Business Organization and Structure

By Arun Kottolli

Organizational structure in most companies follow their growth patterns; A simple structure in the beginning, A more defined functional structure as the company grows, A product based division structure or Area based division structure as the company becomes multinational, and a Transnational network or a Matrix structure as the company becomes a global giant.

Along with the evolution of the company structure along with growth, Organizations are structured to reflect and implement the corporate strategy. This for long has been the chosen way to organize the company. In the recent years, innovative organizational structures have been explored, GE’s “Boundaryless Organization” where the boundary within the organization is more flexible and more permeable allowing a faster knowledge transfer. Other types of structures have been “Modular organizations” and “Virtual Organizations”,  these organizational ideas also revolve around knowledge sharing for better operational decision making.

Modular, Virtual, and Boundary less organizational structures are optimized for faster information creation and sharing. In today’s information driven world, it makes sense to have an organizational structure to exploit faster movement of information.

The underlying philosophy of all the new organizational structures is the value chain of the company. “Value Chain Analysis provides a useful framework for dividing the firm’s activities into a set of distinct activities which add value.” -- G. Dess and et al.

 Modular Organizations rely on outsourcing any (or all) non-critical functions i.e., which does not affect the company’s long term competitive advantages. Outsourcing enables company to remain small, use relatively small amounts of capital, have a small management team and yet achieve seemingly unattainable goals. Such organizations keep their core value chain activities in-house, i.e., those that add value to the company and stakeholders and outsource any activity which adds no value or minor value to its activities. For example, Xilinx, a leading programmable logic chip maker outsource manufacturing and some IT support functions. For Xilinx, major value addition takes place in R&D of the products and in customer interaction areas. Xilinx’s customers value its support in form of design assistance, FPGA logic synthesis, logic functionality, timing and software. Xilinix helps its customers bring their designs to market, have flexibility in the final product design and beat the narrow time-to-market window. This high level of customer interaction and in cases a handholding and guiding customers to achieve their aims adds value. Manufacturing of the chips itself does not add any significant value for Xilinx. Accordingly, the organizational structure at Xilinx follows their value chain Model.

Virtual Organizations. Many companies form strategic alliances with customers, suppliers and even competitors to build new capabilities. Thus the organization appears to have more capabilities than it really possesses. Strategic alliances forms a network of organizations. Firms in this network of organizations may be performing a different value creating activities such as production, R&D, IT infrastructure support, distribution etc. Each company in the network offers its core competence as a service to other member in the network. The alliances in this network need not be permanent and the alliances are maintained as long as it meets the goals and objectives.

Virtual organizations by nature do not have absolute strategic control, every member in the network becomes interdependent on one other. In such a frame work, companies can win only when the other members in the alliance win. This strategic interdependence makes the alliances work for everyone’s gain. Interdependence will be built up over a period of time if organizations learn from each other as to what the other member in the alliance wants in future and builds up the required capability to do so.

 

In our example; Xilinx outsource its manufacturing to TSMC in Taiwan. Both the companies have a strategic interest to see Xilinx succeed. Xilinx’s success will ensure TSMC to have more business in future and TSMC’s success will ensure Xilinx’s to access the next generation manufacturing technology which will allow Xilinx to design more complex chips which has a higher market value. This interdependence is the key for the success of strategic alliances.

If the strategic alliance between Xilinx and TSMC were to survive for a long term, TSMC must learn what Xilinx’s next generation chips need,  in this case newer chips need to conserve power, have a smaller die size, have more programming options, have smaller transistors which run substantially faster, consume lesser power and take up half the die size as that of today’s transistors. Xilinx also needs to know the next generation manufacturing process and capability so that it can change its designs accordingly to help reduce manufacturing costs, increase yield rates, and enable faster testing. This mutual learning will buildup a stronger interdependence between companies who have to work together for mutual benefit. 

Implications for Indian IT services vendors 

Implications of the new organizational structures on Indian IT services, ITES and software companies are enormous. As Indian software companies become global players, they have evolved from being a company that offers IT services to that of an strategic alliance partner. As a services provider in the modular organization structure, Indian companies did not share a long term strategic interest objectives with their customers. But in the virtual organization, Indian companies have to build strategic alliances with other organizations and build an interdependent relationship to leverage their combined resources. US companies and other customers of Indian IT services can benefit from high quality, low cost IT services, tap into the rich experience base of their Indian partners and leverage the combined IT resources. Indian companies can benefit by having a steady customer, learn from the customer requirements and customer experiences to build the next generation IT systems, and become more competitive in the global market. 

As a mere service provider, Indian companies stand a risk of losing a customer once the current transaction is over. Companies can easily switch vendors and Indian IT services companies have to fight to get another customer.  By building strategic alliance with other companies to provide IT services, Indian companies can build a more stable revenue stream, stabilize business and develop newer means to expand and grow in the IT services market.