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operations that, in effect, duplicate the activities of the domestic firm in multiple foreign markets. This leads to reorganization into multinational structures, which are characterized by separate divisions for different countries (or regions, if national markets were sufficiently similar or if the volume of business in a given area was small). Growing multinational firms soon face further pressures for coordination across countries and specialization within countries, especially firms with technologies that permit substantial scale and scope economies. This leads to the creation of global strategies that view the world as the firm’s market. These firms reorganize to promote scale and scope economies in global production and distribution. The global appliance firm Electrolux provides an example of this sort of global strategy. It began as a Swedish firm and grew to achieve scale and scope economies along with the growth of European economic integration following the Second World War.
Gradually, multinational firms develop structures that are appropriate for their increased levels of international activity. This occurs when corporate managers learn to balance responsiveness to local conditions with centralization to achieve global economies. This represents what some call a transnational strategy and is associated with flexible organizations that combine matrix and network structures in ways that permit a great variety of organizational designs. Recent research has focused on the variety of structures that can emerge within internally differentiated multinational firms. A parallel interest of this work has been in the processes used to manage corporate activities in transnational contexts. This supports the idea of corporate management as focusing on the evolving interactions among business units and groups worldwide, rather than on their particular product market strategies that we inherited as legacies of previous strategies.
Multinational firms today not only outsource their manufacturing to lower cost areas, but they also increasingly locate their critical corporate functions wherever in the world it is best to do so. R&D functions, for example, may be located overseas, in order to be closer to production facilities and thus be more effective in developing process innovations. R&D could also be located overseas to better access local talent pools or to build connections with local scientific networks. Moving critical functions overseas is sometimes called offshoring to distinguish it from outsourcing, since it is the firm’s own employees who are relocated to critical locations and the relocation is not primarily motivated by a desire to access cheap labor sources.
CHAPTER SUMMARY
Organizational structure concerns the arrangements, both formal and informal, by which a firm divides up its critical tasks, specifies how its managers and employees make decisions, and establishes routines and information flows to support operations so as to link opportunities in the environment with its resources and capabilities.
Organization design typically involves two steps. First, simple tasks performed by simple work groups need to be organized. Second, work groups and their activities must be linked together into complex hierarchies.
Simple tasks performed by small work groups can be structured in three ways: (1) individually—members of the work group are treated as if they were independent and receive incentives based on individual actions and outcomes; (2) self-managed teams—a collection of individuals, each member of which works with others to
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set and pursue common objectives, with individuals rewarded, in part, on the basis of group performance; and (3) hierarchy of authority—one member of the group monitors and coordinates the work of the other members.
Large firms often require complex hierarchies, by which is meant a structure that involves multiple groups and multiple levels of groupings. Complex hierarchy arises when there is a need to organize simple work groups together into larger groups.
The allocation of authority within the firm is typically considered in terms of centralization versus decentralization. As decisions are made at higher levels within a firm’s hierarchy, the firm is said to be more centralized regarding those decisions. Conversely, as certain decisions are made at lower levels, the firm is more decentralized regarding those decisions.
Four basic types of structure for large organizations can be identified: (1) the unitary functional structure (often called the U-form); (2) the multidivisional structure (often called the M-form); (3) the matrix structure; and (4) the network structure.
The functional structure, or U-form, allows a specialization of labor to gain economies of scale in manufacturing, marketing, and distribution.
The multidivisional structure, or M-form, creates a division of labor between top managers and division managers. Top managers specialize in strategic decisions and long-range planning. Division managers monitor the operational activities of functional departments and are rewarded on the basis of overall divisional performance.
Matrix structures involve overlapping hierarchies and are necessary in situations where there are conflicting decision demands and severe constraints on managerial resources.
Network structure focuses on individuals rather than on positions and is the most flexible of the structural types. Recent developments in networking technologies and modular product designs have greatly expanded the potential applications of network organizations.
Many plausible contingencies may affect a firm’s structure at any given time. Those factors addressed by the firm’s strategy will be the most important in determining an appropriate structural choice for the firm. In other words, structure follows strategy.
The thesis that structure follows strategy has been applied to firms that compete internationally. Multinationals have discovered the need to balance responsiveness to local conditions with centralization to achieve global economies. This is the transnational strategy, and it is becoming associated with flexible organizations that combine matrix and network structures.
QUESTIONS
1.A team of six individuals must fold, stuff, seal, and stamp 250 preaddressed envelopes. Offer some suggestions for organizing this team. Would your suggestions differ if the team was responsible for processing 2,500 envelopes? For assembling 250 personal computers? Why would you change your recommendations?
2.Consider a firm whose competitive advantage is built almost entirely on its ability to achieve economies of scale in producing small electric motors that are used by the firm to make hair dryers, fans, vacuum cleaners, and food processors. Should this firm be organized on a multidivisional basis by product (hair dryer
Questions • 467
division, food processor division, etc.) or should it be organized functionally (marketing, manufacturing, finance, etc.)?
3.What types of structures would a firm consider if it was greatly expanding its global operations? What types of organizing problems would it be most likely to encounter?
4.In the 1980s, Sears acquired several financial services firms, including Allstate Insurance and Dean Witter Brokerage Services. Sears kept these businesses as largely autonomous divisions. By 1994, the strategy had failed and Sears had divested all of its financial services holdings. Bearing in mind the dictum that structure follows strategy, identify the strategy that Sears had in mind when it acquired these businesses, and recommend a structure that might have led to better results.
5.Matrix organizations first sprang up in businesses that worked on scientific and engineering projects for narrow customer groups. Examples include Fluor, which built oil refineries in Saudi Arabia, and TRW, which supplied aerospace equipment to NASA. What do you suppose the dimensions of the matrix would be in such firms? Why would these companies develop such a complex structure?
6.It is sometimes argued that a matrix organization can serve as a mechanism for achieving strategic fit—the achievements of synergies across related business units resulting in a combined performance that is greater than units could achieve if they operated independently. Explain how a matrix organization could result in the achievement of strategic fit.
7.Is is possible to organize too much or too little to meet the needs of the environment? This would be a case of strategic misfit. How would you know if a misfit has occurred? Think of an example of misfit caused by an inappropriate organization design. Explain how a firm’s structure could systematically increase its costs and place it at a strategic disadvantage.
8.While Internet entrepreneurs worked hard to get their venture to the point of a successful initial public offering (IPO), many discovered that their organizational issues changed and became more daunting after the IPO than before it, when they were just working to accommodate rapid growth. Explain why “going public” might put such a stress on a small firm’s structure.
9.The “#1 or #2; Fix, Sell, or Close” rule was one of the most memorable aspects of Jack Welch’s corporate strategy at GE. (Business units needed to achieve a #1 or #2 market share; if not, they had to fix, sell, or close the unit.) In the 1990s, however, this rule was changed to focus on smaller (10 to 15 percent) market-share requirements but a requirement that business unit managers demonstrate significant growth potential. What impact did this change in corporate strategy have on the organizational design of business units?
10. Many of the most pressing organizational issues attracting public attention today seem to concern government agencies, especially those with responsibilities for preventing man-made disasters and attacks or responding to natural ones, such as hurricanes. How do the organizational design issues facing large firms compare with those facing rapid-response public agencies such as FEMA or the EPA?
11. While most managers might agree that firms should organize appropriately for their environmental conditions, they might easily differ on what environmental conditions were facing a firm and what an appropriate response to those conditions might entail. Explain the role of the manager in developing a fit with the firm’s environment.