Designing organization structures PART I: FOUNDATIONS OF ORGANISATION DESIGN Khalidi Swabiri Department of General Management UDBS

Organization design The process by which managers select and manage various dimensions and components of organization structure and culture so that an organization can control activities necessary to achieve its goals is a process of arranging people and physical resources into a structured grouping to carry out plans to accomplish organizational objectives

The Star model Strategy Structure Processes People Rewards

Why Organization Structure? Divide work into specific jobs and departments Assign tasks and responsibilities associated with individual jobs Cluster jobs into units Resource allocation Communication and coordination

Purpose of the structure (cont) Establish relationships among individuals, groups and departments Establish formal lines of authority Allocate and deploys organizational resources Contingencies and environmental demand Basis for competetitive advantage - competence and capabilities framework Strategy execution

Major Considerations in deisgning structure When design structure we have to consider : Work specialization Departmentalization Chain of command Span of control Centralization and decentralization Formalization

Work Specialization A component of organization structure that involves having each discrete step of a job done by a different individual rather than having one individual do the whole job Work specialization is regarded as a source of ever increasing productivity

Departmentalization Once jobs have been divided through work specialization then they have to be grouped back together so that common tasks can be coordinated Work departmentalization refers to the basis by which jobs are grouped together “ the process of subdividing of activities and responsibility areas into units within an organisation”

Departmentalization by Type Functional Grouping jobs by functions performed Product Grouping jobs by product line Geographical Grouping jobs on the basis of territory or geography Process Grouping jobs on the basis of product or customer flow Customer Grouping jobs by type of customer and needs

Chain of Command The continuous line of authority that extends from upper organizational levels to the lowest levels and clarifies who reports to whom. Helps employee to answer questions such as who do I go for if I have problems? The concept of chain of command is related to: Authority responsibility unity of command

Authority Authority: This is a right inherent in a managerial position to tell people what to do and what to expect them to do it The power to hold people accountable for their actions and to make decisions concerning the use of organizational resources To facilitate decision making and coordination managers are part of chain of command and thus are granted certain degree of authority to meet their responsibilities. Authority is related to hierarchy which is classification of people according to their relative authority and rank

Types of organisational Authority Line authority The position authority (given and defined by the organization) that entitles a manager to direct the work of operative employees. Staff authority Positions that have some authority (e.g., organization policy enforcement) but that are created to support, assist, and advise the holders of line authority.

Responsibility and unity of command Responsibility is an obligation to perform an assigned duty. Unity of command is principle that no person should report to more than one boss Without unity of command conflicting demands and priorities from multiple bosses can create problems

Span of Control The number of subordinates a manager can supervise efficiently and effectively Number of interactions as a result of the size in span of management can be determined by the formula n(2n-1 +n-1)

Why is it important? It determine the number and level of managers in an organization. Determines the shape of an organization structure (taller or flatter) There is a limited number of subordinates that a single manager can effectively and productively supervise Increased complexity of managers job as span of control becomes wider

Shapes of organization structures

Span of control and managerial complexity

Do you agree with this ? Ceteris paribus: the wider or larger the span of control, the more efficient the organization is

Span of control Trends in recent years has been towards wider spans this is consistent with : Managers efforts to reduce costs The need to speed up decision making The desire to get closer to customer The need to empower employees

Span of Control Many factors affects the size of span of control Skills and abilities of managers and employees Characteristic of work being done Physical proximity of the subordinates ??? Degree to which standardized procedures are in place Nature and sophiscation of an organization's IS

Centralization And Decentralization A function of how much decision-making authority is pushed down to lower levels in an organization; the more centralized an organization, the higher the level at which decisions are made Managers are involved in day to day decision making Decentralization The pushing down of decision-making authority to the lowest levels of an organization Fosters flexibility and responsiveness managers become accountable risk takers

Factors favoring Centralization Environment is stable. Top managers able to coordinate activities to keep the organization focused on its goals Organization is facing a crisis or the risk of company failure. Company is large- bureaucracy Effective implementation of company strategies depends on managers retaining say over what happens.

Factors favoring Decentralization Environment is complex, uncertain. Lower-level managers are capable and experienced at making decisions. Lower-level managers want a voice in decisions. Decisions are significant. Corporate culture is open to allowing managers to have a say in what happens. Company is geographically dispersed. Effective implementation of company strategies depends on managers having involvement and flexibility to make decisions.

Formalization Use of written rules and procedures to standardize operations Jobs in formalized organisations are highly structured and standardized Highly formalized jobs offer little discretion over what is to be done. Very low level of mutual adjustment

Integration / Boundary spanning Horizontal differentiation/ departmentalization is supposed to enable people to specialize and become more productive Specialization often limits communication between subunits People develop subunit orientation which results to communication and coordination failures Subunit orientation: a tendency to view one’s role in the organization strictly from the perspective of the time frame, goals, and interpersonal orientations of one’s subunit

Types of Integration/boundary spanning Mechanisms Hierarchy of authority: dictates “who reports to whom” Direct contact: managers meet face to face to coordinate activities Problematic that a manager in one function has no authority over a manager in another Liaison roles: a specific manager is given responsibility for coordinating with managers from other subunits on behalf of their subunits

Types of Integration/boundary spanning Mechanisms Task force: managers meet in temporary committees to coordinate cross-functional activities Task force members responsible for taking coordinating solutions back to their respective functions for further input and approval Teams: a permanent task force used to deal with ongoing strategic or administrative issues

Types of Integration/boundary spanning Mechanisms Integrating role: a new, full-time role established to improve communications between divisions Focused on company-wide integration Integrating department: a new department intended to coordinate the activities of functions or divisions Created when many employees enact integrating roles

Integrating Mechanisms

Integrating Mechanisms

Integrating Mechanisms

PART II: Organization Design Decisions

Design decisions How do managers decide what organization design to use? In principle the nature of an organization design depends upon certain contingency factors However, contingency factors exist in two generic models which try to explain the choice of structure at two extremes

Mechanistic Organizations Mechanistic organisations : designed to induce people to behave in predictable, accountable ways Decision-making authority is centralized Subordinates are closely supervised Information flows mainly in a vertical direction along a clearly defined path Hierarchy principal integrating mechanism Tasks and roles coordinated primarily through standardization and formal written rules Best suited to organizations that face stable, unchanging environments Influence people to behave in a predictable manner and roles of people are clearly defined

Organic Organizations Organic organisations : designed to promote flexibility, so people initiate change and can adapt quickly to changing conditions Decision making distributed throughout the hierarchy Coordination is achieved through mutual adjustments Status conferred by ability to provide creative leadership Encourages innovative behavior Suited to dynamic environments

Organizational Design Decisions Mechanistic Organization A rigid and tightly controlled structure High specialization Rigid departmentalization Narrow spans of control High formalization Limited information network (downward) Low decision participation Organic Organization Highly flexible and adaptable structure Non-standardized jobs Fluid team-based structure Little direct supervision Minimal formal rules Open communication network Empowered employees

How the Design Challenges Result in Mechanistic and Organic Structures

Contingency Factors The appropriateness of structure depends on four major factors: Structure Strategy Size Technology Environment

Strategy and structure An organization structure follows the organization strategy. Its imperative that an organisational structure should facilitate the achievement of organisational goals Therefore a change in strategy has to be followed by corresponding a change in structure

Strategy – structure relationships Strategy Frameworks: Innovation Pursuing competitive advantage through meaningful and unique innovations favors an organic structuring. Cost minimization Focusing on tightly controlling costs requires a mechanistic structure for the organization. Imitation Minimizing risks and maximizing profitability by copying market leaders requires both organic and mechanistic elements in the organization’s structure.

Organisational Size-structure relationship There is a compelling evidence in the literature which links a strong relationship between organisational size and structure As an organization grows larger, its structure tends to change from organic to mechanistic with increased specialization, departmentalization, centralization, and rules and regulations

Size and organizational complexity

Technology –structure relationship All organizations regardless of their size use technology to convert inputs into outputs According to Woodwards technology is classified into three categories according to the level of complexity and sophisication

Technology –structure relationship Woodward’s classification of technology: Unit production of single units or small batches Mass production of large batches of output Process production in continuous process of outputs

Woodward’s Findings on Technology, Structure, and Effectiveness Routine technology = mechanistic organizations Non-routine technology = organic organizations

Environment –structure relationship Organization should design its structure to fit its environment

Structure Environment Relationship ; Burns and Stalker Found that organizations need different kinds of structure to control their activities based on the environment Organic structures are more effective when the environment is unstable and changing Mechanistic structures are more effective in stable environments

Relationship Between Environmental Uncertainty and Structure

Organisational Charts The structure of an organization is depicted in the form of an organization chart The organisational chart provides a pictorial representation of overall shape and structural framework of an organization

Organisational Charts Organisational charts are useful in explaining the outline structure of an organization They may be used as a basis of analysis and review of structure for training and management succession and for formulating changes

Organisational Charts Organization chart may represent apparent weakness in structure such as ; Too wide spans of control Overlapping areas of control Lack of unity of command Too long chain of command Unclear reporting relationships and/or lines of communication Unstaffed functions

Organisational Charts Organization chart should always give: The date when it was drawn up The name of the organization or branch or department to which it refers Whether is an existing or proposed structure The extent of coverage if it refers to management structure only or if it includes servicing departments

Limitation of organization chart They depicts only a static view of the organisations Charts do not show the comparative authority and responsibility of positions on the same level or lateral contacts and informal relations Organization charts can become out of date quickly and are often slow to be amended to reflect changes in the actual structure Charts do not show the extent of personal delegation from superior to subordinates or precise relationship between line and staff positions

Common Organization Designs

Functional Structure A functional structure is a design that groups people on the basis of their common skills, expertise, or resources they use Functional structure is the bedrock of horizontal differentiation/ departmentalization by functions An organization groups tasks into functions to increase the effectiveness with which it achieves its goals

Functional Structure

Functional Structure (cont.)

Functional Structure: Advantages Provides people with the opportunity to learn from one another and become more specialized and productive People who are grouped together by common skills can supervise one another and control each other’s behavior People develop norms and values that allow them to become more effective at what they do

Control Problems in a Functional Structure Communication Problems: as more organizational functions develop, each with their own hierarchy, they become increasingly distant from one another Measurement Problems: information needed to measure the profitability of any functional group is difficult to obtain

Control Problems in a Functional Customer Problems: the ability to identify and satisfy customer needs may fall short and sales are lost Strategic Problems: top managers spend too much time finding ways to improve coordination that they have not time to address the longer term Managers can solve control problems by redesigning the functional structure to increase integration between functions

Solving Control: Improving Integration in a Functional Structure by Combining Sales and Marketing

From Functional Structure to Divisional Structure Functional structure is appropriate if the organization: Limits itself to producing a small number of similar products Produces those products in one or a few locations Sells them to only one general type of client or customer As organizations grow, they produce more products and serve many different types of customers A new structure is needed that will Increase manager’s control of individual subunits Integrate the operation of the whole company and ensure subunits are meeting organizational goals

Moving to a Divisional Structure Organizations most commonly adopt the divisional structure to solve control problems that arise with too many products, regions, or customers The type of divisional structure depends on the problem to be solved Divisional structure creates smaller, more manageable subunits and takes the form Product structure Geographic structure Market structure

Product Structure Product structure: a divisional structure in which products (goods or services) are grouped into separate divisions according to their similarities or differences Organizations need to decide how to coordinate its product activities with support functions

Product Division Structure

Divisional Structure II: Geographic Structure When the control problems that companies experience are a function of geography, a geographic divisional structure is appropriate Allows the organization to adjust its structure to align its core competences with the needs of customers in different geographic regions Allows some functions to be centralized and others decentralized

Geographic Structure

Market Structure A market structure aligns functional skills and activities with the needs of different customer groups Each customer group has a different marketing focus, and the job of each group is to develop products to suit the needs of its specific customers Each customer group makes use of centralized support function

Market Structure

Matrix Structure Matrix structure: an organizational design that groups people and resources in two ways simultaneously, by function and product A matrix is a rectangular grid that shows a vertical flow of functional responsibility and a horizontal flow of product responsibility The members of the team are called two-boss employees because they report to two superiors: the product team manager and the functional manager The team is the building block and principal coordination and integration mechanism

Matrix Structure

Advantages of a Matrix Structure The use of cross-functional teams reduces functional barriers and subunit orientation Opens communication between functional specialists The matrix enables an organization to maximize its use of skilled professionals, who move from product to product as needed The dual functional and product focus promotes concern for both cost and quality

Disadvantages of a Matrix Structure Matrix lacks a control structure that leads employees to develop stable expectations of one another The lack of a clearly defined hierarchy of authority can also lead to conflict between functions and product teams over the use of resources People are likely to experience a vacuum of authority and responsibility People then create their own informal organization to provide themselves with some sense of structure and stability Copyright 2010 Prentice Hall

Hybrid Structure Hybrid structure: large complex organizations that have many divisions make use of many different structures Each product division’s manager selects the structure (functional, product, geographic) that best meets the needs of their particular environment and strategy

Thank you for listening