Reference no: EM132217991
Dow—(Failed) Early Global Matrix Adopter
A select few companies are major players globally in the chemical industry. These companies include Dow Chemical, BASF, Bayer, DuPont, ExxonMobil, Formosa, Mitsubishi, and Shell. It is an industry that often takes heavy investment, knowledge, and skills. At the same time, the barriers to the free flow of chemical products between nations largely disappeared several decades ago. This along with the commodity nature of most bulk chemicals has ushered in a prolonged period of intense price competition among the companies in the industry. In such a competitive environment, the company that wins the competitive race is the one with the lowest costs. The Dow Chemical Company, usually referred to as just Dow (which is the same as its stock symbol), was long among the cost leaders.
For years, beginning in the 1970s, Dow’s managers insisted that part of the credit should be placed at the feet of its “matrix” organization. Dow’s organizational matrix had three interacting elements: functions (e.g., R&D, manufacturing, marketing), businesses (e.g., ethylene, plastics, pharmaceuticals), and geography (e.g., Spain, Germany, Brazil). Managers’ job titles incorporated all three elements—for example, plastics marketing manager for Spain—and most managers reported to at least two bosses. The plastics marketing manager in Spain might report to both the head of the worldwide plastics business and the head of the Spanish operations. The intent of the matrix was to make Dow operations responsive to both local market needs and corporate objectives. Thus, the plastics business might be charged with minimizing Dow’s global plastics production costs, while the Spanish operation might be charged with determining how best to sell plastics in the Spanish market.
When Dow introduced this matrix structure as one of the first large multinational corporations to do so, the results were less than promising; multiple reporting channels led to confusion and conflict. The large number of bosses made for an unwieldy bureaucracy. The overlapping responsibilities resulted in turf battles and a lack of accountability. Area managers disagreed with managers overseeing business sectors about which plants should be built and where. In short, the structure didn’t work. Instead of abandoning the structure, however, Dow decided to see if it could be made more flexible. After all, Dow wanted to draw on its people's knowledge and skills in the fullest manner possible, and a matrix structure would do just that it thought.
Dow’s decision to keep its matrix structure was prompted by its move into the pharmaceuticals industry. The company realized that the pharmaceutical business is very different from the bulk chemicals business. In bulk chemicals, the big returns come from achieving economies of scale in production. This dictates establishing large plants in key locations from which regional or global markets can be served. But in pharmaceuticals, regulatory and marketing requirements for drugs vary so much from country to country that local needs are far more important than reducing manufacturing costs through scale economies. A high degree of local responsiveness is essential. Dow realized its pharmaceutical business would never thrive if it were managed by the same priorities as its mainstream chemical operations.
Accordingly, instead of abandoning its matrix, Dow decided to make it more flexible so it could better accommodate the different businesses, each with its own priorities, within a single management system. A small team of senior executives at headquarters helped set the priorities for each type of business. After priorities were identified for each business sector, one of the three elements of the matrix—function, business, or geographic area—was given primary authority in decision making. Which element took the lead varied according to the type of decision and the market or location in which the company was competing. Such flexibility required that all employees understand what was occurring in the rest of the matrix. Although this may seem confusing, for years Dow claimed this flexible system worked well and credited much of its success to the quality of the decisions it facilitated.
By the mid-1990s, however, Dow had refocused its business on the chemicals industry, divesting itself of its pharmaceutical activities where the company’s performance had been unsatisfactory. Reflecting the change in corporate strategy, in 1995 Dow decided to abandon its matrix structure in favor of a more streamlined structure based on global business divisions. The change was also driven by the realization that the matrix structure was just too complex and costly to manage in the intense competitive environment of the 1990s, particularly given the company’s renewed focus on its commodity chemicals where competitive advantage often went to the low-cost producer. As Dow’s then CEO put it in a 1999 interview, “We were an organization that was matrixed and depended on teamwork, but there was no one in charge. When things went well, we didn’t know whom to reward; and when things went poorly, we didn’t know whom to blame. So we created a global divisional structure, and cut out layers of management. There used to be 11 layers of management between me and the lowest-level employees, now there are five.” In short, Dow ultimately found that a matrix structure was unsuited to a company that was competing in very cost-competitive global industries, and it had to abandon its matrix to drive down operating costs.
Reread the Management Focus on Dow Chemical; then answer the following questions:
a. Why did Dow first adopt a matrix structure? What were the problems with this structure? Do you think these problems are typical of matrix structures?
b. What drove the shift away from the matrix structure for companies such as Dow and ABB? Does Dow’s structure now make sense given the nature of its businesses and the competitive environment it competes in?