[SOUND] Imagine you are now designing an advertising firm. This is a service firm rather than production. So, how is an advertising firm, or should be designed. What do they do? Well, they have to attract clients, they have to do research, they have to create advertising planning. You have the creative functions. You have to have media selection. So you can see, there are lots of things an advertising agency has to do. So if you're organizing an advertising agency, how would you organize it? One thing we have to remember in an advertising agency, the clients come and go. You may have one client and that client decides to go to another advertising agency. In the production systems, you decide whether you will continue with a particular product. But in an advertising firm your client decides whether they will continue with their engagement with you or they will go somewhere else. Or, another firm may come to you as a client, and then you have to make room for them. So, how would you then design a firm like this, that needs to be responsive to the environment quickly. So if you look at a full service advertising agency, this is what you see. Yes, there is a governing board, there's an account director, which deals with different accounts, and there are account managers dealing with each client. And then you have different departments, such as creative department, production department, media department, marketing services department. All of these things must be present to provide full service. That's why I call it a full service advertising agency. So, as advertising account manager you need to assemble a team from each of these different functional elements and provide services to your clients. Once a client's contract is over, then the individuals from a given account manager, let's say account manager D, will go back to their functional unit and wait for a new assignment. Or an individual may be working to multiple clients. So, this is our account team and the account team works or comes from different functions and works together with the account manager. Now, this kind of an arrangement is usually called another hybrid design, a matrix design. And the matrix design is just like in the advertising agency, we have different functions and we have different product or client service groups, and they work together. This gives you a lot of flexibility because if your client leaves, or if you change a product, individuals don't leave the company. They basically go back to their functional units. So there are certain strengths to this kind of an arrangement. It reduces the functional barriers because each team works with other functional unit members. It has increased communication because teams need to communicate to deliver the service or the product. You can also have a flexible use of human resources. You don't have to fire and hire new people every time when you close down one of the activities. You just basically wait for the next product or the service demand arise. And we are of course, focusing on both the function side and the product or the service side. But there are major potential pitfalls of this kind of a design. One of them is, people don't know who the boss is. This is what we call ambiguity and dual authority. If you are working the team one and you are coming from one function, are you responsible and you are going to be evaluated by your functional head? Or, are you going to be evaluated and maybe your salary decisions are made by your service or the product manager? That is always confusing for people. So depending on who yells more, that group might be more successful. It is time consuming because there's a lot of coordination. Everybody has to work together as a team. And coordination is not cheap, and it is time-consuming. And finally, this creates a lot of coordination costs, in general. And that's why we need to think about matrix structure in such a way that we don't lose control over them. And that has been one of the issues for matrix structures. But they are implemented across a wide, wide variety of industries. Large corporations try to establish matrix structures, some successful but a lot of them not very successfully. And some people will be saying, well, why do we have to have all these things inside the firm? Why not just spread this and do everything more outsource fashion? And these are what we call dynamic network structures. So imagine, you have still those basic function that needs to be performed. And at the middle you have, let's say you're a fashion company. As a fashion company, you have to have product distribution, product design, product manufacturing, account receivables, advertising. All these things must be performed, but it is possible to outsource all of these things. And the are lots of fashion companies where they only focus on maybe one aspect of the functions that needs to be performed. If you are making running shoes, most companies that build running shoes, they don't do most of the marketing themselves. They don't do product distribution themselves, they don't do product manufacturing themselves. All they may be doing is they design the product. So a dynamic network structure is the most flexible design in some sense. So it has a lot of external flexibility but internal efficiency is not clear. So, when we look at dynamic networks, we see some basic advantages. They are lean and mean because they go and hire people, outsource things. And if that doesn't work, they get rid of them. They are, as a result, very flexible, they can operate anywhere. They don't need a lot of overhead in terms of corporate headquarters. Everyone is specialized in terms of their functions, so they know what to do when they change their activities. As a result, we don't have to deal with large corporate overhead. But, there are also major disadvantages of a design like this. And one of the most important one that the management of the whole network may lose control because they don't have direct hands-on control over what the subcontractors are doing. Boundaries of the organization are not clear, each subcontractor might be working for another company as well. So they don't have the same loyalty necessarily to you. So it makes defection easy. You can say, well, I'm not interested in what you're doing, you're going to move on. And the employees have weak loyalties to the whole thing. They may have some loyalty to their own organization, but they don't have loyalty to the whole network.
