San Borja
D. CONTRATO DE OBRA
As an organization increases the kinds of goods it manufactures or the services it provides, a functional structure becomes less effective at coordinating task activities. Imagine the co- ordination problems a furniture maker like IKEA would experience if it were to produce 100 styles of sofas, 150 styles of tables, and 200 styles of chairs in the same manufacturing unit. Gaining sufficient control over its value-creation activities would be impossible. To maintain effectiveness and simplify control problems as the range of its products increases, an organization groups its activities not only by function but also by type of product. To simplify control problems, a furniture maker might create three product groups or divisions: one to make sofas, one for tables, and one for chairs. A product structure is a divisional structure in which products (goods or services) are grouped into separate divi- sions, according to their similarities or differences, to increase control.
An organization that decides to group activities by product must also decide how to coordinate its product divisions with support functions like R&D, marketing and sales, and accounting. In general, an organization can make two choices: (1) centralize the support functions at the top of the organization so one set of support functions services all the dif- ferent product divisions, or (2) create multiple sets of support functions, one for each prod- uct division. In general, the decision that an organization makes reflects the degree of com- plexity of and difference among its products. An organization whose products are broadly similar and aimed at the same market will choose to centralize support services and use a
product division structure. An organization whose products are very different and that
operates in several different markets or industries will choose a multidivisional structure. An organization whose products are very complex technologically or whose characteristics change rapidly to suit changing customer needs will choose a product team structure.
Product Division Structure
A product division structure is characterized by the splitting of the manufacturing func- tion into several different product lines or divisions; a centralized set of support functions then services the needs of all these product divisions. A product division structure is com- monly used by food processors, furniture makers, and companies that make personal care products, paper products, or other products that are broadly similar and use the same set Divisional structure
A structure in which functions are grouped together according to the specific demands of products, markets, or customers.
CHAPTER 6 • DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 155
Figure 6.4 Product Division Structure
Each product division manager (PDM) has responsibility for coordinating with each support function.
Centralized support functions Canned Soups Division PDM Frozen Vegetables Division PDM Frozen Entrees Division PDM Baked Goods Division PDM Divisions Vice President Sales and Marketing Vice President Research and Development Vice President Materials Management Vice President Finance CEO
of support functions. Figure 6.4 shows a product division structure for a large food processor such as Heinz.
Because controlling the production of many different foods within the same manufac- turing unit proved to be difficult and resulted in increasing costs, Heinz created separate product divisions that make frozen vegetables, frozen entrees, canned soups, and baked goods. This design decision increased horizontal differentiation within the organization, for each division is a separate manufacturing unit that has its own hierarchy headed by a product division manager. Each product division manager (PDM in Figure 6.4) is respon- sible for his or her division’s product (manufacturing or service) activities. The product division manager also coordinates with the central support functions like marketing and materials management to make effective use of their skills and thus enhance product de- velopment. The role of product division manager adds a level to the hierarchy or authority and so also increases vertical differentiation in an organization.
Figure 6.4 shows that in a product division structure, support functions such as sales and marketing, R&D, materials management, and finance are centralized at the top of the organization. Each product division uses the services of the central support functions and does not have its own support functions. Creating separate support functions for each product division would be expensive, and the cost could be justified only if the needs of the different divisions were so diverse and dissimilar that different functional special- ists were required for each type of product.
Each support function is divided into product-oriented teams of functional specialists who focus on the needs of one particular product division. Figure 6.5 shows the grouping of the R&D function into four teams, each of which focuses on a separate product divi- sion. This arrangement allows each team to specialize and become expert in managing the needs of its own product group. However, because all of the R&D teams belong to the same centralized function, they can share knowledge and information. The R&D team that focuses on frozen vegetables can share discoveries about new methods for quick-freezing vegetables with the R&D team for frozen entrees. Such sharing of skills and resources increases a function’s ability to create value across product divisions.
156 PART 2 • ORGANIZATIONAL DESIGN
Figure 6.5 The Assignment of Product-Oriented Functional
Teams to Individual Divisions
Canned Soups Division PDM Frozen Vegetables Division PDM Frozen Entrees Division PDM Baked Goods Division PDM Team 1
Research and Development
Team 2 Team 3 Team 4
Multidivisional Structure
As an organization begins to produce a wide range of complex products, such as many car or truck models, or to enter new industries and produce completely different products, such as appliances, lightbulbs, turbines, and financial services as with GE, the product division structure cannot provide the control the organization needs. Managing complex and di- verse value-creation activities requires a multidivisional structure, a structure in which each product division is given its own set of support functions so they become self-contained divi- sions. Figure 6.6 depicts the multidivisional structure used by a large consumer products Multidivisional structure
A structure in which support functions are placed in self- contained divisions.
Figure 6.6 Multidivisional Structure
Each division is independent and has its own set of support functions. The corporate headquarters staff oversees the activities of the divisional managers, and there are three levels of management: corporate, divisional, and functional.
CEO
Corporate Headquarters Staff
Corporate Managers Divisional Managers Functional Managers Support functions Senior Vice President Marketing Senior Vice President Finance Senior Vice President Materials Management Senior Vice President Research and Development
Support functions Support functions Support functions
CHAPTER 6 • DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 157
company. Four divisions are illustrated, although a company such as GE, IBM, Johnson & Johnson, or Matsushita might have 150 different operating divisions.
Compare the multidivisional structure shown in Figure 6.6 with the product division structure shown in Figure 6.4. A multidivisional structure has two innovations that over- come the control problems a company experiences with the product division structure when managers decide to produce a wider and wider range of different products in differ- ent industries.4The first innovation is the independence of each division. In a multidivi- sional structure, each division is independent and self-contained (in a product division structure, the divisions share the services of a set of centralized functions). When divisions are self-contained, each division has its own set of support functions and controls its own value-creation activities. Each division needs its own set of support functions because it is impossible for one centralized set of support functions to service the needs of totally dif- ferent products—such as automobiles, computers, and consumer electronics. As a result, horizontal differentiation increases.
The second innovation in a multidivisional structure is a new level of management, a corporate headquarters staff, composed of corporate managers who are responsible for overseeing the activities of the divisional managers heading up the different divisions.5 The corporate headquarters staff is functionally organized, and one of the tasks of corpo- rate managers is to coordinate the activities of the divisions. For example, managers at corporate headquarters can help the divisions share information and learn from one an- other so that divisional innovations can be quickly communicated throughout the organi- zation. Recall from Chapter 4 that managers acting in that way are performing an
integrating role.
Because corporate managers now form an additional level in the hierarchy, vertical differentiation has increased, which provides more coordination and control. The heads of the divisions (divisional managers) link corporate headquarters and the divisions. Compared to a functional or a product division structure, a multidivisional structure pro- vides additional differentiation and integration, which facilitate the control of more com- plex activities.
A corporate staff and self-contained divisions are two factors that distinguish a multi- divisional structure from a product division structure. But there are other important differ- ences between them. A product division structure can only be used to control the activities of a company that is operating in one business or industry. In contrast, a multidivisional structure is designed to allow a company to operate in many different businesses. Each di- vision in a multidivisional structure is essentially a different business. Moreover, it is the responsibility of each divisional manager to design the divisional structure that best meets the needs of the products and customers of that division. Thus one or more of the inde- pendent divisions within a multidivisional structure could use a product division structure or any other structure to coordinate its activities. Figure 6.7 illustrates this diversity.
The multidivisional organization depicted in Figure 6.7 has three divisions, each with a different structure. The car-making division has a functional structure because it pro- duces a small range of simple components. The PC division has a product division struc- ture; each of its divisions develops a different kind of computer. The consumer electronics division has a matrix structure (which we discuss later in the chapter) because it has to re- spond quickly to customer needs. GE has over 150 different divisions. Its lightbulb divi- sion has a functional structure and its appliance division operates with a product division structure, but the whole GE empire is operated through a multidivisional structure.
Most Fortune 500 companies use a multidivisional structure because it allows them to grow and expand their operations while maintaining control over their activities. Only when an organization has a multidivisional structure does the management hierarchy expand to include the three main levels of management: corporate managers, who over- see the operations of all the divisions; divisional managers, who run the individual divi- sions; and functional managers, who are responsible for developing the organization’s core competences. See Organizational Insight 6.1, which describes the history of GM’s decision to move to a multidivisional structure, illustrates many of the issues and prob- lems involved in operating a multidivisional structure, and reveals differences between it and a product division structure.
Self-contained division A division that has its own set of support functions and controls its own value-creation activities.
Corporate headquarters staff
Corporate managers who are responsible for overseeing the activities of the divisional managers heading up the different divisions.
158 PART 2 • ORGANIZATIONAL DESIGN
Figure 6.7 A Multidivisional Structure in Which Each Division Has a Different Structure
CEO
Corporate Headquarters Staff
Functional Groups
Functional Structure
Automotive Products Division
Product Division Structure
Personal Computers Division
Matrix Structure
Consumer Electronics Division Senior Vice President Marketing Senior Vice President Finance Senior Vice President Materials Management Senior Vice President Research and Development
Functional Groups Functional Groups
President
General Manager President
W
illiam C. Durant formed the General Motors Company on September 16, 1908. Into it he brought about 25 different companies. Originally, each company retained its own operating identity, and the GM organization was simply a holding company, a central office sur- rounded by 25 satellites. When Alfred P. Sloan took over as president of GM in 1923, he inherited this collection of independently managed car companies, which made their own decisions, did their own R&D, and produced their own range of cars.Ford, GM’s main competitor, was organized very differently. From the beginning, Henry Ford had pursued the advantages of economies of scale and mass production and designed a mechanistic structure to achieve them. He created a highly centralized organization in which he had complete personal control over important decision making. To re- duce costs, Ford at first produced only one vehicle, the Model T, and focused on finding ways to make the car more efficiently. Because of its organizational design, Ford’s company was initially much more prof- itable than GM. The problem facing Sloan was to compete with Ford,
not only in terms of making a successful product but also to improve GM’s financial performance.
Confronted with Ford’s success, Sloan must have been tempted to close several of GM’s small operations and concentrate production in a few locations where the company could enjoy the benefits of cost savings from making fewer models and from economies of scale. For example, he could have chosen a product division structure, created three product divisions to manufacture three kinds of car, and central- ized support functions such as marketing, R&D, and engineering to reduce costs. But Sloan recognized the advantages of developing the diverse sets of research, design, and marketing skills and competences present in the small car companies. He realized there was a great risk of losing this diversity of talent if he combined all these skills into one centrally located R&D department. Moreover, if the same set of sup- port functions, such as engineering and design, worked for all of GM’s divisions, there was a danger that all GM cars would begin to look alike. Nevertheless, Sloan also recognized the advantages of central- ized control in achieving economies of scale, controlling costs, and providing for the development of a strategic plan for the company as a whole, rather than for each company separately.