Crux of OS&D course and learning from case studies

We got 4 case studies to understand the concept of organization structure and design, why we need it, what are the different models, and what works best for what situation. I’m presenting here the learning/takeaways from the 4 case studies we had in our class:

1.      Robin Hood Case (Strategy Formulation)

  • How to formulate a strategy
  • What is a sustainable competitive advantage, positional or competency based
  • Why we need a strategic competitive advantage (Organizations need to create value superior to their competitors)
  • Short term and long term strategy for companies
  • Process model of strategy formulation: Know the purpose, assume, analyze, and formulate strategy, followed by organization structure, and keep on doing it via measuring organization efficiency/output/performance, innovating and building competencies to remain ahead of others.

Key Learning: Organizational structure follows strategy. It’s defined to maintain competitive advantage, and strategy never follows the org design.

2.      Cunningham Motors (Make Vs. Buy)

  • Two ways to build organizations: Within organizations vs. markets
  • Why are companies’ movies towards outsourcing? It’s not about core/non-core, or cost reduction only, it’s also about value maximization. Four main reasons, cost reduction, accessing superior competencies and privileged assets, superior resource leverage, and risk diversification.
  • When can extreme outsourcing succeed: When we have modularity and standardization of outputs, I’m good in drawing and enforcing contracts, I can limit others opportunistic behavior, I can minimize uncertain conditions.
  • Markets do have hidden costs such as transaction costs and strategic risks. So, it may look like that basic org costs are more for producing something, but if we see total picture, org costs may score high on cost reduction.
  • Organizations get formed when markets fail
  • Organizations do have principle-agent issue. It can be solved in two ways, Live with goal divergence, but use direct supervision, rules and regulations, financial incentives and penalties, etc. or Increase Goal convergence, by socializing, aligning, inspiring, motivating and mentoring.
  • Outsourcing sometimes is mindset problem/core rigidities. This mindset is changing, as we are seeing outsourcing of strategic consulting, R&D, etc. by firms now, than never before.

Key Learning: Don’t be rigid when it comes to outsourcing. Now days with complicated technology, full vertical integration is almost impossible. If it fits the bill, and work is not strategic, do go for it. You can outsource even for strategic consulting. Make sure you have control over the markets from where you are buying.

3.      Old car manufacturers Vs. Henry Ford Vs. Alfred Sloan‘s way of managing things  (Craft Vs. Mass Vs. Variety)

  • Old Car manufacturers: “Craft” way, Handmade, highly customized, and highly differentiated for every customer, high on innovation, low on scale. Very high on cost.
  • Henry Ford: Vertical integration, assembly line, standardization, specialization, low variety, high efficiency, very low cost, mass manufacturing, economies of scale -> Totally opposite to the “craft” way of doing things.
  • Alfred Sloan: Multi-divisional structure, breaking the variety-scale trade off, more variety means increase in costs but keeping other things same as Henry’s model.

Key Learning: Choose the way that fits your strategy. Never try to be on both sides, but we can have some variety without sacrificing advantages of standardization, cost reduction and economies of scale.

4.      Acme and Omega (Organizational structured, Input based and Output based)

  • Org structures: Functional, Divisional, Hybrid and Matrix based
  • Functional: Input based, Advantages: Specialized within functions, good repo between managers and subordinates, efficient, feedback is taken positively, Disadvantages: lack the vision of overall goal, functional silos, and bureaucracy and communication issues within divisions. -> Good for medium/big enterprise working with defined output and less uncertainty. Mass production, like Acme. -> Cost Leader
  • Divisional:  Advantages: Output based, business units based on geographies, products, customers, etc., gets the overall vision of product, Disadvantages: Product silos, Redundancy, non-communicating product divisions, lower in depth specialization. -> Good for small/medium enterprise working with lots of uncertainty, complicated requirements, and complex solutions: R&D efforts, like Omega -> can charge premium for product specialization and customization.
  • Hybrid structure: This is combination of functional and divisional but they don’t interfere with each other, for ex. where divisions can be Finance, HR, etc. nonfunctional roles, and then we can have purchase, sales, development, production come under different business units.
  • Matrix structure: One employee, multiple bosses, both functions existing and simultaneously too, Product and functional managers have equal responsibilities and authorities. Advantages: Caters to highly changing environment, innovation driven by in depth specialization, not as redundant as divisional model, Disadvantages: Confusing, Can create politics if not implemented properly, Pseudo bosses, need high degree of coordination
  • Matrix structure looks very confusing, but is being implemented by organizations successfully. Here are the roles people play in this:

i.            Matrix Leader: Power balancing, dual evaluation, bring out conflicts in open, timely resolution, open debates, and provide directions, stretch and challenge.

ii.            Matrix Boss: Source of power is superior customer knowledge and not just hierarchy, treat the same level boss as customer, keeps in mind the bigger goal that is common to both bosses.

iii.            Two Boss Manager: Should not develop affiliations for favors from either of the boss, resolves conflicts involving both bosses

Key Learning: Structure should be such that it helps people to collaborate, rather than restrict any activity. It should render temporariness, so that processes and behavior matters, and not the structure, should prevent power bases so that changes are accepted, develop orientation towards learning and adapting. Matrix structure has got able characteristics, and is good for very large organizations, if implemented properly.

5.      VFM Solutions (Restructuring)

  • Three dimensions to consider while restructuring, strategic objective, job content and human dimension.
  • If size of proposed business is huge, it’s better to create it as a Business unit under upper management/CEO.
  • Also, need to check if new business is one off or strategic aligned with the objective.
  • Can new job be done with existing skill sets? Is there need for training?
  • Have I taken my current important colleagues into confidence and was there enough communication with them?

Key Learning: Restructuring is an important aspect, and where exactly to restructure should be determined after carefully accessing the attributes of the new business, skill set required and aspirations of the existing employees.

 

 

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Competitive Strategy and role of Organization Structure

What is Competitive Advantage: In simple words, it’s the “edge” a particular firm/company is having over it’s rivals and is able to generate more value for it’s stakeholders (customers, employees, suppliers,shareholders, etc)

Competitive Strategy is a strategy to maintain this advantage over rivals. The more sustainable the competitive advantage, the more difficult it is for competitors to neutralize the advantage.

There are two ways to sustain competitive advantage:

  1. Privileged Position: This is just by virtue of you position, and is not sustainable. For example, India is an IT Hub, because of privileged position(low cost, English speaking, good IQ and skilled workforce). Can India or Indian IT companies depend on this position based advantage forever. Time to “think”.
  2. Superior skills and competencies : This is a great way to keep you advantage intact by building on rare and non fungible skills required for a leader. Some examples are quality, brand loyalty, innovation, etc.

Important questions:

  • What is your source of competitive advantage ?
  • Are these based on privileged position or are these based on competencies ?
  • Is your competitive advantage sustainable ?
  • What must we do in the short run and in the long run to maintain / develop sustainable competitive advantage ?

(Refer Robin hood’s case)

Process model of strategy formulation:

  • 3 layered process
  • Step 1: What is the organization goal/purpose? What assumptions are we backing up? What does the analysis of the data available tell us? Do I have a competitive advantage, if yes, is that based on my privileged position or competencies.
  • Step 2:  Design competitive strategy based on your org goal, assumptions and analysis.What should be done to maintain my advantage, or get to my advantage over others.
  • Step 3: Form your organization design to achieve that strategy. Pls note that Org Design should follow Strategy and not other way around.
  • Step 4: Keep on innovating on the skills and processes, measure organization performance and build competencies.

This is an ongoing process, and companies keep on working on this aggresively to maintain supremacy.

[This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji  Some information referred from Wikipedia/other listed sites.]

 

Functional structure vs. Divisional structure

– Functional structure is considered more efficient because people are organized as per the expertise they bring in. Because of this they could deliver the output more efficiently. For the very same reasons, the Divisional structure is not considered efficient as there tend to be the redundancy of resources.

– In Functional structure, the across-function communication is less so the chances of creating Functional silos is more. Divisional structure on the other hands is more flexible and allows for movement of people. Silos are possible here too.

– Functional structure is less flexible whereas Divisional structure is more flexible.

– The Manager or the superior will be an expert in the functional area so there will be more credibility in relaying the feedback. This leads to something called as a Social Specialization. Since Social specialization is missing in Divisional organization, the feedback mechanism may not be fully trust-worthy.

 [This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji . Some information referred from Wikipedia/other listed sites.]

Different types of Organization structures

– Functional structure

– Divisional structure

– Hybrid structure (which includes both Functional and Divisional structure)

– Matrix structure

 Some points:

– Entrepreneurial Organization is the one in which everyone does everything.

– Functional structure is quite skin to Input based organization. It means that People are organized as per the Input/skills they bring in.

– Divisional structure is more like Output based grouping.

– Divisional structure is quite prevalent in the multi-product organizations. Individual functions exists within each org.

– The key question in Divisional structure is on what factor the output will be based on. It could be Product, Geography, Customers.

– Most large software companies are Output based.

– Matrix structure somewhat violates- One person0One boss notion.

– ABB was one of the first company to have imbibed Matrix structure. To make it work they prepared and circulated huge documentation on how to make it work. US Defense is another example.

[This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji . Some information referred from Wikipedia/other listed sites.]

Organization Structure: General Motors vs Ford

General Motors:

– General motors (GM) structure was decentralized.

– They brought in the concept of organization structures based on Business units.

– GM was based on many business units (some through acquisitions) like BUIC, CHEVY, OYM, CADILLAC, PONTAC).

– For each of Business units, GM appointed a General Manager who was like a CEO of that particular business unit.

– Till 2006 or so GM was the highest producer of Cars.

– GM’s organization structure was more based on output i.e. various Product divisions.

 Ford:

– Ford had pioneered the Vertical Integration model. Over a period of years, they had acquired mines and Steel plants and integrated with their production/supply chain.

– Ford’s was a functional organization structure.

– Ford’s structure was grouped with Inputs. i.e on the basis of functional inputs.

[This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji . Some information referred from Wikipedia/other listed sites.]

Organizations and the choice of Cost effectiveness or specialization

Porter mentioned that Organizations have to make their choices. You either make cost effective organizations or a specialized one.

– Some examples here as below:

1. Maruti launched the cost effective cars in India first. Everyone went for Maruti as their first car but when it came to second car, people rarely went for Maruti. Because it was branded as a low cost car, people didn’t want to be seen as driving Maruti as a their second car (as it would not be seen as luxury).

Maruti had successfully captured the cost sensitive segment but despite good quality high end cars, they could not fully capture the market.

2. Toyota earlier captured US market in the low cost segment. But when they had to get into the Luxury segment they launched the Lexus brand. Only catch with Lexus brand was that it did not have Toyota logo. That way customers could be associate it with a low cost brand. In today’s information age, though, it may not be able to achieve what Toyota did with Lexus.

[This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji . Some information referred from Wikipedia/other listed sites.]

Production (Mass Production) model vs Innovation model

– Mass manufacturing result in standardization, efficiency and cost reduction.

– McDonalds is an example of Mass manufacturing. They have a 900 page book that specifies on what each employee is meant to do. They don’t deviate from their standard process (not even the menu).

– Courier business is another example where similar type of transactions are repeated. It is a large skill and low variety business.

– Indian IT has a production model and not necessary an Innovation model.

– Unlike manufacturing, the R&D and production in case of IT is mixed (Automobiles, for example have different groups focusing on R&D and Production).

– Process Innovation has been more associated with Indian IT than the Product Innovation.

[This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji . Some information referred from Wikipedia/other listed sites.]

Henry Ford’s idea of standardization and Indian Software Industry

F.W. Taylor was the first Industrial Engineer.

– Industrial Engineering at the most basic level involves timing people doing the tasks, Study the behaviour and coming up with Optimal speed. The idea is to arrive at the Best practice and an Optimum process.

– Process is codifying the best way of doing things. Once you find the best way to do things, you standardize.

– Henry Ford is said to be influenced by F.W. Taylor.

– Before Ford, Cars were earlier manufactured using the Craft production method.

Craft production is the process of manufacturing by hand with or without the aid of tools. The term Craft production refers to a manufacturing technique applied in the hobbies of Handicraft but was also the common method of manufacture in the pre-industrialized world.

– Ford changed the Craft production method. Basically followed Taylor’s method of breaking the car manufacturing into smaller steps. Basically deskilled the car manufacturing process and made the whole process so simple that people with no education can get trained and do the job.

– Ford formed the idea of Assembly line inspired by the butcher shop.

– Ford’s idea of standardization was- “You can have any color of car as long as it was black”

– This process somewhat have analogy with Indian Software Services industry. It moved away from heroic programming work. The basis is how quickly an organization can pick-up non-computer science graduate, train him/her and make them do the job.

Such people will also have less bargaining power.

[This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji . Some information referred from Wikipedia/other listed sites.]

Errors in the Selection process

There are two type of Errors in the selection process-

1. Type-1- Meaning Selection of the wrong candidates

2. Type-2- Meaning not Selecting the right candidates

The terms Type-1 and Type-2 errors is taken from statistics. More details here-

http://en.wikipedia.org/wiki/Type_I_and_type_II_errors

[This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji . Some information referred from Wikipedia/other listed sites.]

Organizations and the Free-rider problem

– The basis of the Free rider problem in the organization is that not everyone in the organization puts in great efforts because there are others doing the work.

– As Wikipedia [1] defines, A free rider, in economics, refers to someone who benefits from resources, goods, or services without paying for the cost of the benefit.

– Some individuals in a team or community may reduce their contributions or performance if they believe that one or more other members of the group may free ride.

– As a further Example, In a labor union, free riding occurs if an employee pays no union dues or agency shop fees, but benefits from union representation.

[This blog is captured from “Organization Structure and Design” class notes (by Prof Sourav Mukherji . Some information referred from Wikipedia/other listed sites.]

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