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Two themes that run throughout the course are (a) that organizational structures and processes are shaped by a several factors or contingencies and that (b) that all organizational forms are characterized by dilemmas and trade-offs - for example between autonomy and control; flexibility and consistency; quality vs. speed of decision-making and so on.
Drawing on examples from your own experience, or from material covered in the course, map out the key factors that shape organizations and explain the trade-offs inherent in any organizational design, identifying examples of how such trade-offs may be resolved.
History of Organization Structure
"An organization exists because the objective of the organization is pursued by several people together. The combination several people and an objective asks for division of tasks (horizontal or vertical division of tasks) and for agreements (coordination, transfer of will concerning the goal, or acting by order in a hierarchy)" - Henry Mintzberg, 1979
Toward the end of 18th century up to the early 19th century, industrial revolution in US, led to a need for further formalized structures in big organizations. The traditional models focused on efficiency of processes through supervisory or managerial control. Termed as "Mechanistic," these models were defined by extensive rules and procedures, centralized decision making, and a clear division of labor. These organizations were more like machines and usually differentiated workers by their functions, such as finance, production, sales and marketing etc.
Between 1920 and 1930, novel concepts about the organizational structures were introduced. Many behaviorists and thinkers worked in this direction, such as George Elton Mayo (Buchanan 2010, p305), who did the famous "Hawthorne Experiments". These experiments resulted in giving a "humanistic" view to organization structures. These theoretical structures were distinguished as "organic" and help recognize the significance of human behavior and cultural influences in organizations. Whilst the mechanistic model stressed upon efficiency and production by control, organic models advocated flexibility and adaptability by employee empowerment. From a structural view point, mechanistic organizations were vertical or hierarchical and decisions used to flow down via several channels. Organic structures, on the contrary, were relatively flat, or horizontal, and had lesser managerial levels or centralized controls. (Grant 2005)
Case from own experience : Goodyear Tire and Rubber Company
Asia Pacific, India Operations and Structural changes
We will discuss different aspects of structural transformation by Goodyear India from Functional to Divisional (Product based) form.
Company Profile: Goodyear is one of the world's largest tire companies, with operations in most regions of the world. Together with its subsidiaries and joint ventures, Goodyear manufactures markets and sells tires for most applications. Goodyear operates more than 57 plants in 23 countries, with its world headquarters located in Akron, OH, USA. Goodyear specializes in different sectors like Automotive, aviation, commercial, consumer, motorcycle, earthmover and re-tread.
Company's structure in India (before 2008)
India operations are a part of Goodyear's Asia-pacific unit. To start with initially there was a Functional organization structure being followed for many decades in India. The hierarchy is shown in the figure-1 below
Figure above suggest that Goodyear had a very simple, conventional and formal organizational structure However, the Span of control (see Appendix) was different at different levels. It was higher at the bottom line of the organization where a sales manager has to manage a team of 5-6 sales persons. Moreover, this hierarchy existed in other functions as well like production, customer service and operations etc. The figure above also hints the lack of coordination between different functions of the organization.
Shapers which influenced Structural change for Goodyear India
Relevant factors (Mintzberg 1993) which influenced Structural change for Goodyear India
Age and Size- As Goodyear was a global tyre giant and was well established in India, (since 1962) it had a very deep and solid network of retailers across Indian states. Its systems and procedures were well formalized in the market from top of the management to a retailer. Marketing strategy was quite obvious and market knew that when and how to deal with Goodyear. This hampered the speed at which company grew.
Technology, Failure to innovate- The range of Goodyear tyres being marketed up till 2008 had become obsolete and there was a need of new products to compliment rapid developments in automobile sector in terms of engine power, braking efficiencies. Other factors which gained significant for consumers were safety, comfort and driving experience. Despite having a wide range globally, Goodyear could not replace new products because of excessive standardization of products, resistance to change from factory employees, sales team and retailers.
Environment- It was not easy to keep up with the pace of market demands and service requirements with a common strategy for a diverse country like India. As other competitors like Bridgestone and Michelin entered Indian market with more customer focused approach in their different product segments, Goodyear also felt the need to change its strategy of operations in Asia pacific.
An additional factor was that in the emerging Indian market, more value added products were being introduced by competitors which forced Goodyear to launch its new product ranges for different types of tyre customers, thereby complicating the environment.
Strategy- The Place, Promotion and People for different products marketed by Goodyear, became too obtuse to each other due to growth in market size and arrival of competitors. Customer became aware of the features he wanted in his car tyre or truck tyre, so to say. The Four Ps of marketing forced Goodyear to change its functional structure and move to a Product based Unit structure. With a growing market Products became more and more specific to customers need, passenger car tyres started to offer different value additions than truck tyre. Place where these products can be sold started to differentiate as car tyres were being sold in city's posh retail showrooms and truck tyres were being sold at relatively secluded locations far outside of a city at transport hubs where trucks used to load and offload goods. One single strategy to increase business was not enough to retain or gain overall market share. (Cummins 2008)
Delays in decision making: A more formalized structure resulted in slow decision making process and which resulted in dissatisfaction and reduced effect and success ratio of a decision. The flexibility in handling customers, vendors, and processes is at a cost. Employees in these roles should yield faster time to market or better customer knowledge and relationships. Another cost is the time spent resolving conflicts. Managers for customer segments, products, and functions all see the world differently. Disagreement and the inability to resolve issues effectively slowed the company response and turned the focus inward rather than on customers. (Dyck 2010)
Low morale due to:
Un-acceptable decisions- Decisions taken at the strategic apex (see appendix) were mostly generic in nature and were not as effective as they expected to be. To some they were favourable but some others they were not as effective for their market segment.
Unclear performance criteria: Performance recognition by HR was based on a set of criteria, factors of which were not being applicable to all of the employees equally.
Conflicting expectations/pressures: Company's expectations of volumes was a mix of different products, production were not entirely aligned. Sales team wanted to sell a particular product; factory was producing another resulting in higher inventories at each stocking point, creating uneven pressure situations.
Buyer Power: More and more companies are increasing their expenditure in R&D to add more value to its products. This has resulted in to higher fixed costs, which cannot be recovered from a company's existing market. This forces companies to expand its operations and to look for more consumers outside. These external factors were not the only ones which prompted Goodyear to reconsider its organization structure. These factors affected company internally also. Service team, technical staff, marketing and sales force started feeling pressure amidst varied demands from the market. Same was with R&D which has to work on different products at the same time for different types of customer: car tyre customer, truck tyre customer and Farm tyre customer. Marketing was not easy and so was not retailing as even the retailers were confused between different products and their attributes and started to concentrate on one specialized segment either Car tyre, truck tyre or Farm tyre.
Institutionalization: Before 2000, Goodyear's India operations were a very small fraction of their global business as India was in early stages of development. Despite adopting a Divisional structure in most of the countries, Goodyear decided to continue with the Functional structure in India. As revenues from India were small company was able to manage its operations with simple functional design because market was just too immature to consider viability of other organizational forms like Divisional or Matrix (see Appendix). Another important reason was that the most of the companies in India had functional structures because they were either small firms or family own firms. Hence majority of work force in the country was seasoned to work in a functional form of business. Goodyear thus decided to operate with a traditional formal function based structure with a simple top to bottom hierarchy.
Transformation from Functional to Divisional Form
Product Based Unit (PBU)
In 2008 Goodyear decided to change to Product based Unit form and all the departments divided in two different product categories 1) Passenger Business Unit - Car tyre and 2) Commercial Business Unit - Truck and Farm tyres. Both the PBUs had separate set of professionals in different functions from Top management to bottom line workers. Two production facilities were also reorganized: one to produce tyres passenger cars and other to produce tyres for commercial vehicles.
Figure-2 below is the indicative model of the Goodyear's Product based Unit Structure
Trade-Offs and Dilemmas
Selection of people and Assignment of Role: The process of choosing employees was one of the most crucial and important one. Many employees in different departments of Goodyear such as R&D, Marketing, Sales and Production etc were to be assigned their new dedicated functional roles pertaining to their PBU. This involved many trade-offs, some employees felts that they were demoted in hierarchy because of PBU division. Some others who were equally talented and skilled to work in both the PBUs were to be assigned a single PBU specific role and which created a vacancy under a similar capacity in the other PBU.
Human Resources: Human resource policies-in the appropriate combinations-produce the talent that is required by the strategy and structure of the organization, generating the skills and mind-sets necessary to implement its chosen direction. Human resource policies also influence the organization's capability to move in the strategic direction. Flexible organizations require flexible people.
Less Skilled vs. Skilled: Goodyear could hire employees with specialist exposure in a particular field e.g. Retail for Passenger PBU, Channel development for Commercial PBU etc. This facilitated building a more skilled and professional team for each PBU.
High Specialist vs. Product Line: Contrary to the above, there were some lay-offs as well. Over qualified and excessively skilled employees were replaced with job specific workers who could do a particular job 'just' effectively. This was a subjective issue handled exclusively by PBU heads.
Formal Specifications and Informal understanding: When organizing, managers should be aware of the costs of excessive formalization, which may include dampening employee creativity and innovation as well as slowing the organization's responsiveness to critical issues and problems. The degree of free space to be provided at each level became adjustable. Although it was a meticulous and critical decision to avoid any unfavorable effects.
Results of Product based Unit structure
Direct control vs. Autonomy: Goodyear chose a low degree of centralization which meant that there was more power or autonomy at lower level of organization, however holding the core objectives and purposes of a PBU intact. This has resulted positively in both the PBUs as many of the small but necessary decisions could be taken at middle level of management only.
Speed of Response: Response time improved significantly as employees at each level were given more authorities. There was significant improvement in 'After-sales service' which provided higher level of customer satisfaction. However, this also increased number of decisions (to replace defective tyres) favored to consumers in case of product failures. Within the company, response towards a decision on an issue was significantly faster than before.
Flexibility: Sensitive to external factors, company's pricing, logistics and supply (production) became more flexible and started adjusting swiftly to different markets or market segments and also in the event of a change in any of its competitor's strategy (pricing, distribution etc)
Innovation and Predictability: Resultant of PBU structure, a dedicated R&D for both the PBUs was able to introduce new technologies for different market segments. Goodyear consumer-PBU introduced 'longest running tyre technology' for car tyres and commercial-PBU also launched competent new products in truck and farm tyre markets. This enabled company to gain significant market share and acquiring more market out of a growing economy in India.
Organizations shape themselves amidst various factors, external and internal (Fig below). Choosing a structure is a decision which is a subset of strategy adopted by the organization to grow in future.
Goodyear chose to transform into Divisional product form of structure for its strategy to diversify its operations, provide better customer services and compete more effectively in the market. This transformation reflects the above and emancipates from long term strategy of the company.
Figure-3 next page
From the case of Goodyear we can make simple comparison of two most widely adopted organization structures: Functional and Divisional. Divisional form has further sub-categories depending on how an organization is dividing its structure (Buchanan, Huczynski 2010). These are Product based, Geography based, Customer based. Table-1 below compares Functional and Product Based Divisional form.
There's no one "right" organizational structure, so it's important to understand how structure relates to the variety of attributes in a company.
There are many different organizational structures defined which are suitable in varying circumstances such as Matrix, Team based, Virtual, Collaborative and Modular structure ( Buchanan 2010). None of these defined structures is essentially appropriate, but these are just simple indicative version of what exists in real life. Commonly, a company has a combination of different elements of each structural type.
When considering an organizational structure, managers should analyze both external and internal factors existing in organization's environment and their effects on its structure. Also they should assess organization's internal requirements and capacities. After putting all these together, a decision should be made about which structure will be a good fit with organization's strategy and its environment.