Question 1: What is meant by the term “product diversification” strategy? Why did this create problems for the organizational structure?
Orbit was initially operating with 15 product lines. Eventually they branched into 120 product lines. Product diversification can be either related or unrelated. Classic example of related diversification is Amazon Dash which Amazon introduced in 2016 in select markets. Amazon took the concept of Vendor Managed Inventory and applied to individual household that allows automatic ordering of pantry items once a certain level of the item was exhausted. Prior to introduction of Dash®, Amazon alerts used to send email notification based on order date and conventional usage pattern, asking consumers to order before they ran out of groceries. Dash was a natural extension for an online retailer who took the automation of ordering process to a whole new level. Amazon Prime Video, exclusive to Amazon Prime members is an example of unrelated product diversification. Prime Video is streaming video services which is no way connected to Amazon’s core online retailing business. CEO Jeff Bezos always calls his company a technology company and not just an Online Retailing company. In that perspective, streaming service probably fits into the bucket of related diversification.
Product diversification strategy requires personnel with varying skillset. In pursuing diversification strategy, a company can either be exploitative of the existing customer segment and internal resources or it can be explorative of the potential opportunities currently not part of the existing portfolio. Horizontal differentiation with a relatively flat structure allows quick decision making and implementation. Organizational structure can be aligned to the individual products or specific product categories consisting of expanded product lines. Each strategic business units (SBU) can be allocated a budget within which they expected to achieve their targets in the most efficient and effective manner. Allowing such a structure can often lead to redundant work processes across SBUs with little or no coordination among SBUs leading to higher cost of procurement of raw material. An additional managerial layer ensuring coordination can go a long way to ensure coordination and cost savings on the procurement side. A comprehensive cost benefit analysis needs to be undertaken prior to restructuring since adding an additional managerial layer, often adds additional overhead costs.
Question 2: What is meant by the term “centralised” and what does it mean for the HR function?
Any business function with little or no degree of variability among those affected by the function should be centralized. This step avoids duplication of efforts and enables best practices to spread across the organization with multiple strategic business units (SBUs). Most of the HR related business processes involve very little degree of variability and are standard. for example, employee leave policies and leave encashment doesn’t vary much across different business units. Hence it makes complete sense to centralise the HR function.
Question 3: “Each of these divisions is run as a separate profit centre” Explain this statement. What would this mean for each division?
Following restructuring, Orbit ended up having multiple divisions which ran as separate profit centers. This implies that divisions were allocated a budget at the beginning of a fiscal year with a sales target aligned to the holding entity financial projections. These divisions are expected to have considerable autonomy in taking tactical decisions with the central headquarters getting involved in financial and capital budgeting related activities. The divisions are expected to report aggregated information to the HQ as per agreed upon frequency. The divisions is expected to be profitable and reinvest the earnings from one fiscal year to the next in order to continue to operate as a sustainable business entity. Hiring and firing decisions specific to each division is expected to remain local to the divisional leaderships except for strategic roles that cuts across all divisions.
Question 4: Draw an organizational chart to illustrate the new 2010 divisional structure
A matrix configuration is suitable for the product portfolio expansion which Orbit Corp underwent in 2010. The matrix can be very flexible, dealing with new information and adjusting to new situations quickly to utilize limited resources to meet firm’s priorities. Product portfolio expansion introduces an element of uncertainty that is best handled by matrix configuration, when implemented appropriately, realize both the efficiency of functional form and the effectiveness of the divisional form – overcoming the limitations of both forms.
Source: Richard M Burton Organizational Design, A Step by Step Approach
