HCAD 5390

 Organizational design
– Selecting the structure and control systems that are most strategically effective for pursuing sustainable competitive advantage.
 The role of structure and control
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To coordinate strategy implementation.
To motivate and provide incentives for superior performance.

 Building blocks of organizational structure
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Differentiation in the allocation of people and resources to create value.
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Vertical differentiation in the distribution of decision-making authority.
Horizontal differentiation in dividing up people and tasks into functions and divisions.
Integration
 The means used in coordinating people and functions to accomplish organizational tasks.

 Bureaucratic costs and strategy implementation:
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Bureaucratic costs increase with organizational complexity.
More differentiation = more managers.
More integration = more coordination.
Better strategy implementation = better bottom-line performance and profitability.

 Span of control (division of authority)
– The number of subordinates that a single manager directly manages.
 Organizational hierarchy choices
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Flat structures
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Few organizational levels
Wide spans of control
Tall structures
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Many organizational levels
Narrow spans of control

 Principle of minimum chain of command
– Maintaining a hierarchy with the least number of levels of authority needed to achieve a strategy.
 Sources of bureaucratic costs:

 Authority patterns in organizations:
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Centralized
 Decision making retained in the hands of upper-level managers.
Decentralized
 Decisions delegated to lower levels in the organization.

 Advantages of decentralization
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Reduced information overload on upper managers.
Increased motivation and accountability throughout organization.
Fewer managers; lower bureaucratic costs.
 Advantages of centralization
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Easier coordination of organizational activities.
Decisions fitted to broad organizational objectives.
Exercise of strong leadership in crisis.
Faster decision making and response.

 Focus is on division and grouping of tasks to meet business objectives.
 Simple structure:
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Characteristic of small entrepreneurial companies.
Entrepreneur takes on most managerial roles.
No formal organization arrangements.
Horizontal differentiation is low.

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 Structure Follows Strategy:
– Changes in corporate strategy lead to changes in organizational structure

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 Structure Follows Strategy:
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• New strategy is created
New administrative problems emerge
Economic performance declines
New appropriate structure is invented
Profit returns to its previous levels

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 Stages of corporate development
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Simple Structure
Functional Structure
Divisional Structure
Beyond SBU’s

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 Simple Structure:
– Stage I:
 Entrepreneur
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Decision making tightly controlled
Little formal structure
Planning short range/reactive
Flexible and dynamic

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 Functional Structure:
– Stage II:
 Management team
 Functional specialization
 Delegation decision making
 Concentration/specialization in industry

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 Divisional Structure:
– Stage III:
 Diverse product lines
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Decentralized decision making
SBU’s
Almost unlimited resources

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Beyond SBU’s:
– Stage IV:
 Increasing environmental uncertainty
 Technological advances
 Size & scope of worldwide businesses
 Multi-industry competitive strategy
 Better educated personnel

 Advantages
– Task grouping facilitates specialization and productivity.
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Better monitoring of work processes, reduced costs.
Greater control over organizational activities.
 Disadvantages
– Functional orientation creates communication problems.
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Performance and profitability measurement problems.
Location versus function problems (coordination).
Strategic problems due to structural (vertical and horizontal) mismatches.

 Advantages
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Enhanced corporate control by division
Enhanced strategic control of each SBU in portfolio
Growth is easier. New units don’t have to be integrated across organization
Stronger pursuit of internal efficiencies.
Performance of individual units is readily measurable.
 Disadvantages
– Establishing the divisionalcorporate authority relationship
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Distortion of information by divisions
Competition for resources by divisions
Transfer pricing problems between divisions
Short-term research and development focus
Bureaucratic costs

 Advantages
– Flexibility of the structure and membership
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Minimum of direct hierarchical control
Maximizes use of employees’ skills
Motivates employees; frees up top management
 Disadvantages
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High bureaucratic costs
High costs (time and money) for building relationships
Twoboss employee’s role conflict

Matrix
Structure
 Two-boss employee

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 Network Structure:
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“non structure” – elimination of in-house business functions
Termed “virtual organization”
 Useful in unstable environments
 Need for innovation and quick response

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Designers
Manufacturers
Network Structure
Packagers
Corporate
Headquarters
(Broker)
Promotion/
Advertising
Agencies
Suppliers
Distributors

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 Effective implementation requires:
– Leadership
 Leading people to use their abilities and skills most effectively and efficiently to achieve organizational objectives

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 Staffing follows strategy:
– Matching the manager to the strategy
 Executive type
– Executives with a particular mix of skills and experiences

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 Executive Types:
– Dynamic industry expert
– Analytical portfolio manager
– Cautious profit planner
– Turnaround specialist
– Professional liquidator

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Business Strength/Competitive Position
Strong Average
Growth —Concentration
Dynamic Industry Expert
Weak
Retrenchment —
Save Company
Turnaround
Specialist
Stability
Cautious Profit Planner
Growth —Diversification
Analytical Portfolio
Manager
Retrenchment —
Close Company
Professional
Liquidator

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 Managing corporate culture:
– Corporate culture
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Affects firm’s ability to shift its strategic direction
 Strong tendency to resist change
 Corporate culture should support the strategy

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 Strategy-Culture Compatibility:
– Consider the following:
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Is the planned strategy compatible with the firm’s current culture?
 Can the culture be easily modified to make it more compatible with new strategy?
 Is management willing to make major organizational changes?
 Is management committed to implementing the strategy?

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 Managing corporate culture:
– Communication
 Key to effective management of change
 Rationale for strategic change should be communicated to all

 Culture
– The collection of values and norms shared by people and groups in an organization.
– Shared values and a common culture increase integration and improve coordination.
 Values
– Beliefs and ideas about common goals and proper behaviors.
 Norms
– Act as guidelines or expectations that prescribe acceptable behavior by organizational members.

 Ways of transmitting organizational culture:

 The influence of the founder
– Initial cultural values and management style is imprinted on the organization by its founder.
 Organizational structure
– Structure follows strategy.
Strategic leadership affects the cultural norms and values that develop in the organization.

 Individual reward systems
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Piecework plans
Commission systems
Bonus plans
Promotion
 Group and organizational reward systems
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Group-based bonus systems
Profit sharing systems
Employee stock option systems
Organization bonus systems