Organizational Structure and Design Chapter Twelve Organizational Structure and Design

Copyright © 2007 by Nelson, a division of Thomson Canada Limited Objectives After reading and studying this chapter, you should be able to: Identify and define the foundation concepts of organizational structure, including the informal organization. Specify the basic features of the bureaucratic form of organizational structure, including how it is divided into departments. Describe three key modifications of a bureaucratic structure: matrix, flat and outsourcing. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Copyright © 2007 by Nelson, a division of Thomson Canada Limited Objectives (cont.) Describe the two contemporary organizational designs referred to as horizontal structures and network structures. Specify the criteria for an effective organizational design. Understand why a new type of organization chart called an organigraph can contribute to understanding organizational structure. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Copyright © 2007 by Nelson, a division of Thomson Canada Limited Concepts Organization Is a collection of people working together to achieve a common purpose (or simply a big group). Organizational structure Is the arrangement of people and tasks to accomplish organizational goals Organizational design Is the process of creating a structure that best fits a purpose, strategy, and environment. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Types of Organizational Structures Mechanistic versus Organic structures: Mechanistic Organization Hierarchical bureaucracies that emphasize specialization and control and vertical communications, with heavy reliance on rules, policies, and procedures (bureaucracy) Organic Organization Network designed to respond to rapid changes in the environment by emphasizing horizontal specialization, personal coordination, and extensive informal communications, with loose rules, policies, and procedures Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Types of Organizational Structures (cont.) Formal versus Informal Structure: Formal organization structure Is an official statement of the reporting relationships, rules, and regulations that guide and govern the conduct of business by members of the organization Informal organization structure Is a set of unofficial working relationships providing the flexibility to take care of events and transactions not covered by the formal structure. Is revealed using social network analysis to trace informal social relationships and communication channels. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Degree of Formalization Is the degree to which expectations regarding the methods of work are specified, written down, and enforced. A firm with high formalization is likely to have a high degree of specialization of labour and high delegation of authority. Is associated with mechanistic (bureaucratic) organizations. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Degree of Centralization Extent to which executives delegate authority to lower organizational units Less delegation = more centralization. Strategic decisions are more likely to be centralized than operational decisions. The use of functional units will be associated with greater centralization. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Complexity & Differentiation Complexity refers to the number of different job titles and organizational units in an organization. Complexity increases the difficulty of managing an organization and typically increases with the size of the organization. Differentiation is linked to complexity A horizontally differentiated organization will have many different job titles & many departments doing separate work. A vertically differentiated organization will have many different levels. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Copyright © 2007 by Nelson, a division of Thomson Canada Limited Bureaucracy Weber’s ideal organization, characterized by: Rules and procedures controlling the organizational structure A high degree of differentiation among organizational functions A high degree of job specialization An organization of offices determined by hierarchy, with each unit reporting to a higher unit A heavy emphasis on rules and norms to regulate behavior Interpersonal relations characterized by impersonality in place of favoritism Selection and promotion based on merit All administrative actions recorded in writing Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Types of Bureaucracies Machine bureaucracy Uses standardized work processes; is efficient. Best use is in large organizations where work performed by production, technical & support workers Professional bureaucracy Standardizes skills for coordination and is composed of a core of highly trained professionals. E.g., universities, hospitals, accounting firms Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Exhibit 12-1 The Bureaucratic Form of Organization Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Pros & Cons of Bureaucracies Contributions: Make possible large-scale accomplishments Accountability for results Managers with precious skills and expertise Valuable organizational memory Fulfill need for order & security Problems: Suppression of innovation and decision making Lower productivity Rigidity in handling people & problems Passing the buck Inconvenience and inefficiency Slow response (red tape) High worker frustration and low satisfaction Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Copyright © 2007 by Nelson, a division of Thomson Canada Limited Departmentalization The process of subdividing work into specialized departments. Typical forms of departmentalization: Functional Territorial Product or service Customer Hybrid Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Functional Departmentalization Grouping people according to their expertise Most common type of organization Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Territorial Departmentalization Grouping subunits according to the geographic areas that they serve. Common in service organizations Internationalization of business has increased the need for organizing subunits territorially May supplement functional structure (e.g., field force is organized by territory while headquarters is functional) Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Product/Services Departmentalization Is arranging units by the product or service they provide. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Customer Departmentalization Creates a structure based on customer needs e.g., groups set up to work with different customers: small businesses, large businesses, institutions, government All departmentalization forms discussed have advantage of enhancing product growth or providing service to customers, fostering employee pride in unit’s specialty BUT all have similar problems: expense of duplicated effort, difficulty of controlling organizational units Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Copyright © 2007 by Nelson, a division of Thomson Canada Limited Other Structures Hybrid (Mixed) Structure Combines the advantages of different forms into one structure. Both specialized (e.g., functions at headquarters) and self-contained units (e.g., product or territorial units) are included within the organizational structure. Line versus staff Line groups are responsible for the primary purposes of the firm whereas staff groups are responsible for secondary purposes. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Hybrid Organization Structure Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Copyright © 2007 by Nelson, a division of Thomson Canada Limited Span of Control How many people report to any one manager in the organization Narrow spans characteristic of tall organizations, broad spans in flat organizations Span affected by: Routineness of work Experience & skill of managers & workers Requirements for coordination with other departments Amount of nonsupervisory work for manager Cost Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Modifying the Bureaucratic Structure: Matrix Organization Matrix: A project structure superimposed on a functional structure to take advantage of new opportunities and solve special problems. Projects are temporary groups of specialists working under one manager to accomplish a fixed objective such as launching a new product. Matrix structure creates a dual reporting challenge — the involved employees may have to report to two bosses. A key advantage is its ability to implement projects quickly. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Exhibit 12-6 Matrix Organization Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Modifying the Bureaucratic Structure: Flat Organization Relatively few levels Less bureaucratic because: There are fewer managers available to review and approve decisions. The short chain-of-command creates less concern about authority differences among people. Most large organizations have become flatter over last 25 years More efficient than tall organizations only about half the time Downsizing to a flatter structure creates substantial suffering for those laid off and has strong effects on surviving employees. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Modifying the Bureaucratic Structure: Outsourcing Outsourcing is having work done for the organization by other organizations Reduces the need for employees and physical assets and reduces payroll costs. Can create ethical dilemmas for companies who have no control over the actions of their outsourcing supplier. Can cause conflict over which functions are outsourced Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Leading-Edge Organizational Structures The Horizontal Structure Is the arrangement of work by teams that are responsible for accomplishing a process. Is a structure in which employees take collective responsibility for customers. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Reengineering Leading to Horizontal Structure One approach to switching from task to process focus in a horizontal structure is through reengineering: The radical redesign of work to achieve substantial improvements in performance. Searches for the most efficient way to perform a task, eliminating nonessential tasks Organizes work horizontally rather than vertically. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Leading-Edge Organizational Structures The Network Structure (or virtual organization) Is a temporary association of otherwise independent firms that are linked by technology to share resources and markets. Is horizontally oriented, sacrifices hierarchy to quick decision making Requires that its members trust one another. Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Exhibit 12-8: Nine Criteria for an Effective Organizational Design Copyright © 2007 by Nelson, a division of Thomson Canada Limited

Organigraphs: Drawing How Companies Really Work An organigraph is a map that provides an overview of the company’s functions and the way people organize themselves at work. Helps understand organizational functioning: What parts connect to one another? How should processes & people be linked to one another? Whose ideas have to flow to which other people? Assists in identifying competitive opportunities in expanding into new markets and identifying opportunities. Copyright © 2007 by Nelson, a division of Thomson Canada Limited