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This chapter discusses the importance of organizational structure and culture as well as their impact on a firm’s competitive
advantage. Organizational culture and structure are considered important because of organizational inertia, which is a firm’s
inability and resistance to change. Students need to understand that the strategic fit between a firm and its environment is not
static but rather dynamic. That means the environment changes all the time and so should the firm. In order to adapt
successfully, a firm needs to change its strategy and also frequently its structure and culture. This chapter also discusses
mechanistic and organic organizations as well as different types of common organizational structures. The chapter concludes
with a discussion of organizational control and its relation to organizational culture.
Learning Objectives
LO 11–1 Define organizational design and list its three components.
LO 11–2 Explain how organizational inertia can lead established firms to failure.
LO 11–3 Define organizational structure and describe its four elements.
LO 11–4 Compare and contrast mechanistic versus organic organizations.
LO 11–5 Describe different organizational structures and match them with appropriate
strategies.
LO 11–6 Describe the elements of organizational culture, and explain where
organizational cultures can come from and how they can be changed.
LO 11–7 Compare and contrast different strategic control–and–reward systems.
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ChapterCase
POWERPOINT SLIDES 60–61
This brief case is designed to illustrate an organization designed to be consistent in its support of the firm’s strategy. Zappos
is a well-known online shopping site for apparel, and customer satisfaction is a key strategic objective for the company.
EXAMPLES
Although it employs more than 1,500 people, Zappos’ organizational structure is extremely flat. Before Holacracy, Zappos
worked to keep its own employees happy. Once an employee mastered a job, he or she was rotated to a different job, often
horizontally. This system allowed Zappos to create a large pool of trained talent, and made it easier to promote from within.
In keeping with another of its core values, “Create fun and a little weirdness,” the Las Vegas–based startup offers employees
“free” lunches, employer-paid health care benefits, a designated nap room, concierge service, an onsite life coach who is also
a chiropractor, a library of books on happiness (along with other bestsellers), onsite seminars on personal growth, and fun
events such as pajama parties at work.
STRATEGY SMART VIDEO EXAMPLE
POWERPOINT SLIDE 71
In this slide is a brief video to introduce the case, explaining how Holacracy works at Zappos.
Other related videos:
Journal.
CONSIDER THIS DISCUSSION QUESTIONS
What elements of an organic organization are apparent from the chapter material on Zappos? (Refer to 11.3.)
• Flexible organizational structures, adapted over time in response to external market changes and internal changes driven
by growth
What is Holacracy, and how does this organizational structure differ from the more traditional ones discussed in this
chapter?
“Rather than relying on a traditional top-down hierarchical management structure, Holacracy attempts to achieve control and
coordination by distributing power and authority to self-organizing groups (so-called circles) of employees.” “Circles of
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Why is Zappos experiencing significant implementation problems with Holacracy? What else could Zappos do to help
implement the new structure more effectively?
There are a number of possible reasons that students may identify. Encourage them to think back to the chapter on
organizational change in their Org Behavior textbook. I pulled a few concepts that might come up in discussion from
• Radically innovative change, such as Holacracy (which is not used in any other large firm) is the most complex, creates
the highest uncertainty, and has the highest resistance to change of any type of organizational change.
• Lewin’s change model of unfreezing, changing, and refreezing emphasizes the importance of establishing a need for
change, motivating people to make the change, and then supporting them through the change process. One challenge for
Zappos may have been that they were making this significant change while they were quite successful, so the need for
change may have been unclear to many employees.
that take the employee’s perspective into account (some of these problems may be present at Zappos).
Do you think that Holacracy is a good match with Zappos’ business strategy? Why or why not? Explain.
Students are likely to have a variety of opinions on this question. I think that most will say that some type of organic structure
is a good fit for Zappos’ differentiation strategy with an emphasis on customer service. You might want to ask students to
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Advantage LO 11–1 & LO 11–2
EXAMPLES
POWERPOINT SLIDE 8
Lou Gerstner and Sam Palmisano successfully reshaped IBM in response to rapid changes in their external environment to
maintain competitive advantage.
Extended Discussion
An example of an artifact from the culture is the story that at midnight on Friday, May 21, 2010, Zappos created a
problem that required a significant financial cost to deliver that “WOW.” Due to a programming error in its pricing
engine, Zappos accidentally capped the sales price at $49.95 for all products sold on its subsidiary site (www.6pm.com).
The mistake was not discovered until 6 a.m., and Zappos pulled down the site to correct the pricing problem. Once fixed,
there remained a question of what to do about the products sold with the erroneous prices. Zappos’ terms and conditions
clearly state that the firm is under no obligation to fulfill orders placed due to pricing mistakes. However, Zappos decided
to honor every sale made in the time frame between midnight and 6 a.m.—resulting in a loss of over $1.6 million. That’s
putting your money where your “WOW” is! Amazon, which owns Zappos, had its own pricing mistake just two months
prior to the Zappos incident. Best Buy and Dell have also both had online pricing errors. None of these firms handled the
situation as smoothly as Zappos. How else does Zappos deliver WOW to customers? Zappos has a 365-day no-hassle
return policy, free upgrades to express shipping, and courteous and helpful customer representatives, all of which help
make customers very happy.
How does the Zappos business strategy match its organizational structure?
Zappos’s business core competence is customer satisfaction (WOW service) and the company is highly service-oriented.
Since Zappos is positioned at the very end of the value chain (provider to end users), it deals with the environment,
especially customers, directly. That is, high mobility and flexibility are needed for the company’s business operation.
Therefore, the company’s structure is a low degree of formalization and a low degree of centralization, which enables
Zappos to become a more organic organization.
Which strategic control-and-reward system discussed in the chapter would be most appropriate for Zappos?
Output control seems to be the appropriate control mechanism for Zappos in this case. Customer satisfaction can be
maximized, especially for a service-oriented company, by offering fast delivery, no-hassle returns, friendly and
reasonable customer service, and product packaging. Zappos is currently doing so, and output control seems suitable.
Do you think Zappos’ decision to honor every sale, despite its explicit business terms and conditions that would
allow it not to do so, was a sound one? Why or why not?
Apparently Zappos was able to transform this minor crisis (mislabeling the price tag) into a huge opportunity to maximize
they think that these values would be helpful in attracting the type of employee that Zappos needs to gain and sustain a
competitive advantage? AACSB 2015 Standard 9 Ethical understanding and reasoning (able to identify ethical issues and
address the issues in a socially responsible manner)
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NEWER FACULTY: A great example from the past comes from the early 1990s, when Chrysler had terrible customer service
line of cars or trucks has appeared each year since. New engines produce more fuel economy and power as new cars provide
more comfort, performance, and space. They did this with the same people, but working in different ways, with a changed
culture.
POWERPOINT SLIDE 9
Students should be quite familiar with Nintendo Wii, Sony PS3, and MS Xbox 360. While Sony and MS focused on die-hard
gamers with all the graphics and technological features, the companies largely ignored the casual gamers, which may help
Sony and MS broaden their customer base. This can be viewed as an organizational inertia example. Only after about five
DISCUSSION TOPICS
POWERPOINT SLIDE 7
Instructors can ask students about their strategies to survive this semester. Students may give answers such as study hard,
C or D, and so on. This also gives the students a personal example of implementing strategies or the failure to do so.
POWERPOINT SLIDE 8
The chapter notes that changing an organizational culture is daunting and provides an example of Yahoo. What other firms
have attempted to change their culture in recent years? What techniques did they use for the transition? Was it successful?
POWERPOINT SLIDE 9
should also note the internal shift caused by Starbucks’ rapid growth and international expansion. Ask them to identify the
changes Starbucks has made and their assessment of how well the changes have enabled the firm to prosper in the changed
environment.
NEWER FACULTY: You can tie this chapter’s subject back to Chapter 8’s discussion of diversification with the example of
HP’s efforts to implement its 2015 restructuring in which the firm will become less diversified by splitting its consumer and
6/30/15 The Wall Street Journal).
Strategy Highlight 11.1
POWERPOINT SLIDE 10: THE PREMATURE DEATH OF A GOOGLE-LIKE SEARCH ENGINE AT MICROSOFT
In discussing this example, focus students on understanding the elements of an organization’s structure, processes, and
culture that allow ideas to come from anywhere in the organization and be heard, acted upon, and experimented with. These
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EXPERIENCED FACULTY: Due to significant advances in information technology, organic organizations frequently use
virtual teams. In these teams, geographically dispersed team members are able to collaborate through electronic
the decades prior to the widespread use of computer-mediated work, employee productivity remained more or less flat.
STRATEGY SMART VIDEO EXAMPLE
POWERPOINT SLIDE 68
All of the elements of an organization’s design—structure, reward systems, culture, and leadership style—are inter-related.
This video discusses how structure influences a culture of innovation.
DISCUSSION TOPICS
POWERPOINT SLIDE 19
Zappos and W. L. Gore are given as examples of organic organizations. McDonald’s and Walmart are given as examples for
a mechanistic organization. Within one industry Google is an organic organization, while Microsoft is more mechanistic.
Pixar is a more organic structure than the theme park organization is, both within Disney. Ask students to identify other firms
they know of that are mechanistic or organic and connect the choice of structure to the firm’s need for greater reliability or
greater innovation.
POWERPOINT SLIDE 19
Ask students to pair up and compare the two firms that they work for (or the university if they are not employed) on each of
the criteria listed in Exhibit 11.3. Then ask each team to share with the class one point in the format of “Jane’s firm is more
Strategy Highlight 11.2
POWERPOINT SLIDES 17–18: W. L. GORE & ASSOCIATES: INFORMALITY AND INNOVATION
What are the key structural elements that you can observe in this case? There is a low degree of formalization and
decentralization in W. L. Gore and the organizational structure seems to be flat. It is because the company empowers the
employee to make real-time decisions to fix the problem and to quickly satisfy customers that the company encourages face–
to-face communication to keep channels open and smooth. Further, all the employees are the shareholders of the company, so
it promotes a tighter structure and employees will do their best for the company due to the fact that everyone is the “boss.”
What are the core values of W. L. Gore? The four values are Fairness to each other; Freedom to grow knowledge and skills;
END OF CHAPTER DISCUSSION QUESTION 3
Strategy Highlight 11.2 discusses the informal organizational structure of W. L. Gore & Associates. Go to the firm’s
website (www.gore.com) and review the company’s product scope. What commonalities across the products would
likely be enhanced by flexible cross-functional teams?
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Next look in the “About Gore” section of the website. What would be your expectations of the type of norms found at
W. L. Gore?
11.2 Strategy and Structure LO 11–5
POWERPOINT SLIDES 20–35
EXAMPLE
POWERPOINT SLIDE 21
NEWER FACULTY: Understanding that structure follows strategy is crucial for students to have a better understanding of the
AFI framework. First, effective structure provides stability and flexibility. The stability is needed when a firm is actually
implementing the strategy because it implies the capacity required to consistently and predictably manage daily work routines
when actualizing strategy. The flexibility provides for the opportunity to explore competitive possibilities and the allocation
POWERPOINT SLIDE 22
NEWER FACULTY: The four basic organizational structures progress in order of complexity from simple to matrix (Exhibit
11.4):
POWERPOINT SLIDE 23
Simple structure: used by small firms and startups with low organizational complexity.
POWERPOINT SLIDE 24
Functional structure: groups employees into distinct and specialized areas (Exhibit 11.5).
POWERPOINT SLIDE 28
Multidivisional structure (M-form) consists of several distinct strategic business units (SBUs), each with its own
profit and loss responsibilities (Exhibit 11.7).
POWERPOINT SLIDE 32
The matrix structure is a combination of the functional structure and M-form structure (Exhibit 11.9).
Research Update
Gulati, R., Puranam, P., and Tushman, M. (2012), Meta-organization design: Rethinking design in interorganizational and
community contexts.
Strat. Mgmt. J.,
33: 571–586. doi: 10.1002/smj.1975
EXPERIENCED FACULTY: This conceptual research extends the taxonomy of organizational structures to include “meta–
organization,” defined as an organization whose agents are themselves legally autonomous and not linked through
employment relationships. In these organization structures, a central actor shapes the goals and direction of the entire
structure, but each of the individuals or organizations in the structure is a separate independent actor not bound by the
formal authority restrictions of an employment contract. The structures usually are not collocated, which entails different
communication methods. The authors also describe some variations within meta-organizational design. First,
communications can have open or closed membership boundaries and second, they can have big or low stratification of
decision making. This leads to a taxonomy of four types: closed community, open community, extended enterprise, and
managed ecosystem. Examples of meta-organizations include Android Operating System, Wikipedia, and the Tiered
Supplier Systems of the automotive OEMs, and P&G’s Connect + Develop system.
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The multidivisional structure centers on the use of separate businesses or profit centers. The M-form is used by many
organizations that compete in the global economy. General Electric is an example of a company that uses this structure. Each
POWERPOINT SLIDE 33
Exhibit 11.9 in particular can be useful to make the connection for the students between the content of this chapter and that of
Chapter 10. You can use whichever case examples you used while discussing global strategy and ask the students to explain
which organization structure would be the best fit for that firm.
INTEGRATION
Case Analysis: Strategy and Structure
This case analysis starts with a case comparing two very different yet successful firms. The case brings out several points
on their company structure and also their strategy. The student must read the textbook and also the case provided here
before completing the accompanying questions. Difficulty: Medium Blooms: Apply AACSB: Analytic
Follow-Up Activity: The instructor can expand on the concepts from this interactive by discussing the importance of the
alignment of strategy and structure for a variety of example firms. Small Group Exercise 1 in the end of chapter material
might be another way to get students thinking about these questions. In this small group, students are asked to think about
structures needed for two different kinds of start–up firms.
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POWERPOINT SLIDE 35
The matrix structure can be pretty controversial. We ask in the class what type of organizational structures our students are
familiar with. Some of them have worked in matrix organizations. The feeling of having “two bosses” is a common problem
with this structure. Ask them how the tension between their responsibilities affects their effectiveness and motivation at
work.
POWERPOINT SLIDES 25, 29, AND 33
Extended Example
USA Today: Leveraging Ambidextrous Organizational Design
EXPERIENCED FACULTY: The newspaper USA Today, published by Gannett Company, has one of the widest print
circulations in the United States (close to 2 million). Though highly profitable, in the mid–1990s the newspaper faced the
emerging threat of online news media, which is mostly free for the end user. Gannett decided to create a competing online
offering—USAToday.com, making it independent from the namesake newspaper. The online news unit hired staff from
the outside, and its first general manager put in place an organizational structure with fundamentally different roles and
incentives and a different culture. USAToday.com’s culture was that of a new high-tech venture, whereas the print media
USA Today had a more conservative corporate culture. Physically and structurally separated from the print newspaper,
USAToday.com resembled an online startup company in the media business more than a traditional newspaper outlet.
Roughly 80 percent of the online news originated from sources other than the print version.
Although USAToday.com successfully attracted readers and advertising dollars, Gannett starved the fledgling startup by
draining resources. As a result, USAToday.com lost some key editorial talent because it could not provide competitive
compensation packages. To solve this problem, USAToday.com’s general manager pushed for even greater independence
and for profit-and-loss responsibility. That decision further isolated the startup from the print-news unit.
By 2000, Gannett decided it was time to integrate USAToday.com with the newspaper in order to create synergies
between the two news outfits. Duplication of all editorial functions and separate creation of content no longer made sense.
Given the strained relationship and large cultural differences between the print newspaper and the online business,
however, this seemed a daunting task.
The newly appointed general manager of USAToday.com put in place an ambidextrous organizational structure, keeping
the online unit somewhat independent but integrating important functions at the top through joint editorial meetings and
senior management teams. To support this integration, the president of USA Today shifted compensation incentives for
both senior teams to accomplish joint goals rather than to focus solely on each business unit’s performance. General
managers of each unit implemented further integration through weekly meetings of lower–level editorial staff. The general
managers of each unit, therefore, were the key integrating linchpins between formerly independent business units,
allowing for synergies to emerge.
The USA Today integration of USAToday.com was an attempt to build an ambidextrous organization by balancing
exploitation and exploration. Exploitation is the enhancement of the company’s current operations or routines, in this case
it is USA Today’s printed circulations, and exploration, which is finding newness in terms of market opportunities as well
as new services/products—in this case, it is USAToday.com. By integrating them together, it promotes cross-functional
collaboration and coordination with the hope of creating synergies. What forced the firm to integrate USA Today and
USAToday.com? Due to the uneven resource allocation for USAToday.com, it lost some key editorial talent. This forced