Organizational Theory
A functional structure is the bedrock of horizontal
differentiation. It is the first “structure” that
organizations adapt as they grow.
FIGURE 6-1B
CEO
Functional Structure
Research and
Development
Sales and
Marketing
Manufacturing
Materials
Management
Finance
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Organizational Theory
Advantages of a Functional Structure
Facilitates learning for employees as they
learn from one another and become more
specialized.
People that are grouped together by common
skills can supervise one another.
Development of norms and values.
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Organizational Theory
Control Problems in a Functional Structure
Communication problems — development
of subunit orientations.
Measurement problems — as functions
become more complex, it’s often difficult
to isolate each group’s contribution to
product development.
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Organizational Theory
Control Problems in a Functional Structure
Location problems—if centralized control
at one geographical location does not allow
the organization to handle manufacturing
and support activities on a regional basis
Customer problems—the ability to identify
and satisfy unique customer needs may
fall short
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Organizational Theory
Control Problems in a Functional Structure
Strategic problems—top managers spend
too much time addressing coordination
issues for the various functions that
they neglect the longer-term strategic
problems of the company.
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Organizational Theory
Solving Control Problems with a Functional Structure
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Organizational Theory
Functional structure is appropriate if the
organization:
Limits itself to producing a small number of similar
products
Produces those products in one or a few locations
Sells them to only one general type of client or
customer
When production expands to more products, more
locations, and/or more types of customers, more
complex structure required
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Organizational Theory
Product Division Structure—a structure
in which centralized support functions
service the needs of a number of
different product lines.
Typically used by organizations whose
products are broadly similar and aimed
at the same market.
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FIGURE 6-4
CEO
Product Division Structure
Vice President
Sales and
Marketing
Vice President
Research and
Development
Vice President
Materials
Management
Vice President
Finance
PDM
PDM
PDM
PDM
Canned
Soups
Division
Frozen
Vegetable
Division
Frozen
Entrees
Division
Baked
Goods
Division
Centralized support functions
Divisions
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Organizational Theory
Multidivisional Structure—a structure in
which support functions are placed
in self-contained divisions.
Typically used by an organization whose
products are very different and that
operates in several different industries.
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FIGURE 6-6
Multidivisional Structure.
CEO
Corporate Headquarters Staff
Corporate
Senior VP
Senior VP
Senior VP
Senior VP
Managers
Marketing
Finance
Materials
Research and
Management
Development
Divisional
Managers
Division A
Division B
Division C
Division D
Support functions
Support functions
Support functions
Support functions
Functional
Managers
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Organizational Theory
Disadvantages of a Multidivisional Structure
• Managing the Relationship between
Corporate and Divisional Management—
need for balance between centralization and
decentralization of decision making.
• Coordination Problems between Divisions—
divisions may begin competing for resources
rather than cooperating.
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Organizational Theory
Disadvantages of a Multidivisional Structure
• Transfer Pricing—the price at which one
division sells a product to another division
can be a problem spot.
• Bureaucratic Costs—costs will go up with
each division having its own set of support
functions.
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Organizational Theory
Disadvantages of a Multidivisional Structure
• Communication Problems—we know that
communication problems occur in tall
hierarchies, and multidivisional structures
tend to be the tallest.
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Organizational Theory
Product Team Structure—a divisional
structure in which specialists from the
support functions are combined into
product development teams.
Typically used by an organization whose
products are very technologically complex
or whose characteristics change rapidly
to suit customer needs.
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FIGURE 6-8
Product Team
Structure.
CEO
Functions
Vice President
Research and
Development
Vice President
Sales and
Marketing
Vice President
Manufacturing
Vice President
Materials
Management
Vice President
Finance
Product
Development
Teams
PTM
Product
Division
PTM
PTM
Product
Division
Product
Division
Functional specialist
PTM Product Team Manager
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FIGURE 6-9
Geographic Structure
Regional
Operations
Regional
Operations
Individual
stores
CEO
Central Support
Functions
Regional
Operations
Regional
Operations
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FIGURE 6-11
Market Structure
CEO
Central Support Functions
Commercial
Division
Consumer
Division
Government
Division
Corporate
Division
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Organizational Theory
A matrix is a rectangular grid that
shows a vertical flow of functional
responsibility and a horizontal flow
of product responsibility.
Matrix organization employees are often
referred to as two-boss employees because
they report to two superiors:
product manager and functional manager
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FIGURE 6-12
CEO
Matrix Structure
Vice President
Engineering
Vice President
Sales and
Marketing
Vice President
Finance
Vice President
Research and
Development
Vice President
Purchasing
Product A
Manager
Product B
Manager
Product Team
Product C
Manager
Product D
Manager
Two-boss employee
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Organizational Theory
Advantages of Matrix Structure:
• Reduce subunit orientation through the use
of cross-functional teams.
• Increase learning by facilitating
communication across functions.
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Organizational Theory
A multidivisional matrix structure provides for
more integration between corporate and
divisional managers and between divisional
managers.
This structure makes it easier for top
executives from the divisions and from
corporate headquarters to coordinate
organizational activities.
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FIGURE 6-13
Multidivisional Matrix Structure
CEO
Senior Vice
President
Marketing
Senior Vice
President
Finance
Senior Vice
President
Research and
Development
Senior Vice
President
Materials
Management
Automobile
Products
Division
Personal
Computer
Division
Consumer
Electronics
Division
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Organizational Theory
A recent innovation in organizational
architecture is the use of network structures.
A network structure is a cluster of different
organizations whose actions are
coordinated by contracts and agreements
rather than through a formal hierarchy.
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Organizational Theory
Advantages of Network Structures:
Production costs can be reduced.
Bureaucratic costs associated with complex
structures are reduced.
Facilitates organization behaving in an
organic way; underperforming partners can be
replaced.
Lower-cost (foreign) inputs.
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Organizational Theory
Disadvantages of Network Structures:
Coordination problems.
Difficult to obtain the ongoing learning process
seen inside an organization.
Flexibility that comes with being able to
remove and add network partners assumes
that other organizations can be trusted
with proprietary information.
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