[SOUND] As I mentioned earlier, we are trying to differentiate activities inside the firm. So what does that mean? That means we have to define work activities and specializations. How many accountants do we need to have? How many laborer in the production cycle should we have? How many sales people we should have? And define what their responsibilities are. Then we have to think about decision making authority and the chain or command. Who's going to make which decisions? And finally, we need to think about allocating resources and departmental groups. Should we have Department A, Department B, Department C? And how much resources should be allocated to those departments? Now when I talk to my colleagues who are in operations area, or engineers, they say you have to start with work activities. That means you have to allocate tasks. Without that, you really can't run an organization. When I talked to my friends in accounting or finance, they say, you can't run an organization without first thinking about who's going to get what resources. Because without the resources, you can't run an organization. And when I talk to my friends who are lawyers and they say, who is going to make the decisions? Whose signature is more valuable than somebody else? But what we need to do is of course, to do all of these things more or less simultaneously. We can't really go in a sequence. We need to think about who has how much resources, who does what? So if you think about the organizational chart that you see everywhere, can you answer the question of this kind? Do you know which department gets more resources? One of things about organizational charts is that they all look the same. The squares or the rectangles you have are all the same size. So you can't tell whether Department A is getting more resources than Department B. You cannot even tell who is making what decisions. The only thing you see is chain of command, maybe. And maybe you're going to see which activities are in specializations are preformed within each department or within each office. So as a result, organizational charts are not going to tell us a lot, but we need to start at least thinking about organizational design by using some charts. Imagine you are a cookie company. You make expensive cookies, you may make cheap cookies, you may make raisin cookies, you may make chocolate cookies. So, you are in the market for cookies. Now, we have to start thinking that we need to design this organization. The first question is, should we emphasize efficiency or should we emphasize external flexibility? If the cookie market is stable, yes, you will come out with some cookies with maybe marshmallows inside, or boxes are changing, in terms of size, shape, or colors. But really, the world is not changing overnight, suddenly that you have to think about, can we respond? Well, how would you design such a firm? The usually design for medium size and one or two product firms is what we call a functional design. In a functional design, there are certain major functions that must be performed and you decided to perform inside the firm. So you said, here we have a CEO, we have a vice president of R&D. Maybe think about some new types of better healthy cookies. You have a vice president of sales & marketing who needs to go out and make deals with distributors or retailers. You have to have maybe a production vice president will be responsible to make the production cycles go smoothly. And then you have the vice president of supply chain who is going to buy the raw materials or distribute the goods. And, you may have a vice president of finance and accounting to keep the books. So, this is what we call a function design. You may have multiple products, or a group of products, but each group of products are represented within each of these functions. So if you have expensive cookie department versus cheap cookie department. Or you have two types of products. Then you deal with those within each individual function. So, the functions are where the decisions are made, where the resources are located, and it is really more focused on internal efficiency. So what are some of the basic strengths of a design like this? First of all, it has economies of scale. You can use your production facilities to produce variety of cookies so that you don't have to have multiple factories or production facilities. It gives individuals within each department an ability to develop their skills in an in-depth fashion. Everyone working in the R&D understand how cookies can be changed or made. The person in the finance department knows how to keep the books within this kind of an industry. And it assumes that the environment is stable. The number of cookies you are selling are more or less known in advance. So, you don't change your production facilities overnight because the demand suddenly increased or suddenly disappeared. And we have very stable technology in terms of how to produce cookies. What are some of the weakness, of course, of a design like this? Now, if the world changes suddenly, of course, we see that in our habits of consuming sugary products. Well, can this system respond to that? Because we are all focusing on our cookies, our distribution channels, our sales force. And that means we may not be able in responding to the environment quickly. And suddenly, you may wake up and people are not eating cookies, or they expect different cookies. There is another problem with this design, and that is what we call hierarchic overload. In a functional design each functional area cannot make really big decisions that will involve all of the parties. So, what happens? All those decisions has to go up to the CEO level, and the CEO has to deal with all those issues. There's usually a lot of conflict among different units. For instance, the production will say, don't increase the type of cookies we produce because that really reduces the production cycles, and reduces our efficiency. On the other hand, the marketing people may say, well, the tastes are changing, we need to produce different kinds of cookies. So, there will be automatic conflict between these two groups. And that means the CEO and the top management has to address those issues because there is poor coordination across units. That's what I call horizontal coordination. And everyone is evaluated based on how well they do their job effectively. So the production people are evaluated whether there's a lot of waits in the production. R&D's evaluated whether you have new cookies out there. So, everyone focuses on their functional goals, and because of that, they may forget that they are part of a larger organization.
