Copyright 1998 by Houghton Mifflin Company. All rights reserved.
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Chapter 11: Designing Chapter 11: Designing Organizational StructureOrganizational Structure
Text byCharles W. L. HillGareth R. Jones
Multimedia Slides byMilton M. Pressley
Univ. of New Orleans
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
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PreviewPreview
The Role of Organizational Structure
Vertical Differentiation Horizontal Differentiation Integration and Integrating
Mechanisms
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
11-3
The Role of Organizational The Role of Organizational StructureStructure
• Organizational Structure Organizational Structure DefinedDefined
• Building BlocksBuilding Blocks– DifferentiationDifferentiation
• VerticalVertical• HorizontalHorizontal
– IntegrationIntegration
• Bureaucratic CostsBureaucratic Costs
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
11-4Figure 11.1: How Organizational Figure 11.1: How Organizational
Design Increases ProfitabilityDesign Increases Profitability
Economizes on theBureaucratic Costs of
Organizational Structure
Enhancesa Company’s Value-Creation
Skills
Leading to a Low-costAdvantage
Leading to DifferentiationAdvantages and Ability toCharge a Premium Price
Which Increases Profit
GoodOrganizational
Design
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Vertical DifferentiationVertical Differentiation• Span of ControlSpan of Control
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Figure 11.2: Figure 11.2: Tall and Flat StructuresTall and Flat Structures
8
7
6
5
4
3
2
1
3
2
1
Tall Structure (8 levels) Flat Structure (3 levels)
Vertical DifferentiationVertical Differentiation• Span of ControlSpan of Control
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Vertical Differentiation Vertical Differentiation (Continued)(Continued)
Problems with Tall HierarchiesProblems with Tall Hierarchies
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Figure 11.3: Relationship Between Figure 11.3: Relationship Between Company Size and Number of Company Size and Number of
Hierarchical LevelsHierarchical Levels
Employees
Nu
mb
er
of
Hie
rarc
hic
al L
ev
els
1000 2000 3000 10,000
10 9 8 7 6 5 4
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Vertical Differentiation Vertical Differentiation (Continued)(Continued)
• Minimum Chain of Command Minimum Chain of Command PrinciplePrinciple
Problems with Tall HierarchiesProblems with Tall Hierarchies
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11-10
Figure 11.4: Sources of Figure 11.4: Sources of Bureaucratic CostsBureaucratic Costs
Number ofMiddle
Managers
MotivationalProblems
CoordinationProblem
InformationDistortion
BureaucraticCosts
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
11-11
Vertical Differentiation Vertical Differentiation (Continued)(Continued)
• Coordination ProblemsCoordination Problems• Information DistortionInformation Distortion• Motivational ProblemsMotivational Problems• Number of Middle ManagersNumber of Middle Managers
Problems With Tall HierarchiesProblems With Tall Hierarchies
• Minimum Chain of CommandMinimum Chain of Command Principle Principle
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
11-12
Vertical Differentiation Vertical Differentiation (Continued)(Continued)
• Centralization DefinedCentralization Defined• Decentralization DefinedDecentralization Defined• Advantages of DecentralizationAdvantages of Decentralization
– Information Overload ReductionInformation Overload Reduction– Increase of Motivation and Accountability Increase of Motivation and Accountability
(Increases Flexibility and Reduces (Increases Flexibility and Reduces Bureaucratic Costs)Bureaucratic Costs)
– Fewer Managers Needed (Reduced Fewer Managers Needed (Reduced Bureaucratic Costs)Bureaucratic Costs)
Centralization or Decentralization?Centralization or Decentralization?
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• Advantages of CentralizationAdvantages of Centralization– Easier Coordination of Activities Easier Coordination of Activities
Needed to Pursue Firm’s StrategyNeeded to Pursue Firm’s Strategy– Decisions Fit Broad Organizational Decisions Fit Broad Organizational
ObjectivesObjectives– Strong, Focused Leadership Allows for Strong, Focused Leadership Allows for
Speedy DecisionSpeedy Decision
Vertical Differentiation Vertical Differentiation (Continued)(Continued)
Centralization or Decentralization?Centralization or Decentralization?
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11-14
Horizontal DifferentiationHorizontal Differentiation
• Simple StructureSimple Structure• Functional StructureFunctional Structure
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Figure 11.5: Functional StructureFigure 11.5: Functional Structure
CEO
Engineer-ing
Engineer-ing
Researchand Devel-
opment
Researchand Devel-
opment
Salesand
Marketing
Salesand
Marketing
MaterialsManage-
ment
MaterialsManage-
ment
Manufact-uring
Manufact-uring
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11-16
Horizontal Differentiation Horizontal Differentiation (Continued)(Continued)
• Simple StructureSimple Structure• Functional StructureFunctional Structure• Advantages of Functional StructuresAdvantages of Functional Structures
– People Learn from Each Other and People Learn from Each Other and Become More Specialized and Become More Specialized and ProductiveProductive
– Gives Managers Greater Control of Gives Managers Greater Control of Organizational ActivitiesOrganizational Activities
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11-17
Horizontal Differentiation Horizontal Differentiation (Continued)(Continued)
• Problems With Functional StructuresProblems With Functional Structures– Communications ProblemsCommunications Problems– Measurement ProblemsMeasurement Problems– Location ProblemsLocation Problems– Strategic ProblemsStrategic Problems
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11-18
Multidivisional StructureMultidivisional Structure
• Two Main InnovationsTwo Main Innovations– Each SBU in Its Own Self-Contained Each SBU in Its Own Self-Contained
DivisionDivision– Office of Corporate Headquarters Office of Corporate Headquarters
Staff Monitors and Exercises Financial Staff Monitors and Exercises Financial Control Over Divisional ActivitiesControl Over Divisional Activities
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11-19
Figure 11.6: Multidivisional StructureFigure 11.6: Multidivisional Structure
Oil Division(Functional Structure)
PharmaceuticalsDivision (ProductTeam Structure)
Plastics Division(Matrix Structure)
Typical ChemicalTypical ChemicalCompanyCompany
Corporate Headquarters Staff
CEO
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11-20
Multidivisional Structure Multidivisional Structure (Continued)(Continued)
• Strategic ResponsibilityStrategic Responsibility
• Two Main InnovationsTwo Main Innovations- Each SBU in Its Own Self-Contained- Each SBU in Its Own Self-Contained DivisionDivision- Office of Corporate Headquarters Staff- Office of Corporate Headquarters Staff Monitors and Exercises FinancialMonitors and Exercises Financial Control Over Divisional Activities Control Over Divisional Activities
• Operating ResponsibilityOperating Responsibility
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11-21
Multidivisional Structure Multidivisional Structure (Continued)(Continued)
• Enhanced Corporate Financial ControlEnhanced Corporate Financial Control• Enhanced Strategic ControlEnhanced Strategic Control• GrowthGrowth• Stronger Pursuit of Internal EfficiencyStronger Pursuit of Internal Efficiency
• Advantages of Multidivisional Advantages of Multidivisional StructureStructure
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11-22
Multidivisional Structure Multidivisional Structure (Continued)(Continued)
• Difficulty of Establishing the Divisional-Corporate Difficulty of Establishing the Divisional-Corporate Authority RelationshipAuthority Relationship
• Distortion of InformationDistortion of Information• Competition for ResourcesCompetition for Resources• Transfer PricingTransfer Pricing• Short-Term Research and Development FocusShort-Term Research and Development Focus• Bureaucratic CostsBureaucratic Costs
• Disadvantages of Multidivisional Disadvantages of Multidivisional Structure Structure
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Matrix StructureMatrix Structure
• Matrix Structure DefinedMatrix Structure Defined
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Figure 11.7: Two Boss EmployeesFigure 11.7: Two Boss Employees
R&D Finance R&DSales &
MarketingPurchasing
Pro
j/Pro
du
ct
Mg
rs Proj A
Proj C
Proj B
Proj D
FunctionalManagers
President
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11-25
Matrix Structure Matrix Structure (Continued)(Continued)
• Speedy Product DevelopmentSpeedy Product Development• Autonomy and Flexibility Suitable Autonomy and Flexibility Suitable
for Professional Employeesfor Professional Employees• Makes Maximum Use of Employee Makes Maximum Use of Employee
Skills As Existing Projects are Completed and Skills As Existing Projects are Completed and New New Projects DevelopProjects Develop
• Leaves Top Management Leaves Top Management Free to Concentrate on Free to Concentrate on Strategic IssuesStrategic Issues
• AdvantagesAdvantages
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11-26
Matrix Structure Matrix Structure (Continued)(Continued)
• High Bureaucratic CostsHigh Bureaucratic Costs• High New Project Startup CostsHigh New Project Startup Costs• Conflict Between Functions and Conflict Between Functions and
Projects Over ResourcesProjects Over Resources• Difficult to Operate Difficult to Operate
Because Task and Because Task and Role Relationships Role Relationships Become ComplexBecome Complex
• DisadvantagesDisadvantages
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Product Team StructureProduct Team Structure
• Product Team Structure Product Team Structure DefinedDefined
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Figure 11.8: Product Team Figure 11.8: Product Team StructureStructure
Sales andMarketing
R&DMaterials
ManagementEngineering
CEO
ProductTeams
Manufacturing Units
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11-29
Product Team Structure Product Team Structure (Continued)(Continued)
• Product Team Structure Product Team Structure DefinedDefined
• Advantages Similar to Matrix Advantages Similar to Matrix Structure (But, Easier and Structure (But, Easier and Less Costly to Operate)Less Costly to Operate)
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Geographic StructureGeographic Structure
• Geographic Structure DefinedGeographic Structure Defined
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Figure 11.9: Geographic StructureFigure 11.9: Geographic Structure
Regional Operations
Re
gio
na
l Op
era
tio
ns
Re
gio
na
l Op
era
tion
s
Regional Operations
Central Operations
CEO
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11-32
Geographic Structure Geographic Structure (Continued)(Continued)
• More Responsive to Regional More Responsive to Regional Customers’ NeedsCustomers’ Needs
• Reduces Transportation CostsReduces Transportation Costs• Provides More Control Than Functional Provides More Control Than Functional
StructureStructure• Economies of Scale AchievedEconomies of Scale Achieved• Reduction of Coordination and Reduction of Coordination and
Communications ProblemsCommunications Problems
• AdvantagesAdvantages
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11-33
Integration and Integrating Integration and Integrating MechanismsMechanisms
• Integration Integration • Relationship Between Relationship Between
Differentiation and IntegrationDifferentiation and Integration• Forms of Integrating MechanismsForms of Integrating Mechanisms
– Direct ContactDirect Contact– Interdepartmental Liaison RolesInterdepartmental Liaison Roles– Temporary Task ForcesTemporary Task Forces– Permanent TeamsPermanent Teams– Integrating RolesIntegrating Roles– Integrating DepartmentsIntegrating Departments– Matrix StructureMatrix Structure
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
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Table 11.1: Types and Examples Table 11.1: Types and Examples of Integrating Mechanismsof Integrating Mechanisms
DirectContact
Sales and production managers
LiaisonRolesTask Forces
Teams
IntegratingRolesIntegrating
DepartmentsMatrix
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11-35
Table 11.1: Types and Examples Table 11.1: Types and Examples of Integrating Mechanismsof Integrating Mechanisms
DirectContact
Sales and production managers
LiaisonRoles
Assistant sales and plant managers
Task Forces
Teams
IntegratingRolesIntegrating
DepartmentsMatrix
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
11-36
Figure 11.10: Forms of Figure 11.10: Forms of Integrating MechanismsIntegrating Mechanisms
Production Sales
(a) Liaison Role(a) Liaison Role
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11-37
Table 11.1: Types and Examples Table 11.1: Types and Examples of Integrating Mechanismsof Integrating Mechanisms
DirectContact
Sales and production managers
LiaisonRoles
Assistant sales and plant managers
Task Forces Representatives from sales, production, andresearch and development
Teams
IntegratingRolesIntegrating
DepartmentsMatrix
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
11-38
Table 11.1: Types and Examples Table 11.1: Types and Examples of Integrating Mechanismsof Integrating Mechanisms
DirectContact
Sales and production managers
LiaisonRoles
Assistant sales and plant managers
Task Forces Representatives from sales, production, andresearch and development
Teams Organizational executive committee
IntegratingRolesIntegrating
DepartmentsMatrix
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Figure 11.10: Forms of Integrating Figure 11.10: Forms of Integrating Mechanisms Mechanisms (Continued)(Continued)
Sales Production
EngineeringResearch
& Develop-ment
(b) Task Force or Team(b) Task Force or Team
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11-40
Table 11.1: Types and Examples Table 11.1: Types and Examples of Integrating Mechanismsof Integrating Mechanisms
DirectContact
Sales and production managers
LiaisonRoles
Assistant sales and plant managers
Task Forces Representatives from sales, production, andresearch and development
Teams Organizational executive committee
IntegratingRoles
Assistant vice-president for strategicplanning or vice president without portfolio
IntegratingDepartmentsMatrix
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11-41
Figure 11.10: Forms of Figure 11.10: Forms of Integrating Mechanisms Integrating Mechanisms
(Continued)(Continued)
(c) Integrating Role(c) Integrating Role
PlasticsDivision
OilDivision
IntegratingRole
IntegratingRole
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11-42
Table 11.1: Types and Examples Table 11.1: Types and Examples of Integrating Mechanismsof Integrating Mechanisms
DirectContact
Sales and production managers
LiaisonRoles
Assistant sales and plant managers
Task Forces Representatives from sales, production, andresearch and development
Teams Organizational executive committee
IntegratingRoles
Assistant vice-president for strategicplanning or vice president without portfolio
IntegratingDepartments
Corporate headquarters staff
Matrix
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11-43
Table 11.1: Types and Examples Table 11.1: Types and Examples of Integrating Mechanismsof Integrating Mechanisms
DirectContact
Sales and production managers
LiaisonRoles
Assistant sales and plant managers
Task Forces Representatives from sales, production, andresearch and development
Teams Organizational executive committee
IntegratingRoles
Assistant vice-president for strategicplanning or vice president without portfolio
IntegratingDepartments
Corporate headquarters staff
Matrix All roles are integrating roles
Copyright 1998 by Houghton Mifflin Company. All rights reserved.
11-44
Integration and Integrating Integration and Integrating Mechanisms Mechanisms (Continued)(Continued)
• Integration Integration • Relationship Between Relationship Between
Differentiation and IntegrationDifferentiation and Integration• Forms of Integrating MechanismsForms of Integrating Mechanisms
– Direct ContactDirect Contact– Interdepartmental Liaison RolesInterdepartmental Liaison Roles– Temporary Task ForcesTemporary Task Forces– Permanent TeamsPermanent Teams– Integrating RolesIntegrating Roles– Integrating DepartmentsIntegrating Departments– Matrix StructureMatrix Structure
• Integration and ControlIntegration and Control
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