Understanding the Key Factors of Organizational Structure Essay Example

a change in structure is important. Strategy and structure are closely related. Structure is shaped by or aligns with the firm's strategy, but once established, structure can also influence current strategic actions and future strategy decisions. Alfred D. Chandler extensively studied the relationship between an organization's strategy and structure in his influential book Strategy and Structure: Chapters in the History of the American Industrial Enterprise.

According to Chandler (1962), companies follow predictable patterns of growth: first by volume, then by geography, then through integration (vertical, horizontal), and finally through product/business diversification. Chandler also states that a company's growth patterns determine its structural form. All organizations need some form of organizational structure to implement and manage their strategies. As companies grow in size and complexity, they often change their structure. There are three basic types of structures: simple structure, functional structure, multidivisional structure (M-form), and global expansion structure. The following figure illustrates the change in organizational structure with growth and strategy.

Simple Structure A simple structure is one where the owner-manager makes all major decisions and supervises all activities while the staff serves as an extension of the manager's supervisory authority. (C.

The construction of businesses can be divided into three main types: focal point schemes and business-level schemes, functional structure, and multi-divisional structure (Levicki, 1999; Jones, et al., 2010). Focal point schemes and business-level schemes involve offering a single product line in a specific geographic market. Functional structure groups individuals based on their expertise or resource usage, supporting the use of business-level strategies. The multi-divisional structure consists of operating divisions where the top corporate officer delegates daily operations and business-unit strategy to division managers. This structure offers benefits

such as easier monitoring of performance, improved resource allocation, and encourages improvement in underperforming divisions. In today's global economy, international strategies are becoming increasingly important for long-term competitive success.

The following model illustrates how organizations prosper in a global economy: Global expansion strategies can be understood in terms of local responsiveness and geographical integration within the company. Based on these two parameters, four strategies of global expansion have been identified. These include:
- International strategy
- Multi-domestic strategy
- Global strategy
- Transnational strategy

Under the international strategy, companies decentralize all value-creation functions except for R and marketing. The multi-domestic strategy focuses on local responsiveness by delegating control to subsidiaries and divisions in each country. The global expansion strategy aims to reduce costs by centralizing all major value-creation functions at the lowest cost global location. In a transnational strategy, some functions are centralized while others are decentralized based on the most suitable global location for achieving objectives.

It is important to note that the above theory serves as a guideline for how organizations may structure themselves in pursuit of growth and global expansion. However, these rules are not universal, and many organizations have thrived despite structures that do not align with the ones discussed above.Organizations can also use hybrid structures that combine the characteristics described above. ABB, for example, is regarded as a model for how organizations should operate in the 21st century. It emphasizes streamlined structures, quick information transfer, empowered employees, a commitment to continuous learning, world-class HRD programs, and global teamwork and networking.

ABB became widely admired for its organizational structure rather than its products or technology. The company's former CEO, Percy Barnevik, saw ABB as a global and local organization

that was both large and small, centralized and decentralized. ABB was formed in 1987-88 through the merger of two companies with roots dating back to the 19th century: Asea, founded in Sweden in 1890, and Brown Boveri, established in Switzerland in 1891. These companies were part of the wave of industrial ventures established in the late 19th century to supply equipment for the rapidly expanding electrical power industry, which involved power generation, transmission, distribution, and industrial motor usage.

The rapid succession of alliances and acquisitions demonstrated ABB's dedication to the power industry and global strategy. These actions rapidly expanded ABB's international presence in North America and Eastern Europe. The speed at which these acquisitions were incorporated into ABB can be attributed to the flexibility of its new organizational design. ABB's primary focus is on manufacturing and servicing equipment for generating, transmitting, and distributing electrical power.

The clients of this concern are electric public-service corporations from around the world, many of which are state-owned or heavily regulated by the state. Both national and local governments have control over these public-service corporations. Because of this, they have a strong preference for suppliers with a local manufacturing presence. Local companies not only contribute to the local economy, but also provide reliable service and replacement parts for the complex power systems. Any disruption in these systems can be very costly for local businesses and damage the reputation of the public-service corporation. However, these clients also push suppliers to lower prices and increase equipment lifespan, thus reducing profit margins for providers who cannot achieve greater production efficiency.

ABB is also a global leader in rail transit systems, including engines, light rail vehicles, and

signaling. In the rail industry, where rail networks are state-owned or regulated by the state, there is a similar pressure to manufacture locally and be responsive to local clients, while also achieving efficiency through economies of scale and cost savings.

A third category of products offered by ABB is targeted towards a completely different type of client.

ABB sells its edifice systems and industrial production systems to industrial companies, who prioritize monetary value. To meet the demands of its customers and be efficient and cost-competitive, ABB needs to have a strong local presence in each major market. Additionally, with operations in 140 countries and a wide range of closely related product lines, ABB must have coordination within and across products to fully benefit from its diverse offerings. However, the company also needs to be responsive to customers and local issues, and empower its managers to take charge of their units. After the merger of Asea and Brown Boveri was announced in August 1987, a task force of five top directors from each company was formed to develop an organizational architecture for ABB.

The task force agreed on the main features of the new organization. The structure was meant to be an international matrix of business and geography. The primary organizing principle was to create highly focused local companies reporting to both a global business manager, responsible for achieving efficiency in that product line and expanding the business on a global scale, and a country manager, responsible for coordinating the various businesses within a specific country. When selecting the candidates for top-level management positions, the emphasis was on identifying adaptable individuals who could collaborate in multicultural environments and for

whom innovation, risk-taking, and the ability to motivate others came naturally. One of the objectives of the new design was to delegate accountability, decision-making, and responsibility for action throughout the organizational hierarchy.

One of the initial steps taken by the new top management was a drastic reduction in the company's headquarters. In just a few months, the number of professional staff in the corporate HQ in Zurich decreased from over 1,300 to slightly over 100. Another significant move was the development of a company-wide information system, known as ABACUS (Asea Brown Boveri Accounting and Communication System). ABACUS collected monthly performance data from each unit and converted it into a standard currency (US dollars). The information was then sent to the main data processing center in Sweden, where it was compiled and transmitted to the top managers at the Swiss headquarters, as well as to the designated managers at each level of the company. The smallest organizational unit in the new structure, called a profit center, is responsible for providing performance data to ABACUS. Every month, they report their performance data to the next level in the organization - the local operating company/Business Unit (BU) - which then enters the data into the ABACUS system.

The local operating company consisted of multiple net income centres and focused on individual concern and market. ABB's strategy aimed to reduce costs, reduce throughput times, maximize design and production flexibility, and focus on local customer needs. The president of the local operating company had CEO responsibilities for their operations. However, the heads of the local operating companies reported to two supervisors - one being the Business Area director and the other being

the country director for the location of the operating company.

The Business Side of the Matrix: The Business Area

The Business Area (BA) director was responsible for the global strategy and performance of a business. BA management tasks included coordinating technology development, deciding on shipping prices between local operating companies in the BA, transferring expertise within the BA, capturing economies of scale in purchasing, and, possibly most importantly, allocation of markets and production to local operating companies. The fact that the BA director also headed a local operating company increased their motivation to delegate responsibility and decision-making to the local operating companies, based on time pressure, if not personal management philosophy.

Additionally, there was a BA Board that supported the BA director in setting strategy, reviewing performance, and addressing key problem areas. The BA Manager chose the Board members, and membership varied greatly depending on the business type. The BA Board was made up of international individuals and held meetings in different locations throughout the year. In addition to the BA Board, there were several functional councils within the BA that brought together key managers for quarterly meetings. These meetings provided an opportunity to evaluate and share internal best practices and propose solutions for major issues in their area of expertise. When specific problems arose, the BA Board would form project teams comprised of talented younger managers. The BA director would receive monthly reports via ABACUS on the performance of each profit center and operating company within the BA.

The BA director determined the distribution of this type of information among the local operating companies. One of the most important roles of the BA was to promote

best practices. By sharing performance information and exposing managers to various operating methods through transfers and travel assistance, this goal was achieved. The combination of demanding performance requirements and resources for improvement strongly drove change within ABB. The BA directors, in turn, reported to Business Segment Managers. Business segments were comprised of related BAs.

Each section was lead by a member of the Executive Committee, the top-level organizational unit in the company. The directors of the local operating companies also reported to the state director of the state in which they were located. The state director had profit-and-loss responsibilities for all ABB activities within that state. The state director's role was to recognize potential synergies among the various ABB local operating companies, represent a local presence for major projects within that state, provide legal and political support for operations, coordinate certain workforce development plans, and ensure that the local political and social environment was properly considered in business decisions. The state director received monthly reports through ABACUS on the performance of each local operating company in the state and could use this data to identify common issues they faced.

The roles of the caputs of local operating companies were supported by a Steering Committee, which included representatives from the national company, the BA, and other closely-related local operating companies. The Steering Committee helped the caputs in their contrasting responsibilities to the state director and the BA director. The president of the local operating companies underwent performance ratings conducted by both the BA caput and the state director. Although each portion had the same basic public presentation prosodies, they had slightly different outlooks.

Managing the Matrix: The Top Management

At

the highest level of the company, the Executive Committee served as the meeting point for the two dimensions of the matrix. This committee was chaired by the CEO. Each of the 10 Executive VPs was responsible for one or more sections and states, with their individual responsibilities varying based on their tasks.

Each BA director and state director directly reported to a member of the Executive Committee. Due to ABB's acquisitions, the assigned responsibilities of Executive Committee members changed over time, particularly in terms of geography. The major change occurred in the geographical aspect: instead of individual members being accountable for a portfolio of various national companies, the geographic responsibilities were consolidated into three regions: Europe, the Americas, and Asia Pacific. Each member was allocated either one of the four industrial sections or one of three geographical regions. This shift to having regional rather than individual country duties for Committee members also aligned with ABB's global strategy. Furthermore, each Executive Committee member participated in the annual planning process of both the BAs and geographic units reporting to them.

However, the corporate duties in defining the overall strategic direction for the company were just as important. A common language was necessary for extensive communication in a company that operates in 140 countries, and in ABB's case, this language was English. Communication also occurred on an individual level, between the Executive Committee and their direct reports, and even between the Executive Committee and the heads of the local operating companies. The Executive Committee members had access to monthly performance data for all the operating companies, national companies, and business areas they were responsible for. The ABACUS system provided

rapid feedback on any changes in the performance of these units, and the monthly data was regularly reviewed at the top of the company.

Alliance: Developing the Global Manager

One of ABB's key challenges was to develop managers who could effectively work within this demanding system.

The most important task was the development of the "planetary directors" who would hold key roles in the Business Areas and on the Executive Committee. These directors needed to effectively balance the local and global aspects of their positions, ensuring decision-making and accountability while promoting entrepreneurship within local operating companies. ABB aimed to maintain its competitive advantage as a multi-business global company. To achieve this, individuals were developed through training programs, experience on international teams, and rotations across different locations. The unique characteristic of these directors was their extensive international travel. ABB's organizational structure and its impact on strategy and performance provided valuable lessons for others. The company demonstrated that it could successfully compete globally by being responsive to local needs while also prioritizing global integration.

Each local operating company CEO was given autonomy to make independent decisions and run his own business. By reporting to both the country manager and the product manager on a global level, ABB successfully achieved its goal of becoming a leader in the electrical systems and power generation industry. ABB demonstrated the effectiveness of matrix organizations, which had been a popular concept but had failed in other large global organizations such as Citibank and IBM due to their complexity. ABB was the first company to efficiently implement the matrix organizational model on a global scale.

Singing the success of ABB, many organizations around the

world also successfully adopted the matrix structure. The various performance indicators of ABB from 1988-1996 clearly showed that aligning the organizational structure with the organization's strategy, and vice versa, led to achieving great results. ABB managed to coordinate 210,000 employees, 310 business units, and 5000 profit centers in 140 countries through the matrix structure. This demonstrated the significant role of linking mechanisms in transforming a complex kaleidoscope of grouping patterns into a smoothly operating organization.

ABB was able to successfully expand its operations globally by accumulating resources and expertise on a large scale and quickly responding to the needs of local markets and clients. This enabled ABB to increase its profits to $1.3 billion in 1996, and its stock price doubled between 1992 and 1996, thus strengthening its organizational structure.

The SEMCO Model

What makes the SEMCO model unique is that for the first 20 years of its existence, it had a hierarchical structure and culture that heavily relied on authoritarian management styles. However, in the last 20 years, SEMCO has transitioned to a democratic management approach.

SEMCO is a unique approach for companies that have not yet evolved into democratic societies to successfully transition. What sets the SEMCO model of democratic organization apart is its effectiveness in Brazil, a developing country known for its economic ups and downs and frequent instability. It can be argued that in a highly unpredictable environment, traditional hierarchical corporate structures are even less equipped to handle a dynamic socio-economic climate. Perhaps this is why SEMCO's adaptive model has been so successful. SEMCO, a Brazilian company that manufactures a wide range of products such as industrial pumps and cooling towers, as well as provides

environmental and internet services, experienced significant revenue growth from $32 million in 1990 to $212 million in 2003. This growth occurred despite the presence of rampant inflation and chaotic national economic policies in Brazil.

During a sixteen-year period, from 1982 to 1998, Semco experienced a sevenfold increase in productivity and a fivefold increase in profits. It also became a highly desirable employer in Brazil, with an employee turnover rate of only 1% from 1994 to 2004. Additionally, around 80% of Semco's annual revenue in 2003 came from repeat customers. The company had a unique culture where job titles did not hold power; even top managers were responsible for tasks such as photocopying, faxing, typing letters, and handling phone calls. There were no exclusive dining areas for executives, and parking spaces were assigned on a first-come, first-served basis.

Organizational net incomes were divided among employees and wages were determined by the employees themselves. Ricardo Semler, the company's CEO who referred to himself as the Chief Enzyme Officer, was the driving force behind this "rebel" organization. Semler stated, "If you ask me to describe it in traditional business terms, I would have to admit I have no idea what business Semco is in. I have deliberately avoided defining Semco for a simple reason: once you say what business you're in, you create boundaries for your employees, limiting their thinking and giving them a reason to ignore new opportunities." Semler's mindset resulted in a unique administration without a traditional structure, organizational chart, or fixed CEO position. There were no VPs, CFOs, COOs, or CIOs. The company did not have long-term strategic business plans, career plans, job descriptions, or dress codes

for its employees.

Some significant organizational decisions, such as relocating a unit or acquiring a company, were made based on employees' votes.

History

Semler's father, Antionio Curt Semler, an Austrian-born engineer, moved to Argentina in 1937. A visit to Brazil in 1952 inspired him to consider the opportunities that a "vast, undeveloped country" like Brazil offered. During this time, he was working on an extractor technology capable of separating oil from vegetables. With the desire to start his own business, he chose the city of Sao Paulo to initiate his venture, Semco, a contraction of Semler & Co, in 1953.

Soon after, he obtained a patent for his engineering. During the sixties and seventies, Semco primarily manufactured Marine pumps. In the late 1960s, 90% of Semco's sales were to the Brazilian shipbuilding industry. Semco operated as a hierarchical organization with 12 layers of management. According to a Fortune article, fear governed the company. Guards patrolled the factory floor, monitored employees' bathroom breaks, and searched workers before they left the premises.

Anyone unfortunate enough to damage a piece of equipment would have to pay for its replacement personally. According to Semler, the company had a hierarchical structure with rules for every possible situation.

Semler's Arrival

In 1980, when he was just 21 years old, Semler became the CEO of Semco. His approach to running the company was completely different from his father's. He believed that the company, as it was, was too inflexible.

He desired to replace the old approach to making decisions and planning with a more inclusive approach to leadership. However, the senior members of Semco were resistant to this change, resulting in Semler firing two-thirds

of the top management. Initially, Semco had a functional organizational structure where decision-making was time-consuming and each department made independent decisions that often conflicted with the interests of other departments. Eventually, the company transitioned to a matrix structure.

But, dissatisfied with its effectiveness, Semler made a change to the organization once again. A new organization structure: From pyramid to circle. Although the company claimed to have no organization structure, it actually had a highly flexible structure consisting of three concentric circles and a few triangles floating within it. The innermost circle consisted of a team of about twelve people, equivalent to VPs and above. The second circle included the 7-10 leaders of SEMCO's business units and was referred to as partners. The largest circle included virtually everyone else at Semco: machine operators, cafeteria workers, janitors, salesmen, security guards, and so on. They were called associates. The triangles were distributed around the large circle, each surrounding an individual that we would call a coordinator.

These individuals would make up the initial important level of Management A, including the sales, production, and revenue supervisors, as well as the chief of the engineering and assembly area, along with anyone in a leadership role in our previous system.

Organizational Culture

The transformation of business units into smaller units whenever necessary resulted in units that were small enough to operate with a commonly shared set of values, beliefs, and culture. The organization was held together by three interconnected core values: Employee Participation, Profit Sharing, and Free Flow of Information. These values originated from the belief that involving employees in the design and implementation of work procedures would give

them control over their work; sharing profits would create a sense of ownership; and providing information when needed would help employees continuously improve their work practices...

A strong leadership and change management philosophy is attributed to Semler at Semco. He fostered changes that may have been seen as diminishing his own power and authority. He cultivated an empowered atmosphere where employees were encouraged to constantly innovate. One of his ideas would eventually impact the entire workforce.

Semler implemented a practice at Semco where every individual in the company had to clear out their own file cabinets of unnecessary documents. This practice was inspired by seeing a company order expensive file cabinets for papers that were rarely referenced. Semler believed it was important to only keep necessary documents and this practice became a regular exercise at Semco.