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CHAPTER 10
Creating Effective
Organizational Designs

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 Learning Objectives
After reading this chapter, you should be able to:
1. Explain the growth patterns of major corporations and the
relationship between the firm’s strategy and its structure.
2. Identify each of the traditional types of organizational
structure: simple, functional, divisional, and matrix.
3. Describe the implication of a firm’s international operations for
organizational structure.
4. Identify the different types of boundaryless organizations –
barrier-free, modular, and virtual – and their relative
advantages and disadvantages.
5. Explain the need for creating ambidextrous organizational
designs that enable firms to explore new opportunities and
effectively integrate existing operations.

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 Looking Ahead

Traditional Forms of Organizational Structure.

Boundaryless Organizational Designs.
Creating Ambidextrous Organizational
Designs.

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 Organizational Designs

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?

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 Organizational Structure
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.

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 Question 1

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.

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 Organizational Structures: Growth
Patterns

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
ed.,1986,St Paul,
MN: West Publishing
Company.

Access the text alternative for slide images.

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 Organizational Structures: Simple
Structure
The simple organizational structure is the
oldest and most common organizational form.
• 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.

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 Simple Structure Advantages and
Disadvantages
Advantages.
• Highly informal
• Coordination of tasks by direct supervision
• Centralized decision making
• Little specialization of tasks
• Few rules and regulations; informal reward systems
Disadvantages.
• Responsibilities not understood
• Self-interest, employees taking advantage of lack of
regulations
• Limited opportunities for upward mobility
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 Organizational Structures: Functional
Structure
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 and integration of the functional
areas.

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 Functional Structure Example

Exhibit 10.2 Functional Organizational Structure

Access the text alternative for slide images.

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 Functional Structure Advantages and
Disadvantages
Advantages.
• Enhanced coordination and control.
• Centralized decision making.
• Enhanced organizational-level perspective.
• More efficient use of managerial and technical talent.
• Facilitated career paths in specialized areas.

Disadvantages.
• Impeded communication and coordination due
differences in values and orientations – “silos.”
• May lead to short-term thinking.
• Difficult to establish uniform performance standards.
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 Organizational Structures: Divisional
Structure
The divisional organizational structure is where
products, projects, or product markets are grouped
internally.
• Divisions are relatively autonomous, consisting of
products and 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 and

financial objectives; decision making is delegated to
lower-level managers.

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 Divisional Structure Example

Exhibit 10.3 Divisional Organizational Structure

Access the text alternative for slide images.

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 Divisional Structure Advantages and
Disadvantages
Advantages.
• Separation of strategic and operating control.
• Quicker response to changes in the market environment.
• Fewer problems sharing resources across functions.
• Development of general management talent is enhanced.
Disadvantages.
• Very expensive duplication of functions possible.
• Dysfunctional competition among divisions.
• Differences in image and quality possible across divisions.
• Too much focus on short-term performance.

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 Organizational Structures: SBU Structure

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 grouped into homogeneous units.
• Synergies achieved through related diversification
— leveraging core competencies, sharing
infrastructures, using market power.
• Each SBU operates as a profit center.

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 SBU Structure Advantages and
Disadvantages

Advantages.
• Planning and control by the corporate office.
• Decentralization of authority.
• Quicker response to changes in the market environment
by individual business units.
Disadvantages.
• Possible difficulty in achieving synergies.
• Increased personnel and overhead expenses.
• Corporate office further removed from the divisions.
• Corporate unaware of key changes in market conditions.

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 Organizational Structures: Holding
Company Structure
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, synergies are limited.
• Autonomous operating divisions.
• Small corporate staffs, with limited involvement,
relying on financial controls and incentive
programs to obtain performance.

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 Holding Company Structure Advantages
and Disadvantages

Advantages.
• Cost savings due to fewer personnel and lower
overhead.
• Divisional autonomy increases motivation level of
divisional executives.
• Quicker response to the market environment.
Disadvantages.
• Corporate office has little control.
• Difficult to replace key divisional executives.
• Turnaround may be difficult due to limited corporate
staff support.

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 Organizational Structures: Matrix
Structure
The matrix organizational structure is where functional
departments are combined with product groups on a
project basis.
• Functional departments, product groups and geographical
units can be combined.
• Individuals have two managers.
• Project managers and functional managers share
responsibility.
• Product managers handle development, manufacturing and
distribution of their own line.
• Geographic managers are responsible for profitability of the
business in their regions.

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 Matrix Structure Example

Exhibit 10.4 Matrix Organizational Structure

Access the text alternative for slide images.

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 Matrix Structure Advantages and
Disadvantages
Advantages.
• Facilitates collaboration between specialized personnel.
• Allows more efficient utilization of shared resources.
• Improves ability to respond to changes in the competitive
environment.
• Increases options for professional development.
Disadvantages.
• Dual reporting relationships lead to uncertainty regarding
accountability.
• Can lead to power struggles and conflict.
• Relationships are complicated, need teamwork.
• Decision making takes longer.
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 Organizational Structures: International
Operations
Firms with international operations must
consider a structure based on the following:
• Type of strategy driving the firm’s foreign
operations.
• Degree of product diversity.
• The extent to which a firm is dependent on foreign
sales.

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 International Operations Multidomestic
vs. Global

Multidomestic strategies use:

• International division structure.
• Geographic-area division structure.
• Worldwide matrix structure.

Global strategies use:

• Worldwide functional structure.
• Worldwide product division structure.
• Worldwide holding company structure.

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 International Operations Global Startup
A global start-up:
• Uses inputs from around the world.
• Sells its products and services to customers around
the world.
• Has communication and coordination challenges.
• Has fewer resources than well-established
corporations.
• Must use less costly administrative mechanisms.
• Frequently chooses a boundaryless
organizational design.

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 Organizational Structures: Boundaryless
Designs
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, and regulators.
• Geographic boundaries between locations, cultures,
and markets.
Boundaryless designs include barrier-free,
modular, and virtual organizations.

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 Boundaryless Designs: Barrier-Free
Organizations
A barrier-free organization has permeable
internal and 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 and mutually beneficial
relationships with both internal and external
constituencies.

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 Barrier-Free Structures Pros and Cons

Pros Cons
Leverages the talents of all Difficult to overcome political
employees. and authority boundaries inside
and outside the organization.
Enhances cooperation, Lacks strong leadership and
coordination, and information common vision, which can lead
sharing among functions, to coordination problems.
divisions, SBUs, and external
constituencies.
Enables a quicker response to Time-consuming and difficult-
market changes through single- to-manager democratic
goal focus. processes.
Can lead to coordinated win-win Lacks high levels of trust, which
initiatives with key suppliers. can impede performance.
Exhibit 10.6 Pros and Cons of Barrier-Free Structures

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 Question 2

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 these are correct.

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 Boundaryless Designs: Modular
Organizations
A modular organization requires seamless
relationships with external organizations.
• Outsources nonvital functions or non-core
activities to outsiders.
• Activates knowledge and expertise of “best in
class” suppliers but retains strategic control.
• Focuses scarce resources on key areas.
• Accelerates organizational learning.
• Decreases overall costs, leverages capital.

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 Modular Structures Pros and Cons

Pros Cons
Directs a firm’s managerial and Inhibits common vision through
technical talent to the most critical reliance on outsiders.
activities.
Maintains full strategic control over Diminishes future competitive
most critical activities  core advantages if critical technologies or
competencies. other competencies are outsourced.
Achieves “best in class” performance Increased the difficulty of bringing
at each link in the value chain. back into the firm activities that now
add value due to market skills.
Leverages core competencies by Leads to an erosion of cross-
outsourcing with smaller capital functional skills.
commitment.
Encourages information sharing and Decreases operational control and
accelerates organizational learning. potential loss of control over a
supplier.

Exhibit 10.7 Pros and Cons of Modular Structures

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 Boundaryless Designs: Virtual
Organizations
A virtual organization requires forming
alliances with multiple external partners.
• Continually evolving network of independent
companies.
• Linked together to share skills, costs, and
access to one another’s markets.
• Coping with uncertainty through cooperative
efforts.
• Each gains from resulting individual and
organizational learning.
• May not be permanent.
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 Virtual Structures Pros and Cons
Pros Cons
Enables the sharing of costs and Harder to determine where one
skills. company ends and another begins,
due to close interdependencies among
players.
Enhances access to global markets. Leads to potential loss of operational
control among partners.
Increases market responsiveness. Results in loss of strategic control
over emerging technology.
Creates a “best of everything” Requires new and difficult-to-acquire
organization since each partner brings managerial skills.
core competencies to the alliance.
Encourages both individual and
organizational knowledge sharing and
accelerates organizational learning.

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.

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 Boundaryless Designs: Making Them
Work
A “virtual” boundaryless organization requires:
• Mechanisms to ensure effective coordination
and integration.
• Common culture and shared values.
• Horizontal organizational structures.
• Communications and information technologies.
• Human resource practices.

• Awareness of the benefits and costs of

developing lasting internal & external
relationships.

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 Boundaryless Designs: Benefits and
Costs
Benefits.
• Agency costs reduced through relational systems.
• Transaction costs between the firm and its suppliers are
reduced.
• Individual participants are less likely to perceive a conflict
of interest.
Costs.
• Relationships between individuals become more
important than profits.
• Conflicts resolved through ad hoc processes.
• Relationships are driven more by social connections than
by needed competencies.
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 Organizational Structures: Ambidextrous
Designs
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.
• Flexible enough to adapt to changes in the
external environment and create dramatic,
breakthrough innovations.

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 Question 3

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.

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 Ambidextrous Designs: Effectiveness

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, and cultures.
• Effectively integrate each unit into the existing
management hierarchy.
• Are successful when a clear and compelling
vision is communicated by senior management.
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