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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
Chapter 11
Organizational Structure
Chapter Summary
structure.
This chapter examines ways organizations are structured and ways to make those structures most
effective. It describes five traditional organizational structures—simple organization, functional
Learning Objectives
1. Identify five traditional organizational structures, and the pros and cons of each.
2. Describe the product-team structure and explain why it is a prototype for a more open,
agile organizational structure.
3. Explain five ways improvements have been sought in traditional organizational structures.
4. Describe what is meant by agile, virtual organizations.
5. Explain how outsourcing can create agile, virtual organizations, along with its pros and
cons.
6. Describe boundaryless organizations and why they are important.
7. Explain why organizations of the future need to be ambidextrous learning organizations.
Lecture Outline
I. Traditional Organization Structures and Their Strategy-Related Pros and Cons
A. Organizational structure refers to the formalized arrangement of interaction between and
responsibility for the tasks, people, and resources in an organization.
1. It is most often seen as a chart, often a pyramidal chart, with positions or titles and
roles in cascading fashion.
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
B. Simple Organizational Structure
1. In the smallest business enterprise, a simple structure usually prevails.
a) A simple organizational structure is one where there is an owner and,
b) All strategic and operating decisions are made by the owner, or a small
c) Because the scope of the firm’s activities is modest, there is little need to
d) With the strategic concern primarily being survival, and the likelihood that
e) It can also allow rapid response to product/market shifts and the ability to
f) This is in part because the owner is directly involved with customers on a
2. The simple structure can be very demanding on the owner-manager.
a) If it is successful, and starts to grow, this can cause the owner-manager to
b) At the same time, the company’s reliance on the owner as the central point
c) And, this structure usually requires a multitalented, resourceful owner, good
3. Most businesses in this country and around the world are of this type.
a) Many survive for a period of time, then go out of business because of
b) Some grow, having been built on an idea or capability that taps a great need
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whole or part.
C. Functional Organizational Structure
1. A functional organizational structure is one on which the tasks, people, and
2. Functional structures predominate in firms with a single or narrow product focus
a) Such firms require well-defined skills and areas of specialization to build
competitive advantages in providing their products or services.
3. Product, customer, or technology considerations determine the identity of the
parts in a functional structure.
4. The strategic challenge presented by the functional structure is effective
coordination of the functional units.
a) The narrow technical expertise achieved through specialization can lead to
limited perspectives and to differences in the priorities of the functional
units.
D. Divisional Structure
1. When a firm diversifies its product/service lines, covers broad geographic areas,
a) If a functional structure is retained under these circumstances, production
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(1) A new organizational structure is often necessary to meet the increased
b) A divisional organizational structure is one in which a set of relatively
c) A divisional structure allows corporate management to delegate authority for
the strategic management of distinct business entities—the division.
(1) This expedites decision making in response to varied competitive
2. Strategic Business Unit
a) Some firms encounter difficulty in controlling their divisional operations as
the diversity, size, and number of these units continues to increase.
(1) Corporate management may encounter difficulty in evaluating and
controlling its numerous, often multi-industry divisions.
b) The advantages and disadvantages of the SBU form are very similar to those
identified for divisional structures in Exhibit 11.4. Exhibit 11.5, Global
Strategy in Action, shows how Dell and GE changed their structure.
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whole or part.
3. Holding Company
a) A final form of the divisional organization is the holding company
structure, where the corporate entity is a broad collection of often unrelated
b) This approach can provide a cost savings over the more active SBU approach
since the additional level of “pricy” management is not that much.
(1) The negative, of course, becomes the degree to which the corporate
4. Matrix Organizational Structure
a) In large companies, increased diversity leads to numerous product and
b) The matrix organizational structure is one in which functional and staff
(1) It provides dual channels of authority, performance responsibility,
Organizational Structure.
(2) The matrix form is intended to make the best use of talented people
c) The matrix structure also increases the number of middle managers who
(1) In this way, the matrix structure overcomes a key deficiency of
d) Although the matrix structure is easy to design, it is difficult to implement.
(1) Dual chains of command challenge fundamental organizational
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
5. Product-Team Structure
a) To avoid the deficiencies that might arise from a permanent matrix structure,
(1) This approach, used recently by such firms as Motorola, Matsushita,
(2) This adaptation of the matrix approach has become known as the
(3) The product-team structure seeks to simplify and amplify the focus of
(4) Exhibit 11.7, The Product-Team Structure, illustrates how the
b) The product-team structure assigns functional managers and specialists to a
new product, project, or process team that is empowered to make major
decisions about their product.
(1) The team is usually created at the inception of the new-product idea,
(2) Instead of being assigned on a temporary basis, as in the matrix
(3) This results in much lower coordination costs and, because every
c) It appears that product teams formed at the beginning of product-
development processes generate cross-functional understanding that irons out
early product or process design problems.
(1) They also reduce costs associated with design, manufacturing, and
(2) That ability to make speedier, cost-saving decisions has the added
(3) While seemingly obvious, it has only recently become apparent that
place.
(4) Exhibit 11.8, Global Strategy in Action, gives examples of a product-
II. What a Difference a Century Makes
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
A. Exhibit 11.9, What a Difference a Century Makes, offers a useful perspective for
designing effective organizational structures in tomorrow’s global economy.
1. In contrasting twentieth- and twenty-first century corporations on different
2. Successful organizations once required an internal focus, structured interaction,
3. Today and tomorrow, organizational structure reflects an external focus, flexible
4. Three fundamental trends are driving decisions about effective organizational
B. Globalization
1. Companies in virtually every industry either operate globally or will soon do so. In
2. The need for global coordination and innovation is forcing constant
a) Next was locating operations in numerous countries.
b) Today companies will call on talents and resources wherever they can be
C. The Internet
1. The Net fives everyone in the organization, or working with it—from the lowest
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distribution in any manner. This document may not be copied, scanned, duplicated, forwarded, distributed, or posted on a webs ite, in
whole or part.
4. The result—coordination, communication, and decision-making functions are
slow, inefficient, and noncompetitive.
D. Speed
1. Technology, or digitalization, means removing human minds and hands from an
organization’s most routine tasks and replacing them with computers and
networks.
a) Digitizing everything from employee benefits to accounts receivable to
product design cuts cost, time, and payroll, resulting in cost savings and vast
improvements in speed.
b) Leading-edge technologies will enable employees throughout the
c) These technologies will allow employees, suppliers, and freelancers
need for a translator to develop markets, new products, new processes.
d) Again, the ramifications for organizational structures are revolutionary.
2. Whether technology assisted or not, globalization of business activity creates a
potential velocity of decision making that challenges traditional hierarchical
a) First, we will summarize some key ways managers are changing traditional
organizational structures to make them more responsive to this new reality.
b) Second, we will examine current ideas for creating agile, virtual
organizations.
III. Initial Efforts to Improve the Effectiveness of Traditional Organizational Structures
A. Major efforts to improve traditional organizational structures seek to reduce
unnecessary control and focus on enhancing core competencies, reducing costs, and
company be exploited, while ensuring the responsiveness and creativity found in
the small companies against which each of their businesses compete?
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whole or part.
a) Rigorous financial controls and reporting enable cost efficiency, resource
b) Multibusiness companies historically gain advantage by exploiting resources
and capabilities.
c) Aggressive portfolio management seeking maximum shareholder value is
2. Increasingly, globally engaged, multibusiness companies are changing the role of
a) One way this has been done is to create an executive council comprised of
b) IBM’s Sam Palmisano uses this approach today to cross-fertilize ideas and
c) These councils replace the traditional corporate staff function of overseeing