Session Outline
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Organizational Design & Competitive Advantage
Inertia, Structure, Mechanistic vs. Organic
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Strategy & Structure
Simple, Functional, Multidivisional, Matrix
- Organizing for Innovation
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Organizational Culture
Values, Norms, Artifacts, Origins & Change
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Strategic Control & Reward Systems
Input vs. Output Controls
- Implications for Strategic Leaders
Learning Objectives
Define organizational design and list its three components.
Explain how organizational inertia can lead established firms to failure.
Define organizational structure and describe its four elements.
Compare and contrast mechanistic organizations and organic organizations.
Describe different organizational structures and match them with appropriate strategies.
Evaluate closed and open innovation, and derive implications for organizational structure.
Describe the elements of organizational culture, and explain where organizational cultures can come from and how they can be changed.
Compare and contrast different strategic control-and-reward systems.
How do we organize to implement strategy?
"Strategy is the brain of the firm, but structure is the body. Without a flexible body, the brain's commands are useless."
First Principle Question
Why do winners fail?
If a structure made a company successful, shouldn't sticking to it ensure continued success? (The Inertia Trap).
The Inertia Trap: When Yesterday's Success Becomes Today's Failure
Organizational inertia is the resistance to change, where a structure optimized for a past environment becomes a cage when the market shifts. It is the dangerous phenomenon where success in one era breeds complacency and an inability to adapt.
The curve of success eventually becomes the curve of failure without change.
What’s missing, of course, is the conscious strategic decision to change the firm’s internal environment to fit with the new external environment, which would turn four steps leading to the endpoint of inertia (Option A) into a virtuous circle where the firm essentially reboots and reinvents itself (Option B).
Option A: The Firm Arrives at Inertia
Success leads to structural rigidity. The cycle ends in failure to adapt.
Option B: The Firm Rises above Inertia
Strategic intervention resets the cycle. The firm reinvents itself before inertia sets in.
"The need for structural reorganization can be especially intense in many industries where the rate of change is high and potential disruption is frequent. In addition, business leaders find it much easier to create and manage within developed structures than to restructure their organizations to match where they need to be in future."
Negative Examples: Stuck in the Trap
Hindustan Motors (India)
Mastery: Ruled Indian roads with the iconic Ambassador car, a symbol of status and reliability.
Shift: The Indian economy liberalized, and modern, fuel-efficient, stylish cars from global brands like Maruti Suzuki entered the market.
The Trap: "We've always done it this way!" Refused to change the design or technology for decades, leading to obsolescence.
Blockbuster (Global)
Mastery: Perfected the physical video rental store model, making renting movies a convenient weekend ritual.
Shift: The internet and streaming services (Netflix) offered a faster, more convenient model (no late fees, endless choice from home).
The Trap: Fear of cannibalization: Worried that online rentals would destroy their profitable store business, they moved too slowly.
Kodak (Global)
Mastery: The undisputed king of photography, selling film and photo paper to millions globally.
Shift: The invention of digital photography, which required no film or paper.
The Trap: "Our profits come from film!" A Kodak engineer invented the first digital camera, but management hid the idea for fear it would destroy their highly profitable film business.
Nokia (Global)
Mastery: A global leader in mobile phones, known for robust hardware and clear calls.
Shift: The market shifted from hardware to software ecosystems, apps, and touch screens (iPhone, Android).
The Trap: Internal Politics/Blind Spots: Stuck to an outdated operating system (Symbian) and was too slow to grasp the importance of software and apps.
Kingfisher Airlines (India)
Mastery: Created a luxury, full-service flying experience popular among premium customers in India.
Shift: The Indian aviation market shifted towards budget, low-cost carriers (like IndiGo).
The Trap: Ego and poor planning: Insisted on maintaining a high-cost luxury model that failed to adapt to a price-sensitive market.
Yahoo! (Global)
Mastery: A dominant early internet portal and directory with massive early traffic and brand recognition.
Shift: The emergence of highly specialized search engines (like Google) and social media platforms.
The Trap: Lack of vision/strategy: Suffered from frequent leadership changes and an inability to choose a direction (media vs. tech company).
Positive Examples: Adapting and Thriving
Google/Alphabet
Mastery: Mastered web search and advertising algorithms.
Shift: The rise of mobile computing, cloud services, and AI.
Adaptation: Organizational Redesign (Alphabet): Created a parent company structure to allow "Other Bets" to innovate independently.
Netflix
Mastery: Mastered the DVD-by-mail service.
Shift: Faster internet speeds made video streaming viable and popular.
Adaptation: Embraced cannibalization: Quickly shifting resources and redesigning organization around content acquisition.
Apple
Mastery: Mastered personal computers (Macintosh).
Shift: MP3 players, smartphones, and digital music distribution became dominant categories.
Adaptation: Focused on seamless hardware-software integration and design excellence, allowing repeated pivots.
The Lesson
"The very things that make a company successful in one environment (e.g., rigid efficiency, a profitable core product) can become fatal traps when the market changes. Success often breeds a dangerous level of complacency. Continuous monitoring of the environment and a willingness to redesign the entire framework (strategy, structure, systems, and culture) are essential for long-term survival."
First Principle Question
What is an organization made of?
Just as matter is made of atoms, organizations are built from 4 fundamental blocks. How you combine them determines if you are Agile (Organic) or Robust (Mechanistic).
The Four Building Blocks of Organizational Structure
Organizational structure defines how work efforts are coordinated, how resources are distributed, and who reports to whom.
Specialization
Definition: The degree to which tasks are divided into separate, specialized jobs.
Trade-off: Breadth vs. depth of knowledge. High specialization increases productivity but can reduce job satisfaction.
| Degree | Examples |
|---|---|
| High |
IN TCS: Organizes into distinct units (banking, telecom) to build deep expertise.
GL Apple: Highly specialized experts in hardware/software work in concentrated areas.
|
| Low |
IN Early Zomato: Founders wore multiple hats (coding + support).
GL Early Airbnb: Small generalist teams handling all aspects before formal roles.
|
Formalization
Definition: The extent to which behavior is steered by explicit, written rules and procedures.
Trade-off: Consistency and predictability vs. slow decision-making and reduced creativity.
| Degree | Examples |
|---|---|
| High |
IN Indian Railways: Detailed codified rules for safety and scheduling across a massive network.
GL McDonald's: Global SOPs ensure consistent product quality everywhere.
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| Low |
IN Early OYO: Bypassed rigid rules to onboard hotels rapidly.
GL Zappos: Minimizes scripts to encourage personalized customer service.
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Centralization
Definition: The degree to which decision-making is concentrated at the top of the organization.
Trade-off: Coordinated control (centralized) vs. faster response time (decentralized).
| Degree | Examples |
|---|---|
| High |
IN Trad. Conglomerates: Strategic decisions concentrated at top levels (e.g., Reliance).
GL BP (2010): Crisis decisions made at UK HQ slowed response to oil spill.
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| Low |
IN Flipkart: Operational decisions decentralized to local teams for speed.
GL Google/Alphabet: "Other Bets" subsidiaries have significant autonomy.
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Hierarchy
Definition: Determines formal reporting lines and span of control (tall vs flat).
Trade-off: Tall (narrow span) vs. Flat (wide span). Firms de-layer to become nimble.
| Type | Examples |
|---|---|
| Tall |
IN HCL/Wipro: Multiple layers to manage thousands of global employees.
GL The Military: Long chain of command with narrow span of control.
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| Flat |
IN Zerodha: Flat structure to stay agile with few bureaucratic layers.
GL Amazon/Tesla: Increased span of control (6+ reports) to cut bureaucracy.
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Configure Structure
Division of labor (e.g., Generalist vs Specialist)
Rules & procedures (e.g., Playbook vs Freedom)
Decision making (e.g., Top-down vs Delegated)
Reporting lines (e.g., Tall vs Flat)
Mechanistic Organization
Highly standardized, rigid, and efficient. Great for cost-leadership strategies in stable environments.
Indian Railways / SBI
Strict hierarchy and formalization required for safety and massive scale.
McDonald's
Standardized processes ensure a burger tastes the same in Tokyo and New York.
Mechanistic vs. Organic Organizations
The two predominant organizational forms are Mechanistic Organizations (built for efficiency and consistency) and Organic Organizations (built for flexibility and innovation).
1. Mechanistic Organizations
Characterized by high specialization, high formalization, centralized decision-making, and a tall hierarchy. They allow for standardization, economies of scale, and are often used when a firm pursues a cost-leadership strategy.
Each job step is documented in minute detail. HQ provides instructions to franchisees globally via "Hamburger University". Ensures consistent quality (Standardization).
Strict hierarchy and detailed procedures are essential to manage a massive, complex network safely. Ensures large-scale, low-cost transportation.
Relies on highly formalized, specialized assembly lines to achieve high volume and low costs in the competitive Indian auto market.
Uses highly centralized systems and rigid hierarchy to manage supply chain logistics with extreme efficiency and drive down costs.
2. Organic Organizations
Characterized by low specialization, low formalization, a flat hierarchy, and decentralized decision-making. They foster fluid information flow, faster decision-making, and are often used for differentiation strategies.
No formal job titles or chains of command ("lattice organization"). Employees organize in project-based teams. Fosters continuous innovation (GORE-TEX).
Flat hierarchy. Customer service reps are empowered to solve problems without scripts or approval. Differentiation through superior service.
Flat organization avoiding bureaucracy. Small core team of engineers focuses on rapid tech development and user experience (Fintech Innovation).
Encourages bottom-up communication, project-based teams, and experimentation ("20% time"). Fosters R&D and innovation.
| Feature | Mechanistic Organizations | Organic Organizations |
|---|---|---|
| Specialization | High degree; rigid division of labor | Low degree; flexible division of labor |
| Formalization | High degree; intimate familiarity with rules | Low degree; general guidance |
| Centralization | Decision power centralized at the top | Distributed decision making (decentralized) |
| Hierarchy | Tall structures; clear lines of authority | Flat structures; wide span of control |
| Business Strategy | Cost-leadership strategy | Differentiation strategy |
First Principle Question
Does Structure follow Strategy?
Or does strategy follow structure? (Hint: A flexible body allows the brain to execute complex moves).
Simple Structure
A flat organizational structure with low specialization, where the founder makes all key decisions and runs day-to-day operations.
Typical Kirana Store
Owner manages sourcing, sales, and finance directly. No middle management.
Facebook (2004)
Zuckerberg coding in a dorm room. One boss, no formalism.
Pros: Fast decision making, high flexibility.
Cons: Founder overload, lack of specialized systems.
Generated Canvas Diagram
Structure Must Follow Strategy
The "Flexible Body" Metaphor: Structure Enables Strategy
Strategy formulation is the "brain" deciding on the complex moves it wants to make. The organizational structure is the "body."
- Strategy Determines the Required Structure: The brain (strategy) decides it wants to run a marathon (cost-leadership) or perform gymnastics (differentiation). It then designs the body (structure) accordingly—either for endurance or agility.
- Structure Enables (or Constrains) Future Strategy: Once the body is built, its capabilities influence what the brain can decide to do next. A marathon runner's body can't suddenly do gymnastics efficiently. This is the Inertia Trap in action.
1. Cost-Leadership Strategy (Mechanistic Functional Structure)
Goal: Efficiency & Low Cost. Requires centralized, specialized structure.
Maruti Suzuki
Uses a highly centralized functional structure with rigorous process controls to maintain low-cost position in the competitive Indian auto market.
Walmart
Employs a command-and-control functional structure focused on supply chain optimization to drive down costs.
Ryanair
Highly centralized functional structure where every operational cost is scrutinized to enable ultra-low flight prices.
First Principle Question
What is the 'Dark Matter' of a Firm?
It's invisible, holds everything together, and exerts powerful gravity. It's Organizational Culture.
The Culture Onion (Levels of Culture)
Organizational culture exists in layers, much like an onion, moving from visible manifestations to deeply held beliefs.
1 Artifacts (The Outer Layer)
What You See: Visible and tangible manifestations. Easy to observe, difficult to decipher.
- Zappos: The offer to pay employees $2,000 to quit.
- Google: Free gourmet food, scooters, playful offices.
- Indian Startups: Founders sitting in open-plan offices.
2 Norms (The Middle Layer)
What We Do: Unwritten rules and social expectations governing behavior.
- “Always consult with a teammate before deciding” (W.L. Gore).
- “Don't leave work until the client is satisfied” (Consulting).
3 Values & Beliefs (The Core)
What We Believe: Underlying reasons and core beliefs endorsed by management.
- Tata Group: "Integrity" & "Stewardship" (explains no layoffs).
- Zappos: "Deliver Wow Through Service" (explains the $2k offer).
Hover over the layers on the left to visualize structure.
First Principle Question
How do you manage what you can't see?
The Principal-Agent Problem: How do owners ensure employees act in the company's best interest?
The Principal-Agent Problem
This problem arises when one person (the Principal—e.g., owner) delegates authority to another (the Agent—e.g., manager). The core issue is that the agent may not always act in the principal's best interest due to different goals, and the principal cannot perfectly monitor the agent's actions (you can't "see" everything).
1. Input Controls (Process)
Monitor value creation before employees make decisions. Focus is on controlling the process via rules and budgets.
Relies on strict SOPs and hierarchy to ensure discipline in high-stakes situations. Extensive bureaucracy manages public funds.
Detailed SOPs (e.g., frying times) monitor behavior minute-by-minute for 100% global consistency.
2. Output Controls (Outcome)
Define expected results but leave the means to the employee. Focus is on the final outcome via targets and incentives.
Delivery partners judged by metrics (time, ratings). Not micromanaged on routes; only the outcome matters.
Use "OKRs" (Objectives and Key Results). Employees have freedom to find their own path to breakthrough innovations.
Holistic Alignment
Successful firms align their Structure, Control, and Culture. Misalignment leads to friction and failure.
Key Distinctions
| Element | Description | Function | Nature |
|---|---|---|---|
| Structure | The formal blueprint of reporting lines, hierarchy, and division of labor. | Defines authority, roles, and communication channels. | Formal & Visible |
| Control | Systems and processes to monitor behavior/performance and align incentives. | Ensures coordination and guides behavior toward goals. | Formal (Systems) |
| Culture | Shared, unwritten values, beliefs, and norms. | Creates identity, trust, and unspoken expectations. | Informal & Invisible |
🇮🇳 Indian Titans
Tata Group
M-FormStructure: Multidivisional. TCS, Tata Motors, etc. operate as separate SBUs with own CEOs.
Control: Input Controls. Detailed group policies and ethical codes binding all SBUs.
Culture: "Trust" & Stewardship. Commitment to welfare & nation-building (e.g., no mass layoffs).
Maruti Suzuki
FunctionalStructure: Mechanistic/Functional. Highly formalized factory layout with clear chains of command.
Control: Input & Output. Rigorous SOPs (Input) + Strict production targets (Output).
Culture: Frugality & Efficiency. Cost consciousness to serve the price-sensitive mass market.
Zomato / Swiggy
NetworkStructure: Hybrid/Network. Core tech team linked to decentralized delivery partners.
Control: Output Controls. Relies entirely on metrics: time, completion rates, ratings.
Culture: Speed & Execution. High-pressure environment focused on rapid market delivery.
🌍 Global Giants
Google / Alphabet
DivisionalStructure: Divisional (Alphabet). Core Google is functional; "Other Bets" are separate.
Control: Output (OKRs). Objectives & Key Results provide autonomy on how to achieve goals.
Culture: Innovation & Autonomy. Values engineering freedom, debate, and "moonshots".
McDonald's
FranchiseStructure: Mechanistic. Centralized HQ overseeing thousands of standardized franchises.
Control: Input (SOPs). Every step detailed in ops handbooks (e.g., pickle placement).
Culture: Consistency. Expectation that a Big Mac tastes the same anywhere globally.
Zappos
Flat/HolacracyStructure: Flat/Hybrid. Minimizes hierarchy to push decision-making downward.
Control: Culture as Control. Uses cultural alignment (the "offer to quit") as the main filter.
Culture: "Service Wow". Intense focus on service supersedes formal rules.
The King's Fall: Hindustan Motors
A classic study in Organizational Inertia. How the undisputed "King of Indian Roads" failed to adapt.
1. The Era of Complacency
Guaranteed sales to the government created a "Seller's Market." Zero incentive for R&D.
2. The Tectonic Shift (1991)
Liberalization brought Maruti Suzuki. The Ambassador's 1950s design was suddenly obsolete against fuel-efficient modern cars.
3. The Paralysis
Patchwork solutions (minor facelifts) and misguided diversification failed to address the core problem. Production stopped in 2014.
Market Share Collapse (Est.)
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