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return to Apple, its success rate on major projects was high and the culture of the firm, spurred on by Jobs’s personality, emphasized attention to detail and perfectionism in followthrough.
Given Apple’s structure and what we clearly know about its projects and their results, it is doubtful that Steve Jobs was guilty of micromanaging. He would not have had the time to do so effectively, given all of his other responsibilities. While he may have wanted to
micromanage projects—though that is not clear—Apple’s structure ensured that while he maintained control over the direction of the firm, he needed to delegate on implementation. Lashinsky also makes clear that Jobs had a clear inner circle with which he was comfortable. This need to delegate is also a potential explanation for Jobs’s famous tirades over Apple’s few mistakes: he was frustrated that he had to delegate but that the project had not worked out as planned.
Efficient Information Processing
Jay Galbraith argues that organizations should be designed to facilitate information processing.28 Work groups can normally operate independently and manage themselves by work rules that become increasingly routine with more experience. Administrative hierarchy develops to handle “exceptions”—decisions that cannot be easily made using standard organizational routines. Successively higher levels of organization are needed to handle more difficult exceptions. Decisions at the top of an organization are presumably the most difficult and least routine of all—that is, they are strategic decisions. The test of a structure is its ability to efficiently process routine information flows while ensuring that the exceptional situations are attended to by those with the most appropriate knowledge and the requisite authority for action.
Galbraith’s account suggests that structural change occurs in response to changes in the amount, complexity, or speed of information processing that a firm must undertake. As work groups are forced to process more information or act more quickly, existing routines become strained, and some adjustment, either in additional supervision or some cross-cutting team arrangement, is needed. For example, marketing decisions that are routine in industries with stable demand, high entry barriers, and a few well-known domestic competitors become less routine as markets globalize or changes in technology destroy entry barriers. Examples include the response of Kodak and Polaroid to the advent of digital photography and strong Asian competitors. In a similar manner, the entire frame of reference of U.S. automakers was shaken by the nearly simultaneous attack on the U.S. market by low-end Asian competitors as well as high-quality luxury entrants from both Asia and Europe. Pricing and promotion decisions now require keeping track of foreign competitors and monitoring demand in increasingly segmented markets. These changes can overwhelm standard operating procedures and require increased hierarchical oversight.
Luis Garicano models the influence of information processing on organization design and achieves a result consistent with Galbraith.29 He describes a knowledge hierarchy in which firms—usually thought of as professional services firms in law, consulting, and so forth—encounter problems that differ according to their difficulty and the frequency. Workers can acquire and communicate knowledge about solutions to problems. Garicano finds that an optimal organization design involves dividing workers into production workers and “problems solvers” who specialize in dealing with
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more difficult and/or infrequent problems. So in a law firm, less skilled attorneys tackle routine problems such as filing legal documents while passing along to their senior partners the more challenging tasks. Garicano finds that a decrease in the cost of acquiring or transmitting knowledge increases the average span of control of the “problem solvers” and reduces the number of organizational levels.
Arthur Stinchcombe emphasizes the role of organizational structure in promoting more efficient information retrieval.30 Firms should be structured to facilitate the efficient retrieval of information in the varied conditions they face on a regular basis. For example, a pharmaceutical firm might want an independent R&D department capable of rapid interaction with medical school faculty, an important source of new product development. Different levels of structure can deal with different informational needs. Information about labor costs or consumer demand may be highly local. If local work groups control these factors, they will have the proper incentives to
EXAMPLE 13.4 STRATEGY, STRUCTURE, AND THE ATTEMPTED MERGER BETWEEN THE UNIVERSITY OF CHICAGO HOSPITAL AND MICHAEL REESE HOSPITAL
The idea that strategy follows structure has implications for mergers between firms that have pursued different strategies. In melding two such organizations together, issues relating to the control of assets and resources frequently arise. As we saw earlier, the allocation of rights of control of assets is a key determinant of how efficiently a vertical chain or a partnership of two organizations performs. Inside an organization, structure determines the basic rights to control the firm’s assets. Thus, organizational structure can critically affect the success of a merger.
The attempted merger between the University of Chicago Hospital and the Michael Reese Hospital provides an example in which the control of assets and resources was a key issue in the attempted integration of the two organizations. The University of Chicago Hospital is on the campus of a leading research university, which led the hospital to pursue a strategy based on a reputation for providing state-of- the-art medicine. Indeed, advertisements for the hospital celebrated the research accomplishments of its medical staff. Consistent with this strategy, most physicians had faculty appointments in the university’s medical school, and faculty were evaluated on the basis of their research. Physician salaries were based more on their academic standing than on the patient revenues they brought to the hospital.
The University of Chicago Hospital’s nearest competitor on the city’s south side was the Michael Reese Hospital. This hospital also had a long history of quality care, with special emphases on community service and close relationships between medical staff and patients. The medical staff was organized according to a traditional scheme—staff members were identified by clinical areas but billed patients for their services independently of the hospital’s billings. In other words, physicians were rewarded exclusively for providing patient care.
The two hospitals sought to merge in 1985. The merger would allow them to consolidate and reallocate some services and possibly avoid price and nonprice competition in their shared markets. Anticipating a potential conflict between medical staffs over resources and authority to set policy, the two hospitals attempted to negotiate an organizational structure before they merged. As it turned out, they could not develop an agreeable structure to manage their surgical departments as an integrated unit. University physicians refused to be evaluated on the basis of clinical care, while Reese physicians refused to be thought of as research faculty. Unable to coordinate this vital area and fearful that economies in surgery would not be realized, the hospitals called off the merger.
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gather information. Dealing with federal regulations, however, should be the responsibility of a work group with a broader scope. Stinchcombe also argues that firms should internalize activities (rather than rely on market coordination) when the information from those activities is of critical importance. Firms need to be “where the news breaks, whenever it breaks,” since rapid information processing facilitates effective adjustments and environmental changes.
An example of Stinchcombe’s arguments can be seen in the Spanish firm Inditex, whose Zara subsidiary is a major competitor in the global fashion business. The key to Zara’s success was a forward integration to own its stores and place them in critical locations in its important markets. This enables Zara to obtain critical and timely information on which of its products are selling, which are not, and how customer tastes are apparent to store managers. With this information, Zara has developed processes for linking design, manufacturing, and retail so that it can bring new products to market quickly and without excessive advertising. This allows Zara to succeed relative to its competitors through quicker inventory turnaround, reduced discounting, and better use of its working capital.31
Bruce Kogut and Udo Zander make a similar argument for the superiority of organizational structure in processing information relative to market alternatives.32 They focus on knowledge sharing and the multinational structure, which can be thought of as a variant of the multidivisional structure whose units cross national boundaries. They argue that this structure is superior at transferring specific types of knowledge across national boundaries rather than as a means of internalizing transactions in the face of market failure, although such failures play a role in firm boundaries. They argue that this structure is especially valuable for transferring tacit knowledge—knowledge that is complex and difficult to codify and teach. Kogut and Zander support these arguments with survey data on a sample of global innovations by Swedish firms.
STRUCTURE FOLLOWS STRATEGY
Throughout this chapter we have emphasized that the choice of structure depends on environmental factors such as market conditions, technology, and information. These factors may have conflicting implications for structure. A firm that relies on the personal relationships between sales personnel and clients may benefit from a decentralized structure. The same firm may enjoy substantial scope economies, which favors centralization or a matrix structure. When facing conflicting environmental factors, the firm should focus on those factors that are critical to its strategic success. If the firm is dependent on maintaining benefits leadership based on close relationships to customers, then it should favor decentralization. If the firm is pursuing cost leadership based on scope economies, centralization is preferred. If both strategic goals are important, the firm may attempt to overcome the complexity of the matrix structure.
The famed business historian Alfred Chandler first articulated how firms’ strategic choices influence their subsequent choices of structure in his book Strategy and Structure.33 Based on case studies of firms such as DuPont, General Motors, Standard Oil of New Jersey (which has become ExxonMobil), and Sears, Chandler concludes that changes in organization structure are driven by changes in strategy, which, in turn, are associated with changes in the external conditions firms face. In short, Chandler’s thesis is that structure follows strategy.
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Chandler developed this thesis by careful study of evolving markets. In the late nineteenth century, developments in the technological and market infrastructures (which we describe in Chapter 1) created opportunities for achieving unprecedented economies of scale and scope in such industries as tobacco, chemicals, light and heavy machinery, and meatpacking. Firms such as American Tobacco, DuPont, McCormick Harvesting Machine Company (which became International Harvester), and Swift responded by investing in large-scale production facilities and internalizing activities, such as sales and distribution, that independent companies had previously performed for them. They also invested in the development of managerial hierarchies. The first structure typically employed by these early hierarchical firms was the U-form. This was an appropriate structure because it permitted a specialized division of labor that facilitated economies of scale in manufacturing, marketing, and distribution.
The firms that were the first in their industries to invest in large-scale production facilities and develop managerial hierarchies expanded rapidly and often dominated their industries. But most of the early growth of these firms was within a single line of business or occurred within a single market. Shortly after 1900, however, this began to change. Such firms as Singer and International Harvester aggressively expanded overseas. Indeed, by 1914, the largest commercial enterprises in Russia were Singer and International Harvester. Others, such as DuPont and Procter & Gamble, diversified their product lines. This shift in strategy revealed shortcomings in the U-form. According to Chandler, the attempt by the top management of the newly diversified firms to monitor functional departments in the U-form structure led to administrative overload. Managers needed to find a way to delegate decisionmaking authority, and this motivated them to experiment with alternative organizational structures.
The multidivisional structure, or M-form, that emerged after 1920 was a response to the limitations of the U-form in larger diversified firms. The M-form removed top managers from involvement in the operational details of departments, allowing them to specialize in strategic decisions and long-range planning with the support of a professional staff. Division managers monitored the operational activities of the functional departments that reported to them. Top managers were comfortable delegating decision making to division managers because it was straightforward to instill proper incentives. Divisions were run as profit centers, and division managers were rewarded on the basis of division profit-and-loss statements.
Although corporate structures have evolved since the days of the M-form, the principle that structure follows strategy still applies. The network structure developed in SAP AG, a German firm that is one of the world’s largest software producers and the leading producer of real-time, integrated applications software for client/ server computing, provides an example of this principle. Its founders have been intent on SAP remaining largely a product development firm with a flat organization structure. To do this, SAP managers decided not to expand into related but different lines of business, such as training and implementation consulting, even though meeting customer needs during implementation would be critical for growth. To accomplish its growth objectives, SAP has developed a network organization of partners, who perform 80 to 90 percent of the consulting implementation business generated by SAP products. Partners range from major consulting firms, such as Accenture and CSC Index, to hardware manufacturers, such as IBM, HP, and Sun Microsystems, to software and chip manufacturers, such as Oracle, Microsoft, and Intel. Relationship managers for these partnerships play an important role in SAP’s corporate structure.
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EXAMPLE 13.5 SAMSUNG: CONTINUING TO REINVENT A CORPORATION34
Major environmental shifts often force firms to reassess strategies and restructure their organizations. The Samsung business group provides an example of how to continually reinvent a corporation facing the hostile market forces that Asian firms have increasingly endured in recent decades. Samsung was founded in 1938 as a general trading store, exporting fruit and dried fish to Japaneseoccupied Manchuria. By 1995, it had become the largest South Korean business group, or chaebol, at $54 billion in sales. Today, Samsung Group remains the largest business combination in the country, with 2010 sales of over $227 billion and over 315,000 employees worldwide. The group operates globally in such diverse industries as aerospace, chemicals, and finance. This is in addition to Samsung’s longstanding presence as one of the world’s largest maker of semiconductors and as a force in the production of cell phones, TVs, LCD flat panels, and the like.
Samsung’s rise to prominence was based on strong support from the Korean government, inexpensive labor, and an authoritarian culture. As a result, Samsung’s strategy from the 1960s until the mid-1980s was based on using cheap labor to produce lower-quality products at low prices. By also producing large volumes, Samsung reaped economies of scale and thus captured comfortable margins, which also enabled it to enter a variety of businesses with great success.
In the late 1980s, however, a combination of factors impaired Samsung’s historical sources of competitive advantage and caused its managers to reevaluate strategies that had brought the company such success for over two decades. South Korean wages began to rise, and workers began to unionize and strike, causing labor instability. Samsung does not have unions because it pays high wages. Even so, the general labor climate became less friendly. The value of the South Korean currency, the won, had also appreciated, making South Korean exports more expensive. In addition, increased
global competition further eroded Samsung’s competitive positioning.
In response, Chairman Lee Kun-Hee has launched a sweeping remake of Samsung’s culture, including a restructuring of operations. Lee has radically decentralized decision making and encouraged individuality in a company that was known for its rigid hierarchy and subservience to authority. Managers who are not able to assume such responsibility are fired. To encourage individuality, Lee has initiated training programs and other innovative techniques. For instance, each year Samsung sends 400 managers abroad, fully subsidized, for 12 months to do whatever they want. The only requirement is that when they return, they must show proficiency in the host country’s language and culture. In addition to reinventing Samsung’s culture, Lee has consolidated groups in related businesses and specialized in more capitaland technology-intensive industries. Samsung has also tried to shift from being a low-quality, low-cost producer to producing higher-quality goods, competing on an equal basis with leading American, Japanese, and European firms.
This shift in culture and operations forced Samsung to be at the leading edge in innovation and productivity. The firm traditionally adopted its technology from more advanced firms, but Lee instituted massive R&D spending to make Samsung more selfsufficient. Furthermore, Lee has automated plants and even moved some plants to Mexico to save labor costs. Samsung has transformed itself in response to major changes in both global markets and South Korea. The group has actively borrowed the “best practices” of foreign and domestic firms and continues its investment programs today. By 2004, it was the second most profitable firm in the world after Toyota. Even during the global financial crisis, Samsung has maintained its profits, surpassing other Asian electronics manufacturers and comparing favorably to industry leaders such as Intel.
