i Intiodu: © @ Proposed approach ‘© Employ axiomatic design principles to distinguish between thsee multidir sional organisational models: the traditional matrix structure; the front model; and the modular organisation. Designing multidimensional _ organisations ‘© Examine the internal and external contingencies that would favour one mut ‘mensional model over another [lfediction Igenttying the rght criterion by which to structure organisations has always 2 core Issue in organisation design. Traditionally, single product firms were s {ued in terms of the means that they used to produce outputs (Mintzbexg, 1 ¢ means include knowledge, sills or processes that are ued to produce a | + or sevice. The resulting design i often refered to as functional structure he resulting units as business functions (not fo be confused with the term tial reqrerent used elsewhere in this book). Purchasing, Finance and Mark “are typical examples of business functions. Similarly, hospital departments su F atology, Pediatrics and Radiology are defined based onthe knowledge and E Gt doctors each department corresponds to a medical sub-discipline that do [seciase n ater completing their baste medial talning, But we may abo Gyinder this rubric organisations that are structured by process; as we will disct | Overview ® Background «© Many large organisations today are structured along multiple dimensions, repre: | senting markets, products and internal services ‘© Compared to a unidimensional structure, « multidimensional structure allow greater decentralisation, eliminates duplication or multiplication of similar su>- Tints, better reflects the organisation's work processes and creates a more balanced @ ees tivity performed by each worker, such as casting, welding and machining, "in companies with multiple products or services, the organisation is some sured in terms of the ends rather than the means, namely, by the different Ets or services that it delivers. na product-based organisation, the key uni E sponsble fora specific type of product o service, or alternatively, a product I fad. A consumer goods company may have three product divisions: Skin care ibn), Home care (e.g, detergents) and Oral care (e.g, toothpaste). An electe may have product divisions responsible for printets, servers and personal Challenges «The organisation design literature has overlooked the differences between alterna: 4 tive ways in which to combine different dimensions of large organisations ‘e Managers and consultants also tend to refer to any multidimensional structure a tmatrix’ © There are several ways in which to design multidimensional organisations, whi lifer in terms oftheir complexity and flexibility Bid development or Production) will be organised within each product division. ‘Amore recent approach isto structure the organisation based on markets Bach an organisation can elther be defined by the market segments that cust *ategorised into or by the geographical regions in which custome are loca HpALIK may be decomposed into three main units: one for individual customers; © ll businesses; and one for large businesses. A large, global company may cor dpe national subsidiaries; a governmental institution such asthe office man Jtation may be sub-divided into diferent regions and school districts Key questions «© How can the multidimensional organisation best be conceptualised? eHow can we analyse and evaluate the complexity and flexibility of alternative d ‘multidimensional designs?mm Chapter 4 Designing multidimensional organisations ‘To this list we may add the possibilty of defining an organisation based on its projects. An offshore engineering firm may be subdivided into a few large projects, teach focused on delivering a specific solution to a client (eg. the engineering design, {oc a particular oil platform or some ofits sub-systems or components). In some eases, projects may even become more or less permanent units within organisations (Sanchee and Heene, 2004). A project team organised to launch a new product may become a ‘department with responsibilty for the new product once it has been laurichee. Until recently, a fairly common assumption was that It was necessary to select fone main criterion, in other words, that organisational structure needed to be un dimensional. Strategy experts (e.g, Porter, 1996) have maintained that developing a successful strategy requires the ability to focus, by prioritising the activities that contribute most strongly to competitive advantage. From this perspective, It seems hnatural that the telative Importance attributed to each criterion (function, prod uuct/service anid market) should be ceflected in the organisation design and that the ‘most important ctiterion should be employed when defining the highest level ofthe organisational structure. Simple contingency models have often been used to select, the main criterion and align the organisation with the chosen strategy. If product ~ 4 Innovation was deemed most Important, companies would organise by brand or technology platform. IF customer orientation was deemed paramount, a structuce based on geography or customer segments would be adopted, If operational excel: lence was a cancem, one might attempt to introduce a process-based structure (at least in parts of the organisation) However, over time, as organisations grew in size and complexity, it gradually became clear that selecting one criterion for structuring an entire organisation might lead to compromises that result in suboptimal performance. There were also indice tions that companies with a unidimensional structure were rarely able to maintala. | the structure over time; some even oscillated between different (unidimensional) structural configurations, US chip maker Cisco is a ease in point, From 1997 to 2001, I was organised as three semi-autonomous business lines, one for each main cus tomer type: large companies, small/medium-sized companies and internet service providers, Each business lne developed and marketed its own products, and had it) ‘own sales staff. In 2001, the company chose to introduce a product-based structure, and the three business lines were divided into 11 technology groups. The ration ale was to consolidate engineering resources to ensure that technological solutions. would be reused across customer segments, Two US academics, Gulati and Puranam. (2009), examined the Implementation of the new organisation more closely, Whereas the new formal structure appeared to suggest that the company operated a5 a ‘product-centric’ company, they found instead that informal networks ftom the. previous customer-oriented organisation prevailed. For example, marketing people Introduet ‘ould continue to approach thle ot colleagues fom engineering to solve peo tems or to seek advice on how to respond to custome ingues Tei likely tht Informal networks were used to compensate forthe fact that new formal seats | had distanced the engineers from the customers. Cisco later seemed to acknowled thatthe new structure was inadequate in terms of customer responsivenes a | roduced crossunit processes in 2004, aimed at achleving ntegeation atoms tec | Nologies, and also introduced a set of ‘business councils’ that essentially replicat the older grouping by customer ype (at higher management level). In concasion, is difclt to find one terion that Is appropriate actos un tbat hod diferent roles and cary ou fundamentally diferent kinds of setts Course a8 inthe Cisco ase, people may informally compensate for this Weakne but ii arguably better to find 2 formal design that acknowledges the actual fu tons that an organisation seek full Consequently. many lage organisa | today are multidimensional. Units within the organisation that ate responsible { ‘he development and manutscturing of products are typically organised by bs 8 technology platform, Units responsible for sales and easemer suppor ae og | led by geography (e.g., country) or market segment (e4,, large, medium-sized at [sna cstomer), Fall intemal service providers sucha HR Tr and Accounting + ‘yal organised by knowlege and sl. Intl, organisations simply comban [ye units by using diferent grouping cate at different levels of the bleach [erating 2 hybrid organisational model, For example atthe ones evel of the ona G stlon, units would be grouped by skills and knowledge or process, then at the ne “lol they would be combined int age nits grouped by produc, which in tun | would be grouped by geography. With a multidimensional structure, however, it ot necesary to select one dominant cterion atthe expense of another a sie to crete a design where units representing diferent cmersions ar tepresent [these hierarchical le. This development i istatd in Figure 1a io I is natural to compare multidimensional organisations to the multidiviston “Sygantsation described in Chapter 1, In a pure version of the multidivisional mod hasiness nits are supposed to be largely independent economic units, with mana 5 that dicectly control the resources requited to perform its processes. Few firms a ‘organised in this manner today. The majority of large firms have increased resour sharing and coordination between divisions (Hoskisson et al, 1993; Whittington i, 1999), For example, firms have consolidated administrative functions into shart Services units and introduced account management processes in order to coordina {ales and marketing, However, the multidimensional models as defined here go ‘Step further by formally decoupling two or more core dimensions (such as produc 4nd regions) that are usually organised within the same division or business unit in faultdivisional company.114 Chapter 4 Designing multidimensional organisations (cnn) Gees a (GEaE PRE res Figure 4.1a Hybrid organisation with multiple levels of grouping, with products as the main grouping criterion ‘Company x Region 4 SER AHE mi Figure 4.1b_ Hybrid organisation with multiple levels of grouping, with regions as the main grouping criterion ‘Company Powe] fiat] (a Region Region Region * 8 © 2 3 Figure 4.1¢ Mukidimensional organisation ‘A multidimensional structure should confer a number of advantages: © It should make it possible to combine the main advantages of three dliferei ‘organisational models: the customer orientation of a market-based structure; the technology focus of a product-based structure; 35 well asthe economies of scale and competence building derived from a functional structure (if internal unity 4 such as IT, HR and Finance & Accounting are grouped by skills and knowledge). Introduet | Wealso tends to be flatter. As Figures 4.1a-c show, two management levels may _ collapsed into one in a multidimensional organisation. Indeed, lage firms h often introduced this design as part of an effort to ‘disaggregate’ their organi tion by removing management layers, dividing up large units into smaller un and decentralising decision-making authority. ‘A multi¢imensional organisation avoids the duplication or multiplication of sit Jar sub-units that is required to create @ coherent unidimensional structure wh sub-units have been defined according to different grouping criteria at differ levels. (Note that in the hybrid model shown in Figure 4.1a, for example, th ate three sub-units responsible for Region 1, whereas only one is required in | ‘multidimensional structure shown in Figure 4.1¢) © A-multidimensional structure will often reflect the main business processes of | Otganlsation to a greater extent than a unidimensional organisation, which tum will contribute to a more balanced composition of the leadetship team. Indicated in Figure 4.1c, the leadership team may consist of the heads of each the main units, presenting internal service providers, products units and mat lunts. In a hybrid structure (such as that shown in Figure 4.1@ of 4.1b), the eo Position of the leadership team is always skewed toward one dimension, Despite these advantages, one important challenge related to this model is how link the different dimensions ~ representing internal functions, products and m _ kets. Most experts would agree that the suecess of the model is largely depend = Upon how well one is able to coordinate across the units xesponsibte for customs _ Products and internal functions. However, there has been a tendency to overle | fundamental differences between altemnative linking mechanisms. A leading orga = sation design expert, Jay Galbraith, explained that ‘some form of matrix is usue employed to tie the front and the back together’ (2000: p. 243). It has been comm Jn the organisation design literature to present the matrix (1.e., a dual author sfucture) as the mid point on a continuum from product to functionally ba B Sructures (or alternatively, a the mid point between functional and geographi _ tructures) (See Figure 4.2). Managers and consultants also tend to refer to any imu © mensional structure asa ‘matri’ ae ee Functional Matic Product cexganisation coxganisation coxganieation Functions! ual authority Product authonty authonty Sucre Structure gure 4.2 Range of alternative organisation design options according to Galbraith 1971; 2000)CChapter 4 Designing multidimensional organisations However, a closer examination reveals that the matrix structure is only one of | -veral alternative ways in which to create a multidimensional structure. In the 4 mainder of this chapter we review three different approaches. In addition to the atsix structure, we examine the fiont-back model and the modular organisation, Urilising design matrices we show how functions are allocated across internal units i discuss the resulting flexibility and complexity of each model. Example 4.1 Scandinavian telecom To ilusvate alternative ways of designing @ multidimensional structure we use an example ‘case from a company that we refer to as ScanTel, The example cae is the result of interviews land surveys conducted in & large Scandinavian telecomrnunications fm in 2007 and was later revised and updated with representatives from the frm. ScanTel's mission i to afer a broad set a services (elated to both fixed and mabile telephony, cantent and infrastructure, etc) and serve multiple stakeholders (customess, shareholders, employees, etc) in two rain market segments: consumer (individualresdential) and business. Having evolved fiom @ state-owned monopoly, the firm manages considerable assets (telecom network Infrastructure and IT systems) ‘At the highest evel the functional requirement fr this fim ean thus be sated as follows FR, Create value for stakeholders by offering telecommunicaton senvces This functional requirement can be decomposed into a set of mare specific, awer-level ‘unctonal requirements flows FR, = Provide cost-effective IT systoms and applications that meet the needs of intemal cents FR, = Develop and manage an efficient network infrastructure FR, = Maximise profits or Fixed telephony services = Maximise profits for Mobile telephony services FR, = Maximise revenue inthe Business segment ‘Maximise revenue inthe Consumer segment Perform enabling and contol processes In the folowing, we wil review sight different varatons ofthis decomposition. There are ‘often multiple lower-level furctional requirements that can be chosen that al satisfy the highest level FR. It may be necessary to adjust bath the decomposition of functions ard design Parameters (e., unt grouping and/or aloation of responses across units) in order to Improve a design. However, an important premise tha the top-level function (FR,) remains Constant. Ths isthe case inthe folowing discussion; the three multidimensional designs that we describe ar alterative ways of teling this frm’ main mission (expressed as FR). The key design parameters for dalverng the above functions areas follows (lo see Figure 43) 1, = Information systems (S) unit DP, = Operations ui Dp,, = Fixed business unit DP, = Mobile busines unit DP, = Business market unit DP, = Consumer market unit OP = Corporate staff unt | Figure 4.3). There are two products units, defined based onthe network infrastructure be © Figure 4.3 Grouping criteria used to define the key units in ScanTel =|: Curent market trends may challenge these assumptions and make i necessary to revit Introd ‘According to our definition above, this design is multidimensional sit places urs that hs bon decomposed based on thee diferent grouping erteria at the same birarchical level Utlced to deliver services, ether fixed or moble, There are aso twa market unt, defi by the main customer segment that they target: business and consumer (12, individ. resdenia) customers. In addition, there are two important intemal units cesponsble TT systems and the network infastaucture as well as a central staff unit responsible for Finance and Procurement Defined by processor nowledge/tlls Defined product/technology platform Defined by market segment | Consumer Operations : b The key prerequisite for a multidimensional model is that one is able to decompose | organisation into a set of relatively independent sub-unit. This in tum requires thats key assumptions, regarding market segments and product interdependences, actualy | [ tue. As an example, there ae five key assumptions behind the model adopted by Scan) 4, Business and residential customers have dstinct needs and therefore require product and service packages, pricing plans, ete 2. Customers in both segments may buy ether fixed or mobile telecommunicaton prod (02 combination). 4. Thete are limited interdependendes between fixed and motile tecmologes, makir feasible to separate these into wo units 4 There ae seal effects and other advantages from consolidating product-related proce In the back end units, as opposed to spreading them in the font units Simian, IT and operations processes may be consolidated int lnternal sevice pros ‘units that serve al product or market unis, ife ‘ehosen structure. For example, telecom services are increasingly ‘bundled’ (eg, 50-c. | tpl ply offerings with a package of fixed telephone services, broadband and a me {ubscpton), which sometimes require tighter integration between different product | Moreover, the separation between consumer and busines is not alas relevant a ‘ems buy telephone serves on behalf of ther employees, and ezrentialy ater telephon‘Chapter 4 Designing multidimensional organisations aa broadband subscription as an employee benefit. However, even i these trends continue they do not necessarily imply that telecom companies should revert toa unidimensional structure, but the trends wil Wely lead toa diferent decompostion of ScanTels actvties compared to the ane shown here. ‘company such as ScanTel. In reality, ScanTel has several thousand employees, L the sake of simplicity, we consider the effect of changing the formal structure People (Figure 4.4). For the moment we also ignore staff and internal servic _ vider units and focus only on how to link the product-market axis. As Figu | shows, the 21 people include the EVP for each main unit, 2 managers worki sales and marketing who are already attached to one of the market units, as 12 employees who have yet to be allocated to a unit. The matrix Sante ‘The mates structure emerged dung the 19605 and had become quite common: 4 place tn lage organisations bythe early 1970s? During this pid, faders of may | fivsonaed firms had become concerned about the duplation of functions (eg 0 engineering production and marketing) and the lak of coordinalon ares pens Fas ee tases ena sions. The matrix structure was implemented to open up the lateral communication channels and better integrate the different parts of the company. In other firms, the main driver was increasing internationalisation. New country subsidiaries were established, and the matrix structure was introduced to ensure that key employ: ees were focused on developing local business while being integrated in the global structure of the company (Chi and Nystrom, 1998). Key personnel in the country subsidiary would thus report both to a country manager and to a manager in one of the company’s product divisions, The classic example is ABB (prior to changes introduced in 1998). A manager in, say, Spain, would report to the country man- ager In Spain, responsible for sales and customer support. On the second axis the ‘manager would report to a manager in a global business area, which would be organ: ‘ged based on product group or technology (e.g. power transmission, industrial and_| building systems, financial services, ete). The matrix form fell out of favour and was | abandoned by ABB as well as by other well-known proponents such as Shell and BP several years ago. However, the model is not yet extinct; some companies have eeeeeeeeeeey Employees “Figure 44 People in ScanTel that will be organised by means of a matrix in the bsequent examples (Figures 45-47) recently started 0 adopt matic stractres agin, atleast n parts oftheir organise tion Fr example, companies with plants in eiferent counties inreasngy se he plants as part ofa global supply chain, rather than as county-specti resource. I Such companies, a plant mangger responsible for, e., production planning ma} report both to a loca site director and to a supply chain manager in 2 global supp chain organisation. The purpose is to synchronise the global operations and tl ensure that common standards apply actoss different sites. Another vattant Is tel Polect mati. Instead of permanent reporting relationship to two Dosis, ne et refers to organisations where the ‘stale’ pat (eq, the funcional departments) a6 combined with a ‘changeable parte. projects) by means of matrix reporting lines Employees report to project managers on a day-to-day basis but also belong to func tional departments (epresenting diferent technica spline) ‘ ‘There are many ways in which to implementa tat To Mtuminate some of he options that may exis, let us consider how a matix could be implemented i _ low can we use a mateix model to organise this group of 21 people? uestion is at what level a matrix reporting structure should be implements Host straightforward solution is to establish dual reporting lines where oyees report both to a manager in @ market unit and to one of the f Bitdirectors. Assuming that the volume of work is more or less equal act luct categories, the group of 12 can be subdivided into four groups (see ) The main advantage ofthis solution is that it avoids the introduction {itional managerial positions, it simply sub-divides the employees into E /inks them up with the units on both dimensions by adding reporting ys. In practice, it would mean that both the heads of the product units ¢ «of the market units would Influence the goals that ate set, support and Sources to the activities performed by employees, and evaluate the perform Eb employees,Figure 4.5 Example of matrix created by introducing reporting relationships for employees toward a manager within a market manager and the head of a product unit The © When two organisational dimensions that are linked in sach a manner ha unequal number of hierarchical layers (in this example, the prosluct units hav layers, while the market units have three), it leads to an unbalanced matrix ‘mployees will on the product dimension zeport to an executive that is one above the manager in the market unit (see Figure 4.4). Such asymmetrical relationships present employees and managers with considerable challenges only are employees supposed to manage the different and potentially confl expectations from the two axes of the organisation, they must do this while {ng in mind the unequal hierarchical status of their managers. The manap + the market unit may experience that he/she is being ‘overruled! by the EVP i ‘product unit, or that he or she has no real managerial authority and will ne involve the EVP in the market unit in order to make a decision, Despite these lems, asymmetrical power relationships are relatively common in large and cor “organisations (Edmondson etal, 2003). © A balanced matrix can be created In two ways. It is possible to introduc "matrix one level up, by creating additional managerial positions, and establish = ply encompasses the manages. “However, creating a balanced matrix inthis manner comes at a high cost otal number of managers would need to increase from two to four. Other t Hang equal, Mintabesg (1979) estimated that a matrix structare implemented sed by the added time used for supervision, as bosses in a matrix are suppor © jointly hire, agree on goals for the employce and evaluate performance, He di cide the need to create adlitional positions to ensuce that the structure ob sonable degsce of coherence and consistency. In Seal there are only to at there was one manager attached to each market unit. But new middle ma fen positions could be created, reporting to the EVPs of the product units (1 2) the employees instead would report to these middle managers, we would ie ésymmetrical relationships described above, However, the assumption would422 Chapter 4 Designing multidimensional organisations sfejdus124) Chapter 4 Designing, multidimensional organisations The m Regardless of which optlon that Is se significant interdependencies between tl reporting structure, in a matiix, her goals will to a gres lected, a matrix will by its very nature create the units that are connected by means of the the ability of a manager or employee to attain his or at extent be dependent upon decisions taken in units repre. market and product units), In some We should add that coupling may aso be due to operational interdependen ‘hat are unrelated to the choice of reporting structure as sich. In teleeemmn Fons companies, the units responsible for IT and telephone network intesteue bave some Influence on the achlevement of almost all functional requirements Sample, the introduction of @ new pricing scheme, developed by & market v imay necessitate a significant recoding effort on behalf of I, as pricing mechan pe cometimes ‘hard wired’ in the billing system (which is tightly coupled to basic telephony network systems). Similarly, 4 television on celiphone handsets, may re ‘may depend on additional infrastructure i 4 Serious hindrance for achieving speed a ies, (In Figure 4.8, the ‘x's’ in the first tn achievement of all fanctions is dep Operations units.) the introduction of a new product, + squire network capacity increases, wt investments. Such intetdependencies md flexibility in many telecoms von ro columns of the matrix indicate that pendent upon actions and decisions in the 1 sion may encourage the employee to focus on Sculng complex telephony solutions with high margins. The superior on the marker iztension may prefer that the employee sell simpler, but higher-volume sercica {hat contribute to higher revenues. similarly, ifthe product unit is responsible for SRislening new products, the superior on the product dlmension may recognise the Sales manager’ efforts at promoting new and innovative technologies the marker ‘Whereas the superior in the market unit in some cases may resist the introdhction of a cecnnologies (particulaty if they only address niches in the market or tpresent Rnbroved solutions that don't contribute strongly to maintaining or increasing eve fut). These interdependencies represent coupling between functional requirements | in Figure 4.8 they are indicated with ‘x's! in the shaded area, AAs with the other two multidimensional forms ‘Was Intended to allow the combination of Zarked) and, in theory, achieve customer focus and economies of sexle at the time. The main change from a purely functional the lateral channels of communication, and there E the amount and feequency of information bein | Moteover, the matrix significantly alters governa ‘eporting relationships, The two managers that i jpit responsibility for supervising employees, wh the different dimensions of the matrix, tivantage is perhaps that the matrix introduces mote variety and contributes _ fodening of one’s informal network as one is exposed toa larger number of | FF duals belonging to different units EA key issue with matrix structures has bee Ay relationships. However, that we shall discuss, the mu two grouping criteria (eg, product organisation is that it open: fore leads to an Increase in L if exchanged between functt ce processes by introducing « intersect in a matrix structure | }0 ate supposed ta balance the g For the individual employee, the 1 Design parameters Functional requirements 18 Oy Senses perations Fixed Mobile Business Consumer Coponteaat | 11 Prowde cost-effective IF peters t.) x * 12 Develop and manage anefficentnetwore xx inastcture how employees deal with dual aut ‘the primary challenge may not be having two bosses Dut the fact that the twa bosses share 13 Maximise profs for Iutsdiction over the same work process ners aay * EEE sles proces in ScanTe), yet ate held accountable for diferent and pote ~ — f iilicting goals. When employees are at lower levels ate unable to west ny ere A oe . 4 Steen diferent goals, they are escalated to higherdeveh of manigenee Go serves 4 ang from organisations with matrix strictures is indeed that higher level ney fs aseenea 3 ss become overloaded because lower-level managers ate unable to reine ny Business segment * a * * x * S221 therefore refer conflicts tothe executives, n other words, an unintended vy GEsC OF + matrix structure is actually to make the organisation more centralised Semove accountability from lower-level managers (Whitford, 2006), More rex nisational models have been developed to try to adde 16 Muinsermveneinte x : Consumer segment 17 Perform enabling and contol processes ic 5s this issue Figure 4.8 Assumed design matrix i ScanTel adopts a matrix structure. X signifies a {Fong relationship between a DP and a FR, and x a moderalaly strong elatonship. ‘The shaded area corresponds to instances of coupling that are due to the matmeChapter 4 Designing multidimensional organisations The front-back me ("The front-back model delivey the services that the customers require. There is also a Banking Operati ‘unit, which performs ‘back office’ processing, and a corporate tisk unit, whic responsible for risk assessment. Corporate banking ‘viion “The front-back model Is similar to a matsix in that It consists of decentralised units structured along different dimensions (le, decomposed using different criteria). However, whereas the term ‘matelx organisation’ may refer to any combination of dimensions (e.g. geography vs. product, project vs. functional, ete), the ‘front end in the front-back model normally consists of market units, whereas the ‘back end’ comprises the product units, responsible for developing or manufacturing prod ucts. Another important difference from the matrix is that the front-back model may be implemented without dual reporting relationships. In some cases, the front and back ate linked together by an internal customer-supplier interface: The market units identify customer needs, receive orders and request products and services from ‘the units in the ‘back end! The internal customer-supplier relations may be largely informal, but the roles may also be formalised in the form of an internal market where tnlts literally buy and sell from each other. ‘The market units of the front end are usually structured around customer seg: ‘ments at the top level, and then around customers (e.g., by having key account teams for the most important customers) (Galbraith, 2000), The key rationale is to be able to set all the organisation's products or services (cross-selling), to provide & ‘common interface toward the client, or to assemble solutions consisting of products and services from several back end units. Conversely, the back end units should be able to interface with any front end unit to deliver a product. The front-back model is an attempt to derive the advantages of economies of scope! and specialisation, or ‘what Nadler and Tushman (1997) call leverage and focus. Leverage is gained because resources, such as product development and production, are consolidated in a prod- uct unit, and thus more easily derive advantages from scale. For example, a product ‘unit in a home appliances company responsible for refrigerators may be able to re-use engineering designs and share production resources, even though the prod ct is sold in many variants, or even as separate brands, by different market units, Simultaneously, focus is gained as market units are able to concentrate on a set of ‘customers or market segments. Market units, and the various teams within them, should be able to stay in close touch with customers and have the authority to take decisions related to sales and marketing in their respective segments. [A front end structure is sometimes implemented at lower levels of the organisa- tion, even if the overall structure of the company is organised based on geography or product. An example Is a large bank that is geographically organised, with subsidiat- jes in many European counties. However, several of the subsidiaries have organised thelr corporate banking activities with a front-back structure as shown in Figure 49. {As is common fp thishasiness-a ‘celationship banker’ holds the responsiility for continuousgesmmunication with customers, while product specialist#“develop and d revenue-related goals may be assigned only to front end units, as product bbe measured on other goals such as productivity, cost, quality or project ex jon. The result isa lower degree of coupling, ie, actions initiated by units to f eit particular goals (4, satsify the functional requirements) will toa lesser ex jamper the ability to reach other goals (Le, other functional requirements). In (of Scan Tel, we may formalise the functional requirements as follows:* RR rovide cost-effective IT systems and applications that meet the nec internal clients, FR,, = Develop and manage an efficient network infrastructure | R,, = Develop and Jaunch new Fixed telephony services‘ne Chapter 4 Designing multidimensional organisations Figure 4.10 shows the formal reporting lines for employees and Table 4.1 shows the allocation of functions in ScanTel if it were to be organised according to the front-back model Even though the front-back model does not require the dual authority structuce of the matrix, this does not Imply that companies automatically avoid overlap. Ping responsibilities or conflicting goals by implementing the model - the design intent is not always realised. For example, atthe time of our interviews in SeanTel ‘we noted that both front end and back end units had some responsibilty for prod uct development, something which managers cited as a source of friction, The more responsibilities overlap, the stronger the need for joint coordination between the front end and the back end units. And a strong need for joint coordination between, the front and the back often leads to the creation of some mechanism for coordina tion, either an informal meeting forum or project, or a more formal integrator role. Some organisations that have attempted to implement the front-back model have created an additional, ‘coordinating’ layer between the front end and the back end units. In such cases, the organisation is gravitating toward a matrix form. As discussed in Galbraith (2000), a key question regarding the front-back model relates to the balance of power. Its possible to define both the front end and the back end units as profit centres. However, it is more common to see that one axis i the dominant one, holding the profit/loss responsibility. The other axis is then us ally a cost centre. Galbraith (2000) mentioned that the front end is the sole profit centre in some car manufacturers. Although systematic data are lacking, it seems to be the other way around in many other companies. For example, in a large con: sumer goods company, the official chart was drawn as a front-back structure, while the products units in reality dominated decision making, and directed the activites of the market units. The impression is thus that the front-back structure in many ‘cases represents a ‘push’ model. This means that in the product development pro cess, for example, the market units may provide suggestions based on customer feedback regarding possible new products, but the product units usually have the final say in deciding which technologies to employ ot which products to develop.Chapter 4 Designing muitidimersional organisations The modular organsatior Table 4.1 Assumed design matric if ScanTel adopts a front-back organisation. X signifies a strong relationship between a DP and a FR, and xa moderately strong relationship able 4.2. Generic functional requirements and design parameters proposed by Russel ‘Ackoff (1994; 1999) Design par Design parameters —— Generic fnetional requirements Inputunits Output units Market units Executive office 1S Operations Fixed Mobile Business Consumer Corporate Functional requirements stall Provide products or services that are y —- —— nlaly consumed oF used internally « 41 Provide cost-effective — ; ITeystems(-) B x Provide products or services that a |e principally consumed or used x * 4.2 Develop and manage externally anefficentretwork xX x Infrastructure (Market and sell the products or x . _ = service provided by the Output units {13 Develop and launch - ew Fued'telephonry xx x efor executive functions _ x 14 Develop and launch new Mobile telephory x x x x ‘Ackoff concluded that there is no need for @ matrix to link the different dimen | sions in a modular organisation. Instead, he proposed that there should be _ supplier-customer relations between roles belonging to different units. In othe: _xords, if an output unit celles on an input unit for certain services, the head 0 1.5 Maximise revenue in the Business segment 116 Maximise revente in a A 5 [ input unit. Similarly, output units are the suppliers to the market units, which art the Consumer segment supposed to represent the ‘voice of the customer’ within the company, both by eval “ging products and services from the customer’ point of view and by articulating “estomer needs that may be met by developing new offerings, The modular structure is similar in some respects to the front-back mode Hescved by Galbraith. Like the ront-back model, i confers both focus and lever | age. Units can be highly specialise (in terms of function, product or market) ye [in economies of sale and scope from sharing resources Input and market unit, Should be able to serve any output (product) unit (although they may not neces sly serve all at any time), Market units should sll ll the company's produc 0 jces and thus provide a common interface for clients toward the organisation. However, there are also a number of differences. In describing the front-back sation above, we noted that the balance of power may differ from company 417 Perform enabling and contol processes “The modular organisation A third alternative to structuring multidimensional organisations ~ the modular orga: sation — was fist articulated by Goggin (1974) and later modified and extended by Russell Ackoff (1994; 1999).” The starting point is the distinction between three key functional requirements (Table 4.2). Ackoff reasoned that all organisations requie certain inputs, such as people, supplies and capital. Consequently, there is @ need | for ‘input units’ that source these inputs and provide them as services to other inter. company. In some, the front end has the most authority, whereas in others, ii ral units Secand, all organisations produce some outputs, whether they are products ie Dack end (Une product units) that essentially directs the activities ofthe sales anc cor services, ‘Output units’ are defined that perform ths function, and will ypially be 2 modula th {grouped by product category, technology platform or brand in larger organisations |barket units always hold the internal client role, and the product units the supplie ‘Third, market unis’ sell the outputs that are produced to external customers. Markets ple; and not vice versa, This isa key element in creating a ‘pul’ system (asin the tits may be grouped geographically ot by customer segment. Finaly, there may be, in Ff2an philosophy) where work processes In upstream (product) units ate oa iit larger organisations, a need for a small unit of coordinating executives. Key functions for the executives are to develop strategy and set the guidelines forthe operations of the subordinate units, invest in the development of units, and monitor performance and conduct audit of units132 Chapter 4 Designing multidimensional organisations The modular organisa Unlike units in a front-back model, the output (product) units within a modular 4s pointed out in Ackoff (1994; 1999), combining the modular organisation have no fixed assets, and only consist of a few managers (and ppten {an internal market economy conteibute tlally a small supporting staff). Units not only share production and market resausces, then be profit centres and receive income from the sale of their products an se also share human resources. Employees ate formally organised in a resource ___ 5 and pay for services rendered to them. Ackotf also proposed that units shox pool in one of the input units and hired out on request to output or market units bs free both the purchase whatever they need or sell whatever they produce or p Figure 4.11). The model implies the introduction of a dual hierarchy (Malone, vide, either Internally or externally. As a consequence, each unit becomes my 2004), which, despite the name, does not imply a matsix structure. People managers Independent (te, it removes coupling as defined in axiomatic design theory, lead skills groups within the resource pool. However, once allocated to a project in Even if units are not allowed to trade externally, itis possible to use market-bas a business unit, employees work for a project manager. The project manager is essen {Principles to allocate capacity internally. For example, Malone (2004) has describ tally the interna cent of the people manager inthe resource pol there no formal UME, how internal markets maybe sed to allocate manufacturing capa ins ing reporting relationship between them, Unlike traditional HR functions, the resource ‘with several plants. The traditional approach Is based on a centralised process when ‘pool in @ modular organisations becomes a strategic business unit, It is accountable ‘coordinating unit or executive allocates capacity based on sales forecasts trom ston! for providing resources that business units require and for developing the skills that tall. In a modular organisation, the process could instead be completely decentrals the company will need in the future (see Worren, 2008 fora detailed description). | = Rutket units would be allowed to buy futures contracts for products available ats Units in a modular organisation have even greater autonomy than units in the typi- Sific times in the future. I the demand turns out to be less than anticipated, a marl cal implementation of the front-back model, Although the executive offce retains the Sit may sell future contacts to another matket unit. tn ths manner copay lee right to override decisions of individual units, there should in practice be little need Hon becomes a self-regulating process that does not requite management interventh for intervention, provided that clear ‘rules of engagement’ have been established B iltiough higher-level managers obviously need to set up and monitor the proces ‘with regard to such Issues as profit accumulation, capital Investment and protection _Jplerestingly, internal markets should also contribute to greatly decreased comple ‘of intellectual property (see Ackoff, 1999 for further discussion). Apart from resolv yin thatthe resource allocation process becomes much mote transparent, Instend Ing issues that are escalated, the role of the executive office Is primarily to design and jacking multiple forecasts and production schedules for a large number of subsal adjust the overall organisation, that is, define the units are necessary and how they _ [20 Clecttonic market sytem would provide information, accesible forall employe should interact. A firm may also convert an Input unit to a product unit, iF t turns out bout prices forall products in all future time periods that there is a considerable external market forthe services that it delivers [Eve assume that we may combine the modular organisation with an intern ‘The main difference between the modular and the matrix mode! is the elimination fatket, the functional requirements for ScanTTel may be stated as shown in the tab of dual functions and reporting relationships. Like the front-back model, t allows sped ow clalised units with independent performance measures. It shares with the frontback 4 jodel the concept of standard interfaces between units, allowing any output (product) Specitic functional unit to transact with any market unit. A modular organisation may consist ofa ret BE evde products or services tatare FR ‘number of individual units, with a great number of possible constellations with regal Ei ictal consid or used crema FR to collaboration (e.g, product unit A transacting with market unit 1 and 2, produtf organisation w 5 to even greater flexibility. AU units v 5 requirements for ScanTel ximise profs for Fixed telephany services : Maximise profs for Mobile telephony services Efetiet and sol the products or services FR, unit B transacting with market anit § and 3, and so on). 4 Plided by the Output units The modular organisations thus confers true reconfigurability. Because outpul and have no fixed assets, such units ea , FR, product) units and market unis are smal! and b A et Hille products or services that are FR. = Maximise profs for network sonccer easily be added, merged of disbanded quickly and at a low cost. A firm may chot Picross eta seve to disband a unit because there Is no longer any demand for the services or pro _FRS © Maximise competence utilisation = Masimise profits inthe Business segment FRC = Mlaimise profits inthe Consumer seamen ‘Maximise profits for information systems servic may be created to serve new markets or because the company believes that it shod! GE 4.11 shows the formal reporting lines of employees in SeanTel and Tab) “insounce’ a service that has previowsly beer purchase rom an external provide he mapping between functional requirements and design parameters (organ al units). Note that we have added a functional requirement related to th Hnibation of competence (FR,), which has been allocated to a new organisatio tie People unit, i, a resowice poo).434 Chapter 4 Designing multidimensional organisations Employee | [ Fmplovee | { employee | [ employee (ae) es) a iz Figure 4.41 Possible reporting ines for employees f ScanTel adopts a modular organisation Employee Enplovee Discuss Shea Assumed design matrix if ScanTel adopts a modular organisation. X signifies Stone lationship between a DP and a FR, and an x a moderately song telat Design parameters Functional 15 Operations Fixed Mobile Business Consumer Coxporate Poop requirements Staff unk 14 Maximise profits ” 12. Maximise profits a for network x x x 13 Maximise = Profs for Fixed x ee Telephony services “14 Maximize profits for Mobile x x Inthe Business x x x © segment 96 Maximise profits B inthe Consumer x x « 2? Perform enabling and contat x competence x x Usisation Fo the modular organisation first was conceptualised, it represented a theore Possibly. Yet it anticipated fundamental changes that have been taking pla ins the last couple of decades. In many organisations today, the internal val fin is becoming increasingly virtualised in that units are free t Bee! any source, internal or external, An extreme example wor E Prmodlity-based industries, such as electrical energy, The sa #BY company is not dependent on the capacity ofthe company’s own power st BP: in order to serve a customer - once a contract i established with a custome g energy is simply sourced from the energy commodity matket, There ave aml iples in other sectors. Smaller telecom companies are often ‘virtual’ ease network capacity from larger telecom companies. Engineering Mlatly make use of external contractors in times of high demon na 0 source theie inp ld be companies compan compan136 Chapter 4 Designing multidimensional organisations Summary and concusio Reducing dependencies toward internal suppliers in this manner decreases the prob ability that a unit’s performance will be affected by, for example, a lack of capacity another internal unit {xecate a project, but also contain estimates of time and cost associated with fe! activites. Over time, these estimates can be updated to reflect the actual tim {and cost of implementing projects. In this manner, there may be less need forsale {eople to be deeply involved in the technical process, as long as they can acces il correctly interpret the historical data, Another approach is 0 establish actos: setional sales team that involves employees in both a market unit and an outpt oduct) unit. This is a natural approach, particularly in the absence of reliable, hi rial cost data, for example, when the project involves new technologies or othy Uncertainties, Finally, itis possible to rotate personnel between output (produc {ond market units. This approach ensures that those selling products have safficet chnical insight, as well as informal networks, to draw on when there is @ need f {dose collaboration with engineers during a sales process. © A second issue concerns the concept of an internal market, As described abov ombining the modular structure with an internal market should contribute tly increased flexibility. However, the main challenge is determining the boun, [les of the market. Many critics of the internal market model have been concern Despite the advantages reviewed so fa, there are a number of issues related to the ‘modular organisation that should be examined more carefully. Perhaps the most Important issue Is clasfying to what extent the different functions of the sespectvé ‘dimensions (input, output and market) really are separable. If market units are separ | from output (product) units, is it enough that market units identify customer needs andi market trends, and transfer this information to output (product) units in the form of product specifications? Or is it necessary for members of output (prod uct) units to interact directly with customers to understand their preferences, of customise solutions to thete particular needs? This isthe situation in corporate bank ing, Although the relationship manager (representing the market dimension) may sell and initiate the sale of a financial service, the actual service is often performed by product specialists who work for the client (although they sometimes may ints: act with client personnel at a lower level than those that the relationship manager interacts with), Vice versa, when sales people estimate the costs for a complicated engineering project, is it enough for them to rely on information supplied by an G Yon't always promote a common good, especially when the common good go ‘output (product) unit e., historical data showing the costs of similae projects com § syond the simple transactions on which the market’ actors are focused! (199 pleted in the past), or do sales people need a deep understanding of the technica 1), Fostering collective action among a group of semi-autonomous units is oft processes to be able to estimate the cost correctly? Or put differently, is it really pot hallenge. It seems clear that a clear definition ~ and acceptance ~ of the executl sible to design a ‘standard interface’ in modular terms between an output (product ee's role and authority is required in order to avoid fragmentation in a mogul unit and a market unit, or does the interface have to be more peemeable (Kogut and feetnisation. An important consideration is whether a decision, policy or proce Bowman, 1995)? EF modular’ (.e, aimed at enhancing unit performance) or ‘architectural’ (aimed Several options exist when it is not possible to fully separate ouput (product) BE sting the performance of the overall system). As an example, in implementi units and market units (or the ‘front end’ andl the ‘back end! In the terminology of the front-back model). A company may simply integrate market units within output (product) units, essentially reducing a three-dimensional organisation to two dimen sions. Sales and marketing resources will then be organised in the same unit as those | responsible for developing and delivering products and services, but the compazy will find it mote difficult to maintain a common interface toward cllents actos) products and to sell solutions that inelude combinations of products or services fc | Canfiessab-unit roles 1 Reduces complenty + Low degree of resource fen Front-back 1 Two or more 1 One cimensi yy be on both climensions, and may overlap ‘coordinalion 7 Within each unit furetions and goals reporting structure 3 2 e & ~ Dual (orn some cases tiple) 3 E Main the prefered chole. The font back model relies onthe well established line a sation where people are organised within one specific unit. It is possible that thea two models represent different evolutionary stages in the development of lai firms, Firms seeking to combine a product and a market focus may start by a Number af dimensions attains a higher level of process maturity. ey performance iganisaton af resources Ge, where people belong) indiestore Key advantage j i i