Pamela S. Lewis Stephen H. Goodman Patricia M. Fandt Slides Prepared by Zulema Seguel © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. CHAPTER 9 Designing the Contemporary Organization

249 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Learning Objectives slide 1 of 2 1.Explain why organizational design is important for organizational success. 2.Identify the three major components of organizational design. 3.Discuss the four types of organizational structure and the strategic conditions under which each might be appropriate. 4.Describe the factors that affect an organization’s need for coordination and explain how integrating mechanisms can be used to coordinate organizational activities.

349 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Learning Objectives slide 2 of 2 5.Explain the concept of locus of decision making and the advantages and disadvantages of centralized and decentralized decision making. 6.Describe organic and mechanistic organizational systems and discuss the relationships between these systems and environmental stability. 7.Describe how organizational design will likely change in the future.

449 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Organizational Design Defined A plan for arranging and coordinating the activities of an organization for the purpose of fulfilling its mission and achieving its goals.

549 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Components of Organizational Design

649 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Components of Organizational Design Overall organizational design is defined by three primary components: –Organizational structure –Integrating mechanisms –Locus of decision making

749 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Organizational Structure Defines the primary reporting relationships that exist within an organization. The chain of command and hierarchy of responsibility, authority, and accountability are established through organizational structure.

849 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Common Forms of Organizational Structure Functional structure Divisional structure Matrix structure Network structure

949 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Functional Structure Members of the organization are grouped according to the particular function that they perform within the organization. Appropriate when an organization’s greatest source of complexity comes from the diverse tasks that must be performed rather than from its products, geographic markets, or consumer groups.

1049 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Advantages Facilitates specialization Cohesive work groups Improved operational efficiency Functional Structure: Advantages

1149 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Functional Structure: Disadvantages Disadvantages Focus on departmental vs. organizational issues Difficult to develop generalists needed for top- level management Only top-level management held accountable for profitability

1249 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Example of a Functional Structure

1349 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Functional structure Divisional structure Matrix structure Network structure Common Forms of Organizational Structure

1449 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Divisional Structure Members of the organization are grouped on the basis of: –Common products –Geographic markets –Customers served

1549 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Types of Divisional Structure Product divisional –Most appropriate for organizations with relatively diverse product lines that require specialized efforts to achieve high product quality. Geographic divisional –Most appropriate for organizations with limited product lines that either have wide geographic coverage or desire to grow through geographic expansion. Customer divisional –Most appropriate for organizations that have separate customer groups with very specific and distinct needs.

1649 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Product Divisional Advantages –Enhanced coordination. –Better assessment of manager performance and responsibility. –Development of generalist managers. Disadvantages –Managers may lack expertise to operate in wide geographic areas. –Duplication of resources.

Product Divisional Structure

1849 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Geographic Divisional Advantages –Allows for focus on specific new markets. –Good structure for growth along geographic lines. –Adaptable to local needs. Disadvantages –Duplication of product or product/technology efforts. –Coordination and integration are difficult. –May be difficult to manage diverse product lines.

1949 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Geographic Divisional Structure

2049 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Functional structure Divisional structure Matrix structure Network structure Common Forms of Organizational Structure

2149 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Matrix Structure A structure in which the tasks of the organization are grouped along two organizational dimensions simultaneously. Examples include: –Product/function –Product/geographic region

2249 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Matrix Structure: Advantages Advantages Can achieve simultaneous objectives Managers focus on two organizational dimensions, resulting in more specific job skills

2349 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Matrix Structure: Disadvantages Disadvantages Complex, leading to difficulties in implementation Behavioral difficulties from “two bosses” Time consuming from a planning/coordination perspective

A Multinational Matrix Structure

2549 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Functional structure Divisional structure Matrix structure Network structure Common Forms of Organizational Structure

2649 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Network Structure A contemporary organizational structure that is founded on a set of alliances with other organizations that serve a wide variety of functions.

2749 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Types of Network Structure Internal network –A network structure that relies on internally developed units to provide services to a core organizational unit. Stable network –A network structure that utilizes external alliances selectively as a mechanism for gaining strategic flexibility. Dynamic network –A network structure that makes extensive use of outsourcing through alliances with outside organizations.

2849 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Network Structure: Advantages Advantages Maximizes the effectiveness of the core unit Do more with less resources Flexibility

2949 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Network Structure: Disadvantages Disadvantages Fragmentation makes it difficult to develop control systems Success is dependent on ability to locate sources Difficult to develop employee loyalty

Sample Network Structure

3149 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Overall organizational design is defined by three primary components: –Organizational structure –Integrating mechanisms –Locus of decision making Components of Organizational Design

3249 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Managing Complexity Through Integration Interdependence is the degree to which work groups are interrelated. Three primary levels of work group integration: –Pooled interdependence –Sequential interdependence –Reciprocal interdependence

3349 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. B C D A F E Occurs when organizational units have a common resource but no interrelationship with one another. Pooled Interdependence Head- quarters

3449 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Sequential Interdependence Occurs when organizational units must coordinate the flow of information, resources, and tasks from one unit to another. ABC

3549 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Occurs when information, resources, and tasks must be passed back and forth between work groups. Reciprocal Interdependence A C EF D B

3649 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Integrating Mechanisms Methods for managing the flow of information, resources, and tasks within the organization. Three major categories of integrating mechanisms are: –General management systems. –Methods of increasing coordination potential. –Methods of reducing the need for coordination.

3749 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. General Management Systems Some coordination of work units may be achieved through the development of general management systems such as: –The managerial hierarchy –Rules and procedures –Plans and goals Such mechanisms form the foundation of an organization’s integration system.

3849 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Increasing Coordination Potential Two popular mechanisms for increasing coordination potential both vertically and horizontally in the organization are information systems and lateral relationships. –Information systems facilitate the flow of information up and down the traditional chain of command and across organizational units. –Lateral relationships exist across work units and serve as mechanisms for exchanging decision-making information.

3949 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Boundary Spanning Coordination Lateral relationships that help to integrate and coordinate the activities of the organization. Examples include: –Liaisons –Committees –Task forces –Integrating positions –Interfunctional work teams

4049 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Reducing the Need for Coordination In essence, the organization creates “slack resources” that reduce the interdependence of the work groups. As a result, the need for integrating mechanisms is reduced.

4149 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Overall organizational design is defined by three primary components: –Organizational structure –Integrating mechanisms –Locus of decision making Components of Organizational Design

4249 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Locus of Decision Making Locus of decision making refers to the degree to which decision making is centralized versus decentralized.

4349 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Centralized Decision Making Advantage –Gives top-level management maximum control. Disadvantage –Limits the organization’s ability to respond quickly and effectively to changes in the environment.

4449 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Decentralized Decision Making Advantage –Organizations can respond to environmental change more rapidly and effectively because the decision makers are the people closest to the situation. Disadvantage –Top-level managers lose some control.

4549 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Mechanistic Vs. Organic Systems Mechanistic Systems –Highly centralized organizations in which decision-making authority rests with top- level management. Organic Systems –Decentralized organizations that push decision making to the lowest levels of the organization in an effort to respond more effectively to environmental change.

4649 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. The Impact of Environmental Stability Stable Environments –Environments that experience little change. Turbulent Environments –Environments that are characterized by rapid and significant change.

4749 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Organizational Design for a Changing Environment Adaptive Organization –An organization that eliminates bureaucracy which limits employee creativity and brings the decision makers of the organization closer to the customer.

4849 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Implications for Leaders: Organizational Design slide 1 of 2 Remember that organizational design provides an important mechanism for achieving the strategic and operational goals of the organization. Structure their organizations to cope with their source of greatest complexity. Consider ways that partnerships between members of the organization, as well as alliances with other organizations, can create synergy and improve organizational performance. Utilize advanced information technology to support dispersed operations, people, and partners.

49 © Copyright ©2004 by South-Western, a division of Thomson Learning. All rights reserved. Implications for Leaders: Organizational Design slide 2 of 2 Look for ways to increase the integration potential of the organization or to reduce the need for integration. Evaluate the advantages and disadvantages associated with centralized versus decentralized decision making, given the specific circumstances of the organization. Strive to develop an adaptive and flexible organization that is effective in a dynamic business environment.