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Reasons for C hanging an Organization’s Structure

19 January, 2016 - 16:58

Creating an organizational structure is not a onetime activity. Executives must revisit an organization’s structure over time and make changes to it if certain danger signs arise. For example, a structure might need to be adjusted if decisions with the organization are being made too slowly or if the organization is performing poorly. Both these problems plagued Sears Holdings in 2008, leading executives to reorganize the company.

Figure 9.12 Although it was created to emphasize the need for unity among the American colonies, this famous 1754 graphic by Ben Franklin also illustrates a fundamental truth about structure: If the parts that make up a firm do not work together, the firm is likely to fail
 

Sears’s new structure organized the firm around five types of divisions: (1) operating businesses (such as clothing, appliances, and electronics), (2) support units (certain functional areas such as marketing and finance), (3) brands (which focus on nurturing the firm’s various brands such as Lands’ End, Joe Boxer, Craftsman, and Kenmore), (4) online, and (5) real estate. At the time, Sears’s chairman Edward S. Lampert noted that “by creating smaller focused teams that are clearly responsible for their units, we [will] increase autonomy and accountability, create greater ownership and enable faster, better decisions.” 1Unfortunately, structural changes cannot cure all a company’s ills. As of July 2011, Sears’s stock was worth just over half what it had been worth five years earlier.

Sometimes structures become too complex and need to be simplified. Many observers believe that this description fits Cisco. The company’s CEO, John Chambers, has moved Cisco away from a hierarchical emphasis toward a focus on horizontal linkages. As of late 2009, Cisco had four types of such linkages. For any given project, a small team of people reported to one of forty-seven boards. The boards averaged fourteen members each. Forty-three of these boards each reported to one of twelve councils. Each council also averaged fourteen members. The councils reported to an operating committee consisting of Chambers and fifteen other top executives. Four of the forty-seven boards bypassed the councils and reported directly to the operating committee. These arrangements are so complex and time consuming that some top executives spend 30 percent of their work hours serving on more than ten of the boards, councils, and the operating committee.

Because it competes in fast-changing high-tech markets, Cisco needs to be able to make competitive moves quickly. The firm’s complex structural arrangements are preventing this. In late 2007, Hewlett-Packard (HP) started promoting a warranty service that provides free support and upgrades within the computer network switches market. Because Cisco’s response to this initiative had to work its way through multiple committees, the firm did not take action until April 2009. During the delay, Cisco’s share of the market dropped as customers embraced HP’s warranty. This problem and others created by Cisco’s overly complex structure were so severe that one columnist wondered aloud “has Cisco’s John Chambers lost his mind?” 2 In the summer of 2011, Chambers reversed course and decided to return Cisco to a more traditional structure while reducing the firm’s workforce by 9 percent. Time will tell whether these structural changes will boost Cisco’s stock price, which remained flat between 2006 and mid-2011.

KEY TAKEAWAY

  • Executives must select among the four types of structure (simple, functional, multidivisional, and matrix) available to organize operations. Each structure has unique advantages, and the selection of structures involves a series of trade-offs.

EXERCISES

  1. What type of structure best describes the organization of your college or university? What led you to reach your conclusion?
  2. The movie Office Space illustrates two types of structures. What are some other scenes or themes from movies that provide examples or insights relevant to understanding organizational structure?