Module 7 Critical Thinking Exercise Chapter 11?describes the role of culture in the implementation of strategy.? ?The text uses organizational design of?large

Organizational Structure

Determines how efforts of individuals and teams are orchestrated.

How resources are distributed.

Includes four building blocks:

Specialization.

Formalization.

Centralization.

Hierarchy.

Specialization

Describes the degree to which a task is divided into separate jobs.

Larger firms: high degree of specialization.

Smaller ventures: low degree of specialization.

Requires a tradeoff between depth and breadth of knowledge.

An accountant for a large firm may specialize in only one area (e.g., internal audit), whereas an accountant in a small firm needs to be more of a generalist and take on many different things (e.g., internal auditing, plus payroll, accounts receivable, financial planning, and taxes).

Formalization

The extent to which employee behavior is guided by rules and procedures.

Pros:

Ensures consistent and predictable results.

Safety and reliability.

Cons:

Slower decision making.

Reduced innovation.

Hindered customer service.

Centralization

The degree to which decision making is concentrated at the top of the organization.

Correlates to slow response time and reduced customer satisfaction.

Affects strategic planning:

Top-down strategic planning takes place in highly centralized organizations.

Planned emergence is found in more decentralized organizations.

Whether centralization or decentralization is more effective depends on the specific situation. During the Gulf of Mexico oil spill in 2010, BP’s response was slow and cumbersome because key decisions were initially made in its UK headquarters and not onsite. In this case, centralization reduced response time and led to a prolonged crisis.

In contrast, the FBI and the CIA were faulted in the 9/11 Commission report for not being centralized enough.1 The report concluded that although each agency had different types of evidence that a terrorist strike in the United States was imminent, their decentralization made them unable to put together the pieces to prevent the 9/11 attacks.

Hierarchy

The formal, position-based reporting lines:

Who reports to whom.

Span of control:

The number of employees who directly report to a manager.

In tall organizational structures, the span of control is narrow. In flat structures, the span of control is wide, meaning one manager supervises many employees. In recent years, firms have de-layered by reducing the headcount (often middle managers), making the organizations flatter and more nimble.

Mechanistic vs. Organic Organizations

Mechanistic Organization:

Much specialization and formalization.

Tall hierarchies.

Centralized decision making.

Organic Organization:

Little specialization and formalization.

Flat organizational structure.

Decentralized decision making.

Exhibit 11.3 summarizes the key features of mechanistic and organic structures.

Firm Strategy and Structure

The relationship between these is interdependent and dynamic.

Strategy and structure impact a firm’s performance.

Changes over time as the firm grows in size and complexity.

Different firm stages require different structures.

Successful new ventures generally grow first by increasing sales, then by obtaining larger geographic reach, and finally by diversifying through vertical integration and entering into related and unrelated businesses.

Changing Organizational Structures and Increasing Complexity as Firms Grow

Exhibit 11.4

Simple Structure

Used by small firms with low organizational complexity.

The founders usually:

Make all the strategic decisions.

Run day-to-day operations.

Professional managers and sophisticated systems are not usually in place.

Low degree of formalization and specialization.

Examples include entrepreneurial ventures such as Facebook in 2004, when the startup operated out of Mark Zuckerberg’s dorm room, and professional service firms such as smaller advertising, consulting, accounting, and law firms, as well as family-owned businesses.

Functional Structure

Employees are grouped into functional areas:

Based on domain expertise.

Often correspond to distinct stages in the value chain.

Leaders of functional areas report to the CEO.

The CEO coordinates and integrates the work of each function.

Typical Functional Structure

Exhibit 11.5

Benefits of Functional Structure and Business Strategy

A functional structure works when a firm has a narrow focus and small geographic footprint.

Cost Leadership Strategy:

Nurturing and upgrading core competencies.

Differentiation Strategy:

Incorporate decentralized decision making.

Foster innovation and creativity.

Blue Ocean Strategy:

Firm should be efficient and flexible.

Focus is on controlling costs and fostering creativity.

Cost Leadership Strategy:

Using a functional structure allows the cost leader to:

Nurture and constantly upgrade core competencies.

Differentiation Strategy:

Using a functional structure allows a differentiator to:

Incorporate decentralized decision making.

Foster and incentivize continuous innovation and creativity.

Blue Ocean Strategy:

To implement a functional blue ocean strategy:

The firm must be both efficient and flexible.

The firm must control costs & foster creativity.

Mitigate the disadvantages of this approach.

Ambidextrous Organizations

Ambidexterity:

A firm’s ability to address trade-offs over time.

Encourages strategic leaders to balance exploitation with exploration.

Exploitation:

Applying current knowledge to enhance firm performance in the short term.

Exploration:

Searching for new knowledge that may enhance a firm’s future performance.

Disadvantages of Functional Structure

Suboptimal communication across departments.

Solution: cross-functional teams.

Cannot effectively address greater diversification.

This is needed to ensure firm growth.

Firms encountering this adopt a different structure.

Multidivisional Structure

Used as a firm diversifies products and geography.

Each strategic business unit (SBU):

Has profit-and-loss (P&L) responsibility.

Operated independently.

Led by a unique CEO who is responsible for SBU strategy and operations.

Widely adopted organizational structure.

Zappos is an SBU under Amazon, which employs a multidivisional structure. Also, W.L. Gore uses a multidivisional structure to administer its differentiation and related diversification strategies. It has four product divisions (electronic products, industrial products, medical products, and fabrics division) with manufacturing facilities in the United States, China, Germany, Japan, and Scotland, and business activities in 30 countries across the globe.

Typical Multidivisional (M-Form) Structure

Exhibit 11.7

M-Form and Corporate Strategy

Related Diversification:

Cooperative M-Form.

Centralized decision making.

Integrated at corporate headquarters.

Co-opetition among SBUs.

Unrelated Diversification:

Competitive M-Form.

Decentralized decision making.

Low level of integration at corporate headquarters.

Competition among SBUs for resources.

Co-opetition—competition and cooperation at the same time.

Disadvantages of the Multidivisional Structure

Adds another layer of corporate hierarchy.

Bureaucracy, red tape, & duplication of efforts.

Slower decision making.

SBUs competing.

Politics and turf wars over resources.

Cooperation is still needed at the same time.

In some instances, spinning out SBUs to make them independent companies is beneficial. The BCG growth-share matrix helps corporate executives when making these types of decisions. In the last few years when owned by eBay, PayPal outperformed its parent company. PayPal’s executives (and investors) were tired of subsidizing eBay’s stagnant business. Investors also liked separating eBay and PayPal, giving it a valuation that is estimated to be as high as $100 billion; eBay’s standalone valuation is about $35 billion.

Matrix Structure

Leverages SBU (M-form) benefits:

Domain expertise.

Economies of scale.

Efficient processing of information.

Also leverages organizational structure benefits:

Responsiveness.

Decentralized focus.

Typical Matrix Structure with Geographic and SBU Divisions

Exhibit 11.9

Matrix Structure and Global Strategy

This structure fits well with a transnational strategy.

International: functional structure.

Multi-domestic: multi-divisional structure.

Global standardization: multi-divisional structure.

Transnational: global matrix structure.

Exhibit 11.11 shows how different global strategies best match with different organizational structures.

Disadvantages of the Matrix Structure

Difficult to implement.

Organizational complexity.

Administrative costs.

Unclear reporting structures.

Accountability can be undermined.

Employees can have trouble reconciling goals.

Principal-agent problems.

Slower decision-making.

The development pattern of how organizational structures tend to change in time as firms grow in size and complexity is fairly predictable: Starting with a simple structure, then moving to functional structure, and finally implementing a multidivisional or matrix structure.

Organizing for Innovation

Closed Innovation:

Products developed internally.

Costly and time consuming.

Open Innovation:

Ideas and innovation also arise from external sources.

Customers, suppliers, universities, etc.

Leverages licensing agreements, strategic alliances, joint ventures, and acquisitions.

Several factors led to a shift in the knowledge landscape from closed innovation to open innovation. They include:

▪ The increasing supply and mobility of skilled workers.

▪ The exponential growth of venture capital.

▪ The increasing availability of external options (such as spinning out new ventures) to commercialize ideas that were previously shelved or insource promising ideas and inventions.

▪ The increasing capability of external suppliers globally.

Closed Innovation vs. Open Innovation

Exhibit 11.12

Source:. Adapted from H. Chesbrough (2003), “"The Era of Open Innovation,” MIT Sloan Management Review, Spring: 35–41.

Formal and Informal Building Blocks of Organizational Design

Exhibit 11.14

Organizational Culture

Shared values and norms of an organization’s members.

Values: what is considered important.

Norms: appropriate attitudes and behaviors in day-to-day work and interactions.

Expressed through artifacts:

Physical space (cubicles).

Symbols (clothing).

Events (celebrations).

Vocabulary (stories that are told).

Artifacts include elements such as the design and layout of physical space (e.g., cubicles or private offices), symbols (e.g., the type of clothing worn by employees), vocabulary, what stories are told, what events are celebrated and highlighted, and how they are celebrated (e.g., a formal dinner versus a casual barbecue when the firm reaches its sales target).

The Elements of Organizational Culture: Values, Norms, and Artifacts

Exhibit 11.15

Where Do Organizational Cultures Come From?

Founder imprinting.

Examples: Steve Jobs, Walt Disney, Michael Dell, Oprah Winfrey, Martha Stewart, Bill Gates.

Beware of groupthink, when individuals don’t challenge a leader’s opinion.

From company values.

Values are usually linked to a reward system.

Founder imprinting: Steve Jobs (Apple), Walt Disney (Disney), Michael Dell (Dell), Sergey Brin and Larry Page (Google), Oprah Winfrey (Harpo Productions and OWN, the Oprah Winfrey Network), Bill Gates (Microsoft), Larry Ellison (Oracle), Ralph Lauren (Polo Ralph Lauren), Martha Stewart (Martha Stewart Living Omnimedia), and Herb Kelleher (Southwest Airlines).

Walmart founder Sam Walton personified the retailer’s cost-leadership strategy. At one time the richest man in America, Sam Walton drove a beat-up Ford pickup truck, got $5 haircuts, went camping for vacations, and lived in a modest ranch home in Bentonville, Arkansas. Everything Walton did was consistent with the low-cost strategy.

How Does Organizational Culture Change?

When the environment changes:

A firm must hone, refine, and upgrade to ensure a core rigidity doesn’t emerge.

New leadership changes in strategy and structure.

When the original core competencies turn into a liability.

GM’s bureaucratic culture, combined with its innovative M-form structure, was once hailed as the key to superior efficiency and management. However, that culture became a liability when the external environment changed following the oil-price shocks in the 1970s and the entry of Japanese carmakers into the United States. As a consequence, GM’s strong culture led to organizational inertia. This resulted in a failure to adapt to changing customer preferences for more fuel-efficient cars, and it prevented higher quality and more innovative designs. GM lost customers to foreign competitors that offered these features.

Culture Can Help a Firm’s Competitive Advantage If

It makes a positive contribution to economic value creation.

It passes the VRIO principles:

Valuable, rare, difficult to imitate, the firm must be organized to capture value.

It can adapt as the business evolves.

It is best to develop a strong and strategically relevant culture in the first few years of a firm’s existence. Strategy scholars have documented that the initial structure, culture, and control mechanisms established in a new firm can be a significant predictor of later success.

Strategic Control and Reward Systems

Internal-governance mechanisms are put in place to align the incentives of:

Principals (shareholders).

Agents (employees).

Allow managers to:

Specify goals.

Measure progress.

Provide performance feedback.

Input Controls

Seeks to define and direct employee behavior through:

Explicit, codified rules.

Standard operating procedures.

Considered before employees make business decisions.

Example: a budget.

Managers allocate money to R&D projects before they begin.

The use of budgets is key to input controls. Managers set budgets before employees define and undertake the actual business activities. For example, managers decide how much money to allocate to a certain R&D project before the project begins. In diversified companies using the M-form, corporate headquarters determines the budgets for each division. Public institutions, like some universities, also operate on budgets that must be balanced each year. Their funding often depends to a large extent on state appropriations and thus fluctuates depending on the economic cycle. During recessions, budgets tend to be cut, and they expand during boom periods.

Output Controls

Guide employee behavior by:

Defining expected results (outputs), but:

Leaving the means to those results open to individual employees, groups, or SBUs.

Intrinsic motivation is highest when an employee has:

Autonomy (about what to do).

Mastery (how to do it).

Purpose (why to do it).

Today, 3M is best known for its adhesives and other consumer and industrial products. But its full name reflects its origins: 3M stands for Minnesota Mining and Manufacturing Company. Over time, 3M has relied on the ROWE framework and has morphed into a highly science-driven innovation company. At 3M, employees are encouraged to spend 15 percent of their time on projects of their own choosing. If any of these projects look promising, 3M provides financing through an internal venture capital fund and other resources to further develop their commercial potential. In fact, several of 3M’s flagship products, including Post-it Notes and Scotch Tape, were the results of serendipity. To foster continued innovation, moreover, 3M requires each of its divisions to derive at least 30 percent of their revenues from products introduced in the past four years.

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Accessibility Content: Text Alternatives for Images

Organizational Inertia and the Failure of Established Firms to Respond to Shifts in the External or Internal Environments Text Alternate

This image shows a large oval, which contains four smaller ovals:

1. Mastery of, and fit with, the current environment.

2. Success, usually measured by financial measurements.

3. Structures, measures, and systems to accommodate and manage size.

4. A resulting organizational inertia that tends to minimize opportunities and challenges created by shifts in the internal and external environment.

There are shorter internal arrows titled "External Shifts / PESTEL Factors" which indicate pressures on the firm. A square on the inside of the model is titled "Internal Shifts" which includes the sub-bullets of accelerated growth, a change in the business model, entry into new markets, a change in the top management team (TMT), or mergers and acquisitions.

Changing Organizational Structures and Increasing Complexity as Firms Grow Text Alternate

This an important evolutionary pattern.

Small firm size, low organizational complexity equals simple structure.

Medium firm size, medium organizational complexity equals functional structure.

Large firm size, high organizational complexity equals multidivisional structure or matrix structure.

As a firm diversifies into different product lines and geographies, it generally implements a multidivisional or a matrix structure.

Typical Functional Structure Text Alternate

This image demonstrates that while work in a functional structure tends to be specialized, it is centrally coordinated by the CEO. All positions in this image report to the CEO. In this image, it shows the positions as being Research and Development, Engineering and Manufacturing, Marketing, Sales and Service, Human Resources, and Finance and Accounting.

A functional structure allows for an efficient top-down and bottom-up communication chain between the CEO and the functional departments, and thus relies on a relatively flat structure.

Typical Multidivisional (M-Form) Structure Text Alternate

At the top of this image is a box which says “Board of Directors.” Beneath this box are three boxes named Corporate research and development, President, and Corporate headquarters Staff. Corporate research and development and Corporate headquarters Staff report to the President.

Beneath the President are four C E O S B U boxes. Under each C E O is a structure that works for that S B U. They are different and not similar.

Corporations may use S B Us to organize around different businesses and product lines or around different geographic regions. Each S B U represents a self-contained business with its own hierarchy and organizational structure.

Typical Matrix Structure with Geographic and SBU Divisions Text Alternate

In this image, there are geographic divisions (North America, South America, Europe, Middle East & Africa, and Asia) are listed on the left side of the image in a column. Across the top in a row are the words C E O S B U 1, C E O S B U 2, C E O S B U 3 and C E O S B U 4. All of these boxes report to a top box named President Corporate Headquarters.

In the middle of the graph, at the intersection of Europe and C E O S B U 2 is listed, “Employee in France reports to Europe G M and C E O of S B U 2 (example Health Care).

Closed Innovation vs. Open Innovation Text Alternate

This image depicts the closed and open innovation models. In the closed innovation model (Panel A), the firm is conducting all research and development in-house, using a traditional funnel approach. The boundaries of the firm are impenetrable. Outside ideas and projects cannot enter, nor does the firm allow its own research ideas and development projects to leave the firm. Firms in the closed innovation model are extremely protective of their intellectual property. This not only allows the firm to capture all the benefits from its own research and development, but also prevents competitors from benefiting from it.

In the open innovation model, in contrast, a company attempts to commercialize both its own ideas and research from other firms. It also finds external alternatives such as spin-out ventures or strategic alliances to commercialize its internally developed research and development. The boundary of the firm has become porous, allowing the firm to spin out some research and development projects while insourcing other promising projects. Companies using an open innovation approach realize that great ideas can come from both inside and outside the company. Significant value can be had by commercializing external research and development and letting others commercialize internal research and development that does not fit with the firm’s strategy. The focus is on building a more effective business model to commercialize both internal and external research and development, rather than focusing on being first to market.