Ch9/10 - Executing Strategy through Organizational Design

Question 1

Learning Objectives

Answer 1

1. Why is a firm’s organizational structure important? 2. What are the basic building blocks of organizational structure?
2. What are strategic advantages and disadvantages of each organizational structure type?
3. What are the different forms of control and when should they be used?
4. What are the key legal forms of business, and what implications does the choice of a business form have for organizational structure?

Question 2

Key idea

Answer 2

Organizational structure + organizational control process are needed as they facilitate strategy execution

Question 3

Basic Building Blocks of

Organizational Structure

Answer 3

1. Divisions of labor - specialization
2. Organizational Chart - firm structure
3. Informal Linkages - unofficial relationships
4. Vertical Linkages - supervisor-subordinate
5. Horizontal Linkages - rel. b/w equals
6. Unity of Command - report to only 1 supervisor

Question 4

Organizational Structure

(arises out of the need to cooperate which arises from the specialization due to division of labor)

Answer 4

The solution is organizational structure, which is defined as the process by which tasks are assigned and grouped together with formal reporting relationships.

Creating a structure that effectively 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

Question 5

Vertical and Horizontal Linkages

Answer 5

Are the two basic building blocks of all organizational charts/diagrams.

Vertical Linkages - supervisors - subordinates

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.

Horizontal Linkages - b/w equals

These linkages are often called 266 | Chapter 10: Executing Strategy - Organizational Designcommittees, task forces, or teams. Horizontal linkages are important when close coordination is needed across different segments of an organization.

Question 6

Benefit of horizontal linkages

Answer 6

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.

Question 7

Informal Linkages

Answer 7

Informal linkages refer to unofficial relationships such as personal friendships, rivalries, and politics.

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.

Question 8

4 Types of Organizational Structure

Answer 8

1. Functional
2. Multi-divisional
3. Matrix
4. Boundaryless

Question 9

Organizational Structure & Strategy

Answer 9

Organizational structure to a great degree determines the strategic options available to you.

For example: a structure might be built to maximize efficiency, but maybe as a result it lacks the flexibility to react quickly to new opportunities

Question 10

Functional Structure

Answer 10

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.

Question 11

Multi-divisional Structure

Answer 11

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

Question 12

Matrix Structure

Answer 12

The matrix structure can be thought of as a hybrid between functional and divisional structures. Complex organizations or firms that engage in projects of limited duration may use a matrix structure where employees can be put on different teams to maximize creativity and idea flow.

Question 13

Boundaryless Structure

Answer 13

The boundaryless organization is flat, with decentralized decision making and the use of many cross-functional teams. This structure works well in knowledge industries such as IT, where responsiveness to changing environmental and competitive forces must be quick.

Question 14

Functional Structure

Advantages & Disadvantages

Answer 14

Advantages:

1. allows for great specialization
2. keeps costs low and creates efficiency
3. same background - less conflict - easier to get along

Disadvantages:

1. executing strategies can be very slow

What is functional structure best for:

companies that offer narrow and stable product lines

Question 15

Multi-divisional Structure

Answer 15

Advantages:

1. ability to act quickly

Disadvantages:

1. potential acting quickly can backfire
2. more costly than functional st.

Question 16

Matrix Structure

Advantages & Disadvantages

Answer 16

Advantages

1. Flexibility - horizontal linkages

Disadvantages

1. No unity of command - freeloading
2. Increased potential for conflicts - fighting for the best talent

Best for: IT, engineering, and consulting firms. R&D

Question 17

Boundaryless Organizations

Advantages & Disadvantages

Answer 17

Advantages

1. more flexible and responsive

Disadvantages

Question 18

Selecting organizational structure

Answer 18

It’s is all about trade-offs much like economics. You are dealing with scarce resources.

Question 19

3 Types of Control Systems

that executives can implement

Answer 19

1. output control - tracking performance through measurable results “bottom-line perf.”
2. behavioral control - dictate actions of individuals, emphasizing rules and procedures. Focus is actions that lead to results.
3. clan control - relies on shared traditions, expectations, values, and norms to lead people to work toward the good of their organization

mix it up

Question 20

Fads that some managers may choose to adopt

Answer 20

1. Mgmt. by objectives - creating a series of goals
2. Sensitivity training - free-flowing group discussions
3. Quality circles - groups meet to brainstorm new methods or ways to improve quality
4. Strong culture - as name suggests

Question 21

Legal Forms of Business

Answer 21

1. Sole proprietorship
2. Partnership
3. Corporation
4. S Corporation
5. LLC

Question 22

Sole proprietorship

P&L treatment

Answer 22

A sole proprietorship is owned by one person. The firm and its owner are treated interchangeably—the owner is the only beneficiary of any profits and is personally responsible for any losses and debts. Most sole proprietorships are small, but entrepreneur James Cash Penney operated JCPenney as one for many years after buying out his two partners.

Question 23

Partnership

P&L treatment

Answer 23

In a partnership, two or more partners jointly own the firm. A successful partnership requires trust because profits and losses are shared and because each partner is accountable for the actions of others. Partnerships are a common business form for dental practices and law offices.

Question 24

Corporations

P&L Treatment

Answer 24

A corporation such as Southwest Airlines separates ownership and management by issuing ownership shares that are publicly traded in stock markets. Shareholders do not directly receive profits or absorb losses, but profits and losses tend to be reflected in whether the firm’s stock price rises or falls. Shareholders can also benefit from profits in the form of dividends. Most large companies are C corporations with multiple stockholders. A disadvantage of this business form is double taxation: taxes are paid on corporate profits and on any dividends that corporate pays to stockholders, at their personal tax rate. An S corporation is limited to 100 stockholders and is more for smaller companies. It does not have double taxation. Taxes are paid on profits distributed to stockholders at their personal tax rate.

Question 25

LLC

P&L Treatment

Answer 25

A limited liability company (LLC) can be thought of as a hybrid of a corporation and partnership. Like in a corporation, owners are not accountable for the firm’s debts. A winner of a legal judgement against an LLC, for example, cannot claim the personal assets of the LLC’s owners. LLC’s also enjoy the management flexibility of partnerships. For federal tax purposes, an LLC must choose to be treated as a corporation, a partnership, or a sole proprietorship. Many architectural and consulting firms are organized as LLCs.

Question 26

3 Considerations when deciding

Legal Form of Business

Answer 26

1. How taxes are handled
2. How liability of the owners is handled
3. How easy to set up and operate the entity

Question 27

Sole Proprietorship

Answer 27

A sole proprietorship is a firm that is owned by one person. From a legal perspective, the firm and its owner are considered one and the same. On the plus side, this means that all profits are the property of the owner (after taxes are paid, of course). On the minus side, however, the owner is personally responsible for the firm’s losses and debts. This presents a tremendous risk. If a sole proprietor is on the losing end of a significant lawsuit, for example, the owner could find his personal assets forfeited

Question 28

Partnership

Answer 28

In a partnership, two or more partners share ownership of a firm. A partnership is similar to a sole proprietorship in that the partners are the only beneficiaries of the firm’s profits, but they are also responsible for any losses and debts. Partnerships can be especially attractive if each person’s expertise complements the others

As with the sole proprietorship, the owners and the partnership are considered as one. Being personally liable for the debts and actions of the partnership and the partner(s) is certainly a downside, however setting up a partnership is relatively easy. Taxes are also paid at the partners individual rate, a tax advantage generally.

Question 29

Corporations

Answer 29

A key difference between a corporation and a sole proprietorship or partnership is that corporations involve the separation of ownership and management. Corporations sell shares of ownership that are publicly traded in stock markets, and they are managed by professional executives. These executives may own a significant portion of the corporation’s stock, but this is not a legal requirement.

Unfortunately, for shareholders, corporate profits and any dividends that these profits support are both taxed. This double taxation is a big disadvantage of corporations. Corporations (also called C corporations) are also the most difficult form of business to set up and have a number of regulations to comply with.

Question 30

S-Corporation

Answer 30

Much like in a partnership, the firm’s profits and losses are reported on owners’ personal tax returns in proportion with each owner’s share of the firm, so double taxation is avoided. Although this is an attractive feature, an S corporation would be impractical for most large firms because the number of shareholders in an S corporation is capped, usually at one hundred.

S corporations also provide liability protection for their stockholders as C corporations do, and are easier to set up and operate than C corporations.

Question 31

Limited Liability Company (LLC)

Answer 31

Instead, the ability to create a limited liability company (LLC) is granted in state laws (NOT federal). LLCs mix attractive features of corporations and partnerships. The owners of an LLC are not personally liable for debts that the LLC accumulates (like in a corporation) and the LLC can be run in a flexible manner (like in a partnership). When paying federal taxes, however, an LLC must choose to be treated as a corporation, a partnership, or a sole proprietorship.