Foundations of Organization Structure Chapter 15 Foundations of Organization Structure

What Is Organizational Structure? Defines how job tasks are formally divided, grouped, and coordinated. There are six key elements that managers need to address when they design their org.’s structure. Key Elements: Work specialization Departmentalization Chain of command Span of control Centralization and decentralization Formalization © 2005 Prentice Hall Inc. All rights reserved.

1-Work Specialization…..1 The degree to which tasks in the organization are subdivided into separate jobs. Division of labor: Makes efficient use of employee skills Increases employee skills through repetition Less between-job downtime increases productivity Specialized training is more efficient. Allows use of specialized equipment. © 2005 Prentice Hall Inc. All rights reserved.

Division of Labor Benefits include: Adam Smith’s pin factory Increasing levels of skill Less time is wasted moving from job to job Training is less costly Increased focus Adam Smith’s pin factory “Men are much more likely to discover easier and readier methods of attaining any object, when the whole attention of their minds is directed towards that single object, than when it is dissipated among a great variety of things.” WON p. 14 © 2005 Prentice Hall Inc. All rights reserved.

1-Work Specialization…..2 The degree to which tasks in the organization are divided into separate jobs with each step completed by a different person. (Adam Smith’s-Division of Labor) During the 1st half of the 20th century, managers viewed work specialization as an unending source of increased productivity, and , for a time, it was. However, by 1960, it became evident that a good thing could be carried too far. The point reached in some jobs where “human diseconomies” from work overspecialization resulted - boredom, fatigue, stress, poor quality, increased absenteeism, and higher turnover – more than offset the economic advantages. © 2005 Prentice Hall Inc. All rights reserved.

Economies and Diseconomies of Work Specialization Impact from economies of specialization human diseconomies High Low Productivity Work Specialization © 2005 Prentice Hall Inc. All rights reserved.

1-Work Specialization……Today’s View……3 Most managers today see work specialization as an important org. mechanism but not as a source of ever-increasing productivity. They recognize the efficiencies it creates in certain types of jobs, but they also recognize the problems it creates when it’s carried to extremes. McDonald uses high work specialization to efficiently make & sell its products. However, American Express & Ford Australia have broadened the scope of employees’ jobs & reduced work specialization. © 2005 Prentice Hall Inc. All rights reserved.

2- Departmentalization The basis by which jobs are grouped together. Grouping Activities By: Function Product Geography Process Customer © 2005 Prentice Hall Inc. All rights reserved.

2- Departmentalization by Type The basis by which jobs are grouped together is called…. 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 © 2005 Prentice Hall Inc. All rights reserved.

Departmentalization Functional Product Major Types Customer of Organization Functional Product Customer Geographic Process © 2005 Prentice Hall Inc. All rights reserved.

2 -Departmentalization…..continued Large orgs. Often combine most or all of these forms of departmentalization. For example – a major Japanese electronic firm organizes each of its divisions along functional lines, its manufacturing units around processes, its sales units around seven geographic regions, and its sales regions into four customer groupings. © 2005 Prentice Hall Inc. All rights reserved.

Departmentalization …..today’s view Two popular trends today in departmentalization are the increasing use of customer departmentalization & the use of cross-functional teams. customer departmentalization helps managers better monitor customers’ needs & respond to changes in those needs. Managers are using cross-functional teams, which are work teams composed of individuals from various functional specialties. For example at Ford’s material planning & logistics division, a cross-functional team with employees from finance, purchasing, engineering, and quality control areas and with representatives from outside logistics suppliers has made several work improvements. © 2005 Prentice Hall Inc. All rights reserved.

Functional Departmentalization Advantages Efficiencies from putting together similar specialties and people with common skills, knowledge, and orientations Coordination within functional area In-depth specialization Disadvantages Poor communication across functional areas Limited view of organizational goals © 2005 Prentice Hall Inc. All rights reserved.

Geographical Departmentalization Advantages More effective and efficient handling of specific regional issues that arise Serve needs of unique geographic markets better Disadvantages Duplication of functions Can feel isolated from other organizational areas © 2005 Prentice Hall Inc. All rights reserved.

Product Departmentalization + Allows specialization in particular products and services + Managers can become experts in their industry + Closer to customers – Duplication of functions – Limited view of organizational goals © 2005 Prentice Hall Inc. All rights reserved.

Process Departmentalization + More efficient flow of work activities – Can only be used with certain types of products © 2005 Prentice Hall Inc. All rights reserved.

Customer Departmentalization + Customers’ needs and problems can be met by specialists - Duplication of functions - Limited view of organizational goals © 2005 Prentice Hall Inc. All rights reserved.

3 - Chain of Command Chain of Command involves three other concepts: The continuous line of authority that extends from upper levels of an organization to the lowest levels of the organization and clarifies who reports to whom. Chain of Command involves three other concepts: Authority Responsibility Unity of Command © 2005 Prentice Hall Inc. All rights reserved.

3 - Chain of Command……continued Authority Refers to the rights inherent in a managerial position to tell people what to do and to expect them to do it. An org.’s managers, who are in the chain of command, are granted a certain degree of authority to do their job of coordinating & overseeing the work of others. Responsibility The obligation or expectation to perform any assigned duties. As managers assign work to employees, those employees assume an obligation to perform any assigned duty. Unity of Command The concept that a person should have one boss and should report only to that person.( Fayol’s 14 Principles of Management) Without unity of command, conflicting demands & priorities from multiple bosses can create problems. © 2005 Prentice Hall Inc. All rights reserved.

3- Chain of Command….today’s view Early management theorists ( Fayol, Weber, Taylor, & others ) were enamored with the concepts of chain of command, authority, responsibility, & unity of command. However, the above mentioned concepts are considered less relevant today because of things like IT. With computers, employees communicate with anyone with else anywhere in the org. without going through formal channels- i.e., chain of command. Moreover, as more orgs.’ use self-managed & cross-functional teams as new org. designs with multiple bosses are implemented, these traditional concepts are less relevant. © 2005 Prentice Hall Inc. All rights reserved.

4 - Span of Control The number of subordinates a manager can efficiently and effectively direct. Concept: Wider spans of management increase organizational efficiency. Narrow Span Drawbacks: Expense of additional layers of management. Increased complexity of vertical communication. Encouragement of overly tight supervision and discouragement of employee autonomy. © 2005 Prentice Hall Inc. All rights reserved.

4 - Span of Control…….cont’d The number of employees who can be effectively and efficiently supervised by a manager. Width of span is affected by: Skills and abilities of the manager Employee characteristics Characteristics of the work being done Similarity of tasks Complexity of tasks Physical proximity of subordinates Standardization of tasks Sophistication of org.’s information system Strength of the org. culture & preferred style of the manager © 2005 Prentice Hall Inc. All rights reserved.

Contrasting Spans of Control © 2005 Prentice Hall Inc. All rights reserved.

4 - Span of Control …..today’s view The trend in recent years has been toward larger spans of control, which are consistent with managers’ efforts to reduce costs, speed up decision making, increase flexibility, get closer to customers, and empower employees. However, to ensure that performance doesn’t suffer because of these wider spans, orgs. are investing heavily in employee training. Managers recognize that they can handle a wider span when employees know their jobs well or can turn to co-workers if they have Qs. © 2005 Prentice Hall Inc. All rights reserved.

5 - Centralization & Decentralization The degree to which decision-making is concentrated at a single point in the organizations. Organizations in which top managers make all the decisions and lower-level employees simply carry out those orders. Decentralization Organizations in which decision-making is pushed down to the managers who are closest to the action. Employee Empowerment Increasing the decision-making authority (power) of employees. © 2005 Prentice Hall Inc. All rights reserved.

Factors that Influence the Amount of Centralization More Centralization Environment is stable. Lower-level managers are not as capable or experienced at making decisions as upper-level managers. Lower-level managers do not want to have a say in decisions. Decisions are relatively minor. Organization is facing a crisis or the risk of company failure. Company is large. Effective implementation of company strategies depends on managers retaining say over what happens. © 2005 Prentice Hall Inc. All rights reserved.

Factors that Influence the Amount of Centralization More 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. © 2005 Prentice Hall Inc. All rights reserved.

Centralization & Decentralization……. Today’s view An org. have had to become more flexible & responsive, there’s been a distinct trend toward decentralizing decision making. In large companies, especially, lower-level managers are “ closer to the action” & typically have more detailed knowledge about problems & how best to solve them than do top managers. Honeywell Pacific, which moved from a hierarchical management structure to one that is much flatter & team-based. Result- increased revenues & more intimate knowledge of the company’s major customers. © 2005 Prentice Hall Inc. All rights reserved.

6 - Formalization The degree to which jobs within the organization are standardized and the extent to which employee behavior is guided by rules and procedures. Highly formalized jobs offer little discretion over what is to be done. Low formalization means fewer constraints on how employees do their work. © 2005 Prentice Hall Inc. All rights reserved.

Common Organizational Designs Three of the more common org. designs in use: the simple structure, the bureaucracy, and the matrix Simple Structure A structure characterized by a low degree of departmentalization, wide spans of control, authority centralized in a single person, and little formalization. This structure is most widely practiced in small businesses in which the manager & the owner are one & the same. The strength of this structure lies in its simplicity. It is fast, flexible, & inexpensive to maintain, and accountability is clear. One major weakness is that it’s difficult to maintain in any other than small orgs. As org. grows due to its low formalization & high centralization creates information overload at the top. © 2005 Prentice Hall Inc. All rights reserved.

Common Organization Designs (cont’d) Bureaucracy Standardization! that’s the key concept that underlies all bureaucracies. A structure of highly operating routine tasks achieved through specialization, very formalized rules and regulations, tasks that are grouped into functional departments, centralized authority, narrow spans of control, and decision making that follows the chain of command. The primary strength of the bureaucracy lies in its ability to perform standardized activities in a highly efficient manner. Putting like specialties together in functional depts. results in economies of scale, minimum duplication of personnel & equipment, and employees who have the opportunity to talk “ the same language” among their peers. © 2005 Prentice Hall Inc. All rights reserved.

The Bureaucracy Strengths Functional economies of scale Minimum duplication of personnel and equipment Enhanced communication Centralized decision making Weaknesses Subunit conflicts with organizational goals Obsessive concern with rules and regulations Lack of employee discretion to deal with problems © 2005 Prentice Hall Inc. All rights reserved.

Common Organization Designs (cont’d) Matrix Structure Matrix management is a technique of managing an org.( or, more commonly, part of an org.) through a series of dual-reporting relationships instead of a more traditional linear management structure. In its simplest form, a matrix configuration may be known as a cross-functional work team, which brings together individuals who report to different parts of the company in order to complete a particular project or task. A structure that creates dual lines of authority and combines functional and product departmentalization. © 2005 Prentice Hall Inc. All rights reserved.

Matrix Structure © 2005 Prentice Hall Inc. All rights reserved.

Matrix Structure……continued Matrix structure is used in aerospace firms, R&D laboratories, construction companies, hospitals, management consulting firms etc. Essentially, the matrix combines two forms of departmentalization: functional & product. The strength of functional departmentalization lies in putting like specialists together, which minimizes the number necessary while allowing the pooling & sharing of specialized resources across products. Its major disadvantage is the difficulty of coordinating the tasks of diverse functional specialists so that their activities are completed on time & within budget. © 2005 Prentice Hall Inc. All rights reserved.

Matrix Structure……continued Product departmentalization, on the other hand, has exactly the opposite benefits & disadvantages. It facilitates coordination among specialties to achieve on-time completion & meet budget targets. It provides clear responsibility for all activities related to a product, but with duplication of activities & costs. The matrix attempts to gain the strengths of each, while avoiding their weaknesses. The most obvious structural characteristic of the matrix is that it breaks the unity-of-command concept. Employees in the matrix have two bosses – their functional dept. managers & their product managers. Therefore, the matrix has a dual chain of command. © 2005 Prentice Hall Inc. All rights reserved.

Matrix Structure……continued…advantages The strength of the matrix lies in its ability to facilitate coordination when the org. has a multiplicity of complex & interdependent activities. As an org. gets larger, its information-processing capacity can become over-loaded. In a bureaucracy, complexity results in increased formalization. The direct & frequent contact b/w different specialties in the matrix can make for better communication & more flexibility. Information permeates the org. & more quickly reaches the people who need to take account of it. Matrix reduces “ bureau-pathologies” - the dual lines of authority reduce the tendencies of dept. members to become so busy protecting their little worlds that the org’s overall goals become secondary. © 2005 Prentice Hall Inc. All rights reserved.

Matrix Structure……continued…advantages Matrix also facilitates the efficient allocation of specialists. When individuals with highly specialized skills are stuck in one functional dept. or product group, their talents are monopolized & underused. The matrix achieves the advantages of economies of scale by providing the org. with both the best resources & an effective way of ensuring their efficient deployment. © 2005 Prentice Hall Inc. All rights reserved.

Matrix Structure…conti…disadvantages The major disadvantages of the matrix lie in the confusion it creates, its propensity to foster power struggles, & the stress it places on individuals. When unity-of-command concept is ignored, ambiguity increases & ambiguity often leads to conflict. Confusion & ambiguity also create the seeds of power struggles. Bureaucracy reduces the potential for power grabs by defining the rules of the game. When those rules do not exist, power struggles b/w functional & product managers result. For individuals who desire security & absence from ambiguity, this work climate can produce stress. Reporting to more than one boss introduces role conflict & unclear expectations introduce role ambiguity. © 2005 Prentice Hall Inc. All rights reserved.

New Design Options Team Structure The use of teams as the central device to coordinate work activities. Characteristics: Breaks down departmental barriers. Decentralizes decision making to the team level. Requires employees to be generalists as well as specialists. Creates a “flexible bureaucracy.” © 2005 Prentice Hall Inc. All rights reserved.

New Design Options (cont’d) Virtual Organization A small, core organization that outsources its major business functions. Highly centralized with little or no departmentalization. Concepts: Advantage: Provides maximum flexibility while concentrating on what the organization does best. Disadvantage: Reduced control over key parts of the business. © 2005 Prentice Hall Inc. All rights reserved.

New Design Options (cont’d) Boundaryless Organization General Electric’s former chairman, Jack Welch, wanted to eliminate vertical & horizontal boundaries within GE & break down external barriers b/w the company & its customers & suppliers. The boundary-less organization seeks to eliminate the chain of command, have limitless spans of control, and replace departments with empowered teams. And because such org. rely so heavily on IT, it is also sometimes called the T-form ( or technology based) org. © 2005 Prentice Hall Inc. All rights reserved.

Boundary-less Organization….continued © 2005 Prentice Hall Inc. All rights reserved.

T-form Concepts: Eliminate vertical (hierarchical) and horizontal (departmental) internal boundaries. Breakdown external barriers to customers and suppliers. © 2005 Prentice Hall Inc. All rights reserved.

Why Do Structures Differ? Mechanistic Model A structure characterized by extensive departmentalization, high formalization, a limited information network, and centralization. Organic Model A structure that is flat, uses cross-hierarchical and cross-functional teams, has low formalization, possesses a comprehensive information network, and relies on participative decision making. © 2005 Prentice Hall Inc. All rights reserved.

Mechanistic versus Organic Organization • High specialization • Rigid departmentalization • Clear chain of command • Narrow spans of control • Centralization • High formalization • Cross-functional teams • Cross-hierarchical teams • Free flow of information • Wide spans of control • Decentralization • Low formalization © 2005 Prentice Hall Inc. All rights reserved.

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 © 2005 Prentice Hall Inc. All rights reserved.

Why Do Structures Differ? – Strategy Innovation Strategy A strategy that emphasizes the introduction of major new products and services. Cost-minimization Strategy A strategy that emphasizes tight cost controls, avoidance of unnecessary innovation or marketing expenses, and price cutting. Imitation Strategy A strategy that seeks to move into new products or new markets only after their viability has already been proven. © 2005 Prentice Hall Inc. All rights reserved.

Why Do Structures Differ? – Size How the size of an organization affects its structure. As an organization grows larger, it becomes more mechanistic. Characteristics of large organizations: More specialization More vertical levels More rules and regulations © 2005 Prentice Hall Inc. All rights reserved.

Why Do Structures Differ? – Technology How an organization transfers its inputs into outputs. Characteristics of routineness (standardized or customized) in activities: Routine technologies are associated with tall, departmentalized structures and formalization in organizations. Routine technologies lead to centralization when formalization is low. Nonroutine technologies are associated with delegated decision authority. © 2005 Prentice Hall Inc. All rights reserved.

Why Do Structures Differ? – Environment Institutions or forces outside the organization that potentially affect the organization’s performance. Key Dimensions- Capacity: the degree to which an environment can support growth. Volatility: the degree of instability in the environment. Complexity: the degree of heterogeneity and concentration among environmental elements. © 2005 Prentice Hall Inc. All rights reserved.

“Bureaucracy Is Dead” Characteristics of Bureaucracies Specialization Formalization Departmentalization Centralization Narrow spans of control Adherence to a chain of command. Why Bureaucracy Survives Large size prevails. Environmental turbulence can be largely managed. Standardization achieved through hiring people who have undergone extensive educational training. Technology maintains control. © 2005 Prentice Hall Inc. All rights reserved.

Organizational Designs and Employee Behavior Research Findings: Work specialization contributes to higher employee productivity, but it reduces job satisfaction. The benefits of specialization have decreased rapidly as employees seek more intrinsically rewarding jobs. The effect of span of control on employee performance is contingent upon individual differences and abilities, task structures, and other organizational factors. Participative decision making in decentralized organizations is positively related to job satisfaction. © 2005 Prentice Hall Inc. All rights reserved.

Common Organizational Designs Traditional Designs Simple structure Low departmentalization, wide spans of control, centralized authority, little formalization Functional structure Departmentalization by function Operations, finance, human resources, and product research and development Divisional structure Composed of separate business units or divisions with limited autonomy under the coordination and control the parent corporation. © 2005 Prentice Hall Inc. All rights reserved.

Strengths and Weaknesses of Traditional Organizational Designs © 2005 Prentice Hall Inc. All rights reserved.

Facilitates coordination of complex and interdependent activities. Key Elements: Gains the advantages of functional and product departmentalization while avoiding their weaknesses. Facilitates coordination of complex and interdependent activities. Breaks down unity-of-command concept. © 2005 Prentice Hall Inc. All rights reserved.