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Chapter 10
Creating Effective Organizational Designs............................... 314 (10-2)
Traditional Forms of Organizational Structure...................................... 316 (10-4)
Patterns of Growth of Large Corporations: Strategy-Structure Relationships............... 316 (10-5)
Simple Structure............................................................................................................... 318 (10-5)
Functional Structure........................................................................................................ 318 (10-5)
Divisional Structure......................................................................................................... 320 (10-7)
Matrix Structure............................................................................................................... 323 (10-10)
International Operations: Implications for Organizational Structure............................ 324 (10-11)
Global Start-Ups: A Recent Phenomenon....................................................................... 326 (10-12)
How an Organization’s Structure Can Influence Strategy Formulation.......................... 327 (10-12)
Boundaryless Organizational Designs...................................................... 328 (10-13)
The Barrier-Free Organization........................................................................................ 328 (10-14)
The Modular Organization.............................................................................................. 331 (10-17)
The Virtual Organization................................................................................................. 333 (10-19)
Boundaryless Organizations: Making Them Work.......................................................... 336 (10-22)
Creating Ambidextrous Organizational Designs..................................... 339 (10-24)
Ambidextrous Organizations: Key Design Attributes...................................................... 340 (10-24)
Why Was the Ambidextrous Organization the Most Effective Structure?........................ 340 (10-24)
Issue for Debate.......................................................................................... 341 (10-25)
Reflecting on Career Implications............................................................ 342 (10-27)
Summary..................................................................................................... 342 (10-29)
Chapter 10
Creating Effective Organizational Designs
Summary/Objectives
Organizational structures and integrating systems are necessary to manage the
relationships between internal processes and external parties such as suppliers, customers, and
alliance partners. The challenge to managers is to create systems that both maintain order and
provide flexibility and permeability. The purpose of this chapter is to describe the different types
of organizational structures and how they contribute to organizational performance. The chapter
is divided into four sections.
1. The first section uses a “patterns of organizational growth” framework to describe
how structure relates to strategy. Then, four different types of organizational
structure—simple, functional, divisional, and matrix—are discussed in terms of
important contingencies and relative advantages and disadvantages. The
implications of international operations on organizational structure are also
discussed.
2. We address the role of contingencies in determining which reward and evaluation
system is appropriate. Emphasize that there is no “one best way” and that various
approaches (financial or behavioral) are likely to be more effective depending on
conditions. Different business-level and corporate-level strategies may require
alternate approaches to designing reward and evaluation systems.
3. The second section addresses the “boundaryless” approach to organizing. This
discussion emphasizes the importance of flexibility and permeability in
environments of unpredictability and rapid change. Three different types of
boundaryless approaches are described—barrier-free, modular, and virtual.
4. The fourth section suggests the need for ambidextrous organizations. Here,
managers must address two opposing challenges: (1) being proactive in taking
advantage of new opportunities; and (2) ensuring the effective coordination and
integration of existing operations.
Lecture/Discussion Outline
The opening case in LEARNING FROM MISTAKES illustrates the challenges of
managing a boundaryless organization. When it launched the development of the 787 Dreamliner
aircraft, Boeing decided to outsource the bulk of both the design and manufacturing of the plane.
However, they found that many of the suppliers were unable to complete their tasks or completed
them after deadlines. Boeing also had difficulty coordinating and integrating the work of
suppliers. In the end, Boeing saw their delivery schedule slip by three years, and the process was
much more expensive than anticipated.
Discussion Question 1: A number of firms benefit from outsourcing design and manufacturing.
What is different with Boeing that makes it so much harder to be successful?
Response:
The purpose of this question is to allow students to understand the complexity of
Boeing’s operations. Fifty suppliers on multiple continents are difficult to coordinate. While the
suppliers have technological expertise, and could collectively build some components better than
have been harder because:
There were many suppliers
The suppliers were geographically dispersed
The suppliers were using new technologies that had not been used together in the same
plane
Discussion Question 2: What lessons does their experience with the 787 offer Boeing for
its next plane development effort?
Response guidelines: Students can approach this question as a typical case analysis. First,
students could advise Boeing regarding different options it could use—such as in-house
manufacture, outsourced manufacture, or mixed. The trade-offs may include:
Benefits of in-house manufacture:
Control over operations
All technologies developed in-house, so better expertise as to how they interact with each
other
Less cost of monitoring and controlling suppliers’ operations
Benefits of outsourcing:
Access to better technologies
Students may opt for a mixed approach, where Boeing outsources the production of “low-
tech” components. For “high-tech” components, Boeing may want to partner with firms in order
I. Traditional Forms of Organizational Structure
This section emphasizes the relationship between strategy and structure and addresses the
importance of flexibility and permeability in the context of four traditional forms of
organizational structure—simple, functional, divisional, and matrix—as well as structures for
firms with international operation.
The SUPPLEMENT below illustrates the importance of organizational design and
structure. Globalization and the recent economic crisis have forced organizations to rethink their
Extra Example: Importance of Organizational Design and Structure
Poor organizational design and structure can result in a bewildering mess of contradictions: confusion about roles, a
lack of coordination among functions, failure to share ideas, and slow decision making. This can lead to unnecessary
complexity, stress, and conflict. Often those at the top of an organization are oblivious to these problems or, worse,
pass them off as challenges to overcome or opportunities to develop. Structure dictates the relationship of roles in an
organization, and therefore, how people function. An outdated structure can result in unnecessary ambiguity,
confusion, and a lack of accountability. Gill Corkindale, an executive coach, shared some business and leadership
challenges of executives to illustrate the importance of updated and appropriate organizational design:
1. The “unworkable” job: A Swiss engineer’s boss had modified so many parts to his original role that it
was becoming impossible to do his work since one part of his role contradicted the other. Moreover, he was
stretched beyond his limits by the scope of the role and the fact that he had to operate across several time zones.
2. Politics: A Hong Kong retail executive said his role was “schizophrenic” because he was required to
influence a group of internal stakeholders who had been instructed by their boss not to cooperate with him. The
anomaly was the result of historical turf wars between his boss and his boss’s peer: the latter had used his influence
to restructure the department and bring it under his control.
3. Over-regulation: A British banker explained how he was required to get approval from so
many people for a major project that he wasted six months trying to get it off the ground. This severely limited his
ability to compete effectively in the market.
Source: Corkindale, G. 2011. The importance of organizational design and structure. blogs.hbr.org February 11: np.
Discussion Question 3: What are some lessons learned from the examples Corkindale
suggested?
Discussion Question 4: At what level should organizational roles be designed to ensure
that all the relevant details are accounted for? Should individuals who actually perform
the job be consulted? Why/why not?
A. Patterns of Growth of Large Corporations: Strategy-Structure Relationships
In this section, we discuss how a firm’s strategy and structure change as it increases in
EXHIBIT 10.1 depicts Galbraith and Kazanjian’s model of dominant growth patterns of
large corporations.
The dominant pattern of growth is first from a simple structure to a functional structure as
sales and volume increase. A functional structure enhances efficiency and effectiveness by
structuring according to specialized functions. When firms grow beyond existing markets or
regions, the decision-making burden is too great and a divisional structure is needed to organize
B. Simple Structure
Because most organizations are very small, they need only a simple structure. Simple
structures are usually highly centralized because the founder or a top executive makes nearly all
of the decisions. Emphasize that the simple structure is the oldest and most common. It also
Discussion Question 5: Have you ever worked for an organization with a simple
structure? How were decisions made?
Discussion Question 6: What are some examples of companies that operate with a
simple structure?
C. Functional Structure
As firms grow, excessive demands may be placed on the owner-manager in order to
process all the information necessary to run the business. Specialists are needed in various
EXHIBIT 10.2 depicts a diagram of a typical functional organizational structure.
Functional structures are generally found in organizations in which there are single or
closely related products or services, high production volume, and some vertical integration. In
Functional organizations have advantages and disadvantages. One advantage is enhanced
coordination and control. Also, managerial and technical talent is used more efficiently. In a
A disadvantage of functional organizations is that the beliefs, assumptions, and goals
associated with different functional activities may vary across functions. MIT Professor Edgar
The SUPPLEMENT below addresses another kind of problem that Professor Schein has
Extra Example: Professor Schein Comments on Hierarchical Subcultures
Several management authors, including Edgar Schein of MIT, have warned about the potential problems that can
occur because of the shared assumptions that form around the functional units of an organization. These beliefs form
a type of culture that can inhibit cross-functional activities such as communication and consensus building. Schein is
also concerned about another cultural bias:
“Another kind of subculture, less often acknowledged, reflects the common experience of given levels within a
hierarchy. Culture arises through shared experiences of success. If first-line supervisors discover ways of managing
their subordinates that are consistently successful, they gradually build up shared assumptions about how to do their
job that can be thought of as the ‘culture of first-line supervision.’ In the same way, middle management and higher
levels will develop their own shared assumptions and, at each level, will teach those assumptions to newcomers as
they get promoted. These hierarchically-based cultures create the communication problems associated with ‘selling
senior management on a new way of doing things,’ or ‘getting budget approval for a new piece of equipment,’ or
‘getting a personnel requisition through.’ As each cultural boundary is crossed, the proposal has to be put into the
appropriate language for the next higher level and has to reflect the values and assumptions of that level. Or, from
the viewpoint of the higher levels, decisions have to be put into a form that lower levels can understand, often
resulting in ‘translations’ that actually distort and sometimes even subvert what the higher levels wanted.”
Source: Schein, E. H. 1996. Three cultures of management: The key to organizational learning. Sloan Management
Review, Fall: 12.
Discussion Question 7: Have you ever experienced the type of hierarchical “bias”
described by Professor Schein?
Teaching Tip: Ask students how hierarchical subcultures can differ in the various parts
of an organization. This is, production and operations may be very formalized and
“bureaucratic,” whereas research and development (especially primary R&D) may be
rather loosely structured. Ask how such “cultural differences” may create challenges in
bringing about major change in an organization (i.e., require the use of different
incentives, different procedures, etc.).
Other disadvantages of a functional structure include short-term thinking due to excessive
concern for the function rather than the whole organization, a heavier burden for top
Discussion Question 8: Have you ever worked for an organization with a functional
structure? How were decisions made?
Discussion Question 9: What are some examples of companies that operate with a
functional structure?
D. Divisional Structure
The divisional structure is organized around products, projects, or markets. Each division
has its own functional specialists organized into departments. Divisions are independent units
EXHIBIT 10.3 presents a diagram of a typical divisional organizational structure.
General Motors is presented as an example of a divisional structure. Emphasize that a
Advantages of a divisional structure include separation of strategic and operational
control. That is, the divisions focus on managing operations and the corporate office addresses
Disadvantages include a tendency to duplicate activities such as personnel management,
which makes overall costs higher, dysfunctional competition between divisions, conflicting
Discussion Question 10: Have you ever worked for an organization with a divisional
structure? How were decisions made?
Discussion Question 11: What are some examples of companies that operate with a
divisional structure?
STRATEGY SPOTLIGHT 10.1 describes how ArcelorMittal uses the concept of
The SUPPLEMENT below addresses how 3M took steps to coordinate the various
Extra Example: Communicating a Uniform Corporate Image at 3M
The 3M Corporation once had over 1,200 distinct brands but its market research indicated that most consumers did
not really understand what 3M did or what it stood for. Although divisional autonomy and an entrepreneurial spirit
had contributed to 3M’s success, it had also created a diffuse corporate image.
The process of developing a uniform and positive worldwide image began by defining 3M as a corporation.
Ultimately, research in this area led to the development of a list of descriptors of 3M that was pared from 13
adjectives to a critical two: innovative and reliable. With these in hand, three communication objectives were
established:
1. Use the 3M corporate personality as the foundation for an effective, active identity strategy.
2. Make 3M the master brand, link it to all the company’s values and products, and leverage it in all markets.
3. Establish worldwide communication standards.
The result of this campaign was the emergence of a single, unified 3M image. The number of 3M brand names
shrank from 1,200 to fewer than 600. Advertising in more than 40 countries now focuses on reinforcing the
innovation theme. And most important, awareness of 3M has jumped by 10 percent or more in Japan, Australia,
Europe, and even the United States.
Source: Olson, E. M., Cooper, R. & Slater, S. F. 1998. Design strategy and competitive advantage. Business
Horizons, March–April: 57.
Discussion Question 12: What are some examples of other companies that use brand
image and corporate messages to coordinate the activities of its various divisions?
1. Strategic Business Unit Structure
Highly diversified corporations often combine similar divisions into strategic business
units (SBUs). This helps coordinate activities and attain synergies. ConAgra is presented as an
The primary advantage of the SBU structure is that it makes planning and control more
Discussion Question 13: What are some examples of companies that operate with an
SBU structure?
Discussion Question 14: What factors might prevent companies from attaining synergies
among divisions within an SBU?
2. Holding Company Structure
The holding company structure (also referred to as a conglomerate) is another type of
divisional structure. Whereas SBUs are used to group similar divisions, the holding company
An advantage of the holding company structure is the cost savings from having a small
corporate office. Additionally, autonomy at the division level enhances motivation. The
Discussion Question 15: What are some examples of companies that operate with a
holding company structure?
Discussion Question 16: What factors might contribute to poor performance by the
divisions of a holding company?
E. Matrix Structure
A matrix structure is, in essence, a combination of a divisional and functional structure.
Most commonly, functional departments are combined with product groups on a project basis. As
EXHIBIT 10.4 portrays a diagram of a typical matrix organizational structure.
An advantage of the matrix structure is that it facilitates the use of specialized personnel,
equipment, and facilities. This reduces duplication and allows individuals with a high level of
Disadvantages of a matrix structure are related to dual reporting requirements. This can
lead to power struggles and conflict. Further, matrix structures are often used in situations that
Teaching Tip: When discussing the concept of the matrix organization with the class, you
have the opportunity to address, in effect, the difference between “theory” and
“practice.” That is, the matrix organization has many potential benefits (e.g., flexibility,
Discussion Question 17: What are some examples of companies that operate with a
matrix structure?
EXHIBIT 10.5 outlines the advantages and disadvantages of the three different
organizational structures discussed above—functional, divisional, and matrix.
The SUPPLEMENT below discusses a key downside of complex formal organizational
structures, the insulation of top managers.
Extra Example: Structure Can Inhibit Bad News Reaching the Top
Top executives at major firms can often be isolated from key information on strategic issues and problems. Workers
and managers are taught to “go along to get along.” Deborah Cornwell, a management consultant, commented on it
this way, “There’s a tendency for people in large organizations to tell the boss what he wants to hear.” As a result,
managers are reluctant to share information about problems with their bosses. In large organizations with several
layers of management, problems can get watered down at each level, making it unlikely that top executives get a
sense of the emerging problems. Instead, top managers may only hear about a problem when it gets to a crisis point
and can no longer be ignored or covered up at lower levels of the firm. As Martin Zimmerman, a former group Vice
President at Ford Motor Company commented, “You get blindsided when things deteriorate.”
A classic example of this occurred in General Motors. Firm engineers knew there was a design problem with
ignition switches, but the faulty switches with this very design were used in a wide range of GM’s cars for several
years. When asked about when executives knew there was a serious problem with the ignition switches in millions
of cars produced by GM, CEO Mary Barra stated, “I cannot tell you why it took years for a safety defect to be
announced in that program, but I can tell you that we will find out.”
A key challenge for corporate leaders is to construct a structure and a culture that increases information flow
upward. Some firms do it by flattening the organization’s structure so that top managers are closer to front line
employees. Others create corporate leader jobs that are designed to get key information to the top. This is what GM
did when it created a new VP of global vehicle safety, a position that works with engineering teams to ensure design
safety problems get the attention they need. Others strive to create a culture that praises those who bring up
problems or challenges the firm faces. Ford historically had a culture where bad news was not shared. When he was
an Executive VP of Ford, Mark Fields raised a serious technical issue with a new auto the firm was working to
launch; the room fell silent until Alan Mulally, the newly appointed CEO of Ford, clapped his hands and praised him
for openly raising the issue. From that point forward, problems were more openly shared at Ford, and Mr. Fields
rose in prominence in the leadership team, ultimately becoming Mr. Mulally’s successor as CEO of Ford.
Source: Auriemma, A. 2014. Chiefs at Big Firms Are Often Last to Get Bad News. wsj.com. April 3: np.
