Dow's decision to keep its matrix structure was prompted by its move into the pharmaceuticals industry. The company realized that the pharmaceuticals 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 realised 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 a more flexible to 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 matra-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 product divisions. The matrix structure was just too complex and costly to manage in the intense competitive environment of the time, 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 eleven layers of management between me and the lowest-level employees; now there are five Discussion Questions 1. Why did Dow Chemical first adopta matrix structure? What benefits did it hope to derive from this structure? 2. What problems emerged with this structure? How did Dow try to deal with them? In retrospect, do you think those solutions were effective? 3. Why did Dow change its structure again in the mid-1990s? What was Dow trying to achieve this time? Do you think the current structure makes sense given the industry in which Dow operates and the strategy of the firm? Why