1. business and industrial
2. business operations
3. human resources

CHAPTER
11
Organizational Design:
Structure, Culture,
and Control
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Part 3 Strategy Implementation
11–2
Chapter Case 11
Zappos: An Organization Designed
to Deliver Happiness
• Zappos: Success through customer service
 Customer service all in-house
 No scripts or timed calls
• Flat Organizational Structure = Flexibility
 Job rotation = trained talent
 4 weeks of orientation training
 Including 2 weeks on customer service phones.
11–3
EXHIBIT 11.1
Zappos’ Core Values
11–4
11–5
LO 11-1 Define organizational design and list its three
components.
LO 11-2 Explain how organizational inertia can lead established
firms to failure.
LO 11-3 Define organizational structure and describe its four elements.
LO 11-4 Compare and contrast mechanistic versus organic
organizations.
LO 11-5 Describe different organizational structures and match them
with appropriate strategies.
LO 11-6 Describe the elements of organizational culture and explain
where organizational cultures can come from the how they
can be changed.
LO 11-7 Compare and contrast different strategic control and reward
systems.
11–6
How to Organize for Competitive Advantage
• Organizational design

Goal is to translate strategies into realized ones
 Structure
 Processes
 Procedures
• Structure follows strategies
 Structure must be flexible
 Yahoo failed to make changes to
their organizational structure.

Jerry Young ousted in 2008.
11–7
11-10
Sources of
Bureaucratic Costs
Number of
Middle
Managers
Motivational
Problems
Coordination
Problem
Information
Distortion
Bureaucratic
Costs
Copyright  1998 by Houghton Mifflin Company. All rights reserved.
Organizational Inertia and the Failure
of Established Firms
• Organizational inertia
 Resistance to change

Often leads to failure because of the environmental
dynamics: competition, technology, strategy…etc.
• Organizational strategy and structure are not
static… But rather are dynamic!
• A tightly-coupled and coherent activity system that
works well in a static environment may be subject to
problems of inertia in a dynamic environment.
11–10
EXHIBIT 11.2
Organizational Inertia
11–11
LO 11-1 Define organizational design and list its three components.
LO 11-2 Explain how organizational inertia can lead established firms
to failure.
LO 11-3 Define organizational structure and describe its four
elements.
LO 11-4 Compare and contrast mechanistic versus organic
organizations.
LO 11-5 Describe different organizational structures and match them
with appropriate strategies.
LO 11-6 Describe the elements of organizational culture and explain
where organizational cultures can come from the how they
can be changed.
LO 11-7 Compare and contrast different strategic control and reward
systems.
11–12
The Key Elements of Organizational Structure
• Organizational structure determines
 Work efforts of individuals and teams
 Resource distribution
• Key building blocks
 Specialization
 Formalization
 Centralization
 Hierarchy
11–13
The Key Elements of Organizational Structure
• Specialization: degree to which a task is divided
 Division of labor

Example: U.S. Military (Army, Air Force, Navy, Marines)
• Formalization: codified rules and formal procedures
 Detailed written rules and policies

Examples: NASA, McDonald’s
11–14
The Key Elements of Organizational Structure
• Centralization: where the decision is made
 Centralized decision making  slow response time and
reduced customer satisfaction

Example: BP’s Mexican Gulf Oil Spill
• Hierarchy: formal, position-based reporting lines
 Tall structure vs. flat structure
Tall structure higher degree of centralization
 Flat structure  lower degree of centralization

 Span of control
11–15
STRATEGY HIGHLIGHT 11.2
W. L. Gore & Associates:
Informality and Innovation
• Bill Gore articulated 4 core values
 Fairness to each other
 Freedom to grow knowledge and skills
 Ability to make one's own commitments
 Consult with others before taking action
• W. L. Gore is organized in an informal and decentralized
manner
 Empowered employees (no job titles, no job descriptions,
informal team organization, soft reporting lines)
 Face-to-face communication
 All associates are shareholders of the company
11–16
1–16
Assembling the Pieces:
Mechanistic vs. Organic Organizations
• Organic organizations
 Low degree of specialization and formalization
 Flat structure
 Decentralized decision making
 Uses virtual team due to information
technology

Examples: Zappos, W. L. Gore,
and many high-tech firms
• Mechanistic organizations
 High degree of specialization and formalization
 Tall hierarchy
 Centralized decision making

Example: McDonald’s
Video on Web 2.0
Changing workplace
11–17
EXHIBIT 11.3
Mechanistic vs. Organic Organization
LO 11-1 Define organizational design and list its three components.
LO 11-2 Explain how organizational inertia can lead established firms to
failure.
LO 11-3 Define organizational structure and describe its four elements.
LO 11-4 Compare and contrast mechanistic versus organic organizations.
LO 11-5 Describe different organizational structures and match them
with appropriate strategies.
LO 11-6 Describe the elements of organizational culture and explain where
organizational cultures can come from the how they can be
changed.
LO 11-7 Compare and contrast different strategic control and reward
systems.
11–19
Matching Strategy and Structure
• Simple structure
 Small firms with low complexity
 Top management makes all important strategic decisions
 Low degree of formalization and specialization
 A basic organizational structure

Examples: small advertising, consulting, accounting, and law firms
11–20
EXHIBIT 11.4
Changing Organizational Structures and
Increasing Complexity as Firms Grow
Functional Structure
• Functional structure
 Groups of employees with distinct functional areas
 The areas of expertise correspond to distinct stages
in the company value chain activities

Example: College of Business, Finance Department , … etc.
• Recommended with narrow products/services
 Matches well with business-level strategy
Cost leadership  Mechanistic organization
 Differentiation  Organic organization
 Integration strategy  Ambidextrous organization

EXHIBIT 11.5
Typical Functional Structure
11–23
EXHIBIT 11.6
Matching Business Level Strategy and Structure
STRATEGY HIGHLIGHT 11.3
USA Today: Leveraging Ambidextrous
Organizational Design
• USA Today: one of the widest print circulations in U.S.
• USA Today.com, a new independent SBU under Gannett
• Although attracted readers and advertising dollars, USA
Today.com lost key editorial talent due to uneven resource
distribution
• Integration of USA Today and USA Today.com to eliminate
duplication of resources and reduce waste
1–25
Functional Strategy: Drawbacks
• Lacks effective communication channels
across departments
 Lack of linkage between functions
 Often solved the problems by having
cross-functional teams
• It cannot effectively address a higher level of
diversification
11–26
Multidivisional Structure
• Multidivisional structure
 Consists of several distinct SBUs
 Each SBU is operationally independent
 Each leader of SBUs report to the corporate office
 Examples:
Zappos is an SBU under Amazon
 Skype is an SBU under Microsoft
 Paypal is an SBU under eBay

 Companies using M-form structure

GE, Honda
11–27
Organizing the Diversified Firm
• The multidivisional organization, as documented by
Alfred D. Chandler in Strategy and Structure, was
pioneered in the 1920s by pioneering firms such as:
 DuPont, General Motors, Sears and Standard Oil;
 By 1967, two-thirds of Fortune 500 Companies are
multidivisional.
Organizing the Diversified Firm
• Three key features of organizational structure:
 1. The division of tasks;
 2. The depth of the hierarchy (span of control);
 3. The extent of authority delegation
(how much decentralization?)
11–30
EXHIBIT 11.7
Typical M-Form Structure
Functional Structure
Matrix Structure
11–31
11-19
Multidivisional Structure
Typical Chemical
Company
CEO
Corporate Headquarters Staff
Oil Division
(Functional
Structure)
Pharmaceuticals
Division (Product
Team Structure)
Plastics Division
(Matrix Structure)
Copyright  1998 by Houghton Mifflin Company. All rights reserved.
Multidivisional Structure
• Use with various corporate strategies
• Related diversification
 Co-opetition among SBUs
 Transfer core competences across SBUs
 Centralized decision making
• Unrelated diversification
 Decentralized decision making
 Competing for resources
11–33
EXHIBIT 11.8
Matching Corporate-Level Strategy
11–35
11–36
Evolutionary Stability of the Multidivisional Form
• Parable of the Two Watchmakers
 10,000 parts

Watchmaker #1 needs to put all parts together or the watch falls
apart and he needs to start all over with his 10,000 parts.

Watchmaker #2 has developed 100 subsystems of 100 parts.
This is the “principle of near-decomposability” (I.e., a system
that contains localized sub-systems)
Evolutionary Stability of the Multidivisional Form
• Hierarchical systems (containing sub-systems)
will evolve much more rapidly from elementary
constituents than will non-hierarchic systems
containing the same number of elements.
• In organization theory this is called the effectiveness of
“loose coupling.”
 The advantage of “loose coupling” is that if
there is poor performance in division 2 it
does not lead to failure of the entire system.
11–38
Effectiveness of Multidivisional Form
• Effective Divisionalization involves:
 Identification of separable economic activities within
the firm;
 Giving quasi-autonomous standing to each division
(usually of a profit center nature);
 Monitoring the efficiency performance of each
division;
 Awarding incentives;
 Allocating cash flow to high yield uses; and
 Performing strategic planning (diversification,
acquisition, and related activities).
11–39
Weaknesses of Multidivisional Form
• Dysfunctional Aspects of the Multidivisional:
 Emphasis on short-term perspective;
 Loss of economies of scope;
 Duplication of R&D, marketing, etc.;
 Emphasis on financial manipulation instead of
developing firm capabilities and resources; and
 Large conglomerates may have excessive
political power.
Matrix Structure
• A combination of functional and M-form structure
 Creation of dual line of authority and reporting lines
 Each SBU receives support both horizontally and
vertically
 Very versatile
 Enhanced learning from different SBUs
11–41
EXHIBIT 11.9
Typical (Global) Matrix Structure
11–42
EXHIBIT 11.10
Matching Global Strategy and Structure
LO 11-1 Define organizational design and list its three components.
LO 11-2 Explain how organizational inertia can lead established firms to
failure.
LO 11-3 Define organizational structure and describe its four elements.
LO 11-4 Compare and contrast mechanistic versus organic organizations.
LO 11-5 Describe different organizational structures and match them with
appropriate strategies.
LO 11-6 Describe the elements of organizational culture and explain
where organizational cultures can come from the how they can
be changed.
LO 11-7 Compare and contrast different strategic control and reward
systems.
11–46
Organizational Culture:
Values, Norms, and Artifacts
• Organizational culture
 Collectively shared values and norms
 Value: what is considered important
 Norms: appropriate employee behaviors
and attitudes
 Artifacts: expression of culture in items such as
physical design, stories, and celebrations
• Socialization
 Internalize organization’s value and norms through
interactions
• Think of Zappos’ core values
• GM’s culture became strategic liability
11–47
Where Do Organizational Cultures Come From?
• Founder imprinting
 Founders defined and shaped the culture
 Apple (Steve Jobs)
 Disney (Walt Disney)
 Microsoft (Bill Gates)
• Wal-mart’s “low cost” culture by Sam Walton
• Recruit people that fit the culture
 Zappos vs. GE
11–48
How Does Organizational Culture Change?
• Core competency core rigidity
 Culture no longer has good fit with the environment
 Cultural change is needed
• Cultural change
 Brings new leadership
 Mergers and acquisitions
11–49
Organizational Culture
• Culture must be valuable, rare, inimitable, and
non-substitutable (RBV)
 Causal ambiguity and social complexity
• Organizational culture is an important resource
 Southwest Airlines

Friendly and energized employees work collaboratively
 Zappos

Deliver WOW through service
11–50
STRATEGY HIGHLIGHT 11.4
Carly Fiorina at HP:
Cultural Change via Shock Therapy
• Carly Fiorina appointed CEO of HP in 1999
• Engineered acquisition of Compaq in 2002
• Carly Fiorina needed the acquisition to initiate structural and
cultural change in HP to overcome inertia
• Board of Directors fired her in 2005
 Hired Mark Hurd who was himself fired in 2010…
• Continued turnover at top of HP; Mark Hurd was replaced by
Leo Apotheker, who in turn was replaced by Meg Whitman in
September 2011 (see Chapter Case 12).
11–51
1–51
Organizational Culture
• Cultural impact on employee behavior
 Motivates employees by appealing to their ideas
 Strengthen employee commitment, engagement, and
effort
• Culture is vital to an organization
 Stronger founder imprinting leads to higher performance
 Effective alignment allows development and refines
organizational core competency
How to Cut
Costs Video
11–52
LO 11-1 Define organizational design and list its three components.
LO 11-2 Explain how organizational inertia can lead established firms to
failure.
LO 11-3 Define organizational structure and describe its four elements.
LO 11-4 Compare and contrast mechanistic versus organic organizations.
LO 11-5 Describe different organizational structures and match them with
appropriate strategies.
LO 11-6 Describe the elements of organizational culture and explain where
organizational cultures can come from the how they can be
changed.
LO 11-7 Compare and contrast different strategic control and
reward systems.
11–53
Strategic Control and Reward Systems
• Internal governance mechanisms
 Culture
 Sanctions
• Input controls
 Rules and standard operating procedures
 Budgets
 Behavior guidelines
• Output controls
 Result-oriented
 ROWEs (results only work environment)
Dan Pink’s
RSA Video
11–54