An extensive body of literature exists on the subject of organizational behavior and design. Most of it is theoretical, written in academic jargon. This chapter uses the language of business and focuses on organizational forms which have evolved in practice.
This chapter is an updated version of a paper which Richard Brandenburg and Igor Ansoff originally published in 1969. Ansoff noted that the original paper involved ‘much hard work, argument, confrontation, and learning.’ It must have had a significant impact on Ansoff. In the second edition of Implanting Strategic Management, Ansoff took the opportunity to thank Brandenburg for the contributions he made to his personal development and, in fact, to his career.
Evolution of Structure
In this chapter, we shift attention from the process by which management works to the shape of the firm, commonly called its organizational structure . As discussed in the previous chapter, the structure, like the systems, evolved in response to challenges.
As is shown across the top of the figure, two major stimuli to the evolution of structure were the growth of environmental complexity and the progressive accumulation of the critical success factors. In the 1900s, firms succeeded by minimizing the production costs, but in the 1980s, they also need to be responsive marketers, skillful strategists aware of the sociopolitical environment and responsive to frequent shifts in major challenges.
Evolution of corporate structure
Except for the last structure shown in the figure, the adaptive system, the names of the respective structural forms which evolved in response to challenges are now standard in management vocabulary. Each form is built on a different principle of grouping the managerial and the logistic activities of the firm. Thus, the functional structure is built on the principle of ‘putting like things together.’ The multinational (a form of matrix structure) is built on the principle of three-way balance: between responsiveness to local markets and competition, synergy among products and technologies, and efficiency of production.
Until recently, organizational forms were static and monolithic. A single organizing principle was applied to all parts of the firm, and once introduced, a new structure was expected to remain unchanged for a long time.
In the late 1940s, an increasing rate of innovation gave birth to the first dynamic structure (project matrix).
In the late 1950s, the increasing rate of strategic activity gave rise to the dual structure in which the strategic (entrepreneurial and innovation) work is done through strategic substructure (based on SBUs) which is different from the substructure used for the operating (marketing and production) work.
The current high complexity of many firms has already given rise to the multi-structure in which distinctive clusters of the firm’s SBAs are served by different structural configurations. Thus, one large Swedish multinational has three substructures: a multinational, a divisional, and a conglomerate.
As discussed before, although structure and systems are the complementary anatomy and physiology of the firm, until recently their respective evolutions proceeded in an uncoordinated manner. In times of low environmental turbulence , structural adaptation was usually the first response to new challenges. This has led to a common American saying ‘when in doubt, reorganize.’ New systems emerged later, after it became evident that the old systems worked poorly within the new structure.
As environmental turbulence grew, the order began to reverse. In previous chapters, we have argued that the appropriate choice in response to the new strategic challenge is not ‘either structure or system.’ All of the capability components are vital, and structure is only one of the contributors to organizational responsiveness . Therefore, in order to determine the contribution of structure, it is first necessary to understand the dimensions of responsiveness needed by a firm and then determine their implications for structure.
Organizational Responsiveness
In previous sections, we introduced the concept of responsiveness of capability which measures the ability of a firm’s organization to respond effectively to a given level of environmental turbulence. We also defined the concept of capability, identified the components of the capability, and presented a method for choosing the types of component (one of them being organizational structure ) which are appropriate for different levels of turbulence.
In this chapter, we focus on organizational structure and on the building blocks which make up a particular type of structure. Our further concern is with the way in which the building blocks fit together to produce a structure. For this purpose, we need another way of describing responsiveness of capability. We shall use the term organizational responsiveness which as the way a firm handles change . Organizational responsiveness is here described by the type of activity which either the total organization or a block supports effectively.
- 1.
Operating responsiveness which minimizes the operating cost of the firm.
- 2.
Competitive responsiveness which optimizes the firm’s profits.
- 3.
Innovative responsiveness which develops the firm’s near-term profit potential.
- 4.
Entrepreneurial responsiveness which develops the firm’s long-term profit potential.
For example, one of the organizational building blocks is the production function. The activities which it may be called upon to support may be minimization of production costs or balancing cost against responsiveness to market needs. At the level of the total organization, the behaviors which it may be called upon to support range from operating, to competitive, to innovative, to entrepreneurial.
As an example of the way building blocks relate to overall organizational behavior the reader will recall our earlier discussion of the effect that cost minimization by the production function has as a key to effective operating behavior.
In addition to the four types of responsiveness listed above, we will also examine the firm’s administrative responsiveness which is its capability to support in an effective and timely manner the four environment-engaging behaviors.
Operating and competitive responsiveness
In the modern and more complex firm, this principle is moderated by a compromise between economies of scale gained by geographic concentration and advantages of low local costs gained by dispersion of facilities.
Experience has shown that operating responsiveness is maximized when operations are standardized, the overheads are minimal, decisions are decentralized to the lowest possible level, and the size of management is kept at a minimum. This has become known as the maximal decentralization principle .
As the right-hand side of Table 17.2 shows, competitive responsiveness seeks to optimize the firm’s near-term profitability. This is attained through cooperation between production and marketing and fast response to variations in demand and in competitive conditions. Many of the decisions are of an inter-functional nature and must be made rapidly , and the lines of communication between the logistic and management work must be short.
The purpose of decentralization is now to provide quick responsiveness to the markets, as well as maximal efficiency. This means a different pattern of decentralization than in the case of operating responsiveness . While functional decisions remain maximally decentralized, decisions on price setting, production levels product development, etc., are now raised to the general management levels. Corporate management involvement typically remains minimal, because it is too far removed from contact with market realities. The firm is subdivided into independent fully integrated organizational units (divisions), each with its own general management and each operating in distinct markets. Thus, economies of scale of unified production are sacrificed in favor of the need for quick and sensitive reaction to environmental fluctuations.
Innovation and entrepreneurial responsiveness
Responsiveness goal | Innovation (I) Near-term profit potential | Rating | Entrepreneurial ( E) Long-term profit potential | Rating |
|---|---|---|---|---|
Production activities | Speed of changeover to new products | Speed of changeover to new technology Flexibility of facilities/equipment Flexibility of labor force Rapid response to discontinuities | ||
Other: | ||||
Other: | ||||
Average rating | Average rating | |||
Marketing activities | Anticipation of competitive trends New product introduction Anticipation of need trends Market expansion New product profitability analysis | Anticipation o competitive discontinuities Novel product introduction Creative needs research Creative marketing concepts | ||
Other: | ||||
Other: | ||||
Average rating | Average rating | |||
R&D activities | New product development Anticipation of technological trends Timing of new products Profit-oriented product design | Anticipation of technological discontinuities Creation of technologies and products Adaptation of novel technology Timing of creative products/Technology | ||
Other: | ||||
Other: | ||||
Average rating | Average rating | |||
Management activities | General management managers’ innovation Project management system Rapid response to incremental changes Rewards for innovation | Anticipation of turbulence General management managers’ strategic portfolio SBU/SBA structure Managed diversification Strategic planning Capability planning Effective management of discontinuous change Timely response to turbulence Rewards for entrepreneurship | ||
Other: | ||||
Other: | ||||
Average rating | Average rating | |||
The goal of the innovation responsiveness is to optimize the firm’s development of new products and marketing strategies within the firm’s SBAs. It supports what was termed the competitive positioning activity. The central function is research and development, but effective introduction of new products to the markets requires close cross-functional cooperation. The profit potential generating innovation work does not replace the operating profit-making work, but supplements it. As a result, the two types of work compete for time and attention from both management and the logistic functions.
Structural design consequences are the need to provide capacity dedicated to innovation work and to organizing capacity in a way which assures timely and effective multifunctional cooperation. Further, we shall discuss the typical solution which was developed by firms is a project management system .
Decentralization plays a distinct role in innovation responsiveness . Experience has shown that innovation responsiveness is highest when the project managers have the authority and the responsibility for the success of their projects, as well as a budget that enables them to buy the support needed from the functional areas.
Entrepreneurial responsiveness , described on the right-hand side of Table 17.3, assures the firm’s long-term growth , profitability, and continuity through balancing the firm’s SBA, SRA, and SIG portfolio. By comparison with innovation responsiveness , where the role of general management is to guide the natural dynamics of the firm’s evolution, in entrepreneurial responsiveness general management must act as the creative brain of the firm.
When major concern with entrepreneurial effectiveness first surfaced at mid-century, an early solution was to locate the entrepreneurial work at the corporate office and to assign to the middle and lower managers the task of guiding the day-to-day production and competitive activities. As a result of this perception, many firms limited strategic planning responsibilities to the corporate office.
Experience has shown that (with the exception of acquisitions and mergers) confining entrepreneurial concerns to the top levels of management is an ineffective and organizationally frustrating solution. Even the most brilliant entrepreneurial decisions will remain unimplemented unless they are connected, through the intermediate levels of management, to the logistic functions of the firm, which convert such decisions into new products, markets, new marketing activity, and new technologies.
Thus, experience showed that vertical connections between the ‘brain’ at the top of the firm and the ‘body’ of the logistic functions are vital if entrepreneurial activity is not to become a situation of ‘paralysis by analysis .’
Thus, entrepreneurial responsiveness also needs to be decentralized. But in this case, the decentralization is not a process of pushing decisions as far down as possible, but rather a process of sharing of strategic responsibilities among several levels of general management . The maximal decentralization principle is replaced by the principle of strategic visibility : For each major strategic decision, authority/responsibility should be placed at the lowest level of the organization at which all of the variables relevant to this decision are visible.
The need for the ‘brain-body’ connection requires the involvement of significant numbers of managers throughout the managerial hierarchy and of workers in the functions. This has fundamental implications for structure. One of these, discussed in the preceding chapter, is the need for close inter-functional cooperation in the implementation of strategies. Another is the need for an adequate capacity for strategic work. A third is a need for capability for strategic work. Finally, strategic work must be protected from infringement of the day-to-day operating activities. All of these issues will be discussed in subsequent chapters.
The firm’s capability fully supports organizational behavior in one or more of the primary responsiveness modes which the firm is pursuing.
The firm’s capability is quickly adaptable to changes in the primary responsiveness modes.
In the past, when major administrative changes were infrequent and unplanned, they lagged behind the changes in the action types of responsiveness. As a result, when discontinuities occurred, there followed a significant period of time during which the administrative support was mismatched from the new behavior of the firm. Furthermore, since management attention was focused sequentially on one responsiveness at a time, the capability of the firm was single purpose, designed to support the dominant activity of the time. The structural consequences were that structures were single purpose and reactive, stable, and usually regarded as permanent.
Administrative responsiveness
Responsiveness | Administrative (A) | Rating |
|---|---|---|
Goals | 1. Effective support of O, C, I, E activity 2. Harmonious coexistance of O, C, I, E 3. Timely adaptation to O, C, I, E priorities and demands | |
Average rating | ||
Logistics (functional) | Capabilities match strategies Rapid capability adaptation Multipurpose capabilities Capacity for innovation Capacity for entrepreneurship Capacities above critical mass | |
Other: | ||
Average rating | ||
Management | Anticipation of capability needs Anticipatory adaptation Multipurpose capability Capacity for innovation Capacity for entrepreneurship Capability adapts to turbulence Responsiveness to discontinuities Self-renewal capability | |
Other: | ||
Average rating | ||
Fortunately, these demands on structure come at a time when new technologies make it possible to meet them. In particular, the emergence of computerized decision support systems makes possible flexible management structures which change to accommodate different types of decision process. Earlier, we have suggested that this development will lead to an integration of systems and structure into ‘strystems ’ which are comprehensive, flexible, and dynamic.
*Determining the Preferred Responsiveness
- 1.
The first step in determining the preferred future responsiveness of the firm is to determine the profile of the present responsiveness. This should be done by evaluating the firm (using a scale from 5 to 0) on the respective characteristics. The ratings are averaged for each function.
A rating of 5 means that the particular type of responsiveness maximizes its particular goal. A zero responsiveness denotes no contribution to the goal.
Thus, zero operating responsiveness denotes the highest cost producer in an industry, and a zero-competitive responsiveness denotes a chronically unsuccessful marketer.
Determining preferred responsiveness
Present | Desired | Imperative | Preferred | ||||
|---|---|---|---|---|---|---|---|
Type of responsiveness (1) | Average responsiveness level (2) | Relevant objectives (3) | Firm’s priorities (4) | Relevant turbulence category (5) | Priority weight (6) | Priority weight (7) | Responsiveness gap (8) |
Operating | Near-term performance (minimize cost) | 1–2 | |||||
Competitive | Near-term performance(optimal profit) | 2–3 | |||||
Innovative | Near-term potential | 3–4 | |||||
Entrepreneurial | Long-term potential | 4–5 | |||||
Administrative | Adaptability | 4–5 | |||||
Administrative | Capability match to responsiveness | 1–5 | |||||
- 2.
The second step is to establish the desired priorities of the respective types of responsiveness as determined by the objectives of the firm.
The top lines of Figs. 3.3.2–3.3.4 show the objectives which are met by each type of responsiveness. These are transcribed in column 3 of Table 17.5. The next step is to enter in column 4 the firm’s priorities for the respective objectives, using a scale of 10–0: 10 for the highest and 0 for objectives of no importance.
- 3.
The third step is to determine the imperative responsiveness priorities required by the firm’s environment.
During the first half century, when firms were in control of their environment, turbulence was low, predictability high, and the desired responsiveness and the preferred responsiveness would have been the same. But as firms lost control, turbulence grew, and environment became unpredictable. The environment increasingly determined the characteristics of responsiveness which are essential for both success and survival. For example, the management of a firm may be focused on near-term profitability, but, if a significant proportion of the firm’s profit comes from SBAs on turbulence levels 3 and above, the neglect of the longer-term perspective could jeopardize the firm’s long-term survival. Therefore, responsible management cannot neglect building the responsiveness required by its high turbulence environments.
- (a)
The percentage of the firm’s profit which will depend on a particular type of responsiveness.
- (b)
The competitive intensity that the firm will encounter in making this profit.
Determining imperative responsiveness
Segment the firm’s environment into SBAs.
Diagnose the future turbulence level of each SBA.
Group the SBAs into four turbulence level categories: l–2, 2–3, 3–4, 4–5, and enter the names or numbers of the SBAs which belong in each category into column 2 of Table 17.6.
Estimate the percentage of the total profits over the next seven to ten years expected from each SBA. (It is important not to neglect SBAs which are currently minor contributors, but which will become important in the long-term future.) Enter the profit percentages in column 3 of Table 17.6.
For each SBA, estimate on a scale of 10–0 the level of competitive intensity expected during the following five to seven years. Enter the estimates in column 4 of Table 17.6.
Multiply column 3 by column 4 to obtain the priority weight of the SBA; enter in column 5 of Table 17.6. Enter the priority weight for each category in column 6 of Table 17.5.
Determine the imperative priority weight for diversity of the firm’s capability by analyzing the spread of the other priority weights in column 6. If the spread is large, which means that most of the responsiveness types must be present in the firm, the priority weight for diversity should be close to 10. If one or two types of responsiveness cover or have dominant priority weights, the need for diversity should be low.
Select the larger priority rating of column 4 and column 6 and enter it in column 7 under preferred priority weight. The respective priority weights determine the priorities which should be assigned to developing the respective types of responsiveness listed in column 1 of Table 17.5.
Subtract column 2 from the number 10 and enter the result in column 8 titled responsiveness gap. The respective gaps measure the relative amount of work which would be needed to build a responsiveness to the 100% level.
Patterns of Responsiveness
Patterns of responsiveness
Present | Preferred | Action |
|---|---|---|
Dominant | – Same dominant – Different dominant – Multiresponsiveness | – Close responsiveness gap – Redesign organization – Build multiresponsiveness or – Contract firm’s portfolio |
Multiresponsiveness | – Dominant – Multiresponsiveness | – Redesign organization – Close responsiveness gap |
The outcome of the preference analysis may indicate that the same type of responsiveness should remain dominant in the future. This will typically occur when the firm’s objectives remain stable, when the SBA which contributes a majority of the firm’s profits is expected to remain on the historical level of turbulence, and when competitive intensity in the minority SBAs is expected to remain low. In this case, as the figure shows, the indicated action is to reinforce the present pattern of capabilities by closing the respective gaps in the order of indicated priority.
A frequent result in the environment of the 1980s was a shift from the historical level of turbulence in the key SBA of the firm. In such cases, responsiveness analysis produces a dominant preferred responsiveness which is different from the historical. Usually, the shift is from the historical operating or competitive responsiveness to innovative or entrepreneurial responsiveness . The indicated action is to shift the firm’s capability to a profile which supports the new dominant responsiveness.
Another frequent result is a pattern of preferred responsiveness which no longer shows dominance. For example, all types of responsiveness have priority weights 5 or 4.
This will occur in cases when the firm is diversified to a point where several of its strategic business areas are expected to make comparable contributions to profits.
- 1.
Build a multi-capability firm which can simultaneously accommodate different kinds of action responsiveness. This requires a high level of administrative flexibility and diversity.
- 2.
The second alternative is to divest the firm from some of its SBAs in a way that reduces the range of responsiveness necessary for success. This alternative has been publicly espoused and pursued by a number of major firms.
The reader will recognize that the responsiveness analysis is an alternative and complementary method to the capability profile analysis . Just like the profile analysis , responsiveness analysis can be used to design each of the capability components. In the remaining sections of the chapter, we shall use the results of the responsiveness analysis for only one of the components, namely the organizational structure of the firm.
Dimensions of Organizational Design
Recall, early experience in creating workable organizational arrangements resulted in three functional groupings of the logistic work of the firm: production, marketing (originally called sales), and R&D. These follow the logical sequence of logistic work (creation—manufacturing—sales of products), and the capability of each function is distinct from the others. As we shall presently see, these functions became the basic building blocks in early organizational forms.
The next development came when innovation responsiveness became important, and it was discovered that the boundaries between the functions impeded the lateral interactions which are essential to rapid and effective innovation and change. In response, the concept of project was invented. Unlike the three functions which are permanent, projects are temporary, built around specific acts of innovation.
The functional building blocks acquired the name of line Junctions because they contribute directly to the profitability of the firm. As firms become large, the job of supplying common input requirements of the line functions was split off into supporting staff functions: personnel, purchasing, and accounting.
On the management side, the initial subdivision was between functional managers, charged with assuring the performance of their respective functions, and general managers, charged with assuring the overall performance or the organization. As firms became diversified and large, it became necessary to share general management responsibilities among a number of general managers. This was accomplished through the concept of the profit center in which a manager has complete profit and loss responsibility, full control of resources placed at their disposal, and authority to plan and conduct the profit center in a way which will optimize the objectives assigned to it.
The profit center concept was based on the principle of unity of authority and responsibility , which states that a manager’s authority must be commensurate with his responsibility. In America, application of the principle has been shown, time and again, to produce superior performance.
The profit center was conceived during the first half century when innovative and entrepreneurial responsiveness were unimportant. Hence, the typical profit center responsibility was for near-term profitability (0 or C responsiveness), including the development and maintenance of the necessary capabilities.
When development of the future profitability potential became as important as near-term profit making, the concept of the profit center became vague. In some firms, the responsibility for innovation and entrepreneurship gravitated to other parts of management, and in some, it remained neglected precisely because the profit center responsibility remained, as before, confined to near-term profitability. Eventually, the ambiguity was resolved through the concept of the strategic business unit. An SBU can be described as a strategic profit center which is responsible for both near-term performance and for development of future potential.
- 1.
On the dimension of responsiveness, some managers were assigned the responsibility for assuring profitable growth in the near term (a combination of operations and competitive responsiveness ); others for assuring the long-term profit/growth potential (a combination of innovation and entrepreneurial responsiveness ); and still others for development of the firm’s capability (administrative responsiveness ).
- 2.
The second subdivision of responsibility was the performance of the principal steps of the managerial process: planning (decision making), implementation, and control.
Just as with logistic work, input-producing staff management responsibilities were separated from output-producing line management responsibilities. Among the management staff functions which appeared over the years are finance, organization planning, management development, management information systems, and corporate planning.
Organizational building blocks
The first of these was a transition of purchasing, in firms which found themselves resource constrained, from the status of a staff to a line function. This meant that from being a staff responder to the demands of the line functions, purchasing graduated to being a line contributor in determining what the demand for resources should be. In firms which are heavily dependent on scarce, expensive, or politically controlled resources, responsibility for strategic resources gravitated to the general management level.
The second and similar change occurred in the status of the finance function as a consequence of the high cost of borrowing, which in many cases exceeded the after-tax return which a firm could earn on borrowed money. Under such circumstances, finance became a line function which provided a critical input to the strategic planning process of the firm.
The third change was a similar elevation of the traditional staff public relations to the line function of societal relations.
- 1.
We shall first deal with the different ways in which the building blocks have been put together.
- 2.
Secondly, we shall examine different roles of corporate management.
- 3.
Thirdly, we shall discuss the problems which have been encountered in defining the role of staff functions.
The Functional Form
The first modern organizational form evolved around the turn of this century in response to rapid growth and complexity of the firm. This functional form had received wide acceptance in industry and can still be found among smaller firms and in process industries.
The organizing principle was described by the management of the Du Pont Company which spoke of ‘putting like activities together.’ The functional form puts all production, marketing, research, and development activities under respective functional managers who report to a central headquarters. The headquarters is the only general management level of the firm, responsible for all decisions which involve functional interactions and interdependencies. In our terminology, this responsibility spans all of the types of responsiveness which the firm is called upon to exhibit. Thus, the headquarters is the one and only profit center .
The principal advantage of the functional form is its operating responsiveness which is attained through specialization of work according to the respective functions, economies of scale, overheads, and skills. So long as the firm remains single product, single market, and small, the functional form is also competitively responsive. The headquarters managers are in close touch with the market, lines of communication are short, and all of the decisions are about the unique product and market of the firm.
But competitive responsiveness drops off progressively as either the size of the firm, or the number of product-markets increases. Functional managers begin to encounter internal conflict of priorities among their respective product-markets. If synergies among the different products and markets are low, the advantages of scale and standardized skills are lost. When environmental fluctuations occur, functions come into conflict with one another, because each prefers to respond according to its distinctive perspective.
As a result, the workload on the headquarters grows, and its contact with the realities of the marketplace is diminished by the height of the management pyramid which intervenes between the headquarters and the logistic functions.
Innovative and entrepreneurial responsiveness are inherently poor in the functional form , because of their conflict with operating and competitive responsiveness . When general management is overloaded with decision workload, near-term profitability concerns preempt attention to the long-term development of the firm.
Similar priority conflicts occur and are similarly resolved within the functions. Recall, the problem is further aggravated by low downstream coupling among the functions. Lateral relations among them are not formalized, and each manager’s responsibility (and rewards) for effective performance of his function comes in conflict with other functions.
- 1.
To handle the problems of overload, a two-tier management was introduced in the headquarters. The lower level was made responsible for day-to-day operations and the upper for long-term policy, which, in our language, includes innovative, entrepreneurial, and administrative responsiveness .
- 2.
Alleviation of the problem at the headquarters shifted the spotlight to the functional level. In response, projects were introduced. Innovation (such as new product development) or administrative projects (such as building a new headquarters) were organized by ‘borrowing’ resources from the respective functions for the duration of the project. Project managers were appointed, who typically had coordinating responsibility for assuring the progress of a project. In this staff role, the project managers reported to the chief operating manager at the headquarters.
- 3.
In more recent times, firms which remained functionally organized and whose environment moved to levels 4–5 began to have difficulties with the entrepreneurial response. To solve this, SBA-based strategic planning was introduced in some firms to enhance the entrepreneurial responsiveness . While all of the above modifications helped, operating responsiveness remains the basic strength of the functional form , while the other types of responsiveness remained marginal. This is illustrated where the respective increments of responsiveness are rated on a scale 5–0.
It is for the reason of limited range of responsiveness that, around the 1920s, many firms moved to a different type of organizational structure . But in industries in which the economies of scale and specialization remained a critical success variable, the functional form , with its various modifications, is still used.
Fully developed functional form
The Divisional Form
Among the firms which pioneered the second basic organizational form in the 1920s were Du Pont and General Motors. The form received relatively slow acceptance prior to World War II but spread rapidly after the war to a majority of large- and medium-sized corporations.
This divisional form evolved in response to the shortcomings of the functional form discussed above. For example, both General Motors and DuPont had grown and become diversified both in their products and in their markets. In the case of Du Pont, diversification had created a heterogeneous product which firmly put limits on realizable advantages of scale and at times produced negative synergy . Functional managers were making production, manufacturing, and development decisions over a range of distinctive products, many of which lay outside their competence ; standard operating procedures, which were optimal for some products, were suboptimal for others. Under pressures of accelerated change, corporate managers were juggling decisions about a range of different business, while their total workload overloaded the corporate capacity and slowed down response.
The solution was to group the firm’s activities according to the distinctive product markets and not according to functions. Each grouping, called a division , had its own functional capability . Thus, within the firm, there were as many marketing, production, and R&D departments as there were divisions. In fact, at first glance, the divisionalized firm appears as nothing more than an assemblage of a number of functional forms .
The distinctive feature of the divisional form comes from the respective roles played by the divisional managers and the headquarters.
Each division is a profit center , and its manager has a total authority/responsibility for assuring its performance. In the early days of the divisional form , this implied responsibility for the operating and competitive responsiveness . In theory, the headquarters kept the residual general management responsibilities: appointing and developing general managers, approving divisional budgets, controlling performance, allocating strategic resources , and obtaining external financing.
In frequent practice, when the corporate managers promoted themselves ‘upstairs,’ away from control of daily operations, they had difficulty in restraining themselves from meddling in the work of presumably autonomous division managers. As a result, physical distance of a division from corporate headquarters became a measure of how well the profit center concept worked in that division. This confusion of roles was further aggravated when changing environment made necessary greater innovative, entrepreneurial, and strategic responsiveness . We shall be exploring further the role of the corporate headquarters in the following section.
The multiplication of production, marketing, and R&D departments meant company-wide economies of scale were lost, and synergies minimized. The goal of minimal costs, inherent in operating responsiveness , was compromised in favor of increased competitive responsiveness which was made possible by elimination of conflicts and interference among different businesses, as well as the focus of the divisional managers on a single business. The responsiveness of the original ‘pure’ divisional form is rated. Over time, just like the functional form , the divisional form has undergone several significant modifications.
The loss of economies of scale was not taken lightly by the corporate managements, and they soon discovered that there were certain functions, such as purchasing or accounting, which were not vital to the effective functioning of a profit center , since they offered supporting inputs which had little importance on the divisional manager’s profit optimizing decisions.
Thus, staff logistic functions were born and placed under control of the corporate office . The corporate office also tended to retain management staff functions , which either had no impact on the freedoms of divisional managers (such as public relations) or offered impartial advice (such as legal) to the divisional managers without infringing on their authority.
The theory of this solution was that staffs were responsive servants of the division managers. As we shall see presently, the practical reality was frequently different. Staffs developed a tendency to infringe on divisional authority. Thus, a first chink appeared in the principle of unity of authority and responsibility . We shall be discussing the role of staffs in a subsequent section.
The creation of corporate staffs offered some measure of economies of scale and helped enhance operating responsiveness . In some firms, in which economies of scale in production had an importance comparable to competitive responsiveness , a more drastic step was taken. The production activity was taken away from the divisions and consolidated into a profit center under a production general manager (usually a vice president).
In theory, just like the staffs, the production manager was supposed to be a responsive supplier of goods to the respective divisions which purchased from him. But the fact was that profit optimization behavior of manufacturing operations conflicted with optimal behaviors by marketing and R&D (e.g., production is optimized when manufacturing runs are long and products standardized, while marketing succeeds when production is responsive to frequent changes).
In an attempt to resolve this difficulty, the mechanism of transfer pricing was invented, under which manufacturing ‘sold’ its output to the divisions, and again in theory, the divisional managers were free to buy the products from the outside competitors. However, in practice, transfer pricing worked imperfectly because pressures from headquarters and loyalty to the firm made it very difficult for divisional managers to buy from outsiders, and the absence of the external market for the production output made transfer prices artificial and unrealistic.
As divisions became large, they encountered the problem which had also plagued the functional structure: the suppression of innovation by the operating activity. The solution, as in the functional form , was to add project management to the structure.
In some firms (particularly in the American aerospace industry) in which the innovation budget was a large percentage of the total budget, a separate profit center was developed which was named project matrix substructure . One dimension of the matrix is a pool of talent and facilities reserved for innovation work. The talent and skills for the innovation are drawn from this pool (and not from the divisions concerned with marketing and production) by projects which form the second dimension of the matrix. After the project is completed, the new product or market is transferred to the divisions for exploitation, the project is dissolved, and the resources are returned to the pool.
The project matrix substructure greatly enhances the innovation responsiveness of the firm because it protects innovation from conflict with operations and because it permits creation of highly specialized innovation capabilities within the profit center . But, like centralization of production, it creates lateral conflicts between the innovation profit center and the divisional and the production profit centers. The conflicts become particularly visible during the transfer of innovations to the exploitation activities.
In so-called R&D firms whose principal products are innovations or problem solving (e.g., consulting firms), or in firms whose economies of scale in production are insignificant, the project matrix structure can be highly effective as the basic organizational form. This means that the firm is subdivided into a capability group (frequently and confusingly called division ) and a project group.
As firms diversified beyond national to international markets, a frequently used instrument was an international division charged with managing foreign activities.
So long as the international division remained a sales agent for the domestic products, it remained a marketing ‘service’ division and its objectives were in consonance with the domestic divisions. But, as the international division became concerned with responding to the unique demands of local markets and also began to establish foreign manufacturing and product development units, the international division manager came into conflict with the interests of the domestic division managers.
In the absence of a formal arrangement for shared authority /responsibility, this conflict could be avoided only through mutual and cooperative goodwill between the domestic and international operations. Typically, in tightly controlled American corporations in which each profit center is under pressure to optimize its own performance, the goodwill was difficult to maintain and conflict persisted. When foreign profits and sales became a significant part of the firm’s total, firms began to turn to a new organizational form which we shall be discussing presently.
A recent structural development in the divisional structure has been the emergence of the corporate office as the top-level general management center of the firm. The emergence was triggered, on the one hand, by growing importance of strategic work at the corporate level and, on the other hand, by work overload on corporate management.
In the corporate office , the historically focal role of the chief executive, in which he personally makes all of the key corporate level decisions, is changed to a role in which he shares corporate level responsibility and authority with one or more managers, although he still retains a primus inter pares (first among equals) role in resolving conflicts which arise among the members of the office.
In the USA, where the principle of unity of authority and responsibility is strongly ingrained, the corporate office represents a further and important step away from the principle of unity of authority and responsibility. But in Europe, where the principle never acquired the same status, the corporate office sometimes appeared as an American reinvention of the Jong practiced collegial management.
The collegial, or corporate office, management is observable in two models. One of these, the alter ego model , makes the corporate office roles substitutable for one another. Thus, for example, the corporate office member who happens to be in town will make the decision about any matter which requires prompt corporate response. The other, shared authority model , assigns specific decision areas (e.g., for respective competitive, strategic, administrative, and societal responsiveness), to different members of the corporate office.
Collegial management is practiced effectively only in a minority of European enterprises. In many other enterprises, the top group is composed of powerful ‘barons,’ who use the political process to gain a favorable position for the part of the firm under their control. It can be argued that converting such politicized bodies into an effective corporate office is more difficult than instituting a corporate office in firms in which collegial management has not previously been practiced.
The growing need for strategic responsiveness produced another recent structural development. This was the evolution of the dual structure in which an strategic business unit (SBU) structure is added to the divisional structure . In the SEU substructure, certain managers, not necessarily the divisional managers, are made responsible for strategic development of clusters of coherent SBAs assigned to them. The dual structure presents an important departure from the historical practice under which there was only one permanent structure within the firm, through which all of the work of the firm was done. Under the dual structure, one structure is used for the profit-making activity of the firm and a different structure for the firm’s strategic development.
- 1.
The manager becomes the strategic planner for his SBAs which makes him, in fact, an SBA and not SBU manager.
- 2.
In a more powerful role, he has the resources, the budget, and the authority to carry strategic plans to the point of proven new products, new markets, new technology, and new capabilities, but he transfers the new profit potential to other managers who are responsible for realizing the profit.
- 3.
Finally, if the SBU manager is also made responsible for profit making in his SBAs, he becomes a strategic profit center with a ‘cradle to grave’ responsibility for his SBAs.
The latter role suggests that a logical conclusion would not be to put in a dual structure but to reorganize the firm using the SBU as a unit. This would mean regrouping the historical divisions of the firm according to coherent ‘sub-portfolios’ of SBAs and assigning strategic profit center responsibility to the SEU/divisional managers. This solution has considerable merit, provided the firm is not a multinational, and also provided that corporate economies of scale are not important to the firm’s success.
To summarize, the original ‘pure’ divisional structure offered an effective response in SBAs on turbulence levels 2–3 in which competitive responsiveness is the key to success. Its essential difference from the functional form is that it decentralizes much of the general management responsibility to the divisional levels, thus putting general management in close touch with the marketplace.
As the need for innovation, entrepreneurial, and administrative responsiveness grew, a series of modifications was made to the pure divisional form . Each of these improved the overall responsiveness, but only at the cost of violating the time-hallowed principle of unity of authority and responsibility and creating potential conflicts among the different profit centers .
The Matrix Form
By the time the divisional form underwent all of the modifications described above, it also changed its character. The original basic form was strongly wedded to the principle of unity of authority and responsibility. By the time the sixth modification was introduced, authority and responsibility became so subdivided that the success of a profit center manager was determined to a substantial extent by variables controlled by other managers.
In recognition of this basic difference, the fully elaborated divisional form is given the distinctive name of domestic matrix form .
As the matrix form evolved, the inherent contradictions in managing profit centers whose managers do not have full control over their own performance frequently remained unrecognized. The corporate managers (particularly in the USA) continued to put pressure on each profit center manager to optimize his own performance and, at the same time, exhorted him to cooperate with other profit center managers, whose performance could only be optimized at his expense. For example, if the production profit center transfers its output to the marketing divisions at cost, its profit will be zero, while the marketing division’s profit will be greatly enhanced. As a result, the new conflicts inherent in each new stage of modifications of the basic divisional form remained unresolved. In many firms which adopted the matrix form , the malfunctions due to conflicts were frequent enough to give it a bad reputation. As a result, some of these firms began to move back to simpler structures, and articles appeared which criticized the matrix form as impractical.
Indeed, the matrix form should not be considered unless the firm needs the complex pattern of responsiveness which it makes possible.
This pattern is potentially very impressive, with a high level of performance on all types of responsiveness.
This potential is not likely to be realized unless corporate management takes the steps necessary to resolve conflicts and avoid dysfunctions caused by the split authority/responsibility inherent in the matrix structure.
- Two complementary approaches can be taken to avoid the dysfunctions:
- (a)
Corporate management should recognize the unavoidable reality of the inter-profit center conflicts, anticipate their occurrence, and act to resolve them before the conflicts flare up.
- (b)
A shared authority /responsibility substructure should be introduced alongside the matrix structure.
- (a)
Support by basic forms of different behaviors
Basic form | Modifications | Behaviors | ||||
|---|---|---|---|---|---|---|
Operating | Competitive | Innovative | Entrepreneurial | Administrative | ||
Functional | 1. Basic form | 5 | 2 | 1 | 1 | 1 |
2. Two-tier corporate management | 4 | 2 | 1 | 2 | 2 | |
3. Project management** | 4 | 3 | 3 | 2 | 2 | |
4. SBA-based planning | 4 | 4 | 3 | 3 | 2 | |
Divisional | 1. Basic form | 2 | 5 | 3 | 2 | 2 |
2. Corporate staffs | 3 | 5 | 3 | 2 | 3 | |
3. Centralized production | 4 | 4 | 3 | 2 | 3 | |
4. Project matrix | 4 | 4 | 4 | 2 | 4 | |
5. Corporate office | 4 | 4 | 4 | 3 | 4 | |
Domestic matrix | 6. Dual structure | 4 | 4 | 4 | 4 | 4 |
International matrix | 7. Country profit centers | 4 | 4 | 4 | 4 | 4 |
Multistructure | 1. Holding | * | * | * | 2 | 1 |
2. Conglomerate | * | * | * | 3 | 2 | |
3. Integrated | 5 | 5 | 5 | 5 | 5 | |
- 1.
Each country organization operates in a distinct economic, political, and cultural environment, which creates distinct critical success factors to which the products and marketing strategies of the firm must be responsive.
- 2.
Each country manager typically markets the entire product-technology scope of the firm.
- 3.
Differences in the degree of market penetration result in different business approaches to the country market: Some country markets are offered standard products of the firm, some products have tailored features, and some are developed specifically for the local markets.
- 4.
A country manager is responsible for the performance of production units located in his country, but these units frequently produce for global consumption.
Multinational matrix
The Multi-structure
The common feature of the fifteen organizational forms discussed in the preceding pages is that they are all unistructural in the sense that the same organizing principle applies to all parts of the firm. Broader unistructural firms are also typically uni-capability firms, which means that they use a single reward system, single planning system, share the same culture , etc. But, since the beginning of the modern firm, there have been multi-structure firms, made of units whose structures were not forced into a single mode. An ancient multi-structure is the holding company which owns shareholding positions in a number of firms and exercises no direct control over the way the subsidiaries are structured.
A more recent multi-structure , the conglomerate, emerged in the USA during the 1950s. A conglomerate typically consists of a number of subsidiaries wholly owned by the parent. The parent headquarters exercises financial control over the subsidiaries and offers assistance to the subsidiaries. It does not control the subsidiaries’ strategies nor their structures. And neither, with two exceptions, does it insist on commonalities of capability except those necessary to enable the parent to consolidate and control the overall financial performance. These exceptions are common accounting and budgeting systems.
There is now a visible trend toward a multi-structure in firms in which the corporate management retains an active role in managing both strategic and operating performance but allows its groups, divisions, or profit centers to choose the structural form which is most responsive to their needs.
It is safe to predict that the multi-structural approach will be used increasingly in the future. This is for two reasons. First, the diversity of the firm and the competitive pressures of the environment will make it increasingly necessary to optimize the structure for each SBA of the firm. The second reason is that the job of managing a complex multi-structure from the headquarters will be made much easier by modern information technology.
The Role of the Headquarters
As was evident from the preceding discussion, the role of the corporate headquarters evolved alongside the evolution of organizational forms. As can be seen from the second column, there are at least twelve complementary roles which can be found at the headquarters. Of these roles, 2, 4, 7, and 10 are focused on control of the various dimensions of the firm’s performances. Roles 1, 5, and 8 involve the corporate office in planning the overall future of the firm. In the remaining roles, 3, 6, 9, 11, and 12, the corporate office not only plans but also implements what it plans.
In these latter roles, the corporate ‘staffs’ (such as finance and administration) perform a vital ‘line’ function.
Roles of corporate headquarters
Responsiveness | Roles | Applicable organizational forms |
|---|---|---|
Financial | 1. Investment in subsidiaries/divisions | Holding, all other forms, |
2. Control of financial performance | Conglomerate, all other forms | |
3. External financing | All forms | |
Operating (O+C) | 4. Control of divisional profitability | Divisional, matrix |
5. Corporate profit optimization | Functional, divisional, matrix | |
Strategic (E+I) | 6. Acquisitions, mergers, venture management | All forms |
7. Control of bottom-up management | Divisional, matrix | |
8. Strategic portfolio management | Divisional, matrix, functional | |
9. Societal response | All forms | |
Administrative | 10. Accounting/rewards/senior management development | Conglomerate, divisional, matrix |
11. Corporate capability | Divisional, matrix | |
12. Functional capability | Functional |
- 1.
The preference by the top management for a loosely managed as opposed to a coherently managed firm. This choice is between the holding or conglomerate forms on the one side, and the functional, divisional matrix on the other.
- 2.The types of responsiveness required for success in the future environment. The corporate role profiles which are found in each of the organizational forms. The column labeled ‘decentralized divisional ‘ represents the original basis form of Table 17.9. As the entries in the column indicate, the decentralized divisional firm originally swung the production from one extreme to another: from the highly centralized role of the headquarters to the minimal control functions. As discussed in the preceding pages, over the years, the headquarters progressively assumed additional roles (Table 17.11).Table 17.11
Corporate headquarters’ role profiles for different organizational forms
Organizational form
Responsiveness
Holding
Conglomerate
Functional
Decentralized
Divisional
Matrix
Financial
1,3
1,2,3
1,2,3
1,2,3
1,2,3
1,2,3
Operating
–
–
5
4
4,5
4,5
Strategic
6
6,9*
6,8,9*
7
6,8,9
6,8,9
Administrative
–
10
10,11,12
10
10,11
10,11
3.3.7 Staffs and Overhead Functions
In the preceding pages, we discussed two key aspects of organizational design : the choice of the organizational form and of the appropriate general management roles. A third key aspect is the incorporation into the firm of what, in American business language, are interchangeably called staff or overhead functions.
Probably, the earliest overhead activity to be institutionalized within the firm was accounting because it was essential both for measuring the performance of a firm and for assessing its financial health. This was quickly followed by creation of staff departments for maintenance, purchasing, personnel, legal, public relations, finance, etc.
All of these activities had two features in common: They provided essential inputs and support for the logistic and the management line functions, but their contribution per unit of the firm’s production was very difficult to measure. This was partly due to the lack of measurement, and partly, because they typically have a critical mass , the overhead staff functions could not be expanded and contracted as readily as the direct labor costs incurred in the line functions. This made staffs difficult to control and manage, particularly because when left uncontrolled, they exhibited a Parkinsonian tendency to grow out of proportion to the needs of the firm.
This led, in the early part of this century, to the emergence of a control tool called the minimal staff principle . The principle states that the firm will be most profitable when the respective staff functions are reduced to an absolute minimum. In the USA, a yardstick called indirect (staff) to direct (line) personnel ratio became a standard tool for measuring organizational efficiency.
But, over time, staffs continued to proliferate. Most of the proliferation occurred in firms in which line management, beset with the growing diversity, complexity , novelty , and decision workload, increasingly required assistance for information gathering, preprocessing of decisions, expert advice, and development and maintenance of the increasingly complex administrative infrastructure of the firm. Among the new staff departments were: organizational planning, data processing, management information systems, management development, budgeting, financial planning, operations research , corporate planning, management system design, environmental surveillance , and forecasting .
Staff contributions to management
Type of contribution Type of behavior | Information input | Decision analysis | Administrative design and operation |
|---|---|---|---|
Operations | – Costs – Investments | – Work study – Financial performance – Capital investment | – Accounting system |
Competitive | – Forecasts – Competitive behavior | – Sales analysis – Competition analysis – Operations analysis | – Organizational structure – Long-range planning – Management information system – Forecasting |
Innovation | – Product market opportunities | – Market research – Technology assessment – R&D payoff | – Management development – R&D project management |
Entrepreneurial | – Economic/technological/social/political trends and discontinuities | – Competitive strategy – SBA portfolio – Capability design – Socio-political impact | – Strategic postur planning – Issue management – Strategic management – Crisis management – Environmental surveillance |
As the necessary staff inputs increased, the minimal staff principle progressively lost both its meaning and usefulness. It is true that, left uncontrolled and unmeasured, staffs (like other organizational units) exhibit a Parkinsonian tendency to become bloated out of proportion to the firm’s needs. They also exhibit a tendency to pursue the goals and values of their respective professions more than the goals of the firm. But an arbitrary minimization of the indirect to the direct ratio is likely to ‘cut off the nose to spite the face.’ As the necessary staffs grow, firms will increasingly need methods for determining the size, type, and composition of staffs which, while avoiding the Parkinsonian tendencies, are needed to support line management. The technology for designing the optimal staffs, which will replace the minimal principle, is still in the developmental stages.
As staffs proliferate, a new approach is also needed to curb their historical tendency to exceed their intende roles.
- 1.
Corporate staffs, charged with providing services to the lower levels of management, tend to present their advice, not as a neutral input, but as a compulsory ‘corporate policy.’
- 2.
Staffs charged with decision analysis in support of corporate management tend to use their private expertise and complexity of the analysis to obscure the issues and to bias the decision alternatives presented to the management.
- 3.
Staffs charged with designing and operating the corporate structure and systems tend to design them to serve the needs of the corporate management and to neglect the needs of the other levels of management. This tendency has frequently been observed in corporate planning, with the result that planning is perceived as a form filling process for the benefit of the headquarters, and not as analysis which helps each manager to improve his own performance.
As staffs proliferated, and as dependence on their expertise increased, some observers were led to conclude that line management in large firms had become captives of their ‘technocracies.’ While it is a visible exaggeration to claim this for all firms, this phenomenon is observable, particularly in large firms in mature industries.
The solution to this problem is not clear at this point. Certainly, an important step is a clearer definition of the roles of staffs that is found in most situations. Beyond this, some observers have suggested that the line/staff distinction is obsolete, and that a rethinking and redefinition of the roles in the management process is in order. Other observers suggest that line management has to develop a new ‘expertise in managing experts’ and that it must devote increasing attention to management of the staff work in the manner similar to managing line operations.
Whatever the solution, it is clear today that the staffs and overhead functions will become an increasingly important factor in the success of the firm. In management, effective design of the automated office is becoming more important than its operating costs. Increasingly, complex decisions will be dependent on staff expertise and on decision models designed and operated by staffs.
Thus, as firms progressively become knowledge-, technology-, and capital-intensive, the historically labor-intensive, ‘direct’ functions are being replaced by ‘indirect’ functions as the keys to the firm’s success.
*Redesigning the Structure
In the preceding pages, we have developed categories, concepts, and relationships which make it possible to diagnose the adequacy of the present structure for meeting the challenges of tomorrow and to determine the changes that need to be made.
In spite of the efforts to explore the complexities of organizational structure , the description in this chapter still falls short of illuminating the many nuances and complexities found in business firms. Therefore, the procedure presented below should be used with the understanding that it will produce a first approximation which will raise issues and questions about the firm’s structural needs and require further detailed analysis.
Redesigning the structure
- 1.
Diagnose the present, the desired, the imperative, and the preferred responsiveness.
- 2.
Determine whether the firm will need a unistructure or a multi-structure . If the future profit contribution is distributed among the different types of responsiveness, and if each type has a high preferred priority weight, consideration should be given to using a multi-structure.
- 3.
Compare the preferred priorities of Table 17.5, with the ratings in Table 17.9 to determine the preferred form (or forms).
- 4.
Using Table 17.9, diagnose the present form, and, comparing the preferred and the present forms, determine the changes in the form which should be made.
- 5.
Using Figs. 3.3.12 and 3.3.13, identify the preferred corporate role profile(s).
- 6.
Using the same tables, diagnose the present role profile and through comparison with the preferred profile, determine the changes in the profile.
- 7.
Using Table 17.12, repeat the preceding two steps to determine the changes in the staff support.
Summary
Structure is the arrangement of tasks, roles, authority, and responsibility through which a firm does its work. Throughout the history of the firm, structure evolved in response to the dual challenges of external diversity of the firm’s strategic position and internal complexity of the firm. The progress has been from stable monolithic structures to dynamic multifaceted ones.
The purpose of structure is to support the firm’s behavior. Therefore, the distinct types of behavior (responsiveness) in which the firm seeks to engage can be used to identify the structure it needs.
The types of responsiveness are: operating, competitive, innovative, entrepreneurial, and administrative.
Functional—operating responsiveness
Divisional—competitive responsiveness
Project matrix—innovative responsiveness
International matrix—strategic responsiveness
Multi-structure —responsiveness to different needs in different SBAs.
The relative importance of the different types of responsiveness to a firm can be determined, on the one hand, by the stylistic preferences of management and, on the other, by the turbulence characteristics of the firm’s environment. This chapter presents a procedure by which management of a firm can determine the preferred responsiveness pattern and then use it to redesign the firm’s structure.
Exercises
- 1.
Textbooks on sociology recognize both formal and informal aspects of organizational structure . This chapter has been focused on the formal aspect. Define what is meant by an informal structure. When does it arise? How does it interact with the formal structure? What effect does it have on the firm? How can it be managed?
- 2.
How does organizational structure of the firm differ from structures found in nonprofits? Choose a nonprofit firm with which you are familiar, draw its role and task structure, diagnose its responsiveness.
- 3.
Using a firm with which you are familiar, or a case assigned by your tutor, follow the procedure on organizational responsiveness to determine the preferred structure for the firm.
- 4.
What are the advantages and disadvantages of a multi-structure? What should be the roles, the tasks, the responsibilities, and the structure of the corporate office in a multi-structure?