CH-10 Creating Effective Organizational Designs – Strategic Management: Creating Competitive Advantages : Book Guide

Chapter 10 Creating Effective Organizational Designs Summary/Objectives Organizational structures and integrating systems are necessary to manage the relationships between internal processes and external parties such as suppliers, customers, and alliance partners. The challenge to managers is to create systems that both maintain order and provide flexibility and permeability. The purpose of this chapter is to describe the different types of organizational structures and how they contribute to organizational performance. The chapter is divided into four sections. 1. The first section uses a “patterns of organizational growth” framework to describe how structure relates to strategy. Then, four different types of organizational structure — simple, functional, divisional, and matrix — are discussed in terms of important contingencies and relative advantages and disadvantages. The implications of international operations on organizational structure are also discussed. 2. We address the role of contingencies in determining which reward and evaluation system is appropriate. Emphasize that there is no “one best way” and that various approaches (financial or behavioral) are likely to be more effective depending on conditions. Different business-level and corporate-level strategies may require alternate approaches to designing reward and evaluation systems. 3. The second section addresses the “boundary-less” approach to organizing. This discussion emphasizes the importance of flexibility and permeability in environments of unpredictability and rapid change. Three different types of boundary-less approaches are described — barrier-free, modular, and virtual. 4. The fourth section suggests the need for ambidextrous organizations. Here, managers must address two opposing challenges: (1) being proactive in taking advantage of new opportunities; and (2) ensuring the effective coordination and integration of existing operations. Lecture/Discussion Outline The opening case illustrates the challenges of managing a boundaryless organization. When it launched the development of the 787 Dreamliner aircraft, Boeing decided to outsource the bulk of both the design and manufacturing of the plane. However, they found that many of the suppliers were unable to complete their tasks or completed them after deadlines. Boeing also had difficulty coordinating and integrating the work of suppliers. In the end, Boeing saw their delivery schedule slip by three years, and the process was much more expensive than anticipated.  Discussion Question 1: A number of firms benefit from outsourcing design and manufacturing. What is different with Boeing that makes it so much harder to be successful? Response guidelines: The purpose of this question is to allow students to understand the complexity of Boeing’s operations. Fifty suppliers on multiple continents are difficult to coordinate. While the suppliers have technological expertise, and could collectively build some components better than what Boeing could do in-house, they do not have experience working together. The suppliers also may have issues putting their work for Boeing as the highest priority. Jet plane components are all interdependent, and it may be very difficult to anticipate how the technologically advanced components would function together. To sum up, Boeing’s outsourced design may be harder because: • There were many suppliers • The suppliers were geographically dispersed • The suppliers may not be putting their work for Boeing at the highest priority • The suppliers were using new technologies that had not been used together in the same plane • The components had to be assembled in a very complex, interdependent plane Answer: Boeing’s complex aircraft designs involve extensive coordination between numerous global suppliers, making quality control and integration more challenging compared to simpler outsourcing models. Discussion Question 2: What lessons does their experience with the 787 offer Boeing for its next plane development effort? Response guidelines: Students can approach this question as a typical case analysis. First, students could advise Boeing regarding different options it could use – such as in-house manufacture, outsourced manufacture, or mixed. The trade-offs may include: Benefits of in-house manufacture: • Control over operations • All technologies developed in-house, so better expertise as to how they interact with each other • Better appreciation of the final customers’ expectations • Less cost of monitoring and controlling suppliers’ operations • Less cost of transporting components and working to solve problems with suppliers Benefits of outsourcing: • Access to better technologies • Cost savings • Political benefits from using suppliers in client countries • Students may opt for a mixed approach, where Boeing outsources the production of “low-tech” components. For “high-tech” components, Boeing may want to partner with firms in order to design the new components, but manufacture in-house. The goal of the discussion is to get students to appreciate the essential trade-offs with the make or buy decision, and that Boeing can choose from a bewildering number of options. Answer: Boeing should improve its supply chain management and integration strategies, ensuring better coordination and quality control. Lessons learned emphasize the importance of a cohesive and flexible supply chain. I. Traditional Forms of Organizational Structure This section emphasizes the relationship between strategy and structure and addresses the importance of flexibility and permeability in the context of four traditional forms of organizational structure — simple, functional, divisional, and matrix — as well as structures for firms with international operation.. The SUPPLEMENT below illustrates the importance of organizational design and structure. Globalization and the recent economic crisis have forced organizations to rethink their strategies and change they way they operate. When organizational strategy changes, its structures, roles, and functions should be realigned with the new objectives.  Extra Example: Importance of Organizational Design and Structure Poor organizational design and structure can result in a bewildering mess of contradictions: confusion about roles, a lack of coordination among functions, failure to share ideas, and slow decision-making. This can lead to unnecessary complexity, stress, and conflict. Often those at the top of an organization are oblivious to these problems or, worse, pass them off as challenges to overcome or opportunities to develop. Structure dictates the relationship of roles in an organization, and therefore, how people function. An outdated structure can result in unnecessary ambiguity, confusion, and a lack of accountability. Gill Corkindale, an executive coach, shared some business and leadership challenges of executives to illustrate the importance of updated and appropriate organizational design: 1. The “unworkable” job: A Swiss engineer‘s boss had modified so many parts to his original role that it was becoming impossible to do his work since one part of his role contradicted the other. Moreover, he was stretched beyond his limits by the scope of the role and the fact that he had to operate across several time zones. 2. Politics: A Hong Kong retail executive said his role was "schizophrenic" because he was required to influence a group of internal stakeholders who had been instructed by their boss not to cooperate with him. The anomaly was the result of historical turf wars between his boss and his boss' peer: the latter had used his influence to restructure the department and bring it under his control. 3. Over-regulation: A British banker explained how he was required to get approval from so many people for a major project that he wasted six months trying to get it off the ground. This severely limited his ability to compete effectively in the market. Source: Corkindale, G. 2011. The importance of organizational design and structure. blogs.hbr.org February 11: np.  Discussion Question 3: What are some lessons learned from the examples Corkindale suggested? Answer: Corkindale’s examples illustrate the need for clarity in strategy, effective communication, and alignment of goals. Key lessons include the importance of adaptive management and stakeholder engagement. Discussion Question 4: At what level should organizational roles be designed to ensure all the relevant details are accounted for? Should individuals who actually perform the job be consulted? Why/why not? Answer: Organizational roles should be designed at all levels with input from those performing the job to ensure accuracy and practicality. Involving employees ensures that roles are realistic and aligned with actual job requirements. A. Patterns of Growth of Large Corporations: Strategy-Structure Relationship In this section, we discuss how a firm’s strategy and structure change as it increases in size, diversifies into new product-markets, and expands its geographic scope. EXHIBIT 10.1 depicts Galbraith and Kazanjian’s model of dominant growth patterns of large corporations. The dominant pattern of growth is first from a simple structure to a functional structure as sales and volume increase. A functional structure enhances efficiency and effectiveness by structuring according to specialized functions. When firms grow beyond existing markets or regions, the decision-making burden is too great and a divisional structure is needed to organize around products, projects, or markets. As firms grow into international markets and/or enjoy expanding sales revenues, international structures are needed. There are several types of international structures as will be discussed below. B. Simple Structure Because most organizations are very small, they need only a simple structure. Simple structures are usually highly centralized because the founder or a top executive makes nearly all of the decisions. Emphasize that the simple structure is the oldest and most common. It also tends to be the most informal with little specialization. This may enhance creativity since employees are often not bound by many rules, but may lead to management problems if employees do not understand their responsibilities. Simple organizations often offer few chances for career advancement.  Discussion Question 5: Have you ever worked for an organization with a simple structure? How were decisions made? Answer: In a simple structure, decisions are often made informally and quickly due to fewer layers of management. This can lead to faster implementation but might lack thorough analysis. Discussion Question 6: What are some examples of companies that operate with a simple structure? Answer: Examples include small startups or tech firms like GitHub, which operate with flat structures for flexibility and rapid decision-making. C. Functional Structure As firms grow, excessive demands may be placed on the owner-manager in order to process all the information necessary to run the business. Specialists are needed in various functional areas (such as accounting, marketing, and engineering). Thus, a functional structure often develops in which functions are managed by specialists. Then, the chief executive’s job shifts to coordinating and managing the departments. EXHIBIT 10.2 depicts a diagram of a typical functional organizational structure. Functional structures are generally found in organizations in which there are single or closely related products or services, high production volume, and some vertical integration. In these areas, which correspond to the dominant pattern of growth (i.e., into new markets, new product lines, or via vertical integration), centralized decision-making is still needed to coordinate activities. Functional organizations have advantages and disadvantages. One advantage is enhanced coordination and control. Also, managerial and technical talent is used more efficiently. In a functional structure, there are more opportunities for professional development and career advancement. A disadvantage of functional organizations is that the beliefs, assumptions, and goals associated with different functional activities may vary across functions. MIT Professor Edgar Schein suggests that such different orientations may even cause certain words to hold different meanings in different groups. This, in turn, leads to functional biases or “silo” thinking that may impede communication and coordination. STRATEGY SPOTLIGHT 10.1 provides an example of an effective functional organization structure – Parkdale Mills. The SUPPLEMENT below addresses another kind of problem that Professor Schein has identified with organizational structures that emphasize differences in function. It is related to the culture that emerges around different levels of hierarchy.  Extra Example: Professor Schein Comments on Hierarchical Subcultures Several management authors, including Edgar Schein of MIT, have warned about the potential problems that can occur because of the shared assumptions that form around the functional units of an organization. These beliefs form a type of culture that can inhibit cross-functional activities such as communication and consensus building. Schein is also concerned about another cultural bias: “Another kind of subculture, less often acknowledged, reflects the common experience of given levels within a hierarchy. Culture arises through shared experiences of success. If first-line supervisors discover ways of managing their subordinates that are consistently successful, they gradually build up shared assumptions about how to do their job that can be thought of as the “culture of first-line supervision.” In the same way, middle management and higher levels will develop their own shared assumptions and, at each level, will teach those assumptions to newcomers as they get promoted. These hierarchically-based cultures create the communication problems associated with ‘selling senior management on a new way of doing things,’ or ‘getting budget approval for a new piece of equipment,’ or ‘getting a personnel requisition through.’ As each cultural boundary is crossed, the proposal has to be put into the appropriate language for the next higher level and has to reflect the values and assumptions of that level. Or, from the viewpoint of the higher levels, decisions have to be put into a form that lower levels can understand, often resulting in ‘translations’ that actually distort and sometimes even subvert what the higher levels wanted.” Source: Schein, E. H. 1996. Three cultures of management: The key to organizational learning. Sloan Management Review, Fall: 12.  Discussion Question 7: Have you ever experienced the type of hierarchical “bias” described by Professor Schein? Answer: Yes, hierarchical bias can affect decision-making and communication, leading to inefficiencies or overlooked perspectives. Teaching Tip: Ask students how hierarchical subcultures can differ in the various parts of an organization. This is, production and operations may be very formalized and “bureaucratic,” whereas research and development (especially primary R&D) may be rather loosely structured. Ask how such “cultural differences” may create challenges in bringing about major change in an organization (i.e., require the use of different incentives, different procedures, etc.). Other disadvantages of a functional structure include short-term thinking due to excessive concern for the function rather than the whole organization, a heavier burden for top management who must resolve conflicts between functions, and difficulty establishing policies that apply uniformly to all functional areas.  Discussion Question 8: Have you ever worked for an organization with a functional structure? How were decisions made? Answer: In a functional structure, decisions are typically made within departments, with a focus on functional expertise and efficiency. This can lead to siloed operations but clear specialization. Discussion Question 9: What are some examples of companies that operate with a functional structure? Answer: Examples include Procter & Gamble and General Electric, which use functional structures to streamline operations within specialized departments. D. Divisional Structure The divisional structure is organized around products, projects, or markets. Each division has its own functional specialists organized into departments. Divisions are independent units managed by a central corporate office. Divisional executives manage divisional performance to achieve corporate financial objectives. EXHIBIT 10.3 presents a diagram of a typical divisional organizational structure. General Motors is presented as an example of a divisional structure. Emphasize that a divisional structure is needed as organizations become large and more complex. Advantages of a divisional structure include separation of strategic and operational control. That is, the divisions focus on managing operations and the corporate office addresses strategic issues. Also, a divisional structure makes it easier to respond quickly to changes in the business environment. Multiple management levels means that rewards and career paths are linked to the development of general management talent. Disadvantages include a tendency to duplicate activities such as personnel management, which makes overall costs higher, dysfunctional competition between divisions, conflicting goals, and uneven performance comparisons that inhibit resource sharing. Another potential disadvantage is that with many divisions providing different products and services, there is the chance that differences in image and quality may occur across divisions. Finally, since financial success is valued so highly, there may be too much focus on short-term performance.  Discussion Question 10: Have you ever worked for an organization with a divisional structure? How were decisions made? Answer: In a divisional structure, decisions are made within individual divisions based on market or product lines. This can enhance responsiveness but may lead to duplication of efforts. Discussion Question 11: What are some examples of companies that operate with a divisional structure? Answer: Companies like Johnson & Johnson and PepsiCo operate with divisional structures, allowing them to focus on specific markets or products. STRATEGY SPOTLIGHT 10.2 describes how Arcelor Mittal uses the concept of “twinning” to break down barriers in a divisional structure. The SUPPLEMENT below addresses how 3M took steps to coordinate the various activities among its divisions in order to present a unified and positive corporate image.  Extra Example: Communicating a Uniform Corporate Image at 3M The 3M Corporation once had over 1,200 distinct brands but its market research indicated that most consumers did not really understand what 3M did or what it stood for. Although divisional autonomy and an entrepreneurial spirit had contributed to 3M’s success, it had also created a diffuse corporate image. The process of developing a uniform and positive worldwide image began by defining 3M as a corporation. Ultimately, research in this area led to the development of a list of descriptors of 3M that was pared from 13 adjectives to a critical two: innovative and reliable. With these in hand, three communication objectives were established: 1. Use the 3M corporate personality as the foundation for an effective, active identity strategy. 2. Make 3M the master brand, link it to all the company’s values and products, and leverage it in all markets. 3. Establish worldwide communication standards. The result of this campaign was the emergence of a single, unified 3M image. The number of 3M brand names shrank from 1,200 to fewer than 600. Advertising in more than 40 countries now focuses on reinforcing the innovation theme. And most important, awareness of 3M has jumped by 10 percent or more in Japan, Australia, Europe, and even the United States. Source: Olson, E. M., Cooper, R. & Slater, S. F. 1998. Design strategy and competitive advantage. Business Horizons, March-April: 57.  Discussion Question 12: What are some examples of other companies that use brand image and corporate messages to coordinate the activities of its various divisions? Answer: Companies like Unilever and Nestlé use brand image and corporate messages to align their diverse divisions, creating a unified corporate identity and strategic direction. 1. Strategic Business Unit Structure Highly diversified corporations often combine similar divisions into strategic business units (SBUs). This helps coordinate activities and attain synergies. ConAgra is presented as an example of a company with dozens of divisions grouped into three SBUs — food service, retail, and agricultural products. SBUs are typically run as profit centers. The primary advantage of the SBU structure is that it makes planning and control more manageable. The disadvantages include it may be difficult to realize synergies even among similar divisions and the additional hierarchical level of an SBU adds personnel and overhead expenses.  Discussion Question 13: What are some examples of companies that operate with an SBU structure? Answer: Examples include General Electric and Siemens, which use Strategic Business Units (SBUs) to manage diverse product lines and markets effectively. Discussion Question 14: What factors might prevent companies from attaining synergies among divisions within an SBU? Answer: Factors include lack of clear communication, misalignment of goals, and insufficient integration between divisions, which can hinder achieving synergies. The SUPPLEMENT below addresses how Cargill strives to keep the cost of its corporate unit small while also leveraging synergistic opportunities across its business units.  Extra Example: Cargill Implements an SBU Structure Cargill is a $100 billion agribusiness behemoth with over 70 business units. Greg Page, the firm’s Chairman and CEO, strives to find the balance between corporate financial discipline and synergistic opportunities across the business units. He’s created a novel SBU structure to help find that balance. At the top is the company’s senior corporate governing body, the Cargill Leadership Team (CLT). This group has only six people. The CLT’s role is to allocate human and financial capital and set the broad strategy of the firm. The next layer is the Corporate Center, which includes CLT members and about 25 others who head up the firm’s SBUs. The non-CLT Corporate Center members are “tagged,” to use Cargill’s terminology, to a CLT member to ensure that administrative matters and lines of responsibility are aligned and clear. Members of the Corporate Center, along with some division heads and next level functional leaders, populate 12 committees, including the food risk committee, technology committee, strategy and capital committee, and the Cargill brand reputation committee. These committees work to leverage economies of scope, the transferring of competencies between units, and maintenance of consistency across the SBUs. Page asserts that “By keeping the CLT too small to conduct the day-to-day affairs of the company, it forces that accountability and ownership down the line. With it comes a lot of engagement and shared, or collective, leadership.” Source: Neilson, G.L. & Wulf, J. 2012. How many direct reports? Harvard Business Review. 90(4): 113-118. 2. Holding Company Structure The holding company structure (also referred to as a conglomerate) is another type of divisional structure. Whereas SBUs are used to group similar divisions, the holding company structure is used to manage a portfolio of unrelated businesses. Since the businesses are unrelated, most management decisions, controls, and incentives are left to the operating divisions. As a result, corporate staffs are small. An advantage of the holding company structure is the cost savings from having a small corporate office. Additionally, autonomy at the division level enhances motivation. The disadvantage relates to the dependence that corporate executives have on divisional executives to achieve financial goals.  Discussion Question 15: What are some examples of companies that operate with a holding company structure? Answer: Examples include Berkshire Hathaway and SoftBank, which operate with holding company structures to manage diverse investments and subsidiaries. Discussion Question 16: What factors might contribute to poor performance by the divisions of a holding company? Answer: Factors contributing to poor performance include lack of coordination, strategic misalignment, and limited oversight from the parent company. E. Matrix Structure A matrix structure is, in essence, a combination of a divisional and functional structure. Most commonly, functional departments are combined with product groups on a project basis. As a result, personnel from functional departments work under a product group manager for the duration of a project. Multinational corporations combine product groups and geographical units — an alternative to the product/function matrix. In both cases, personnel become responsible to two managers. EXHIBIT 10.4 portrays a diagram of a typical matrix organizational structure. An advantage of the matrix structure is that it facilitates the use of specialized personnel, equipment, and facilities. This reduces duplication and allows individuals with a high level of expertise to divide their efforts among multiple projects at one time. Such sharing and collaboration leads to more efficient use of resources. It also provides professionals with greater responsibilities and enhances the use of their skills. Disadvantages of a matrix structure are related to dual reporting requirements. This can lead to power struggles and conflict. Further, matrix structures are often used in situations that are complex which may lead to excessive reliance on group processes and teamwork, and erode timely decision making. Teaching Tip: When discussing the concept of the matrix organization with the class, you have the opportunity to address, in effect, the difference between “theory” and “practice.” That is, the matrix organization has many potential benefits (e.g., flexibility, quick adaptation to change) that may be very difficult to realize in practice (e.g., the structure can become very cumbersome, lead to turf wars, etc.). Ask students if any of them have had experience with a matrix structure and see if any of these problems were experienced. Also, ask what managers should do to effectively implement matrix structures.  Discussion Question 17: What are some examples of companies that operate with a matrix structure? Answer: Examples include IBM and Google, which use matrix structures to balance functional and project-based work, facilitating collaboration and flexibility. EXHIBIT 10.5 outlines the advantages and disadvantages of the three different organizational structures discussed above — functional, divisional, and matrix. F. International Operations: Implications for Organizational Structure Consistency between strategy and structure is required to be successful in global markets. As firms expand into foreign markets, changes in structure follow changes in strategy. Firms that pursue multidomestic strategies (as discussed in Chapter 7) would most likely use international division or geographic-area division structures. With these, local managers have high autonomy to manage within the demands and constraints of the local market. If product diversity becomes large, firms may benefit from a worldwide matrix structure. Global strategies, by contrast, typically have more centralized operations in order to manage for overall efficiency. Here, worldwide functional and worldwide product division structures are more likely because the market is more homogeneous and requires less local attention. Once firms with global strategies become highly diversified, they are likely to shift to a worldwide holding company structure.  Discussion Question 18: What are some examples of international companies that use worldwide, international, and geographic-area structures? Answer: International companies like Coca-Cola and Nestlé use worldwide, international, and geographic-area structures to manage global operations and market-specific strategies. G. Global Start-Ups: A Recent Phenomenon Up to this point in this section, we have suggested that international expansion occurs primarily after the potential of domestic growth is exhausted. However, there are two interrelated trends which have given rise to “global start-ups:” • many firms now decide to expand internationally relatively early in their history • some firms are “born global”— that is from the very beginning many startups are global in their activities There is no reason for all startups to be global; global startups require a higher level of communication, coordination, and transportation costs. Some of the circumstances under which going global from the beginning is advantageous are: • the required human resources are globally dispersed, going global may be the best way to access those resources • foreign financing may be easier to obtain and more suitable for the project, • the target customers in many specialized industries are located in other parts of the world • there is a gradual move from domestic markets to foreign markets and if a product (or service) is successful, it may be immediately imitated by firms in other countries • high up-front development costs; a global market is necessary to recover the costs STRATEGY SPOTLIGHT 10.3 discusses Buffalo Grid, a British start-up with a global vision and scope of operations. H. How an Organization’s Structure Can Influence Strategy Formulation Typically, in discussing the relationship between strategy and structure, we strongly imply that structure follows strategy. However, in this section we stress the caveat that structure can influence a firm’s strategy. Given that a firm’s structure can be rather difficult to change, strategy cannot realistically be formulated without taking structure into account. The SUPPLEMENT below discusses how a new role in many corporations—Chief Diversity Officer (CDO)—can promote diversity and spur innovation.  Extra Example: A New Position in the Corporate Organizational Chart: Chief Diversity Officer In the corporate world, a new position in the typical organizational chart has emerged in recent years—the Chief Diversity Officer (CDO). The more progressive companies are releasing CDO’s from the confines of human resources departments and positioning them to work closely with the heads of product development, business development, marketing, and sales. This change in reporting relationships (a key component of organization structure) allows the CDO to more easily detect innovation opportunities throughout the organization. “Increasingly, CDOs report to the CEO, outside of HR,” asserts Edie Fraser, founder and president of Diversity Best Practices, an organization that tracks diversity initiatives by corporations. One company that has taken this approach is the Russell Corporation with $1.5 billion in revenues. The company (founded in 1902 and recently acquired by Berkshire Hathaway), now has three business segments: apparel, sports equipment, and athletic shoes. At Russell, the human resources function handles the traditional diversity matters such as affirmative action, recruiting, and legal issues. However, CDO Kevin Clayton is busy turning a separate diversity department into a profit center. For example, Clayton’s group discovered that a large number of Russell’s employees had graduated from historically black colleges and universities. The group then used those graduates’ ideas to create products for the black university market, resulting in an $8 million-to-$10 million contract. Since then, Clayton has created several additional development groups that combine employees of different ethnicities and religions. Clayton is expecting to significantly increase revenues in the future. Sources: Johansson, F. 2006. Masters of the multicultural. Harvard Business Review, 83(10): 18-19; Young, N. 2006. Berkshire Hathaway to acquire Russell Corporation. Russell Corporation press release, April 17: np; and www.russellcorp.com.  Discussion Question 19: In organizations that are too small to have a separate Chief Diversity Officer, what would be the best ways to achieve the objectives described in the above supplement, that is, spurring innovation and promoting diversity? Answer: Small firms can promote diversity by integrating inclusive practices into daily operations and leadership, even without a dedicated Chief Diversity Officer. II. Boundaryless Organizational Designs Organizations that become boundaryless become more open and permeable, not “chaotic.” STRATEGY SPOTLIGHT 10.4 discusses four types of boundaries — vertical boundaries, horizontal boundaries, external boundaries, and geographic boundaries — and provides examples of how organizations have made them more permeable. Boundaryless approaches should be considered a complement to, not a replacement for, traditional forms of organizing. Several types of structure can be used to make organizations more boundaryless. Barrier-free approaches involve removing internal boundaries to encourage teamwork and widespread sharing of information. Virtual and modular organizational forms are used to make external relations more permeable and create seamless knowledge systems across organizations. The SUPPLEMENT below highlights some of the big challenges faced by firms in today’s global economy associated with coordinating activities among diverse professionals spread across the world. It states that, among other initiatives, many multinationals are hiring sociologists to help unlock the secrets of teamwork among colleagues who have never met.  Extra Example: Coordinating a Firm’s Activities in a Global Economy--A Perspective For global companies, success once meant having bodies and factories on the ground from Sao Paulo to Silicon Valley to Shanghai. Coordinating their activities was a deliberately planned effort handled by headquarters. Now, the challenge is to weld these vast, globally dispersed workforces into superfast, efficient organizations. Given the conflicting needs of multinational staff and the swiftly shifting nature of competition brought about by the Internet, that’s an almost impossible task. And getting professionals to collaborate instantly—not tomorrow or next week, but now—requires nothing less than a management revolution. Complicating matters is the fact that the many business activities are no longer accomplished by a single, integrated entity with full-time employees and a recognizable hierarchy. Business activities are now being accomplished by a fluid constellation of firms, with a classic corporation at the center of an ever-shifting network of suppliers and outsourcers, some of whom only join the team for the duration of a single project. To adapt, multinationals are hiring sociologists to unlock the secrets of teamwork among colleagues who have never met. They are arming staff with an arsenal of new technology tools to keep them perpetually connected. They include software that helps engineers to co-develop 3D prototypes in virtual worlds and services that promote social networking and that track employees and outsiders who have the skills needed to nail a job. Corporations are investing lavishly in posh campuses, crafting leadership training enters, and offering thousands of online courses to develop pipelines of talent. Source: Engardio, P. 2007. Managing the new workforce. BusinessWeek, August 20-27: 48-51.  Discussion Question 20: Have you coordinated project work with professionals in other parts of the organization? Other countries? What were the challenges? How were they overcome? Answer: Challenges include time zone differences and communication barriers. Solutions involve using collaborative tools and setting clear expectations for cross-functional teamwork. Discussion Question 21: What are some examples of other companies that have implemented more flexible and permeable organizational structures? Have they been successful? Why? Why not? Answer: Companies like Valve and Zappos have adopted flexible structures, fostering innovation and adaptability, though results vary based on implementation and culture. A. The Barrier-Free Organization Traditional organizations had boundaries intended to maintain order by making the role of managers and employees clearly defined. But these boundaries also stifled communication and created a “not my job” mindset. A barrier free organization enables a firm to bridge differences in culture, function, and goals to find common ground that facilitates information sharing and cooperation. 1. Creating Permeable Internal Boundaries Teams are an important part of barrier free structures because they 1) substitute peer-based for hierarchical control; 2) often develop more creative solutions via brainstorming and other group problem solving techniques; and 3) absorb administrative tasks previously handled by specialists. The SUPPLEMENT below provides examples of how two firms—Nokia and Accenture—were able to achieve high-performing teams whose members were located across many countries.  Extra Example: How Nokia and Accenture Developed High Performing Teams Across National Boundaries Lynda Gratton, of the London Business School, led a study of 52 global teams in 15 multinationals. She asserts that, “Complex teams really struggle to be productive.” Not surprisingly, she found that some multinationals were very successful in overcoming coordination challenges. Below, we discuss Nokia and Accenture: • Nokia’s global marketing and product development teams were very effective—even though they involved scores of people working in several countries. Why? Nokia carefully selects people who have a “collaborative mindset” and carefully includes in task forces a range of nationalities, ages, and, educational levels. Teams are also made up of people who have worked together in the past and others who have never met. Members are encouraged to network online and share their photographs and personal biographies. • Accenture, which spent $700 million on education in 2006, says its 38,000 consultants and most of its services workers take courses on collaborating with offshore colleagues. And each year, Accenture puts up to 400 of its most promising managers through a special leadership development program. They are assigned to groups that can include Irish, Chinese, Belgians, and Filipinos, and specialist in fields such as finance, marketing, and technology. Over 10 months, teams meet in different international locations. As part of the program, they pick a project—developing a new Web page, say—and learn how to tap the firm’s worldwide talent pool to complete it. Source: Engardio, P. 2007. Managing in the new workforce. BusinessWeek, August 20-27: 48-51.  Discussion Question 22: What are some other means of ensuring coordination across geographically dispersed team members? (e.g., leadership, culture, trust, reward systems, rules/regulations) Answer: Effective coordination can be achieved through strong leadership, fostering a collaborative culture, establishing trust, and using integrated reward systems. 2. Developing Effective Relationships with External Constituencies Emphasize that barrier-free relationships must also extend to other divisions of a corporation and to external stakeholders. To promote interdivisional coordination and resource sharing, firms often use interdivisional task forces and common training programs, and create reward and incentive systems that foster cooperation. Boundaries between organizations and external constituencies such as customers also need to be more flexible and porous. IBM’s relationship with the Mayo Clinic is provided as an example.  Discussion Question 23: Have you ever worked for a barrier-free organization? How were relationships among participants in barrier free transactions and/or projects managed? Answer: In a barrier-free organization, relationships are managed through open communication channels and collaborative practices, enhancing transparency and teamwork. The SUPPLEMENT below addresses the example of the Irvine Medical Center, a hospital that developed more efficient processes by fostering barrier-free relationships inside the hospital and with employee unions.  Extra Example: Breaking Barriers at the Irvine Medical Center In 2008, the Irvine Medical Center, a unit of Kaiser Permanente, wanted to streamline its costliest, most time-intensive surgeries: total hip and knee replacements. The task was daunting, because the solution required collaboration among specialists who normally fight for resources. Neither a top-down administrative mandate nor a surgeon-driven approach would work to improve the processes. A top-down approach wouldn’t have worked because surgeons in different groups each had their own way of doing things and would be resistant to an administrative mandate, and each surgery group had little influence on the practices in other surgery units. Also, the hospital had to get other employees on board, and most of those are covered by unionized contracts that limit changes in work load and flow. Kaiser created a collaborative community, the Labor Management Partnership (LMP), that included Kaiser managers, surgeons, and most of the hospital’s employee unions. The LMP worked cooperatively to find efficiency gain opportunities. The benefit was that all members felt engaged. As one nurse stated about operating room procedures, “Usually when we are in the room, we wish it would be done differently, but this time we actually got a voice in how it’s done differently.” They identified ways to streamline sequential operations, such as by bringing housekeeping in to begin clean-up as soon as a surgeon begins suturing the patient closed. They also set up an alert system to ensure that staff knew when they were needed. For example, they trigger the post-op and transportation staff to prepare fifteen minutes before the end of a surgery. Finally, they found ways in which the hospital could be more efficient by adding staff. For example, they added a “floater” nurse who could move between operating rooms to provide extra help or relieve staff on breaks. These steps all reduced surgery cycle-times and also improved employee morale. They increased the number of total joint replacement surgeries from two to four per day and freed up 188 hours of operating time room per year. A survey of the operating room staff showed an 85% increase in job satisfaction. Seeing the benefits, Kaiser implemented similar LMP teams in general surgery, head and neck surgery, urology, heart, and other surgery specialties in Irvine as well as in other Kaiser hospitals. Source: Adler, P., Heckscher, C., & Prusak, L. 2011. Building a collaborative enterprise. Harvard Business Review. 89(7/8); 94-101.  Discussion Question 24: How might approaches such as the Irvine Medical Center’s LMP be used in other organizations? Answer: Approaches like Irvine Medical Center’s LMP can be adapted by promoting cross-functional collaboration and leveraging shared goals and metrics. Some organizations have even benefited from breaking down barriers with competitors by creating cooperative relationships that benefit groups of competitors in an industry.  Discussion Question 25: In what ways might competitors work together cooperatively to mutually benefit all participants? Answer: Point out that barrier-free approaches can be difficult to implement and maintain. The type of democratic processes that emerge in a boundaryless approach often need to be carefully managed. The entire organization — goals and strategies — must support the effort. One way to enhance a barrier-free approach is to utilize well-designed and effectively implemented information technology systems that support knowledge gathering and sharing. Competitors might collaborate on industry standards or joint ventures to share resources and reduce costs, benefiting all participants.  Discussion Question 26: What other types of organizational systems might be utilized to ensure the success of a barrier-free approach? Answer: Organizational systems such as shared services, joint ventures, and strategic alliances can enhance a barrier-free approach by promoting integration and cooperation. STRATEGY SPOTLIGHT 10.5 discusses how large corporations benefit by participating in the Business Roundtable. We highlight how it has aided Walmart’s sustainability initiatives. 3. Risks, Challenges, and Potential Downsides Not all efforts to create barrier-free structures have been successful. Examples are given of companies whose process times increased rather than decreased or broke down because rewards and incentives were not aligned with the objectives of the boundaryless system. An example of team failure by Challenger Electrical Distribution in Jackson, Mississippi identified 5 reasons for failure: 1) limited personal credibility; 2) lack of commitment to the team; 3) poor communications; 4) limited autonomy; and 5) misaligned incentives. Teaching Tip: Virtually all students have worked in teams — either in “real world organizations” or on projects for their college courses. Ask them what they felt the characteristics were of both effective and ineffective teams that they worked on. And, ask them how the teams that they worked on could have been made more effective. EXHIBIT 10.6 outlines the pros and cons of the barrier free type of organization. B. The Modular Organization The modular organization type is actually a central hub surrounded by networks of outside suppliers and specialists that perform non-vital functions. Such outsourcing allows the firm to tap into the knowledge and expertise of “best in class” suppliers but retain full strategic control. For modular companies, outsourcing the non-core functions offers three advantages: 1. It can decrease overall costs, quicken new product development by hiring suppliers whose talent may be superior to that of in-house personnel, avoid idle capacity, realize inventory savings, and avoid becoming locked into a particular technology. 2. It enables a company to focus scarce resources on the areas where they hold a competitive advantage. These benefits can translate into more funding for research and development, hiring the best engineers, and providing continuous training for sales and service staff. 3. By enabling an organization to tap into the knowledge and expertise of its specialized supply chain partners, it adds critical skills and accelerates organization learning. The modular type of organization allows a company to leverage relatively small amounts of capital and a small management team. By minimizing the need to make big investments, it can promote rapid growth. Firms taking this approach, however, must 1) identify the best suppliers and establish mutually beneficial working relationships; and 2) avoid outsourcing critical components of its business in ways that compromise it long-term competitive advantage. The SUPPLEMENT below discusses how Porsche relies on outsourced engineering to remain innovative.  Extra Example: Porsche Outsources Research Porsche makes some of the most technologically advanced cars in the world, but the company does not have a large in-house R&D staff. It has to find another way of sourcing innovative ideas and expertise. One highly successful method is to outsource the work to universities and doctoral students doing basic R&D. Another method is to bring students into the company with internships. Every year, Porsche welcomes some 600 Masters students to work with its engineers for four to six months. Porsche budgets for both outsourced research and internships and has found that it has resulted in cheaper and faster results than most equivalent in-house research efforts. A critical factor in making this work is that the engineers at Porsche must respect their colleagues; whether they are full time colleagues, university researchers or graduate students doing internships; and value what comes out of their research efforts. This allows Porsche to draw on much of this research and rapidly integrate it into their product line. Source: Lorange, P. 2010. Leading in turbulent times. Lessons learnt and implications for the future. Bingley, UK: Emerald Group.  Discussion Question 27: Do you believe the average corporation is capable of integrating such R&D efforts into its operations? Why? Why not? Answer: Corporations can integrate R&D efforts effectively by fostering a culture of innovation, providing resources, and aligning R&D with strategic goals. Discussion Question 28: Are you familiar with any other organizations that have similar programs? Answer: Yes, companies like Google and Apple have innovative programs that encourage creativity and collaboration, enhancing their competitive edge. 1. Strategic Risks of Outsourcing Potential disadvantages of the modular form include 1) loss of critical skills or developing the wrong skills; 2) loss of cross-functional skills; and 3) loss of control over a supplier. EXHIBIT 10.7 addresses the pros and cons of the modular form of organizational structure. It is not only what a firm chooses to outsource but also how they manage relationships with the firms they use as suppliers that will determine their long-term prospects. The SUPPLEMENT discusses how firms need to be very conscious of how they control and manage relationships with suppliers of key components  Extra Example: The Need to Manage the Supply Chain Thomas Choi and Tom Linton argue that manufacturers have delegated too much power to their top-tier suppliers. By pushing the design of key components and the management of lower-tier suppliers onto top-tier suppliers, manufacturers are undermining their ability to control key technologies, innovate, cut costs, and manage risk. Their prescription is for firms to retain or reassert control for items that have the most significant impact on the cost of goods sold. They use the old 80/20 rule and note that typically 20% of the components of a product account for 80% of the product’s total component cost. For example, in a typical smartphone, two or three semiconductors and the LCD screen account for over 50% of the total component cost of the phone. Rather than delegate the design, manufacturing, and sourcing of these components to top-tier suppliers, manufacturers should be more involved in managing the design process and maintain direct contact with lower tier suppliers of key components. If they don’t, they delegate key decisions to firms that may not always be working in the firm’s best interests. For example, one risk that arises if a phone manufacturer outsources the purchasing of the semiconductors to a top-tier supplier is that the supplier may choose to use a chip that benefits the supplier firm at the expense of the phone manufacturer. If the supplier works with several phone manufacturers, it may choose to use a supplier and a specific semiconductor that it is also using in a competing company’s phone rather than the optimal chip for this phone design. If the phone firm, instead, works directly with the chip supplier, they are more likely to get the best chip for their phone. Manufacturers who retain control over their key components develop deep knowledge of the technical aspects of the parts, have stronger knowledge of the critical costs in their supply chains, and can react more quickly to market dynamics since they have direct ties with the suppliers of these key components. The experience of LG Electronics bears this out. In 2009, when recession hit the electronics industry, LG worked directly with about 300 top- and lower-tier suppliers to reduce components costs and found savings of more than $6 billion. It would have been unlikely to find similar savings potential if it delegated the cost savings efforts to top-tier suppliers. Having direct ties with lower-tier suppliers also gives the manufacturers direct insight on new technology development and new product introductions in these supplier industries, enhancing their ability to design and launch innovative products using these leading technologies. Sources: Choi, T. & Linton, T. 211. Don’t let your supply chain control your business. Harvard Business Review. 89(11); 112-116.  Discussion Question 29: Why do firms often choose to delegate responsibilities to top tier suppliers even though it leaves them less responsive and less able to manage costs in their supply chain? Answer: Firms delegate to top-tier suppliers to leverage expertise, manage costs, and focus on core activities, despite potential challenges in responsiveness. C. The Virtual Organization The virtual type of organization is an evolving network of independent companies – suppliers, customers, even competitors — linked together to share skills, costs, and access to one another’s markets. By pooling and sharing resources and working together in a cooperative effort, each gains in the long run. Virtual organizations are a type of strategic alliance in which complementary skills are used to pursue common objectives. Lockheed Martin is presented as an example of a unique alliance of a company with academia and government. Virtual organizations may not be permanent. And, participating firms may be involved in multiple alliances at once. Unlike the modular type, virtual organization firms give up part of their control and participate in a collective strategy that enhances their own capacity, makes them better able to cope with uncertainty, and enhances their competitive advantages. STRATEGY SPOTLIGHT 10.6 describes how collaborative relationships involving five global firms from five separate industries allows the firms to collectively develop an environment friendly plastic – a component they all need for their products. The SUPPLEMENT below describes the importance of technology in linking organizations virtually. It describes a virtual organizing initiative that led to cost savings and faster response times.  Extra Example: Technology-Enabled Virtual Organizing Enhances Productivity at Analog Devices When Analog Devices, a global designer and manufacturer of semiconductors needed to enhance collaboration among the 9,000 engineers it employs around the world, it turned to virtual organizing. Analog Devices produces a wide range of integrated circuits for analog, digital, and mixed signal processing used in many sectors of the economy including cars, cameras, medical imaging, and factory automation. It is a competitive arena and Analog Devices reasoned it could respond faster and be more competitive if the engineering staff could collaborate more effectively across long distances. To achieve this, it made infrastructure changes that allowed it to be more agile and operate more virtually. First, it introduced Voice over IP (VoIP) at all its U.S. sites. This alone led to efficiencies that saved the company thousands of dollars per month, in part because it allowed engineers on both sides of the Atlantic to collaborate in real time without interruption. Secondly, it increased the capacity of its network such that engineers could share information from very large databases using “any-to-any” conversion processes, that is, a uniform method of converting all message structures into easy-to-understand formats regardless of the message syntax. In other words, it allows for exchanging information that previously might have been incompatible with drag and drop ease. According to David Coughlan, Analog Devices’ Network Planning and Design Manager, “The [new] network has allowed our total throughput to triple. . . That was a twofold win: dollar savings with huge service improvements.” Sources: Dharmagadda, T. 2009. Why is the concept of ‘virtual organizations’ all encompassing? http://tushneem.wordpress.com, May 24: np. Anonymous. 2007. Analog Devices case study. www.bt.com, March 19: np.  Discussion Question 30: What are some other ways that virtual organizing—either with the help of technology or not—might contribute to costs savings and service improvements? Answer: Virtual organizing can reduce overhead, enable global reach, and improve service by using technology to facilitate remote collaboration and streamlined operations. The SUPPLEMENT below points out that effective leadership is the number one factor that influences success in a virtual organization. Moreover, it discusses the importance of collaboration tools, goal definition, and coaching where HR can help a manager enable a virtual team.  Extra Example: Transitioning to a Virtual Organization The virtual workspace can be defined as an environment where employees work away from company locations and communicate with their respective workplaces via telephone or digital devices. The virtual organization has different and/or greater challenges than the traditional face-to-face workplace environment, with lines of work crossing over geographies, markets, cultures, alliances, partnerships, and supplier networks. The very nature of virtual work requires planning and thoughtful design. The development and evaluation of virtual teams present a unique opportunity for HR to partner with many different elements of the business. Further, with increasing dependence on technology for communication in the workplace, the role of leadership is changing. Leaders of virtual workplaces require certain essential skills including a strong focus on relationships, emotional intelligence, a track record of results and innovation, a focus on process and outcome, and the ability to give positive and constructive feedback. HR should be part of any pilot program to help leaders understand, anticipate and mitigate management problems. Elain Orler, president of talent Function Group LLC, summarizes, “Leaders need to be more flexible in how and when they communicate. Some people connect on instant messenger while others prefer text messages…the more flexibility I have, the more I can connect with my diverse team.” Flexibility of leadership seems to be the paramount to ensure success in virtual workplace. Source: Anonymous. 2010. Successfully transitioning to a virtual organization: Challenges, impact and technology. HR Magazine. April. Vol. 55 Issue 4: 1-9.  Discussion Question 31: The supplement above discusses the role of leadership in a virtual workplace. Can you think of an example of how a leader bridges and understand cultural differences in virtual workplace? Answer: Leaders bridge cultural differences by promoting inclusivity, understanding diverse perspectives, and ensuring clear communication in virtual teams. Discussion Question 32: Can such virtual organizations be successful in the long run? How can leaders motivate employees that they rarely see in person? Can relationships develop in such an environment? Are they relevant for productivity? Answer: Virtual organizations can succeed long-term by fostering trust, setting clear goals, and maintaining engagement through regular communication and recognition. 1. Challenges and Risks Despite their many advantages, alliances often fail to meet expectations. One reason is that unique managerial skills are required — managers who can find good partners, build win-win relationships, and achieve the right balance of freedom and control. Point out that some alliances are short-term only and may be dissolved once the objective is fulfilled. Others may have long-term objectives. The key to managing both is to be clear about the overall strategic objectives at the time the alliance is being formed. The virtual organization is the culmination of joint venture strategies of the past. To form effective virtual organizations, strategic planning is needed to determine what synergies exist and how to capitalize on them by combining core competencies. As such, the virtual form may work better for some types of organizations than others.  Discussion Question 33: What types of contingencies are likely to influence whether a virtual organizational type will be a successful form for pursuing a venture or strategic goal? Answer: Contingencies include the nature of the venture, technological capabilities, and the organization’s ability to manage remote teams effectively. EXHIBIT 10.8 summarizes the pros and cons of the virtual form of organizational structure. The SUPPLEMENT below discusses how a high school student was able to co-lead a virtual team that earned $400,000 for web design work.  Extra Example: A Virtual Team of Twelve “Geeks” that Spans National Boundaries Max Oshman, a high school junior in the United States, took in $400,000 for his Web design work that only took three months. Actually, it was Max and 11 fellow geeks — a virtual team of twelve. Says Max: “Some of them live in the U. K., two in Croatia, two in Sweden and the rest are scattered around Southern California, New York, Texas, and Amsterdam.” The leaders of this e-gang — called pLotdev Multimedia Developers LLC — are Max and Yves Darbouze, a 30-year old Miami resident. The e-gang’s average age is 23. Max has never met any of his collaborators in person. How does the team communicate? According to Max: “Mostly by e-mail. When we have a big project, we communicate via phone. We also have group talks using MSN Messenger.” Max and Yves joined forces (by e-mail) after Max completed his first book, Macromedia Flash: Super Samurai, when he was 15. Max’s co-author introduced him to Yves, who needed some Web design work done, thinking Max would be good for the job. “We spoke about the industry and where it was going, and we shared many of the same beliefs,” says Max. “We decided that we would start a company.” At the time Yves had no idea that Max was 17. Max and Yves are convinced that a pair of Macromedia’s software programs will change the world. One is Flash, a 3-D graphics program. The other is ColdFusion, which lets people update Web sites without a programmer. Rich Karlgaard, the writer, was very impressed when Max explained the software to him. Mr. Karlgaard felt that it made perfect sense: cheap, off-the-rack software that will open up Web design to artists, the way Adobe opened up page design 15 years ago. Max, of course, probably missed the analogy — fifteen years ago, he was only two! Source: Karlgaard, R. 2003. Flash kid. Forbes. March 17: 39.  Discussion Question 34: Although these are clear advantages to working virtually, there may be disadvantages as well. What are the potential problems of working virtually as is described in this example? Answer: Potential problems include isolation, communication breakdowns, and reduced team cohesion, which can impact productivity and collaboration. D. Boundaryless Organizations: Making Them Work Many times, the most effective way to design an organization is by using a combination of organizational types. Often, when firms face external pressures, resource scarcity, and declining performance, they tend to become more internally focused. Point out that this may actually be the best time to reexamine value chain activities and determine how to better manage relationships both internally and externally. By so doing, organizations may find that they can solve some of their problems by turning to boundaryless forms of organizing. The SUPPLEMENT below presents an excerpt from the book Wikinomics that emphasizes the advantages of combining several aspects of boundaryless organizing to enhance collaboration.  Extra Example: Boundaryless Organizations Help Companies Achieve the New Rule for Global Competitiveness: “Collaborate or Perish” Modular organizations favor outsourcing; virtual organizations highlight accessing global markets. Both practices are enabled by, and contribute to, collaboration. In the book Wikinomics: How Mass Collaboration Changes Everything by Don Tapscott and Anthony Williams, the authors suggest that Web-based collaboration activities are the key to effective outsourcing and enhanced globalization. Here is an excerpt from the book: “Globalization . . . affects the geography of innovation. The world provides a diverse set of environments for innovation, depending on factors like technology infrastructure, country-specific skills, income levels, and competitive dynamics. Innovative multinational firms have long tapped these diverse environments for new ideas. Even small and medium-size businesses are seeing the upside in the rise of a more open global economy. Unlike large firms, they are not deeply encumbered by large workforces, substantial investments in physical plant, or organizational rigidities. Now, with a truly global business infrastructure at hand, they can literally buy, off the shelf, practically any function they need to run a company. Everything from market research to back-office support to contract manufacturing is available on tap. And most, if not all of it, can be managed over the Web. Suddenly the small can become very large quickly with superefficient business models that enable them to exploit world-class capabilities. In the collaboration economy, the real advantage of global sourcing is not cost savings but the endless possibilities for growth, innovation, and diversity. The brainpower behind the next generation of products and services will be more numerous, more diverse, and more distributed than at any time in history. Tomorrow’s global marketplace will provide an abundance of opportunity and a plethora of choices and variety. And the greatest growth engines of the twenty-first century will be business webs that fuse the resources and competencies of the developed and developing worlds into unbeatable combinations. As it turns out, in the global economy no man, company, or nation is an island. And the bona fide new business rule for competitiveness, ‘collaborate or perish,’ is a global one.” Source: Tapscott, D. & Williams, A. D. 2008. Wikinomics: How Mass Collaboration Changes Everything. New York: Penguin Group, pp. 61-62.  Discussion Question 35: In what way does collaboration give small firms advantages over large firms? What might be the disadvantages for small firms trying to use collaboration methods? Answer: In making the transition to more democratic, participative styles of management and greater reliance on teamwork, managers must select a balance of tools and techniques to facilitate the effective coordination and integration of key activities. The next five subsections address factors that must be considered in any transition from traditional to boundaryless organization forms. 1. Common Culture and Shared Values 2. Horizontal Organization Structures 3. Horizontal Systems and Processes 4. Communications and Information Technologies 5. Human Resources Practices STRATEGY SPOTLIGHT 10.7 describes how Procter & Gamble’s successful introduction of Crest Whitestrips could be partially explained by the use of effective boundaryless concepts. Managers need to also be aware of the benefits and costs of developing strong and long-term relationships with both internal and external stakeholders. We discuss three primary benefits that organizations accrue when building and relying on long-term relationships. • Reduced agency costs within the firm • Reduced transaction costs with suppliers and customers • Greater commitment to shared goals and finding win-win solutions We also identify three potential costs of relying on long-term relationships. • Firms get locked-in with employees, suppliers, and customers • Conflicts are resolved through ad hoc negotiations and processes • The social capital of individuals and firms drives their opportunities rather than their competencies • III. Creating Ambidextrous Organizational Designs In this section we address the challenge that organizations face in rapidly changing and complex competitive environments: exploring for new opportunities (adaptability) and effectively exploiting the value of their existing assets and competencies (alignment). Firms that achieve both adaptability and alignment are considered ambidextrous organizations — aligned and efficient in how they manage today’s business but flexible enough to changes in the environment so that they will prosper tomorrow. A. Ambidextrous Organizations: Key Design Attributes Here, we focus on a study by O’Reilly and Tushman that investigated 35 efforts to launch breakthrough innovations undertaken by 15 business units in nine different industries. They studied the organizational designs as well as the processes, systems, and cultures associated with the innovative projects and their impact on the operations and performance of the traditional businesses. The firms organized their breakthrough projects into one of four primary ways: • functional organizational structures • cross-functional teams • unsupported teams • ambidextrous organizations (structurally independent units integrated into the existing senior management structure) B. Why Was the Ambidextrous Organization the Most Effective Structure? The ambidextrous organizational form was most effective on both dimensions: success in creating desired innovations and the performance of the existing business. The study found that there were many factors which explained the superior performance. Among these were: • a clear and compelling vision • cross-fertilization among business units • tight coordination and integration at the managerial levels • sharing was encouraged and facilitated by effective reward systems • established units were shielded from the distractions of launching new businesses  Discussion Question 36: Do organizations that you are familiar with share the structural attributes of ambidextrous organizations? Why? Why not? Answer: Some organizations, like Google and 3M, exhibit ambidextrous traits by balancing innovation with operational efficiency, adapting to both exploration and exploitation. The SUPPLEMENT below provides some of the attributes of ambidextrous behaviors of individuals. It was based on research which involved interviews with a wide variety of people from front-line workers to senior executives.  Extra Example: The Behaviors of “Ambidextrous Individuals” Based on a study by Julian Birkinshaw and Cristina Gibson (that was published in the Summer 2004 issue of the MIT Sloan Management Review), ambidextrous individuals: • take the initiative and are alert to opportunities beyond the confines of their own jobs • are cooperative and seek out opportunities to combine their efforts with others • are brokers, always looking to build internal linkages • are multitaskers who are comfortable wearing more than one hat Source: Birkinshaw, J. & Gibson, C. 2004. Building ambidexterity into an organization. MIT Sloan Management Review, 45 (4): 47-55.  Discussion Question 37: Think about times in your own life when you were expected to both cooperate and take initiative. How easy or difficult is it to be an ambidextrous individual? Teaching Tip: The above behaviors would appear to have important career implications. You might consider asking students questions such as the following: First of all, you might ask them what type of behaviors would be conducive to ambidexterity — prior to discussing the four bulleted items. Then, consider asking them how important they feel these behaviors are for career success as well as how to develop such behaviors (e.g., taking the initiative to develop social networks, being open to new opportunities, being comfortable taking on multiple projects, and improving one’s ability to be a valuable “team player,” and so on). Answer: Being ambidextrous involves managing conflicting demands for innovation and efficiency, requiring flexibility and effective time management. I IV. Issue for Debate In setting up roomkey.com, the hotel chains are creating a type of boundaryless organization in that they are working cooperatively with competing firms in creating and managing a subsidiary organization and website to sell hotel space.  Discussion Question 38: Do you think roomkey.com will be successful? Why or why not? Answer: The discussion will likely focus on the challenge of competing against established competitors in this market and building a unique brand name for roomkey.com. However, the instructor should also push the students to consider the challenge of managing roomkey.com as an ongoing business. Six competing chains founded this website and now have at least nine hotel chains cooperating and listing on the website. It is not clear that they will all have the same goals for roomkey.com or will always cooperate with each other. To facilitate the discussion, the instructor can draw on the cons of boundaryless organizations listed in Exhibit 10.6 in the text. Roomkey.com’s success depends on its ability to offer unique value and effectively compete with OTAs through differentiation and strategic partnerships.  Discussion Question 39: What actions can roomkey.com take to try to pull more business away from the OTAs? Answer: Try to get the students thinking as broadly as possible here. They may start with easy answers, such as lower prices and additional banner advertising on other sites. You may want to also push them to consider options, such as linking with airlines to have a direct link option from airline websites to roomkey.com. Airlines may be receptive to this since they also struggle with OTA websites. They could also work this to be a preferred site for travelers by creating a loyal customer program where travelers booking at any of the member chains could gain loyalty points for any chain they book on the website. Roomkey.com can attract business by offering exclusive deals, enhancing user experience, and leveraging hotel chains’ loyalty programs.  Discussion Question 40: How can the chains use roomkey.com to improve their position relative to OTAs even while it is unclear whether or not roomkey.com will take off? Answer: By threatening to forward integrate and replace the OTAs, the bargaining power of the hotel chains may increase. They may push to renegotiate the arranged deals with the OTAs in exchange for not promoting roomkey.com as much as they could or not making many rooms available on roomkey.com. This issue also can be linked back to question one since the member chains may question how committed the other chains are and whether or not they can be trusted. They may fear their competitors will abandon their commitment to roomkey.com if , in doing so, the competitors can strike a better deal with the OTAs. Chains can use Roomkey.com to improve direct bookings, gather valuable data, and strengthen relationships with customers, even amidst uncertainty.  V. Reflecting on Career Implications Below, we provide some suggestions on how you can lead the discussion on the career implications for the material in Chapter 10.  Boundaryless Organizational Designs: Does your firm have structural mechanisms (e.g., culture, human resources practices) that facilitate sharing information across boundaries? Regardless of the level of boundarylessness of your organization, a key issue for your career is the extent to which you are able to cut across boundaries within your organization. Such boundaryless behavior on your part will enable you to enhance and leverage your human capital. Evaluate how boundaryless you are within your organizational context. What actions can you take to become even more boundaryless? Students may benefit from their abilities to interact with others in their local business environment, be they others in different divisions of the organization, different geographic regions, different companies, or different levels of the hierarchy. It’s most effective to work with students who are able to interact with those outside their office, and most probably can. Even in the smallest organizations, student employees will probably be able to interact with suppliers and customers. To increase students’ awareness of their boundary-spanning activities, ask students to list ways that they interact with others outside their office. Then ask students to assess the value of these boundary-spanning interactions. At the least, students should appreciate the information that these interactions give. The interactions are also likely to be enjoyable. The information can be very useful, as it may help students do their jobs and be more aware of career opportunities. Next, ask students what they can do to increase their interactions with others outside their office. Some possibilities are to get more involved with selling to customers, or supply chain management. For those working in multidivisional firms, there may be opportunities to volunteer or otherwise participate in cross-functional task forces or new venture initiatives. The point of the discussion is to increase students’ appreciation of these outside interactions and relationships.  Horizontal Systems and Processes: One of the approaches suggested in the chapter to improve boundarylessness within organizations is reengineering. Analyze the work you are currently doing and think of ways in which it can be reengineered to improve quality, accelerate response time, and lower cost. Consider presenting the results of your analysis to your immediate superiors. Do you think they will be receptive to your suggestions? This discussion is to apply the concept of reengineering to students’ careers. As students work in their organizations, it is usually a good idea to consider how the work can be improved. Ask students how their organizational processes can be reengineered in a way that reduces boundaries. Perhaps a customer-centric team could be created that would deal with all issues related to large customers. This team would make it much easier to coordinate between divisions on issues related to that customer, thus limiting barriers between divisions. Students my come up with other possible examples, and their contributions show they understand the concept. To present their thinking to immediate superiors, there is no correct method because it all depends on factors such as students’ position, experience, relationships with superiors, and organizational culture. However, students could discuss the prospect of approaching their superiors and assessing what would happen. Class discussion of the possibility will likely bring out some of the factors that could determine the success of the proposal. The point is to get students to visualize the possibility. They may act on it someday, and that would probably help their careers.  Ambidextrous Organizations: Firms that achieve adaptability and alignment are considered ambidextrous. As an individual, you can also strive to be ambidextrous. Evaluate your own ambidexterity by assessing your adaptability (your ability to change in response to changes around you) and alignment (how good you are at exploiting your existing competencies). What steps can you take to improve your ambidexterity? There are three steps to this discussion. First, ask students to assess their adaptability. Students who rate themselves high on this characteristic may have potential to be entrepreneurs. Second, ask students to assess their alignment. Alignment is very important as it should be maximized if the organization were to get the most value out of the students, and students were to maximize their potential. The problem with achieving ambidexterity is that responding to changes around you, such as dealing with crises and “putting out fires”, draws employees away from their areas of expertise. Third, ask students how they can improve adaptability and alignment. One possibility is to develop expertise in a specific type of recurring problem and then handle that type of challenge when it comes up. Let others handle the other types of challenges. Most possible solutions may involve some sort of teamwork, and that point should emerge from the discussion. Let students wrestle with the issue. It’s complex and nuanced, so use their contributions to assess how well they understand the situation. The point is to appreciate the nature of much managerial work, and to think about working with others to maximize team effectiveness.  VI. Summary Successful organizations must ensure that they have the proper type of organizational structure. Furthermore, they must ensure that their firms incorporate the necessary integrating and processes so that the internal and external boundaries of the firm are flexible and permeable. Such a need is increasingly important, as the environments of firms become more complex, rapidly changing, and unpredictable. In the first section of the chapter, we discussed the growth patterns of large corporations. Although most organizations remain small or die, some firms continue to grow in terms of revenues, vertical integration, and diversity of products and services. In addition, their geographical scope may increase to include international operations. We traced the dominant pattern of growth, which evolves from a simple structure to a functional structure as a firm grows in terms of size and increases its level of vertical integration. After a firm expands into related products and services its structure changes from a functional to a divisional form of organization. Finally, when the firm enters international markets its structure again changes to accommodate the change in strategy. We also addressed the different types of organization structure — simple, functional, divisional (including two variations: strategic business unit and holding company), and matrix as well as their relative advantages and disadvantages. We closed the section with a discussion of the implications for structure when a firm enters international markets. The three primary factors to take into account when determining the appropriate structure are type of international strategy, product diversity, and the extent to which a firm is dependent on foreign sales. The second section of the chapter introduced the concept of the boundaryless organization. We did not suggest that the concept of the boundaryless organization replaces the traditional forms of organization structure. Rather, it should complement them. This is necessary to cope with the increasing complexity and change in the competitive environment. We addressed three types of boundaryless organizations. The barrier-free type focuses on the need for the internal and external boundaries of a firm to be more flexible and permeable. The modular type emphasizes the strategic outsourcing of noncore activities. The virtual type centers on the strategic benefits of alliances and the forming of network organizations. We discussed both the advantages and disadvantages of each type of boundaryless organization as well as suggested some techniques and processes that are necessary to successfully implement them. These are common culture and values, horizontal organization structures, horizontal systems and processes, communications and information technologies, and human resource practices. The final section addresses the need for managers to recognize two opposing challenges. These include (1) being proactive in taking advantage of new opportunities, and (2) ensuring the effective coordination and integration of existing operations. Such challenges suggest the need for ambidextrous organizations. Such organizations are both efficient in how they manage existing assets and competencies as well as take advantage of opportunities in rapidly changing and unpredictable environments. We discussed several attributes of effective ambidextrous organizations. Chapter 10: Creating Effective Organizational Designs Select an organization with which you are familiar — preferably one that you have worked in. To what extent is this organization “boundaryless,” that is, are the boundaries across departments and hierarchical levels rather permeable or are they fixed and rigid? How is this aspect of organizational design affecting its performance? How could it be improved? Teaching suggestions: *When and under what kind of industry environments is boundarylessness more important and when would it not work? Clearly, organizations operating in dynamic environments would need greater permeability across boundaries than those that operate in stable and predictable environments. Boundarylessness is a higher concept than mere communication and coordination across departments. Not all organizations can afford to be boundaryless. Consider a bank. Tight controls and rigidity are very critical for maintaining the integrity and efficiency in a banking system. Also, the strategy a firm pursues will have a determining impact on its structure. A tight cost control strategy would require a rigid organization structure with strict controls than a more flexible system as envisaged by a boundaryless organization. The importance of keeping the structure aligned with the strategy needs to be driven home strongly. You can then raise discussion on the various forms of boundarylessness. Barrier-free type involves making both internal and external organizational boundaries (with outside organizations such as supplier organizations, buyer organizations etc.,) permeable. Modular organizations and virtual types of organizations focus on the need to create seamless relationships with external organizations. Outsourcing non-core activities is at the core of a modular organization. Forging alliances among independent entities to exploit specific market opportunities is the essence of a virtual organization. (Strategy Spotlight 10.6 provides the example of collaborative relationships among firms from different industries.) Organizations such as Dell can be used as examples of organizations that balance between the need for tight control and creating boundarylessness. Dell has extremely tight controls on its assembling operations and supply chain management. On the other hand, it made its boundaries extremely permeable with its suppliers. Suppliers own the inventory facility on the Dell campus in Austin, Texas. Creating effective partnerships with various stakeholder groups reflects itself in the structure and control at Dell. You can draw attention to the kind of culture, communication, investment in information technologies and human resource practices that are necessary to support a boundaryless organization. End of Chapter Teaching Notes Chapter 10: Creating Effective Organizational Designs Summary Review Questions 1. Why is it important for managers to carefully consider the type of organizational structure that they use to implement their strategies? Response: Organization structure is the formalized patterns of interactions that link a firm’s tasks, technologies, and people. Structures ensure that firms use resources effectively to accomplish the organizational mission. Firms also need structure to balance the need to divide tasks into meaningful groups and integrate between them to ensure efficiency and effectiveness. Answer: Managers must align organizational structure with strategy to ensure efficient implementation and adaptability. An appropriate structure facilitates coordination, decision-making, and resource allocation. 2. Briefly trace the dominant growth pattern of major corporations from simple structure to functional structure to divisional structure. Discuss the relationship between a firm’s strategy and its structure. Response: A simple structure is an organizational form in which the owner-manager makes most of the decisions and controls activities, and the staff serves as an extension of the top executive. The entire management is one team. As the corporation becomes more complex, simple structures tend not to be capable of dealing with all the complexity, so the corporation divides problems into manageable chunks by function. Teams form to handle marketing, accounting, operations, and other functional tasks. This new organizational structure with groups reporting to the CEO is called a functional structure. As corporations become more complex, they add on multiple related divisions, each with a functional structure, also called a divisional structure. So the firm could have functional structure divisions for a number of (a) geographical markets, (b) products, and/or (c) projects. For the divisional structure, the divisions are interdependent and the corporation follows a single, coherent mission. Firms follow a growth strategy as they evolve from a simple structure to a functional structure. From functional structures they can follow a related diversification strategy to evolve into a divisional structure. Corporations with functional structures that follow a vertical integration strategy maintain their functional structures but with more integration. As these vertically integrated corporations pursue related diversification, they tend to adopt division structures. And corporations with functional structures that follow unrelated diversification strategies tend to develop holding company structures, which have business units that do not follow related business strategies. As these holding companies develop relatedness in their products and markets, their business unit strategies converge and the corporations tend to evolve into division structures. Answer: Major corporations often evolve from simple structures to functional structures as they grow, then to divisional structures to manage increased complexity. Structure should align with strategy to effectively support growth and operational needs. 3. What are the relative advantages and disadvantages of the types of organizational structure—simple, functional, divisional, matrix—discussed in the chapter? Response: The simple structure has advantages of: • Very effective and efficient in the coordination of activities • Control systems and performance evaluation that are efficient and informal • Decision making that is centralized and clear. The disadvantages of the simple structure include: • Possible misunderstandings of tasks and responsibilities, because they are frequently not written, which may lead to conflict and confusion • Employees who may act out of self-interest due to the lack of clarity in boundaries and sanctions. Such actions may erode other employees’ motivation and waste resources • The small size and flat structure that may limit potential upward mobility of employees, which makes recruitment and retention of managers a possible problem The functional structure has the advantages of: • Centralizing and coordinating activities within each functional area • Decision making that is centralized and clear • A more efficient and effective use of managerial talent • Facilitated career paths within each functional area. The disadvantages of the functional structure include: • Difficult coordination due to the functional-specific perspectives in each department that leads to stovepipes or silos within the organization • Short-term thinking based on what is best for the functional area and not the organization as a whole • Top executives distracted by the need to settle conflicts between departments • Difficulties with establishing performance evaluation standards that are consistent across departments The division structure has the advantages of: • Enabling division managers to set strategies that are effective within the division’s business environment • Less conflict between functional departments • Greater coordination and integration between all divisions and functional areas due to multiple levels of general managers in the organization • The disadvantages of the division structure include: • The expense of maintaining large numbers of general managers • Dysfunctional competition between divisions • Consistent manager evaluation that promotes distributive bargaining between divisions and inhibits sharing of resources • Inconsistent corporate image across various products and markets • A tendency to focus on short-term performance The matrix structure has multiple lines of authority and some individuals report to at least two managers. The advantages of the matrix structure include: • Better use of specialized personnel, equipment, and facilities • Less duplication of functions • Resource sharing enables collaboration and more effective response to changes in the business environment • Organizational flexibility that gives managers greater range of responsibility, which may help to develop their skills and competencies The disadvantages of the matrix structure include: • Uncertainty of priorities due to dual-reporting structure • Possible power struggles and conflict over performance evaluations, resources, and personnel • Complicated working relationships, with a possible over reliance on group processes • Diffusion of responsibility and accountability Answer: Simple: Advantages include flexibility and low cost; disadvantages are limited scalability and lack of specialization. Functional: Advantages are efficiency and expertise; disadvantages include siloed operations and slower decision-making. Divisional: Advantages include responsiveness and market focus; disadvantages involve duplication and complexity. Matrix: Advantages are dynamic resource allocation; disadvantages include potential for confusion and conflict. 4. When a firm expands its operations into foreign markets, what are the three most important factors to take into account in deciding what type of structure is most appropriate? What are the types of international structures discussed in the text and what are the relationships between strategy and structure? Response: The three factors to take into account are (1) the type of strategy that is driving the firm’s foreign operations, (2) product diversity, and (3) the firm’s dependence on foreign sales. The text discusses the following structures: • International division • Geographic-area division • Worldwide functional • Worldwide product division • Worldwide matrix • Multidomestic strategies require firms to respond to unique conditions in each country, and are consistent with the international division and geographic area division structures. These structures allow autonomy of local mangers to respond to conditions in the local business environment. As the firm’s dependence on foreign sales increases, the preferred structure would likely change from international division to geographic area division. As product diversity increases, along with dependence on foreign sales, the firm will likely benefit from a worldwide matrix structure. Global strategies require firms to coordinate operations across countries, and are consistent with the worldwide functional and the worldwide product division structures. Firms with low levels of product diversity tend to benefit from worldwide functional structures, and firms with high product diversity tend to benefit from worldwide matrix structures. Answer: Key factors for choosing a structure for foreign markets include market diversity, local responsiveness, and control over international operations. Structures like global, international, and geographic-area structures align with different strategies based on global integration and local adaptation needs. 5. Briefly describe the three different types of boundaryless organizations: barrier-free, modular, and virtual. Response: Boundaryless organizational designs have permeable boundaries, be they vertical, horizontal, external, or geographic. Barrier-free organizations bridge real differences in culture, function, and goals to find common ground that facilitates information sharing and other forms of cooperative behavior. Removing barriers enables firms to share information and engage in other types of cooperative behaviors, thus improving innovation, productivity and enhanced organizational capability. Modular organizations outsource nonvital functions, which benefits from the knowledge and expertise of outside suppliers while retaining strategic control. Virtual organizations are continually evolving networks of independent companies that are linked together to share skills, costs, and access to one another’s markets. The companies may be suppliers, buyers, or even competitors that mutually benefit from the closeness. Answer: Barrier-free: Promotes open communication and collaboration. Modular: Outsources non-core activities to focus on core competencies. Virtual: Relies on technology for collaboration across dispersed locations. 6. What are some of the key attributes of effective groups? Ineffective groups? Response: Effective groups, or teams, are able to maximize the potential of organizational human capital. Research indicates that effective teams have: • Common culture and shared values • Horizontal organizational structures, which group similar and related business units under common management control • Horizontal systems and processes, which break through barriers that often exist between divisions • Communications and information technologies, which play an important role in bridging gaps between isolated units • Human resource practices, which upgrade human capital by providing training and skills to handle new information technologies, build effective teams, and interact with individuals with different perspectives Ineffective groups may respond to external pressures, resource scarcity, or declining performance by becoming more internally focused. But this response does not take advantage of innovative opportunities for radically improving the organization. Answer: Effective groups have clear goals, strong communication, and cohesive dynamics. Ineffective groups suffer from poor communication, unclear objectives, and internal conflict. 7. What are the advantages and disadvantages of the three types of boundaryless organizations: barrier-free, modular, and virtual? Response: The advantages of barrier-free organizations include: • Leverages talents of all employees • Bridging differences in culture, function, and goals to find common ground • Facilitates information sharing and other types of cooperative behavior • Enables quicker response to market changes through a single-goal focus • Greater innovation and productivity • Can lead to coordinated win-win initiatives with key suppliers, customers, and alliance partners The disadvantages of barrier-free organizations include: • Difficult to overcome political and authority boundaries inside and outside the organization • Lack of strong leadership and common vision, leading to coordination problems • Longer time to sort out responsibilities on projects • Lacks high levels of trust, which can impede performance • Frustration of managers trained in traditional hierarchical organizations • Possible lack of top management commitment • Possible high turnover of team members • Insufficiently frequent meetings • The advantages of modular organizations include: • Decrease in overall costs (stimulate new product development by incorporating talented personnel from suppliers, avoid idle capacity, reduce inventories, and avoid being locked in to a particular technology) • Focus scarce resources on the areas where firms hold competitive advantages (maintains control over most critical activities, more funding for research and development, hiring the best talent, and providing training for sales and service staff) • Tapping into the knowledge and expertise of specialized supply chain partners, which adds critical skills and accelerates organizational learning. Firms benefit from best practice throughout the industry supply chain The disadvantages of modular organizations include: • Loss of common vision through reliance on outsiders • Loss of critical skills and possible competitive advantage • Developing the wrong skills • Loss of flexibility to respond to market shifts by bringing back in to the firm specific activities • Loss of cross-functional skills • Loss of control over suppliers The advantages of virtual organizations include: • Sharing of costs and skills • Access to global markets • Increased market responsiveness • Allows access to best practices and core competences of all members in the organization • Encourages knowledge sharing and accelerates organizational learning The disadvantages of virtual organizations include: • Lack of boundaries between constituent firms, thus making it difficult to determine the terms of exchanges • Potential loss of operations control among partners • Loss of strategic control over emerging technologies • Need to acquire new and difficult-to-acquire management skills Answer: Barrier-free: Advantages include flexibility and collaboration; disadvantages are potential for ambiguity and lack of structure. Modular: Advantages are cost savings and focus on core activities; disadvantages include dependency on external partners. Virtual: Advantages are global reach and cost efficiency; disadvantages are isolation and management challenges. 8. When are ambidextrous organizational designs necessary? What are some of their key attributes? Response: Ambidextrous organizations achieve both alignment, involving short-term coordination of activities and modest incremental innovations, and adaptability, involving long-term proactive actions characterized by dramatic, breakthrough innovations that enable a firm to better exploit opportunities. Most business environments indicate a need for some degree of ambidextrous organization. Too much reliance on adaptability will result in low short-term profitability. Too much reliance on alignment will result in loss of business opportunities. Ambidextrous organizations have established traditional structures that maintain alignment, and breakthrough efforts organized within structurally independent units that were integrated into the existing senior management structure. Effective ambidextrous structures are related to: • A clear and compelling vision that is consistently communicated by senior management • Cross fertilization among business units without cross-contamination • Tight coordination and integration of management that enabled sharing of resources such as cash, people, and expertise • Reward systems that pertain to overall company goals • Autonomy of the breakthrough effort Answer: Ambidextrous designs are necessary for firms needing to balance exploration and exploitation. Key attributes include flexible structures, dual focus on innovation and efficiency, and adaptive processes. Experiential Exercise Many firms have recently moved toward a modular structure. For example, they have increasingly outsourced many of their information technology (IT) activities. Identify three such organizations. Using secondary sources, evaluate (1) the firm’s rationale for IT outsourcing and (2) the implications for performance. Response: You may get students responding with the following pattern. Note that these are just hypothetical cases not similar to any real firm. These examples are merely illustrative. Firm Rationale Implication(s) for Performance Firm A outsourced statistical process controls for its manufacturing operations Reduce costs Cost savings, but lower quality, and some problems dealing with international partners Firm B outsourced e-marketing Get better IT quality Got better IT, but had difficulties managing relationship with partner Firm C outsourced its IT operations Focus on marketing, and outsource other activities Improvement in marketing, but loss of IT expertise that had contributed to firm success (Note to instructor) For each example, ask students to identify the activity(ies) that have been outsourced, the firm’s rationale, and the implications for performance. It is interesting to also challenge the students to identify potential costs of the outsourcing (assuming that the student responded that the implications for performance were positive). How might the outsourcing hurt the firm in the short or medium-term? The purpose of the exercise is to get students to recognize and examine the modular organization strategy. Answer: 1. IBM: IBM outsources IT infrastructure to focus on core competencies and innovate. Implications: This has enhanced its service offerings and reduced operational costs. 2. General Electric (GE): GE outsources IT to streamline operations and leverage specialized expertise. Implications: This approach has improved efficiency and allowed GE to focus on strategic areas. 3. Nike: Nike outsources IT to manage costs and access advanced technologies. Implications: This has led to cost savings and greater flexibility but can create dependency on external vendors. Application Questions Exercises 1. Select an organization that competes in an industry in which you are particularly interested. Go on the Internet and determine what type of organizational structure this organization has. In your view, is it consistent with the strategy that it has chosen to implement? Why? Why not? Response: There are 2 challenges. First, firms do not advertise their strategies. So students will have to look at the evidence and argue for one strategy or another. Use one of the 3 generic strategies or, for international firms, one of the 4 international strategies. Second, firms often do not advertise their organizational structure. Finding it may be a challenge. One method is to look at the top management of the firm and examine their titles. If they are, say, VP Marketing, VP operations, and VP Finance, then we have some evidence for a functional structure. Also, not many firms are easy to classify, so this exercise requires a bit of judgement. After determining the strategy and structure, assess the fit. Is there another structure that should go with this strategy? What if the firm adopted another structure? Would performance worsen? Why? (Note to instructors) Understanding the need to fit strategy and structure is a central concept that is very important for the students to understand. We suggest that you first ask students to describe the corporate strategy that the organization follows. Then ask students about the organization’s core competence and how it competes. Does the organization need divisions with autonomy or more centralized decision-making? Is the organization small enough for a simple strategy? Ask about relatedness of divisions, vertical integration, product diversity, and other characteristics that determine organizational structure. The end result is to help students to understand that organizational structure determines what type of competitive advantage the firm can develop. This understanding is often a challenge for inexperienced students. Answer: For an organization in a specific industry, identify its structure and evaluate if it supports its strategy effectively. This involves assessing alignment between organizational design and strategic goals. 2. Choose an article from BusinessWeek, Fortune, Forbes, Fast Company, or any other well-known publication that deals with a corporation that has undergone a significant change in its strategic direction. What are the implications for the structure of this organization? Response: (Note to instructor) To guide classroom discussion, first ask students to identify the original strategic direction and the reason for the change. Then ask students to identify the original organizational structure and the degree of fit with the original strategy. Then ask students how the structure should change, if at all, given the new strategic direction. For each proposed change in structure, ask students to justify the change. Ask students to identify what boundaries, internal or external, need to be made more permeable. A possible extension of this exercise is to have students research firms that have strategies similar to the corporation’s new strategic direction. Ask them what type of organizational structures these firms have and whether or not the corporation-of-interest should imitate those structures. Answer: Analyze an article about a corporation’s strategic shift to understand structural implications. Structural changes should support the new strategic direction, ensuring effective implementation and alignment. 3. Go on the Internet and look up some of the public statements or speeches of an executive in a major corporation about a significant initiative such as entering into a joint venture or launching a new product line. What do you feel are the implications for making the internal and external barriers of the firm more flexible and permeable? Does the executive discuss processes, procedures, integrating mechanisms, or cultural issues that should serve this purpose? Or are other issues discussed that enable a firm to become more boundaryless? Response: (Note to instructors) The purpose of this exercise is to get students to identify the trend towards boundaryless organizations. If students do not identify any tendency or methods for boundarylessness, ask the students to identify some boundaries that the corporation should consider making more permeable. It might be useful to review the benefits of boundaryless organizations such as the ability to reduce costs, share resources or more fully exploit managerial talent, and ask students how the corporation might achieve these benefits. Answer: Review executive statements on initiatives to gauge their approach to making the firm’s structure more flexible. Look for mentions of integrating mechanisms, cultural changes, or procedural adjustments. 4. Look up a recent article in the publications listed in question 2 above that addresses a firm’s involvement in outsourcing (modular organization) or in strategic alliance or network organizations (virtual organization). Was the firm successful or unsuccessful in this endeavor? Why? Why not? Response: (Note to instructor) The exercise enables students to analyze a move towards boundaryless organization. All such moves are characterized by potential costs and benefits. The first step is to identify the move, including its form, who the partners are (if any), and what internal and external barriers were bridged. Then ask if the move was a success and why. For discussion, ask students what concerns the CEO should address in order to improve performance in the next five years. Answer: Evaluate a firm’s success or failure in outsourcing or strategic alliances. Assess how well the chosen strategy and structure supported its goals and performance outcomes. Ethics Questions 1. If a firm has a divisional structure and places extreme pressures on its divisional executives to meet short-term profitability goals (e.g., quarterly income), could this raise some ethical considerations? Why? Why not? Response: Any time there are such extreme pressures to meet profitability goals, there is a potential for unethical behavior. In the divisional structure, the divisions are interdependent, which means that the performance of each division depends in part on cooperating with other divisions. Self-interested managers might try to be unethical by: • Bargaining with other divisions for access to his or her division’s resources • Cutting costs by reducing headcount • Taking credit for the results of another division • Disagreeing with other divisions regarding allocation of resources or executive performance evaluations These actions are unethical to the extent they are done in the self interest of managers at the expense of the firm’s performance. The actions are a violation of the managers’ obligation to the firm’s owners of maximizing firm value. Answer: Pressuring divisional executives for short-term gains may lead to unethical practices, such as financial manipulation or neglect of long-term goals. It can compromise ethical standards and stakeholder trust. 2. If a firm enters into a strategic alliance but does not exercise appropriate behavioral control of its employees (in terms of culture, rewards and incentives, and boundaries—as discussed in Chapter 9) that are involved in the alliance, what ethical issues could arise? What could be the potential long-term and short-term downside for the firm? Response: Without effective behavioral control, employees will tend not to have (a) shared values, (b) a commitment to organizational success, (c) a clear understanding of the organizational mission, and (d) an understanding of investments and activities that the organization will avoid. For the alliance, employees will therefore tend to work at cross-purposes. They will not be consistent in their understanding of the purpose of the alliance, which could lead to destructive conflicts over responsibilities, resources, and alliance strategy. The problem is compounded by the presence of the alliance partner. There is a possibility of inappropriate sharing of information and resources with the partner, which could erode the firm’s competitive advantage. Without effective behavior control, employee self-interest is a common problem. In addition to the direct costs of employee misbehavior, additional problems occur because the alliance partner will observe the behavior. The firm’s reputation in the industry could be affected, and the alliance partner could surreptitiously get access to the firm’s intellectual property. So the downsides include costs to the firm from internal conflict and wasted effort, the loss of reputation, and the loss of trade secrets and know-how to the partner. Answer: Lack of behavioral control in alliances can lead to ethical issues such as misaligned goals, conflicts of interest, and reputational damage. Short-term benefits might be overshadowed by long-term relationship and trust issues. Solution Manual for Strategic Management: Creating Competitive Advantages Gregory G. Dess, Alan Eisner, G.T. (Tom) Lumpkin, Gerry McNamara 9780077636081, 9781259245558