Division of Labor Chapter 9 in the eBook states ‘ linkages show the lines of responsibility through which a supervisor delegates authority to subordinates, over

Chapter 9: Executing Strategy through Organizational

Design

Chapter 9: Executing Strategy through Organizational Design

9.1 Executing Strategy through Organizational Design

9.2 The Basic Building Blocks of Organizational Structure

9.3 Creating an Organizational Structure

9.4 Creating Organizational Control Systems

9.5 Legal Forms of Business

9.6 Conclusion

9.1 Executing Strategy through Organizational Design

Learning Objectives

After reading this chapter, you should be able to understand and articulate answers to the following questions:

1. What are the basic building blocks of organizational structure?

2. What types of structures exist, and what are advantages and disadvantages of each?

3. What is control and why is it important?

4. What are the different forms of control and when should they be used?

5. What are the key legal forms of business, and what implications does the choice of a business form have for organizational structure?

Can Oil Well Services Fuel Success for GE?

General Electric’s logo has changed little since its creation in the 1890s, but the company has grown to become the sixth largest in the United

States.

Wikimedia Commons – public domain.

In February 2011, General Electric (GE) reached an agreement to acquire the well-support division of John Wood Group PLC for $2.8 billion. This was GE’s third acquisition of a company that provides services to oil wells in only five months. In October 2010, GE added the deepwater exploration capabilities of Wellstream Holdings PLC for $1.3 billion. In December 2010, part and equipment maker Dresser was acquired for $3 billion. By spending more than $7 billion on these acquisitions, GE executives made it clear that they had big plans within the oil well services business.

While many executives would struggle to integrate three new companies into their firms, experts expected GE’s leaders to smoothly execute the transitions. In describing the acquisition of John Wood Group PLC, for example, one Wall Street analyst noted, “This is a nice bolt-on deal for GE (Layne, 2011).” In other words, this analyst believed that John Wood Group PLC could be seamlessly added to GE’s corporate empire. The way that GE was organized fueled this belief.

GE’s organizational structure includes six divisions, each devoted to specific product categories: (1) Energy (the most profitable division), (2) Capital (the largest division), (3) Home & Business Solutions, (4) Healthcare, (5) Aviation, and (6) Transportation. Within the Energy division, there are three subdivisions: (1) Oil & Gas, (2) Power & Water, and (3) Energy Services. Rather than having the entire organization involved with integrating John Wood Group PLC, Wellstream Holdings PLC, and Dresser into GE, these three newly acquired companies would simply be added to the Oil & Gas subdivisions within the Energy division.

In addition to the six product divisions, GE also had a division devoted to Global Growth & Operations. This division was responsible for all sales of GE products and services outside the United States. The Global Growth & Operations division was very important to GE’s future. Indeed, GE’s CEO Jeffrey Immelt expected that countries other than the

9.1 Executing Strategy through Organizational Design 276

United States will account for 60 percent of GE’s sales in the future, up from 53 percent in 2010. To maximize GE’s ability to respond to local needs, the Global Growth & Operations was further divided into twelve geographic regions: China, India, Southeast Asia, Latin/South America, Russia, Canada, Australia, the Middle East, Africa, Germany, Europe, and Japan (GE News Center, 2010).

Finally, like many large companies, GE also provided some centralized services to support all its units. These support areas included public relations, business development, legal, global research, human resources, and finance. By having entire units of the organization devoted to these functional areas, GE hoped not only to minimize expenses but also to create consistency across divisions.

Growing concerns about the environmental effects of drilling, for example, made it likely that GE’s oil well services operations would need the help of GE’s public relations and legal departments in the future. Other important questions about GE’s acquisitions remained open as well. In particular, would the organizational cultures of John Wood Group PLC, Wellstream Holdings PLC, and Dresser mesh with the culture of GE? Most acquisitions in the business world fail to deliver the results that executives expect, and the incompatibility of organizational cultures is one reason why.

GE fits a dizzying array of businesses into a relatively simple organizational chart.

Adapted from company document posted at http://www.ge.com/pdf/company/ge_organization_chart.pdf

The word executing used in this chapter’s title has two distinct meanings. These meanings were cleverly intertwined in a quip by John McKay. McKay had the misfortune to be the head coach of a hapless professional football team. In one game, McKay’s offensive unit played particularly poorly. When McKay was asked after the game what he thought of his offensive unit’s execution, he wryly responded, “I am in favor of it.”

In the context of business, execution refers to how well a firm such as GE implements the strategies that executives create for it. This involves the creation and operation of both an appropriate organizational structure and an appropriate organizational control processes. Executives who skillfully orchestrate structure and control are likely to lead their firms to greater levels of success. In contrast, those executives who fail to do so are likely to be viewed by stakeholders such as employees and owners in much the same way Coach McKay viewed his offense: as worthy of execution.

References

GE News Center, GE names vice chairman John Rice to lead GE Global Growth & Operations [Press release].

2010, November 8. GE website. Retrieved from http://www.genewscenter.com/ Press-Releases/GE-Names-Vice-

Chairman-John-Rice-to-Lead-GE-Global-Growth-Operations-2c8a.aspx.

Layne, R. 2011, February 14. GE agrees to buy $2.8 billion oil-service unit; shares surge. Bloomsberg

277 Mastering Strategic Management

Businessweek. Retrieved from http://www.businessweek.com/news/2011-02-14/ge-agrees-to-buy-2-8-billion-oil-

service-unit-shares-surge.html.

9.1 Executing Strategy through Organizational Design 278

9.2 The Basic Building Blocks of Organizational Structure

Table 9.1 The Building Blocks of Organizational Structure

Legendary football coach Vince Lombardi once noted, “The achievements of an organization are the results of

the combined effort of each individual.” Understanding how people can be most efficiently organized is the basis

for modern management thought, and we illustrate the building blocks of organizational structure below.

Division of labor is a process of splitting up a task into a series of smaller tasks, each of which is performed by a specialist. In ancient Greece, historian Xenophon wrote about the division of labor in shoe making: one person cut out the shoes, another sewed the uppers together, and a third person assembled the parts.

An organizational chart is a diagram that depicts a firm’s structure.

Do you know what happens each year on the Wednesday of the last full week of April? It’s Administrative Professionals’ Day. Savvy workers mark this day with generosity. The reason involves informal linkages, which are unofficial relationships such as friendships that do not appear in organizational charts. Administrative professionals such as secretaries tend to be well informed about both policies and office politics. So keep them on your side!

Vertical linkages tie supervisors and subordinates together. These linkages show the lines of responsibility through which a supervisor delegates authority to subordinates, oversees their activities, evaluates their performance, and guides them toward improvement.

Horizontal linkages are formal relationships between equals in an organization. They often take the form of committees and task forces.

Employees may receive conflicting guidance about how to do their jobs if they work in a situation where multiple bosses are present. This problem can be avoided by following the unity of command principle, which states that each person should only report directly to one supervisor.

Learning Objectives

1. Understand what division of labor is and why it is beneficial.

2. Distinguish between vertical and horizontal linkages and know what functions each fulfills in an organizational structure.

Division of Labor

General Electric (GE) offers a dizzying array of products and services, including lightbulbs, jet engines, and loans.

One way that GE could produce its lightbulbs would be to have individual employees work on one lightbulb at a

time from start to finish. This would be very inefficient, however, so GE and most other organizations avoid this

approach. Instead, organizations rely on division of labor when creating their products (Table 9.1 “The Building

Blocks of Organizational Structure”). Division of labor is a process of splitting up a task (such as the creation of

lightbulbs) into a series of smaller tasks, each of which is performed by a specialist.

Table 9.2 Hierarchy of Authority

We illustrate one of the oldest recorded stories that is relevant to the design of modern organizations below.

After fleeing Egypt, Moses found himself as the sole judge of the entire Hebrew population. This was a daunting task because estimates suggest the population may’ve exceeded on million people.

Moses’s father-in-law Jethro warned Moses that he would wear himself out if he tried to handle such a heavy load alone.

Jethro offered Moses some practical advice. He told Moses that he should teach the people decrees and laws in an effort to minimize trouble and act as an example to demonstrate how the people live and the duties they were to perform.

Rather than handling all judging himself, Moses should appoint capable and trustworthy officials over groups of thousands, hundreds, fifties, and tens. These men would serve as judges for the people at all times, and only the most difficult cases would be brought to Moses.

Key Takeaway

This is perhaps the first recorded example of a clear hierarchy of authority—an arrangement of individuals based

on rank. A similar idea is used today in the U.S. justice system where there are lower courts for easy-to-resolve

cases and the Supreme Court only handles the most difficult cases.

The leaders at the top of organizations have long known that division of labor can improve efficiency. Thousands

of years ago, for example, Moses’s creation of a hierarchy of authority by delegating responsibility to other judges

offered perhaps the earliest known example (Table 9.2 “Hierarchy of Authority”). In the eighteenth century, Adam

Smith’s book The Wealth of Nations quantified the tremendous advantages that division of labor offered for a pin

factory. If a worker performed all the various steps involved in making pins himself, he could make about twenty

pins per day. By breaking the process into multiple steps, however, ten workers could make forty-eight thousand

pins a day. In other words, the pin factory was a staggering 240 times more productive than it would have been

without relying on division of labor. In the early twentieth century, Smith’s ideas strongly influenced Henry Ford

and other industrial pioneers who sought to create efficient organizations.

Division of labor allowed eighteenth-century pin factories to dramatically increase their efficiency.

While division of labor fuels efficiency, it also creates a challenge—figuring out how to coordinate different

tasks and the people who perform them. The solution is organizational structure, which is defined as how

tasks are assigned and grouped together with formal reporting relationships. Creating a structure that effectively

9.2 The Basic Building Blocks of Organizational Structure 280

coordinates a firm’s activities increases the firm’s likelihood of success. Meanwhile, a structure that does not

match well with a firm’s needs undermines the firm’s chances of prosperity.

Division of labor was central to Henry Ford’s development of assembly lines in his automobile factory. Ford noted, “Nothing is

particularly hard if you divide it into small jobs.”

Wikimedia Commons – public domain.

Vertical and Horizontal Linkages

Most organizations use a diagram called an organizational chart to depict their structure. These organizational

charts show how firms’ structures are built using two basic building blocks: vertical linkages and horizontal

linkages. Vertical linkages tie supervisors and subordinates together. These linkages show the lines of

responsibility through which a supervisor delegates authority to subordinates, oversees their activities, evaluates

their performance, and guides them toward improvement when necessary. Every supervisor except for the

person at the very top of the organization chart also serves as a subordinate to someone else. In the typical

business school, for example, a department chair supervises a set of professors. The department chair in turn is a

subordinate of the dean.

Most executives rely on the unity of command principle when mapping out the vertical linkages in an

organizational structure. This principle states that each person should only report directly to one supervisor. If

employees have multiple bosses, they may receive conflicting guidance about how to do their jobs. The unity of

command principle helps organizations to avoid such confusion. In the case of General Electric, for example, the

head of the Energy division reports only to the chief executive officer. If problems were to arise with executing

the strategic move discussed in this chapter’s opening vignette—joining the John Wood Group PLC with GE’s

Energy division—the head of the Energy division reports would look to the chief executive officer for guidance.

Horizontal linkages are relationships between equals in an organization. Often these linkages are called

281 Mastering Strategic Management

committees, task forces, or teams. Horizontal linkages are important when close coordination is needed across

different segments of an organization. For example, most business schools revise their undergraduate curriculum

every five or so years to ensure that students are receiving an education that matches the needs of current

business conditions. Typically, a committee consisting of at least one professor from every academic area (such

as management, marketing, accounting, and finance) will be appointed to perform this task. This approach helps

ensure that all aspects of business are represented appropriately in the new curriculum.

Committee meetings can be boring, but they are often vital for coordinating efforts across departments.

Yohann Legrand – Meeting – CC BY-SA 2.0.

Organic grocery store chain Whole Foods Market is a company that relies heavily on horizontal linkages. As

noted on their website, “At Whole Foods Market we recognize the importance of smaller tribal groupings to

maximize familiarity and trust. We organize our stores and company into a variety of interlocking teams. Most

teams have between 6 and 100 Team Members and the larger teams are divided further into a variety of sub-

teams. The leaders of each team are also members of the Store Leadership Team and the Store Team Leaders are

members of the Regional Leadership Team. This interlocking team structure continues all the way upwards to

the Executive Team at the highest level of the company (Mackey, 2010).” This emphasis on teams is intended to

develop trust throughout the organization, as well as to make full use of the talents and creativity possessed by

every employee.

Informal Linkages

Informal linkages refer to unofficial relationships such as personal friendships, rivalries, and politics. In the long-

running comedy series The Simpsons, Homer Simpson is a low-level—and very low-performing—employee at

a nuclear power plant. In one episode, Homer gains power and influence with the plant’s owner, Montgomery

Burns, which far exceeds Homer’s meager position in the organization chart, because Mr. Burns desperately wants

to be a member of the bowling team that Homer captains. Homer tries to use his newfound influence for his own

9.2 The Basic Building Blocks of Organizational Structure 282

personal gain and naturally the organization as a whole suffers. Informal linkages such as this one do not appear

in organizational charts, but they nevertheless can have (and often do have) a significant influence on how firms

operate.

Key Takeaway

• The concept of division of labor (dividing organizational activities into smaller tasks) lies at the heart of the study of organizational structure. Understanding vertical, horizontal, and informal linkages helps managers to organize better the different individuals and job functions within a firm.

Exercises

1. How is division of labor used when training college or university football teams? Do you think you could use a different division of labor and achieve more efficiency?

2. What are some formal and informal linkages that you have encountered at your college or university? What informal linkages have you observed in the workplace?

References

Mackey, John’s blog. 2010, March 9. Creating the high trust organization [Web blog post]. Retrieved from

http://www2.wholefoodsmarket.com/blogs/jmackey/2010/03/09/creating-the-high-trust-organization/.

283 Mastering Strategic Management

9.3 Creating an Organizational Structure

Learning Objectives

1. Know and be able to differentiate among the four types of organizational structure.

2. Understand why a change in structure may be needed.

Within most firms, executives rely on vertical and horizontal linkages to create a structure that they hope will

match the needs of their firm’s strategy. Four types of structures are available to executives: (1) simple, (2)

functional, (3) multidivisional, and (4) matrix (Table 9.3 “Common Organizational Structures”). Like snowflakes,

however, no two organizational structures are exactly alike. When creating a structure for their firm, executives

will take one of these types and adapt it to fit the firm’s unique circumstances. As they do this, executives must

realize that the choice of structure will influences their firm’s strategy in the future. Once a structure is created, it

constrains future strategic moves. If a firm’s structure is designed to maximize efficiency, for example, the firm

may lack the flexibility needed to react quickly to exploit new opportunities.

Table 9.3 Common Organizational Structures

Executives rely on vertical and horizontal linkages to create a structure that they hope will match the firm’s

needs. While no two organizational structures are exactly alike, four general types of structures are available to

executives: simple functional, multidivisional, and matrix.

Simple Strucutre

Simple structures do not rely on formal systems of division of labor, and organizational charts are not generally needed. If the firm is a sole proprietorship, one person performs all of the tasks that the organization needs to accomplish. Consequently, this structure is common for many small businesses.

Functional Structure

Within a functional structure, employees are divided into departments that each handles activities related to a functional area of the business, such as marketing, production, human resources, information technology, and customer service.

Multidivisional Structure

In this type of structure, employees are divided into departments based on product areas and/or geographic regions. General Electric, for example, has six product divisions: Energy, Capital, Home & Business Solutions, Healthcare, Aviation, and Transportation.

Matrix Structure

Firms that engage in projects of limited duration often use a matrix structure where employees can be put on different teams to maximize creativity and idea flow. As parodied in the move Office Space, this structure is common in high tech and engineering firms.

Simple Structure

Many organizations start out with a simple structure. In this type of structure, an organizational chart is usually

not needed. Simple structures do not rely on formal systems of division of labor (Table 9.4 “Simple Structure”).

If the firm is a sole proprietorship, one person performs all the tasks the organization needs to accomplish. For

example, on the TV series The Simpsons, both bar owner Moe Szyslak and the Comic Book Guy are shown

handling all aspects of their respective businesses.

Table 9.4 Simple Structure

Most small businesses begin with a simple structure where one person or a small set of people share the tasks

needed to accomplish the firm’s goals with relatively little formalized division of labor. We illustrate a number of

businesses that commonly rely upon a simple structure below.

Need a few dollars to tide you over? You may want to pawn your rare coin collection. The pawn shop’s simple structure will mean that the same person values your coins, decides how much money you can borrow, and writes up your paperwork.

The reality show Miami Ink illustrates how a tattoo parlor’s simple structure governs a colorful set of tattoo artists who create body art for their patrons.

Architects often also act as marketers and accountants when drafting their small business plans.

Bait shop owners generally do not dive deep into their pockets to pay for additional personnel as many are owner operated.

When a dry cleaner is family owned as many are, all members of the family pitch in as needed to clean clothing and wait on customers.

There is flexibility in the management of many yoga studios given the laid back management style often embraced.

Instrument dealers may create beautiful music, but they rarely create complex organizational structures.

“Bridezillas” are an occupational hazard for bridal shops, but these shops are generally able to avoid the complexity associated with other organizational structures.

There is a good reason most sole proprietors do not bother creating formal organizational charts.

If the firm consists of more than one person, tasks tend to be distributed among them in an informal manner

rather than each person developing a narrow area of specialization. In a family-run restaurant or bed and breakfast,

for example, each person must contribute as needed to tasks, such as cleaning restrooms, food preparation, and

serving guests (hopefully not in that order). Meanwhile, strategic decision making in a simple structure tends to

be highly centralized. Indeed, often the owner of the firm makes all the important decisions. Because there is little

emphasis on hierarchy within a simple structure, organizations that use this type of structure tend to have very few

rules and regulations. The process of evaluating and rewarding employees’ performance also tends to be informal.

285 Mastering Strategic Management

The informality of simple structures creates both advantages and disadvantages. On the plus side, the flexibility

offered by simple structures encourages employees’ creativity and individualism. Informality has potential

negative aspects, too. Important tasks may be ignored if no one person is specifically assigned accountability for

them. A lack of clear guidance from the top of the organization can create confusion for employees, undermine

their motivation, and make them dissatisfied with their jobs. Thus when relying on a simple structure, the owner

of a firm must be sure to communicate often and openly with employees.

Functional Structure

As a small organization grows, the person in charge of it often finds that a simple structure is no longer adequate

to meet the organization’s needs. Organizations become more complex as they grow, and this can require more

formal division of labor and a strong emphasis on hierarchy and vertical links. In many cases, these firms evolve

from using a simple structure to relying on a functional structure.

Table 9.5 Functional Structure

Functional structures rely on a division of labor whereby groups of people handle activities related to a specific

function of the overall business. We illustrate functional structures in action within two types of organizations that

commonly use them.

Grocery Store Functions Spa Functions

Grocery stockers often work at night to make sure shelves stay full during the day.

Some spa employees manicure fingernails, a practice that is over four thousand years old. Many also provide pedicures, a service whose popularity has nearly doubled in the past decade.

Pharmacists’ specialized training allows them to command pay that can exceed $50 an hour.

Compared to other spa functions, little training is required of a tanning bed operator–although the ability to tell time may help.

Bakers wake up early to give shoppers their daily bread.

Almost anyone can buy a shotgun or parent a child without any training, but every state requires a license in order to cut hair.

Bagging groceries requires a friendly personality as well as knowing that eggs should not go on the bottom.

Cucumber masks are usually applied by a skin care specialist who has taken a professional training program.

Folks that work checkout aisles should be trusted to handle cash.

The license required of massage therapists in many states ensures that spa visits end happily.

The creation of produce, deli, and butcher departments provides an efficient way to divide a grocery store physically as well as functionally.

Within a functional structure, employees are divided into departments that each handle activities related to a

functional area of the business, such as marketing, production, human resources, information technology, and

customer service (Table 9.5 “Functional Structure”). Each of these five areas would be headed up by a manager

who coordinates all activities related to her functional area. Everyone in a company that works on marketing

the company’s products, for example, would report to the manager of the marketing department. The marketing

managers and the managers in charge of the other four areas in turn would report to the chief executive officer.

9.3 Creating an Organizational Structure 286

An example of a functional structure

Using a functional structure creates advantages and disadvantages. An important benefit of adopting a

functional structure is that each person tends to learn a great deal about his or

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