Organizational Designs Chapter 13 1 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible.

(c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible website, in whole or in part.

1

Organizational DesignsChapter 13


2

Introduction


3

The Animal Refiner

Risk management today is so complex and so important for Tyson’s competitive success that the

company has changed its structure to better oversee those risks.


4

What’s Next

This chapter is about business organizations, why they take the shapes they do, and how they

change with their environments.


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ORGANIZATIONAL ACTIVITIES, CENTRALIZATION, ANDDECENTRALIZATION


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It Takes More than a MousetrapContrary to the proverb, if you want to bring the

world to your door you need to do more than invent a better mousetrap. This chapter asks who in an

organization would best be given authority to make different decisions, and why. Doing so requires

understanding how information originates within a firm, how it is transferred, and who can put it to

the most effective use. The firm does not just process material, financial, and human inputs. It

also processes information, and its ability to do this well depends on its organizational design.


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CentralizationSome decisions will best be centralized, that is, one

person(department) uses information from different sources to set a policy that may affect those who provided the

information.Decisions are better made centrally under the

following conditions:

1. They require information from more than one source.

2. They require decision-making skills (e.g., knowledge of forecasting techniques) that those who produced the information do not have.

3. The decision maker’s incentives are aligned with those of the principals, in this case the firm’s shareholders.


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Centralization - Transmitting Information and Commands

It seems obvious that better information makes for better performance, but what is meant by good information is far less obvious. Exactly who has

that data and how it gets to the decision maker are both critical questions in organizational design.


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Decentralization - Management

The second industrial revolution marked the emergence of management as a defined

occupation. Organizational design is the study of who can best decide what, and the best design depends on the organization’s purpose—what it

produces and what markets it operates in.


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Decentralization - Principals and Agents Everywhere

Many members of an organization are simultaneouslyprincipals attempting to obtain performance from subordinates and agents expected to perform for

their supervisors. Contracts determine methods of payment that a principal can use to elicit effort from

an agent.


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ORGANIZATIONAL LINKAGES


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A “Tree” without Roots or Branches

What sort of business might have an organization chart like the one depicted here? It consists of a single row of Xs that represent individuals. No

important authority relationships are shown above or below them.

One possibility is that it describes a group medical (or possibly a law or accounting) practice.


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A Simple Hierarchy

Limits on the abilities of individuals to process information suggest a basic principle: Put the

decision where the information is. If a person at a low level of the organization has all of the

information that is relevant to a decision, assigning responsibility for that decision to person at a higher level will not improve the quality of the decision that

gets made.


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A Simple Hierarchy

In this simple organization there are two possible reasons to keep A and B separate rather than combine them. First, they might provide HQ with dissimilar information like financial data and sales statistics. Second, separate paths to A and B allow HQ to avoid overloading each manager with irrelevant information and makes it more likely that orders will be sent to those best positioned to carry them out as HQ wishes.


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U-FORM AND M-FORM ORGANIZATIONS


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Functionalization and DivisionalizationThere are two broad ways to categorize the activities that take place in A and B. The first is functionalization, where each box contains only specialists in some

aspect of the firm’s operations. Box A might be the purchasing department, responsible for buying all of

the firm’s inputs. Box B might be the sales

department, which markets all the company’s products and is in charge of both its

sales force and its advertising campaigns.

The second way to fill the boxes is to divisionalize

along product or geographic lines. Box A might

contain all the company’s North American activities, including production, input

procurement,and sales, while Box B

contains the corresponding activities for Europe.

Geographic divisionalization is growing with globalization.


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U-form Organizations – Green Bay Packers


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In a U-form organization headquarters makes decisions using information submitted by various departments, and possibly itself as well. A well-

known U-form firm is the National Football League’s Green Bay Packers. Specialized functions such as

public relations, ticketing, security, andbuilding (stadium) supervision are each departments staffed by specialists who report to the president and

chief executive officer (CEO).


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A U-form organization should serve the Packers well for several reasons:

• The firm produces a single product—football—in a single location. • The operating environment changes little from

year to year. • The Packers face hardly any direct competition

from other teams for customers.


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U-form Organizations - Problems of U-form Organizations

There are limits to the information a firm’s headquarters can use effectively in making decisions. If a U-form firm makes several different products or

sells the same product in different markets, information from functional departments

will be less helpful to its management. Whether a larger staff at headquarters improves top-level

decision making depends on the types of information it must evaluate and the criteria for accepting or

rejecting a proposed project.


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M-form Organizations

A divisionalized firm is often called M-form, where the “M” stands for multidivisional. An M-form firm like

the one shown engages in activities A, B, and C. These might be different products it produces or units

it operates in different locations.


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M-form Organizations

Activities A, B, and C each resemble a stand-alone U-form firm. If management chose to divest C, it could possibly remain intact and viable as a U-form firm

that now had its own management. The M-form keeps decisions at the divisional level that would be

sent to headquarters in a U-form firm. The headquarters of an M-form firm, however, must be able to identify, measure, and compare a division’s performance (and its future prospects) with other

divisions.


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M-form Organizations - Product Divisions: MicrosoftMicrosoft Corporation is divisionalized into six business segments:

• The Client segment is responsible for the Windows operating systems and relations with personal computer (PC) manufacturers.

• Server and Tools handles the Windows Server Operating System.

• Platform Products and Services produces programming tools and server software.

• Online Services is in charge of the Microsoft Network (MSN), e-mail, and related services.

• The Business division produces application software, most importantly the Office suite.

• The Entertainment and Devices division produces the Xbox game console, Zune player, and operating systems for personal digital Assistants.


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M-form Organizations - Geographic Divisions: Ingram Micro

Ingram Micro is the world’s largest ($35 billion sales in 2008) wholesale distributor of computer hardware and software, with staff in 34 countries and sales in

140. The company’s four divisions cover North America, Europe and the Middle East, the Asia-Pacific

region, and Latin America.


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From U-form to M-form: Ford and General Motors

The origins and early development of the U.S. automobile industry offer a comparison of the competitive advantages of U-form and M-form

firms. Both GM and Ford MotorCompany began as U-form organizations, and both

became M-form when U-forms became unmanageable.


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From U-form to M-form: Ford and General Motors - U-form: Ford

Henry Ford made history by turning the automobile into a mass-consumption good. Unlike other

manufacturers whose production runs were small, Ford standardized his Model T and produced it in

volumes that drastically lowered costs. Introduced in 1908, the Model T was built on assembly lines

(themselves largely Ford’s invention) with interchangeable parts and workers specialized to

particular steps. A concernwith dependable supplies and predictable quality led

Ford to vertically integrate into production of raw materials. Ford’s production environment changed

little over two decades.


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From U-form to M-form: Ford and General Motors - M-form: General Motors

General Motors’ William C. Durant had a quite different strategy. Believing buyers wanted choices that Ford would not offer, Durant

(originally president of the independent Buick company) chose to make acquisitions in order to produce a wider variety of cars. By the 1920s,

GM was producing nine different makes of cars and trucks, each in several body styles. Operated as a U-form, the company had become

unmanageable. By the 1920s, GM was producing nine different makes of cars and trucks, each in several body styles. Operated as a U-form,

the company had become unmanageable.

In 1923, Alfred P. Sloan became president of GM and designed reportingprocedures to compare divisional performance to meet the goal of better

allocatingcapital by using the then-novel concept of return on investment.


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From U-form to M-form: Ford and General Motors - The Competitive Consequences

Over the 1920s General Motors cemented its lead over Ford. Historian Chandler argues that Ford’s U-form and

its concentration on a single product generated information flows to management that favored the status quo, and that Ford’s organization itself was an important reason for its failure to see and adapt to market changes

GM had in large part caused. Logistical problems and management’s reluctance to abandon the old system left Ford with a mix of U-form and M-form activities. Today,

GM’s management is concerned that the company cannot compete because it is over-divisionalized, and it is

attempting to standardize its various brands around the world.


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MATRIX ORGANIZATIONS AND SELF-CONTAINEDUNITS


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Matrix Organizations

Here is the 2008 organization chart of

ABB Group. ABB produces and sells five

major product lines worldwide. ABB is

doubly divisionalized into superimposed M-form

organizations. It is called a “matrix organization,” or sometimes an “MX-

form.”


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Matrix OrganizationsThe matrix form has advantages and disadvantages and is more likely to be found in firms that produce

diverse goods that are sold in diverse markets.

A country unit can use its accumulated experience to reduce the costs of dealing with government for all of ABB’s products sold there. Likewise, all of ABB’s product divisions can use a country unit to manage risks denominated in that country’s

currency. If several product divisions manufacture in a country there may be advantages in procuring inputs for them jointly.

ABB’s MX-form also has potential advantages when broken down by product. If it produces and markets a certain good in

several countries, the various plants may be able to share innovations or learn better operating practices from one

another.


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Matrix Organizations

On the downside, ABB’s employees ultimately have two bosses—the country or regional manager and the business area

manager—and their interests may be in conflict. A country manager may want to begin manufacturing a certain product

there while a product manager favors continued transshipment to the country. A country manager might want to discourage

information transfer from an efficient plant in her domain to an inefficient one elsewhere that will lower the local plant’s

relative performance.


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Self-Contained Units - Why Redesign an Organization?

Tyson redesigned itself to better adapt to the new importance and complexity of risk management in the

markets for many of its inputs and outputs. The financial revolution that began in the 1970s changed

risk management from a relatively simple and standardized activity to an essential element of

corporate strategy. The revolution had two consequences for a business like Tyson. First, risk

management at the divisional level became inadequate. Second, specialists like Jean Beach,

however, could not do the entire job. They would have to

interact with people in the divisions who were experts in operations.


34

Self-Contained Units

Here is an organization before and after the

creation of a self-contained unit. In this

figure the company has reorganized its risk management into an

SCU that reports only to headquarters. It has final

authority in that area, but doing its job requires contact with employees who have expertise in

division-level risks.


35

Self-Contained Units

The benefits and drawbacks of a self-contained unit mirror those of the matrix organization. Ideally,

people with different expertise will combine their knowledge to produce better policies than any subset

of them could produce. There is, however, no guarantee that the relationship between the SCU and

the operating employees will turn out this way.


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FORMAL AND INFORMAL AUTHORITY


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Who Really Decides?An expert once called an organizational diagram “an optimistic chart of expectations about relationships.”

A graph of relationships may differ greatly in practice from their

actual implementation. A line that links higher employees or divisions with lower ones portrays

formal authority. Their real relationships often play out in accordance with informal

authority.A chart can also fail to reveal important relationships. A vice president’s administrative assistant may not even appear on it, but the vice president may have

given her authority to issue certain orders under the vice president’s name without his active involvement.


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Informal Authority, Contingencies, and Competition

In Chapter 12 we compared transactional governance by organizations with governance by markets or

contracts. Problems encountered in contracts are mirrored in organizations. In both, negotiations over an unforeseen problem may take place outside the

formal relationship outlined in the contract or chart. Situations might arise within an organization that are incompatible with existing authority relationships. In response, members of the organization may negotiate new relationships whose authority characteristics do

not appear on the chart but are generally acknowledged to exist.

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Informal Authority, Contingencies, and Competition


The stories of GM and Ford show the potential importance of organizational form as a competitive tool. An inappropriate form can obstruct a firm that would otherwise be competitive. Many companies

treat their organization charts as confidential documents that must not fall into the hands of

competitors. Charts can provide information about strategies.

Organizational Designs Chapter 13 1 (c) 2010 Cengage Learning. All Rights Reserved. May not be scanned, copied or duplicated, or posted to a publicly accessible.

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