Please check through page 26 to page 31of pdf CH12. ’12-3 Reengineering’ and based on this part to analysis this case. (you have

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Restructuring Organizations

learning objectives

Describe the most common organization structures used today and understand their strengths and weaknesses.

Present the process of downsizing.

Describe and evaluate the reengineering intervention.

I n this chapter, we begin to examine techno- structural interventions—change programs focusing on the technology and structure of

organizations. Increasing global competition and rapid technological and environmental changes are forcing organizations to restructure them- selves from rigid bureaucracies to leaner, more flexible designs. These new forms of organi- zing are highly adaptive and innovative, but require more sophisticated managerial capabilities to operate successfully. They often result in fewer managers and employees and in streamlined work flows that break down functional barriers.

Interventions aimed at structural design include moving from more traditional ways of dividing the organization’s overall work, such as functional, divisional, and matrix structures, to more integrative and flexible forms, such as process, customer-centric, and network structures. Diagnostic guidelines help

determine which structure is appropriate for particular organizational environments, technologies, and conditions.

Downsizing seeks to reduce costs and bureaucracy by decreasing the size of the organi- zation. This reduction in personnel can be accomp- lished through layoffs, organization redesign, and outsourcing, which involves moving functions that are not part of the organization’s core competence to outside contractors. Successful downsizing is closely aligned with the organization’s strategy.

Reengineering radically redesigns the organi- zation’s core work processes to give tighter linkage and coordination among the different tasks. This workflow integration results in faster, more responsive task performance. Reengineering often is accomplished with new information technology that permits employees to control and coordinate work processes more effectively.

12-1 Structural Design Organization structure describes how the overall work of the organization is divided into subunits and how these subunits are coordinated for task completion. Based on a contin- gency perspective shown in Figure 12.1, organization structures should be designed to fit with at least four factors: the environment, organization size, technology, and

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organization strategy. Organization effectiveness depends on the extent to which its structure is responsive to these contingencies.1

Organizations traditionally have structured themselves into one of three forms: func- tional departments that are task specialized; self-contained divisional units that are ori- ented to specific products, customers, or regions; or matrix structures that combine both functional specialization and self-containment. Faced with accelerating changes in com- petitive environments and technologies, however, organizations increasingly have rede- signed their structures into more integrative and flexible forms. These more recent innovations include process structures that design subunits around the organization’s core work processes, customer-centric structures that focus attention and resources on specific customers or customer segments, and network-based structures that link the organization to other, interdependent organizations. The advantages, disadvantages, and contingencies of the different structures are described below.

12-1a The Functional Structure The most widely used organizational structure in the world today is the basic functional structure, depicted in Figure 12.2. The organization usually is divided into functional units, such as marketing, operations, research and development, human resources, and finance. This structure is based on early management theories regarding specialization, line and staff relations, span of control, authority, and responsibility.2 The major func- tional units are staffed by specialists from those functions. It is considered easier to man- age specialists if they are grouped together under the same head and if the head of the department has been trained and has experience in that particular function.

Table 12.1 lists the advantages and disadvantages of functional structures. On the positive side, functional structures promote specialization of skills and resources by

FIGURE 12.1

Contingencies Influencing Structural Choices

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grouping people who perform similar work and face similar problems. This grouping facilitates communication within departments and allows specialists to share their expertise through standardized processes. It also enhances career development within the specialty, whether it is accounting, finance, engineering, or sales. The functional

FIGURE 12.2

The Functional Structure

TABLE 12.1

Advantages, Disadvantages, and Contingencies of the Functional Structure

ADVANTAGES

• Promotes and develops technical specialization • Supports flexibility of deployment and reduces duplication of scarce resources • Enhances career development for specialists within large departments • Facilitates communication and performance because superiors share expertise with their subordinates • Supports the development of common processes

DISADVANTAGES

• Emphasizes routine tasks, which encourages short time horizons • Fosters narrow perspectives by managers, not business metrics and broader criteria for decision making • Processes cut across functions, which can make coordination and scheduling difficult (the “white

space” problem) • Obscures accountability for overall outcomes; managers and employees may not have a line of

sight to the business • Difficulty developing general management capability

CONTINGENCIES

• Stable and certain environment • Small- to medium-size • Routine technology, interdependence within functions • Goals of efficiency and technical quality

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structure reduces duplication of services because it makes the best use of people and resources.

On the negative side, functional structures tend to promote routine tasks behaviors with a limited orientation. Department members focus on their own tasks, rather than on the organization’s overall value-added processes. This can lead to conflict across functional departments when each group tries to maximize its own performance without considering the performances of other units. Coordination and scheduling among departments, often called the “white space” problem, can be difficult when each emphasizes its own perspec- tive. As shown in Table 12.1, the functional structure tends to work best in small- to medium-size firms in environments that are relatively stable and certain, although there are exceptions. Cisco Systems claims to be one of the largest functionally organized com- panies in the world. These organizations typically have a small number of products or ser- vices, and coordination across specialized units is relatively easy. This structure also is best suited to routine technologies in which there is interdependence within functions, and to organizational goals emphasizing efficiency and technical quality.

12-1b The Divisional Structure The divisional structure represents a fundamentally different way of organizing. Also known as a product or self-contained-unit structure, it was developed at about the same time by General Motors, Sears, Standard Oil of New Jersey (now ExxonMobil), and DuPont.3 It groups organizational activities on the basis of products, services, custo- mers, or geography. All or most of the resources and functions necessary to accomplish a specific objective are set up as a division headed by a product or division manager. For example, General Electric has plants that specialize in making jet engines and others that produce household appliances. Each plant manager reports to a particular division or product vice president, rather than to a manufacturing vice president. In effect, a large organization may set up smaller (sometimes temporary) special-purpose organizations, each geared to a specific product, service, customer, or region. Many organizations use the divisional structure to expand globally. Samsung Electronics, for example, structures self-contained business units around particular product groups that are responsible for their respective products worldwide. Colgate-Palmolive forms self-contained units around geographic regions with each region responsible for the firm’s products in that area. A typical division structure is shown in Figure 12.3. It is interesting to note that the formal structure within a self-contained unit often is functional in nature.

Table 12.2 lists the advantages and disadvantages of divisional structures. These organizations recognize key interdependencies and coordinate resources toward an over- all outcome. This strong outcome orientation ensures accountability and promotes cohe- sion among those contributing to the self-contained unit. These structures provide employees with opportunities for learning new skills and expanding knowledge because workers can move more easily among the different specialties within the unit. As a result, divisional structures are well suited for developing general managers.

Divisional structures do have certain problems. They may not have enough specialized work to use people’s skills and abilities fully. Specialists may feel isolated from their profes- sional colleagues and may fail to advance in their career specialty. The structures may promote allegiance to a specific product, service, customer, or region rather than to the organization’s objectives. They also place multiple demands on people, thereby creating stress.

The divisional structure works best in conditions almost the opposite of those favoring a functional organization, as shown in Table 12.2. The organization needs to be relatively large to support the duplication of resources assigned to the units. Because each unit is

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FIGURE 12.3

The Divisional Structure

TABLE 12.2

Advantages, Disadvantages, and Contingencies of the Divisional Structure

ADVANTAGES

• Recognizes sources of interdepartmental dependencies, reduces complexity • Fosters an orientation toward divisional outcomes and clients • Allows diversification and expansion of skills and training • Ensures accountability by departmental managers and so promotes delegation of authority and

responsibility • Heightens departmental cohesion and involvement in work

DISADVANTAGES

• May use skills and resources inefficiently: coordination, sharing, and learning across divisions is difficult • Limits career advancement by specialists to movements out of their departments • Impedes specialists’ exposure to others within the same specialties; hard to create common processes • Puts multiple-role demands on people and so creates stress • Line of sight is to business and may promote divisional objectives over organization objectives

CONTINGENCIES

• Unstable and uncertain environments • Large-size • Technological interdependence across functions • Goals of product specialization and innovation

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designed to fit a particular niche, the structure adapts well to uncertain conditions. Divi- sional units also help to coordinate technical interdependencies falling across functions and are suited to goals promoting product or service specialization and innovation.

12-1c The Matrix Structure Some organization development (OD) practitioners have focused on maximizing the strengths and minimizing the weaknesses of both the functional and the divisional struc- tures, and this effort has resulted in the matrix structure.4 It superimposes a lateral structure that focuses on product or project coordination on a vertical functional structure, as shown in Figure 12.4. Matrix structures originally evolved in the aerospace industry where chang- ing customer demands and technological conditions caused managers to focus on lateral relationships between highly specialized functions to develop a flexible and adaptable system of resources and procedures, and to achieve a series of project objectives. Matrix structures now are used widely in manufacturing, service, nonprofit, governmental, and professional organizations.5

Every matrix organization contains three unique and critical roles: the top manager (e.g., President or General Manager), who heads and balances the dual chains of com- mand; the matrix bosses (functional and product or program vice presidents), who share subordinates; and a few “two-boss” managers, who report to the two different

FIGURE 12.4

The Matrix Structure

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matrix leaders and manage workers deployed to the specific product or program. In Figure 12.4, only the Software (SW) Manager and Hardware (HW) Manager have two bosses. The SW and HW team members take their day-to-day direction from the software and hardware managers but belong to the Engineering function.

Each of these roles has its own unique requirements. For example, functional matrix leaders are expected to maximize their respective technical expertise within constraints posed by market realities. Two-boss managers, however, must accomplish work within the demands of supervisors who want to achieve technical sophistication on the one hand, and to meet customer expectations on the other. Thus, a matrix organization has more than its matrix structure. It also must be reinforced by matrix performance man- agement systems that get input from both functional and project bosses, by matrix lead- ership behavior that operates comfortably with lateral decision making, and by a matrix culture that fosters open conflict management and a balance of power.6

Matrix structures, like all organization structures, have both advantages and disad- vantages, as shown in Table 12.3. On the positive side, they enable multiple orientations. Specialized, functional knowledge is integrated with a focus on a particular business or project. New products or projects can be implemented quickly by using people flexibly and by moving between product and functional orientations as circumstances demand. Matrix structures allow functional expertise learned in one business or program to be transferred to another product, program, or business. For many people, matrix structures are motivating and exciting.

TABLE 12.3

Advantages, Disadvantages, and Contingencies of the Matrix Structure

ADVANTAGES

• Emphasizes cross-functional product or program focus and integration of functional excellence • Uses people flexibly, because departments maintain reservoirs of specialists • Permits functional learning to be carried between projects or programs • Recognizes and provides mechanisms for dealing with legitimate, multiple sources of power in the

organization • Can adapt to environmental changes by shifting emphasis between project and functional aspects

DISADVANTAGES

• Can be very difficult to introduce without a preexisting supportive management climate • Conflicts between businesses and functions over methods, resources, priorities is always present • Increases role ambiguity, stress, and anxiety by assigning people to more than one department • Without power balancing between product and functional forms, lowers overall performance • Makes inconsistent demands, which may result in unproductive conflicts and short-term crisis

management • May reward political skills as opposed to technical skills

CONTINGENCIES

• Dual focus on unique product demands and technical specialization • Pressure for high information-processing capacity • Pressure for shared resources

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On the negative side, these structures can be difficult to manage. To implement and maintain them requires heavy managerial costs and support. IT managers must deal with the often conflicting tensions between technical excellence and customer responsiveness. When people are assigned to more than one department, there may be role ambiguity and conflict, and overall performance may be sacrificed if there are power conflicts between functional departments and project structures. People can get confused about how the matrix operates, and that can lead to chaos and inefficiencies. To make matrix structures work, organization members need interpersonal and conflict management skills as well as some tolerance for ambiguity.

As shown in Table 12.3, matrix structures are appropriate under three important conditions.7 First, there must be real outside pressures for a dual focus. For example, a matrix structure works well when there are many customers with unique demands, on the one hand, and strong requirements for technical sophistication, on the other. The OD practitioner must work with management to determine whether there is real pres- sure for a dual focus. Managers often agree, without carefully testing the assumption, that both functional and product orientations are important. Second, a matrix organiza- tion is appropriate when the organization must process a large amount of information. Circumstances requiring such capacity are few and include the following: when external environmental demands change unpredictably; when the organization produces a broad range of products or services, or offers those outputs to a large number of different mar- kets; when the relevant technologies evolve quickly; and when there is reciprocal interde- pendence among the tasks in the organization’s technical core. In each case, there is considerable complexity in decision making and pressure on communication and coordi- nation systems. Third, there must be pressures for shared resources. When customer demands vary greatly and technological requirements are strict, valuable human and physical resources are likely to be scarce. The matrix works well under those conditions because it facilitates the sharing of scarce resources. If any one of the foregoing condi- tions is not met, a matrix organization is likely to fail.

12-1d The Process Structure A relatively new logic for structuring organizations is to form multidisciplinary teams around core processes, such as product development, order fulfillment, sales generation, and customer support.8 As shown in Figure 12.5, process-based structures emphasize lateral rather than vertical relationships.9 All functions necessary to produce a product or service are placed in a common unit usually managed by a role labeled a “process owner.” There are few hierarchical levels, and the senior executive team is relatively small, typically con- sisting of the chief executive officer, the chief operating officer, and the heads of a few key support services such as strategic planning, human resources, and finance.

Process structures eliminate many of the hierarchical and departmental boundaries that can impede task coordination and slow decision making and task performance. They reduce the enormous costs of managing across departments and up and down the hierarchy. Process-based structures enable organizations to focus most of their resources on serving customers, both inside and outside the firm.

The use of process-based structures is growing rapidly in a variety of manufacturing and service companies. Typically referred to as “horizontal,” “boundaryless,” or “team- based” organizations, they are used to enhance customer service at such firms as Ameri- can Express Financial Advisors, Healthways, Johnson & Johnson, 3M, Xerox, and General Electric Capital Services. Although there is no one right way to design process- based structures, the following features characterize this new form of organizing:10

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• Processes drive structure. Process-based structures are organized around the three to five key processes that define the work of the organization. Rather than products or functions, processes define the structure and are governed by a “process owner.” Each process has clear performance goals that drive task execution.

• Work adds value. To increase efficiency, process-based structures simplify and enrich work processes. Work is simplified by eliminating nonessential tasks and reducing layers of management, and it is enriched by combining tasks so that teams perform whole processes.

• Teams are fundamental. Teams are the key organizing feature in a process-based structure. They manage everything from task execution to strategic planning, are typically self-managing, and are responsible for goal achievement.

• Customers define performance. The primary goal of any team in a process-based structure is customer satisfaction. Defining customer expectations and designing team functions to meet those expectations command much of the team’s attention. The organization must value this orientation as the primary path to financial performance.

• Teams are rewarded for performance. Appraisal systems focus on measuring team performance against customer satisfaction and other goals, and then provide real recognition for achievement. Team-based rewards are given as much, if not more, weight than is individual recognition.

FIGURE 12.5

The Process Structure

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• Teams are tightly linked to suppliers and customers. Through designated mem- bers, teams have timely and direct relationships with vendors and customers to understand and respond to emerging concerns.

• Team members are well informed and trained. Successful implementation of a process-based structure requires team members who can work with a broad range of information, including customer and market data, financial information, and per- sonnel and policy matters. Team members also need problem-solving and decision- making skills and abilities to address and implement solutions.

Table 12.4 lists the advantages and disadvantages of process-based structures. The most frequently mentioned advantage is intense focus on meeting customer needs, which can result in dramatic improvements in speed, efficiency, and customer satisfaction. Process-based structures remove layers of management, and consequently information flows more quickly and accurately throughout the organization. Because process teams comprise multiple functional specialties, boundaries between departments are removed, thus affording organization members a broad view of the workflow and a clear line of sight between team performance and organization effectiveness. Process-based structures also are more flexible and adaptable to change than are traditional structures.

TABLE 12.4

Advantages, Disadvantages, and Contingencies of the Process-Based Structure

ADVANTAGES

• Clear line of sight focuses resources on customer satisfaction • Improves speed and efficiency, often dramatically • Responds to environmental change and customer requests rapidly • Strong cross-functional collaboration and integration • Develops broad knowledge and increases ability to see total work flow • Enhances employee involvement • Lowers costs because of less overhead structure

DISADVANTAGES

• Changing to this structure can threaten middle managers and staff specialists • Must learn to balance competing demands for fluidity and efficiency • Can be difficult to supervise multiple functions, requires changes in command-

and-control mindsets • Duplicates scarce resources, sharing learnings can be difficult • Requires new skills and knowledge to manage lateral relationships and teams • May take longer to make decisions in teams and result in internal focus • Can be ineffective if wrong processes are identified

CONTINGENCIES

• Uncertain and changing environments • Moderate- to large-size • Nonroutine and highly interdependent technologies • Customer-oriented goals

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A major disadvantage of process structures is the difficulty of changing to this new organizational form. These structures typically require radical shifts in mindsets, skills, and managerial roles—changes that involve considerable time and resources and can be resisted by functional managers and staff specialists. Managers must learn to balance competing demands for organization fluidity and efficiency.11 Moreover, process-based structures may result in expensive duplication of scarce resources and, if teams are not skilled adequately, an overly internal focus and slower decision making as they struggle to define and reach consensus. Finally, implementing process-based structures relies on properly identifying key processes needed to satisfy customer needs. If critical processes are misidentified or ignored altogether, performance and customer satisfaction are likely to suffer.

Table 12.4 shows that process structures are particularly appropriate for highly uncertain environments where customer demands and market conditions are changing rapidly. They enable organizations to manage nonroutine technologies and coordinate workflows that are highly interdependent. Process-based structures generally appear in medium- to large-size organizations having several products or projects. They focus heavily on customer-oriented goals and are found in both domestic and global organizations.

Application 12.1 describes the process-based structure proposed as part of the struc- tural change process at Healthways Corporation.

12-1e The Customer-Centric Structure Closely related to the process-based structure, the customer-centric structure focuses sub- units on the creation of solutions and the satisfaction of key customers or customer groups.12 As shown in Figure 12.7, these customer or market-facing units are supported by other units that develop new products, manufacture components and products, and manage the supply chain. A variety of organizations, including the Lord Corporation, Dow, IBM, and Citibank, have implemented these complex structures. Also known as front–back organizations, these structures excel at putting customer needs at the top of an organization’s agenda.

Galbraith notes that globalization, e-commerce, and the desire for solutions have greatly enhanced the power of the customer to demand organizational structures that service their needs. These new structures highlight the radical differences between product-focused organizations, like the function or divisional structure, and customer- centric organizations as shown in Table 12.5. In a product-centric organization, the goal is to provide customers with the best product possible and to create value by devel- oping new products and innovative features. Product-centric structures have core struc- tural features that include product groups and teams that are measured by product margins. The most central process is new-product development.

Customer-centric structures have a very different look and feel. In a customer- centric structure, the organization develops the best solution for the customer by offering a customized bundle of products, services, support, and education. Their core structures focus attention and resources on customers with market-facing units organized around large individual customers or customer segment teams that attempt to maximize cus- tomer profit and loss. These core units are supported by sophisticated customer relation- ship management processes and integrating mechanisms that link the market-facing units with the support units.

While any one of these differences may seem obvious, a careful look will show that the product-centric dimensions represent important and deeply rooted assumptions in

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1 HEALTHWAYS’ PROCESS STRUCTURE

H ealthways Corporation (HC) (www. healthways.com) is a provider of specialized disease management services to health plans and hospitals. In fiscal year 2002,

HC had revenues of $122 million. The company, founded in 1981 as American Healthcorp (AMHC), originally owned and managed hospi- tals. In 1984 it offered its first disease manage- ment service focused on diabetes. Under the name Diabetes Treatment Centers of America, it worked with hospitals to create “centers of excellence” to improve hospital volumes and lower costs. After going public in 1991, it offered in 1993 its first diabetes management program to health plans—an entirely new customer seg- ment. This shift in customer base was a key event in the company’s history, and two new disease management programs for cardiac and respiratory diseases were offered in 1998 and 1999, respectively. By 2000, hospital revenues, once 10

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