Organizational Design and Structure Notes
Organizational Design Overview
Definition: The process of creating, implementing, monitoring, and modifying an organization's structure, processes, and procedures.
Key Components:
Structure (formal)
Culture (informal)
Control
Strategy informs Structure AND Structure can inform Strategy
Both!
The relationship b/w the two is independent & dynamic
Both affect firm performance
We want Strategy to inform structure but it’s not always possible b/c structure constrains strategy
Organizational Inertia: firm’s resistance to changing the status quo
Four Building Blocks of Structure:
Specialization: Degree to which tasks are divided.
Formalization: Extent of defined rules and procedures.
Centralization: Level of decision-making authority.
Hierarchy: Organizational reporting lines.
Key Functions of Structure:
Communication and supervision.
Coordination of employee and team efforts.
Management and distribution of resources
Specialization & Division of Labor
Larger orgs: individuals and teams have more specific tasks
Smaller orgs: individuals tend to be generalists
Ex: Faculty (employee) responsibilities
Emory → professors and advisors are separate people
Marist → professors are also advisors
Trade-off between depth and breadth of knowledge
Ex: Yelp Account Manager
Idea: efficiency in productivity. The more narrow/niche we do, the more efficient we become at it Con: employes get tired of doing the same thing
Formalization: How well-defined is the work?
degree to which rules and procedures define work
Ex: employee handbook, customer service scripts, SOPs
Pros: Consistency, predictability, reliability, safety
Cons: Rigidity, reduced creativity → Reduced innovation
Centralization: How concentrated is decision-making power?
Who makes decisions?
Examples:
BP may have been over-centralized (Deepwater Horizon)
US intelligence may have been under-centralized (not communicating with each other)
Top-down strategic planning = MORE Centralized
Strategy as planned Emergence = more Decentralized
Hierarchy: Who reports to whom?
Hierarchy = position-based reporting lines
Span of Control”
Tall organizations → narrow span of control =
Narrow → Few direct reports
Examples:
BP may have been over-centralized (Deepwater Horizon)
US intellegicence may have been under-centralized (not communicating with each other)
Tall Structure: Narrow span of control; fewer employees per manager.
Flat Structure: Wide span of control; more employee interaction.
Top-down strategic planning = MORE Centralized
Strategy as planned Emergence = more Decentralized
Mechanistic vs Organic Structure
Mechanistic Organizations:
High specialization, rigid labor division, centralized decision-making, tall hierarchy, cost-leadership strategy (e.g., McDonald's).
Organic Organizations:
Low specialization, flexible labor, decentralized decision-making, flat hierarchy, differentiation strategy (e.g., Zappos, W.L. Gore)
Evolution of Organizational Structures
Growth Stages:
Simple Structure: Small firms, low complexity; decisions by founders
Founders make strategic decisions, low formalization/specialization
Small professional services firms (accounting, advertising, consulting, law, startups, etc)
Functional Structure: Groups by functional area; reports to CEO
Con: people don’t interact, and limited growth potential [Goolge’s old structure]
Multidivisional Structure: Diversified firms [geo, product mkts etc.]; SBUs are independent with profit responsibility. CEO of holding company for things like capital
What Google became →
Matrix Structure: Combination of functional and divisional for flexibility.
Closed vs. Open Innovation
Closed Innovation: Traditional model focusing on in-house development.
Open Innovation: Collaborating with partners, leveraging external ideas and resources for innovation.
Trends in Practice: Encouraging innovative thinking within a company culture (e.g., Google's '20% time' initiative for creative projects)
Conclusion
Organizational design is critical for aligning structure with strategy and adapting to changing environments to prevent inertia leading to failure.
Inertia
Typical firm path (assuming success at each step)
1. Master their environments
2. Achieve success
3. Structures and systems to accommodate size
4. Inertia that constrains opportunities and amplifies mismatch between
firm and environment
• Resist change = option A; Flexibility and Adaptation = option B
9
Importance of Organizational Design in M&A
Successful M&A: Achieving success in mergers and acquisitions (M&A) requires:
Need to have plan for integration
Ensure motivations for M&A are related to competitive advantage
Goals:
• reduce competitive intensity
• portfolio diversification
• lower costs
• pre-empt competitors (AND be somewhat correct about the value of the
acquisition)
3
Helps firms grow
more profit
widen margins
Increase economies of scale
more bargaining power
Four Building Blocks of Structure:
Specialization: Degree to which tasks are divided.
Formalization: Extent of defined rules and procedures.
Centralization: Level of decision-making authority.
Hierarchy: Organizational reporting lines.
Key Functions of Structure:
Communication and supervision.
Coordination of employee and team efforts.
Management and distribution of resources
Specialization & Division of Labor
Larger orgs: individuals and teams have more specific tasks
Smaller orgs: individuals tend to be generalists
Ex: Faculty (employee) responsibilities
Emory → professors and advisors are separate people
Marist → professors are also advisors
Trade-off between depth and breadth of knowledge
Ex: Yelp Account Manager
Idea: efficiency in productivity. The more narrow/niche we do, the more efficient we become at it Con: employes get tired of doing the same thing
Formalization: How well-defined is the work?
degree to which rules and procedures define work
Ex: employee handbook, customer service scripts, SOPs
Pros: Consistency, predictability, reliability, safety
Cons: Rigidity, reduced creativity → Reduced innovation
Centralization: How concentrated is decision-making power?
Who makes decisions?
Examples:
BP may have been over-centralized (Deepwater Horizon)
US intelligence may have been under-centralized (not communicating with each other)
Top-down strategic planning = MORE Centralized
Strategy as planned Emergence = more Decentralized
Hierarchy: Who reports to whom?
Hierarchy = position-based reporting lines
Span of Control”
Tall organizations → narrow span of control =
Narrow → Few direct reports
Examples:
BP may have been over-centralized (Deepwater Horizon)
US intellegicence may have been under-centralized (not communicating with each other)
Tall Structure: Narrow span of control; fewer employees per manager.
Flat Structure: Wide span of control; more employee interaction.
Top-down strategic planning = MORE Centralized
Strategy as planned Emergence = more Decentralized
Mechanistic vs Organic Structure
Mechanistic Organizations:
High specialization, rigid labor division, centralized decision-making, tall hierarchy, cost-leadership strategy (e.g., McDonald's).
Organic Organizations:
Low specialization, flexible labor, decentralized decision-making, flat hierarchy, differentiation strategy (e.g., Zappos, W.L. Gore)
Evolution of Organizational Structures
Growth Stages:
Simple Structure: Small firms, low complexity; decisions by founders.
Functional Structure: Groups by functional area; reports to CEO.
Multidivisional Structure: Diversified firms; independent SBUs with profit responsibility.
Matrix Structure: Combination of functional and divisional for flexibility.
Closed vs. Open Innovation
Closed Innovation: Traditional model focusing on in-house development.
Open Innovation: Collaborating with partners, leveraging external ideas and resources for innovation.
Trends in Practice: Encouraging innovative thinking within a company culture (e.g., Google's '20% time' initiative for creative projects)
Conclusion
Organizational design is critical for aligning structure with strategy and adapting to changing environments to prevent inertia leading to failure.
Case Study: Google's Organizational Structure
Historical Context:
As of 2015, Google restructured into stand-alone strategic business units (SBUs) to foster innovation and adapt to competition in online advertising.
Goals of Restructure:
Enhanced support for radical innovation.
Improved financial transparency.Organizational Structure Determinants
Evolution of Organizational Structures
Growth Stages:
Simple Structure: Small firms, low complexity; decisions by founders.
Functional Structure: Groups by functional area; reports to CEO.
Multidivisional Structure: Diversified firms; independent SBUs with profit responsibility.
Matrix Structure: Combination of functional and divisional for flexibility.
Closed vs. Open Innovation
Closed Innovation: Traditional model focusing on in-house development.
Open Innovation: Collaborating with partners, leveraging external ideas and resources for innovation.
Trends in Practice: Encouraging innovative thinking within a company culture (e.g., Google's '20% time' initiative for creative projects)
Conclusion
Organizational design is critical for aligning structure with strategy and adapting to changing environments to prevent inertia leading to failure.