ChapterChapter O RGANIZATIONAL STRUCTURE AND DESIGN FourteenFourteen

After reading this chapter you should be able to: 1.Describe organizational structure and how it is revealed by an organizational chart. 2.Explain the basic characteristics of organizational structure as revealed in an organizational chart (hierarchy of authority, division of labor, span of control, line versus staff, and decentralization). 3.Describe different approaches to departmentalization, including functional organizations, product organizations, matrix organizations, and the boundaryless organization. 4.Distinguish classical from neoclassical approaches to organizational design. 5. Distinguish mechanistic organizations from organic organizations as described by the contingency approach to organizational design, and describe the conditions under which each is most appropriate. 6.Describe the five organizational forms identified by Mintzberg: simple structure, machine bureaucracy, professional bureaucracy, divisional structure, and adhocracy. 7.Characterize two forms of interorganizational design -- conglomerates and strategic alliances.

Organizational Structure: The Basic Dimensions of Organizations (Pp ) Organizational Structure - the formal configuration between individuals and groups regarding the allocation of tasks, responsibilities, and authorities within organizations Organizational chart - diagram representing the connections between the various departments within an organization - provides information about the various tasks performed within an organization and the formal lines of authority between them

Board member Board member Board member Board member Chief Executive Officer Legal counsel President V.P Sales/ Marketing V.P Human Resources V.P Production V.P Research and Development Industrial Products Director- Sales Consumer Products Director- Sales Industrial Products Director- Human Resources Consumer Products Director- Human Resources Industrial Products Director- Production Consumer Products Director- Production Industrial Products Director- R&D Consumer Products Director- R&D Western Region Industrial Products Sales Manager Eastern Region Industrial Products Sales Manager Western Region Consumer Products Sales Manager Eastern Region Consumer Products Sales Manager etc. Figure 14.1 Organization Chart

Hierarchy of Authority - a configuration of the reporting relationships within organizations (i.e., who reports to whom) Tall organizations - have many levels in the hierarchy Flat organizations - have few levels in the hierarchy - many organizations have been restructuring by flattening their hierarchy - results in job losses, particularly among middle-level managers Organizational Structure: The Basic Dimensions of Organizations (cont.) Division of Labor - process of dividing the many tasks in an organization into specialized jobs - the more tasks are divided into separate jobs, the more those jobs are specialized, i.e., the narrower the range of activities Span of Control - the number of subordinates in an organization who are required to report to each manager Wide span - many subordinates report to a manager - typical of flat organizations Narrow span - few subordinates report to a manager - typical of tall organizations

Chief Executive Tall hierarchy Chief Executive Flat hierarchy Relatively wide span of control Figure 14.3 Relatively narrow span of control

Organizational Structure: The Basic Dimensions of Organizations (cont.) Line and Staff Positions Line positions - positions in which people can make decisions related to basic work Staff positions - positions in which people make recommendations to others but are not involved in decisions concerning day-to- day operations - line and staff personnel often hold different views about the organization - such differences may be conflict-arousing

Organizational Structure: The Basic Dimensions of Organizations (cont.) Decentralization - extent to which authority and decision making are spread throughout all levels of an organization rather than being reserved for top management (i.e., centralization) - although not always ideal, there has been a recent trend toward decentralization Low DecentralizationHigh decentralization (High centralization)(low centralization) Eliminates the additional Can eliminate levels of management, responsibility not desired by making a leaner organization people performing routine jobs Permits crucial decisions to bePromotes greater opportunities for made by individuals who have decisions to be made by people closest the “big picture”to problems Table 14.2

Departmentalization: Ways of Structuring Organizations (Pp ) Functional Organizations - departmentalization based on the activities or functions performed (e.g., sales, finance) - structure usually adopted when starting an organization Departmentalization - process of breaking organizations into coherent units - limitations - functional units may lose perspective about overall goals of the organization - tends to discourage innovation due to lack of coordination and cross-fertilization among functional units - advantages - takes advantage of potential economies scale - allows individuals to specialize and perform only those tasks at which they are most expert

Sales Department Production Department Research & Development Department Accounting Department Chief Executive Officer President Figure 14.4 Functional Organization of a Typical Manufacturing Firm

Departmentalization: Ways of Structuring Organizations (cont.) Product Organizations - departmentalization based on the products (or product lines) produced - separate divisions established that contain all of the resources necessary to to develop, manufacture, and sell a product - organization is composed of separate divisions, each of which operates independently Cost centers - advantage - managers from each division can devote their energies to one particular business - limitations - loss of economies of scale because of duplication of resources - ability to attract and retain talented employees - problems of coordination across product lines may arise

Figure 14.5 An Example of Product Organization Product Group 2 Product Group 1 Product Group 3 President Chief Executive Officer Prod. = productionR&D = research and development Actg. = accounting Prod.Actg.SalesR&DProd.Actg.SalesR&DProd.Actg.SalesR&D

Departmentalization: Ways of Structuring Organizations (cont.) Matrix Organizations - departmentalization in which a product or project form is superimposed on a functional form - product (project) managers share authority with functional managers - may be either permanent or temporary structure Dual authority - employees report to two bosses, one functional, the other product (project) - three major roles in matrix design Top leader - individual with authority over both functional and product (project) managers Matrix bosses - people who head functional departments or specific projects Two-boss managers - people who must report to both product and functional managers and attempt to balance the demands of each - advantages - permits flexible use of an organization’s human resources - efficient means of responding to changed environment - enhances communication among managers - limitation - frustration and stress experienced by two-boss managers

Project Gamma manager Production support group Legal support group Engineering support group Project Beta manager Production support group Legal support group Engineering support group Project Alpha manager Production support group Legal support group Engineering support group Production department Legal department Accounting department Engineering department Farm Machinery Division President Figure 14.7 Matrix Organization Accounting support group Accounting support group Accounting support group

Organizational Design (Pp ) Organizational Design - process of coordinating the structural elements of an organization in the most appropriate manner Classical Organization Theory - approaches that assume there is a single best way to design organizations - effective organizations had a formal hierarchy, clear rules, highly routine tasks, specialization of labor, narrow spans of control, and impersonal working environment - fallen into disfavor because it is insensitive to human needs and is not suited to a changing environment Neoclassical organization theory - attempt to improve on classical organization theory by arguing that employee satisfaction as well as economic effectiveness are the goals of organizational structure - proposed a “one best way” to structure organizations - design flat organizations and high degree of decentralization

Organizational Design (cont.) Contingency Approach - recognizes that no one approach to organizational design is best, but that the best design is the one that best fits with the existing environmental conditions External Environment - sum of all the forces with which an organization must deal effectively if it is to survive Highly stable - unchanging environments, environmental demands are predictable Highly unstable - turbulent environments, conditions change on a daily basis Mechanistic organization - an internal organizational structure in which people perform specialized jobs, rigid rules are imposed, and authority is vested in a few, top-ranked officials - appropriate for stable environments Organic organization - an internal organizational structure in which jobs tend to be very general, there are few rules, and decisions can be made by lower-level employees - appropriate for unstable environments

Department function Research Manufacturing Theorized ideal structure Organic Mechanistic Organic structure observed Highly effective Ineffective Mechanistic structure observed Ineffective Highly effective When a group’s structure did not match the ideal design for the task, the groups were not very effective When a group’s structure matched the ideal design for the task, the groups were very effective Figure 14.8 Matching Organizational Design and Industry

Organizational Design (cont.) Mintzberg’s Five Organizational Forms - organizations are composed of five basic elements or groups of individuals, any one of which may predominate Operating core - employees who perform the basic work related to the organization’s product or service Strategic apex - top-level executives responsible for running the entire organization Middle line - managers who transfer information between the strategic apex and the operating core Technostructure - specialists responsible for standardizing various aspects of the organization’s activities Support staff - individuals who provide indirect support services

DesignDescriptionDominant GroupExample Simple structureSimple, informalStrategic apexSmall, authority centralizedentrepreneurial in a single personbusiness Machine bureaucracyHighly complex, formalTechnostructureGovernment offices environment with clear lines of authority ProfessionalComplex, decision-Operating coreUniversities bureaucracymaking authority is vested in professionals DivisionalizedLarge, formalMiddle lineMultidivision structureorganizations with`businesses such as several separate divisionsGeneral Motors AdhocracySimple, informal, withSupport staffSoftware decentralized authoritydevelopment firm Table 14.4 Mintzberg’s Five Organizational Forms

Organizational Design (cont.) Boundaryless Organization - organization in which chains of command are eliminated, spans of control are unlimited, and rigid departments give way to empowered teams - requires a great deal of trust to function effectively - traditional managerial power bases are weakened - several variations of boundaryless organizations that involve only the elimination of external boundaries Modular organization - surrounds itself with other organizations to which it regularly outsources non-core functions - have a central hub that is surrounded by networks of outside specialists who can be added or subtracted as needed Virtual organization - highly flexible, temporary organization formed by a group of companies to exploit a specific opportunity - each participating company contributes only its core competencies

Interorganizational Designs (Pp ) Conglomerates - organizational diversification in which an organization (usually a very large, multinational one) adds an entirely unrelated business or product to its organizational design - parent company can enjoy the benefits of diversification - countercyclical business trends across different industries - may provide built-in markets and access to supplies as companies typically support other companies in the conglomerate Strategic Alliance - organizational design in which two or more separate companies combine forces to develop and operate a specific business - goal is to provide benefits to each individual organization that could not be attained by operating separately - offer opportunities for commercial development in countries with transforming economies - strategy to gain access to markets in foreign countries

Joint Ventures (different companies work together to fulfill the same opportunity, each requiring the other; e.g., AT&T and TSYS’s Universal Card) Mutual Service Consortia (similar companies pool resources to share a joint benefit; e.g., hospitals share expenses to build and operate an MRI unit) Value-Chain Partnerships (different companies that rely on each other for their unique business; e.g., customer-supplier relationships) Closeness of Relationship Weak and distant Strong and close Figure A Continuum of Strategic Alliances