Deck 4: Asection 1: Global Forces: How Is Canada Faring in the Global Village

Question 1

Why did companies like Nike and Dell decide not to own their manufacturing facilities but rather outsource this to independent manufacturers? How does this differ from the traditional approach?

Answer 1

These and other companies have found that they can become quite profitable without actually having to own their entire operation. The traditional bureaucracy is structured so that production occurs in company-owned plants, research and development are conducted by in-house experts, and sales and marketing are performed by the company's own sales and marketing department. Companies that want to be more "virtual", don't believe that they need to "own" everything. Dell Computer owns no plants and simply assembles computers from parts whose manufacture has been outsourced. Nike achieved success by focusing on what they do best-designing and marketing their products. They outsource almost all their footwear manufacturing to outside suppliers. The virtual organization doesn't just outsource the peripheral function of the company; it outsources whatever costs less to outsource than to do in-house.
There are a number of gains potentially achieved by going virtual:
1. The cost savings are significant: A virtual organization does not need to own its own plants, nor employ its own research and development teams, nor hire its own sales staff. This means the virtual organization also doesn't need to hire the extra staff to support all these functions-such as personnel specialists, company lawyers, accountants, and so on. The virtual organization can outsource most of these functions and focus on what it does best. So there is little if any administrative overhead, so to speak, because work activities are largely contracted.
2. The virtual organization is a great alternative for entrepreneurs: Individuals seeking to start up a new business or venture may face huge startup costs. The network of arrangements within a virtual organization can exploit the expertise of different companies while not requiring the initiator of the business to buy everything and start a business from scratch.
3. For a mature company, going virtual can be a fast way to develop and market new products: Relying on the expertise of partners means that no huge investment is required to enter a new product or service territory.
4. Virtual organizations are fast and flexible: For example, the flexible arrangements of those parties involved can be of a temporary nature to produce a good or service; resources can be quickly arranged and rearranged to meet changing demands and best serve customers; management isn't getting bogged down in peripheral functions, but is simply focusing on central functions.

Question 2

Why would a business like Walmart be better structured as a mechanistic rather than an organic organization? Make any assumptions you need to with regard to the nature of this organization.

Answer 2

This requires some assumptions to be made. Given your perception of a company like Walmart why would you view it as more closely reflecting a mechanistic rather than an organic organization?
Mechanistic - recall:
1. division of labour - how narrow or how wide are jobs - functional specialization, narrow division of labour
2. centralized decision-making
3. high formalization
4. narrow span of control/hierarchical
Consider: Strategy, size, technology, environment - i.e., consider the contingencies of structure and explain how each could impact Walmart's structure.
Size - Walmart is a huge organization. The bigger an organization is, the more hierarchy and rules needed to maintain control over so many employees. Stability and reliability of service also require many rules and levels of management as well as centralized decision making. This is more mechanistic.
Strategy - Walmart is not focused on innovation but in providing cheap goods to customers in an efficient manner. Its focus on efficiency and reliability suggest that it could be served by a mechanistic structure. Similarly, it requires the administrative structure (hierarchy) and rules/regulations to ensure its goal of efficiency is carried out.
Technology - is this company significantly affected by technology? If you assume that the technology that drives Walmart is relatively routine and unchanging then it is fine for Walmart to have the mechanistic structure which doesn't need to adapt to technological change very fast. You serve customers, you order inventory in using the same technology over time with little change.
Environment - would you assume the environment is relatively stable or dynamic- changing? If you assume that this industry is not subject to much change - it is the retail industry, then creating a mechanistic organization that runs on the ability to repeat what it does over time - i.e. reliability and predictability of operations - is fine.
- if you think the environment is becoming volatile with more competition (like Target), then you might argue that Walmart needs to become more organic in order to be more adaptive to these competitive changes and changes customer preferences.