designing organizations · 2015-07-28 · 3.2 the product-centric versus customer-centric...

Designing Organizations

DesigningOrganizations

Strategy, Structure, and Process atthe Business Unit and Enterprise

Levels

Third Edition

Jay R. Galbraith

Copyright © 2014 by Jay R. Galbraith. All rights reserved.

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Library of Congress Cataloging-in-Publication DataGalbraith, Jay R.

Designing organizations : strategy, structure, and process at the business unit and enterpriselevels / Jay R. Galbraith.—3rd Edition.

pages cmIncludes bibliographical references and index.

ISBN 978-1-118-40995-4 (hardback); ISBN 978-1-118-41729-4 (pdf);ISBN 978-1-118-46382-6 (epub)1. Organizational effectiveness. 2. Strategic planning. I. Title.

HD58.9.G35 2014658.4′012—dc23

2013040235

Printed in the United States of AmericaTHIRD EDITION

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The Jossey-Bass

Business & Management Series

Contents

List of Figures and Tables ix

Preface xiii

1. Introduction 1

2. The Star Model 15

3. Single-Business Strategy and FunctionalOrganization 57

4. Designing the Lateral Organization 89

5. Types of Single-Business Strategy 107

6. The Reconfigurable Functional Organization 131

7. Designing the Network Organization 149

8. Multibusiness Strategy and Organization 185

9. The Mixed Model 205

10. Adding Value 217

11. The Value-Adding Conglomerates 235

12. Synergy Portfolio Strategies 255

vii

viii CONTENTS

13. Organizational Design Challenges andOpportunities Resulting from Big Data 285

Bibliography 301

About the Author 307

Index 309

List of Figures and Tables

Figures

1.1 Types of Interdependence 92.1 The Star Model 172.2 Functional Organization 252.3 Product Structure 282.4 Hybrid Product and Function Structure 303.1 Rovio Functional Structure 633.2 Lateral Processes Across Functions 723.3 Work Flows Across a Functional Structure 733.4 Types of Lateral Processes 763.5 Matching Coordination Needs with Lateral

Processes 783.6 Mirror-Image Functional Structure 824.1 Product and Component Team Combination 964.2 Product Manager Variations 1004.3 Planning Matrix for a Telecom Operator 1034.4 Matrix Structure with Dual Authority 1045.1 Nike’s Functional Structure 1085.2 Nike’s Cross-Functional Running Shoe Team 1095.3 Retail Bank Structure 1165.4 Retail Bank Planning and Budgeting Spreadsheet 1185.5 Nike’s Digital Functional Structure 1246.1 The Star Model 1326.2 Product Team Organization 1376.3 Multidimensional Organization 139

ix

x L IST OF F IGURES AND TABLES

6.4 Fully Reconfigurable Organization 1416.5 Reconfigurable But Aligned Star Model 1467.1 The Transformation of the Computer Industry 1547.2 Types of External Relationships and Coordination

Requirements 1617.3 Partnership Structure for Sourcing, Alliances, or

Joint Ventures 1697.4 The Operator Alliance Model 1707.5 The Shared Alliance Model 1717.6 The Autonomous Joint Venture Model 1728.1 BMW Corporate Organization Structure 1928.2 Amgen Corporate Organization Structure 1938.3 Kellogg’s Corporate Organization Structure 1948.4 Holding Company 1968.5 Portfolio Strategy and Organization 2029.1 The Hewlett-Packard Mixed Model 2109.2 Portfolio Strategy and Organization 212

10.1 Portfolio Strategy Today 21811.1 Financial Performance Versus the Number of

Diverse Businesses in the Portfolio 23911.2 GE Organization Structure 24411.3 Danaher Corporation Organization Structure 24911.4 Illinois Toolworks Organization Structure 25312.1 Value Chain for United Technologies’ Businesses 25612.2 Leveraging Intellectual Property at Disney 25812.3 Synergy Through Solutions at IBM 25812.4 The Walt Disney Company Structure 26212.5 Start Model for the Disney Organization 27512.6 IBM Structure 28213.1 Nike Organization Structure, July 2013 298

Tables

1.1 Matching Strategy and Organization 123.1 The Cost-Centric Organization 68

L IST OF F IGURES AND TABLES xi

3.2 The Product-Centric Versus Customer-CentricOrganization 69

8.1 Corporate Strategy and Organization 1918.2 Corporate Strategy and Organizational Processes 1968.3 Corporate Strategy and Compensation Practices 198

11.1 Berkshire Hathaway Companies 242

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Preface

The last revision I did for this book was standard. I updatedthe examples and references, modified some ideas based on newresearch, and added a new chapter or two. For this revision, I tookmore time and substantially rewrote the book. The basics, like theStar Model and lateral forms of organization, remain the same.But the organization design thinking throughout the book is muchmore driven by strategy. It follows the research and theory thatstarted with Alfred Chandler’s Strategy and Structure (1962).

The first couple of chapters explain the approach of strategicorganization design. It is a top-down approach as opposed to asociotechnical systems approach, which is bottom up. Sociotechis much more influenced by the actual work of the first levelof the organization. The strategic approach to design is basedon the Star Model, a holistic framework for combining strategy,structure, processes, rewards, and people. (I am the holder ofthe copyright and trademark on the Star Model.) In addition todiscussing the Star Model, the first chapters set the methodologyof growth leading to strategic transformation. I assume that com-panies pursue growth to attract capital and talent and, for thosethat are publicly traded, to drive their stock price. However,a company can grow only so far in its core business and homecountry. As a result, growth drives a diversification strategy froma single business into a multiple business portfolio. These twostages of growth—a single core business strategy and a multiplebusiness portfolio strategy—are covered in this book. Growthalso drives companies to expand outside their home country

xiii

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xiv PREFACE

into host countries. These companies take on three-dimensionalstructures where functions, businesses, and geographies all reportto the CEO. I have described these organizations in more detailin Designing the Global Corporation (2000).

A fourth-stage organization arises when companies focus on acustomer dimension. I discussed these organizations in Designingthe Customer-Centric Organization (2005). In chapter 13 of thisbook, I speculate about a fifth dimension that could result fromthe impacts of analytics and big data. Throughout the book, Irefer to “big data,” which denotes the greater volume, variety, andvelocity of data that are available today.

In chapters 3 through 7, I describe the different types of single-business functional organizations. Chapters 3 and 4 focus on thefunctional structure and the cross-functional lateral processes thatcharacterize most single-business organizations. In this edition,I highlight the growing interest in social technologies to coor-dinate work flows, products, and services across the company. Ialso distinguish between the different types of business strategiesand organizations. I follow Treacy and Wiersema’s (1997) threeorganizational types: cost-centric, product-centric, and customer-centric. In chapter 5, I discuss the organizations for each of thesestrategies along with several case studies to bring them alive. Inthat samechapter, Ipresent someideasabout thereal-timedecisionprocesses that are enabled by big data.

Chapter 6 is devoted to the reconfigurable organization.When competitive advantages do not last long, neither dothe organizations that implement them. So today we designorganizations to be easily and quickly changeable. This capa-bility requires us to become even more adept at lateral forms oforganization. The final chapter in this group, chapter 7, focuseson the network organization. Rather than vertical integration,many companies are using virtual integration. That is, companiesare using partnerships rather than ownership to coordinate thecomponents of their businesses. This is particularly true forcompanies using embedded microchips in their products. Such

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PREFACE xv

companies are building networked ecosystems of app developersto write applications for their software platforms.

Chapters 8 through 12 examine the variations on the enter-prise strategies and organizations. In chapter 8, I review what weknow about portfolio strategy and the continuum spanning fromrelated portfolios to unrelated or conglomerate portfolios. Histori-cally, the literature has focused on either pure types of strategiesin the related portfolio with its multidivisional structure or onconglomerates with their holding company structures. Chapter 9elaborates on the mixed model. Chapters 10 and 11 treat the sub-ject of how corporate centers add value to their portfolios. That is,these companies create portfolios that are more valuable than thesum of their stand-alone businesses. I focus on three conglomer-ates: General Electric, Danaher, and Illinois Tool Works. Finally,chapter 12 examines two different approaches to creating valuethrough synergy. One type leverages intellectual property acrossbusiness units. Disney and Armani are examples I use to show howcompanies leverage characters, brands, and fashion designs acrossdiverse portfolios. The other model is the solutions strategy. IBMand medical products companies combine products, software, andservices from diverse business units into smart solutions for theircustomers.

In chapter 13, I speculate about the effects of big data on orga-nization design and whether they will result in a new dimensionof organizational structure. Disney and Nike are already creatingdigital divisions that are generating new sources of revenue.

Therefore, this edition is both an update of the basic contentof organizational design and a presentation of a lot of new mate-rial. As social networking and big data work their ways throughorganizations, there will be much more to uncover and analyze inthe years to come.

Breckenridge, Colorado Jay R. GalbraithDecember 2013

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Designing Organizations

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1

INTRODUCTION

Organization design, as opposed to organization theory, is a pre-scriptive body of knowledge. It is intended to inform the choicesof how to organize and manage institutions and serve the leaderswho have been entrusted with the stewardship of these institu-tions. These organizations are purposeful: they have been createdto accomplish specific goals and objectives. Organization design istherefore focused on creating organizations through which thesegoals and objectives can be accomplished.

The knowledge base underlying the choice of organizationdesigns has its roots in scientific management and classical man-agement principles. The practitioners and scholars who devel-oped the knowledge in these areas were searching for the one bestway to organize. Those early thinkers created many of the prin-ciples, like span of control, and much of the useful language, likecentralization, that we still use today. However, it was not difficultto find effective organizations that violated many of the principlesof classical management. As a result, modern organization designgrew out of efforts to explain these exceptional observations.

Modernorganizationdesigncameoutofavarietyofwork in the1950s and 1960s. One stream, developed in the United States, isbest illustratedbytheworkofAlfredChandler inStrategyandStruc-ture (1962). He found that the different organizational structureswe had observed could be explained by differences in companies’strategies. Therefore, different strategies lead to different organiza-tions. This stream, referred to as strategic organization design, is atop-down design process that begins with the entity’s strategy and

1


2 DESIGNING ORGANIZATIONS

can be applied at the enterprise, business unit, geographical, andfunctional levels.

A second stream of thought developed in Europe around thework of Eric Trist and his followers (Trist and Murray, 1993). Itwas referred to as the sociotechnical systems approach. It was bot-tom up. It focused on the alignment of the technology involvedin doing the work and the social system that could be createdto perform that work. Sociotechnical systems’ thinking and toolsare best at designing organizations at the bottom levels of thestructure. The strategic design thinking and tools are best usedfor designing organizations’ top levels. The strategic organizationdesign approach is the one that I follow in this book.

Today’s Organization Design

The interest in organization design has been increasing over thepast couple of decades. One of the reasons is that our organiza-tions have been increasing in complexity over that time. “Doingwhat comes naturally” is not a sufficient guide to organizingtoday’s institutions. Most leaders today rose up through a farsimpler structure. Nor are the old dismissives relevant: “All youneed are good people. They’ll make any organization work.”And people do make a misaligned organization work, but at aprice. The people in an organization that is misaligned with itsstrategy and stakeholder environment cannot serve its customersand work around the system at the same time. They can performmuch more effectively when the system supports them in doingtheir work. Besides, high-performing companies do not wantorganizations that just work; they want organizations that excel.The discipline of organization design has evolved along with theincreasing organizational complexity and the desire to createhigh-performing organizations.

In the following chapters, I trace the organizational stagesthrough which companies have progressed from the sim-ple, single-business strategy to the complex multibusiness,


INTRODUCTION 3

multicountry, multicustomer segment strategy. The firstorganizational stage is the single-business strategy, sometimescalled the U form, or unitary form of organizations. Almost allcompanies start as a single business that is organized around func-tions, like sales, marketing, operations, product development,finance, and human resources. It is a unitary or one-dimensionalform because it is structured only around functions. All peoplereporting to the CEO are functional leaders. Chapter 3 is devotedto the design of the single business or business unit, I introducethe concept of the lateral or horizontal organization. In order toget anything done, companies have to work across functionsto deliver customer orders, new products, and projects. Theseprocesses are executed through lateral forms of cross-functionalcoordination. The functional structure or hierarchy is the verticalform, and the processes are the lateral forms, which vary frominformal and self-organizing processes, to formal teams, to thematrix form. Lateral forms are present in all types of organizations,but I present them in a discussion about business units in chapter 3since they are the principal design challenge facing businessunit leaders.

The second stage arrives when a single business diversifies intonew business areas. The company then creates a business unit anda profit and loss center for each new business area. Each businessunit is another functional organization. The organization designchallenge is thus to create a corporate center to govern the vari-ous business units. This center typically contains functional staffsto coordinate the functions across business units. The role andsize of the center vary with the diversity of the businesses in thecorporate portfolio. Since the CEO of the enterprise has bothfunctions and businesses reporting to the center, the company hasa two-dimensional organization structure.

The third stage develops when a company expands out of itshome market into new host countries. This strategy adds a thirddimension—a geographical dimension—to the organization.Initially companies simply add a geographical division to their



multiple business unit divisions. But when international salesreach around 30 to 40 percent of total sales, the internationaldivision disappears. In consumer goods companies, the divisionis replaced by regional profit centers, one of which is the homecountry. In the business-to-business (B2B) world, the interna-tional division is split and the parts are added to their respectivebusiness units, creating global business unit profit and loss centers.However, in the global business unit structure, there is still aninternational or regional overlay on the global business units.And in the regional structure, there are global business units thatare overlaid across the regions. So reporting into the corporatecenter are functions, business units, and geographies. Theorganization design challenge is balancing power and authorityacross the three-dimensional structure. The resulting powerdistributions will be driven by the global portfolio strategy(Galbraith, 2000).

The fourth strategy stage begins with a focus on the cus-tomer (Galbraith, 2005). Driven partly by demands from globalcustomers like Walmart, companies such as Procter & Gamble,IBM, and investment banks are adding global customer orcustomer segments to their structures. Another contributingfactor is the conversion of products and services into digitalofferings. In the digital world, everything talks to everythingelse. Vendors, like IBM and Accenture, can combine digitalhardware, software, and services into smart solutions for theircustomers. They can easily customize and codevelop applicationswith customers for customer segments, like financial services andutilities. This solutions strategy is best executed by organizingaround the customer or customer segments called verticals. So inthese solutions-oriented companies, we find customer segmentsreporting into the corporate center along with business units,countries, and functions. The challenge for organization designersis to integrate four dimensions into a one-company strategy andorganization. Integration becomes the task of the company’sprocesses. As we will see, the more complex the structure is, themore important are the processes.


INTRODUCTION 5

Inevitably, the question that comes up is, “Is there a fifthstage?” In the concluding chapter, I speculate about a fifth stage.It appears that the forces around big data, meaning the increasedvolume, complexity, variety, and velocity of available data, mayvery well manifest themselves in a fifth strategy and organizationaldimension.

Drivers of New Strategies

It is natural to ask why companies are continually changing theirstrategies. What is driving this movement through the stages?Usually managers prefer to keep things simple, so why are theymoving to ever more complicated strategies? There are at leasttwo reasons. One is the pursuit of growth. Many companies aredriven by a growth imperative. And the other is the continuingfragmentation of the stakeholder environment.

Growth

Every publicly traded company wants to grow and drive its stock totrade at a premium price. If there is no growth, the company’s stockis flat and trades like a bond. A high stock price makes it easier toattract capital and reward employees. The elevated stock also canserve as a currency to make acquisitions. More important, talentedpeople want to join a growth company that has a bright future. Butwhilegrowthisdesirable, it also faces limits.Afirmcangrowonly somuch in its core business and its home country. So when growth inthe core business slows, firms diversify into adjacent businesses andbecomemultibusiness companies.Whengrowthslows in thehomecountry, firms expand across borders and become multinationals.This pursuit of new growth opportunities causes firms to changestrategies and move through the stages.

Fragmentation of the Stakeholder Environment

The other driver of strategic change is the movement from massmarkets to ever smaller market segments. In the twentieth century,



businesses used mass production to supply mass merchants to servethemassmarket.Now,withever-increasingdata,firmscanfocusonever smaller customer segments. Consulting firms can now identify650 microsegments in the food market. Some of these microseg-ments are declining, some are flat, and others are growing. So foodcompanies are focusing on these growth microsegments, like His-panic moms and senior foodies. Both the growth imperative andmarket fragmentation lead to customer-focused strategies.

So it is largely the growth imperative and market segmen-tation that drive firms to continually evolve their strategies.But not all companies progress through all of the stages. Somecompanies, like utilities and defense firms, remain domesticenterprises, and some family-owned companies remain in asingle business. Andersen, Marvin, and Pella focus largely on res-idential windows and doors. Most companies, however, becomethree-dimensional, multinational enterprises like General Mills,Pfizer, Siemens, Canon, and Johnson & Johnson, while others,like Experian and Nike, progress or are progressing through fouror even five stages. My point is that different strategies drivedifferent organization designs. It is not size or industry that is theprimary shaper of different organizational forms. Size, industry,and nationality all have their effects, but in this book, I startwith strategy to begin the design process.

The other point about strategy stages that is importantfor organization design is that the strategies are cumulative.Chandler called this feature concatenation. That is, a multibusi-ness enterprise also has stage 1, single-business strategies thatguide its business units. And when the stage 2 enterprise expandsacross borders, it adds third-stage international strategies to itsstage 2 multifunction, multibusiness strategies. This cumulativestage-wise progression is what increases the complexity oforganization designs and gives organization design its challengeand its priority to create high-performing enterprises.


INTRODUCTION 7

Drivers of Organization Designs

There are three major shapers of organization designs. The firstis the one that we have been discussing: the diversity and varietyof units that must be coordinated for the company to execute itsmission. The second is the degree of interdependence betweenthese diverse units. Usually the units in a company are notindependent but require coordination, and the amount dependson the degree of interdependence. This interdependence resultsfrom the initial division of labor into functional specialtiesthat are needed to execute the business’s activities. The thirdfactor is the dynamics of change associated with a business.The dynamics consist of the rate or pace of change combinedwith its predictability. The predictability of change is the key.Even if a business is subject to constant change, if that change ispredictable, a company can use plans and schedules to coordinateinterdependence among units. If each unit can meet its plannedgoals and delivery schedules, the organization greatly reduces theamount of ongoing communication that it needs to coordinateits work. It is when change is constant and unpredictable thatplans and schedules need constant revision and renegotiation.These organizations require designs that permit high levels ofcommunication, flexibility, and adaptation.

Variety and Diversity

It is actually the interaction of the three shapers—variety,interdependence, and change dynamics—that drives organizationdesigns. To illustrate, let us start with a single business thatconducts its affairs through seven functions: development (ofproducts and services), operations, marketing, procurement,sales, finance, and human resources. These seven functionsmust coordinate their efforts to conduct normal business forthe existing product already in the market. They must also



synchronize their activities to launch a new product, and theyprobably need to agree on the priority and features of the nextproduct in development. The communication and decisionmaking to arrive at the plans and schedules for the existingproduct in a seven-function organization must take place acrosstwenty-one interfaces. (Links = 1∕2 n [n – 1]. Thus, 21 = 1∕2 ×7 [6].) Communication and collaboration must also take placeacross these same seven functions and twenty-one interfaces forthe launch of the next product and yet again for the initiation ofthe new product. The process repeats itself for each product that isadded to the single-business, functional organization. So variety,as measured by the number of products in this case, increasesthe volume of information processing and decision makingthat a single functional organization must execute. And everyfunctional organization has a limited capacity for communicatingand deciding. Then when the growth imperative causes the singlebusiness to follow a diversification strategy, it will add one or twonew businesses. At this point, the coordination task exceeds thecompany’s capacity to coordinate. As a result, it will move to astage 2, multibusiness company and multibusiness structure. Thefunctional organization does not have the information-processingand decision-making capacity to manage multiple businesseswithin a single functional structure.

Dell is a good example. Dell started with a single product lineof desktop personal computers. In order to maintain its growth,it added desk-side computers and laptops. Then it added newbusinesses of personal desktop printer, personal desk-side storage,and low-end servers. It also migrated from a single personal com-puter business into a multibusiness unit, multiprofit center com-pany. It changed its name from Dell Computers to Dell. Eachprofit center was a functional organization capable of managinga single business, like personal computers, printers, storage, andservers.


INTRODUCTION 9

Interdependence

Interdependence is the degree to which activities in one organi-zational unit affect the activities and goal accomplishments ofother units. Interdependence has been a driver of coordinationsince the work of Thompson (1967), who identified three typesof interdependence, which increased in magnitude. These typesare shown in figure 1.1. The simplest interdependence is pooledinterdependence whereby field units, shown in figure 1.1a, sharethe same pool of funds and talent resources. Other than sharingresources, these field units, like sales units, perform their workcompletely separately. There is a minimal need to coordinate andcommunicate between one another. The next type, sequential,shown in figure 1.1b, indicates a higher level and greater amountof interdependence. In sequential interdependence, the output ofmanufacturing is a necessary input for the performance of the salesfunction. In order to achieve successful performance, companymanagement must coordinate the flow of work across sequentiallyinterdependent units. The sequentially interdependent units,however, also possess pooled interdependence. The greatestamount of interdependence exists when units are reciprocallyinterdependent, as in figure 1.1c. The output of both is the inputof the other. Engineering design groups are a good example. Thereciprocally interdependent units possess the greatest amount of

Figure 1.1 Types of Interdependence

FieldUnit

FieldUnit

Hardware

EngineeringCenter Center

SoftwareSalesManufacturing

(a) Pooled (b) Sequential (c) Reciprocal



interdependence because they possess all three types. They requirethe greatest need for coordination as a result.

Interdependence is a variable that can be changed andcan lead to different amounts of coordination. For example,the new product initiative referred to above may have greaterinterdependence among development, marketing, operations,and procurement than it has with the other three functions.Therefore, the interdependent four functions can form a corenew product team, which has more limited communication withthe other three functions. But when you add the other functionsto the core team, it becomes the extended product team. Oneof the reasons that interdependence drives organization designsis that a principle of design is to create structural units based onthe degree of interdependence. A designer should maximize theamount of interdependence and coordination that takes placewithin an organizational unit and minimize interdependence andcoordination across units.

Today the most competitive management practices—leanprocesses, speed to market, and real-time decision makingenabled by big data—increase the interdependence amongfunctions. Previously companies reduced interdependence byusing sequential work flows across functions. Between each stopin the flow of work were buffers like in-process inventories andorder backlogs. These sequential work flows, called “looselycoupled systems,” uncoupled the functions so that they couldsolve their issues independent of other functions. The looselycoupled systems reduced the amount of information processingand decision making so that the complexity of coordinationfit within the business unit’s capacity. However, loose couplingled to the barriers between functions that we refer to todayas silos.

The competitive practices referred to above are creatingtightly coupled systems that remove the buffers that uncoupledsequential flow across functions. And in their place, we need to

designing organizations · 2015-07-28 · 3.2 the product-centric versus customer-centric...

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