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.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 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).

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 improve coordination between subunits and motivation. (Fig. 6.3)

Managerial Implications: Functional Structure

For an entrepreneur, division of labor within a function and between functions is a vital design task. A diagram of task relationships shows if the organization is obtaining the advantages of a functional structure or experiencing disadvantages. Reengineering the design of the functional structure can increase effectiveness.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

P H A M H O A N G H I E N

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.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________

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 company’s product division, multidivision, 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 function’s 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 doesn’t 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. (Fig. 6.6)

• Refer to discussion question 2 here to distinguish between a product division and multidivisional structure.

_________________________________________________________________________________ _________________________________________________________________________________

P H A M H O A N G H I E N

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 divisional

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 corporate

management.

Organizational Insight 6.1: Creating GM’s Multidivisional Structure

Alfred Sloan took over GM’s 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 GM’s structure different from a product division structure? Evaluate GM’s structure. A. GM’s structure had self-contained divisions and a corporate headquarters staff. GM’s structure had several benefits:

1. The ability to measure each division’s performance and to allocate resources better

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 development time

Still costs soared due to duplication of functions. Disadvantages of a Multidivisional Structure

1. Determining what authority to centralize or decentralize from the corporate to the divisional level

2. Coordination problems from uncooperative divisions competing 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

Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Product Team Structure

A hybrid of the product division and the multidivision 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,

P H A M H O A N G H I E N

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 Chrysler’s Team Structure

To develop a car, Chrysler traditionally created a product division, responsible for acquiring inputs. This ineffective method was successfully replaced by Chrysler’s 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 to Toyota’s three, quality was poor, and costs were high. The product team structure was successfully tested for a new sports car, with a development time of three years, good quality, and low costs. Customer demand was high.

Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

6.4 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 has prospered. (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 maintain its mechanistic/organic balance.

Q. Describe Wal-Mart’s structure.

A. Wal-Mart selected a geographic structure. Store operations are divided into regions, including international operations, giving managers input into their region’s product mix to maximize sales. As it expands globally, Wal-Mart will further divide up its international division to meet customer needs. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

P H A M H O A N G H I E N

6.5 Divisional Structure III: Market Structure

The customer is the focus in a market structure: commercial, consumer, corporate, and government customers. Each division develop products for its customers but uses centralized support functions. This structure 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 or resources. Centralizing support functions (advertising, market research, and computers) saved the bank $2 million.

Managerial Implications: Changing Organizational Structure

Functional structures may require change to improve control. For production of many similar products, a divisional structure is appropriate, for dissimilar products, a multidivisional structure. To reduce

development time through more integration, use a product development team structure. To customize products for different regions; use a geographic structure; to coordinate among different customer types, use a market structure. Structural changes should increase effectiveness.

Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

6.6 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. (Fig. 6.12)

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.

Q. What are the drawbacks of a matrix structure?