Organisation Structure and Design

7/31/2019 Organisation Structure and Design

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ORGANISATION STRUCTURE

AND DESIGN


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We routinely enjoy the goods and services

that organisations provide, we rarely bother

to wonder about how these goods and

services are produced.


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How Does an Organization Create

Value? Value creation takes place at three stages: input,

conversion, and output Inputs: include human resources, information and

knowledge, raw materials, money and capital

Conversion: the way the organization uses human

resources and technology to transform inputs intooutputs

Output: finished products and services that theorganization releases to its environment

Each stage is affected by the environment in which the

organization operates

Environment the set of forces and conditions thatoperate beyond an organizations boundaries but affect itsability to acquire and use resources to create value


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How an Organization Creates Value


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How McDonald's creates value


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McDonald's Input

obtain from its environment:

Raw materials( ground beef, sandwichbuns, potatoes, milk-shake mix etc.)

Money and capita( shareholders

investment)

Human resources( cooks, clean-up crew,order takers, managers)

Information and knowledge (training,knowledge of fast-food industry)

Customers

McDonald's conversion process

Transforms inputs and adds value tothem:

Machinery( grills, toasters,

milk-shake machines)

Computers ( computerized cashregisters, ordering systems,inventory tracking)

Human skills and abilities(personnel trained in sandwich

preparation, ordering, potato frying,overseeing the whole operation)

McDonald's environment

Sales of outputs to Customers:

Satisfied customers

Suppliers of meat, potatoes, milk-shakemix

Population from which to chooseemployees

Government health regulations

Competitors ( Taco Bell, Burger King)

McDonald's outputs

Released to its environment:

Fast and cheap food

Satisfied customers

Satisfied shareholders


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Why Do Organizations Exist?People working together to produce goods and services

create more value than people working alone5 major reasons why organizations exist:

To increase specialization and the division of labor Division of labor allows specialization

Specialization allows individuals to become experts at their job

To use large-scale technologyTaking the advantage of the economies of scale and scope

results from the use of modern automated and computerized

technology.

Economies of scale: cost savings that result whengoods and services are produced in large volume

Economies of scope: cost savings that result when anorganization is able to use underutilized resources moreeffectively because they can be shared across several

different products or tasks


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To manage the external environmentpressures from the environment in which organizationsoperate also make organizations the favored mode for

organizing productive resources External environment consists of the political, social,economic, and technological factors that affectorganizations

Organizations regularly exchange products and

services for needed resources Organizations need to manage their externalenvironment

To exert power and control Organizations structure their members to efficiently

produce products and services

To economize on transaction costs Transaction costs: the costs associated with

negotiating, monitoring, and governing exchanges

between people who must cooperate


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Organizational Theory, Design, and

Change: Some Definitions

Organizational theory: the study of how organizationsfunction and how they affect and are affected by the

environment in which they operate

Organizational structure: the formal system of task andauthority relationships that control how people to

coordinate their actions and use resources to achieve

organizational goals

Organizational culture: is the set of key values, beliefs,

and attitudes shared by organizational members andhelps shape the behavior within the organization


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Organizational design: the process by which managersselect and manage aspects of structure and culture so

that an organization can control the activities necessary

to achieve its goals

Organizational change: the process by whichorganizations move from their present state to some

desired future state to increase their effectiveness


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Basic challenges of

organisational design


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Design Challenge 1:

people in this organisation take on new tasks as the

need arises and its very clear who is responsible forwhat, and who is supposed to report to whom. This

makes it difficult to know on whom to call when the

need arises and difficult to coordinate people's

activities so they work together as a teamAs the organization grows, managers must decide how

to control and coordinate the activities that are required

for the organization to create value. The principle

design challenge is how to manage differentiation to

achieve organizational goals.


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Differentiation : the process by which anorganization allocates people and resources toorganizational task and establishes the task and

authority relationship that allow the organizationto achieve its goals. or in short it is the process ofestablishing and controlling the division of labour,or degree of specialization, in the organization.

In a simple organization, differentiation is lowbecause the division of labour is low, typicallyone person or few people perform all

organizational tasks so, there are few problemswith coordinating who does what, for whom, andwhen, however in a complex organization boththe division of labour an differentiation are high.


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Building blocks of differentiation


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The basic building blocks of differentiation are

organizational roles

Organizational roles: the set of task-related behaviorsrequired of a person by his or position in and

organization.

Organizational structure is based on a system of

interlocking roles, and the relationship of one role to

another. The differentiation of an organization into

individual organizational roles results in clear authority.

Authority: the power to hold people accountable fortheir actions and to make decisions concerning the use of

organizational resources.

Control: the ability to coordinate and motivate people to

work in the organization's interests


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Function: a subunit composed of a groupof people, working together, who possesssimilar skills or use the same kind ofknowledge, tools, or techniques to performtheir jobs

Division: a subunit that consists of acollection of functions or departments thatshare responsibility for producing aparticular good or service

Organizational complexity: the number of

different functions and divisions possessedby an organization Degree of differentiation


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Support functions:facilitate an organizationscontrol of its relations with its environment and itsstakeholders

Purchasing, sales and marketing, public relations, andlegal affairs

Production functions: manage and improve the

efficiency of an organizations conversionprocesses so that more value is created Production operations, production control, and quality

control

Production operations controls manufacturing process,

Production control decides on most efficient way toproduce at low cost,

Quality control monitors product quality.

5 Different Kinds of Functions


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Maintenance functions: enable an organizationto keep its departments in operation includes

Personnel: recruit and train and improve skills

Engineering :repair broken machinery and Janitorial services: to keep work environment safe and

healthy

Adaptive functions: allow an organization toadjust to changes in the environment

Research and development, market research, andlong-range planning

Managerial functions: facilitate the control andcoordination of activities within and among

departments Acquisition of, investment in, and control of resources


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Hierarchy: a classification of people according to

their relative authority and rank Vertical differentiation:the way an organization

designs its hierarchy of authority and createsreporting relationships to link organizational roles

and subunits Establishes the distribution authority between levels

Horizontal differentiation:the way anorganization groups organizational tasks into rolesand roles into subunits (functions and divisions)

Roles differentiated according to their main taskresponsibilities

Vertical and Horizontal Differentiation


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Organizational Chart of the B.A.R. and Grille

Design Challenge 2:


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Design Challenge 2:We can't get people to communicate andcoordinate in this organization. Specifying tasksand roles is supposed to help coordinate the work

process, but here it builds barriers between peopleand function.

companies have often found that specializationlimits communication between subunits and

prevents them from learning from one another. As aresult of horizontal differentiation, the members ofdifferent functions develop a subunit orientation.

To avoid the communication problems that canarise from horizontal differentiation, organisationstry to find new or better ways to integrate functions.That is to promote cooperation, coordination andcommunication among separate subunits.


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Balancing Differentiation and Integration

Horizontal differentiation is supposed to enable

people to specialize and become moreproductive

Specialization often limits communication betweensubunits

People develop subunit orientation Subunit orientation:a tendency to view ones role in the

organization strictly from the perspective of the time frame,goals, and interpersonal orientations of ones subunit

When subunit orientation occurs, communication fails

and coordination becomes difficult Integration: the process of coordinating various

tasks, functions, and divisions so that they worktogether and not at cross-purposes


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Types and examples ofIntegrating Mechanisms


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Integration

mechanism( in

order of increasing

complexity)

Description Example (e.g., in Johnson

and Johnson

Hierarchy ofauthority

A ranking of employeesintegrates by specifying who

reports to whom.

Sales person reports to DiaperDivision sales manager

Direct contact Managers meet face-to-face to

coordinate activities

Diaper division sales and

manufacturing managers meet

to discuss scheduling

Liaison role A specific manager is given

responsibility for coordinating

with managers from other

subunits on behalf of his or her

subunit

A person from each of J&Js

production, marketing and

research and development

departments is given

responsibility for coordinatingwith other departments

Taskforce Managers meet in temporary

committees to coordinate cross-

functional activities.

A committee is formed to find

new ways to recycle diapers


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Team Managers meet regularly in

permanent committees to

coordinate activities

A permanent J&J committee

is established to promote

new product development in

the Diaper Division

Integrating role A new role is established to

coordinate the activities of

two or more functions or

divisions

One manager takes

responsibility for

coordinating diaper and baby

soap divisions to enhancetheir marketing activities

Integrating

department

A new department is created

to coordinate the activities of

functions or divisions

A team of managers is

created to take responsibility

for coordinating J&Jscentralization program to

allow divisions to share skills

and resources.


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Managers must fit level of integration and

level of differentiation

Differentiation and integration must bebalanced

Complex organizations need more

integration Simple organizations need less integration

i C 3 d


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Design Challenge 3: People in this organization donttake responsibility or risks. They are always looking tothe boss for direction and supervision. As a result,decision making is slow and cumbersome and we missout on a lot of opportunities to create value.

Hierarchy of authority is supposed to improve the wayan organization functions because people can be heldaccountable for their actions and because the hierarchy

defines the area of each person's authority within theorganization.

However many companies complain that when ahierarchy of authority exists, people are constantlylooking to their superior for directions. When somethingnew or unusual occurs they prefer to let it pass, or theypass it on to their superior than assume responsibilityand take the risk of dealing with it.

B l i C t li ti d D t li ti


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Centralizedorganization: the authority to make

important decisions is retained by top levelmanagers Top managers able to coordinate activities to keep

the organization focused on its goals

Decentralized organization: the authority tomake important decisions is delegated tomanagers at all levels in the hierarchy Promotes flexibility and responsiveness

Ideal balance entails: Enabling middle and lower managers who are at the

scene of the action to make important decisions

Allowing top managers to focus on long-term strategy

making

Balancing Centralization and Decentralization

F t i fl i th t f t li ti d D t li ti


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Factors influencing the amount of centralization and Decentralization

More Centralization More Decentralization

Environment is more stable. Environment is complex, uncertain.

Lower-level managers are not as

capable or experienced at making

decisions.

Lower-level managers are capable and

experienced at making decisions.

Lower-level managers do not want to

have a say in decisions.

Lower-level managers want a voice in

decisions.Decision are more significant. Decision are relatively minor.

Organization is facing a crisis or the

risk of company failure.

Corporate culture is more open to

allowing managers to have a say in

what happens.

Company is large Company is geographically dispersed

Effective implementation of company

strategies depends on managers

retaining more say over what happens.

Effective implementation of company

strategies depends on managers having

more involvement and flexibility to

make decisions.


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Design Challenge 4: people in this organization paytoo much attention to the rules. Whenever I needsomebody to satisfy an unusual customer request or

need real quick service from another function. I cantget it because no one is willing to bend or break therules.

Standardization: conformity to specific models or

examplesdefined by sets of rules and norms that areconsidered proper in a given situation. Standardizeddecision-making and coordination procedures makepeoples actions routine and predictable.

Mutual adjustment: the compromise that emergeswhen decision making and coordination areevolutionary processes and people use their judgmentrather that standardized rules to address problems.

Guide decision making and promote coordination.

Balancing Standardization and Mutual


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Balancing Standardization and Mutual

Adjustment

Standardization: conformity to specific models orexamplesdefined by sets of rules and norms thatare considered proper in a given situation.Standardized decision-making and coordination

procedures make peoples actions routine andpredictable.

Mutual adjustment: the process throughwhich people use their judgment rather thanstandardized rules to address problems,guide decision making, and promotecoordination


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Formalization: the use of written rules and procedures

to standardize operations.

Rules : formal, written statements that specify the

appropriate means for reaching desired goals.

Norms: standards or styles of behavior that are

considered acceptable or typical for a group of peopleSocialization: the process by which organizational

members learn the norms of an organization and

internalize these unwritten rules of conduct.


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Challenge facing managers is:

To find a way of using rules and norms to

standardize behavior, and

to allow for mutual adjustment to givemanagers opportunity to discover new and

better ways to achieve goals


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Each design challenge has implications for how anorganization as a whole and the people in the

organization behave and perform. Useful concepts for

addressing the way in which managements response

to the challenges collectively influence how anorganizational structure works are the concepts of

mechanistic structure and organic structure.


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Mechanistic structure: designed to induce

people to behave in predictable, accountable

ways.

Organic structure: which promote flexibility,

so people initiate change and can adapt quickly

to changing conditions.

How the design challenges result in Mechanistic or Organic Structure


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g g g

Mechanistic structures result when an

organisation makes these choices.

Organic structures result when an

organisation makes these choices.

Individual SpecializationEmployees work separately and

specialize in one clear defined task

Joint SpecializationEmployees work together and coordinate

their actions to find the best way of

performing a task

Simple integrating mechanisms

Hierarchy of authority is clearly defined

and is the major integrating mechanism.

Complex integrating mechanisms

Task forces and teams are the major

integrating mechanisms

Centralization

Authority to control tasks is kept at the

top of the organization. Mostcommunication is vertical

Decentralization

Authority to control tasks is delegated to

people at all levels in the organization.Most communication is lateral

Standardization

Extensive use is made of rules and SOPs

to coordinate tasks, and work process is

predictable.

Mutual adjustment

Extensive use is made of face-to face to

coordinate tasks, and work process is

relatively unpredictable.


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Organisational design and

strategy in a changing globalenvironment


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An organization's strategy is a specific pattern of

decisions and actions that managers take to use

core competences to achieve a competitiveadvantage and outperform competitors.

Customers are likely to respond to a strategy that

is based on the goal of offering high qualityproducts and services at appropriate price.

Through its strategy an organisation seeks to use

and develop core competences to gain acompetitive advantage so that it can increase its

share of scarce resources in its environment.


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Core competences: the skills and abilities in

value creation activities that allow a company to

achieve superior efficiency quality innovation, orcustomer responses

Sources of core competences:

Specialized resources: two kinds ofresources give an organization a competitive

advantage

Functional resourcesOrganisational resources

Coordination abilities

The value creation cycle


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The value creation cycle

Gl b l i d


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Global expansion and core

competences

Expanding globally into overseas markets

can be an important facilitator of the

development of an organizations core

competences

Th ti f l th h


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The creation of value through

global expansion

Functional-level strategy


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Functional-level strategy A plan of action to strengthen an organizations functional

and organizational resources, as well as its coordination

abilities, in order to create core competences. The strategic goal of each function is to create a corecompetence that give the organization a competitiveadvantage.

An organization creates value by applying its functional skills

and knowledge to inputs and transforming them into outputsof finished goods and services. To gain a competitiveadvantage, an organization must be able to do at least one ofthe following

1. Perform functional activities at a lower than that of its

rivals2. Perform functional activities in a way that clearly

differentiates its goods and services from those of itsrivals by giving its products unique qualities thatcustomers greatly desire.


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Low-cost and differentiation

advantages resulting fromfunctional-level strategy

Value-creating Source of low-cost advantage Sources of differentiation


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g

function

g

advantage

Manufacturing Development of skills in

flexible manufacturing

technology

Increase in product quality and

reliability

Human

recourses

management

Reduction of turnover and

absenteeism

Hiring of highly skilled personnel

Materials

management

Use of just-in-time inventory

system\computerizedwarehousing

Development of long-term

relationship with suppliers

and customers

Use of company reputation and

long term relationships withsuppliers and customers to

provide high quality inputs and

efficient distribution and disposal

of outputs

Sales andmarketing

Increased demand and lowerproduction costs

Targeting of customer groupsTailoring products to customers

Promoting brand names

Research and

development

Improved efficiency of

manufacturing technology

Create new products

Improvement of existing

products.

F ti l l l t t g d


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Functional level strategy andstructure

Structural characteristics associated with

the development of core competences in

production, sales and research and

development.


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Managerial implications of functional-level strategy


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1. As a manager or member of function, identify the

functional resources or coordination abilities that give your

function a core competence. Having identified the source ofyour functions core competence, establish a plan to

improve or strengthen them, and create a set of goals to

measure you progress

2. Study your competitors and the methods and practices theyuse to control their functional activities. Pick your most

effective competitors, study its methods, and use them as a

benchmark for what you wish to achieve in your function

3. Analyze the way your functional structure and culture affect

functional resources and abilities. Experiment to see

whether changing a component of structure or culture can

enhance your functions core competence.

Managerial implications of functional level strategy

Business-level strategy


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Business level strategy

A plan to combine functional core competences

in order to position the organization so that ithas a competitive advantage in its domain.

Low-cost business level strategy: a plan

whereby an organization produces low-pricedgoods and services for all customer groups

Differentiation business level strategy: a plan

whereby an organization produces high priced,quality products aimed at particular market

segments.


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Characteristics of organizational

structure associated with Business-

level Differentiation and Low coststrategies


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Organisation Structure and Design

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