Strategic Organizational Diagnosis and Design 03 lecture - Organizational Design Fads and Value Perspective of Organizational Design

ww

w.r

illo

.ee

TMO1180 - Strategic Organizational

Diagnosis and Design

3rd lecture -

Organizational Design Fads and

Value Perspective of Organizational

DesignMarko Rillo

Tallinn University of Technology

Tallinn School of Economics and Business Administration

ww

w.r

illo

.ee

Reminder - Key Dates

• 21.10 - deadline for course project

• 28.10 - presentations

ww

w.r

illo

.ee

"New" Forms - and some "Crazy"

Names ... a) Networked organization (Drucker, 1988)

b) Learning organization (Senge, 1990)

c) Virtual corporation (Davidow & Malone, 1992)

d) Relational organization (Keene, 1991)

e) Boundaryless Organization (Ashkenas et al., 2002)

f) Crazy organization (Peters, 1992)

g) Cluster organization (Mills, 1991)

h) Human networking (Savage)

i) Democratic corporation (Ackoff, 1994)

j) Centerless Corporation (Pasternack & Viscio, 1998)

k) Intelligent enterprise (Quinn, 1992)

l) Re-engineered corporation (Hammer & Champy, 1993)

m) Customer centric organization (Galbraith, 2002)

J. Strikwerda (2005)

ww

w.r

illo

.ee

Networked Organization (Drucker)

ww

w.r

illo

.ee

Learning Organization (Senge)

ww

w.r

illo

.ee

Virtual Corporation (Davidow & Malone,

1992)

• Customer-driven company

of the future

– Ex. looks at how Dell has

made it possible to get

instant mass customization

• Deliver instantaneous,

customized services and

products

ww

w.r

illo

.ee

Relational Organization (Keene, 1991)

• The new enterprise is a

network of distributed

teams that act as clients

and servers for each other

ww

w.r

illo

.ee

Boundaryless Organization

(Ashekenas)• This book grew out of work done by the

authors as consultants hired by General Electric's CEO Jack Welch, who first approached them with the concept of a "boundarylessorganization."

• Applying what they learned in the effort to transform the way GE did business and from numerous other examples, they consider the vertical, horizontal, external, and geographic boundaries that exist for organizations.

• The authors provide tools to help measure the degree to which boundaries exist, demonstrate the consequences of boundaries, and identify steps to eliminate them

ww

w.r

illo

.ee

Crazy Organization (Peters)

• Well ... it is Tom Peters

ww

w.r

illo

.ee

Cluster Organization (Mills)

• This is a multidimensional

concept that, in part,

harkens back to elements

of matrix organization

• But it also capitalizes on

the latest in technology

and shifts primary

accountability and initiative

away from top

management to individuals

ww

w.r

illo

.ee

Human Networking (Savage)

• Hierarchies are levelled

and the imagery of

networks and spider webs

butts out yesterday's

pyramids

ww

w.r

illo

.ee

Democratic corporation (Ackoff, 1994)

• Espouses the stakeholder theory of the firm, in which employees, suppliers, customers, investors, creditors, debtors and government all play a role in helping a company to grow and develop

• One of the good examples of "revolutionizing" org. design

ww

w.r

illo

.ee

Centerless Corporation (Pasternack &

Viscio, 1998)

• Booz-Allen & Hamilton's

consultants:

• Decreasing bureaucracy

and increasing

communication prove a

successful alternative to

the top-down style of

central management

ww

w.r

illo

.ee

Intelligent enterprise (Quinn, 1992)

• Successful companies of the 90'swill derive their competitive edge not from ephemerally superior products but from a deep understanding of a few highly developed knowledge and service based core competencies

• Roots in RBV:– technological sophistication,

– better knowledge bases,

– more creative customer responsiveness,

– unsurpassed management of human and intellectual capital that competitors cannot reproduce

ww

w.r

illo

.ee

Re-engineered corporation (Hammer &

Champy, 1993)

• Management consultants wrote:

post-industrial companies must

be "reengineered," which

necessitates starting anew,

going back to the beginning to

invent a better way of

accomplishing tasks

• To reduce inventories, and

empowering employees so that

decision-making "becomes part

of the work."

ww

w.r

illo

.ee

Customer Centric Organization

(Galbraith, 2002)

• A nice practice-oriented

textbook that provides a

hands-on approach on

how to create

organizations

ww

w.r

illo

.ee

Back To Reality - Start with Basics

- Some Key Terms• Three Generic Organizational Structures

– Unitary form (functional) U-form

– Multidivision form - M-form (Williamson 1975)

– Holding- or conglomerate structure - H-Forms

• Hybrid Organizational Structures

– Matrix structure

– Team-based structure

ww

w.r

illo

.ee

Terms -

Collaborative Communities of Firms1. Bilateral collaboration – This type of innovation occurs when a

member firm collaborates with its customers on new solutions,

perhaps using consulting advice from the node.

2. Direct collaboration – Two or more member firms work together

closely on the development of new solutions.

3. Pooled collaboration –Member firms supply ideas, information, and

experiences to a central database that is accessible by other

member firms to pursue innovation projects.

4. External collaboration – A member firm works with a non-member firm

on a „one-off‟ innovation project.

ww

w.r

illo

.ee

U-FORMS

• Functional (or U-Form) structures group on the basis of

their common expertise/experience or because they use

the same resources or focus on the same activities

• Increased specialization

• Economies of scale in

monitoring

• Critical decision-making is

centralized in one “peak” person

• Cannot handle the complexity of

multiple activities well

• Subgoal pursuit problems can

become acute

• Absence of objective measures of

performance

• Operations can divert attention

from strategic/ competitive/

entrepreneurial issues

Stanley Han (California State University, Sacramento) - http://www.csus.edu/indiv/h/hany

ww

w.r

illo

.ee

M-FORMS• A Multi-divisional structure is designed to manage diversification while controlling

bureaucratic costs and control-loss problems

• M-Forms decentralizes operating decision-making to the business unit/division level where all necessary competitive and operational decisions are made.

• Strategic decision-making responsibility is retained at the headquarters level. The HQ also monitors division‟s performance by using both objective market/output measures and subjective performance measures .

• Uses objective market-output

measures, bureaucratic controls, and

clan/cultural controls

• Encourages exploiting of economies

of scope across divisions

• Frees corporate to focus on strategic

concerns

• Facilitates diversification and growth

• Introduces additional levels of

hierarchy

• Opportunism and information

distortion problems

• Myopic focus

• Divisions may compete at the

expense of cooperating

• Transfer pricing battles


ww

w.r

illo

.ee

Types of M-form

Cooperative Form

• Related-Constrained -divisions co-operate in deliveryof certainservices, havecertain limits of autonomy, certainfunctions are centralized

• Examples?

Competitive Form

• Unrelated -

divisions are fully

independent in their

activities and are

frequently

encouraged to

compete with the

offerings of the

other divisions

• Examples?

SBU Form

• Related-Linked -

divisions provide

related services,

but are fully

autonomous

• Examples?


ww

w.r

illo

.ee

H-Form

• Holding or Conglomerate structures seek to exploit the

advantages of internal capital markets

• How do you get people to achieve organizational goals in

the most efficient way possible?

• Promotes entrepreneurialapproach

• Frees corporate to focus on strategic concerns

• Facilitates diversification and growth

• Lack of common strategic focus

• Opportunism

• Unrestrained self-interest

• Error and mistakes

• Ambiguity in measuring performance

• Complexity/Inability in giving unambiguous direction


ww

w.r

illo

.ee

Three Generic Forms of Organizational

Governance in H-Form Firms• Market/Output-based Incentive Schemes

– Profit goals

– Output quotas

• Bureaucratic Monitoring and Control Schemes

– Rules and procedures

– Standardization and monitoring

• Clan or Culture-based Control Schemes

– Norms, values, socialization

– Internalization of organizational goals


ww

w.r

illo

.ee

• Better control and leadership

• Cost - economies of scope and

scale

Some Statistics of MNCs in Europe -

Waves of "Centralization" of M-Form ...

CEO

HR Mkt. Finance IT Support R&D

• Reduction of double work

• Cross-sales

• Increased profitability

Business1 Business2

R&DSupportProd.

Structure Type No. of co-s %

Co-operational

division

132 51,4

Traditional division 66 25,7

Holding 30 11,7

Functional 15 5,8

Matrix 14 5,4

Total 257 100

University of St.Gallen, Top 300 German, Austrian ja Swiss company study 2004 - Sebastian Raisch

ww

w.r

illo

.ee

Any Ideas about Statistics in Estonia?

• No idea!

• Potential study for master thesis?

• What organizational forms / structural contingencies

are there among Estonian ÄP Top500 firms?

ww

w.r

illo

.ee

What Aspects of "Design" are there in

Business?• We start off by mapping and designing our business

model

• We design our strategy on the basis of our key

understanding of the business idea

• Thereafter we design our processes and structures

There are lots of possibilities for doing that, ex ...

ww

w.r

illo

.ee

One Possibility would be to Start at

Micro and Sort out Processes ...

Bremner, Knipfer, Latreille (2006) - Better operating models for

financial institutions. McKinsey on IT. Winter 2006, p. 4

ww

w.r

illo

.ee

ww

w.r

illo

.ee

How to Set Up a Business On-line Distribution Store?

ww

w.r

illo

.ee

Potential View - Look at the Structure as a

System of Value Creation

J. Strikwerda (2005), p. 39.

ww

w.r

illo

.ee

The Other Possibility would be to Think About the

Requirements that the System Needs to Satisfy ...

Economic requirements:

• Type and availability of human resources, Type of knowledge exploited, Economies of scale, Economies of scope, Economies of speed, Purchasing power, Uniqueness of resources, Modularity, standards, Communication costs, Market efficiency

Fit-to-market:

• Patterns of consumer preferences, buying behavior; Availability of alternative distribution channels; Link between products/services and distribution channels; Need for mix-match flexibility


ww

w.r

illo

.ee

Lets Consider the Following Case ...

• In one case, dating back to 1997, a European firm produced electrical and electronic products for three types of markets: consumer markets, so called institutional markets (hospitals, schools, prisons, etc.) and professional markets (TV studio‟s, stadiums, etc.)

• These three markets by volume, growth, distributors, prices mechanism, degree of maturity, preferred technology, market share, competition, were separate markets and had to be dealt with in that way.

• This firm used two types of technologies, a conventional one, using a specific raw material for which this firm was the single largest global buyer, and a modern high tech product, for which this firm also was the single largest global buyer.

• In addition to that, considerable economies of scale and scope were to be exploited due to the volume of production and due to knowledge that was applicable to all two types of technology and all three markets. The then management was stuck in the issue whether to organize the firm (that till then functionally organized, causing undue coordination costs) in two business units based on technology or in three business units based on the three markets

• Look at the scheme on the next page for graphical description of the case ...


ww

w.r

illo

.ee

Dilemma - what to do when You are Stuck-in-the-Middle?

Ex. - Firm where Operations and Market Fit don't Meet. Should we replace functional structure with 2-division or 3-divisional?


1) Consumer segment

2) Institutional market:

hospitals, schools,

prisons

3) Professional markets:

TV studios, stadiums

Conventional

technology

High-tech

technology

ww

w.r

illo

.ee

RELY ON THE MOST IMPORTANT

ASPECT STRUCTURE!

The organization form should coincide

with the aspect structure that is the most

critical for the value creation of the firm,

respectively its success in the market!

ww

w.r

illo

.ee

Some Examples

• Efficient manufacturing was most critical for success when manufacturing capability was scarce

• When Sloan understood that producing different cars for different consumer segments as defined by income was critical for success - he based the divisions on market segments defined by consumer income

• Walt-Disney exploits concepts, which are exploited through multiple platforms, which defines its operating model

• Professional service firms, pursue a key-account management strategy - business units are suppliers to accounts

ww

w.r

illo

.ee

Aspect Structures all are Convergent with the

Business Unit as Management Control Structure

1. Legal structure

2. Product/services structures (across functional departments)

3. Delivery-structures, operational processes

4. Project structures (innovation, development, co-engineering)

5. Informal, social structures, etnical structures

6. Functional structures (accounting, HRM)

7. Knowledge structures (content)

8. Patterns of routines and competencies

9. Information structures (data)

10. Technological structures, e.g. generic technologies

11. Geographical structures

13. Account structures (account management)

14. Fiscal and financial structures (international cash management)


ww

w.r

illo

.ee

Relations between them -

Enablers and Scarcities• Emergence of the major, vertically integrated, multi-

divisional companies at the beginning of the

twentieth century is closely connected to

innovations in techniques for management

accounting (Jensen 1998)

• Due to changing scarcities in the economy -

importance of aspect structure may change over

time and hence hence the need to adapt the

operating model of the firm

ww

w.r

illo

.ee

Comment on Scarcities and Enablers!

• Interesting: "What kinds of new structures are

enabled by social networking?"

• What do you think - what scarcities we have today?

And what kinds of structures should be foster in

order to overcome them?

ww

w.r

illo

.ee

Hence the Firm has to Answer:

1. What activities are core in creating value and in

which way?

2. Which activities are needed to ensure that the value

the firm creates also is captured by the firm?

3. What activities are needed to defend the core value

creating activities of the firm?

ww

w.r

illo

.ee

Value ...

Fjeldstad and Andersen 2003

ww

w.r

illo

.ee

Value Net (Parolini)

ww

w.r

illo

.ee

Value Net Paradigm ...

ww

w.r

illo

.ee

Case Study (1/2)• A division of the MNC is organized in four business units each with a distinct

technology and subsequent products. Within the division of the multinational the

business units are profit centers.

• These products are components and subsystems that are sold to a third party, who

assembles these components and subsystems, into a consumer product. These

consumer products enjoy a high brand image, are innovative by technology and

design. The innovativeness (value) of the third party results in organizing a number of

co-engineering teams for various product types.

• Each of the MNC 4 BU-s contributes to each of the co-engineering teams by providing

ideas, making available technological know how and placing engineers for

development in the teams.

• Co-engineering teams produce innovative designs for components and subsystems,

which then are mass manufactured and supplied to the third party by each of the

business units.

• The third party is willing to pay a higher price, partly because due to the innovative

components and subsystems it can ask a higher price in the market, but also because

the MNC has agreed to sell components exclusively to the third party.

J. Strikwerda (2005).

ww

w.r

illo

.ee

Case Study (2/2)• At a certain moment the managers of the MNC 4 BU-s find themselves in

disagreement on the allocation of costs of the co-engineering teams - due to

the complexity of the processes such teams have an overhead in terms of

project managers, commercial & contracting support etc.

• Also a disagreement rose about inputs of the individual MNC BU-s in the co-

engineering teams and the benefits resulting for each of the business units.

• The co-engineer teams not just produced separate components and

subsystems, they produced a coherent, integrated system of components and

subsystems, of which the value for the third party was more then the sum of

the values of the separate components and sub-systems.

• Since these co-engineering teams also had engineers from the third party,

the third party is entitled to a part of the output of the co-engineering teams

as well.

• What do you think about the design of the organization and what should be

done differently?


ww

w.r

illo

.ee

Solution

• Define each separate project (that develops

integrated systems for the third party) as a profit

center.

– Engineering phase being the investment phase

– The phase of manufacturing and supplying the systems

the profit phase

ww

w.r

illo

.ee

Building Blocks of Organizations

Nowadays


ww

w.r

illo

.ee

Yes, we have lots of different organizations out there

...

ww

w.r

illo

.ee

J. Strikwerda (2005) The Logic of the Operating Model under Changing Scarcities and New Technologies:

An Exercise in the Foundations of Business Administration? Universiteit van Amsterdam -

Amsterdam Business School; Nolan Norton Institute, p. 12.

ww

w.r

illo

.ee

"Verlag" - Medieval Europe

• Entrepreneur, through contracting suppliers, artisans likeweapon smiths, transporters, most sea captains, warehousesetc, orchestrated a manufacturing and supply chain.

• Examples are the Trip brothers in the seventeenth century inAmsterdam, the publishing industry, the apparel industry(Uzzi, 1997), etc.

• The entrepreneur in this model, called Verleger (German: "publisher"), earns rents by running a business withoutowning the production factors like factories, equipment

• Although he takes ownership of the raw materials, intermediate products and final products


ww

w.r

illo

.ee

Replication Design

(How to "McDonalds" an organization?)

• Sometimes the issue is not

so much value creation,

but exploitation

• Hence - an unit needs to

be copied across

geographical domains

Winter & Szulanski (2001)

ww

w.r

illo

.ee

THANKS FOR YOUR TIME

Any questions?

The most important?

What will you remember?