Organizing the Business Enterprise Chapter 3 Organizing the Business Enterprise © 2009 Pearson Education, Inc.

What is an Organization According to Louis Allen, “Organization is the process of identifying and grouping work to be performed, defining and delegating responsibility and authority and establishing relationships for the purpose of enabling people to work most effectively together in accomplishing the same. In simple words, Organization may be defined as a group of people working together to accomplish a common objective or goal.

What Is Organizational Structure? The specification of the jobs to be done within an organization and the ways in which those jobs relate to one another. Determinants of Organizational Structure: Organization’s purpose, Vision, Mission and Strategy, Size of the organization Technology and processes used Organization’s environment (Internal and External) Organizational structure is the specification of the jobs to be done within an organization and the ways in which those jobs relate to one another. Organizational charts are used to: Clarify structure. Show employees where they fit into a firm’s operations. Show the chain of command, or reporting relationships, within a company. Teaching Tips: Please return to your student team and think of an example company from whom you buy products or services. Develop an example of what their organizational chart might look like. We will share the answers with the class. Answers will vary. Have the students share and see if they can name the different types of organizational structures they have prepared, but hold off providing the appropriate answer until later in the class. © 2009 Pearson Education, Inc.

Organizational Charts It is the diagrammatic representation depicting a company’s structure and showing employees where they fit into a firm’s operations. The organization charts show reporting relationships between the various parts within the company, called “Chain of Command”

The Building Blocks of Organizational Structure Two important aspects on which the organizational structure of almost every organization is based on, are 1. Specialization This is the process of identifying the specific jobs that need to be done and designating the people who will perform them. This involves: Division of work Job specialization

2. Departmentalization This is the process of grouping jobs into logical units. Departmentalization allows the firm to treat a department as a profit center. Profit center: a separate company unit which is responsible for its own costs and profits.

Departmentalization may be done on a variety of bases, as Customer departmentalization according to type of customers likely to buy a given product. Ex: different sections in a super market  Product Departmentalization according to specific products being created Ex: Fixed line, GSM, Internet by Omantel Process departmentalization according to production process used to create a good or a service  Ex: extraction, refining in PDO Geographic departmentalization according to the geographic areas being served by a business.  Ex: Coca cola has division for America, Asia, Africa etc. Functional Departmentalization according to businesses’ functions and activities. Ex: Marketing, Production, Human Resource, Accounting etc.

Multiple Forms of Departmentalization This figure depicts multiple forms of departmentalization, including: Functional: Grouped by functional areas such as marketing, production or finance. Geographical: Organized by state location plant managers. Product: Split into the two groups, consumer products and industrial products in this example. Teaching Tips: In your student teams, please look at this diagram and decide if any of these forms of departmentalization might apply. Please share your responses with the class. Answers will vary.

Establishment of a decision-making hierarchy After jobs have been appropriately specialized and grouped into manageable departments, the next step is to establish the decision making hierarchy. This involve the following Assigning Tasks – Responsibility and authority determine who can make decisions and specifying how they should be made. Responsibility: duty to perform an assigned task Authority: Power to make a decision necessary to complete a task

B) Performing Tasks – Delegation and Accountability Implementing Decisions that have been made Delegation: Assignment of a task, responsibility or authority by a manager to a subordinate Accountability: Liability of a subordinate to accomplish a task assigned by managers

C) Distributing authority – Centralization and Decentralization determine the pattern of authority through out the organization Centralized organization: organization in which most decision-making authority is held by upper level management Decentralized organization: organization in which a great deal of decision-making authority is delegated different levels of management

Establishing the Decision-Making Hierarchy Centralized Organization Top managers hold most decision-making authority Decentralized Organization Once we have organized our organization, we need to establish the decision-making hierarchy. There are basically two types of decision-making hierarchy: Centralized organization: Top managers hold most decision-making authority. Decentralized organization: Lower-level managers hold significant decision-making authority. Teaching Tips: In your student teams, refer to the example organization you have been discussing and determine which type of decision-making hierarchy applies. We will share our answers with the class. Answers will vary, but students should defend their position of one versus the other. Lower-level managers hold significant decision-making authority

Tall and Flat Organizations Flat Organizational Structure Common in decentralized organizations Fewer layers of management Rapid communication Wide spans of control Tall Organizational Structure Common in centralized organizations Multiple layers of management Slower communication Narrower spans of control Span of control: it is the number of people supervised by one manager. As we examine organizational structure, we need to look at both tall and flat models. Flat organizational structure: Is common in decentralized organizations. Has fewer layers of management. Involves rapid communication. Has wide spans of control. Tall organizational structure: Is common in centralized organizations. Has multiple layers of management. Involves slower communication. Has narrower spans of control. Teaching Tips: Once again in your student teams, please think about your example company. What type of organizational strategy does the firm use? Answers should include either flat or tall organizational structure, with evidence coming from the items listed under each above.

Organizational Structure and Span of Control This diagram shows the difference between organizational structure and span of control. As you can see, the flat organizational structure is demonstrated by the example of a law firm. It is easy to see the decision-making process here. The U.S. Army example shows the many layers of decision making in a tall organization. Teaching Tips: In your student teams, discuss the difference between these two types of organizations. We will share our discussion with the entire class. Answers should refer back to the last slide and offer explanations incorporating those elements.

Forms of Authority Line Authority Staff Authority The type of operational authority that flows up and down the chain of command Staff Authority Authority based on special expertise and usually involves counseling and advising line managers Committee and Team Authority Authority granted to committees or work teams that play central roles in the firm’s daily operations There are a number of forms of authority that can be used within an organization. These include: Line Authority: This is the type of operational authority that flows up and down the chain of command. Staff Authority: This is authority based on special expertise and usually involves counseling and advising line managers. Many times marketing staff will fit in this area. Committee and Team Authority: This is the type of authority granted to committees or work teams that play central roles in the firm’s daily operation. Teaching Tips: In your student teams, please choose one form of authority that we have just discussed. Please think back to any of your example companies you have discussed today and determine what type of authority you believe that company might use and why. Answers will vary based on company chosen.

Line and Staff Organization This figure shows the differences between line and staff managers in an organization. Here, the staff managers are those within the Human Resources Department and the Engineering Department. The actual functional areas such as purchasing, materials handling, and even sales are grouped and report to the division manager for that specific product. Teaching Tips: Discuss with your student partner which type of management appeals to you. What type of manager would you like to be—staff or line—and why? We will share our answers with the class. Answers will vary based on students.

Forms of Organizational Structure 1. Functional Structure Form of business organization in which authority is determined by the relationships between group functions and activities Used by most small- to medium-sized firms structured around basic business functions (marketing, operations, finance, HR, Production etc.) Advantages: Specialization and smoother internal coordination Disadvantages: Centralization, poor cross-functional coordination, and lack of accountability Now we will take a look at functional structure. Functional structure is a form of business organization in which authority is determined by the relationships between group functions and activities. Functional structure is used by most small- to medium-sizes firms that are structured around basic business functions, such as marketing, operations and finance. The advantages of functional structure include specialization and smoother internal coordination. The disadvantages of functional structure include centralization, poor cross-functional coordination and lack of accountability. Teaching Tips: In your student teams, please think of an example of a small- to medium-sized business. Then discuss the advantage or disadvantage you see in using functional structure within that example firm. We will share our responses with the class. Answers will vary based on companies chosen but should refer back to the specific advantages and disadvantages listed in the above slide.

Functional Structure Figure 6.5 provides us with a visual example of functional structure. Teaching Tips: What do you see in this organizational chart that could make your sample company a success or a failure? Please refer back to our discussion a few minutes ago. We will share our examples with the class. Answers will vary but could include lack of open communication between functional areas, making it take much longer to get decisions made within the organization.

2. Divisional Structure Organizational structure in which corporate divisions operate as autonomous businesses under the larger corporate control. It is based on departmentalization by product, with each division managed as a separate enterprise Organizations using this approach are typically structured around several divisions Divisions – are departments that resemble separate businesses in that they produce and market their own products Advantages: Increased product-focus and internal coordination Disadvantages: Duplication of efforts and competition between divisions Another type of organization is divisional structure. It is based on departmentalization by product, with each division managed as a separate enterprise. Organizations using this approach are typically structured around several divisions. The divisions are departments that resemble separate businesses in that they produce and market their own products. Advantages of divisional structure include increased product-focus and internal coordination. Disadvantages of divisional structure include duplication of efforts and competition between divisions. Let’s see what this looks like in the next slide.

Divisional Structure Figure 6.6 is an example of an organization that uses divisional structure. Teaching Tips: Now go back, in your student teams, to the example company you selected before for other activities. Please apply divisional structure to that organization and discuss how this structure could help or hinder the company you chose. We will share our answers with the class. Answers will vary based on the company chosen. However student answers should reflect back to the material presented about divisional structure.

3. Matrix Structure Organizational structure in which teams are formed and the team members report to two or more managers. Organized along two dimensions, instead of just one, by combining, for example, functional and divisional structures Advantages: Highly flexible, focused on a single problem, access to resources and expertise Disadvantages: Loss of command and control, lack of accountability, impermanent existence Another form of organizational structure is matrix. The matrix structure is organized along two dimensions instead of just one. For example, the matrix organization may combine functional and divisional structures. The advantages of a matrix structure are: It is highly flexible. It is focused on a single problem. It has access to resources and expertise. The disadvantages of the matrix structure include: Loss of command and control. Lack of accountability. Impermanent existence. Let’s take a look at a matrix organizational structure. © 2009 Pearson Education, Inc.

3. Matrix Organization Figure 6.7 provides an example of a matrix organization within Martha Stewart’s Omnimedia organization. Here we see that there are two basic function areas: the media group and the merchandising group. Under each of these are specific media and different retailer lines. The interesting issue here is the use of area specialists, in various areas of importance to the company, such as cooking, weddings, crafts, gardening, etc. Teaching Tips: Imagine your student team has been hired by Omnimedia as a team of consultants with experience in organizational structure. Martha wants to know the benefits of using this type of matrix organization. Please discuss this in your teams. What will be included in your response to Martha Stewart? Be sure to provide evidence for your recommendation. We will share our recommendations with the class. Answers should address the key advantages stated in the last slide.

4. International Structures Approaches to organizational structure developed in response to the need to manufacture, purchase and sell in global markets (more than one country) These organization may adapt Department, division, or geographic structures to suit their needs. There are two other forms of organizational structure we will examine: International and global structures. International structures are developed in response to the need to manufacture, purchase and sell in global markets. In addition, their structure will include department, division or geographic forms of organization. Global structure includes the following: Acquiring resources, including capital. Producing goods and services. Engaging in research and development. Selling products. All the above are completed without any consideration of national boundaries. Teaching Tips: In your student teams, please think of a multinational corporation that offers a consumer product for sale. Discuss in your teams which structure would be best for your chosen organization and why it is the best structure. We will share our responses with the class. Answers will vary according to the company chosen.

International Division Structure Here is an example of an international division structure, split geographically. © 2009 Pearson Education, Inc.

Formal & Informal Organizational Systems It is official arrangement of jobs and job relationships that follow the formal lines of communication. Informal Organization: Everyday social interactions among employees that transcend formal jobs and job interrelationships. These relationships are not based on formal lines of communication, based on employees personal choice and beliefs. Advantages: May reinforce the formal organization Disadvantages: Can reinforce office politics that put the interests of individuals ahead of those of the firm May communicate distorted or inaccurate information The informal organization includes everyday social interactions among employees that transcend formal jobs and job interrelationships. Advantages of informal organization are that it may reinforce the formal organization. Disadvantages include that it could reinforce office politics that put the interests of individuals ahead of those of the firm. In addition, this type of organization may communicate distorted or inaccurate information. Teaching Tips: In your student teams, discuss why an informal organization could improve or hinder the productivity of one of the sample companies you have discussed in this class session. Answers will vary but should be based on the information presented in this slide as it is applied to the company being discussed. © 2009 Pearson Education, Inc.