This document discusses organizational structure and strategic control. It covers traditional and contemporary approaches to organizational structure and control. The traditional approach uses simple, functional, divisional, and matrix structures. The contemporary approach emphasizes boundaryless and ambidextrous designs. Effective control requires both informational and behavioral controls. Behavioral control balances culture, rewards, and boundaries. Corporate governance ensures manager and shareholder interests are aligned.

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Creating Effective
Organizational Designs
Professor John Coy
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Learning ObjectivesAfter reading this chapter, you should have
a good understanding of:The importance of organizational
structure and the concept of the “boundaryless” organization in
implementing strategies.The growth patterns of major
corporations and the relationship between a firm’s strategy and
its structure.Each of the traditional types of organizational
structure: simple, functional, divisional, and matrixThe relative
advantages and disadvantages of traditional organizational
structureThe implications of a firm’s international operations
for organizational structure
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Learning ObjectivesAfter reading this chapter, you should have
a good understanding of:Why there is no “one best way” to
design strategic reward and evaluation systems, and the
important contingent roles of business- and corporate-level

2. strategies.The different types of boundaryless organizations—
barrier-free, modular, and virtual—and their relative advantages
and disadvantagesThe need for creating ambidextrous
organizational designs that enable firms to explore new
opportunities and effectively integrate existing operations
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Traditional Forms of
Organizational StructureOrganizational structure refers to
formalized patterns of interactions that link a
firm’sTasksTechnologiesPeopleStructure provides a means of
balancing two conflicting forcesNeed for the division of tasks
into meaningful groupingsNeed to integrate the groupings for
efficiency and effectiveness
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Question
Most organizations begin very small and ______.
A) grow to become a medium sized organization
B) continually grow
C) remain small
D) often decrease in size
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Answer: C
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Dominant Growth Patterns

3. of Large Corporations
Adapted from Exhibit 10.1 Dominant Growth Patterns of Large
Corporations
Source: Adapted from J. R. Galbraith and R. K. Kazanjian,
Strategy Implementation: The Role of Structure and Process,
2nd ed. (St. Paul, MN: West Publishing Company, 1986), p.
139.
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Patterns of Growth of
Large CorporationsSimple StructureSimple structure is the
oldest and most common organizational formStaff serve as an
extension of the top executive’s personalityHighly
informalCoordination of tasks by direct supervisionDecision
making is highly centralizedLittle specialization of tasks, few
rules and regulations, informal evaluation and reward system
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Patterns of Growth of
Large CorporationsFunctional Structure
Adapted from Exhibit 10.2 Functional Organizational Structure
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Patterns of Growth
of Large CorporationsFunctional StructureFound where there is
a single or closely related product or service, high production

4. volume, and some vertical integrationAdvantagesEnhanced
coordination and control Centralized decision making Enhanced
organizational-level perspective More efficient use of
managerial and technical talent Facilitated career paths and
development in specialized areas
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Patterns of Growth
of Large CorporationsDisadvantagesImpeded communication
and coordination due to differences in values and
orientationsMay lead to short-term thinking (functions vs.
organization as a whole) Difficult to establish uniform
performance standards
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Divisional Structure
Adapted from Exhibit 10.3 Divisional Organizational Structure
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Divisional StructureOrganized around products, projects, or
marketsEach division includes its own functional specialists
typically organized into departmentsDivisions are relatively
autonomous and consist of products and services that are
different from those of other divisionsDivision executives help
determine product-market and financial objectives
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5. Divisional StructureAdvantagesStrategic business unit (SBU)
structure Separation of strategic and operating control Quick
response to important changes in external environment Minimal
problems of sharing resources across functional departments
Development of general management talent is enhanced
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Divisional StructureDisadvantages Can be very expensive Can
be dysfunctional competition among divisions Can be a sense of
a “zero-sum” game that discourages sharing ideas and resources
among divisions Differences in image and quality may occur
across divisions Can focus on short-term performance
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Divisional StructureStrategic business unit (SBU)
structureDivisions with similar products, markets, and/or
technologies are grouped into homogenous SBUsTask of
planning and control at corporate office is more manageableMay
become difficult to achieve synergies across SBUsAppropriate
when the businesses in a corporation’s portfolio do not have
much in commonLower expenses and overhead, fewer levels in
the hierarchyInherent lack of control and dependence of CEO-
level executives on divisional executives
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Matrix Structure
Adapted from Exhibit 10.4 Matrix Organizational Structure
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6. Matrix StructureA combination of the functional and divisional
structuresIndividuals who work in a matrix organization become
responsible to two managersThe project managerThe functional
area manager
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Matrix StructureAdvantagesFacilitates the use of specialized
personnel, equipment and facilitiesProvides professionals with a
broader range of responsibility and
experienceDisadvantagesCan cause uncertainty and lead to
intense power strugglesWorking relationships become more
complicatedDecisions may take longer
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International Operations: Implications for Organizational
StructureThree major contingencies influence structure adopted
by firms with international operationsType of strategy driving
the firm’s foreign operationsProduct diversityExtent to which
the firm is dependent on foreign salesStructures used to manage
international operationsInternational divisionGeographic-area
divisionWorldwide functionalWorldwide product
divisionWorldwide matrix
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ExampleNike culture used to encourage local managers to focus
on market share rather than profitability.This lead to Wall
Street to comment on the lack of managerial control at
Nike.Nike decided to implement a matrix structure to resolve
this issue.This matrix structure clearly stated local managers’

7. responsibilities by region and product.Nike headquarters
establishes which products to focus on and how to do it under
the new matrix structure.
Source: “The New Nike,” Business Week. September 20, 2004
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Question
Does the relationship between strategy and structure imply that
structure follows strategy?
*
The strategy of a firm influences their structural elements as the
division of tasks. It is also true that existing structures can
influence the formulation of strategies of a firm. Ultimately,
strategy cannot be developed without the consideration of a
firm’s structural elements.
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Relationships between Rewards & Evaluation Systems and
Business-level and Corporate-level Strategies
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Boundaryless Organizational DesignsBoundaries that place
limits on organizationsVertical boundaries between levels in the
organization’s hierarchyHorizontal boundaries between
functional areasExternal boundaries between the firm and its
customers, suppliers, and regulatorsGeographic boundaries
between locations, cultures and markets

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Making Boundaries More PermeableFirst approachPermeable
internal boundariesHigher level of trust and shared
interestsShift in philosophy from executive development of
organizational developmentGreater use of teamsFlexible, porous
organizational boundariesCommunication flows and mutually
beneficial relationships with internal and external
constituencies
Barrier-free type of organization
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Pros and Cons of
Barrier-Free Structures
Adapted from Exhibit 10.7 Pros and Cons of Barrier-Free
Structures
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Making Boundaries More PermeableSecond approach
Outsources nonvital functions, tapping
into knowledge and expertise of “best in class” suppliers but
retains strategic controlThree advantagesDecrease overall costs,
leverage capitalEnables company to focus scarce resources on
areas where it holds competitive advantageAdds critical skills
and accelerates organizational learning
Modular type of organization

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Pros and Cons of Modular Structures
Adapted from Exhibit 10.8 Pros and Cons of Modular Structures
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Making Boundaries More PermeableThird approachContinually
evolving network of
independent companies linked together to share skills, costs,
and access to one another’s
marketsSuppliersCustomersCompetitorsEach gains from
resulting individual and organizational learningMay not be
permanent
Virtual type of organization
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Pros and Cons of Virtual Structures
Source: R. E. Miles and C. C. Snow, “Organizations: New
Concepts for New Forms,” California Management Review,”
Spring 1986, pp. 62-73; R. E. Miles and C. C. Snow, “Causes of
Failure in Network Organizations,” California Management
Review, Summer 1999, pp. 53-72; and H. Bahrami, “The
Emerging Flexible Organization: Perspectives from Silicon
Valley,” California Management Review, Summer 1991, pp. 33-
52.
Adapted from Exhibit 10.9 Pros and Cons of Virtual Structures

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Boundaryless Organizations:
Making Them WorkFactors facilitating effective coordination
and integration of key activitiesCommon culture and shared
valuesHorizontal organization structuresHorizontal systems and
processesCommunications and information technologiesHuman
resource practices
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Creating Ambidextrous
Organizational DesignsTwo contradictory challenges faced by
firmsAdaptabilityAlignmentAmbidextrous organizations
Aligned and efficient in how they manage in today’s
businessFlexible enough to changes in the environment so they
will prosper tomorrow
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Creating Effective
Organizational Designs
Professor John Coy
9

11. Strategic Control and
Corporate Governance
Professor John Coy
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Learning ObjectivesAfter reading this chapter, you should have
a good understanding of:The value of effective strategic control
systems in strategy implementation.The key difference between
“traditional” and “contemporary” control systems.The
imperative for “contemporary” control systems in today’s
complex and rapidly changing competitive and general
environments.The benefits of having the proper balance among
the three levers of behavioral control: culture, rewards and
incentives, and boundaries.The three key participants in
corporate governance: shareholders, management (led by the
CEO), and the board of directors.The role of corporate
governance mechanisms in ensuring that the interests of
managers are aligned with those of shareholders from both the
United States and international perspectives.
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Ensuring Informational ControlTraditional control systemBased
largely on the feedback approachLittle or no action taken to
revise strategies, goals and objectives until the end of the time
periodContemporary control systemContinually monitoring the
environments (internal and external)Identifying trends and
events that signal the need to revise strategies, goals and

12. objectives
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Traditional Approach to
Strategic ControlTraditional approach is sequentialStrategies
are formulated and top management sets goalsStrategies are
implementedPerformance is measured against the predetermined
goal setControl is based on a feedback loop from performance
measurement to strategy formulation
Adapted from Exhibit 9.1 Traditional Approach to Strategic
Control
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Traditional Approach
to Strategic ControlProcess typically involves lengthy time lags,
often tied to the annual planning cycleThis “single-loop”
learning control system simply compares actual performance to
a predetermined goalMost appropriate whenEnvironment is
stable and relatively simpleGoals and objectives can be
measured with certaintyLittle need for complex measures of
performance
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Contemporary Approach
to Strategic ControlRelationships between strategy formulation,
implementation and control are highly interactiveTwo different
types of controlInformational controlBehavioral control

13. Adapted from Exhibit 9.2 Contemporary Approach to Strategic
Control
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Informational controlConcerned with whether or not the
organization is “doing the right things”Behavioral
controlConcerned with whether or not the organization is “doing
things right” in the implementation of its strategyBoth types of
control are necessary conditions for success
Contemporary Approach
to Strategic Control
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Informational ControlDeals with internal environment and
external strategic contextKey question“Do the organization’s
goals and strategies still ‘fit’ within the context of the current
strategic environment?”Two key issuesScan and monitor
external environment (general and industry)Continuously
monitor the internal environment
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Informational ControlTraditional approachUnderstanding of the
assumption base is an initial step in the process of strategy
formulationContemporary approachInformation control is part
of an ongoing process of organizational learning that updates
and challenges the assumptions underlying the firm’s strategy
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14. Informational Control
ContinuouslyMonitorTestReview
Update and Challenge the assumptions
The Firm’s
Contemporary Control System
Assumptions
Premises
Goals
Strategies
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Question
What are two compelling reasons for an increased emphasis
on culture and rewards in implementing a system of behavioral
control?
*
First, organizations are facing competition that continually
becomes increasingly more complex. Organizations must be
flexible and act quickly to respond to challenges that arise in an
uncertain environment.

15. Second, the implicit contract between an organization and their
key employees has decomposed over the years because younger
managers view themselves as free agents in today’s labor
market.
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Behavioral ControlBehavioral control is focused on
implementation—doing things rightThree key control
“levers”CultureRewards Boundaries
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Behavioral Control: Balancing Culture,
Rewards, and BoundariesContemporary approach
- A balance betweenCultureRewardsBoundariesTraditional
approachEmphasizes comparing outcomes to predetermined
strategies and fixed rules
Adapted from Exhibit 9.3 Essential Elements of Strategic
Control
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Building a Strong and Effective CultureOrganizational culture
is a system ofShared values (what is important)Beliefs (how
things work)Organizational culture shapes a
firm’sPeopleOrganizational structuresControl
systemsOrganizational culture producesBehavioral norms (the
way we do things around here)
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16. Building a Strong and Effective CultureCulture sets implicit
boundaries (unwritten standards of acceptable
behavior)DressEthical mattersThe way an organization conducts
its businessCulture acts as a means of reducing monitoring costs
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ExampleMany researchers are breaking the rules according to
Raymond De Vries, an associate professor of medical education
and a member of the Bioethics Program at the University of
Michigan in Ann Arbor.Numerous researchers are falsifying
their research to compete with the intense competition within
the field of science.The organizational culture of a company,
not an individual’s failing character, is the underlining cause
for unethical behavior of researchers.
Source:. “Many Researchers Break the Rules: Study,,” Forbes.
April 13, 2006.
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Building a Strong and Effective CultureEffective culture must
beCultivatedEncouragedFertilizedMaintaining an effective
cultureStorytellingRallies or pep talks by top executives
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Motivating with Rewards and IncentivesRewards and incentive
systemsPowerful means of influencing an organization’s
cultureFocuses efforts on high-priority tasksMotivates
individual and collective task performanceCan be an effective
motivator and control mechanism

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Motivating with Rewards and IncentivesPotential
downsideSubcultures may arise in different business units with
multiple reward systemsMay reflect differences among
functional areas, products, services and divisionsShared values
may emerge in subculture in opposition to patterns of the
dominant cultureReward systems may lead to information
hoarding, working at cross purposes
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Motivating with Rewards and IncentivesCreating effective
reward and incentive programsObjectives are clear, well
understood and broadly acceptedRewards are clearly linked to
performance and desired behaviorsPerformance measures are
clear and highly visibleFeedback is prompt, clear, and
unambiguousCompensation “system” is perceived as fair and
equitableStructure is flexible; it can adapt to changing
circumstances
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Setting Boundaries and ConstraintsFocus efforts on strategic
prioritiesShort-term objectivesSpecific and measurableSpecific
time horizon for attainmentAchievable, but challengingProvide
proper direction, but be flexible when faced with need to change
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Setting Boundaries and ConstraintsShort-term action
plansSpecificCan be implementedIndividual managers held

18. accountable for implementation of action plans
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Question
Which of the following types of controls is most appropriate in
an organization where consistency in product and service is
critical?
A) Bureaucratic controls
B) Systematic controls
C) Cultural controls
D) Rule-based controls
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Answer: D
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Organizational Control:
Alternative Approaches
Approach Some Situational Factors
Culture: a system of unwritten rules that forms an internalized
influence over behavior.
Rules: Written and explicit guidelines that provide external
constraints on behavior.Often found in professional
organizationsAssociated with high autonomyNorms are the basis
for behaviorAssociated with standardized outputTasks are
generally repetitive
and routineLittle need for innovation or creative activity
Adapted from Exhibit 9.6 Organizational Control: Alternative
Approaches

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Approach Some Situational Factors
Rewards: The use of performance-based incentive systems to
motivate.
Organizational Control:
Alternative ApproachesMeasurement of output and performance
is rather straightforwardMost appropriate in organizations
pursuing unrelated diversification strategiesRewards may be
used to reinforce other means of control
Adapted from Exhibit 9.6 Organizational Control: Alternative
Approaches
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Evolving from Boundaries
to Rewards and CultureOrganizations should strive to have
boundaries internalizedSystem of rewards and incentives
coupled with a strong cultureHire the right people (already
identify with the firm’s dominant values)Train people in the
dominant cultural valuesHave managerial role modelsReward
systems clearly aligned with organizational goals and objectives
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Role of Corporate GovernanceCorporate
governanceRelationship amongThe shareholdersThe
management (led by the Chief Executive Officer)The board of
directorsIssue is How corporations can succeed (or fail) in

20. aligning managerial motives withThe interests of the
shareholdersThe interests of the board of directors
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ExampleStock-option stashes grew 47% from the previous year
for CEO’s according to compensation consulting firm Watson
Wyatt. Soaring stock-option growth indicates that CEOs pay is
directly related to their good performance.Watson Wyatt
believes the compensation package offered to CEO’s is in
accordance with the job market.If the board of a company could
hire someone to do the job for less, they would hire that
individual.
Source: Clark, Hannah. “Stock-Option Stashes for CEOs,”
Forbes, February 28, 2007.
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Separation of Owners (Shareholders)
and ManagementShareholders (investors)Limited
liabilityParticipate in the profits of the enterpriseLimited
involvement in the company’s affairsManagementRun the
companyDoes not personally have to provide the fundsBoard of
directorsElected by shareholdersFiduciary obligation to protect
shareholder interests
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Agency TheoryDeals with the relationship betweenPrincipals –
who are owners of the firm (stockholders), and the Agents –
who are the people paid by principals to perform a job on their
behalf (management)

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Agency Theory: Two ProblemsGoals of principals and agents
may conflictDifficult or expensive for the principal to verify
what the agent is actually doingHard for board of directors to
confirm that managers are actually acting in shareholders’
interestsManagers may opportunistically pursue their own
interestsPrincipal and agent may have different attitudes and
preferences toward risk
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Governance Mechanisms: Aligning
the Interests of Owners and ManagersTwo primary means of
monitoring behavior of managersCommitted and involved board
of directorsActive, critical participants in setting
strategiesEvaluate managers against high performance
standardsTake control of succession processDirector
independenceShareholder activismRight to sell stockRight to
vote the proxyRight to sue for damages if directors or managers
fail to meet their obligationsRight to information from the
companyResidual rights following company’s liquidation
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Managerial incentives (contract-based outcomes)Reward and
compensation agreements (from TIAA-CREF)Align rewards of
all employees (including rank and file as well as executives) to
the long-term performance of the corporationAllow creation of
executive wealth that is reasonable in view of the creation of
shareholder wealthMeasurable and predictable outcomes that are
directly linked to the company’s performanceMarket

22. orientedEasy to understand by investors and employeesFully
disclosed to investing public and approved by shareholders
Governance Mechanisms: Aligning
the Interests of Owners and Managers
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External Governance
Control MechanismsMarket for corporate controlAuditorsBanks
and analystsRegulatory bodies (Sarbanes-Oxley Act in
2002)Media and public activists
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Major Provisions of Sarbanes-Oxley ActAuditorsBarred from
certain types of non-audit workNot allowed to destroy records
for five yearsLead partners auditing a firm should be changed at
least every five yearsCEOs and CFOsMust fully reveal off-
balance sheet financesVouch for the accuracy of information
revealedExecutivesMust promptly reveal the sale of shares in
firms they manageAre not allowed to sell shares when other
employees cannot
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Strategic Control and
Corporate Governance
Professor John Coy