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Organization & ManagementOrganization & ManagementMAN 3025MAN 3025

Prof. WernickProf. WernickChapter 7 – Organizational

Structure and Design

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Learning ObjectivesLearning Objectives

Explain the concepts of organizational structure and design.Understand the role of differentiation and integration in organizations.Identify the main structures used by organizations and describe their strengths and weaknesses.Determine the appropriate org. structure for a firm given a set of internal and external factors.

After studying this chapter, you should be able to:

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Principles of Organizational Principles of Organizational StructureStructure

Organizational structure: The sum of ways an organization divides its labor into distinct tasks and then coordinates them.Organizational design: The process of assessing the organization’s strategy and environmental demands and then determining the appropriate structure.

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Organizational ChartsOrganizational Charts

Organizational charts:Illustrate relationships among units and lines of authority among supervisors and subordinates.

Typically use labeled boxes and connecting lines.Akin to the skeleton of a body.

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Organizational Structure: Organizational Structure: Wernickskosherdills.comWernickskosherdills.com

Executive VicePresident

Pickle ProcurementSteven Brine


Mkt’g & SalesGary Gherkin

Senior VicePresident

Special ProjectsRicardo Relish


Internet StrategyDonna Delicatessen

CEOProf. David Wernick

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Structure vs. Org ChartStructure vs. Org ChartKey point: An organizational chart is NOT the same thing as its structure. The chart depicts formallines of authority and reporting relationships, but in many organizations, informalrelationships are key.Example: Bill Clinton’s White House Vice-President

President

The Clinton

White House

First Lady

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Organizational Structure: Key Organizational Structure: Key DimensionsDimensions

Formal Informal

Centralized Decentralized

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Differentiation = the extent to which tasks are divided into subtasks that are performed by individuals with specialized skills.Integration = the extent to which various parts of an organization cooperate and interact with each other.

Differentiation vs. IntegrationDifferentiation vs. Integration

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Differentiation vs. IntegrationDifferentiation vs. Integration

“Balancing the pushing of people and tasks apart and pulling them together is the basic challenge of organizational structure and design. Fundamentally, the ‘right’ structure or the right balance of differentiation and integration is a function of the demands in the environment and the organization’s strategy.”

-Hitt, Black & Porter

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Task Vs. Cognitive Task Vs. Cognitive DifferentiationDifferentiation

Task differentiation: differentiation by what employees do.Example: Boeing’s specialized designers and engineers (p. 231)Cognitive differentiation: the extent to which people in different units within an organization think about different things -- or about similar things -- in a different way.

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Cognitive DifferentiationCognitive DifferentiationAccountants and marketing managers may think about similar things in different ways.Ex: organizational performance.Accountants may think in terms of financial results.Marketing managers may think of it in terms of customer satisfaction.Cognitive differentiation makes the job of managing all the more challenging and important!

How can I increase

market share?

How can I balance

the books?

MarketingManager Accountant

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Integration & InterdependenceIntegration & InterdependenceInterdependence is a driving force of integration.

Interdependence: the degree to which one unit or one person depends on another to accomplish a task.

PooledSequentialReciprocal

Kumbaya!

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Different Types of Different Types of InterdependenceInterdependence

Pooled interdependence: when various groups are largely independent in their functions but collectively contribute to the common output.Sequential interdependence: when the outputs of one group become the inputs of another group.Reciprocal interdependence: when two or more groups depend on one another for independence.

The greater the interdependence, the greater the need for cooperation and integration.

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FormalizationFormalizationOne way to balance differentiation and integration is through formalization.Formalization = an organization’s official and defined systems for decision making, communication, and control.

Line of authority – specifies who reports to whom.Unity of command – the notion that an employee should have one and only one boss.Span of control – the number of employees reporting to a given supervisor.

Note: more formal organizations tend to have narrow spans of control; less formal orgs tend to have wide spans of control.

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Factors that Influence the Factors that Influence the Span of ControlSpan of Control

Technology is a powerful factor influencing effective span of control.Mobile phones, fax machines, e-mail, workshare software, etc. can allow managers to effectively supervise employees who are not geographically proximate, have complex and different jobs, and require significant coordination.

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Spans of Control & Org Spans of Control & Org ShapeShape

Consistent patterns of span of control can affect the overall shape of an organization.A narrow span of control throughout the organization results in a “tall” organizational structure (i.e., lots of layers).A wide span of control results in a “flat” organizational structure (i.e., few layers).

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Tall Organizational StructuresTall Organizational Structures

Tall organizational structure:a structure that has multiple layers or is high in terms of vertical differentiation.Tend to be slower at making decisions and responding to changes in the biz environment.Best suited to stable external environments.Example: American Airlines

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Tall Organizational StructureTall Organizational Structure

Tall Organizational Structure

Levels = 4Span of Control = 3Total Employees = 40

Adapted from Exhibit 7.4: Tall and Flat Organization Structures

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Flat Organizational Flat Organizational StructuresStructures

Flat organizational structure: a structure that has fewer layers in its hierarchy than a tall organization.Tend to be quicker at making decisions and responding to changes.Best suited to dynamic environments.Example: Southwest Airlines

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Tall Organizational StructureFlat Organizational Structure

Flat Organizational StructureFlat Organizational Structure

Adapted from Exhibit 7.4: Tall and Flat Organization Structures

Levels = 3Span of Control = 7Total Employees = 57

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The Case for Flat The Case for Flat Organizational StructuresOrganizational Structures

Authors Brafman and Beckstrom (B&B) argue in new book that organizations with flat structures (starfish) are superior to those with tall structures (spiders).

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SpidersSpidersSpider (traditional) organizations have a clear hierarchy, chain of command, and physical corporate headquarters.There are firm divisions between departments, and each unit’s roles and responsibilities are fixed.Knowledge and power are concentrated at the top.Remove the top leadership, and the organization can no longer function.

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StarfishStarfishStarfish (non-traditional) organizations have no clear hierarchy or chain of commandMay have no physical corporate headquarters.Divisions between departments (if these exist at all) are fluid.Knowledge and power are distributed throughout the organization.Remove the top leadership, and the organization survives (regenerates).

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The Spaniards vs. Native The Spaniards vs. Native AmericansAmericansB&B use historical analogy to explain power of decentralized organizations.Spaniards had no difficulty defeating the Aztecs & Incas.Both civilizations were highly centralized (spider) entities.After capturing & killing their leaders, the civilizations crumbled.By contrast, the Spaniards were routed by the Apaches, who had a decentralized (starfish) structure and no formal leadership.

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InformalizationInformalization

Informal organization: the unofficial means of means of communication, decision making, and control that are part of the way things get done in an organization.Informal structures are often not represented in official org. charts but are important nonetheless.

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InformalizationInformalization: The U.S. vs. : The U.S. vs. JapanJapan

Japanese firms rely much more on informalization than U.S. firms.In Japan, decisions are often made in face-to-face meetings between people who do not have formal reporting relationships.This process of informal communication and incremental decision-making is referred to as nemawasi.

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Centralization and Centralization and DecentralizationDecentralization

Centralization refers to the level at which decisions are made within the organization.Centralized organizations tend to restrict decision making to fewer individuals, usually at the top of the organization.Decentralized organizations tend to push decision-making authority down to the lowest level possible.

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Centralization: U.S. vs. Centralization: U.S. vs. Japanese FirmsJapanese Firms

Japanese firms exhibit a high degree of centralization.Unlike in U.S. and European firms, decisions are not generally delegated.Host country nationals working for Japanese owned multinationals have complained about a “bamboo ceiling.”This refers to the tendency of Japanese firms to limit strategic decision making in foreign subsidiaries to Japanese expatriate managers.

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Formalization vs. Formalization vs. CentralizationCentralization

Formalization and centralization are often confused; they are NOT the same thing.Formalization pertains to the reporting structure within the organization.Centralization refers to the locus of decision making.

Hmm..

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Formalization vs. Formalization vs. CentralizationCentralization

You can have a very formal organization (i.e., clear chain of command) where decision-making is decentralized (i.e., made at lower levels).Likewise, you can have a highly informal organization (i.e., unclear chain of command) where decision-making is highly centralized (i.e., made at the top).

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US ArmyUS Army

Coordination is achieved through rigidly structured, hierarchical relationships.

Decisions about strategy and tactics are made at the top of the organizational pyramid.

Decision making structure:CENTRALIZED

Type of Formalization:FORMAL

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Formal

Informal


Combinations of Formal/Informal Combinations of Formal/Informal and Centralized/Decentralizedand Centralized/Decentralized

Adapted from Exhibit 7.5: Combinations of Formal/Informal and Centralized/Decentralized

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Club MedClub Med

Loose relationships exist between individual managers and those at the corporate HQ.

General managers have considerable autonomy to make decisions about what is best for their resorts.

Decision making structure:DECENTRALIZED

Type of Formalization:INFORMAL

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Formal

Informal




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MitsubishiMitsubishi

Lots of communication between people who do not have formal reporting relationships.

Decisions about strategy and operations made at the top of the organizational pyramid by Japanese nationals.

Decision making structure:CENTRALIZED

Type of Formalization:INFORMAL

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Formal

Informal




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Phillips ElectronicsPhillips Electronics

Coordination is achieved through rigid lines of authority and clear chains of command.

Decisions about strategy and operations pushed down the organizational pyramid and made by local affiliates.

Decision making structure:DECENTRALIZED

Type of Formalization:FORMAL

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Formal

Informal




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Common Organizational Common Organizational StructuresStructures

The six most common organizational structures:Functional StructureProduct StructureDivision StructureCustomer StructureGeographic/Regional StructureMatrix Structure

Note: Most organizations combine one or more structure.

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Functional StructureFunctional Structure

The simplest organizational structure.Organizes the firm around traditional functional areas such as accounting, finance, marketing, operations, etc.Most common when the technology and products of the firm are similar throughout the world.

I’m a bean counter –

what’s your function?

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Adapted from Exhibit 7.6: Functional Structure

CEO

Vice PresidentMarketing

Vice PresidentSales

Vice PresidentManufacturing

Vice PresidentHuman Resources

Market research

Advertising

Promotion

East region

South region

West region

Purchasing

Operations

Logistics

Recruiting

Training

Compensation

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StrengthsSmall to medium-sized firms with limited product diversificationSpecialization of functional knowledgeLess duplication of functional resourcesFacilitates coordination within functional areas

WeaknessesWeak coordination across functional groupsRestricted view of overall organizational goalsLimits customer attention Slower response to market changesBurdens chief executives with decisions

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Product StructureProduct Structure

Organizes the firm around specific products or related sets of products and services.Each product is generally treated as a profit center (i.e., related expenses are subtracted from the revenues generated by the sales of that product).

Dude, I’m a profit center!

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Product StructureProduct Structure

Adapted from Exhibit 7.7: Product Structure

CEO

Vice PresidentProduct A

Vice PresidentProduct B

Vice PresidentProduct C

Vice PresidentProduct D

Marketing

Operations

Sales

Marketing

Operations

Sales

Marketing

Operations

Sales

Marketing

Operations

Sales

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Product StructureProduct StructureStrengths

More focus on products and customersEasier to evaluate performance of the productProduct responsiveness to market changesLess burden on the top executive in making operating decisions

WeaknessesDuplication and lack of economies of scale Problems for customers purchasing across multiple product groupsConflicts between product group and corporate objectivesConflict between product groups

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Division StructureDivision Structure

An extension of the product structure.Organizes firm activities around divisions, which typically consist of multiple products within a generally related area.For large, diversified multinational firms, this structure is one of the most common.

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Adapted from Exhibit 7.8: Division Structure

CEO

Vice PresidentMedical systems

Vice PresidentBioscience

Vice PresidentClinical

Anesthesia

Hypodermic

Infusion

Labware

Cell biology

Immunology

Vacutainer

Diagnostics

Consulting

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StrengthsReduced functional duplicationCustomer focus can increaseCross-product coordination is easedCross-regional coordination is often eased

WeaknessesMost appropriate only for diversified, large companies with many products and product familiesMay inhibit cross-division coordinationCoordination difficulties between division and corporate objectives

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Customer StructureCustomer Structure

Organizes firm activities around categories of customers (e.g., industrial, retail, private sector, government, etc.).Typically used when different categories of customers have separate needs.Not used that often; may be difficult to implement.

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Adapted from Exhibit 7.9: Customer Structure

CEO

Vice PresidentRetail

Vice PresidentIndustrial

Vice PresidentMilitary

Small

Mid-size

Domestic

International

Army

Navy

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StrengthsIn-depth understanding of specific customersResponsiveness to changes in customer preferences and needs Responsiveness to moves by competitors to better serve customers

WeaknessesDuplication of functional resources in each customer unitCoordination between customer units and corporate objectivesFailure to leverage technology or other strengths in one unit across other units

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Geographic/Regional Geographic/Regional StructureStructure

Organizes firm activities around various geographical areas or regions.Regional executives are generally responsible for all functional activities and products in their regions.Commonly used by multinational companies –especially where customer demands, gov’tregulations, and competitive conditions vary significantly from one region to another.

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Geographical/Regional Geographical/Regional StructureStructure

Adapted from Exhibit 7.10: Geographical/Regional Structure

Chief ExecutiveOfficer

Vice PresidentNorth America

Vice PresidentEurope

Vice PresidentSoutheast Asia

Vice PresidentLatin America

Vice PresidentAfrica

Strengths:• Facilitates local responsiveness• Develops in depth knowledge of

specific regions/countries• Creates accountability by region• Facilitates cross-functional

coordination within regions

Weaknesses:• Often creates cross-regional

coordination difficulties• Can inhibit ability to capture

global scale economies• Duplicates resources and

functions across regions

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Matrix StructureMatrix Structure

Involves dual reporting relationships (i.e., one person essentially reports to two bosses).The two overlapping structures are based on the two dominant aspects of an organization’s environment.

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Chief ExecutiveOfficer

Health Beauty Cleaning Food

NA

AP

Matrix StructureMatrix Structure

Adapted from Exhibit 7.11: Matrix Structure

EMEA

LA

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Matrix StructureMatrix StructureStrengths

Information flow Decision quality Suited to a changing and complicated business environmentFlexible use of human resources

WeaknessesComplexity of performance evaluationsInhibited ability to respond to changing conditionsDiffused accountabilityConflicts between differing perspectives and objectives

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Hybrid StructuresHybrid Structures

Some firms have adopted variations on the aforementioned organizational structures.These are known as hybrid structures.Hybrid structures aim to gain the advantages of one structure and reduce its disadvantages by incorporating the strengths of different structures.

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Hybrid StructuresHybrid Structures

Adapted from Exhibit 7.12: Hybrid Structure

CEO

Vice PresidentFinance

Vice PresidentHuman Resources

Vice PresidentOperations

Vice PresidentProduct A

Vice PresidentProduct B

Auditing

Accounting

Treasury

Recruiting

Training

Compensation

Purchasing

Manufacturing

Logistics

Retail

Industrial

Education

Government

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Hybrid Structures: ContinuedHybrid Structures: Continued

Adapted from Exhibit 7.12: Hybrid Structure

CEO

Vice PresidentNorth America

Vice PresidentLatin America Asia Pacific Vice President

EMEA

Marketing

Operations

Sales

Marketing

Operations

Sales

Marketing

Operations

Sales

Marketing

Operations

Sales

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Networked StructuresNetworked StructuresMany firms are adopting org structures that do not fit the traditional mold.These new forms are often called networked structures.May involve formal or informal relationships among units or organizations.Used by clothing and footwear firms like Nike and Adidas who don’t want to own overseas production factories.

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OutsourcingOutsourcing

A key element of most networked structures is the use of outsourcing.Outsourcing is the practice of taking a significant activity within the organization and contracting it out to an independent party.

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Network StructureNetwork Structure

Adapted from Exhibit 7.14: Network Structure

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Organizational UncertaintyOrganizational UncertaintyLow uncertainty Moderate uncertainty

High uncertaintyModerate Uncertainty

Adapted from Exhibit 7.15: Matrix of Organizational Uncertainty

Simple

Complex

Static Dynamic

Low demands placed on structure to facilitate extent or speed of coordination

Low demands placed on structure for broad coordination, high for speed of coordination

High demands placed on structure to facilitate extent or speed of coordination, low demand on speed

High demands placed on structure to facilitate both extent and speed of coordination

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Low InternationalProduct Diversity

High InternationalProduct Diversity

High ForeignSales

Low ForeignSales

International Strategy and StructureInternational Strategy and Structure

Geographicstructure

Matrixstructure

Worldwideproduct division

Internationaldivision

Adapted from Exhibit 7.16: International Strategy and Structure

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The Rub:The Rub:All organizations must grapple with the question of how to organize their internal operations to maximize efficiency.While the optimal organizational structure will vary depending on the nature of the firm and the external environment, there is a growing trend towards flatter, less formal corporate structures.Networked structures that outsource non-core activities can be expected to proliferate in the coming years.

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