Designing Effective Organizations: How to Create Structured Networks
Summary of the Book Designing Effective Organizations Chapter 1 to 6. Everything for the exam of the Master Business Administration course Strategy Control & Design.
In companies with extensive and complicated interdependencies between
product units, market units, geographical units, functional units, and project
units, the simplicity of the self-managed network seems out of reach.
The approach to corporate organization design includes 3 components:
1. First, nine tests of good design. The tests, which can be applied to any
proposed design, highlight weaknesses in design options. They can be
used to identify refinements that will overcome the weaknesses, or to rule
out seriously flawed options.
2. Second, a language in the form of a taxonomy of different kinds of unit
roles and relationships.
3. Third, a process that managers can follow when they are facing a design
challenge. The process, which builds on the tests and the taxonomy,
provides managers with a rigorous but practical approach to organization
design.
A structured network:
An organization with the maximum of self-management, but with sufficient
structure and hierarchy to work well. It is a design where the value creation
potential is amplified and the value destruction potential is minimized.
Chapter 2
The fit drivers and tests
In developing the framework, we have concentrated on managers who are faced
with a tough practical design decision. The strategy should drive the
organization design: the design that is chosen needs to give priority attention to
the elements that are most critical for the successful implementation of the
strategy (structure follows strategy).
,Contingency factors:
“Onzekerheden in de toekomst”. Certain contingency factors: the nature of the
technology, the size of the organization and uncertainty in the environment.
Four drivers of fit:
1. Product-market strategies: how the company plans to win in each
product-market area it chooses to compete in
2. Corporate strategy: how the company plans to gain advantage from
competing in multiple product-market areas
3. People: the skills and attitudes of the individuals who are likely to be
available to work within the organization
4. Constraints: the legal, institutional, environmental, cultural, and internal
factors that limit the choice of design.
1. Product-market strategies
The design of the organization should make implementation of the company’s
product-market strategies easier. Product-market strategy means the strategy
for winning and the major operating initiatives that management have planned
for each product-market area.
Examples of these strategies:
- Low feedstock costs (raw material to supply an industrial process)
- Close integration between resources
- High asset utilization (by careful balancing of output streams)
- Compete trough product innovation
- Superior technical service to customers
Examples of major operating initiatives concerning product-market strategies:
- Selling a non-integrated asset
- Improving the links with the refinery business
- Adding additional output streams.
- Investing more in product research
- Improve the IT support to its technical service staff
The market advantage test
Does the design allocate sufficient management attention to the operating
priorities and intended sources of advantage in each product-market area?
List each major operating initiative and source of advantage for each
product-market segment in which the company plans to compete.
Check whether the units are defined so as to give sufficient attention to
each initiative and source of advantage.
, Where the design appears to give too little attention, consider alterations
to the design or other changes that will correct the flaw.
This test forces managers to be more explicit about operating priorities and
sources of advantage. Management attention is a limited resource. Giving more
attention to one issue (like products) means giving less attention to another (like
functions or countries).
2. Corporate Strategy
In multi-business companies that compete in more than one product-market
area, there is a need for a corporate-level strategy as well ass product-market
strategies.
Product-market strategies focus on the product markets and operating functions,
the corporate strategy focuses on the priorities of the group as a whole and the
activities of the corporate parent.
Corporate strategy is about what product-market areas to compete in and how
to manage the portfolio of businesses.
The choice of product markets should be driven by the ability of the parent to
add value: the company should focus its attention on those market opportunities
where it has most to contribute. Decisions about how to manage the portfolio
should also be driven by the parent’s ability to add value. The corporate strategy
is built on “parenting propositions” of the corporate parent: the sources of the
value the parent is expecting to add.
Parenting propositions:
The areas of parenting where the corporate level has, or is ambitious to have,
special skills. Parenting propositions are the parental equivalent to sources of
competitive advantage at the business level. It is what parents can do to win an
advantage over their rivals: they are the sources of parenting advantage.
Parenting advantage test
Does the design allocate sufficient attention to the intended sources of added-value
and strategic initiatives of the corporate parent?
List the major parenting propositions and parent-level strategic
initiatives.
Check whether each proposition and strategic initiative has sufficient
attention within the design.
Where the design appears to give too little attention, consider alterations
or other changes that will correct the flaw.
3. People
The importance of people is partly because of the skills that individuals possess,
and hence the responsibilities that they are able to discharge well. Building the
organization with an eye on the available skills is essential. It is equally
, important to build around personal preferences and desires, since these
determine which responsibilities managers will take on with enthusiasm and
which they will resist.
Unless the design of the new organization takes account of the people who will
make it work, its success will be doubtful at best. Problems often occur when the
design looks so well suited to the strategy, that managers disregard the people
issues.
The people test
Does the design adequately reflect the motivations, strengths, and weaknesses of
the available people?
List the senior managers who will be part of the new organization, and
asses how committed these senior managers will be to making the
organization work.
List particularly talented individuals and assess whether the design uses
their talents to the full.
List the job roles that are pivotal (belangrijk voor succes/key to making
the organization run smoothly), and judge whether these roles will be
easy or difficult to fill with competent managers.
The test involves being clear about who the most talented individuals are and
what skills they bring to the new organization. It also involves examining all the
job categories that may be difficult to fill; finding out whether managers with the
appropriate skills exist today.
The value of this test is that is ensures managers do not overlook the people
dimension.
4. Constraints
Constraints represent something of a catch-all category. In it we include a range
of factors that can constrain the design choice:
Legal and governmental issues, such as requirements for certain
governance processes, legal or ownership structures, and law, such as
health and safety.
Institutional and stakeholder issues, such as the preferences of major
shareholders, the requirements of industry associations, or the demands
of the capital markets.
Other external issues, such as the local culture, particular pressure
groups, or unions.
Internal issues, such as IT capabilities, internal culture, and organization-
wide skills.
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