CHAPTER SUMMARY

Company tasks are organized to provide customers with goods and services. The functional
structures and as the foundation of horizontal differentiation by creating a division of labor
that leads to core competences. Functional structures face control problems as an organization
grows and becomes more complex: lack of communication, inability to measure performance,
and lack of customer responsiveness. To resolve these issues, a company adopts a more complex
structure by increasing vertical differentiation, horizontal differentiation, and integration. The
source of control problems, the product, geography, or the customer, determines the type of
structure. Three product structures (product division, multidivisional, and product team) are
discussed, highlighting both advantages and disadvantages. The geographic structure and the
market structure are examined with their advantages and disadvantages. The matrix structure is
appropriate when a high level of coordination and a rapid development time are necessary. The
advantages and disadvantages of the matrix are reviewed as well as the difference between the
matrix and the product team structures. The multidivisional matrix structure offers a high level of
coordination among divisions. Structures may need to be changed over time, so managers should
continually evaluate the cost/benefit ratio of company structure. Trends in structure include
network organizations, outsourcing, and the boundary less organization, each with advantages
and disadvantages. A key issue in organizational design is how to group tasks and coordinate
activities to create a competitive advantage. Organizational structure fosters coordination,
motivation, and control. The appropriate structure depends on the complexity of activities, the
amount of coordination needed, the number of products marketed, the geographical location,
and the customer served. Reengineering an organization can increase performance.
Functional Structure
Functional structure is the bedrock of horizontal differentiation, which begins
when one person assumes a functional task. As others assume specialized roles, a
functional structure emerges, with people placed in groups based on common
skills or common use of resources. The B.A.R. and Grille grouped waiters and
busboys into the dining area function and chefs and kitchen staff into the kitchen
function.
Advantages of a Functional Structure
1. People with common skills share information for problem solving or
accomplishing a task. Learning from peers increases skills and abilities.
2. People can supervise each other and meet work schedules. Peer
supervision is key if work is complex because supervision from above is difficult.
3. Working closely, peers develop norms and values that increase their effectivenes
s and loyalty.
Control Problems in a Functional Structure
A functional structure controls people and resources and develops core
competences. As acompany grows and becomes more complex, each function tries
to maintain the companys position. Increased demand may strain manufacturing
to produce products fast enough or insufficient quantity. Control problems arise.


Q. What problems do functional structures face?
A
. Communication Problems.
Functions communicate poorly because of subunit orientation.
Measurement Problems.
Evaluating the cost and contribution of each function to a product is
difficult.
Location Problems.
With regional offices, a company must balance decision-making
between centralized functions and regional managers.
Customer Problems.
New types of customers require customized products to meet
their needs.
Strategic Problems.
Solving daily coordination problems prevents top managers from
focusing on long-term strategic issues, resulting in a loss of strategic
direction.

Reengineering Functional Structure to Solve Control Problems
Before adopting a more complex and costly structure, a company may solve
control problems through integrating mechanisms. Marketing and sales have
functional hierarchies. Some companies consolidate departments to resolve
coordination problems. (Fig. 6.2).

From Functional Structure to Divisional Structure
A functional structure best serves a company that produces a few, similar products
at a few production sites and markets to one type of customer. When production
expands to more products at more locations and to several types of customers,
a company requires a complex structure.This move entails three design choices:

Increasing vertical differentiation, increasing the levels in the hierarchy,
centralizing decision-making,and increasing control with rules.
Increasing horizontal differentiation, product teams or divisions to overlay a
functional grouping.
Increasing integration,using integrating mechanisms such as task forces and teams
to improvecoordination between subunits and motivation.
Moving to a Divisional Structure
A divisional structure groups people from different functions to
provide customers with goods or services. This structure makes
subunits easier to manage as a company grows. The type of
divisional structure depends on the source of control problems. If
many, complex products cause problems, a product structure fits
best. If multiple locations cause problems, a geographic structure
fits best. If different customer types cause problems, a market
structure fits best.

6.3 Divisional Structure I: Three Kinds of Product Structure
As the number of products and/or services increase, tasks are
grouped by product and function. A product structure groups
products into separate divisions. A company must determine the
difference and complexity of products and coordination methods
between support functions and product divisions. Support
functions can be centralized at the top or grouped for each product
division. These decisions determine a companys product division,
multi-division, or product team structure.

Product Division Structure
A product division structure with centralized support functions is appropriate
when products are similar and target the same market.
Q. What types of companies generally meet this criteria?
A. Food processors, furniture makers, and paper companies fit a product division
structure. H. J. Heinz has product divisions with manufacturing facilities and a
manager who coordinates with support functions like marketing. Vertical
differentiation is increased and support functions centralized at the top.(Fig. 6.4)
Each support function is grouped into a product-oriented team. (Fig. 6.5)Sharing of
skills and resources increases a functions ability to create value across product
divisions.
Multidivisional Structure
A multidivisional structure is appropriate if products are different and are sold in
many markets. Divisions are self-contained, each with their own support functions
and control. Because products differ, centralized support functions at the top is
infeasible. An automaker doesnt know how to market a computer. The
multidivisional structure has a corporate headquarter, organized functionally and
responsible for overseeing division managers. Staff members facilitate integration
to share information quickly among divisions. Unlike a product division structure,
a multidivisional structure can control many businesses.
Q. What companies should use the multidivisional structure?
A. Most Fortune 500 companies, like General Motors, have a multidivisional structure because
it permits growth and retention of control. There are three management levels: corporate,
divisional, and functional.


Advantages of a Multidivisional Structure
1. Increased organizational effectiveness, due to a division of labor between corporate and division
al managers.
2. Increased control, because corporate managers monitor divisional managers and make
comparisons.
3. Profitable growth, because capital can be allocated to divisions with the greatest potential return
on investments.
4. An internal labor market, because good divisional managers are promoted to corporatemanagem
ent.
Organizational Insight 6.1: Creating GMs Multidivisional Structure
Alfred Sloan took over GMs 25 product divisions in 1923 when Ford was highly centralized and
achieved economies of scale by producing one model. Sloan developed a multidivisional structure
with diversity in R&D, design, and marketing skills, but centralized control for economies of scale,
cost control, and strategic planning. Divisional managers made decisions, and corporate managers
evaluated performance and created strategic plans. In 1984 competition forced GM to consolidate
divisions, but centralized control resulted in look-alike cars, and layers of hierarchy slowed decision-
making. So GM returned design control to the divisions, but kept R&D and purchasing centralized.
Q. How was GMs structure different from a product division structure? Evaluate
GMs structure.

A. GMs structure had self-contained divisions and a corporate headquarters staff.
GMs structure had several benefits:
1. The ability to measure each divisions performance and to allocate resources bet
ter
2. Improvement in employee morale due to divisional decision-making
3. Sufficient time for corporate managers to focus on strategic issues
4. Sharing of divisional information to compare profitability and product developm
ent timeStill costs soared due to duplication of functions.

Disadvantages of a Multidivisional Structure
1. Determining what authority to centralize or decentralize from the corporate to t
he divisional level2. Coordination problems from uncooperative divisions competin
g for resources
3. Determining transfer pricing, the price of a product or service
sold by one division to another
4. Higher bureaucratic costs
5. Distorted information, resulting in communication problems
Product Team Structure
A hybrid of the product division and the multi-division structures,
the product team structure customizes products, speeds development
time, and reduces costs. The poor communication leading to slow
development in the multidivisional structure is avoided. Functional
specialists serve on self-contained, product division teams. A team
manager oversees design and manufacturing activities, and employees
become loyal to product not function. Decentralization and integration
facilitate rapid decision-making.(Fig. 6.9)
Organizational Insight 6.2: Iacocca Pioneers Chryslers Team Structure
To develop a car, Chrysler traditionally created a product division,
responsible for acquiring inputs. This ineffective method was successfully
replaced by Chryslers product platform teams.
Q. Why did Chrysler change to a product team approach? What benefits
did this structure provide?
A. The functional approach was ineffective; development time was seven
to eight years compared toToyotas three, quality was poor, and costs were
high. The product team structure was successfully testedfor a new sports
car, with a development time of three years, good quality, and low costs.
Customerdemand was high.

Divisional Structure II: Geographic Structure

As a company expands into different regions, it needs to organize its core
competences to meet the needs of different regional customers.
The geographic divisional structure permits some functions to be
centralized and others to be decentralized. (Fig. 6.9)This structure
increases both horizontal and vertical differentiation. A regional hierarchy
is added.

Organizational Insight 6.3 Wal-Mart Goes National Then Global

Wal-Mart found the right balance between a mechanistic and organic style
of operating and hasprospered. (Organizational Insight 4.6)Q. What
structural problems did Wal-Mart face?A. Wal-Mart had to choose
a structure complex enough to operate its growing empire and
still maintainits mechanistic/organic balance.Q. Describe Wal-Marts
structure.A. Wal-Mart selected a geographic structure. Store operations
are divided into regions, includinginternational operations, giving
managers input into their regions product mix to maximize sales. As it
expands globally, Wal-Mart will further divide up its international division
to meet customer needs.
Market Structure
The customer is the focus in a market structure: commercial,
consumer, corporate, and governmentcustomers. Each division
develop products for its customers but uses centralized support
functions. Thisstructure permits a quick response to market
changes. (Fig. 6.11)

Organizational Insight 6.4: Tailoring Structure to Customers
Mellon Bank used a product structure, organizing divisions by CDs,
insurance, and credit cards.Managers competed for customers,
divisions did not coordinate, and sales fell. Mellon Bank
reorganized.Q. What were the advantages of a market structure?A.
Communication among divisions improved, because managers were
not competing for customers orresources. Centralizing support
functions (advertising, market research, and computers) saved the
bank $2 million.

Matrix Structure
The matrix structure includes both functional and product responsibility. It is used for
a high level of group coordination to respond to changing conditions. The matrix
structure is flat with decentralized authority. Functional employees remain under a
functional head, but work under a product manager. The product manager leads the
team whose members are responsible to both functional and product managers. Role
and authority relationships are ambiguous. Control is exerted horizontally via teams. A
matrix is an organic structure. Although both a product team and matrix structure use
teams, matrix team members have two bosses and team membership is not fixed.
Advantages of a Matrix Structure
1. Functional barriers and subunit orientation are reduced.
2. Cross functional communication allows members to learn and develop skills.
3. Employee skills are utilized
4. Employees are concerned about both cost and quality.
Disadvantages of a Matrix Structure
1.Lack of bureaucratic structure leads to role ambiguity and role conflict.
2. Teams may fight over resources
3. Members often refuse transfers to stay with peers.
4. Informal hierarchies emerge in response to uncertainty.
5. Unmet expectations lead managers to increase control resulting in a taller, bureaucrati
c structure
The Multidivisional Matrix Structure
A matrix design can enhance a multidivisional
structure when placed at the companys top
to increase integration between corporate and
division managers. Corporate
specialists analyze divisional performance and
design action plans. Division heads and
corporate executives exchange information
and coordinate activities.
1. As organizations grow and differentiate, what problems can arise with a function
al structure?

As a company grows, it encounters control problems: lack of communication,
inability to measure performance, location issues, customer concerns, and neglect
of strategic matters. Functions develop hierarchies, become remote, and make
coordination difficult. Determining the contribution and cost that each function
brings to a product is difficult. Balancing control between corporate and regional
offices is difficult. A functional design makes product customization difficult. Top
managers spend time on operational and coordination issues, neglecting long-
term strategic concerns.

2. How do the product division structure and the multidivisional structure differ?

There are structural differences:
The divisions in a multidivisional structure are independent with their own
support functions; product structure divisions share centralized support functions.
A multidivisional structure has a corporate headquarters staff.
A multidivisional structure permits a company to run many businesses; a product
division structure is appropriate for one business.
In a multidivisional structure, various divisions can have different structures.

3. Why might an organization prefer to use a product team structure rather than a
matrix structure?
A product team structure allows employees to report to only one boss, the team
manager, not two. This reporting structure reduces role conflict and role
ambiguity, making responsibilities clear. Because of a clearly defined hierarchy, a
product team structure avoids conflicts over resources. Established procedures are
used because team membership is fixed; in a matrix, people rotate and feel
unstable. Employees may create their own structure, which leads to more
bureaucracy and a taller hierarchy.

4. What are the principal differences between a functional structure and a multidiv
isional structure?Why does a company change from a functional to a
multidivisional structure?

A functional structure is simpler and is used for one business. A multidivisional
structure has more integration, more horizontal and vertical
differentiation. Corporate headquarters is a level with a division of labor between
corporate and divisional managers. Control increases because corporate managers
oversee and measure divisional performance. An internal labor market allows for
the promotion of divisional managers to corporate positions. A company adopts a
multidivisional structure because the number and complexity of different products
cause control issues.


5. What are the advantages and disadvantages associated wit
h network structures?
Advantages:
1. Production costs reduced through partners with lower costs
2. High bureaucratic costs avoided with a flat structure
3. Organic organizational behaviour
4. Partners replaced for unmet performance expectations
5. Access to low-cost foreign sources of inputs and expertise

Disadvantages:
1. Coordination problems emerge, followed by lack of cost red
uction and improved quality
2. Difficulty in replacing partners and keeping proprietary infor
mation from competitors