 company’s 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 1,200 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.
 Discussion Question 8: 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.
 Discussion Question 9: What are some examples of companies that operate with an
SBU structure? How were decisions made?
Discussion Question 10: What factors might prevent companies from attaining
synergies among divisions within an SBU?
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.
holding company structure? How were decisions made?
Discussion Question 12: What factors might contribute to poor performance by the
divisions of a holding company?
E. 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—an alternative to the product/function matrix. In both
cases, personnel become responsible to two managers.
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 lead 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.
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.). Reflect on what
managers should do to effectively implement matrix structures.
matrix structure? How were decisions made?
The SUPPLEMENT/EXTRA EXAMPLE below discusses a key downside of complex formal

organizational structures, the insulation of top managers.
 Extra Example: Structure Can Inhibit Bad News Reaching the Top
Top executives at major firms can often be isolated from key information on strategic issues
and problems. Workers and managers are taught to “go along to get along.” Deborah
Cornwell, a management consultant, commented on it this way, “There’s a tendency for
people in large organizations to tell the boss what he wants to hear.” As a result, managers
are reluctant to share information about problems with their bosses. In large organizations
with several layers of management, problems can get watered down at each level,
making it unlikely that top executives get a sense of the emerging problems. Instead, top
managers may only hear about a problem when it gets to a crisis point and can no longer
be ignored or covered up at lower levels of the firm. As Martin Zimmerman, a former group
Vice President at Ford Motor Company commented, “You get blindsided when things
deteriorate.”
A classic example of this occurred in General Motors. Firm engineers knew there was a
design problem with ignition switches, but the faulty switches with this very design were
used in a wide range of GM’s cars for several years. When asked about when executives
knew there was a serious problem with the ignition switches in millions of cars produced by
GM, CEO Mary Barra stated, “I cannot tell you why it took years for a safety defect to be
announced in that program, but I can tell you that we will find out.”
A key challenge for corporate leaders is to construct a structure and a culture that
increases information flow upward. Some firms do it by flattening the organization’s
structure so that top managers are closer to front line employees. Others create corporate
leader jobs that are designed to get key information to the top. This is what GM did when it
created a new VP of global vehicle safety, a position that works with engineering teams to
ensure design safety problems get the attention they need. Others strive to create a
culture that praises those who bring up problems or challenges the firm faces. Ford
historically had a culture where bad news was not shared. When he was an Executive VP
of Ford, Mark Fields raised a serious technical issue with a new auto the firm was working to
launch; the room fell silent until Alan Mulally, the newly appointed CEO of Ford, clapped his
hands and praised him for openly raising the issue. From that point forward, problems were
more openly shared at Ford, and Mr. Fields rose in prominence in the leadership team,
ultimately becoming Mr. Mulally’s successor as CEO of Ford.
Source: Auriemma, A. 2014. Chiefs at Big Firms Are Often Last to Get Bad News.
wsj.com. April 3: np.
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 Module 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.
 Discussion Question 14: What are some examples of international companies that
use worldwide, international, and geographic-area structures? How were decisions
made?
G. Global Start-Ups: A Recent 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 that have given rise to “global start-ups:”
• many firms now decide to expand internationally relatively early in their

history
• some firms are “born global”—that is from the very beginning many start-
ups are global in their activities
There is no reason for all start-ups to be global; global start-ups 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
• 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
• high up-front development costs; a global market is necessary to recover
the costs.
H. How an Organization’s 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 firm’s strategy. Given that a firm’s structure can be rather difficult
to change, strategy cannot realistically be formulated without taking structure into
account.
II. Boundaryless Organizational Designs
Organizations that become boundaryless become more open and permeable, not
“chaotic.”
There are four types of boundaries—vertical boundaries, horizontal boundaries,

external boundaries, and geographic boundaries—and we discuss 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 structures 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.
 Discussion Question 15: What are some examples of other companies that have
implemented more flexible and permeable organizational structures? Have they
been successful? Why? Why not?
A. 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.
1. Creating Permeable Internal Boundaries
Teams are an important part of barrier free structures because they 1) substitute
peer-based 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/EXTRA EXAMPLE below provides examples of how two firms—Nokia

and Accenture—were able to achieve high-performing teams whose members were
located across many countries.
 Extra Example: How Nokia and Accenture Developed High Performing

Teams Across National Boundaries
Lynda Gratton, of the London Business School, led a study of 52 global teams in 15
multinationals. She asserts that, “Complex teams really struggle to be productive.” Not
surprisingly, she found that some multinationals were very successful in overcoming
coordination challenges. Below, we discuss Nokia and Accenture:
• Nokia’s global marketing and product development teams were very effective—even
though they involved scores of people working in several countries. Why? Nokia
carefully selects people who have a “collaborative mindset” and carefully includes in
task forces a range of nationalities, ages, and, educational levels. Teams are also made
up of people who have worked together in the past and others who have never met.
Members are encouraged to network online and share their photographs and personal
biographies.
• Accenture, which spent $700 million on education in 2006, says its 38,000 consultants
and most of its service workers take courses on collaborating with offshore colleagues.
And each year, Accenture puts up to 400 of its most promising managers through a
special leadership development program. They are assigned to groups that can
include Irish, Chinese, Belgians, and Filipinos, and specialist in fields such as finance,
marketing, and technology. Over 10 months, teams meet in different international
locations. As part of the program, they
pick a project—developing a new web page, say—and learn how to tap the firm’s
worldwide talent pool to complete it.
Source: Engardio, P. 2007. Managing in the new workforce. BusinessWeek, August 20–27:
48–51.
 Discussion Question 16: What are some other means of ensuring coordination across
geographically dispersed team members? (e.g., leadership, culture, trust, reward
systems, rules/regulations)
2. Developing Effective Relationships with External Constituencies
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.
 Discussion Question 17: How were relationships among participants in barrier free
transactions and/or projects managed?
The SUPPLEMENT/EXTRA EXAMPLE below addresses the example of the Irvine

Medical Center, a hospital that developed more efficient processes by fostering barrier-
free relationships inside the hospital and with employee unions.
 Extra Example: Breaking Barriers at the Irvine Medical Center
In 2008, the Irvine Medical Center, a unit of Kaiser Permanente, wanted to streamline its
costliest, most time-intensive surgeries: total hip and knee replacements. The task was
daunting, because the solution required collaboration among specialists who normally
fight for resources.
Neither a top-down administrative mandate nor a surgeon-driven approach would work to

improve the processes. A top-down approach wouldn’t have worked because surgeons in
different groups each had their own way of doing things and would be resistant to an
administrative mandate, and each surgery group had little influence on the practices in
other surgery units. Also, the hospital had to get other employees on board, and most of
those are covered by unionized contracts that limit changes in workload and flow.
Kaiser created a collaborative community, the Labor Management Partnership (LMP), that
included Kaiser managers, surgeons, and most of the hospital’s employee unions. The LMP
worked cooperatively to find efficiency gain opportunities. The benefit was that all
members felt engaged. As one nurse stated about operating room procedures, “Usually
when we are in the room, we wish it would be done differently, but this time we actually
got a voice in how it’s done differently.” They identified ways to streamline sequential
operations, such as by bringing housekeeping in to begin clean-up as soon as a surgeon
begins suturing the patient closed. They also set up an alert system to ensure that staff
knew when they were needed. For example, they trigger the post-op and transportation
staff to prepare fifteen minutes before the end of a surgery. Finally, they found ways in
which the hospital could be more efficient by adding staff. For example, they added a
“floater” nurse who could move between operating rooms to provide extra help or relieve
staff on breaks.
These steps all reduced surgery cycle-times and also improved employee morale. They
increased the number of total joint replacement surgeries from two to four per day and
freed up 188 hours of operating time room per year. A survey of the operating room staff
showed an 85% increase in job satisfaction.
Seeing the benefits, Kaiser implemented similar LMP teams in general surgery, head and
neck surgery, urology, heart, and other surgery specialties in Irvine as well as in other Kaiser
hospitals.
Source: Adler, P., Heckscher, C., & Prusak, L. 2011. Building a collaborative enterprise.
Harvard Business Review. 89(7/8); 94–101.
 Discussion Question 18: How might approaches such as the Irvine Medical Center’s
LMP be used in other organizations?
Some organizations have even benefited from breaking down barriers with
competitors by creating cooperative relationships that benefit groups of competitors in an
industry.
 Discussion Question 19: 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.
 Discussion Question 20: What other types of organizational systems might be utilized
to ensure the success of a barrier-free approach?
3. Risks, Challenges, and Potential Downsides
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 we have all worked in teams—either in “real world

organizations” or on projects for college courses. Think of what you felt as the
characteristics of both effective and ineffective teams that you worked on. And,
reflect on how the teams that you worked on could have been made more
effective.
TABLE 1 below 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.
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.
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.
The SUPPLEMENT/EXTRA EXAMPLE below discusses how Porsche relies on outsourced

engineering to remain innovative.
 Extra Example: Porsche Outsources Research
Porsche makes some of the most technologically advanced cars in the world, but the
company does not have a large in-house R&D staff. It has to find another way of sourcing
innovative ideas and expertise. One highly successful method is to outsource the work to
universities and doctoral students doing basic R&D. Another method is to bring students
into the company with internships. Every year, Porsche welcomes some 600 Masters
students to work with its engineers for four to six months. Porsche budgets for both
outsourced research and internships and has found that it has resulted in cheaper and
faster results than most equivalent in-house research efforts. A critical factor in making this
work is that the engineers at Porsche must respect their colleagues; whether they are full
time colleagues, university researchers or graduate students doing internships; and value
what comes out of their research efforts. This allows Porsche to draw on much of this
research and rapidly integrate it into their product line.
Source: Lorange, P. 2010. Leading in turbulent times. Lessons learnt and implications for the
future. Bingley, UK: Emerald Group.
 Discussion Question 21: Do you believe the average corporation is capable of

integrating such R&D efforts into its operations? Why? Why not?
Discussion Question 22: Are you familiar with any other organizations that have
similar programs?
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.
Table 2 addresses the pros and cons of the modular form of organizational structure.
It is not only what a firm chooses to outsource but also how they manage
relationships with the firms they use as suppliers that will determine their long-term
prospects. The SUPPLEMENT/EXTRA EXAMPLE discusses how firms need to be very conscious
of how they control and manage relationships with suppliers of key components
 Extra Example: The Need to Manage the Supply Chain
Thomas Choi and Tom Linton argue that manufacturers have delegated too much power
to their top-tier suppliers. By pushing the design of key components and the management
of lower-tier suppliers onto top-tier suppliers, manufacturers are undermining their ability to
control key technologies, innovate, cut costs, and manage risk.
Their prescription is for firms to retain or reassert control for items that have the most
significant impact on the cost of goods sold. They use the old 80/20 rule and note that
typically 20% of the components of a product account for 80% of the product’s total
component cost. For example, in a typical smartphone, two or three semiconductors and
the LCD screen account for over 50% of the total component cost of the phone. Rather
than delegate the design, manufacturing, and sourcing of these components to top-tier
suppliers, manufacturers should be more involved in managing the design process and
maintain direct contact with lower tier suppliers of key components. If they don’t, they
delegate key decisions to firms that may not always be working in the firm’s best interests.
For example, one risk that arises if a phone manufacturer outsources the purchasing of the
semiconductors to a top-tier supplier is that the supplier may choose to use a chip that
benefits the supplier firm at the expense of the phone manufacturer. If the supplier works
with several phone manufacturers, it may choose to use a supplier and a specific
semiconductor that it is also using in a competing company’s phone rather than the
optimal chip for this phone design. If the phone firm, instead, works directly with the chip
supplier, they are more likely to get the best chip for their phone.
Manufacturers who retain control over their key components develop deep knowledge of
the technical aspects of the parts, have stronger knowledge of the critical costs in their
supply chains, and can react more quickly to market dynamics since they have direct ties
with the suppliers of these key components. The experience of LG Electronics bears this out.
In 2009, when recession hit the electronics industry, LG worked directly with about 300 top-
and lower-tier suppliers to reduce components costs and found savings of more than $6
billion. It would have been unlikely to find similar savings potential if it delegated the cost
savings efforts to top-tier suppliers. Having direct ties with lower-tier suppliers also gives the
manufacturers direct insight on new technology development and new product
introductions in these supplier industries, enhancing their ability to design and launch
innovative products using these leading technologies.
Sources: Choi, T. & Linton, T. 2011. Don’t let your supply chain control your business. Harvard
Business Review. 89(11); 112–116.
 Discussion Question 23: Why do firms often choose to delegate responsibilities to top
tier suppliers even though it leaves them less responsive and less able to manage
costs in their supply chain?
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 another’s markets. By pooling and sharing resources and working together in a
cooperative effort, each gain in the long run.
Virtual organizations are a type of strategic alliance in which complementary skills

are used to pursue common objectives.
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.
The SUPPLEMENT/EXTRA EXAMPLE below describes the importance of technology in

linking organizations virtually. It describes a virtual organizing initiative that led to cost
savings and faster response times.
 Extra Example: Technology-Enabled Virtual Organizing Enhances

Productivity at Analog Devices
When Analog Devices, a global designer and manufacturer of semiconductors needed to

enhance collaboration among the 9,000 engineers it employs around the world, it turned
to virtual organizing. Analog Devices produces a wide range of integrated circuits for
analog, digital, and mixed signal processing used in many sectors of the economy
including cars, cameras, medical imaging, and factory automation. It is a competitive
arena and Analog Devices reasoned it could respond faster and be more competitive if
the engineering staff could collaborate more effectively across long distances.
To achieve this, it made infrastructure changes that allowed it to be more agile and
operate more virtually. First, it introduced Voice over IP (VoIP) at all its U.S. sites. This alone
led to efficiencies that saved the company thousands of dollars per month, in part
because it allowed engineers on both sides of the Atlantic to collaborate in real time
without interruption. Secondly, it increased the capacity of its network such that engineers
could share information from very large databases using “any-to-any” conversion
processes, that is, a uniform method of converting all message structures into easy-to-
understand formats regardless of the message syntax. In other words, it allows for
exchanging information that previously might have been incompatible with drag and drop
ease. According to David Coughlan, Analog Devices’ Network Planning and Design
Manager, “The [new] network has allowed our total throughput to triple. . . . That was a
twofold win: dollar savings with huge service improvements.”
Sources: Dharmagadda, T. 2009. Why is the concept of ‘virtual organizations’ all

encompassing? http://tushneem.wordpress.com, May 24: np. Anonymous. 2007. Analog
Devices case study. www.bt.com, March 19: np.
 Discussion Question 24: What are some other ways that virtual organizing—either
with the help of technology or not—might contribute to costs savings and service
improvements?
The SUPPLEMENT/EXTRA EXAMPLE below points out that effective leadership is the
number one factor that influences success in a virtual organization. Moreover, it discusses
the importance of collaboration tools, goal definition, and coaching where HR can help a
manager enable a virtual team.
 Extra Example: Transitioning to a Virtual Organization
The virtual workspace can be defined as an environment where employees work away
from company locations and communicate with their respective workplaces via telephone
or digital devices. The virtual organization has different and/or greater challenges than the
traditional face-to-face workplace environment, with lines of work crossing over
geographies, markets, cultures, alliances, partnerships, and supplier networks.
The very nature of virtual work requires planning and thoughtful design. The development
and evaluation of virtual teams present a unique opportunity for HR to partner with many
different elements of the business. Further, with increasing dependence on technology for
communication in the workplace, the role of leadership is changing. Leaders of virtual
workplaces require certain essential skills including a strong focus on relationships,
emotional intelligence, a track record of results and innovation, a focus on process and
outcome, and the ability to give positive and constructive feedback. HR should be part of
any pilot program to help leaders understand, anticipate and mitigate management
problems. Elain Orler, president of talent Function Group LLC, summarizes, “Leaders need
to be more flexible in how and when they communicate. Some people connect on instant
messenger while others prefer text messages…the more flexibility I have, the more I can
connect with my diverse team.” Flexibility of leadership seems to be the paramount to
ensure success in virtual workplace.
Source: Anonymous. 2010. Successfully transitioning to a virtual organization: Challenges,

impact and technology. HR Magazine. April. Vol. 55 Issue 4: 1–9.
 Discussion Question 25: The supplement above discusses the role of leadership in a
virtual workplace. Can you think of an example of how a leader bridges and
understands cultural differences in a virtual workplace?
Discussion Question 26: Can such virtual organizations be successful in the long run?
How can leaders motivate employees whom they rarely see in person? Can
relationships develop in such an environment? Are they relevant for productivity?
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 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 long-term 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.
 Discussion Question 27: 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?
TABLE 3 summarizes the pros and cons of the virtual form of organizational structure.
D. Boundaryless Organizations: Making Them Work
Many times, the most effective way to design an organization is by using a

combination of organizational types.
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.
1. Common Culture and Shared Values
2. Horizontal Organization Structures
3. Horizontal Systems and Processes
4. Communications and Information Technologies
5. Human Resources Practices
The SUPPLEMENT/EXTRA EXAMPLE below discusses how Novartis has created

horizontal organizational structures to break down silos that inhibited learning across
organizational units and with outside groups.
 Extra Example: Breaking Down Silos at Novartis
Novartis, the Swiss pharmaceutical giant, sees the need to be more effective at
developing new drugs. Joerg Reinhardt, the firm’s CEO, has committed to invest more in
R&D, but he is also making changes in the organization’s structure to enhance its
effectiveness in drug development.
Novartis is consolidating its R&D staff and housing them in four geographic locations:
Shanghai, Basel (Switzerland), Boston, and San Diego. In combining researchers from
different scientific disciplines and product areas in these locations, the firm is trying to
create an environment where researchers can bounce questions and ideas off of each
other. They have also based these operations in cities with major research universities so
the firm can better tap the knowledge emerging from academic communities in each of
these cities. In the words of Mr. Reinhardt, “A larger group of people benefiting from the
infrastructure that been created at a research place is a better approach than having
small groups with limited infrastructure spread around the world.”
Source: Falconi, M. 2014. Novartis Chairman Stresses Need for R&D Investment. wsj.com.
March 22: np.
Managers need to also be aware of the benefits and costs of developing strong
and long-term relationships with both internal and external stakeholders. We discuss three
primary benefits that organizations accrue when building and relying on long-term
relationships.
• Reduced agency costs within the firm
• Reduced transaction costs with suppliers and customers
• Greater commitment to shared goals and finding win-win solutions
We also identify three potential costs of relying on long-term relationships.
• Firms get locked-in with employees, suppliers, and customers
• Conflicts are resolved through ad hoc negotiations and processes
• The social capital of individuals and firms drives their opportunities rather than
their competencies
III. Creating Ambidextrous Organizational Designs
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 today’s business but flexible
enough to changes in the environment so that they will prosper tomorrow.
A. Ambidextrous Organizations: Key Design Attributes
Here, we focus on a study by O’Reilly 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 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)
B. Why Was the Ambidextrous Organization the Most Effective Structure?
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 that 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
• established units were shielded from the distractions of launching new
businesses
 Discussion Question 28: Do organizations that you are familiar with share the
structural attributes of ambidextrous organizations? Why? Why not?
The SUPPLEMENT/EXTRA EXAMPLE below provides some of the attributes of

ambidextrous behaviors of individuals. It was based on research that involved interviews
with a wide variety of people from front-line workers to senior executives.
 Extra Example: 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.
 Discussion Question 29: Think about times in your own life when you were expected
to both cooperate and take initiative. How easy or difficult is it to be an
ambidextrous individual?
IV. 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 module, 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.
The second section of the module introduced the concept of the boundaryless
organization. We did not suggest that the concept of the boundaryless organization
replace 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 final 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.
Application Questions and Exercises
1. 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?
2. Why is it important for managers to carefully consider the type of organizational

structure that they use to implement their strategies?
3. Briefly trace the dominant growth pattern of major corporations from simple structure to
functional structure to divisional structure. Discuss the relationship between a firm’s
strategy and its structure.
4. When a firm expands its operations into foreign markets, what are the three most
important factors to take into account in deciding what type of structure is most
appropriate? What are the types of international structures discussed in the text and
what are the relationships between strategy and structure?
5. Choose an article from BusinessWeek, Fortune, Forbes, Fast Company, or any other well-
known publication that deals with a corporation that has undergone a significant
change in its strategic direction. What are the implications for the structure of this
organization?
6. Look up a recent article in the publications listed in question 5 above that addresses a
firm’s involvement in outsourcing (modular organization) or in strategic alliance or
network organizations (virtual organization). Was the firm successful or unsuccessful in
this endeavor? Why? Why not?
7. If a firm has a divisional structure and places extreme pressures on its divisional
executives to meet short-term profitability goals (e.g., quarterly income), could this raise
some ethical considerations? Why? Why not?

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MODULE IN

COURSE LEARNING OUTCOMES

Module 9: Creating Effective Organizational Designs

1. The first section uses a “patterns of organizational growth” framework to

2. We address the role of contingencies in determining which reward and

3. The second section addresses the “boundaryless” approach to organizing.

The opening case in LEARNING FROM MISTAKES illustrates the challenges of

 Discussion Question 1: A number of firms benefit from outsourcing design and

Boeing shows the complexity of Boeing’s operations. Fifty suppliers on multiple

• There were many suppliers

Boeing can explore different options —such as in-house manufacture, outsourced

Benefits of in-house manufacture:

• Control over operations

• Access to better technologies

I. Traditional Forms of Organizational Structure

The SUPPLEMENT/EXTRA EXAMPLE below illustrates the importance of organizational

 Extra Example: Importance of Organizational Design and Structure

3. Over-regulation: A British banker explained how he was required to get approval

Source: Corkindale, G. 2011. The importance of organizational design and structure.

Discussion Question 4: At what level should organizational roles be designed to

A. Patterns of Growth of Large Corporations: Strategy-Structure Relationships

FIGURE 1 below depicts Galbraith and Kazanjian’s model of dominant growth

The dominant pattern of growth is first from a simple structure to a functional

As firms grow, excessive demands may be placed on the owner-manager in order

Functional organizations have advantages and disadvantages. One advantage is

A disadvantage of functional organizations is that the beliefs, assumptions, and

Other disadvantages of a functional structure include short-term thinking due to

The divisional structure is organized around products, projects, or markets. Each

Advantages of a divisional structure include separation of strategic and operational

Disadvantages include a tendency to duplicate activities such as personnel

The SUPPLEMENT/EXTRA EXAMPLE below addresses how 3M took steps to coordinate

 Extra Example: Communicating a Uniform Corporate Image at 3M

3. Establish worldwide communication standards.

1. Strategic Business Unit Structure

2. Holding Company Structure

The holding company structure (also referred to as a conglomerate) is another type

A matrix structure is, in essence, a combination of a divisional and functional

An advantage of the matrix structure is that it facilitates the use of specialized

Disadvantages of a matrix structure are related to dual reporting requirements. This

The SUPPLEMENT/EXTRA EXAMPLE below discusses a key downside of complex formal

F. International Operations: Implications for Organizational Structure

Consistency between strategy and structure is required to be successful in global

Global strategies, by contrast, typically have more centralized operations in order to

G. Global Start-Ups: A Recent Phenomenon

Up to this point in this section, we have suggested that international expansion

• many firms now decide to expand internationally relatively early in their

H. How an Organization’s Structure Can Influence Strategy Formulation

Typically, in discussing the relationship between strategy and structure, we strongly

II. Boundaryless Organizational Designs

There are four types of boundaries—vertical boundaries, horizontal boundaries,

Boundaryless approaches should be considered a complement to, not a

A. The Barrier-Free Organization

Traditional organizations had boundaries intended to maintain order by making the

1. Creating Permeable Internal Boundaries

The SUPPLEMENT/EXTRA EXAMPLE below provides examples of how two firms—Nokia

 Extra Example: How Nokia and Accenture Developed High Performing

2. Developing Effective Relationships with External Constituencies

Emphasize that barrier-free relationships must also extend to other divisions of a

The SUPPLEMENT/EXTRA EXAMPLE below addresses the example of the Irvine

 Extra Example: Breaking Barriers at the Irvine Medical Center

Neither a top-down administrative mandate nor a surgeon-driven approach would work to

 Discussion Question 19: In what ways might competitors work together

3. Risks, Challenges, and Potential Downsides

Teaching Tip: Virtually we have all worked in teams—either in “real world