ESSAY

On the topic

ORGANIZATIONAL STRUCTURE AND INNOVATION

Integrated Management

SS 2015

Prof. Dr. Andreas Gerlach

Dr. Kai Neuschaefer

Siva Srinivas Anand Selvarajan

Matr. -No. 10048364

Table of Contents

1. Introduction .......................................................................................................................... 1

1.1 Organizational Structure ................................................................................................... 1

1.2 Organizational Innovation ................................................................................................ 1

2. Building Blocks of Organization Structure ........................................................................ 2

2.1 Centralization .................................................................................................................... 2

2.1.1 Case in Point – Caterpillar ......................................................................................... 2

2.1.2 Case in Point – McDonald’s ...................................................................................... 2

2.2 Decentralization ................................................................................................................ 3

2.2.1 Case in Point – Urban Outfitters ................................................................................ 3

2.3 Departmentalization .......................................................................................................... 4

3. Burns and Stalker’s Organizational Model ....................................................................... 4

3.1 Mechanistic Structure ....................................................................................................... 4

3.2 Organic Structure .............................................................................................................. 4

3.2.1 Case in Point – 3M ..................................................................................................... 5

4. Modern Organizational Structure ...................................................................................... 5

4.1 Matrix Organizational Structure ....................................................................................... 5

4.2 Managing the Matrix Structure ......................................................................................... 6

4.3 Unclear Roles and Responsibilities .................................................................................. 6

4.4 Matrix Structure Innovativeness ....................................................................................... 7

4.4.1 Case in Point – Ford ................................................................................................... 7

4.5 Case in Point – Oticon ...................................................................................................... 8

5. Strategic Structural Innovative firm .................................................................................. 8

5.1 Autonomous Innovation ................................................................................................... 9

5.2 Systematic Innovation..................................................................................................... 10

6. Conclusion ........................................................................................................................... 10

References ................................................................................................................................ 11

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1. Introduction

1.1 Organizational Structure

Organizational structure is defined as the coordination of individual and team work within an

organization to accomplish the goals and objectives of the organization (Mason Carpenter, et

al., Dec. 2012, p.336). Structure is meant to support the functions and process of the

organization flows smoothly and as intended. The Community Tool Box at KU’s Work Group

(Community Tool Box, n.d, ch. 9) says that suitable structure should be designed at the initial

stage of organizational development. Also one should be aware of the possible changes in the

structure as the organization grows.

Thus Structure provides the steadiness for the organization. The organizational design

history shows that structures are easier to put in place than to modify, disintegrate or reshuffle.

The main problem with organizational design is to reconcile the qualities like flexibility,

dynamism and alertness, and the technology and experience, with the need for endurance, order

and stability (Richard Pettinger, 2002, pp. 382f).

1.2 Organizational Innovation

John Locke said that “New opinions are always suspected and usually opposed, without any

other reason but because they are not already common”. According to (Daft (1978), Damanpour

and Evan (1984), Damanpour (1996) as cited in Lam, A., 2004, p.3), the term ‘Organizational

Innovation refers to the creation or adoption of an idea or behaviour’ new to the organization.

Thus Innovation is defined as the emergence of new concept, ideas and creating new

economical, effective process. Innovation is a crucial factor for organizational growth and

regarded as competitive advantages for a lots of organizations. Organizational design remains

the key for the process of innovation.

Thus the ability of an organization to innovate is the pre-condition for successful

resource and new technology utilization (Lam, A., 2010, p.163). There are diverse theories of

organizational innovation. In this paper we are going to discuss about the theories of

organizational design focuses on the link between structural forms and the organizational

propensity to innovate.

Problem Statement & Research Question

The purpose of this paper is to observe the complex relationship between organization and

innovation from the viewpoint of different organizational structure and its ability to innovate.

Also this paper is concerned on the question of,

How do an organization can cope with the change and adjust to turbulent environment

and technological shifts? What is the relationship between the organizational structure

and innovation?

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This is studied in reference to the adaptation of different types of organizational

structure by the companies and its innovativeness. Also this paper argues that organizational

structure plays a key role in enabling innovation.

2. Building Blocks of Organization Structure

In this chapter we will discuss about the building elements of the company’s structure and see

how the basic elements converges to two main types of organizational structure along with its

ability to innovate.

2.1 Centralization

The organization in which most of the decision making happens at upper levels of the hierarchy

are known as centralized organization. Thus the authority lies at the top level of the

organization. So, for a company with centralized decision making, the success solely depends

on the skills of CEOs and top level managers. Many companies encounter inefficiencies in

decision making due to centralized power (Bauer, T., et al., Dec. 2012, p.336).

Association with innovativeness: The centralized decision making of a company poorly

supports the innovation. It is only suitable for small scale industries and companies which have

a stable and predictable environment.

2.1.1 Case in Point – Caterpillar

Nelson, G.L argues that (Nelson, G.L, & Pasternack, B.A, 2005, Ch. 14) Caterpillar, the

construction machinery and equipment manufacturer suffered the consequences of centralized

decision making. During 1980’s all the pricing decision of the company came from

headquarters located in Peoria, Illinois. So a sales representative from Africa had to contact the

headquarters for any updated information regarding discounts or offers. As a result of delay in

information flow within the caterpillar, the competitors like Komatsu (Japanese firm) utilized

this as an opportunity and entered the African market with timely offers and promotions. After

this incident the caterpillar have gone for decentralized approach to compete the globalization.

Results: Keep what’s good, fix what’s wrong, and unlock great performance.

2.1.2 Case in Point – McDonald’s

Also centralization has its own advantages also. For instance, McDonald’s follows

centralization to maintain and standardize its product quality all over the world. In accordance

to the top level management decision, all the McDonald outlets practises standard steps in

purchasing and packing products (Ebert, R.J., & Griffin, R.W, 2012, p. 180).

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Span of control: Span of control refers to the number of people under the control of single

manager in an organization. Higher the span of control, becomes more difficult for a manager

to control. Span of control is directly proportional to the innovation.

Tall Organizational Structure: The tall structure tend to have several layers of management

and has the characteristics of centralization. Tall structures have narrow span of control and the

tasks are similar and repetitive. Tall organizational structures are less likely to innovate.

2.2 Decentralization

According to Jack Welch, former CEO of General Electric, “If you don’t let managers make

their own decisions, you’re never going to be anything more than a one-person business”

The organization in which the crucial decisions can also be made at lower levels of the

hierarchy are known as decentralized organization. Thus the authority lies at the lower level of

the organization. So, the decision making and problem solving can be done by the employees

who has the better knowledge of the issue. Nowadays, companies are embracing

decentralization more rather than centralization. One of the reason is that the decentralized

environment are more employee friendly and has efficient flow of information.

Association with innovativeness: Decentralization makes the company more innovative and

increases its responsiveness to the market change. It is suitable for larger companies having

complex and unpredictable environment.

2.2.1 Case in Point – Urban Outfitters

Ronald Ebert states that (Ebert, R.J., & Griffin, R.W., 2012, pp. 181) Urban Outfitters, Inc. is

an American multinational clothing corporation follows decentralized pattern which gave

managers significant freedom to make product displays to attract customers and to choose

which product to display near the door and so on

Sometimes decentralization also leads to organizational confusion. Many organizations

experience problem in figuring out a right balance between the centralization and

decentralization.

Flat Organizational Structure: The flat structure tend to have fewer layers of management

and has the characteristics of decentralization. Flat structures have wide span of control. Flat

organizational structures are more likely to innovate.

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2.3 Departmentalization

Departmentalization is the process of grouping together of people performing same tasks. It is

classified broadly as either functional or divisional (Erdogan, B., et al., 2012, pp. 339f).

Functional Structures are found in companies with fewer product line and the departments

represents functional groups such as Finance, Marketing, and accounting. These type of

structures are less prone to change and results in reduced innovativeness.

Divisional Structures are found in companies with diverse product lines and each department

represents unique products, services etc. Each department has its own functional departments

such as marketing, finance etc. Thus departmentalization by product may increase the ability

of the company to innovate but it lowers the response time.

3. Burns and Stalker’s Organizational Model

According to Burns and Stalker (Burns & Stalker, 1961, Ch.8), the two main types of

organizational configuration based on the environmental factors such as predictability, stability

as Mechanistic (Predictable & Stable) & Organic (Non-predictable and unstable). These models

are highly helpful in understanding the challenges faced by organizations due to their efforts to

shift from mechanistic to organic form, as the pace of environment change accelerates and

innovation becomes more important.

3.1 Mechanistic Structure

This type of structure is more firm, hierarchical and formalised in nature which is resistant to

change. These forms lack entrepreneurial behaviour. But these forms are suitable for stable

environment because of its increased efficiency and uniformity attained through a well-

established rules and structure. Moreover, the mechanistic structure is clear and void of

uncertainty, it is beneficial for new businesses.

Association with innovativeness: These type of structures are not suitable for innovation and

also it inhibits individual initiative.

3.2 Organic Structure

This type of structure is volatile, flat, decentralized, and flexible in nature and has the potential

to change according to the market demand and shifts. Employee job satisfaction levels are

higher in organic form. These type of structure encourages entrepreneurial action and self-

determination of the employee.

Association with innovativeness: Basically organic structures are fluidic and act as a catalyst

for innovation.

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3.2.1 Case in Point – 3M

In reference to (Adair, J., 2007, as cited in (Mason Carpenter, et al., 2012, p.342), 3M known

as the Minnesota Mining and Manufacturing Company, is an American multinational

conglomerate corporation has an organic structure. The company follows decentralization as its

core principle. 3M has a total of nearly 100 profit centres with each divisions operates like a

small independent company. Every single division manager activities are autonomous and

responsible for his or her action. Thus when products produced by a division becomes large in

number and profitable, initiates the spun off to generate separate small units. Through this

process the company dexterity, individual initiative, autonomy and innovativeness are

maintained.

4. Modern Organizational Structure

The beginning of the 19th century witnessed faster pace of technological advancement. From

the telegraph to telephone to the computer to the Internet, each advancement demanded

structural change and adaptation of respective organizations.

During the late 19th century business became global and envisaged the quest for

alternative organizational structure. In the meantime, management experts also created new

organizational designs for companies to keep abreast with technological shifts and changes.

Each structure has its unique feature to handle their business in specific situations. Out of the

various structures in practise we are going to look first into the Matrix Structure.

4.1 Matrix Organizational Structure

Some companies find that none of the previous structures match their requirements. So they

went for a structure with combined qualities of both functional and divisional structure. When

the traditional functional structure superimposing divisional on top of it gives the structure of

matrix-like appearance. NASA pioneered this type of structure. Due to its flexibility nature, it

is extensively used by the organizations having unstable surroundings. According to the

PMBOK Guide 4th Ed., (William Duncan R., 1996, pp.21f) the matrix structure can be classified

into three types depending on the level of power of Project manager as Strong, Balanced and

Weak Structure.

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Fig. 1: Balanced Organizational Structure. (William Duncan R., 1996, p.21)

Thus the (Fig. 1) shows the typical balanced matrix structure of an organization.

Although the matrix structures are more innovative and good for rapidly changing environment

it has a challenge of managing its complex structure. The above figure depicts that the staffs

represented by black boxes are the ones who are responsible to report both the Project and

Functional Manager (Dual reporting) of the organization. Thus when a matrix organization

grows the structure will become more and more complex.

4.2 Managing the Matrix Structure

Companies are facing problems in the adoption of matrix structure (Bartlett & Ghoshal, 1990;

Burns & Whorley, 1993). Though each companies had unique issues, most of the issues were

common to all. The top five problems reported by them were misaligned goals, unclear roles &

responsibilities, ambiguous authority, silo-focused employees and lack of matrix guardian.

4.3 Unclear Roles and Responsibilities

Mostly of the matrix structure has problem with roles and responsibilities. Usually in a matrix

structures an employee has to report one or more bosses. This results in confusion among both

the employees and managers. According to Thomas sy (Thomas sy, 2005, vol.28.1, p.44)

companies must have four fundamental elements when establishing roles and responsibilities:

1. Well defined guidelines and descriptions in the areas of roles and responsibilities

2. Assignment of responsibility for business objectives

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3. Approval for tasks should be from single person/contact

4. Communication and information sharing should be planned through Periodic meetings

or circulation of newsletters.

Apart following these four fundamental elements, companies can make use of RASIC(R=

Responsible, A=Approval, S=Support, I=Inform, C= Consult) tool to help employees clarify

their roles (Galbraith, 2002; Gilmore & McCann, 1983). So, for a company which is new to

matrix structure uses RASIC tool to solve the challenge. But when the companies got used to

matrix structure its dependency on RASIC chart reduces and employees begin to function with

a “Mental” RASIC. From this we can conclude that RASIC is one of the fundamental tool of

matrix organization. In a similar way, companies resolve most of the problems in the matrix

structure.

4.4 Matrix Structure Innovativeness

As said by Martti Mäkimattila (Mäkimattila M., 2014, pp. 131-132) it has been claimed that

MO (Matrix Organization) is flexible and supports innovation (Galbraith, 1971; Van der Panne,

et al., 2003). Communication, openness, intra and inter organizational environment, are the

important things considered to gain innovation in today’s organized, networked, and fast-paced

world (Chesbrough, 2003 & Johannessen, 2009). When a matrix is launched to support this,

then correcting and reframing the innovation process is an essential task for successful

accomplishments and to get the maximum benefit from it.

Some companies make use of matrix structure as a temporary measure to accomplish a

specific project in certain part of organization. In these companies matrix structure ends with

the end of specific project. Companies like Nike, Unilever, Ford and General Motors uses

matrix structure as either temporary or permanent form.

4.4.1 Case in Point – Ford

As stated by Ronald Elbert (Ronald Ebert, J & Ricky Griffin, W, 2012, p.181) Ford, is an

American multinational automaker employs matrix structure to produce new models like its

newest Mustang. It creates a new design team composed of members from all the departments

such as marketing, engineering, finance and manufacturing to design its new car. After the

successful completion of the project the members are reassigned to their previous positions

inside the company.

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From the above examples, we can infer that matrix structures are embedded with

innovativeness but with the expense of complexity. So to get the best innovation practise out of

the matrix structure one has to find the perfect balance between different kinds of matrix

structure.

4.5 Case in Point – Oticon

In this case study we are going to discuss about Oticon, a Danish electronics producer’s rise

and decline due to its ‘Spaghetti Organization’ during the early 1990’s. Verona and Ravasi

(Verona & Ravasi, 2003, pp.557-606) argued that the company got the world attention for its

radical organizational transformation and innovative benefits. The ‘spaghetti organization’, is

nothing but a flat, loosely arranged project-based organization categorised by extensive

allocation of tasks and project duties to autonomous teams. The restructuring of the organization

occurred in 1990 from the traditional, functional based structure that the company had relied

upon from its establishment. This restructuring happened in response to the loss of its

competitive advantage during 1980s. Though the company were the market leaders of hearing

aids industry, the late 80’s saw the shift in technological paradigm and the Oticon began to lose

its market to the rival companies. In response to the crisis during 1990, the Oticon underwent

series of changes in the structure to make the company more creative and entrepreneurial in

nature. The radical restructuring leads to series of remarkable innovations and gave

extraordinary performance results. Despite its shine in 1990, the radical structure was

abandoned partially in 1996 and then slowly superseded by more stable and traditional matrix

structure. Foss (Foss, 2003, pp.331-349) argues that the spaghetti structure was partly unstable

because of the motivational problem due to ‘Selective Intervention’. Also it created frustration

among the employees and resulted in partial retreat of the spaghetti structure. However, the

spaghetti structure is considered as the successful innovation, the partial retreat of spaghetti

remains us the inherent difficulties of maintaining a complete adhocracy.

5. Strategic Structural Innovative firm

The work of economist in the field of strategy reflects the structure as both cause and effect of

managerial strategic choice in reaction to market potentials. Two variables ‘strategy’ and

‘structure’ are responsible in building the organizational form. The core concept is that certain

organizational archetypes enable superior innovative performance in a particular environment

than others because they are compatible to lower operation cost and manage the so-called

capital market failures. Some forms like matrix or multi-divisional form, has emerged due to

the increase in manufacturing capacity and complexity of the companies and is associated with

a strategy of diversification into related product and technological areas (Chandler, 1962 as

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cited in (Lam, A., 2010, p.166) . It may seem as an efficient innovator for a specific market

condition, but they have limitations in developing new competencies.

The ‘innovative firm’ theory developed by Lazonick and West (Lazonick & West, 1998, pp.1-

47) is rooted in the chandlerian framework, focuses on how strategy and structure determine

the competitive advantage of the companies. This theory suggests that companies in the

developed nations should embrace high level of ‘Organizational Integration’ to withstand its

competitive lead over others. It is believed that Japanese organizations have competitive

advantage in the fields of automobile and electronics over USA because of their unique capacity

of integrating shop-floor workers and enterprise networks, which paves way for them to work

out new innovative strategies. Lazonick and West argues that US firms like Motorola and IBM

also maintained their competitive advantages over others through organizational integration.

Thus this theory points out the structure of the companies and its internal cohesiveness as an

important factor in innovative performance. But this understanding also is not enough because

the Japanese companies works well in established technological field where the incremental

innovation is important, but not necessary in fields of rapid development where radical

innovation plays a crucial role. Teece (Teece, 1998 as cited in (Lam, A., 2010, p.166) explains

the link between the strategy, structure and innovation nature in relation to the innovation

properties and suggesting some organizational needs to achieve innovation. According to his

framework governance and non-governance structures of organization and the external links

strongly influences the rate and direction of the organizations innovation. He also argues that

different organizational structures such as conglomerate, virtual structure etc., works wel l with

different environment to produce several types of innovation. Teece (Teece, 1998 as cited in

(Lam, A., 2010, p.166) further argued that the two main types of innovation ‘autonomous’ and

‘systematic’ innovation matches with different organizational structures.

5.1 Autonomous Innovation

An autonomous innovation is something which do not require huge modifications of linked

products and processes of an organization. For example, at first, the installation of power

steering did not require any massive modification to the car or engine. Simple technical change

in the arm’s length of the steering arrangements were made to accomplish the autonomous

innovation.

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5.2 Systematic Innovation

In contrast to the autonomous innovation, systematic innovation required total redesign of

related parts or complete change of the production process. For example, the switch to front

wheel drive in early 1980’s demands complete redesign of the car and its related parts such as

suspension and brake system. This type of modification is known as systematic innovation.

This type of innovation requires structures like matrix because it involves complex coordination

among various departments of the organization. Yet these suggestions are to be empirically

verified (Teece, 1998 as cited in (Lam, A., 2010, p.166). Many of the empirical propositions

within this chapter in relation to structure, strategy and innovation are yet to be verified and

show interesting opportunities for further research.

6. Conclusion

In this paper we have discussed about the various organizational structural forms, evolution of

company’s adoption to structure, structural problems, abandonment, and organizational

innovation. From this we can conclude that organization structure remains as a key factor for

any given company to cope up according to ever-changing environmental needs and

technology. So, through partial organizational restructuring, company can clearly withstand the

unstable environment to some extent. Moreover, complete restructuring works well at the

beginning producing new product innovativeness but eventually led to confusions. There are

also several other factors like organizational culture, learning, and geographical area affects the

organizations response to the fast-paced and highly competitive world.

The relationship between the organization structure and innovation is quite difficult to explain

because there is no single clear framework for understanding the phenomenon of

‘Organizational Innovation’. From our study we can say to some extent that loose structures

tends to be more innovative but that kind of structures getting unstable/abandoned in a long

run. Moreover, extreme or complete decentralization of structure can lead to collapse of the

organization. Finding a balance between the structure and innovation remains a mystery. Since

the structure and innovation depends on various factors we cannot give away a defined answer.

Even some authors remain coy about stating definitions of organizational innovation. Thus the

evolution of structure is a non-ending process and the relationship between the structures also

keeps changing according to the technological shifts and innovation.

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Name Siva Srinivas Anand Selvarajan Signature _____________________ Date 30/06/2015