To clarify the various ways firms are typically organized, consider the following hypothetical example. ABC Company produces and sells two versions of a product in two countries, Norway and the United States. Each version of the product requires occasional country-specific design adaptations, and, of course, each version must be marketed in each country. There are thus four basic tasks, design and marketing for each version of the product. These four activities may be organized into one of four commonly observed structures, depicted in Figures 1-4.In Figure 1, the structure is flat with the manager in charge of each activity reporting directly to the CEO; an example is Nucor (Ghemawat 1995). Figure 2 depicts a divisional hierarchy in which there are two midlevel managers, each coordinating the two functions for a given country (product). In Figure 3, the hierarchy is organize along functional lines; i.e., each of the two middle managers is in charge of a function for both countries (products). Finally, Figure 4 shows a matrix organization in which each bottom-level manager reports to two middle managers; e.g., the marketing manager for Norway reports both to the middle manager in charge of Norway and the middle manager in charge of global marketing.
An interesting topic in the theory of the firm, relatively under explored in the economics literature, is what determines whether an organization adopts a matrix or hierarchical structure, how many levels are involved, and how activities are grouped. Several authors in the organization behavior literature have argued that the choice between divisional and functional structures is driven by the relative importance of coordination of functional activities within
a product line and economies of scale from combining similar functions across product lines (see Jennergren 1981 for a survey). The advantage of a divisional structure is that it allows better coordination among the various functions, such as manufacturing, product design, personnel, and marketing, required to produce and sell a product. Segregating these functions by product divisions, however, results in the failure to exploit economies of scale available if, for example, marketing for all products is handled by a central marketing department. Trading off these advantages, it is argued, determines whether one adopts a divisional or a functional hierarchy.
|
