Another innovation in organizational design that swept across the world during the last decade is the use of network structures. Recall from Chapter 3 that a network structure is a cluster of different organizations whose actions are coordinated by contracts and agreements, rather than by a formal hierarchy of authority.17Very often one organiza-
tion takes the lead in creating the network as it searches for a way to increase effective- ness; for example, a clothing manufacturer may search for ways to produce and market clothes more cheaply. Rather than manufacturing the clothes in its own factories, the company decides to outsource its manufacturing to a low-cost Asian company; it also forms an agreement with a large Madison Avenue advertising agency to design and implement its sales campaign. Recall also how outsourcing is moving a value-creation activity that was done inside an organization to the outside, where it is performed by another company.
Network structures often become very complex as a company forms agreements with a whole range of suppliers, manufacturers, and distributors to outsource many of the value-creation activities necessary to produce and market goods and services.18For ex-
ample, Nike, the largest and most profitable sports shoe manufacturer in the world, has developed a very complex network structure to produce its shoes. At the center of the network is Nike’s product design and research function located in Beaverton, Oregon, where Nike’s designers pioneer new innovations in sports shoe design. Almost all the other functional specialisms that Nike needs to produce and market its shoes have been outsourced to companies around the world!19
How does Nike manage the relationships among all the companies in its network? Principally by using modern IT (discussed in depth in Chapter 12). Nike’s designers use computer-aided design (CAD) to design shoes, and all new product information, includ- ing manufacturing instructions, is stored electronically. When the designers have done their work, they relay all the blueprints for the new products electronically to Nike’s net- work of suppliers and manufacturers in Southeast Asia.20For example, instructions for
the design of a new sole may be sent to a supplier in Taiwan, and instructions for the leather uppers to a supplier in Malaysia. These suppliers then produce the shoe parts, which are then sent for final assembly to a manufacturer in China with whom Nike has established an alliance. From China these shoes are shipped to distributors throughout the world and are marketed in each country by an organization with which Nike has formed some form of alliance, such as a long-term contract.
Advantages of Network Structures
Why does Nike use a network structure to control the value-creation process rather than perform all the functional activities itself? Nike, and other organizations, can realize sev- eral advantages by using a network structure.
First, to the degree that an organization can find a network partner that can perform a specific functional activity reliably, and at a lower cost, production costs are reduced.21 Almost all of Nike’s manufacturing is done in Asia, for example, because wages in Southeast Asia are a fraction of what they are in the United States. Second, to the degree that an organization contracts with other organizations to perform specific value-creation activities, it avoids the high bureaucratic costs of operating a complex organizational struc- ture. For example, the hierarchy can be kept as flat as possible and fewer managers are needed. Also, because Nike outsources many functional activities, it is able to stay small
172 PART 2 • ORGANIZATIONAL DESIGN
and flexible. Control of the design process is decentralized to teams that are assigned to develop each of the new kinds of sports and leisure shoes for which Nike is well known.
Third, a network structure allows an organization to act in an organic way. If the envi- ronment changes, for example, and new opportunities become apparent, an organization can quickly alter its network in response. For example, it can sever the links to companies whose services it no longer needs and develop new linkages with companies that do have the skills it needs. An organization that performs all of its own functional activities would take a longer time to respond to the changes taking place. Fourth, if any of its network partners fail to perform up to Nike’s standards, they can be replaced with new partners. Finally, a very important reason for the development of networks has been that organiza- tions gain access to low-cost overseas sources of inputs and functional expertise, some- thing crucial in today’s changing global environment.
Disadvantages of Network Structures
Although the network structure has several advantages, it also has drawbacks in certain situations. To see what these are, imagine a high-tech company racing to bring to market proprietary hardware and software faster than its competitors. How easy would it be to outsource the functional activities necessary to ensure that the hardware and software are compatible and work with other companies’ software? Not easy at all. Close interac- tion is needed between the hardware and software divisions, and between the different groups of hardware and software programmers responsible for designing the different parts of the system. A considerable level of mutual adjustment is needed to permit the groups to interact so that they can learn from one another and constantly improve the fi- nal product. Also, managers must be there to integrate the activities of the groups to make sure their activities mesh well. The coordination problems arising from having dif- ferent companies perform different parts of the work process would be enormous. Moreover, there has to be considerable trust between the different groups so they are willing to share their ideas, which is necessary for successful new product development.
It is unlikely that a network structure would provide an organization with the ability to control such a complex value-creation process because managers lack the means to co- ordinate and motivate the various network partners effectively. First, it would be difficult to obtain the ongoing learning that builds core competences over time inside a company because separate companies have less incentive to make such an investment.22As a re- sult, many opportunities to cut costs and increase quality would be lost. Second, if one of Nike’s suppliers failed to perform well, Nike could easily replace it by forming a contract with another. But how easy is it to find reliable software companies that can both do the job and be trusted not to take proprietary information and use it themselves or give it to a company’s competitors?
In general, the more complex the value-creation activities necessary to produce and market goods and services, the more problems are associated with using a network struc- ture.23Like the other structures discussed in this chapter, network structures are appro- priate in some situations and not in others.
The Boundaryless Organization
The ability of managers to develop a network structure to produce or provide the goods and services their customers want, rather than create a complex organizational structure to do so, has led many researchers and consultants to popularize the idea of the “bound- aryless organization.” The boundaryless organization is composed of people who are linked by computers, faxes, CAD systems, and video teleconferencing, and they may rarely or ever see one another face to face.24People come and go as their services are
needed, much as in a matrix structure, but they are not formal members of an organiza- tion. They are independent functional experts who form an alliance with an organization, fulfill their contractual obligations, and then move on to the next project.
The use of outsourcing and the development of network organization are increasing rapidly as organizations recognize the many opportunities they offer to reduce costs and increase flexibility. Clearly, managers have to assess carefully the relative benefits of having
CHAPTER 6 • DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 173
their own organization perform a functional activity or make a particular input, versus form- ing an alliance with another organization to do so to increase organizational effectiveness. Designing organizational structure is becoming an increasingly complex management activ- ity in today’s changing world.
E-Commerce
E-commerce is trade that takes place between companies, and between companies and individual customers, using IT and the Internet. Business-to-business (B2B) commerce is trade that takes place between companies using IT and the Internet to link and coordi- nate the value chains of different companies (Figure 6.14). Companies use B2B com- merce because it allows them to reduce their operating costs and may improve product quality. A main B2B network application is the B2B marketplace, an industry-specific trading network set up to connect buyers and sellers using the Internet. To participate in a B2B marketplace, companies agree to use the network software standard that allows them to search for and share information with each other. Then, companies can work to- gether over time to find ways to reduce costs or improve quality.
Business-to-customer (B2C) commerce is trade that takes place between a company
and its network of individual customers using IT and the Internet. When a company uses IT to connect directly to customers, they have increased control of their network. For example, they can handle their own marketing and distribution and do not need to use in- termediaries like wholesalers and retailers. Dell, for example, was one of the first compa- nies to create a B2C network that allowed it to sell directly to the customer and to customize its PCs to their needs. The use of online storefronts allows companies to pro- vide customers with a much wider range of products and to give them much more infor- mation about these products in a very cost-effective way. This often allows them to attract more customers, and so a company’s network strengthens over time. This is the goal of Dell and of course Amazon.com, which has opened over 50 different kinds of storefronts to be able to sell its millions of loyal customers a wider and wider range of products. Today, Amazon.com is working to expand its range of cloud-computing storefronts that will allow its customers to store their data, music, and videos on Amazon’s servers and also to use the programs and computing power on its servers to process their data and satisfy their software needs. Creating this new form of cloud-based network structure is a major challenge for Amazon because competitors like Google, Apple, and Dell are also establishing their own virtual networks.
E-commerce
Trade that takes place between organizations, and between organizations and customers, using IT and the Internet.
Figure 6.14 Types of E-Commerce
Company Company Individual Customer B2C Commerce B2B Commerce
174 PART 2 • ORGANIZATIONAL DESIGN
Summary
Designing organizational structure is a difficult and challenging task. Managers have to manage the vertical and horizontal dimensions of the structure continually and choose an appropriate allocation of authority and task responsibilities. As an organization grows and becomes more complex, changing its structure to respond to changing needs or con- tingencies becomes important.
Designing a structure that fits a company’s needs is a major challenge. Each structure has advantages and disadvantages, and managers have to be ready and willing to redesign their organization to obtain the advantages and anticipate and minimize the problems of whichever structure they choose. An organization in control of its structure has an impor- tant competitive advantage over one that is not.
Many organizations ignore the coordination problems inherent in the organizing process. Too often, an organization waits until it is already in trouble (in decline) before attempting to deal with coordination and motivation problems. The characteristics of the top-management team are critical in this regard because they determine how decisions get made and how top managers perceive the problems the organization is experiencing. Chapter 6 has made the following main points:
1. A functional structure is a design that groups people because they have similar skills or use the same resources. Functional groups include finance, R&D, marketing, and engineering. All organizations begin as functional structures.
2. An organization needs to adopt a more complex structure when it starts to produce many products or when it confronts special needs, such as the need to produce new products quickly, to deal with different customer groups, or to handle growth into new regions.
3. The move to a more complex structure is based on three design choices: increas- ing vertical differentiation, increasing horizontal differentiation, and increasing integration.
4. Most organizations move from a functional structure to some kind of divisional structure: a product structure, a geographic structure, or a market structure. 5. The three kinds of product structure are product division structure, multidivi-
sional structure, and product team structure.
6. Product division structure is used when an organization produces broadly similar products that use the same set of support functions.
7. Multidivisional structures are available to organizations that are growing rapidly and producing a wide variety of products or are entering totally different kinds of industries. In a multidivisional structure, each product division is a self-contained division with the operating structure that best suits its needs. A central headquar- ters staff is responsible for coordinating the activities of the divisions in the or- ganization. When a lot of coordination between divisions is required, a company can use a multidivisional matrix structure.
8. Product team structures put the focus on the product being produced. Teams of functional specialists are organized around the product to speed product development.
9. Geographic structures are used when organizations expand into new areas or begin to manufacture in many different locations.
10. Market structures are used when organizations wish to group activities to focus on the needs of distinct customer groups.
11. Matrix structures group activities by function and product. They are a special kind of structure that is available when an organization needs to deal with new or tech- nically sophisticated products in rapidly changing markets.
12. Network structures are formed when an organization forms agreements or con- tracts with other organizations to perform specific functional value-creation activities.
CHAPTER 6 • DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 175
Discussion Questions
1. As organizations grow and differentiate, what problems can arise with a func- tional structure?
2. How do the product division structure and the multidivisional structure differ? 3. Why might an organization prefer to use a product team structure rather than a
matrix structure?
4. What are the principal differences between a functional structure and a multidivi- sional structure? Why does a company change from a functional to a multidivi- sional structure?
5. What are the advantages and disadvantages associated with network structures?