Organizational Structure
Summary Chapter 8-14
Chapter 8: Organizational Design and Strategy in a Changing Global Environment
Strategy: The specific pattern of decisions and actions that managers take to use core competences to achieve a
competitive advantage and outperform competitors.
Core competences: The skills and abilities in value-creation activities that allow a company to achieve superior
efficiency, quality, innovation, or customer responsiveness.
Sources of core competences
Specialized resources
1. Functional resources: the skills possessed by an
organization’s functional personnel -> need to be unique
or special and difficult to imitate
2. Organizational resources: the company-specific skills
and competence (skills of top management team. Vision
of the CEO, possession of scarce resources)
Coordination abilities: the ability to coordinate its functional
and organizational resources to create the most value
➔ Organization’s ability to coordinate and motivate function
cannot be imitated
! The way an organization coordinates people and resources
within functions determines the strength of the core competences !
Global expansion of core competences
Expanding globally can be an important facilitator of the development of an organization’s core competences.
Value creation begins when a core competence is transferred to another market to produce cheaper or improved
products that will give the organization a low-cost or differentiation advantage.
1. Transfer of core competences abroad
2. Establishing a global network: locates value-creation activities in countries where economic, political, and
cultural conditions are likely to enhance low-cost or differentiation advantage
3. Gaining access to resources and skills
4. Learning to enhance core competences: after learning new functional skills in one country, it can transfer it
to its domestic base, and then to all foreign operations
Dangers:
● Risk of losing control of its core skills by sharing it with foreign partners
● When outsourcing a functional activity, the organization is no longer able to invest resources into improving its
skill in that activity
Four levels of strategy
Functional-level: a plan of action to strengthen an organization's resources and coordination a abilities to create core
competences (Functional Managers)
Organization must be able to perform functional activities
1. at a lower cost compared to its rivals, to charge lower prices
2. in a way that allows it to differentiate its products from those of its rivals so that they can charge higher or
premium prices
An organization’s design should permit each function to develop a structure that suits its resources.
Structure best for development of function abilities: Mechanistic, flat, decentralized structure
1
,Business-level: a plan to use an organization’s functional core competences to position it so it has a competitive
advantage in its domain or segment of its industry (Top-management team)
1. Low-cost: can use its skills in low-cost value creation to produce for a customer group that wants low-priced
goods and service
2. Differentiation: use its skills at differentiation to produce for a customer group that wants and can afford
differentiated products that command a high/premium price
Low-cost strategy Differentiation strategy
Environment Slow moving Complex, uncertain, quick moving
Structure mechanistic structure organic structure, as it permits the development
of a decentralized, cross-functional team
Structure for close control of approach to decision making
functional activities
Focuses on one or few Produce a wide range of products (product
products structure)
Handling different groups of customers (market
or geographical structure)
Rapid product development and speedy
response to competitors (product team or matrix
structure)
Culture Develop values of economy Need to be different and to develop innovative
and frugality products increases product developments’ and
marketing’s importance
A common language, a code
of behavior based on Organic structure fosters the development of
low-cost values cultural values of innovation, quality, excellence,
and uniqueness
Mechanistic structure fosters
values that focus attention
on improving existing rules
2
, 3. Focus strategy: the organization specializes in one segment of a market and focuses all their resources on
that segment
Three factors affect an organization’s choice of a
structure to create a competitive advantage for itself:
1. As an organization produces a wider range of
products, it will need greater control over the
development, marketing, and production.
2. As an organization tries to find new customer
groups, it will need a structure that allows it to
serve the needs of its customers.
3. As the pace of new product development in an
industry increases, an organization will need a
structure that increases coordination among its
functions.
Corporate-level: a plan to use and develop competences so that the organization can protect and enlarge its current
domain and expand into new ones (Corporate-level managers)
Vertical integration: A strategy in which an organization takes over and
owns its suppliers (backwards vertical integration) or its distributors
(forward vertical integration)
How it enhances core competences in value creation:
● Keep profits previously earned by others
● Lower cost assembly of inputs
● Control reliability and quality inputs
● Seize unique inputs -> unique products
● If only few suppliers -> reduce dependence
● Backward integration -> control distribution
Related diversification: the entry into a new domain that is related in some way to an organization’s domain
● New domain -> can use existing core competences there -> create low-cost / differentiated competitive
advantages there
● Related diversification → requires lateral communication between divisions + vertical communication between
divisions and headquarters → integrating teams and roles of functional experts are needed → coordinate skill
and resource transfers
● Much larger headquarters staff + more managerial time and effort needed
● If severe coordination problems → multidivisional matrix structure
● Much greater bureaucratic costs
● More communication and coordination needed
Unrelated diversification: the entry into a new domain that is not related in any way to an organization’s core domain
● A specific core competence: top-management team’s ability to operate and coordinate
● If taking over an inefficient organization → create value that has not existed previously
3
Summary Chapter 8-14
Chapter 8: Organizational Design and Strategy in a Changing Global Environment
Strategy: The specific pattern of decisions and actions that managers take to use core competences to achieve a
competitive advantage and outperform competitors.
Core competences: The skills and abilities in value-creation activities that allow a company to achieve superior
efficiency, quality, innovation, or customer responsiveness.
Sources of core competences
Specialized resources
1. Functional resources: the skills possessed by an
organization’s functional personnel -> need to be unique
or special and difficult to imitate
2. Organizational resources: the company-specific skills
and competence (skills of top management team. Vision
of the CEO, possession of scarce resources)
Coordination abilities: the ability to coordinate its functional
and organizational resources to create the most value
➔ Organization’s ability to coordinate and motivate function
cannot be imitated
! The way an organization coordinates people and resources
within functions determines the strength of the core competences !
Global expansion of core competences
Expanding globally can be an important facilitator of the development of an organization’s core competences.
Value creation begins when a core competence is transferred to another market to produce cheaper or improved
products that will give the organization a low-cost or differentiation advantage.
1. Transfer of core competences abroad
2. Establishing a global network: locates value-creation activities in countries where economic, political, and
cultural conditions are likely to enhance low-cost or differentiation advantage
3. Gaining access to resources and skills
4. Learning to enhance core competences: after learning new functional skills in one country, it can transfer it
to its domestic base, and then to all foreign operations
Dangers:
● Risk of losing control of its core skills by sharing it with foreign partners
● When outsourcing a functional activity, the organization is no longer able to invest resources into improving its
skill in that activity
Four levels of strategy
Functional-level: a plan of action to strengthen an organization's resources and coordination a abilities to create core
competences (Functional Managers)
Organization must be able to perform functional activities
1. at a lower cost compared to its rivals, to charge lower prices
2. in a way that allows it to differentiate its products from those of its rivals so that they can charge higher or
premium prices
An organization’s design should permit each function to develop a structure that suits its resources.
Structure best for development of function abilities: Mechanistic, flat, decentralized structure
1
,Business-level: a plan to use an organization’s functional core competences to position it so it has a competitive
advantage in its domain or segment of its industry (Top-management team)
1. Low-cost: can use its skills in low-cost value creation to produce for a customer group that wants low-priced
goods and service
2. Differentiation: use its skills at differentiation to produce for a customer group that wants and can afford
differentiated products that command a high/premium price
Low-cost strategy Differentiation strategy
Environment Slow moving Complex, uncertain, quick moving
Structure mechanistic structure organic structure, as it permits the development
of a decentralized, cross-functional team
Structure for close control of approach to decision making
functional activities
Focuses on one or few Produce a wide range of products (product
products structure)
Handling different groups of customers (market
or geographical structure)
Rapid product development and speedy
response to competitors (product team or matrix
structure)
Culture Develop values of economy Need to be different and to develop innovative
and frugality products increases product developments’ and
marketing’s importance
A common language, a code
of behavior based on Organic structure fosters the development of
low-cost values cultural values of innovation, quality, excellence,
and uniqueness
Mechanistic structure fosters
values that focus attention
on improving existing rules
2
, 3. Focus strategy: the organization specializes in one segment of a market and focuses all their resources on
that segment
Three factors affect an organization’s choice of a
structure to create a competitive advantage for itself:
1. As an organization produces a wider range of
products, it will need greater control over the
development, marketing, and production.
2. As an organization tries to find new customer
groups, it will need a structure that allows it to
serve the needs of its customers.
3. As the pace of new product development in an
industry increases, an organization will need a
structure that increases coordination among its
functions.
Corporate-level: a plan to use and develop competences so that the organization can protect and enlarge its current
domain and expand into new ones (Corporate-level managers)
Vertical integration: A strategy in which an organization takes over and
owns its suppliers (backwards vertical integration) or its distributors
(forward vertical integration)
How it enhances core competences in value creation:
● Keep profits previously earned by others
● Lower cost assembly of inputs
● Control reliability and quality inputs
● Seize unique inputs -> unique products
● If only few suppliers -> reduce dependence
● Backward integration -> control distribution
Related diversification: the entry into a new domain that is related in some way to an organization’s domain
● New domain -> can use existing core competences there -> create low-cost / differentiated competitive
advantages there
● Related diversification → requires lateral communication between divisions + vertical communication between
divisions and headquarters → integrating teams and roles of functional experts are needed → coordinate skill
and resource transfers
● Much larger headquarters staff + more managerial time and effort needed
● If severe coordination problems → multidivisional matrix structure
● Much greater bureaucratic costs
● More communication and coordination needed
Unrelated diversification: the entry into a new domain that is not related in any way to an organization’s core domain
● A specific core competence: top-management team’s ability to operate and coordinate
● If taking over an inefficient organization → create value that has not existed previously
3
