Week 7 Flashcards
Organizational Design and Competitive Advantage
Organizational design is the process of creating, implementing, and monitoring the structure, processes, and procedures of an organization. The three key components are: structure, culture, and control. The goal is to design an organization that allows managers to effectively translate their chosen strategy into a realized one.
To implement a formulated business strategy, structure must accommodate strategy. However, in reality, a firm’s strategy often follows the structure. This shows that some managers only consider strategies that do not change the existing organizational structures.
This reflects inertia; a firm’s resistance to change the status quo, which can lead to their failure. The need for structural reorganization is particularly high in industries with a high change rate and frequent potential disruptions. If a firm has optimized structure, the tightly coupled system can break apart when internal or external pressures occur.
Inertia
A firm’s resistance to change the status quo, which can lead to their failure.
The need for structural reorganization is particularly high in industries with a high change rate and frequent potential disruptions.
If a firm has optimized structure, the tightly coupled system can break apart when internal or external pressures occur.
How inertia affects different firms, depending on whether they make conscious strategic decisions
These four steps are:
- Fit with the current environment;
- Success (usually financial);
- Structures, measures and systems are put in place to manage the organization’s size;
- Organization inertia emerges and limits opportunities and challenges presented by the
changing internal and external environment.
Organizational structure
Organizational structure determines how the work efforts of individuals and teams are organized and how resources are distributed. The key building blocks of organizational structure are:
- Specialization; the degree to which a task is divided into separated jobs, i.e. the division of labour. Usually, the larger the company, the higher the level of specialization;
- Formalization; the extent to which employee behaviour is steered by explicit and codified rules and procedures;
- Centralization; the degree to which decision-making is concentrated at the top of the organization;
- Hierarchy; the formal, position-based reporting lines that specify who reports to whom.
Several of these building blocks can combine to form two different organizational forms:
mechanistic organizations or organic organizations.
Mechanistic organizations
Mechanistic organizations are characterized by a high degree of specialization and formalization, and a tall hierarchy that relies on centralized decision-making.
It allows for economies of scale, standardization, and often a cost-leadership strategy.
Organic organizations
Organic organizations have a low degree of specialization and formalization, and have a flat organizational structure with decentralized decision-making.
It allows for continuous innovation and is often paired with a differentiation strategy.
Changing organizational structures and increasing complexity with firm growth
The four structures an organization can progress through are:
- simple structure,
- functional structure,
- multi-divisional structure,
- matrix structure.
Simple structure
A simple structure is usually used by small firms that have low organizational complexity.
Important strategic decisions tend to be made by the founders of these firms, who also run the daily operations.
Functional structure
A functional structure is used when sales increase, as it groups employees into distinct functional areas based on domain expertise, for example, R&D, Marketing, and Human Resources.
A functional design allows for a higher degree of specialization, which is linked to higher productivity, and work tends to be centrally coordinated by a CEO.
A functional structure is appropriate when a firm has a relatively narrow focus with regard to its product offerings and geographic focuses. Therefore, it is well-matched with different business strategies, but will require modifications to match the context.
There are three ways a functional structure can be modified to match the strategy of a firm
- Cost leadership strategy; use a functional structure that contains elements of a mechanistic structure. This is beneficial as it allows the cost leader to constantly improve core competencies in manufacturing and logistics, creates incentives for cost-cutting innovation, and focuses on economies of scale.
- Differentiation strategy; use a functional structure that contains elements of an organic organization. This is beneficial as it facilitates innovation and flexibility.
- Blue ocean strategy; this strategy is a trade-off between differentiation and low-cost strategies. The firm therefore needs qualities of both structures, meaning an ambidextrous organizational structure should be used. An ambidextrous organization is able to balance and utilize different activities in a trade-off situation. Therefore, managers can balance exploitation (applying current knowledge to enhance short-term firm performance), with exploration (searching for new knowledge that may enhance a firm’s future performance).
Disadvantages of functional structures
Disadvantages of functional structures include:
- the possible emergence of functional silos,
“Functional silos in a business are teams of employees, grouped by function, that all operate separately from each other, without cross-collaboration. “
- teams of employees, in which information is shared within a team, but not across teams.
Another disadvantage is that functional structures do not allow for further company growth.
A multi-divisional structure (M-form)
A multi-divisional structure (M-form) is used when a firm diversifies its product lines and geographies.
This form consists of several distinct strategic business units (SBUs), each with its own profit-and-loss (P&L) responsibility.
Each SBU operates more or less independently, with its own CEO or general manager who is responsible for the unit’s business strategy and daily operations. Company-wide staff functions, such as finance and R&D, support all SBUs.
M-form and corporate strategy
If we link the structures to corporate diversification, we can get the following matches:
● Single-business or dominant-business strategies generally employ a functional structure;
● For firms that pursue related or unrelated diversification, the M-form is most suitable;
● Related-diversification in the M-form tends to be centralized, whereas unrelated-diversification is often supported by decentralized decision-making.
Disadvantages of the M-form
Disadvantages of the M-form, which result from additional layers in its structure (compared to the functional structure), are problems with increasing bureaucracy and possibly duplicating efforts.
Additionally, since the SBUs are standalone units, they may end up competing with each other for resources.
A Matrix structure
The matrix structure is based on two (or more) dimensions at the same time. It uses dual reporting, which means that employees must report to more than one manager at the same time. Next to this, it creates ECONOMIES OF SCOPE.
A Matrix structure is a mix of the functional and M-form structures, that firms can use to take advantage of both.
It combines the domain expertise, economies of scale, and efficient processing of information from the M-form with the decentralized focus and responsiveness from the functional structure.
Firms tend to use a global matrix structure to pursue a transnational strategy, where the firm combines the benefits of a multi-domestic strategy (high local responsiveness) with those of a global-standardisation strategy (lowest-cost position attainable).
