Strategy Planning – Organizational Implementation

deadline 17 February 2021.

Organizational Implementation

This week, our focus is on organizational structure and strategy implementation. For this critical thinking assignment, read the case study, W.L. Gore (Gore) & Associates: Rethinking Management (Case # 22) from your textbook. In addition, read Chapter 6, “Organizational Structure and Management Systems: The Fundamentals of Strategy Implementation.”

· Name and describe a typical company that is organized as a hierarchy.

· Describe how the following are practiced at this company—specialization, coordination, cooperation, and control.

· How does this company’s structure and management system promote the effective implementation of the company’s strategy?

· Describe how the following are practiced at Gore—specialization, coordination, cooperation, and control.

· Given that typical control mechanisms are lacking at Gore, how is the company able to effectively operate?

· How do Gore’s organizational structure and management systems promote effective strategy implementation?

Your well-written paper should meet the following requirements:

· 5 pages which does not include the required title and reference pages.

· APA style.

· Support your submission with course material concepts, principles, and theories from the textbook and at least two scholarly, peer-reviewed journal articles unless the assignment calls for more.

· Turnitin Originality Check REPORT REQUIRED.

Case 22

If a man could flow with the stream, grow with the way of nature, he’d accomplish
more and he’d be happier doing it than bucking the flow of the water.

—W. L. GORE

W. L. Gore &
Associates:
Rethinking
Management

Malcolm Gladwell (author of The Tipping Point and Outliers) described his visit to
W. L. Gore & Associates (Gore) as follows:

When I visited a Gore associate named Bob Hen at one of the company’s plants
in Delaware, I tried, unsuccessfully, to get him to tell me what his position was.
I  suspected, from the fact that he had been recommended to me, that he was one of
the top executives. But his office wasn’t any bigger than anyone else’s. His card just
called him an “associate.” He didn’t seem to have a secretary, one that I could see
anyway. He wasn’t dressed any differently from anyone else, and when I kept asking
the question again and again, all he finally said, with a big grin, was, “I’m a meddler.”1

The absence of job titles and the lack of the normal symbols of hierarchy are not
the only things that are different about Gore. Since its founding in 1958, Gore has
deliberately adopted a system of management that contrasts sharply with that of other
established corporations. While the styles of management of all start-up companies
reflect the personality and values of their founders, the remarkable thing about Gore is
that, as a $3.2 billion company with 9500 employees (“associates”) in 25 countries of
the world, its organizational structure and management systems continue to defy the
principles under which corporations of similar size and complexity are managed.

The Founding of Gore

Wilbert L. (Bill) Gore left DuPont in 1958 after 17 years as a research scientist. At
DuPont, Gore had been working on a new synthetic material called polytetrafluoro-
ethylene (PTFE), which it had branded “Teflon.” Gore was convinced that DuPont’s
commitment to supplying large industrial markets with basic chemical products had

This case was prepared by Robert M. Grant. ©2019 Robert M. Grant.

630 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

caused it to overlook new applications for PTFE. When Bill Gore and his wife, Vieve,
formed their own business in 1958, they were keen, not only to explore these novel
applications, but also to create the energy and passion that he had experienced when
working in small research teams at DuPont on those occasions when they were given
the freedom to pursue innovation.

Working out of their home in Newark, Delaware, and with the help of their
son, Bob, the Gores’ first product was Teflon-insulated cable. However, their break-
through was Bob Gore’s discovery of the potential of Teflon to be stretched and
laced with microscopic holes. The resulting fabric shed water droplets but was also
breathable. Gore-Tex received a US patent in 1976. Not only did it have a wide
range of applications for outdoor clothing, the fact that Gore-Tex was chemically
inert and resistant to infection made it an excellent material for medical applications
such as artificial arteries and intravenous bags. The potential to vary the size of
the microscopic holes in Gore-Tex also made it ideal for a wide range of filtration
applications.

Since then, continuous innovation has resulted in a growing array of consumer prod-
ucts (such as guitar strings, dental floss, footwear components, and vacuum cleaner
bags), industrial products (such as fuel cell components, electronic components, fire
safety fabrics, and rope fibers), and medical products (such as implantable medical
devices, pharmaceutical tubing products, and sealants).

Origins of the Gore Management Philosophy

FundingUniverse.com describes the development of Bill Gore’s management ideas
as follows:

From their basement office, the Gores expanded into a separate production facility in
their hometown of Newark, Delaware. Sales were brisk after initial product introduc-
tions. By 1965, just seven years after the business had started, Gore & Associates was
employing about 200 people. It was about that time that Gore began to develop and
implement the unique management system and philosophy for which his company
would become recognized. Gore noticed that as his company had grown, efficiency
and productivity had started to decline. He needed a new management structure, but
he feared that the popular pyramid management structure that was in vogue at the
time suppressed the creativity and innovation that he valued so greatly. Instead of
adopting the pyramid structure, Gore decided to create his own system.

During World War II, while on a task force at DuPont, Gore had learned of another
type of organizational structure called the lattice system, which was developed to
enhance the ingenuity and overall performance of a group working toward a goal.
It emphasized communication and cooperation rather than hierarchy of authority.
Under the system that Gore developed, any person was allowed to make a decision
as long as it was fair, encouraged others, and made a commitment to the company.
Consultation was required only for decisions that could potentially cause serious
damage to the enterprise. Furthermore, new associates joined the company on the
same effective authority level as all the other workers, including Bill and Vieve. There
were no titles or bosses, with only a few exceptions, all commands were replaced by
personal commitments.

New employees started out working in an area best suited to their talents, under the
guidance of a sponsor. As the employee progressed there came more responsibility,

CASE 22 W. L. GORE & ASSOCIATES: REThINkING MANAGEMENT 631

and workers were paid according to their individual contribution. “Team members
know who is producing,” Bill explained in a February 1986 issue of the Phoenix
Business Journal. “They won’t put up with poor performance. There is tremendous
peer pressure. You promote yourself by gaining knowledge and working hard, every
day. There is no competition, except with yourself.” The effect of the system was to
encourage workers to be creative, take risks, and perform at their highest level.2

Bill Gore’s ideas about management were influenced by Douglas McGregor’s The
Human Side of Enterprise, published when Gore was starting up his own company.
In it, McGregor identifies two models of management: the conventional model of
management, rooted in Taylor’s scientific management, and Weber’s principles of
bureaucracy, which McGregor termed “Theory X.” At its core is the assumption that
work is unpleasant, that employees are motivated only by money, and that manage-
ment’s principal role is to prevent shirking. “Theory Y” was McGregor’s alternative
theory rooted in the work of the human relations school of management, which
assumes that individuals are self-motivated, anxious to solve problems, and capable of
working harmoniously on joint tasks.

Bill Gore’s dominant concern was the limits to organizational size. He believed that
the need for interpersonal trust would result in organizations declining in effective-
ness once they reached about 200 members. Hence, in 1967, rather than expand their
Delaware facility, Bill and Vieve decided to build a second manufacturing facility in
Flagstaff, Arizona. From then on, Gore built a new facility each time an existing unit
reached 200 associates.

According to Malcolm Gladwell, Gore’s insistence upon small organizational units
is an application of a principle developed by anthropologist Robin Dunbar. According
to Dunbar, social groups are limited by individuals’ capacity to manage complex social
relationships. Among primates, the size of the typical social group for a species is cor-
related with the size of the neocortex of that species’ brain. For humans, Dunbar esti-
mates that 148 is the maximum number of individuals that a person can comfortably
have social relations with. Across a range of different societies, Dunbar found that 150
was the typical maximum size of tribes, religious groups, and army units.3

Organization Structure and Management Principles

The Gore organization does include elements of hierarchy. For example, as a corpo-
ration, it is legally required to have a board of directors—this is chaired by Bob Gore.
There is also a CEO, Terri Kelly. The company is organized into four divisions (fabrics,
medical, industrial, and electronic products), each with a recognized “leader.” Within
these divisions there are specific business units, each based upon a group of products.
There are also specialized, company-wide functions such as human resources and
information technology.

What is lacking is a codified set of ranks and positions. Gore associates are expected
to adapt their roles to match their skills and aptitudes. The basic organizational units
are small, self-managing teams.

Relationships within teams and between teams are based upon the concept of a
lattice rather than a conventional hierarchy. The idea of a lattice is that every orga-
nizational member is connected to every other organizational member within the
particular facility. In the lattice, communication is peer to peer, not superior to sub-
ordinate. For Bill Gore, this was a more natural way to organize. He observed that in

632 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

most formal organizations it was through informal connections that things actually got
done: “Most of us delight in going around the formal procedures and doing things the
straightforward and easy way.”4

New associates are assigned to a “sponsor” whose job is to introduce the new hire
to the company and guide him or her through the lattice. The new hire is likely to
spend time with several teams during the first few months of employment. It is up
to the new associate and a team to find a good match. An associate is free to find

EXHIBIT 1

What we believe

Founder Bill Gore built the company on a set of beliefs

and principles that guide us in the decisions we make,

in the work we do, and in our behavior toward others.

What we believe is the basis for our strong culture, which

connects Gore associates worldwide in a common bond.

FUNDAMENTAL BELIEFS

Belief in the individual: If you trust individuals and believe

in them, they will be motivated to do what’s right for

the company.

Power of small teams: Our lattice organization harnesses

the fast decision-making, diverse perspectives, and col-

laboration of small teams.

All in the same boat: All Gore associates are part owners of

the company through the associate stock plan. Not only

does this allow us to share in the risks and rewards of the

company, it gives us an added incentive to stay com-

mitted to its long-term success. As a result, we feel that

we are all in this effort together and believe we should

always consider what’s best for the company as a whole

when making decisions.

Long-term view: Our investment decisions are based on

long-term payoff and our fundamental beliefs are not

sacrificed for short-term gain.

GUIDING PRINCIPLES

◆ Freedom: the company was designed to be an orga-

nization in which associates can achieve their own

goals best by directing their efforts toward the suc-

cess of the corporation; action is prized; ideas are

encouraged; and making mistakes is viewed as part

of the creative process. We define freedom as being

empowered to encourage each other to grow in

knowledge, skill, scope of responsibility, and range

of activities. We believe that associates will exceed

expectations when given the freedom to do so.

◆ Fairness: everyone at Gore sincerely tries to be fair

with each other, our suppliers, our customers, and

anyone else with whom we do business.

◆ Commitment: we are not assigned tasks; rather, we

each make our own commitments and keep them.

◆ Waterline: everyone at Gore consults with other

associates before taking actions that might be

“below the waterline”—causing serious damage

to the company.

Working in Our Unique Culture

Our founder Bill Gore once said, “The objective of the

Enterprise is to make money and have fun doing so.” And

we still believe that, more than 50 years later.

Because we are all part owners of the company

through the associate stock plan, Gore associates expect

a lot from each other. Innovation and creativity; high

ethics and integrity; making commitments and standing

behind them. We work hard at living up to these expec-

tations as we strive for business success. But we also trust

CASE 22 W. L. GORE & ASSOCIATES: REThINkING MANAGEMENT 633

a new sponsor if desired. Typically, each associate works on two or three different
project teams.

Annual reviews are peer based. Information is collected from at least 20 other asso-
ciates. Each associate is then ranked against every other associate within the unit in
terms of overall contribution. This ranking determines compensation.

The company’s beliefs, management principles, and work culture are articulated on
its website (Exhibit 1).

and respect each other and believe it’s important to cele-

brate success.

Gore is much less formal than most workplaces. Our

relationships with other associates are open and informal

and we strive to treat everyone respectfully and fairly. This

type of environment naturally promotes social interac-

tion and many associates have made lifelong friends with

those they met working at Gore.

Do Something You’re
Passionate About

At Gore, we believe it’s important to have passion for what

you do. If you’re passionate about your work, you are natu-

rally going to be highly self-motivated and focused. If you

feel pride and ownership, you will want to do whatever it

takes to be successful and have an impact. So when you

apply for an opportunity at Gore, be sure you’re going to

be passionate about the work you’ll be doing.

The Lattice Structure and Individual
Accountability

Gore’s unique “lattice” management structure, which illus-

trates a nonhierarchical system based on interconnec-

tion among associates, is free from traditional bosses and

managers. There is no assigned authority, and we become

leaders based on our ability to gain the respect of our

peers and to attract followers.

You will be responsible for managing your own work-

load and will be accountable to others on your team.

More importantly, only you can make a commitment to

do something (e.g., a task, a project, or a new role)—but

once you make a commitment, you will be expected

to meet it. A “core commitment” is your primary area of

concentration. You may take on additional commitments

depending on your interests, the company’s needs, and

your availability.

Relationships and Direct
Communication

Relationships are everything at Gore—relationships with

each other, with customers, with vendors and suppliers,

and with our surrounding communities. We encourage

people to build and maintain long-term relationships by

communicating directly. Of course, we all use e-mail, but

we find that face-to-face meetings and phone calls work

best when collaborating with others.

Sponsors

Everyone at Gore has a sponsor, who is committed to

helping you succeed. Sponsors are responsible for sup-

porting your growth, for providing good feedback on

your strengths and areas that offer opportunities for

development and for helping you connect with others in

the organization.

Source: www.gore.com/en_xx/careers/whoweare/about-gore.
html, W. L. Gore & Associates: Beliefs, Principles and Culture.
Reproduced by permission of W. L. Gore & Associates.

634 CASES TO ACCOMPANY CONTEMPORARY STRATEGY ANALYSIS

Leadership

Leadership is important at Gore, but the basic principle is that of natural leadership:
“If you call a meeting and people show up—you’re a leader.”5 Teams can appoint
team leaders; they can also replace their team leaders. As a result, every team leader’s
accountability is to the team. “Someone who is accustomed to snapping their fingers
and having people respond will be frustrated,” says John McMillan, a Gore associate.
“I snap my fingers and nobody will do anything. My job is to acquire followership, artic-
ulate a goal and get there … and hope the rest of the people think that makes sense.”6

CEO Terri Kelly compares the conventional approach to leadership with Gore’s
“ distributed leadership model”:

The model of the single powerful leader who operates through command and control
is attractive in its simplicity … In reality, it is impractical to expect the single leader to
have all the answers, and history has shown that relying upon rigid control mecha-
nisms will not prevent catastrophic outcomes. It’s far better to rely upon a broad base
of individuals and leaders who share a common set of values and feel personal own-
ership for the overall success of the organization. And as organizations grow in size
and complexity, it becomes even more critical to distribute the leadership load … The
capacity of the organization increases when it distributes the leadership load to com-
petent leaders on the ground who can make the best knowledge-based decisions.7

She argues that talented newcomers to the workforce adapt much more easily to the
distributed leadership than to traditional modes of management. Young people recog-
nize that they have choices, are not wedded to a single organization, and will move to
where they perceive the best opportunities. As a result, companies that persevere with
traditional management models will find it difficult to retain the best talent. At the same
time, warns Kelly, making the shift to a distributed leadership model is a challenge to
top management. It requires a fundamental change in the values, attitudes, and reward
systems that are deeply embedded in most organizations:

It will require a shift within the organization from valuing a key few to valuing the
unique contributions of many. Individuals will need to feel they have a voice and can
be heard. Leaders will need to recognize that their primary role is to empower others
versus build their own power. They will no longer stand behind a title with assumed
authority to tell people what to do.

Leaders’ focus will shift to creating the right environment and instilling the right values
that can enable capable leaders to emerge. They will recognize that they are only
leaders if they have willing followers, and that this needs to be earned every day.
Ultimately, their contributions will be judged by the people they lead.

Most rewards systems depend upon higher level management to assess the effec-
tiveness of the leader. This view can be somewhat limited and biased by the fact the
managers were often the ones who put the leader in the role in the first place. Those
who know their leaders best are typically the individuals they lead. If you want indi-
viduals to have a voice in the organization, they must also have a voice in selecting
and evaluating their leaders.

CASE 22 W. L. GORE & ASSOCIATES: REThINkING MANAGEMENT 635

In our company, we have found it very useful to adopt a peer ranking system. All
associates get the opportunity to rank members of their team, including their leaders.
They are asked to create a contribution list in rank order based on who they believe
is making the greatest contribution to the success of the enterprise. This approach
serves as an excellent form of “checks and balances” when it comes to who is truly
recognized for their contributions as well as for overall leadership.8

Innovation

The success of Gore’s unusual management system is its capacity for innovation. Between
1976 and 2017, Gore received 1428 US patents; in each year between 2012 and 2018 it
was awarded between 70 and 108 patents. Even more remarkable has been its ability to
extend its existing technological breakthroughs to a wide variety of new applications.
Central to Gore’s ability to innovate is its willingness to allow individuals the freedom
to pursue their own projects: each associate is allowed a half day each week of “dabble
time.” New product ideas typically originate with customers or individual employees
and are then developed by a self-directed team. Gore’s Elixir guitar strings began when
several amateur guitarists in the research department began experimenting with differ-
ent coatings for guitar strings, then sent samples to musicians to try.

The source of Gore’s innovations is not so much its brilliant technologists and engi-
neers as a management system that attracts top talent and provides an environment that
inspires creativity and collaboration. Gary Hamel closes his discussion of Gore with the
following challenge:

Bill Gore was a 40-something chemical engineer when he laid the foundations for his
innovation democracy. I don’t know about you, but a middle-aged polytetrafluoro-
ethylene-loving chemist isn’t my mental image of a wild-eyed management innovator.
Yet, think about how radical Gore’s vision must have seemed back in 1958. Fifty years
later, postmodern management hipsters throw around terms like complex adaptive
systems and self-organizing teams. Well, they’re only a half century behind the curve.
So ask yourself, am I dreaming big enough yet? Would my management innovation
agenda make Bill Gore proud?9

Notes

1. M. Gladwell, The Tipping Point (Little, Brown & Co.,
London, 2000).

2. “W. L. Gore & Associates, Inc. History,” http://www.fundin-
guniverse.com/company-histories/WL-Gore-amp;-Associ-
ates-Inc-Company-History.html, accessed July 20, 2015.

3. Gladwell, op. cit.: 177–181.
4. Quoted by G. Hamel with B. Breen, The Future of

Management (Harvard Business School Press, Boston, MA,
2007, p. 87).

5. Reprinted by permission of Harvard Business School
Press from The Future of Management by Gary Hamel.
Boston, MA, 2007, p. 100 Copyright © 2007 by the Harvard
Business School Publishing Corporation; all rights reserved.

6. “W. L. Gore & Associates, Inc.: Quality’s Different Drum-
mer,” IMPO Magazine, January 14, 2002, http://www.
impomag.com/articles/2002/01/wl-gore-associates-inc-
qualitys-different-drummer, accessed July 20, 2015.

7. Terri Kelly, “No More Heroes: Distributed Leadership,”
Management Innovation eXchange (April 8, 2010), http://
www.managementexchange.com/blog/no-more-heroes,
accessed July 20, 2015.

8. Ibid.
9. Reprinted by permission of Harvard Business School Press

from The Future of Management by Gary Hamel. Boston,
MA, 2007, p. 100. Copyright © 2007 by the Harvard
Business School Publishing Corporation; all rights reserved.

6 Organization Structure
and Management
Systems: The
Fundamentals of
Strategy Implementation

Ultimately, there may be no long-term sustainable advantage other than the ability to
organize and manage.

—JAY GALBRAITH AND ED LAWLER

I’d rather have first-rate execution and second-rate strategy anytime than brilliant
ideas and mediocre management.

—JAMIE DIMON, CEO, JPMORGAN CHASE & CO.

Many people regard execution as detail work that’s beneath the dignity of a business
leader. That’s wrong. To the contrary, it’s a leader’s most important job.

—LARRY BOSSIDY, FORMER CEO, HONEYWELL

6

◆

Introduction and Objectives

◆

Strategy Formulation and Strategy Implementation

● The Strategic Planning System: Linking Strategy
to Action

◆ The Fundamentals of Organizing: Specialization,
Cooperation, and Coordination

●

Specialization and Division of Labor

●

The Cooperation Problem

●

The Coordination Problem

◆

Developing Organizational

Capability

●

Processes

●

Motivation

●

Structure

◆

Organization Design

●

The Role of Hierarchy

●

Defining Organizational Units

●

Alternative Structural Forms: Functional,
Multidivisional, Matrix

● Systems and Style: Mechanistic versus Organic
Organizational Forms

● Recent Trends in Organizational Design

◆ Summary

◆ Self-Study Questions

◆ Notes

O U T L I N E

132 PART II THE TOOLS OF STRATEGY ANALYSI

S

Introduction and Objectives

We spend a lot of our time strategizing: pondering our next career move, making plans for a vaca-
tion; thinking about how to improve our marketability. Most of these strategies remain just wishful
thinking: if strategy is to yield results, it must be backed by commitment and translated into action.

The challenges of strategy implementation are even greater for organizations than for individuals.
Executing strategy requires the combined efforts of all the members of the organization, many of whom
will have played no role in its formulation; others will find that the strategy conflicts with their own
personal interests. Even without these impediments, implementation tends to be neglected because
it requires commitment, persistence, and hard work. “How many meetings have you attended where
people left without firm conclusions about who would do what and when?” asks super-consultant,
Ram Charan.1

In this chapter, we consider some of the fundamentals of strategy implementation. We begin by
clarifying the relationship between strategy formulation and strategy implementation. If strategy
involves translating intention into action, the basic organizational requirements are for coordination
and cooperation. We view organizational capability as the mechanism through which coordination
and cooperation effectuate action. We disaggregate organizational capability into four components:
resources, motivation, processes, and structure and go on to explore the role of each of these in strategy
implementation.

This chapter introduces only the fundamentals of strategy implementation. In subsequent chap-
ters, we shall consider strategy implementation in particular contexts, such as strategic change
(Chapter 8), innovation (Chapter 9), mature industries (Chapter 10), international business (Chapter 12),
multi business firms (Chapter  14), and mergers and acquisitions (Chapter  15). At the same time, our
consideration of strategy implementation is limited: ultimately strategy implementation embraces the
whole of management.

By the time you have completed this chapter, you will be able to:

◆◆ Understand the relationship between strategy formulation and strategy implementation
and the role of strategic planning systems in linking strategy to action.

◆◆ Recognize the role of cooperation and coordination as the basic requirements for organi-
zational effectiveness.

◆◆ Appreciate the role that resources, processes, motivation, and structure play in developing
organizational capabilities.

◆◆ Select the organizational structure best suited to a particular business context.

CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS 133

Strategy Formulation and Strategy Implementation

The relationship between strategy formulation and strategy implementation has long
been a contentious issue. During the early years of corporate planning, strategy was
viewed as a two-stage process: first, formulation (mainly by top management), then
implementation (mainly by middle management). This conception was challenged by
Henry Mintzberg who envisaged strategy as emerging from the interaction between
the formulation and implementation (see the discussion of “How is Strategy Made? The
Strategy Process” in Chapter 1).2

From what we have learned about the nature of strategy, it is clear that we cannot
separate strategic management into self-contained formulation and implementation
stages. The intended strategy of any organization is inevitably incomplete: it com-
prises goals, directions, and priorities, but it can never be comprehensive. It is during
implementation that the gaps are filled in and, because circumstances change, the
strategy adapts. Equally, strategy formulation must take account of the conditions of
implementation. The observation “Great strategy; lousy implementation” is typically a
misdiagnosis of strategic failure: a strategy which has been formulated without taking
account of its ability to be implemented is a poorly formulated strategy. Clearly, strategy
formulation and implementation are interdependent. Nevertheless, the fact remains that
purposeful behavior requires that action must be preceded by intention, and intention
needs to be preceded by thought.

The Strategic Planning System: Linking Strategy to Action

Our outline of the development of strategic management in Chapter  1 (see “A Brief
History of Business Strategy”) indicated that companies adopted corporate planning,
not to formulate strategy but to facilitate coordination and control in increasingly large
and complex organizations.

Similarly with entrepreneurial start-ups, when Steve Jobs and Steve Wozniak founded
Apple Computer at the beginning of 1977, strategy was developed in their heads and
through their conversation. A written articulation of Apple’s strategy did not appear
until they needed to write a business plan in order to attract venture capital funding.3
However, Apple did not adopt a systematic strategic planning process until several
years later when it needed to establish capital expenditure budgets for its different
functions and product teams and link strategy to day-to-day decision-making.

Thus, Mintzberg’s claim that formalized strategic planning is a poor way to make
strategy, even if it is right, fails to recognize the real value purpose of strategic planning
systems. As we shall see, strategic planning systems provide a framework for the
strategy process which can assist in building consensus, communicating the strategy
and its rationale throughout the organization, allocating resources to support the
strategy, and establishing performance goals to guide and motivate the individuals and
groups responsible for carrying out the strategy.

The Strategic Planning Cycle Most large companies have a regular (normally
annual) strategic planning process that results in a document that is endorsed by the
board of directors and provides a development plan for the company for the next three
to five years. The strategic planning process is a systematized approach that assem-
bles information, shares perceptions, conducts analysis, reaches decisions, ensures

134 PART II THE TOOLS OF STRATEGY ANALYSIS

consistency among those decisions, and commits managers to courses of action and
performance targets.

Strategic planning processes vary between organizations. At some they are highly
centralized. Even after an entrepreneurial start-up has grown into a large company,
strategy making may remain the preserve of the chief executive. At MCI Communica-
tions, former CEO Orville Wright observed: “We do it strictly top-down at MCI.”4 How-
ever, at most large companies, the strategic planning process involves a combination of
top-down direction and bottom-up initiatives.5

Figure 6.1 shows a typical strategic planning cycle. The principal stages are:

1 Setting the context: guidelines, forecasts, assumptions. The CEO typically initiates
the process by indicating strategic priorities—these will be influenced by the
outcome of the previous performance reviews. In addition, the strategic planning
unit may provide assumptions or forecasts that offer a common basis for strategic
planning by different units within the organization. For example, the 2017–20
strategic plan of the Italian oil and gas company Eni was based upon (a) the
goal of increasing free cash flow by expanding petroleum production and selling
assets and (b) assumptions that the price of crude would rise to $60 per barrel
and the dollar/euro exchange rate would appreciate to 1.20 by 2020.6

2 Business plans. On the basis of these priorities and planning assumptions, the
different organizational units—product divisions, functional departments, and
geographical units—create strategic plans that are then presented for com-
ment and discussion to top management. This dialogue represents a critically
important feature of the strategy system: it provides a process for sharing
knowledge, communicating ideas, and reaching consensus. This process may
be more important than the strategic plans that are created. As General (later
President) Dwight Eisenhower observed: “Plans are worthless, but planning is
everything.”7

Corporate

Guidelines

Draf

t

Business

Plans

Discussions
with

Corporate

Revised
Business

Plans

Approval
by

Board

Corporate
Plan

Capex
Budget

Performance
Targets

Operating Plan/
Operating Budget

Performance
Review

Forecasts/
Scenarios/
Planning

Assumptions

FIGURE 6.1 The generic annual strategic planning cycle

CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS 135

3 The corporate plan. Once agreed, the business plans are then integrated
to create the corporate strategic plan that is then presented to the board
for approval.

4 Capital expenditure budgets. Capital expenditure budgets link strategy
to resource allocation. They are established through both top-down and
bottom-up initiatives. When organizational units prepare their business plans,
they will indicate the major projects they plan to undertake during the stra-
tegic planning period and the capital expenditures involved. When top
management aggregates business plans to create the corporate plan, it estab-
lishes capital expenditure budgets both for the company as a whole and for
the individual businesses. The businesses then submit capital expenditure
requests for specific projects that are evaluated through standard appraisal
methodologies, typically using discounted cash flow analysis. Capital expen-
diture approvals take place at different levels of a company according to
their size. Projects of up to $5 million might be approved by a business
unit head; projects of up to $25 million might be approved by divisional
top management; larger projects might need to be approved by the top
management committee; the biggest projects may require approval by the
board of directors.

5 Operational plans and performance targets. Implementing strategy requires
breaking down strategic plans into a series of shorter-term plans that pro-
vide a focus for action and a basis for performance monitoring. At the basis
of the annual operating plan are a set of performance targets derived from
the strategic plan. These performance targets are both financial (sales growth,
margins, return on capital) and operational (inventory turns, defect rates,
number of new outlets opened). In the section on “Setting Performance Tar-
gets” in Chapter 2, I outlined the basic cascading logic for goal setting: overall
goals of the organization are disaggregated into more specific performance
goals as we move down the organization. As Chapter 2 shows, this can use
either a simple financial disaggregation or the balanced scorecard method-
ology. There is nothing new about this approach: management by objectives
(the process of participative goal setting) was proposed by Peter Drucker in
1954.8 Performance targets can be built into the annual operating budget. The
operating budget is a pro forma profit-and-loss statement for the company as
a whole and for individual divisions and business units for the upcoming year.
It is usually divided into quarters and months to permit continual monitoring
and the early identification of variances. The operating budget is part fore-
cast and part target. Each business typically prepares an operating budget for
the following year that is then discussed with the top management committee
and, if acceptable, approved. In some organizations, the budgeting process
is part of the strategic planning system: the operating budget is the first year
of the strategic plans; in others, budgeting follows strategic planning. Opera-
tional planning is more than setting performance targets and agreeing budgets;
it also involves planning specific activities. As Bossidy and Charan explain:
“An operating plan includes the programs your business is going to complete
within one year … Among these programs are product launches; the marketing
plan; a sales plan that takes advantage of market opportunities; a manufac-
turing plan that stipulates production outputs; and a productivity plan that
improves efficiency.”9

136 PART II THE TOOLS OF STRATEGY ANALYSIS

The Fundamentals of Organizing: Specialization, Cooperation,
and Coordination

Translating intention into action requires organizing. To understand what organizing
involves, we must understand why firms exist.

Specialization and Division of Labor

Firms exist because of their efficiency advantages in producing goods and services that
results from the division of labor: each worker specializing in a specific task. Consider
Adam Smith’s description of pin manufacture:

One man draws out the wire, another straightens it, a third cuts it, a fourth points it, a
fifth grinds it at the top for receiving the head; to make the head requires two or three
distinct operations; to put it on is a peculiar business, to whiten the pins is another; it
is even a trade by itself to put them into the papers.10

Smith’s pin makers produced about 4800 pins per person each day. “But if they had all
wrought separately and independently, and without any of them having been educated
to this peculiar business, they certainly could not each have made 20, perhaps not one
pin, in a day.”

However, specialization comes at a cost: dividing the production process requires
integrating the separate efforts. This involves two problems: first, the cooperation
problem, aligning the interests of individuals who have divergent goals; second, the
coordination problem, even in the absence of goal conflict, how do individuals harmo-
nize their separate efforts?

The Cooperation Problem

The economics literature analyzes cooperation problems arising from goal misalign-
ment as the agency problem.11 An agency relationship exists when one party (the
principal) contracts with another party (the agent) to act on behalf of the principal. The
problem is ensuring that the agent acts in the principal’s interest. Particular attention has
been given to agency problems arising between owners (shareholders) and managers.
The central issue of corporate governance is ensuring that managers act in the inter-
ests of shareholders. However, agency problems exist throughout the entire hierarchy:
employees tend to pursue their own interests rather than those of their organization.
Even organizational goals fragment as a result of specialization as each department
creates its own subgoals. The classic conflicts are between different functions: sales
wishes to please customers, production wishes to maximize output, R & D wants to
introduce mind-blowing new products, while finance worries about profit and loss.

Several mechanisms are available to management for achieving goal alignment
within organizations:

● Control mechanisms typically operate through hierarchical supervision: man-
agers supervise the behavior and performance of subordinates using positive
and negative incentives. The principal positive incentive is the oppor-
tunity for promotion up the hierarchy; negative incentives are dismissal
and demotion.

CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS 137

● Performance incentives link rewards to output: they include piece rates for pro-
duction workers and profit bonuses for executives. Performance-related incen-
tives have the advantages of being “high powered”—rewards are directly related
to performance—and they avoid the need for costly monitoring and supervision
of employees. Pay-for-performance is less effective when employees work in
teams or where output is difficult to measure.

● Shared values. Some organizations achieve high levels of cooperation and
low levels of goal conflict without resorting to either punitive controls or
performance incentives. The members of churches, charities, and voluntary
organizations often share values that support common purpose. Similarly,
for business enterprises, as we saw in Chapter 2 (see pp. 52–53), shared values
among members encourage the convergence of interests and perceptions that
facilitate consensus and enhances performance.12 In doing so, shared values
can act as a control mechanism that is an alternative to bureaucratic control or
financial incentives. An organization’s values are one component of its culture.
Strategy Capsule 6.1 discusses the role of organizational culture in aligning
individual actions with company strategy.

● Persuasion. Implementing strategy requires leadership and at the heart of lead-
ership is persuasion. J.-C. Spender argues that, language is central, both to the
conceptualization of strategy and to its implementation.13 Leadership requires
influencing others, where rhetoric—the use of language for persuasion—is a
core skill. Management rhetoric is not simply about communicating strategy; it
involves changing the perceptions of organizational members, their relationships
with the organization, and, ultimately, guiding their actions to actualize the
strategy in the face of uncertainty and ambiguity.

The Coordination Problem

Willingness to cooperate is not enough to ensure that organizational members integrate
their efforts—it is not a lack of a common goal that causes Olympic relay teams to drop
the baton. Unless individuals can find ways of coordinating their efforts, production
does not happen. As we shall see in our discussion of organizational capabilities, the
exceptional performance of Disney theme parks, the Ferrari Formula 1 pit crew, and
the US Marine Corps band derives less from the skills of the individual members and
more from superb coordination among them.

Mechanisms for coordination include the following:

● Rules and directives: A basic feature of all firms is a general employment
contract under which individuals agree to perform a range of duties as required
by their employer. This allows managers to exercise authority by means of
general rules (“Secret agents on overseas missions will have essential expenses
reimbursed only on production of original receipts”) and specific directives
(“Miss Moneypenny, show Mr Bond his new toothbrush with 4G communica-
tion and a concealed death ray”).

● Mutual adjustment: The simplest form of coordination involves the mutual
adjustment of individuals engaged in related tasks. In soccer or doubles
tennis, players coordinate their actions spontaneously without direction or
established routines. Such mutual adjustment occurs in leaderless teams and
is especially suited to novel tasks where routinization is not feasible.

138 PART II THE TOOLS OF STRATEGY ANALYSIS

● Routines: Where activities are performed repeatedly, coordination becomes
routinized. As we shall see in more detail when we discuss processes,
organizational routines are “regular and predictable sequences of coordinated
actions by individuals” that provide the foundation of organizational capability.
If organizations are to perform complex activities efficiently and reliably, rules,
directives, and mutual adjustments are not enough—coordination must become
embedded in routines.

STRATEGY CAPSULE 6.1

Organizational Culture as an Integrating Device

Corporate culture comprises the beliefs, values, and

behavioral norms of the company, which influence

how employees think and behave.a It is manifest in

symbols, ceremonies, social practices, rites, vocabulary,

and dress. While shared values are effective in aligning

the goals of organizational members, culture exercises

a wider influence on an organization’s capacity for pur-

poseful action. Organizational culture is a complex

phenomenon. It is shaped by the national and ethnic

cultures within which the firm is embedded and the

social and professional cultures of organizational mem-

bers. Most of all, it is a product of the organization’s his-

tory, especially the founder’s personality and beliefs: the

corporate culture of Walt Disney Company continues to

reflect the values, aspirations, and personal style of Walt

Disney. A corporate culture is seldom homogeneous:

different cultures coexist within different functions and

departments.

Culture can facilitate both cooperation and

coordination through fostering social norms and a sense

of identity. Cultures can also be divisive and dysfunc-

tional. At the British bank NatWest during the 1990s, John

Weeks identified a “culture of complaining” which was a

barrier to top-down strategy initiatives.b A culture may

support some types of corporate action but handicap

others. Lehman Brothers (whose collapse in September

2008 triggered the global financial crisis) was renowned

for its individualistic, entrepreneurial culture whose

downside was ineffective risk management. The culture

of the British Broadcasting Corporation reflects internal

politicization, professional values, and dedication to the

public good, but a lack of customer focus.c

Cultures take a long time to develop and cannot

easily be changed. As the external environment changes,

a highly effective culture may become dysfunctional. The

police forces of some US cities have developed cultures

of professionalism and militarism, which increased their

effectiveness in fighting crime, but led to isolation and

unresponsiveness to community needs.d

Despite its power in determining how an orga-

nization behaves, culture is far from being a flexible

management tool at the disposal of chief executives. It

is a property of the organization as a whole, which is not

amenable to manipulation. CEOs inherit rather than cre-

ate the culture of their organizations. The key issue is to

recognize the culture of the organization and to ensure

that structure and systems work with the culture and not

against it. Where strategy is aligned with organizational

culture, it can act as a control device and a source of flex-

ibility: when individuals internalize the goals and princi-

ples of the organization, they can be allowed to use their

initiative and creativity in their work.

Notes:
aE. H. Schein, “Organizational Culture,” American Psychologist 45
(1990): 109–119.
bJ. Weeks, Unpopular Culture: The Ritual of Complaint in a British
Bank (Chicago: University of Chicago Press, 2004).
cT. Burns, The BBC: Public Institution and Private World (London:
Macmillan, 1977).
d“Policing: Don’t Shoot,” Economist (December 13, 2014): 37.

CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS 139

The relative roles of these different coordination devices depend on the types of
activity being performed and the intensity of collaboration required. Rules are highly
efficient for activities where standardized outcomes are required—most quality- control
procedures involve the application of simple rules. Routines are essential for activ-
ities where close interdependence exists between individuals, be the activity a basic
production task (supplying customers at Starbucks) or more complex (performing
a heart bypass operation). Mutual adjustment works best for nonstandardized tasks
(such as problem-solving), where those involved are well informed of the actions of
their coworkers, either because they are in close visual contact (a chef de cuisine and
her sous chefs) or because of information exchange (a design team using interactive
CAD software).

Developing Organizational Capability

Translating strategy into action requires organizational capability. Hence, the develop-
ment and deployment of organizational capabilities lies at the core of strategy imple-
mentation. So far, we have said little about the determinants of organizational capability
beyond recognizing that capabilities involve combining resources to perform a task. Let
us look more closely at the structure of organizational capability in the light of our pre-
ceding discussion of the fundamentals of organizing.

Capabilities require resources, and the level of capability depends, to some degree,
upon the amount and quality of these resources. However, there is more to capa-
bility than resources alone. In sport, all-star teams can be beaten by teams that create
strong capabilities from modest resources. In 1992, the US men’s Olympic basketball
team—the “Dream Team” that included Charles Barkley, Larry Bird, Patrick Ewing,
Magic Johnson, Michael Jordan, Karl Malone, and Scottie Pippen—lost to a team of
college players in one of their practice games. In Euro 2016, the English soccer team,
with a market value of $810 million, was eliminated by Iceland, a team valued at
$30 million. Similarly, in business: upstarts with modest resources can outcompete
established giants—Dyson against Electrolux in domestic appliances, ARM against Intel
in microprocessors, Spotify against Apple in streamed music. Clearly, there is more to
organizational capability than just resources.

The effectiveness with which resources—people especially—are integrated to cre-
ate capabilities depends upon three major factors: processes, motivation, and structure.
These are depicted in Figure 6.2.

ORGANIZATIONAL
CAPABILIT

IES

RESOURCES

Motivation StructureProcesses

FIGURE 6.2 Integrating resources to build capability

140 PART II THE TOOLS OF STRATEGY ANALYSIS

Processes

The academic literature views organizational capability as based upon organizational
routines—“regular and predictable behavioral patterns [comprising] repetitive patterns
of activity” that determine what firms do, who they are, and how they develop.14 Like
individual skills, organizational routines develop through learning-by-doing—and, if
not used, they wither.

However, the academic literature’s emphasis on routines as an emergent phenomenon
ignores the role of management. In practice, patterns of coordination among organi-
zational members to undertake a productive task are planned by managers who use
learning-before-doing as a vital preliminary to learning-by-doing. For this reason, I
emphasize organizational processes over organizational routines, where a process is
a coordinated sequence of actions through which specific productive tasks are per-
formed. Not only is the term process well understood by managers, but there are
established tools for their design, mapping, and development.15

Motivation

Processes provide the basis for team members to coordinate their individual actions;
however, the effectiveness of the coordination depends upon the extent of their
motivation. We discussed motivation in relation to the challenge of aligning the goals
of individuals with those of the organization. Team motivation is more complex: it
depends not only on each individual’s willingness to strive in performing his/her
specific task but also on a willingness to subordinate individuals to team goals. Despite
decades of research, the determinant of exceptional team performance remains a
mystery—which is why outstandingly successful sports coaches—Alex Ferguson,
Joe Gibbs, John Wooden, Scotty Bowman—command huge fees on the corporate
lecture circuits.

Structure

The people and processes that contribute to an organizational capability need to
be located within the same organizational unit if they are to coordinate effectively.
Processes that span internal organizational boundaries rarely achieve high levels
of capability. Until the mid-1980s, European and US automakers used a sequential
system of new product development which began in marketing then went, in turn,
to styling, engineering, manufacturing, and finance. When they adopted the cross-
functional product development teams pioneered by Toyota and Honda, the time to
develop a new model of car was halved.16 As companies develop new capabilities,
so their organizational structures become more complex. Strategy Capsule 6.2 shows
the evolution of organizational structure at a management consulting company as it
developed specialist capabilities.

The design of organizational structure is a broad topic that cannot be reduced to
the simple principle of locating each organizational process within an organizational
unit. So let us consider more generally the basic issues that are involved in the design
of organizational structures.

CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS 141

STRATEGY CAPSULE 6.2

Capability Development and Organizational Structure
at Booz & Company

During the 1990s, Booz Allen Hamilton (now Strategy&,

a subsidiary of PwC) transitioned from a “generalist” to a

“specialist” model of management consulting. Under the

generalist model, consultants were located in one of its

28 offices throughout the world and were then assigned

to one or more consulting projects. The expectation was

that they would develop, through experience, broad-

based consulting expertise that was not specific either

to a particular management function or particular sector.

Booz’s managing partner referred to the firm as “a colony

of artists” (see Figure 6.3a).

During the 1990s, Booz recognized the need to

develop specialist capabilities in relation to individual

management functions (such as strategy, operations,

information technology, and change management) and

specific sectors (e.g., energy, telecom, financial services,

and automobiles). To develop these specialist capabilities,

Booz adopted a matrix structure comprising functional

practices and sector practices (see Figure  6.3b). Hence,

a new consultant or associate joining Booz would be

located within a particular office and assigned to one or

more client teams, but training and career development

purposes would also be part of a functional practice and

a sector practice.

FIGURE 6.3 Booz Allen Hamilton (Worldwide commercial business)

b 1998: Organizing for capabilitya 1992: “A colony of artists”

FUNCTIONAL PRACTICES

P
R
A
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T
I
C
E
S

I
N
D
U
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T
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Y

NY Tokyo

London

Strategy Operations IT
Financial
services

Energy

Telecom

Consumer

Engineering

Chemicals

/Pharma

P r o j e c t Te a m sP r o j e c t Te a m s

NY

Tokyo

London

Project Teams

Project Teams
Project Teams
Project Teams
Project Teams
Project Teams

142 PART II THE TOOLS OF STRATEGY ANALYSIS

Organization Design

Designing structures that can reconcile efficiency through specialization with effective
integration is a major management challenge that is informed by a substantial body of
organizational theory. Let us restrict ourselves to four issues that are especially rele-
vant to implementing strategy. We begin by acknowledging the need for hierarchy—all
organizations are hierarchical to a greater or lesser degree. We go on to consider how
to define organizational units within these hierarchies. We then examine how these
organizational units are configured within the overall structure of the company. Finally,
we look at formality within organizations and the relative merits of mechanistic and
organic structures.

The Role of Hierarchy

Hierarchy is the fundamental feature of all but the simplest organizations and the
primary mechanism for achieving coordination and cooperation. Despite the nega-
tive images that hierarchy often conveys, there are no viable alternatives for complex
organizations—the critical issue is how hierarchy should be structured and how its var-
ious parts should be linked. Hierarchy is a solution both to the problem of cooperation
and the problem of coordination.

Hierarchy as Mechanism for Cooperation: Hierarchy is system of control
through authority: each member of the organization reports to a superior and has
subordinates to supervise and monitor. Hierarchy is a core feature of bureaucracy—
a formalized administrative system devised by the Qin emperor of China in about
220BC, and deployed ever since in public administration, the military, and commerce.
For the German sociologist, Max Weber, bureaucracy was the most efficient and
rational way to organize human activity. It involves “each lower office under the con-
trol and supervision of a higher one”; a “systematic division of labor”; formalization
in writing of “administrative acts, decisions, and rules”; and work governed by stan-
dardized rules and operating procedures. Authority is based on “belief in the legality
of enacted rules and the right of those elevated to authority under such rules to issue
commands.”17

Hierarchy as Coordination: Hierarchy is a feature not only of human organiza-
tions, but of all complex systems:

● The human body comprises subsystems such as the respiratory system, nervous
system, and digestive system, each of which consists of organs, each of which is
made up of individual cells.

● The physical universe is a hierarchy with galaxies at the top, solar systems below,
planets below that, and so on, all the way down to atoms and subatomic particles.

● A novel is organized by chapters, paragraphs, sentences, words, and letters.

The basic principle here is that of modularity: dividing complex systems into hierarchi-
cally organized components.18 Modular, hierarchical structures have two major advan-
tages in coordinating productive activities:

CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS 143

● Economizing on coordination: Hierarchy reduces the amount of communica-
tion needed to coordinate the activities of organizational members. Suppose
that the optimal span of control is five. In a group of six individuals, there
are 15 bilateral interactions, if one member is appointed coordinator, there
are five vertical interactions. Similarly, a group of 25 involves 250 bilateral
interactions; a hierarchical system with a span of control of five requires a
three-tier hierarchy and 24 interactions. The larger the number of organiza-
tional members, the greater the efficiency benefits from organizing hierar-
chically. Complex computer software can require large development teams:
Microsoft’s Windows 8 development team comprised about 3200 software
development engineers, test engineers, and program managers. These were
organized into 35 “feature teams,” each of which was divided into a number
of component teams. As a result, each engineer needed to coordinate only
with the members of his or her immediate team. The modular structure
of the Windows 8 development team mirrored the modular structure of
the product.

● Adaptability: Hierarchical, modular systems can evolve more rapidly than uni-
tary systems. This adaptability requires decomposability: the ability of each
component subsystem to operate with some measure of independence from
the other subsystems. Modular systems that allow significant independence for
each module are referred to as loosely coupled.19 The modular structure of Win-
dows enabled a single feature team to introduce innovative software features
without the need to coordinate with all 34 other teams. The key requirement is
that the different modules must fit together—this requires a standardized inter-
face. Entire companies may be viewed as loosely coupled modular structures. At
Procter & Gamble, decisions about developing new shampoos can be made by
the Beauty, Hair, and Personal Care sector without involving P&G’s other three
sectors (Baby, Feminine, and Family Care; Fabric and Home Care; and Health
and Grooming). A modular structure also makes it easier to add new businesses
and divest others—in 2015, P&G sold its cosmetics and fragrances business
to Coty.20

Organizational capabilities can also be viewed as being organized hierarchically. In
the petroleum sector, drilling capability is composed of several specialist capabilities;
then drilling capability links with other capabilities to form overall exploration capa-
bility (see Figure 6.4). Similarly with Apple’s new product development capability, this

Negotiating
Capability

Geological
Capability

Directional
Drilling

Capability

Well
Logging

Capability

Deepwater
Drilling

Capability

Well
Casing

Capability

Hydraulic
Fracturing
Capability

Seismic
Capability

Drilling
Capability

Well Construction
Capability

Partnering
Capability

Procurement
Capability

Exploration Capability

FIGURE 6.4 The hierarchical structure of organization capabilities: The case of oil
and gas exploration

144 PART II THE TOOLS OF STRATEGY ANALYSIS

too is a higher-level capability that combines an array of lower-level capabilities such as
market insight, microelectronic capability, software engineering, design aesthetics, and
partner relations management. Because these upper-level capabilities integrate such a
broad span of specialist know-how, they are difficult for others to imitate.

Defining Organizational Units

An organizational hierarchy is composed of organizational units—but how should we
define these units? The principle we have established so far is that organizational struc-
ture should be aligned with processes: those who perform a process should be located
within the same organizational unit. The fundamental issue is intensity of coordination
needs: those individuals who need to interact most closely should be located within
the same organizational unit. In the case of McDonald’s, the store managers and crew
members undertake food preparation, cooking, and cleaning: the individual store is the
basic organizational unit. At Infosys Consulting, a client engagement may involve con-
sultants and software engineers at different Infosys offices throughout the world as well
as those at the client site: the project team is the appropriate organizational unit—even
if it is temporary and spans multiple locations. However, individuals’ organizational
roles typically involve them in multiple processes—which should take precedence
when defining organizational units? James Thompson’s answer was “Where interdepen-
dence among organizational members is most intense.”21

Alternative Structural Forms: Functional,
Multidivisional, Matrix

The same principle of defining organizational units in the basis of the intensity of
interdependence also applies to the integration of lower-level organizational units
into higher-level units. On the basis of these alternative approaches to grouping tasks
and activities, we can identify three basic organizational forms for companies: the
functional structure, the multidivisional structure, and the matrix structure.

The Functional Structure Single-business firms tend to be organized by
function. Most airlines have functional structures (see Figure 6.5). Grouping together
functionally similar tasks is conducive to exploiting scale economies, promoting
learning and capability building, and deploying standardized control systems.
Since cross- functional integration occurs at the top of the organization, functional

Finance
Legal &

Regulatory Technology
Human

ResourcesMarketingOperations

Board of Directors

CEO
Michael O’Leary

FIGURE 6.5 Ryanair Holdings plc: Organizational structure

CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS 145

structures are conducive to a high degree of centralized control by the CEO and top
management team.

As functionally organized companies grow and diversify, so there are pressures to
decentralize through adopting a divisional structure (see below). However, as com-
panies and their industries mature, the advantages of efficiency, centralized control,
and well-developed functional capabilities can cause companies to revert to functional
structures. General Motors, a pioneer of the multidivisional structure, integrated its
product divisions and overseas subsidiaries into a more integrated functional structure
as scale economies became its dominant strategic priority.

The Multidivisional Structure In a multidivisional corporation, the divisions are
separate businesses, defined by product or geography. The key advantage of the multi-
divisional structure is the potential for decentralized decision-making. It is a loosely
coupled, modular organization where business-level strategies and operating decisions
can be made at the divisional level, while the corporate headquarters concentrate on
corporate planning, budgeting, and providing common services.

The effectiveness of the multidivisional form depends on the ability of the corporate
center to apply a common management system to the different businesses. At ITT, Harold
Geneen’s “managing by the numbers” allowed him to cope with over 50 divisional heads
reporting directly to him. At BP, a system of “performance contracts” allowed CEO John
Browne to oversee BP’s 24 businesses, each of which reported directly to him. Divi-
sional autonomy also fosters the development of leadership capability among divisional
heads—an important factor in grooming candidates for CEO succession.

The large, divisionalized corporation is typically organized into three levels: the
corporate center, the divisions, and the individual business units, each representing a
distinct business for which financial accounts can be drawn up and strategies formu-
lated. Figure 6.6 shows General Electric’s organizational structure at the corporate and
divisional levels. Chapter 14 will look in greater detail at the management of the multi-
divisional corporation.

Matrix Structure Whatever the primary basis for grouping, all companies that
embrace multiple products, multiple functions, and multiple locations must coordinate
across all three dimensions. Organizational structures that formalize coordination and
control across multiple dimensions are called matrix structures.

Corporate Executive O�ce
Chairman & CEO

Corporate Sta�
-Business Development
-Commercial & Public Relations
-Human Resources

-Legal
-Global Research
-Finance

GE
Power

GE
Digital

GE
Health care

GE
Capital

GE
Renewable

Energy

GE
Aviation

GE Trans-
portation

Current
powered

by GE

Baker
Hughes

FIGURE 6.6 General Electric: Organizational structure, January 2018

146 PART II THE TOOLS OF STRATEGY ANALYSIS

Figure  6.7 shows the Shell management matrix (prior to reorganization in 1996).
Within this structure, the general manager of Shell’s Berre refinery in France reported
to his country manager, the managing director of Shell France, but also to his business
sector head, the coordinator of Shell’s refining sector, as well as having a functional
relationship with Shell’s head of manufacturing.

Many diversified, multinational companies, including Philips, Nestlé, and Unilever,
adopted matrix structures during the 1960s and 1970s, although in all cases one
dimension of the matrix tended to be dominant in terms of authority. Thus, in the
old Shell matrix, the geographical dimension, as represented by country heads and
regional coordinators, had primary responsibility for budgetary control, personnel
appraisal, and strategy formulation.

Since the 1980s, the matrix structure has fallen out of favor and several large corpo-
rations have claimed to have dismantled their matrix organizations: “They led to conflict
and confusion; the proliferation of channels created informational logjams as a pro-
liferation of committees and reports bogged down the organization; and overlapping
responsibilities produced turf battles and a loss of accountability.”22 Yet, any company
that operates over multiple products, multiple functions, and multiple geographical

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OPERATING COM
PAN

IES

FIGURE 6.7 Royal Dutch Shell Group: Pre-1996 matrix structure

CHAPTER 6 ORGANIZATION STRUCTURE AND MANAGEMENT SYSTEMS 147

markets has to coordinate with each of these dimensions. So, all multifunctional, multi-
product, multinational companies are de facto matrix organizations. The problem is
over-formalization, resulting in a top-heavy corporate HQ and over-complex systems
that slow decision-making and dull entrepreneurial initiative. The trend has been for
companies to focus on formal systems of coordination and control on one dimension,
then allowing the other dimensions of coordination to be mainly informal. Thus, while
Shell claims to have dismantled its matrix and organized itself around four business sec-
tors, the reality is that it still has country heads, responsible for coordinating all Shell’s
activities in relation to legal, taxation, and government relations within each country,
and functional heads, responsible for technical matters and best-practice transfer within
their particular function.

Systems and Style: Mechanistic versus Organic
Organizational Forms

So far, we have looked just at structure—the architecture of organizations. Equally
important are the systems through which the structure operates and the management
styles through which these systems are manifest. During the first half of the 20th century,
management thought was dominated by Weber’s theory of bureaucracy and Frederick
Taylor’s rational approach to job design and employee incentives. During the 1950s, the
human relations school of management recognized the importance of social relation-
ships within organizations and adverse impact of inertia and alienation on employee
effort. “Theory X” had been challenged by “Theory Y.”23 The important issue here is
that different types of management suit different circumstances. Among Scottish engi-
neering companies, Burns and Stalker found that firms in stable environments had
mechanistic forms, characterized by formality and high degrees of job specialization;
those in less stable markets had organic forms that were less formal and more flex-
ible.24 Table 6.1 contrasts key characteristics of the two forms.

This principle that an organization’s structure, systems, and management style should
reflect the environment, in which it operates forms the basis of contingency theory—
there is no one best way to organize; it depends upon circumstances.25 Although
Alphabet (Google) and McDonald’s are both large international companies, their struc-
tures and systems are very different. McDonald’s is highly bureaucratized: high levels

TABLE 6.1 Mechanistic versus organic organizational forms

Feature Mechanistic forms Organic forms

Task definition Rigid and highly specialized Flexible and broadly defined

Coordination and control Rules and directives vertically
imposed

Mutual adjustment, common culture

Communication Vertical Vertical and horizontal

Knowledge Centralized Dispersed

Commitment and loyalty To immediate superior To the organization and its goals

Environmental context Stable with low technological
uncertainty

Dynamic with significant technological
uncertainty and ambiguity

Source: Adapted from Richard Butler, Designing Organizations: A Decision-Making Perspective (London: Routledge,
1991): 76, by permission of Cengage Learning.