Fundamentals of Organization Structure

Fundamentals of Organization Structure
Chapter four Fundamentals of Organization Structure

Organization Structure
Three key component in the definition of organization structure Organization structure designates formal reporting relationships, including the number of levels in the hierarchy and the span of control of managers and supervisors. Organization structure identifies the grouping together of individuals into departments and department into the total organization. Organization structure includes the design of systems to ensure effective communication, coordination, and integration of effort across departments.

Three key component in the definition of organization structure The first two elements are the structural framework, which is the vertical hierarchy. The third element pertains to the pattern of interaction among organizational information and coordination where and when it is needed.

A Sample Organization Chart

A chart of organization sample above was quite effective in the business world for most of the twentieth century. However this type of vertical structure is not always effective, particularlyi rapidly changing environments. Over the years, organization have developed other structure designs, many of them aimed at increasing horizontal coordination and communication and encouraging adaptation to external changes.

Vertical Information Linkages
is defined as the extent of communication and coordination among organization elements Vertical linkage Are used to coordinate activities between the top and bottom of an organization and are designed primarily for control of the organization. Organization may use any of a variety of structure devices (tools) to achieve vertical linkage, including hierarchical referral, rules, plans and formal management information system

Vertical linkage Hierarchical referral Chain of command, which is illustrated by the vertical lines If a problem arises that employees don’t know how to solve, it can be reffered up to the next level in the hierachy. When the problem is solved, the answer is passed back down to lower levels. The line of the organization chart act as communication channels.

Vertical linkage Rules and plans To the extend of that problems and decisions are repititious, a rule or procedure can be established so employee know how to respond without communicating directly with their manager. Rules provide a standard information source enabling employees to be coordinated without actually communicating about every job. A plan provide standing information for employee. The most widely used plan is the budget.

Vertical linkage Vertical information system Vertical information systems include the periodic reports, written information, and computer-based communications distributed to managers. Information system make communication up and down the hierarchy more efficient.

Horizontal linkage Horizontal linkage refers to the amount of communication and coordination horizontal across organizational department. Horizontal communication overcomes : Barriers between departments and Provides opportunities for coordination among employees to achieve organization objective

Horizontal linkage The following devices are structural alternatives that can improve horizontal coordination and information flow : Information systems Computerized information systems can enable managers or frontline workers throughout the organization to routinely exchange information about problems To build relationships with others all across the organization, aiming to support and enhance on going horizontal coordination across project and geographical boundaries.

Horizontal linkage Direct contact One way to promote direct contact is to create a special liaison role. A liaison person is located in one department but has the responsibility for communicating and achieving coordination with another department. Liaison roles usually link with only two departments.

Horizontal linkage Task Forces When linkage involves several departments, a more complex device such as task force is require. Task force is a temporary committee composed of representatives from each department affected by a problem.

Horizontal linkage Full-time integrator A full-time integrator frequently has a little, such as product manager, project manager, program manager or brand manager. The brand manager for Planters Peanuts, for example, coordinates the sales, distribution and advertising for the product.

Project Manager Location in the Structure
President Finance Department Financial Accountant Budget Analyst Management Engineering Product Designer Draftsperson Electrical Marketing Market Researcher Advertising Specialist Planner Purchasing Buyer Project Manager New Product B Product A Product C

Horizontal linkage Team Teams are permanent task forces and are often used in conjunction with a full time integrator. Special project teams may be used when organizations have a large-scale project, a major innovation or a new product line. Boeing used about 250 teams to design and manufacture the 777 aircraft.

Teams Used for Horizontal Coordination at Wizard Software Company
President Marketing Vice Pres. Programming Vice Pres Research Vice Pres Videogames Basic Research Supervisor Videogames Sales Manager Videogames Chief Engineer Videogames Product Team Applications and Testing Supervisor Memory Products Sales Manager Memory Products Chief Programmer Memory Products Research Supervisor Memory Products Team Memory Products International Manager Customer Service Manager Procurement Supervisor Advertising Manager

The Relationship of Organization Design to Efficiency vs
The Relationship of Organization Design to Efficiency vs. Learning Outcomes Horizontal Organization Designed for Learning Horizontal structure is dominant Shared tasks, empowerment Relaxed hierarchy, few rules Horizontal, face-to-face communication Many teams and task forces Decentralized decision making Dominant Structural Approach Vertical structure is dominant Specialized tasks Strict hierarchy, many rules Vertical communication and reporting systems Few teams, task forces or integrators Centralized decision making Vertical Organization Designed for Efficiency

Ladder of Mechanisms for Horizontal Linkage and Coordination
H IGH Teams Full-time Integrators Task Forces Coordination Required Amount of Horizontal Direct Contact LOW Information Systems LOW HIGH Cost of Coordination in Time and Human Resources

Departmental Grouping Options
Functional grouping Places employees together who perform similar function or work process. For example All marketing people work together under the same supervisor All chemists may be grouped in a department different from biologists because they represent different discipline.

Structural Design Options for Grouping Employees into Departments
Functional Grouping CEO Engineering Marketing Manufacturing Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

Strengths and Weaknesses of Functional Organization Structure
Slow response time to environmental changes May cause decisions to pile on top, hierarchy overload Leads to poor horizontal coordination among departments Results in less innovation Involves restricted view of organizational goals STRENGTHS: Allows economies of scale within functional departments Enables in-depth knowledge and skill development Enables organization to accomplish (do) functional goals Is best with only one or a few products Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,” Organizational Dynamics (Winter 1979): 429.

Divisional grouping People are organized according to what the organization produces. All people required to produce toothpaste, including personnel in marketing, manufacturing and sales are grouped together under one executive.

Structural Design Options for Grouping Employees into Departments
Divisional Grouping Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

Strengths and Weaknesses of Divisional Organization Structure
Suited to fast change in unstable environment Leads to client satisfaction because product responsibility and contact points are clear Involves high coordination across functions Allows units to adapt to differences in products, regions, clients Best in large organizations with several products Decentralizes decision-making WEAKNESSES: Eliminates economies of scale in functional departments Leads to poor coordination across product lines Eliminates in-depth competence and technical specialization Makes integration and standardization across product lines difficult Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,” Organizational Dynamics (Winter 1979): 431.

Reorganization from Functional Structure to Divisional Structure at Info-Tech
R&D Manufacturing Accounting Marketing Info-Tech President Divisional Structure

Multifocused grouping An organization may need to group by function and product division simultaneously or perhaph by product division and geography. These structural forms are often called matrix or hybrid

Structural Design Options for Grouping Employees (Continued)
Multifocused Grouping CEO Manufacturing Marketing Product Division 2 Division 1 Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

Matrix structure Matrix can be used when both technical expertise (skill) and product innovation and change are important for meeting organizational goals. The matrix is a strong form of horizontal linkage The unique characteristis of the matrix organization is that both product division and functional structures (horizontal and vertical) are implemented simultaneously.

Matrix structure The product managers and functinal managers have equal authority with in the organization, and employees report to both of them.

Condition for the Matrix structure
The matrix is the correct structure when the following conditions are met Condition 1 : Pressure exists to share scare resources across product lines. The organization is typically medium-size and has a moderate number of product line

The matrix is the correct structure when the following conditions are met Condition 1 : It fells pressure for the shared and flexible use of people and equipment across those products For example, the organization is not large enough to assign engineers full-time to each product line, so engineers are assigned part-time to several produst or project

The matrix is the correct structure when the following conditions are met Condition 2 Environmental pressure exist for two or more crotical outputs, such as for in-depth technical knowledge (function structure) and frequent new products (divisional structure). A balance of power is needed between the functional and product side of organization.

The matrix is the correct structure when the following conditions are met Condition 3 Environmental domain of the organization is both complex and uncertain. Frequent external changes and high interdependence between departments require a large amount of coordination and information processing in both vertical and horizontal direction

Dual-Authority Structure in a Matrix Organization
President Director Design Mfg Marketing Procure- ment of Product Vice President Vice President Vice President Controller Operations Manager Product Manager A Product Manager B Product Manager C Product Manager D

Strengths and Weaknesses of Matrix Organization Structure
Achieves coordination necessary to meet dual demands from customers Flexible sharing of human resources across products Suited to complex decisions and frequent changes in unstable environment Provides opportunity for both functional and product skill development Best in medium-sized organizations with multiple products WEAKNESSES: Causes participants to experience dual authority, which can be frustrating and confusing Means participants need good interpersonal skills and extensive training Is time consuming; involves frequent meetings and conflict resolution sessions Will not work unless participants understand it and adopt collegial rather than vertical-type relationships Requires great effort to maintain power balance Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 429.

Matrix Structure for Englander Steel
President Industrial Relations Vice Mfg. Services Finance Marketing Metallurgy Field Sales Open Die Business Mgr. Ring Products Wheels & Axles Steelmaking Vertical Functions Horizontal Product Lines

Horizontal grouping Employees are organized around core work processes, the end-to-end work, information, and material flows that provide value directly to customers. All people who work on a core process are brought together in a group rather than being separated into functional department.

Structural Design Options for Grouping Employees (Continued)
Horizontal Grouping CEO Human Resources Finance Core Process 1 Core Process 2 Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

Horizontal structure Organizations typically shift toward a horizontal structure during a procedure called reengeneering. Reengeneering, basically means the redesign of a vertical organization along its horizontal workflows and process.

Horizontal structure A process refers to an organized group of related task and activities that work together or transform inputs into outputs that create value for customers. Examples the processes include order fulfillment, new product development and customer services.

Horizontal structure For example, claims handling at Progressive Casualty Insurance Company. In the past : Customer claims  agent  customer service representative  claims manager To day Customer claims  team, that handle the entire claims process from beginning to the end.

A Horizontal Structure
Team 3 2 1 Top Management Customer Process Owner Testing Product Planning Research Market Analysis New Product Development Process Distrib. Material Flow Purchasing Procurement and Logistics Process Sources: Based on Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999); John A. Byrne, “The Horizontal Corporation,” Business Week, December 20, 1993, 76-81; and Thomas A. Stewart, “The Search for the Organization of Tomorrow,” Fortune, May 19, 1992,

Characteristic Horizontal structure Structure is created around cross-functional core process rather than tasks, and function. Thus boundaries between departments are obliterated. Self directed teams, not individuals, are the basis of organizational design and performance. Process owners have responsibility for each core process in its entirety

Characteristic horizontal structure People on the team are given the skills, tools, motivation, and authority to make decisions central to the teams performance. Teams have the freedom to think creatively and respond flexibly to new challenges that arise.

Strengths and Weaknesses of Horizontal Structure
Flexibility and rapid response to changes in customer needs Directs the attention of everyone toward the production and delivery of value to the customer Each employee has a broader view of organizational goals Promotes a focus on teamwork and collaboration—common commitment to meeting objectives Improves quality of life for employees by offering them the opportunity to share responsibility, make decisions, and be accountable for outcomes WEAKNESSES: Determining core processes to organize around is difficult and time-consuming Requires changes in culture, job design, management philosophy, and information and reward systems Traditional managers may balk when they have to give up power and authority Requires significant training of employees to work effectively in a horizontal team environment Can limit in-depth skill development Sources: Based on Frank Ostroff, The Horizontal Organization: What the Organization of the Future Looks Like and How It Delivers Value to Customers, (New York: Oxford University Press, 1999); and Richard L. Daft, Organization Theory and Design, 6th ed., (Cincinnati, Ohio: South-Western College Publishing, 1998) 253.

Hybrid structure One type of hybrid that is often used is to combine characteristic of the functional and division structures. Sun Petroleum Product (SPPC) reorgonized to a hybrid structure to be more responsive to changing markets.

Hybrid Structure Part 1. Sun Petrochemical Products
President Functional Structure Chief Counsel Human Resources Director Technology Vice President Financial Services Vice Pres. Product Structure Fuels Vice President Lubricants Vice President Chemicals Vice President Sources: Based on Linda S. Ackerman, “Transition Management: An In-Depth Look at Managing Complex Change,” Organizational Dynamics (Summer 1982): ; and Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999), Fig. 2.1, 34.

Hybrid structure In its structure, three major product divisions, fuel, lubricants, and chemicals were created, each serving a different market and requiring a different strategy. Each product line vice president is now in charge of all functions for that product, such as marketing, planning, supply and distribution, and manufacturing.

Hybrid structure The activities such as human resources, legal, technology, and finance were centralized as functional departments at headquarter in order to achieve economies of scale.

Hybrid structure Another example, Ford Motor Company is used this type of hybrid structure.

Hybrid Structure Part 2. Ford Customer Service Division
Vice President and General Manager Functional Structure Finance Strategy and Communication Human Resources Director and Process Owner Teams Teams Parts Supply / Logistics Group Director and Process Owner Horizontal Structure Teams Teams Vehicle Service Group Director and Process Owner Teams Technical Support Group Sources: Based on Linda S. Ackerman, “Transition Management: An In-Depth Look at Managing Complex Change,” Organizational Dynamics (Summer 1982): ; and Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999), Fig. 2.1, 34.

Hybrid structure Several horizontally aligned groups, made up of multiskilled teams, focused on core processes such as : Part supply and logistics (acquiring parts and getting tem to dealers quickly and efficiently), Vihicle service and programs (collecting and disseminating about repair problems), and

Hybrid structure Several horizontally aligned groups, made up of multiskilled teams, focused on core processes such as : Technical suport (ensuring that every service department receive updated technical information) Each group has a process has a process owner who is responsible for seeing that the teams meet overall objectives.

The Relationship of Structure to Organization’s Need for Efficiency vs
The Relationship of Structure to Organization’s Need for Efficiency vs. Learning Matrix Structure Horizontal Structure Functional Structure Functional with cross-functional teams, integrators Divisional Structure Modular Structure Horizontal: Coordination Learning Innovation Flexibility Dominant Structural Approach Vertical: Control Efficiency Stability Reliability

Fundamentals of Organization Structure

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