1
Organizational Designs
Chapter 13
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3
The Animal Refiner
Risk management today is so complex and so important for
Tyson’s competitive success that the company has changed its
structure to better oversee those risks.
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or posted to a publicly accessible website, in whole or in part.
4
What’s Next
This chapter is about business organizations, why they
take the shapes they do, and how they change with
their environments.
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or posted to a publicly accessible website, in whole or in part.
5
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6
It Takes More than a Mousetrap
Contrary to the proverb, if you want to bring the world to
your door you need to do more than invent a better
mousetrap. This chapter asks who in an organization would
best be given authority to make different decisions, and
why. Doing so requires understanding how information
originates within a firm, how it is transferred, and who can
put it to the most effective use. The firm does not just
process material, financial, and human inputs. It also
processes information, and its ability to do this well
depends on its organizational design.
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7
Centralization
Some decisions will best be centralized, that is, one person
(department) uses information from different sources to set a
policy that may affect those who provided the information.
Decisions are better made centrally under the following
conditions:
1. They require information from more than one source.
2. They require decision-making skills (e.g., knowledge of
forecasting techniques) that those who produced the
information do not have.
3. The decision maker’s incentives are aligned with those
of the principals, in this case the firm’s shareholders.
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or posted to a publicly accessible website, in whole or in part.
8
Centralization - Transmitting
Information and Commands
It seems obvious that better information makes for better
performance, but what is meant by good information is far
less obvious. Exactly who has that data and how it gets to
the decision maker are both critical questions in
organizational design.
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or posted to a publicly accessible website, in whole or in part.
9
Decentralization - Management
The second industrial revolution marked the emergence
of management as a defined occupation. Organizational
design is the study of who can best decide what, and the
best design depends on the organization’s purpose—
what it produces and what markets it operates in.
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10
Decentralization - Principals and
Agents Everywhere
Many members of an organization are simultaneously
principals attempting to obtain performance from
subordinates and agents expected to perform for their
supervisors. Contracts determine methods of payment that a
principal can use to elicit effort from an agent.
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12
A “Tree” without Roots or Branches
What sort of business might have an organization chart like
the one depicted here? It consists of a single row of Xs that
represent individuals. No important authority relationships
are shown above or below them.
One possibility is that it describes a group medical
(or possibly a law or accounting) practice.
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or posted to a publicly accessible website, in whole or in part.
13
A Simple Hierarchy
Limits on the abilities of individuals to process information
suggest a basic principle: Put the decision where the
information is. If a person at a low level of the organization
has all of the information that is relevant to a decision,
assigning responsibility for that decision to person at a higher
level will not improve the quality of the decision that gets
made.
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14
A Simple Hierarchy
In this simple organization there are two possible reasons to
keep A and B separate rather than combine them. First, they
might provide HQ with dissimilar information like financial
data and sales statistics. Second, separate paths to A and B
allow HQ to avoid overloading each manager with irrelevant
information and makes it more likely that orders will be sent
to those best positioned to carry them out as HQ wishes.
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15
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16
Functionalization and Divisionalization
There are two broad ways to
categorize the activities that take
place in A and B. The first is
functionalization, where each box
contains only specialists in some
aspect of the firm’s operations.
Box A might be the purchasing
department, responsible for
buying all of the firm’s inputs.
Box B might be the sales
department, which markets all
the company’s products and is in
charge of both its sales force and
its advertising campaigns.
The second way to fill the boxes
is to divisionalize along product
or geographic lines. Box A might
contain all the company’s North
American activities, including
production, input procurement,
and sales, while Box B contains
the corresponding activities for
Europe. Geographic
divisionalization is growing with
globalization.
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17
U-form Organizations – Green Bay Packers
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18
U-form Organizations – Green Bay
Packers
In a U-form organization headquarters makes decisions using
information submitted by various departments, and possibly
itself as well. A well-known U-form firm is the National
Football League’s Green Bay Packers. Specialized functions
such as public relations, ticketing, security, and
building (stadium) supervision are each departments staffed
by specialists who report to the president and chief executive
officer (CEO).
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19
U-form Organizations – Green Bay
Packers
A U-form organization should serve the Packers well for
several reasons:
•The firm produces a single product—football—in a
single location.
•The operating environment changes little from year to
year.
•The Packers face hardly any direct competition from
other teams for customers.
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20
U-form Organizations - Problems of Uform Organizations
There are limits to the information a firm’s headquarters can
use effectively in making decisions. If a U-form firm makes
several different products or sells the same product in
different markets, information from functional departments
will be less helpful to its management. Whether a larger staff
at headquarters improves top-level decision making depends
on the types of information it must evaluate and the criteria
for accepting or rejecting a proposed project.
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or posted to a publicly accessible website, in whole or in part.
21
M-form Organizations
A divisionalized firm is often called M-form, where the “M”
stands for multidivisional. An M-form firm like the one shown
engages in activities A, B, and C. These might be different
products it produces or units it operates in different locations.
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22
M-form Organizations
Activities A, B, and C each resemble a stand-alone U-form
firm. If management chose to divest C, it could possibly
remain intact and viable as a U-form firm that now had its
own management. The M-form keeps decisions at the
divisional level that would be sent to headquarters in a Uform firm. The headquarters of an M-form firm, however,
must be able to identify, measure, and compare a division’s
performance (and its future prospects) with other divisions.
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23
M-form Organizations - Product
Divisions: Microsoft
Microsoft Corporation is divisionalized into six business segments:
•The Client segment is responsible for the Windows operating systems
and relations with personal computer (PC) manufacturers.
•Server and Tools handles the Windows Server Operating System.
•Platform Products and Services produces programming tools and
server software.
•Online Services is in charge of the Microsoft Network (MSN), e-mail,
and related services.
•The Business division produces application software, most
importantly the Office suite.
•The Entertainment and Devices division produces the Xbox game
console, Zune player, and operating systems for personal digital
Assistants.
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24
M-form Organizations - Geographic
Divisions: Ingram Micro
Ingram Micro is the world’s largest ($35 billion sales in 2008)
wholesale distributor of computer hardware and software,
with staff in 34 countries and sales in 140. The company’s four
divisions cover North America, Europe and the Middle East,
the Asia-Pacific region, and Latin America.
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or posted to a publicly accessible website, in whole or in part.
25
From U-form to M-form: Ford and
General Motors
The origins and early development of the U.S. automobile
industry offer a comparison of the competitive advantages
of U-form and M-form firms. Both GM and Ford Motor
Company began as U-form organizations, and both
became M-form when U-forms became unmanageable.
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or posted to a publicly accessible website, in whole or in part.
26
From U-form to M-form: Ford and
General Motors - U-form: Ford
Henry Ford made history by turning the automobile into a
mass-consumption good. Unlike other manufacturers whose
production runs were small, Ford standardized his Model T
and produced it in volumes that drastically lowered costs.
Introduced in 1908, the Model T was built on assembly lines
(themselves largely Ford’s invention) with interchangeable
parts and workers specialized to particular steps. A concern
with dependable supplies and predictable quality led Ford to
vertically integrate into production of raw materials. Ford’s
production environment changed little over two decades.
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27
From U-form to M-form: Ford and General
Motors - M-form: General Motors
General Motors’ William C. Durant had a quite different strategy. Believing buyers
wanted choices that Ford would not offer, Durant (originally president of the
independent Buick company) chose to make acquisitions in order to produce a
wider variety of cars. By the 1920s, GM was producing nine different makes of cars
and trucks, each in several body styles. Operated as a U-form, the company had
become unmanageable. By the 1920s, GM was producing nine different makes of
cars and trucks, each in several body styles. Operated as a U-form, the company
had become unmanageable.
In 1923, Alfred P. Sloan became president of GM and designed reporting
procedures to compare divisional performance to meet the goal of better allocating
capital by using the then-novel concept of return on investment.
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28
From U-form to M-form: Ford and General
Motors - The Competitive Consequences
Over the 1920s General Motors cemented its lead over Ford.
Historian Chandler argues that Ford’s U-form and its concentration
on a single product generated information flows to management
that favored the status quo, and that Ford’s organization itself was
an important reason for its failure to see and adapt to market
changes GM had in large part caused. Logistical problems and
management’s reluctance to abandon the old system left Ford with
a mix of U-form and M-form activities. Today, GM’s management is
concerned that the company cannot compete because it is overdivisionalized, and it is attempting to standardize its various brands
around the world.
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29
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30
Matrix Organizations
Here is the 2008
organization chart of ABB
Group. ABB produces and
sells five major product lines
worldwide. ABB is doubly
divisionalized into
superimposed M-form
organizations. It is called a
“matrix organization,” or
sometimes an “MX-form.”
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or posted to a publicly accessible website, in whole or in part.
31
Matrix Organizations
The matrix form has advantages and disadvantages and is
more likely to be found in firms that produce diverse goods
that are sold in diverse markets.
A country unit can use its accumulated experience to reduce the costs of
dealing with government for all of ABB’s products sold there. Likewise, all
of ABB’s product divisions can use a country unit to manage risks
denominated in that country’s currency. If several product divisions
manufacture in a country there may be advantages in procuring inputs for
them jointly.
ABB’s MX-form also has potential advantages when broken down by
product. If it produces and markets a certain good in several countries,
the various plants may be able to share innovations or learn better
operating practices from one another.
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32
Matrix Organizations
On the downside, ABB’s employees ultimately have two bosses—the
country or regional manager and the business area manager—and their
interests may be in conflict. A country manager may want to begin
manufacturing a certain product there while a product manager favors
continued transshipment to the country. A country manager might want
to discourage information transfer from an efficient plant in her domain
to an inefficient one elsewhere that will lower the local plant’s relative
performance.
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or posted to a publicly accessible website, in whole or in part.
33
Self-Contained Units - Why Redesign
an Organization?
Tyson redesigned itself to better adapt to the new importance
and complexity of risk management in the markets for many of
its inputs and outputs. The financial revolution that began in
the 1970s changed risk management from a relatively simple
and standardized activity to an essential element of
corporate strategy. The revolution had two consequences for a
business like Tyson. First, risk management at the divisional
level became inadequate. Second, specialists like Jean Beach,
however, could not do the entire job. They would have to
interact with people in the divisions who were experts in
operations.
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or posted to a publicly accessible website, in whole or in part.
34
Self-Contained Units
Here is an organization
before and after the creation
of a self-contained unit. In
this figure the company has
reorganized its risk
management into an SCU
that reports only to
headquarters. It has final
authority in that area, but
doing its job requires contact
with employees who have
expertise in division-level
risks.
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or posted to a publicly accessible website, in whole or in part.
35
Self-Contained Units
The benefits and drawbacks of a self-contained unit mirror
those of the matrix organization. Ideally, people with different
expertise will combine their knowledge to produce better
policies than any subset of them could produce. There is,
however, no guarantee that the relationship between the SCU
and the operating employees will turn out this way.
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36
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37
Who Really Decides?
An expert once called an organizational diagram “an
optimistic chart of expectations about relationships.” A graph
of relationships may differ greatly in practice from their
actual implementation. A line that links higher employees or
divisions with lower ones portrays formal authority. Their
real relationships often play out in accordance with informal
authority.
A chart can also fail to reveal important relationships. A vice
president’s administrative assistant may not even appear on it,
but the vice president may have given her authority to issue
certain orders under the vice president’s name without his
active involvement.
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or posted to a publicly accessible website, in whole or in part.
38
Informal Authority, Contingencies, and
Competition
In Chapter 12 we compared transactional governance by
organizations with governance by markets or contracts.
Problems encountered in contracts are mirrored in
organizations. In both, negotiations over an unforeseen
problem may take place outside the formal relationship
outlined in the contract or chart. Situations might arise within
an organization that are incompatible with existing authority
relationships. In response, members of the organization may
negotiate new relationships whose authority characteristics do
not appear on the chart but are generally acknowledged to
exist.
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or posted to a publicly accessible website, in whole or in part.
39
Informal Authority, Contingencies, and
Competition
The stories of GM and Ford show the potential importance of
organizational form as a competitive tool. An inappropriate
form can obstruct a firm that would otherwise be competitive.
Many companies treat their organization charts as confidential
documents that must not fall into the hands of competitors.
Charts can provide information about strategies.
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or posted to a publicly accessible website, in whole or in part.