Chapter 8: Designing Adaptive Organizations P a g e | 1
Effective Management 7th Edition
Chapter 8: Designing Adaptive Organizations
Pedagogy Map
This chapter begins with the learning outcome summaries and terms covered in the chapter, followed by a
set of lesson plans for you to use to deliver the content in Chapter 8.
Lesson Plan for Lecture (for large sections)
Lesson Plan for Group Work (for smaller classes)
Assignments with Teaching Tips and Solutions
Highlighted Assignments Key Points
What Would You Do? Eli Lilly needs to grow its drug pipeline or face significant
losses with the expiration of several patents.
Management Team Decision General Motors must decide if it should shift its focus to the
Chinese auto market.
Additional Assignments Key Points
Management Team Decision Students must decide if a company should institute a dress
policy.
Develop Your Career Potential Students are encouraged to spend a day at their firm doing
someone elses job as a path to understanding.
Learning Outcomes
8-1 Describe the difference between organizational structure and organizational process.
Like a successful architect, a successful company must constantly examine its organizational design.
Organizational structure is the vertical and horizontal configuration of departments, authority, and jobs
within a company. Organizational structure is concerned with questions such as Who reports to whom?
and Who does what? and Where is the work done? That is, companies use organizational structure to set
8-2 Describe the departmentalization approach to organizational structure.
The five traditional departmental structures are functional, product, customer, geographic, and matrix.
Functional departmentalization is based on the different business functions or expertise used to run a
8-3 Explain organizational authority.
Organizational authority is determined by the chain of command, line versus staff authority, delegation,
and the degree of centralization in a company. The chain of command vertically connects every job in the
company to higher levels of management and makes clear who reports to whom. Managers have line
8-4 Discuss the different methods for job design.
Companies use specialized jobs because they are economical and easy to learn and dont require highly
paid workers. But specialized jobs arent motivating or particularly satisfying for employees. Companies
have used job rotation, job enlargement, job enrichment, and the Job Characteristics Model to make
Chapter 8: Designing Adaptive Organizations P a g e | 3
8-5 Differentiate between mechanistic and organic organizations and identify which design
8-6 Explain the methods that companies are using to redesign internal organizational processes
(i.e., intraorganizational processes).
Today, companies are using reengineering, empowerment, and behavioral informality to change their
intraorganizational processes. Through fundamental rethinking and radical redesign of business processes,
8-7 Describe the methods that companies are using to redesign external organizational
processes (i.e., interorganizational processes).
Organizations are using modular and virtual organizations to change interorganizational processes.
Because modular organizations outsource all noncore activities to other businesses, they are less
expensive to run than traditional companies. However, modular organizations require extremely close
Terms
authority
autonomy
behavioral formality
behavioral informality
centralization of authority
chain of command
complex matrix
interorganizational process
intraorganizational process
Job Characteristics Model (JCM)
job design
job enlargement
job enrichment
job rotation
pooled interdependence
private spaces
product departmentalization
reciprocal interdependence
reengineering
sequential interdependence
shared spaces
Lesson Plan for Lecture
Pre-Class Prep for You: Pre-Class Prep for Your Students:
Review chapter and determine what points to
cover.
Bring PPT slides.
Read Chapter 8, bring book.
Warm Up Begin Chapter 8 by asking your students the following series of questions:
Is how a company is structured important? Why or why not?
Ask students about any corporate restructurings they have read or heard about in the
press and what prompted the companies in question to restructure.
Topics PowerPoint Slides Activities
8-1 Designing
Organizational
Structures
8-2 Departmentalization
8-2a Functional
Departmentalization
Departmentalization
8-2d Geographic
Departmentalization
8-2e Matrix
Departmentalization
1: Designing Adaptive
Organizations
2: What Would You Do?
6: Departmentalization
7: Functional
Departmentalization
Departmentalization
10: Product
Departmentalization
11: Product
Departmentalization:
AcmeFoods Inc.
12: Product
Departmentalization
After you lecture on
Section 8-2 (through slide
21), ask students if they can
sheet, which lists
executives names and
titles, and having students
19: Matrix
8-3 Organizational
Authority
8-3b Line versus Staff
Authority
8-3d Degree of
22: Chain of Command
23: Authority
Authority
25: Delegation:
26: How to Be a More
Ask students if chain of
command is more
industries or companies
than others, or if it is
8-4 Job Design
8-4b Job Rotation,
8-4c Job Characteristics
Model
28: Job Specialization
Enlargement, and
Model
31: Job Characteristics
Model
8-5 Designing
Organizational Processes
8-6 Intraorganizational
Processes
8-6b Empowerment
36: Organizational
Processes
37: Reengineering
38: Reengineering and
Task Interdependence
40: Behavioral
Ask students if theyve ever
seen (or done) a job and
thought, If only they did
better, easier, etc.
8-7 Interorganizational
Processes
8-7b Virtual Organizations
41: Modular
Organizations
44: Virtual Organizations
Ask students if they think a
company can outsource
them to explain their
reasoning.
Management Workplace 45: Modern Shed Launch video in slide 45.
Questions on slide can
Chapter 8: Designing Adaptive Organizations P a g e | 6
Special
Items
Spark a debate among your students by asking them to respond to the following
statement:
Conclusion
Possible assignments:
Remind students about any upcoming events.
Lesson Plan for Group Work
Pre-Class Prep for You: Pre-Class Prep for Students:
Review material to cover and modify your
lesson plan to meet your needs.
Set up the classroom so that small groups of
45 students can sit together.
Read Chapter 8, bring book.
Warm Up Begin Chapter 8 by asking your students the following questions:
Is how a company is structured important? Why or why not?
Ask students about any corporate restructurings they have read or heard about in the
press.
Content
Delivery
Ask students: So, when companies say theyre going to restructure, what are they
talking about?
Lecture on Designing Organizational Structures (Section 8-1).
Chapter 8: Designing Adaptive Organizations P a g e | 7
Break for the following group activity:
“Pick a Structure”
Divide the class into small groups of 3 5 students. Give each group a list of three
different well-known companies of interest to students (Starbucks, Vans, Sephora,
Apple, Google, Toyota, Capital One, etc.). For each company on their list, students
should decide what kind of organizational structure the company uses and defend
Lecture on Organizational Authority and Job Design (Sections 8-3 and 8-4)
Conclude the section on job design by reviewing the What Really Works on the Job
Characteristics Model.
Segue into the section on organizational processes (Section 8-5) by asking, So far weve
focused on how companies organize people to get the companys work done. What else
do companies need to organize?
Lecture on Intraorganizational Processes (Section 8-6).
As you get to the section on behavior formality/informality, poll your students to see
how many would prefer working in a formal environment versus an informal
environment. Or give them a Likert scale and ask them to raise their hands to indicate
preferences. Use an Excel spreadsheet or even the chalkboard to create a frequency
count.
Break for the following activity:
Lecture on Interorganizational Processes (Section 8-7)
“Dressing Up or Down for Work”
Chapter 8: Designing Adaptive Organizations P a g e | 8
Finish the class with the following activity:
“What to Outsource”
Put students back in the groups you used for Pick a Structure and present them with
the same list of companies as previously. Consider having each group choose only
one company as the basis of this activity. Tell students to create a list of business
Conclusion
and
Preview
Assignments:
1. If you have finished covering Chapter 8, assign students to review Chapter 8 and
read the next chapter on your syllabus.
Remind students about any upcoming events.
Assignments with Teaching Tips and Solutions
What Would You Do Case Assignment
What Really Happened? Solution
ELI LILLY
In the case, you learned that pharmaceutical firm Eli Lilly stood to lose 75 percent of its revenues over the
next seven years as seven of its most profitable drugs came out of patent protection. When patent
protection expires, the company holding the patent typically sees sales of that drug drop by 80 percent
within a year as cheaper generic equivalents steal sales and market share. After laying off 5,500 workers
and reducing annual expenses by $1 billion, CEO John Lechleiter had to find a way to jumpstart Lillys
drug development process. Lets find out what happened at Lilly and see what steps CEO Lechleiter took
to restructure his company to address this challenge.
With those short-term steps behind you, the long-term challenge is to grow Lilly’s drug pipeline? But
how? You need to encourage faster, less expensive innovation, which is never easy. Some think that large
Behavioral formality refers to workplace situations characterized by routine and regimen, specific rules
about how to behave, and impersonal detachment. By contrast, behavioral informality refers to workplace
situations characterized by spontaneity, casualness, and interpersonal familiarity. Casual dress policies
and open office systems are two of the most popular methods for increasing behavioral informality. While
casual dress increases behavioral informality by having managers and workers at all levels dress in a more
relaxed manner, open office systems increase behavioral informality by significantly increasing the level
of communication and interaction among employees. By definition, open office systems try to increase
interaction by removing physical barriers that separate workers.
Chapter 8: Designing Adaptive Organizations P a g e | 9
boards, and computers are readily available. With no office walls, inviting common areas, and different
departments mixed together in large open spaces, spontaneous communication occurs more often. Studies
show that people whose office cubicles are directly adjacent to main walkways or office atriums report 60
percent more face-to-face communication, while those with informal meeting spaces (such as open
lounges, or team work rooms) within 75 feet of their desks report 102 percent more face-to-face
communication.
At Lilly, CEO John Lechleiter restructured the company to significantly improve communication in
product development teams and speed up the entire drug development process. One of his first steps was
to put everyone involved in the drug development process, from scientists, to government specialists who
work with the Food and Drug Administration, to those who bring finished products to markets, under one
building which Lilly named the Development Center of Excellence. Why do that? To increase the
While Lilly used behavioral informality to increase communication in product development teams, it
reengineered internal processes to significantly increase the speed with which it completed the formal
phases of drug development and testing.
Reengineering is the fundamental rethinking and radical redesign of business processes to achieve
dramatic improvements in performance measures, such as cost, quality, service, and speed. When
reengineering organizations, managers must ask themselves, Why do we do what we do? and Why do
we do it the way we do? The usual answer is Because thats the way weve always done it.
Reengineering is about significant change, about starting over by throwing out the old ways of getting
work done. It is also about processes, that is, how things get done.
According to CEO John Lechleiter, the Development Center of Excellence is implementing a project
management methodology called Critical Chain, developed by physicist Eli Goldratt. Critical Chain was
actually first applied at Lilly in a completely different context by our IT group. They, in turn, helped our
research labs launch a pilot program that has proved the power of Critical Chain in drug development.
Historically, across our pipeline, we have a 60 percent success rate in hitting milestones on time in other
words, we miss almost half of our deadlines. In the Critical Chain pilot program, the success rate so far is
100 percent. Thats why were now applying Critical Chain in force.
Chapter 8: Designing Adaptive Organizations P a g e | 10
Also, if the traditional company structure used by pharmaceutical firms hasn’t been successful at
encouraging drug development, are their nontraditional organizational structures that Lilly use to help to
speed development and lower costs?
The most common organizational structure is functional departmentalization. Functional
departmentalization organizes work and workers into separate units responsible for particular business
functions or areas of expertise. Functional departmentalization allows work to be done by highly qualified
specialists, lowers costs by reducing duplication, and, since everyone in the same department has similar
work experience or training, communication and coordination are less problematic for departmental
managers. On the other hand, with functional departmentalization cross-department coordination can be
difficult, and it may also lead to slower decision making and produce managers and workers with narrow
experience and expertise. Since speeding drug development is critical to Lilly, functional
departmentalization wouldnt meet the companys needs at this time.
Matrix departmentalization is a hybrid structure in which two or more forms of departmentalization are
used together. The most common matrix combines the product and functional forms of
departmentalization, but other forms may also be used. Several things distinguish matrix
departmentalization from the other traditional forms of departmentalization. Most employees report to
two bosses, one from each core part of the matrix. Matrix structures lead to much more cross-functional
interaction than other forms of departmentalization something which Lilly wants but doing so requires
So, if the traditional company structure used by pharmaceutical firms, typically functional, product, or
matrix structures, havent been successful at encouraging drug development, are there nontraditional
organizational structures that Lilly could use to speed development and lower costs?
The option that Lilly has chosen is to become a modular organization. Except for the core business
activities that they can perform better, faster, and cheaper than others, modular organizations outsource all
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As part of its move toward becoming a modular organization, Lilly created a group within the company
called Chorus, which consists of a team of 24 scientists who outsource 80 percent of Lillys research to
Why did Lilly turn to a modular organization structure? Trying to do everything yourself won’t work.
The odds of owning everything and being at the right place at the right time are not high, said Peter
Johnson, Lilly’s vice president of corporate strategic planning.
How well is Chorus working? Thus far, 25 percent of the molecules the Chorus has had other research
companies investigate have proved worthy of further study. And one discovery, a treatment for
rheumatoid arthritis, has gone to late-stage development testing. And these positive results are not only
being achieved much faster, the cost to achieve them is roughly a third less than it would have cost for
Lilly to do the testing in-house.
Of course, modular organizations have disadvantages, too, such as the loss of control that occurs when
key business activities are outsourced to other companies. Also, suppliers to whom work is outsourced
can sometimes become competitors. Well discuss these key issues in the next question.
Finally, to what extent should Lilly outsource parts of its drug-development process to outside vendors
and companies? Because you risk creating new competitors with your own dollars when you outsource, a
general guideline is to only outsource noncore business activities. But when you’re a pharmaceutical
firm, drug development is the core of your business.
By choosing to become a modular organization which significantly relies on outsourcing, Lilly was
hoping to significantly reduce costs while simultaneously increasing the speed with which it was able to
test and bring drugs to market. The downside of modular organizations, as discussed above, is the loss of
So, is Lilly risking its future by outsourcing the core function of researching and testing new drugs? It
turns out that contract research organizations (CROs), which do this kind of research, have been around
for 25 years. However, they have grown substantially in the last decade as large pharmaceutical
companies like Lilly have turned to CROs to do critical testing of potential drugs. In fact, the 1,000+
CROs in business today have combined revenues of nearly $20 billion a year. And who works for them?
Researchers who used to work at large pharmaceutical firms.
And even when CROs inevitably learn that the drugs theyre testing dont have potential (most dont),
that, too, is positive for Lilly. Why? Because it costs less for the CRO to do the testing and you learn the
negative news quicker, thus reducing overall costs on failed drugs. For example, Covance, a Lilly CRO,
determined that a drug to treat alcohol dependence wasnt effective; Lilly was still pleased because it only
cost $8 million to conduct the study, half of what it would have cost Lilly itself to do so. And, the results
were determined a year earlier than Lilly could have produced them.
Management Team Decision
CHINA THE FUTURE OF GENERAL MOTORS?
Purpose
The purpose of this exercise is to have students thoughtfully consider what functions and elements a
company can outsource effectively and how an organization can change its design to take advantage of
new opportunities.
Setting It Up
This activity can be used as group work or as an individual assignment. One way to introduce the activity
is to ask students what a company should do when it struggles in one market but finds success in another.
Should it change its design to focus on the potentials of the new market? Should it try to maintain a hold
in the old market? Should it try to balance out investments in both?
Questions
1. The text describes a number of different approaches concerning organizational structure. Which do
you think would be ideal for GMs success in China? Which of the structures would help GM expand
to other foreign markets?
Students responses will vary, but in their responses they should recognize that there are clear
advantages and disadvantages to each of the departmentalization structures presented in the text.
The most common organizational structure is functional departmentalization. Companies tend to
Chapter 8: Designing Adaptive Organizations P a g e | 13
sales representatives in marketing. Third, with everyone in the same department having similar work
experience or training, communication and coordination are less problematic for departmental
managers. At the same time, functional departmentalization has a number of disadvantages. To start,
cross-department coordination can be difficult. Managers and employees are often more interested in
Product departmentalization organizes work and workers into separate units responsible for
producing particular products or services. One of the advantages of product departmentalization is
that, like functional departmentalization, it allows managers and workers to specialize in one area of
expertise. Unlike the narrow expertise and experiences in functional departmentalization, however,
Customer departmentalization organizes work and workers into separate units responsible for
particular kinds of customers. The primary advantage of customer departmentalization is that it
focuses the organization on customer needs rather than on products or business functions.
Furthermore, creating separate departments to serve specific kinds of customers allows companies to
specialize and adapt their products and services to customer needs and problems. The primary
Matrix departmentalization is a hybrid structure in which two or more forms of
departmentalization are used together. The most common matrix combines the product and functional
forms of departmentalization, but other forms may also be used. Several things distinguish matrix
departmentalization from the other traditional forms of departmentalization. First, most employees
report to two bosses, one from each core part of the matrix. Second, by virtue of their hybrid design,
matrix structures lead to much more cross-functional interaction than other forms of