Fluent Essays

Read Porsche case carefully and write a strategic analysis of the company.  Describe each of these elements: Porsches competitive positioning, industry and external environment, and resources and capabilities.  (750 to 1,500 words).  Next, Id like you to give me a 1 page debate, where you argue BOTH sides of this statement: Porsche has made a critical error in expanding into the SUV and sedan segments, and this will damage their prestige and standing with customers in the long-term.   Lastly, make 1-3 strategic recommendations for Porsche (450 to 750 words ).  IMPORTANT NOTE: The case talks a lot about the location for manufacturing cars.  That is NOT what Im interested in.  Ignore that aspect of the case and focus instead on the competitive environment, the industry, and Porsches core competencies.  Do not write about the decision regarding the location of manufacturing.  PLEASE ONLY USE MATERIAL FROM THE ATTACHED FILES ! Please be sure to use the Porsche case Another article to use  https://hbr.org/1992/01/the-balanced-scorecard-measures-that-drive-performance-2 9 - 7 0 6 - 0 1 8 R E V : M A R C H 1 4 , 2 0 0 7 ________________________________________________________________________________________________________________ Professor Jeffrey Fear and Carin-Isabel Knoop, Executive Director, Global Research Group, prepared this case from published sources with the assistance of Research Associate Claudia Linsenmeier. HBS cases are developed solely as the basis for class discussion. Cases are not intended to serve as endorsements, sources of primary data, or illustrations of effective or ineffective management. Copyright © 2006 President and Fellows of Harvard College. To order copies or request permission to reproduce materials, call 1-800-545-7685, write Harvard Business School Publishing, Boston, MA 02163, or go to http://www.hbsp.harvard.edu. No part of this publication may be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—electronic, mechanical, photocopying, recording, or otherwise—without the permission of Harvard Business School. J E F F R E Y F E A R C A R I N - I S A B E L K N O O P Dr. Ing. h.c. F. Porsche AG (A): True to Brand? I do not copy any Harvard blueprint; instead I try every day to lead my team through fact-based discussions. In this process it helps that people feel how enthusiastic I am. I stand behind every decision. My colleagues learn that immediately. — Wendelin Wiedeking1 Porsche . . . there is no substitute. —Porsche advertising slogan2 [Location] is not an uncritical issue. People think that as a car comes off the line at Zuffenhausen, [company founder] Ferdinand Porsche comes by and caresses the car with his hand, and that makes it an official Porsche. Of course, Ferdinand Porsche hasn’t been doing that for some time. —Porsche spokesman3 In August 1996, legendary sports car maker Dr. Ing. h.c. F. Porsche A.G. (Porsche)4 launched the Boxster, a zippy new two-seater with an “entry-level” price of $40,000. At the same time, Porsche chairman and CEO Wendelin Wiedeking stunned the automotive world by announcing that as of September 1997 the Boxster would be assembled in Finland, rather than at Porsche’s main Zuffenhausen plant, which was already operating beyond capacity. In spring of 1998, just months after the controversial move to Finland, Wiedeking shocked observers yet again by confirming rumors that Porsche would enter the fast growing sport-utility vehicle (SUV) market by 2002. The company would also be looking for a production site for this new model. This one-two punch immediately sparked a debate about whether Porsche would or could remain true to its brand and its “made in Germany” imprimatur. Could the Porsche brand ever align with an SUV concept? Could the small German company become a major player in the already very competitive—and chiefly U.S.-oriented—SUV market? Would luxury SUV sales expand beyond North America to markets that had neither the roads and parking nor the cheap energy for oversized vehicles? And would SUV production be located in Germany or elsewhere? Launching a new model series was risky for any manufacturer, but especially risky for a small player such as Porsche. If Porsche went ahead with an SUV, there were several options for development and production. It could partner with a major manufacturer to gain development and manufacturing efficiencies as well as production slots. Porsche could also follow the course of its German compatriots BMW and Mercedes-Benz, who had established manufacturing bases in the United States, the largest SUV D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until Apr 2020. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 706-018 Dr. Ing. h.c. F. Porsche AG (A): True to Brand? 2 market in the world. But Porsche would need to decide if “made in Germany” was integral to its global appeal. However, making SUVs in Germany—with its strong unions, high and rising labor costs, and appreciating currency—could push the luxury product prices even higher, and posed other challenges as well. But how important was it for the new model to actually be “made in Germany?” The responsibility for these decisions lay with Wiedeking, a relentless efficiency expert who, in the mid-1990s, had steered Porsche through one of the most noteworthy turnarounds in industry history. He staved off bankruptcy by cutting costs, paring the product line to two models, and expanding into 70 global markets—30 more than in 1993.5 By the time of the 1998 SUV announcement, the 50-year old firm was back on solid financial footing and its stock price beat the national DAX index by 180\% in the previous two years (see Exhibits 1 and 2 for stock and financial information). But the company still needed to manage risk sensibly. Analysts fretted about the dilutive impact an SUV might have on the Porsche name, and worried that the DM 1 billion investment (ca. $550 million in 1998) was a huge bet for a small player like Porsche. Meanwhile, competition within Porsche’s core business was expected to increase with the coming launch of a sporty two-seater from Audi, positioned at an equal performance level but priced 15\% below the Boxster.6 The Legacy Ferdinand Porsche was born on September 3, 1875, in Maffersdorf, Bohemia, in the former Austro- Hungarian Empire (now Vratislavice in the Czech Republic). After a brief stint as Daimler-Benz’s technical director, he left the company, which did not want to build small, fast cars for the public. Unemployed at 55, Porsche started his own design firm for all sorts of vehicles. His son, Ferdinand Anton Ernst “Ferry” Porsche, and his son-in-law, Anton Piëch,7 joined him, along with key engineers. Ferry became head of R&D. The senior Porsche, renowned for his temper and single-mindedness, imbued the firm with a spirit of fierce independence. In 1934, Adolf Hitler tasked Porsche to develop a family car that was both cheap and reliable— yielding the “people’s car” or Volkswagen, whose design was intended to evoke the German infantry helmet and honor National Socialist ideals. During wartime, the company focused on tank design, including the formidable “Tiger.” In June 1948, Porsche launched the 356, the first automobile to carry the Porsche name. Volkswagen manufactured the 356, with its tubular space-frame chassis, aluminum body, and rear-mounted four-cylinder engine, until Porsche opened its own production facility in Stuttgart-Zuffenhausen in 1950.8 See Exhibit 3 for company milestones. In 1953, Porsche produced its first car specifically for racing, the 550. In 1964 came the 911, also a racing car. Designed by Ferry’s eldest son, Ferdinand Alexander “Butzi” Porsche, the vehicle became a twentieth-century design milestone. In the 1970s Porsche and Volkswagen collaborated on launching the 914. In 1972, Porsche became a joint stock company (Porsche AG) with the Porsche and Piëch families on the supervisory board. Butzi left the company at the same time to found his own design studio for other products, called “Porsche Design.” Porsche AG was nearly derailed by the U.S. economy’s tailspin and stock market crash in 1987. Sales volume collapsed from a peak of 50,000 cars in 1986 to 14,000 in 1993.9 The culprits were global recession—particularly in the United States, Porsche’s most important market—and a stagnant product line. Leadership problems also affected company performance during this period. In 1990 Butzi succeeded Ferry as chairman of the supervisory board, but lasted only until early 1993. He was replaced by Helmut Sihler, one of the most respected men in German business. Moreover, between 1987 and 1992, four chairmen of the managing board left in disputes with the controlling Porsche and D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until Apr 2020. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 Dr. Ing. h.c. F. Porsche AG (A): True to Brand? 706-018 3 Piëch families about how to run the company.10 Sihler named Wendelin Wiedeking, a 38-year-old engineer from central-western Germany, executive director (CEO) of the group in 1993. New Leadership An avid car enthusiast since childhood, Wiedeking first drove at age 11, and built over 1,500 model cars as a boy. After completing his doctorate in engineering, he joined Porsche in 1983 as an assistant to the production director. He left in 1988 to head a maker of automotive ball bearings, where he was exposed to Japanese and American production methods and management strategies. In 1991 he returned to Porsche as production and materials management director, and was soon promoted to spokesman of the executive board, and then President and CEO. Wiedeking claimed that the most important quality in leading a manufacturing operation was “clear direction.” Since the age of 15, after his father’s death, his goals had been clear: “I have always known what I wanted and have also realized it—without regard for the hesitant and the doubtful.”11 He believed that an effective manager had to “make everybody know about the strategy. In bad times, you must talk very openly about the problems you’re facing. Say what you really mean. Put everything on the table. Good things as well as bad things. And then do it. Just do it.” He was also said to like and live by two German proverbs: “You sweep the steps from the top down” and “He who barks must also bite.” Finally, while rival brands such as Jaguar, Ferrari, Lamborghini, Lotus, Alfa Romeo and Aston Martin had allowed themselves to be sold to mass marketers such as Ford, Fiat, Chrysler and General Motors, Wiedeking remained as independent as the company he led, explaining “Size alone is not a prerequisite for survival.” Wiedeking quickly made his mark inside and outside the company. He emerged as one of the most admired, but outspoken and unconventional CEOs in Germany, challenging the very tenets of shareholder value, and questioning the necessity of issuing quarterly reports and forecasts. “Yes certainly, we [Porsche] too have already heard about shareholder value,” he explained. “That changes nothing for us because our customer comes first, then our employees, then our business partners, suppliers, dealers and afterward our shareholders. It is completely inappropriate to place the shareholder first. It will limit the strength of the enterprise. You will achieve the opposite goal and spiral downwards.”12 Such tough talk and bold decision making was quickly turning Wiedeking into a “brand”13 himself, like Chrysler’s Lee Iacocca in the 1980s. Lean Production Together with a global brand name and a highly skilled workforce, Wiedeking inherited a bloated management roster, an inefficient production process, and a record $150 million loss widely blamed on management complacency.14 Early into his tenure as CEO he promised to cut production costs by 30\%. Porsche’s chairman at the time (Butzi Porsche) declared such a feat impossible. “But I said, ‘No, I offered it, I’ll bring it,’” Wiedeking reminisced, “and I brought it.”15 Wiedeking benchmarked every aspect of production to find out how much time, effort, and money went into making every Porsche. His goal was to emulate modern “lean production” or “just in time”16 manufacturing methods to cut costs and increase productivity. Lean production moved away from the principles of specialization, where individual production line workers had a deep knowledge of one specific task. Instead, lean production environments called for highly skilled and flexible workers who could operate multi-purpose machinery with minimal supervision.17 Workers’ ability to be productive in a team environment became imperative, along with a focus on continuous improvement throughout the entire operation. D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until Apr 2020. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 706-018 Dr. Ing. h.c. F. Porsche AG (A): True to Brand? 4 In 1992 Wiedeking took key managers on a tour of Toyota, Honda, and Nissan production facilities to show how fat and wasteful Porsche’s production process was in comparison. He hired a leading Japanese automotive consultant who, during a plant visit, described the Zuffenhausen plant as more of a warehouse than a factory. He then handed Wiedeking a circular saw and told him to cut the storage shelves in half.18 Once trained in the principles of lean production, Porsche employees passed them on to major suppliers to help them lower waste and production cycle time, thus reducing component prices for Porsche.19 The new strategy reduced manufacturing defects and inventory (from 7 days’ worth to 1 day). Revenue per employee rose 53\% from FY92 to FY97. The number of cars per production employee per year almost doubled over the same period from 4.9 to 9.1 cars. In FY92 the old 911 (then type 993) took 128 hours to produce; five years later, only 70 hours. The new 911 took 56 to 58 hours to produce.20 Wiedeking dismissed a third of the company’s middle managers and established the Porsche Improvement Program, designed to measure quality and efficiency and eliminate waste: “I had to cut 2,000 jobs to save 6,000,” he explained.21 Employee participation picked up and improvement suggestions increased from 0.09 to 4 per person. Wiedeking rewarded employee suggestions with cash (DM 100 for a good idea that was implemented) or with gifts, like trips or motorcycles.22 New Models In 1991, a year before Wiedeking became CEO, Porsche launched the first of several cars at lower price points than traditionally associated with the Porsche brand. The 911 RS America was a no-frills version of the long-running rear-engine 911 model; priced at $54,000, it ran about $10,000 under traditional Porsche prices. This was followed by the entry-level 968 at about $40,000, close to the $37,000 Nissan 300ZX Turbo or the $33,000 Mazda RX-7.23 By early 1992, Porsche postponed the launch of a larger, luxury Porsche 989 for aging baby boomers when it became clear that its total cost would be 30\% higher than the price it could command in the market.24 The company wrote off significant development costs for the 989 and geared up for its $40,000 two-seat Boxster, to launch by 1996. In an important departure from Porsche practice, the Boxster would share 40\% of its parts with the 996.25 Changes continued in 1992 with a revamped, water-cooled 911. Moving away from the traditional air-cooled engine was another break with the past—and sacrilege to many Porsche purists. The redesigned 911 and the Boxster were developed simultaneously in a record 37 months, and at a greatly reduced cost. Design engineers made extensive use of computer simulation, which cut the prototype development time and kept costs down. The new 911 used components developed for the 986, reducing costs by 15\%.26 In addition, the Boxster and the new 911 shared the same basic engine, the same basic body structure, and a similar design for chassis and suspension. The result was a higher production volume for individual parts, and an assembly line common to both cars. The SUV Bet The Porsche SUV would be the company’s third series, and the first developed and launched entirely under Wiedeking’s watch. He wanted the vehicle to combine traditional Porsche styling and performance with off-road driving capability and a spacious interior, placing more emphasis on “sports” than “utility.” The new car had to retain the brand’s style and panache while accommodating family, outdoor, and transport activities. Wiedeking felt that SUVs were “nearer to D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until Apr 2020. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 Dr. Ing. h.c. F. Porsche AG (A): True to Brand? 706-018 5 the sports car business than sedans. We also looked at minivans, but we do not want an eighth ‘me- too’ product. It has to be a real Porsche in terms of chassis, performance, and design”—Porsche’s key strengths.27 Wiedeking continued: “We know from our surveys that a lot of our customers are waiting for a Porsche SUV. Then there will be no doubt that customers can proudly park their SUV next to a Mercedes S-Class and other cars like that.”28 The average Porsche customer already owned three cars: an SUV, a limousine or sedan, and a sports car.29 Much of the SUV sales boom after 1996 occurred in the so-called Premium SUV market. For example, the immediate success of the 1996 Mercedes off-roader M-Class demonstrated a demand for luxury SUVs (see Exhibit 4 for SUV market information). Porsche wanted to leverage its “premium” brand to enter that market, emulating Ford Motor Company’s achievement with its GT sports car and BMW with its 7- and 5-series luxury vehicles. SUV optimists argued that Porsche had found a solution to diversify its “aging model range” in an oversaturated market. They estimated a breakeven number of 10,000 units priced between DM 100,000 and DM 120,000. By building 20,000 SUVs a year, Porsche could boost its total sales by 50\%.30 But many Porsche enthusiasts feared that instead of rejuvenating the company, the SUV would cheapen the Porsche image. Some saw the move as near sacrilege.31 Porsche family shareholders cringed, fearing the company’s pure breed sports car tradition and exclusivity were not befitting bulky off-roaders. Wiedeking countered: “Our new sport utility vehicle will not only correspond in full with Porsche’s high technical and visual standards, but will also pave the way for future growth potential in the sales, turnover and earnings areas” he promised.32 An SUV would give Porsche “a new dimension in both profit and revenues.”33 The automotive press reported that Porsche saw the SUV as its chance to balance the risks of its exchange rate position. Porsche was particularly sensitive to the value of the dollar because 44\% of its cars in 1997 were sold in the United States (see Exhibit 5).34 While Porsche had improved its hedging operations since its liquidity crisis of the late 1990s, the company remained highly exposed to the U.S. market and dollar fluctuations. In 1998, 23\% of its sales came from the United States (and 37\% from Germany).35 About 80\% of its sales came from its vehicles and 9\% from spare parts.36 The SUVs’ popularity with U.S. drivers was attributed to the nation’s historic affinity for larger cars and trucks that could serve for both work and personal use. This new breed of vehicle was viewed as innately “American”: the rugged and powerful appearance, and the promise to combine the carrying capacity of station wagons with the off-road capability of pick-ups, offered an alternative to old fashioned family suburban and rural utility vehicles. The sporty and aggressive design appealed even to those who would never dream of taking a car into rough terrain, namely preppy, youthful professionals, including working women who preferred not to be associated with station- wagon moms. Luxury/crossover SUVs targeted the high-end market with top quality interior amenities such as navigation systems and DVD players, stylish materials (wood and leather), and lowered suspensions. After Ford’s successful launch of the Explorer, other leading manufacturers both in the United States and abroad (Japan, Germany) followed with their own models. To cut down development and manufacturing costs, SUV bodies tended to be less sophisticated than the newer smaller cars. Most cars employed unibody construction, with a steel body shell designed to absorb the impact of collisions and crumple without injuring the passengers. Many (not all) SUVs were built in the tradition of light trucks, using a “body-on-frame” method which provided a lower level of safety but better maneuverability. Porsche’s SUV would join an already crowded market, estimated at about two million units in early 1998. Still, the category ranged from pick-ups, light trucks, and small jeeps to high-end entries such as the Suzuki LJ. Range Rover—the only SUV with a base price over DM 100,000.37 A successful D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until Apr 2020. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 706-018 Dr. Ing. h.c. F. Porsche AG (A): True to Brand? 6 high-end, high-performance Porsche SUV could trigger me-too follow-ons within two to three years, thanks to the compression of development intervals within the automobile industry. Already, Mercedes Benz was rumored to be considering an M-Class vehicle with a 300-plus horsepower engine. BMW was also rumored to be interested in developing what would later become the X5. The potential for such new entrants threatened the sustainability of Porsche’s sales forecasts of 20,000 SUVs each year.38 Finally, some observers questioned the long-term attractiveness of the SUV segment, predicting a move towards smaller, more fuel-efficient cars.39 In the context of the broad demographic that could afford only lower priced vehicles, Porsche’s decision to go forward with a luxury SUV seemed particularly puzzling. And though SUVs had emerged as the most profitable segment of the industry in the 1990s, they lacked the agility and performance synonymous with Porsche. The challenge was now to close the perceptual gap between Porsche attributes and those associated with SUVs. Location Decisions One thing was certain—Porsche lacked production capacity for a new SUV. In 1998, the Zuffenhausen factory, originally designed to produce 20,000 cars annually, worked three shifts six days a week and had reached a capacity of about 40,000 cars per year.40 The location of a new factory had to satisfy multiple criteria and posed a serious challenge to Wiedeking. Since outsourced parts would make up approximately 80\% of the finished product, easy access to suppliers was imperative;41 other factors included labor costs (hourly wages as well as additional expenses such as healthcare, retirement benefits, etc.); the quality, skills, and flexibility of the local labor pool; proximity to major or high quality ports and airports; favorable tariff structures for imported components and exports of finished product; and access to a large local market.42 The site decision would also consider nonfinancial support of local authorities, the location’s fertility as a learning ground, and its potential impact on the Porsche brand. Until the 1990s, the labor-intensive automobile industry had been largely a national affair regarding technology, parts supply, and skill base. Several factors propelled automotive manufacturers beyond their borders, including the expansion of the Central and Eastern European markets after the end of the Cold War, and the emergence of potentially large new markets such as China, India, and other countries in Asia, Central and South America.43 Manufacturers adopted one of four strategies for internationalization, encompassing various levels of local content. The first option was to export complete cars. The second was to export slightly disassembled cars, known in the sector as semi-knocked-down or SKD kits. The third option was substantial local assembly of cars (or completely-knocked-down kits or CKD) and fourth, the use of integrated local manufacturing.44 Typically, manufacturers chose one of three approaches to locate facilities abroad. First they could choose to locate in emerging large market areas (e.g., China, Russia and India) or established ones (e.g., the United States, northern Europe and Japan). They could also locate close to such large markets, exporting to them from peripheral countries such as Mexico, Spain, Portugal, Canada and Central and Eastern Europe. Finally, domestic facilities could also be expanded to serve the global markets from the home base.45 According to a study, emerging larger markets or peripheral markets accounted for 51\% of the world’s plants, but only 23\% of its capacity. Players aimed to either maximize economies of scale or adopt a more flexible production system when defining their international strategy. The latter had been Porsche’s approach. D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until Apr 2020. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 Dr. Ing. h.c. F. Porsche AG (A): True to Brand? 706-018 7 In 1992 and 1993 BMW and Mercedes Benz moved about 10\% of their production to the United States.46 In turn, they pressured suppliers to locate component factories closer to U.S. plants, much as Toyota and Nissan had before them. Thus, the 1990s marked the rise of the global supplier, created through an intense wave of M&A and joint venture activities and international expansion. European automobile manufacturers developed an ever-increasing length and globalization of supply networks, especially into Central and Eastern Europe.47 Several major mergers and alliances, such as Daimler-Chrysler and Nissan-Renault, reinforced the prevailing argument that any manufacturer unable to produce four million cars a year could not survive on its own.48 Porsche’s options spanned the compass: SUV production could follow the Boxster’s path to Finland or go across the southeastern border to the emerging Czech and Slovak automotive markets; or it could follow competitors to North America. “There is plenty of spare capacity around the world,” Wiedeking said in May 1997. “The main investment [for the Porsche SUV] is in the design and manufacturing equipment.”49 Porsche was expected to spend about $830 million in design and development of the new model.50 Exhibit 6 provides more information on labor costs, additional labor expenses, and working hours in the manufacturing sector in selected countries. Replicate the Boxster Solution? One option for assembling the new SUV was to outsource it to a third party, as Porsche had done in 1997 for its Boxster model. At the time of the SUV decision, it was not widely known that Porsche already produced only about 70\% of its cars in German factories; the Finnish company, Valmet Automotive, manufactured the rest.51 The controversial decision arose when Boxster sales forecasts reached 20,000 for 1998, following actual sales of nearly 16,000 in 1996/97 (about 6,450 in the United States).52 Porsche’s Zuffenhausen plant was running at full capacity to meet the surging demand for the revamped 911 Turbo.53 In a surprising move, Porsche outsourced some of the production to Valmet, an independent European contract manufacturer of premium specialty cars. “We had no choice,” said Wiedeking, stressing that on-site German assemblers and engineers ensured that the Boxsters assembled in Finland were “100\% Porsche” and just as good as those made in Germany. Porsche leaders also cited high German labor costs to justify the move,54 along with fixed costs, which Wiedeking professed to abhor.55 With that stroke, Porsche joined automakers such as Chrysler, Fiat, Peugeot Citroen, and Saab, which had outsourced the entire assembly of models either too specialized or time-consuming to be produced in their own plants. For Saab, it was cheaper to ship body panels and engines for its convertibles to Valmet than to disrupt its own production lines with the tooling and engineering required for soft-top models.56 Although the Finland decision was widely reported as Porsche’s first overseas production move, between 60 and 80 individual 911s had already been assembled annually in Mexico since 1995, with still others manufactured in Indonesia.57 Despite living in the shadow of the Soviet Union for decades, Finland had become the world’s 15th-largest economy, growing at a robust 5\% per year in the 1990s. Home to five million inhabitants and a number of international companies such as telecom giant Nokia, Finland was the last country to join the EU in 1995 but one of the first to qualify for the common currency scheduled to take effect in 1999. In July 1997 the European Commission approved a regional aid package to Valmet (Finland’s only car assembly … © Jay R. Galbraith. Do not post, publish or reproduce without permission. All rights reserved. THE STAR MODEL™ JAY R. GALBRAITH The Star Model™ framework for organization design is the foundation on which a company bases its design choices. The framework consists of a series of design policies that are controllable by management and can influence employee behavior. The policies are the tools with which management must become skilled in order to shape the decisions and behaviors of their organizations effectively. What is the Star Model™? The organization design framework portrayed in Figure 1 is called the “Star Model™.” In the Star Model™, design policies fall into five categories. The first is strategy, which determines direction. The second is structure, which determines the location of decision-making power. The third is processes, which have to do with the flow of information; they are the means of responding to information technologies. The fourth is rewards and reward systems, which influence the motivation of people to perform and address organizational goals. The fifth category of the model is made up of policies relating to people (human resource policies), which influence and frequently define the employees’ mind-sets and skills. Figure 1—The Star Model™ JAY R. GALBRAITH THE STAR MODEL™ 2 © Jay R. Galbraith. Do not post, publish or reproduce without permission. All rights reserved. Strategy Strategy is the company’s formula for winning. The company’s strategy specifies the goals and objectives to be achieved as well as the values and missions to be pursued; it sets out the basic direction of the company. The strategy specifically delineates the products or services to be provided, the markets to be served, and the value to be offered to the customer. It also specifies sources of competitive advantage. Traditionally, strategy is the first component of the Star Model™ to be addressed. It is important in the organization design process because it establishes the criteria for choosing among alternative organizational forms. (See the book, Designing Dynamic Organizations by Galbraith, Downey and Kates, published by Jossey-Bass in 2002, for tools to help translate strategy into criteria.) Each organizational form enables some activities to be performed well, often at the expense of other activities. Choosing organizational alternatives inevitably involves making trade-offs. Strategy dictates which activities are most necessary, thereby providing the basis for making the best trade-offs in the organization design. Matrix organizations result when two or more activities must be accomplished without hindering the other. Rather than choosing the “or,” matrix requires an embracing of the “and.” Companies want to be global and local. Structure The structure of the organization determines the placement of power and authority in the organization. Structure policies fall into four areas: • Specialization • Shape • Distribution of power • Departmentalization Specialization refers to the type and numbers of job specialties used in performing the work. Shape refers to the number of people constituting the departments (that is, the span of control) at each level of the structure. Large numbers of people in each department create flat organization structures with few levels. Distribution of power, in its vertical dimension, refers to the classic issues of centralization or decentralization. In its lateral dimension, it refers to the movement of power to the department dealing directly with the issues critical to its mission. Departmentalization is the basis for forming departments at each level of the structure. The standard dimensions on which departments are formed are functions, products, workflow processes, markets, customers JAY R. GALBRAITH THE STAR MODEL™ 3 © Jay R. Galbraith. Do not post, publish or reproduce without permission. All rights reserved. and geography. Matrix structures are ones where two or more dimensions report to the same leader at the same level. Processes Information and decision processes cut across the organization’s structure; if structure is thought of as the anatomy of the organization, processes are its physiology or functioning. Management processes are both vertical and horizontal. Figure 2—Vertical processes Vertical processes, as shown in Figure 2 allocate the scarce resources of funds and talent. Vertical processes are usually business planning and budgeting processes. The needs of different departments are centrally collected, and priorities are decided for the budgeting and allocation of the resources to capital, research and development, training, and so on. These management processes are central to the effective functioning of matrix organizations. They need to be supported by dual or multidimensional information systems. Figure 3—Lateral Processes Horizontal–also known as lateral–processes, as shown in Figure 3, are designed around the workflow, such as new product development or the entry and fulfillment of a customer order. These management processes are becoming the primary vehicle for managing in today’s organizations. Lateral processes can be carried out in a range of ways, from voluntary contacts between members to complex and formally supervised teams. JAY R. GALBRAITH THE STAR MODEL™ 4 © Jay R. Galbraith. Do not post, publish or reproduce without permission. All rights reserved. Rewards The purpose of the reward system is to align the goals of the employee with the goals of the organization. It provides motivation and incentive for the completion of the strategic direction. The organization’s reward system defines policies regulating salaries, promotions, bonuses, profit sharing, stock options, and so forth. A great deal of change is taking place in this area, particularly as it supports the lateral processes. Companies are now implementing pay-for-skill salary practices, along with team bonuses or gain- sharing systems. There is also the burgeoning practice of offering non- monetary rewards such as recognition or challenging assignments. The Star Model™ suggests that the reward system must be congruent with the structure and processes to influence the strategic direction. Reward systems are effective only when they form a consistent package in combination with the other design choices. People This area governs the human resource policies of recruiting, selection, rotation, training, and development. Human resource policies – in the appropriate combinations – produce the talent required by the strategy and structure of the organization, generating the skills and mind-sets necessary to implement the chosen direction. Like the policy choices in the other areas, these policies work best when they are consistent with the other connecting design areas. Human resource policies also build the organizational capabilities to execute the strategic directions. Flexible organizations require flexible people. Cross-functional teams require people who are generalists and who can cooperate with each other. Matrix organizations need people who can manage conflict and influence without authority. Human resource policies simultaneously develop people and organizational capabilities. Implications of the Star Model™ As the layout of the Star Model™ illustrates, structure is only one facet of an organization’s design. This is important. Most design efforts invest far too much time drawing the organization chart and far too little on processes and rewards. Structure is usually overemphasized because it affects status and power, and a change to it is most likely to be reported in the business press and announced throughout the company. However, in a fast-changing business environment, and in matrix organizations, structure is becoming less important, while processes, rewards, and people are becoming more important. JAY R. GALBRAITH THE STAR MODEL™ 5 © Jay R. Galbraith. Do not post, publish or reproduce without permission. All rights reserved. Another insight to be gained from the Star Model™ is that different strategies lead to different organizations. Although this seems obvious, it has ramifications that are often overlooked. There is no one-size-fits-all organization design that all companies–regardless of their particular strategy needs–should subscribe to. There will always be a current design that has become “all the rage.” But no matter what the fashionable design is–whether it is the matrix design or the virtual corporation–trendiness is not sufficient reason to adopt an organization design. All designs have merit but not for all companies in all circumstances. The design, or combination of designs, that should be chosen is the one that best meets the criteria derived from the strategy. A third implication of the Star Model™ is in the interweaving nature of the lines that form the star shape. For an organization to be effective, all the policies must be aligned and interacting harmoniously with one another. An alignment of all the policies will communicate a clear, consistent message to the company’s employees. The Star Model™ consists of policies that leaders can control and that can affect employee behavior, as suggested in Figure 4. It shows that managers can influence performance and culture, but only by acting through the design policies that affect behavior. Figure 4 — How Organization Design Affects Behavior and Culture JAY R. GALBRAITH THE STAR MODEL™ 6 © Jay R. Galbraith. Do not post, publish or reproduce without permission. All rights reserved. Overcoming Negatives Through Design One of the uses of the Star Model™ is to use it to overcome the negatives of any structural design. That is, every organizational structure option has positives and negatives associated with it. If management can identify the negatives of its preferred option, the other policies around the Star Model™ can be designed to counter the negatives while achieving the positives. Centralization can be used as an example. When the internet became popular, many units in some organizations began their own initiatives to respond to it. These organizations experienced the positives of decentralization. They achieved speed of action, involvement of people closest to the work and tailoring of the application to the work of the unit. They also experienced the negatives of decentralization. The many initiatives duplicated efforts and fragmented the companys response. There were multiple interfaces for customers and suppliers. They ran into difficulty in attracting talent and sometimes had to settle for less than top people. Most companies have responded by centralizing the activities surrounding the internet into a single unit. In so doing, they have reduced duplication, achieved scale economies and presented one face to the customer. They have combined many small internet units into one large one which is attractive for professional internet managers. But at the same time, decision making moves farther from the work, the central unit becomes an internal monopoly and the result can be lack of responsiveness to other organizational departments who are using the internet. To minimize the negatives of the central unit, the management of the company can design the appropriate processes, rewards and staffing policies. For example in the planning process, the central unit can present its plan to service the rest of the organization. The leadership team can debate the plan and arrive at an approved level of service. The plan can be prepared by people from the central unit and a horizontal team of people from throughout the company. Along with its goals of reducing duplications and achieving scale, the central unit will also be expected to meet the planned service levels that were agreed. The central units performance will be measured and rewarded on the basis of meeting planned goals. And finally to keep the central unit connected to the work, it can be staffed by a mix of permanent professionals and rotating managers from the rest of organization on one or two year assignments. This complete design increases the chances that the central unit will achieve its positives while minimizing the usual negatives. D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until May 2021. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until May 2021. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until May 2021. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until May 2021. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until May 2021. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until May 2021. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until May 2021. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860 D o N ot C op y or P os t This document is authorized for educator review use only by TOM COUGHLAN, Mercy College until May 2021. Copying or posting is an infringement of copyright. [email protected] or 617.783.7860