1. BA105: Organizational Behavior Professor Jim Lincoln Week 2: Lecture

2. 2 Class Business First three weeks of readings on reserve in Long Library http://courses.haas.berkeley.edu/spring2004 /ba105 (login=lincoln; pw=ba105)http://courses.haas.berkeley.edu/spring2004 /ba105 Prepare “Allentown Materials” case for Thursday.

3. 3 Organization design I: Session objectives Introduce organization design as the clearest case of the “manager as engineer” perspective Understand the legacy of classical (“one best way”) design theory Understand principles of grouping and linking Get a feel for strategic organization design from the congruence or “fit” perspective –There is no “one best way” –Every design must be aligned with the rest of the organization’s architecture

4. 4 Strategy (diversification; innovation) Input Environment (Competition, change) Resources (munificence) History (age, conditions at founding) Output Systems Unit Individual Informal Organization (culture, leadership, networks, politics) Tasks ( technologies, work flows) People (ability, skills, motivation, biases) Formal Organization (job titles, departments, reporting hierarchy, IT & HR systems Organizational Design

5. 5 Carly Fiorina’s reorg at HP Most dramatically, she launched a plan to consolidate H-P's 83 businesses into only 12. She also aligned the reduced number of divisions into two "front-end" groups that would focus on customer activities, such as marketing and sales, and two "back-end" organizations devoted strictly to designing and making computer and printer products. Old-time H-P executives were shocked. "I was a deer caught in the headlights when she described the front and back end," says Carolyn Ticknor, who now presides over the merged printer unit. Several of these executives protested that employees weren't ready for a major reorganization. Some executives fretted that managers wouldn't wield "real" authority if they couldn't control both product development and marketing. "It took some of the glory, if you wish, out of the job," says Mr. Perez, the departed executive. Consternation rippled through the ranks. Managers who had long aspired to run their own autonomous units, known as P&Ls, short for profit & loss, suddenly saw most of those jobs disappear. WSJ, 8/22/2000

6. 6 What is formal organization? Bureaucracy! Meaning what exactly…? Formal structure –Grouping (or division of labor or differentiation) Divide work and group people doing similar tasks into distinct jobs and work units –Linking (or coordination or integration) Devise mechanisms of control and coordination to direct activity and create an integrated whole Formal measurement & information systems –Accounting & finance –Inventory and process control –Human resource

7. 7 What should structure do? Provide efficiency in the accomplishment of tasks Coordinate and integrate activities across the organization Allow for flexibility –adjust quickly and smoothly to new conditions –Support creativity & innovation Fit the organization’s strategy and environment Channel individual behavior in cooperative & productive ways Economize on information processing Empower people to undertake and accomplish challenging tasks Align with & support the organization’s culture, networks, incentive systems, etc.

8. 8 What shouldn’t structure do? Cause overspecialization leading to unmanageable coordination problems Balkanize the organization into warring fiefdoms Disempower and demotivate people Become a weapon in organizational politics Become sacred and ceremonial Breed “bureaucratic personalities” Be a residue or holdover from the past Mire the organization in “red tape” Divert or smother alternative means of channeling & coordinating action Provide a safe haven for the incompetent or unmotivated

9. 9 This week: –Classical and mainstream design perspectives Next week: –Leading edge “new economy” design perspectives

10. 10 SCIENTIFIC MANAGEMENT : “Systems so perfect that no one will need to be good” Frederick W. Taylor: The Principles of Scientific Management, 1911. Frank B. Gilbreth: Motion Study, a Method for Increasing the Efficiency of the Workman. New York, D. Van Nostrand Company, 1911. Which always brings to mind….

11. 11 The Scientific Management Program: The Origin of Industrial Engineering Time and motion study Reduce physical tasks to elemental units (“therbligs”). Recombine in maximally efficient way Fixed rules & standards for physical task performance Pay geared to performance (piece rates) Production scheduling, equipment design, shop layout Scientific method (measure, experiment) Functional foremanship

12. 12 Oper- ations Foreman Worker AWorker BWorker C Main- tenance Foreman Quality Assurance Foreman Taylor’s Functional Foremanship

13. 13 Line Foreman Worker AWorker BWorker C Main- tenance Quality Assurance The Line and Staff Alternative

14. 14 CLASSICAL ADMINISTRATIVE THEORY Principles of horizontal structuring –Specialization (divide tasks) –Unity of direction (group tasks into departments) Principles of vertical structuring –Unity of command –Scalar chain “Go through channels” –Span of control Principles of authority and decision-making –Centralization: Fit authority to responsibility Delegate routine decisions; manage exceptions Henry Fayol: General and Industrial Management, 1949 L. Gulick and L. Urwick: Papers on the Science of Administration, 1937 J. Mooney: The Principles of Organization, 1947

15. 15 Specialization (Division of Labor)

16. 16 Unity of Direction (Grouping)

17. 17 Principles of Hierarchy: Unity of Command, Scalar Chain, Span of Control

18. 18 CEO “A” Logical flaws in CM: The trade-off between hierarchy & span of control CEO “A” Case 1 Case 2 Herbert Simon: “The proverbs of administration.” Public Administration Review 6 (1946):53-67.

19. 19 Do organizations have to be hierarchical?

20. 20 Market- ing Market- ing Engineer ing Engineer ing Manu- facturing Manu- facturing Human Resources Human Resources Manage- ment Manage- ment Coordination by hierarchy economizes on communication and centralizes control Accounting

21. 21 Coordination by mutual adjustment maximizes communication and diffuses control Marketing Engineer- ing Engineer- ing Manu- facturing Manu- facturing Human Resources Human Resources Accounting

22. 22 Market- ing Market- ing Engineer ing Engineer ing Manu- facturing Manu- facturing Human Resources Human Resources Coordination by rules & standards economizes on hierarchy and communication Accounting

23. 23 Which coordination solution is chosen depends on the degree of interdependence Regional HQ Aircraft Scheduling 1. Pooled Interdependence 2. Sequential Interdependence Product Development ManufacturingSales Hotel AHotel BHotel C OperationsMaintenance Need for Integration Low Medium High Coordinating Mechanism Rules/standards Hierarchy Mutual Adjustment 3. Reciprocal Interdependence

24. 24 Strategic grouping: Functional organization, product organization, and hybrid forms

25. 25 Strategic grouping dimensions Inputs –Functions, disciplines, or skills: engineering, finance, manufacturing, marketing, accounting, HR, PR, maintenance, quality, legal, logistics, etc. Outputs –Product: attributes, benefits to customers, underlying technology (what does it do? or how does it work?) –Customer: attributes or preferences; ways of buying or using products –Region: (Northeast, midwest; Europe; East Asia)

26. 26 Engineer- ing Manufac- turing Market ing General Manager Human Resources Account- ing Functional organization

27. 27 Engineer- ing Manufac- turing Market- ing General Manager Human Resources Account- ing Product A Product B Product C Functional organization

28. 28 CEO Cars Prefab Houses Electronics HRMfgMktHRMfgMktHRMfgMkt Product division organization

29. 29 CEO North America Europe Asia Pacific HRMfgMktHRMfgMktHRMfgMkt Regional division organization

30. 30 CEO Home market Education market Corporate market HRMfgMktHRMfgMktHRMfgMkt Customer-type divisions

31. 31 Professors A, B, & C Undergrad Program MBA Program PhD Program Undergrad MBA PhD Professor A Professor B Professor C Are Haas professors organized by function or product?

32. 32 Functional Organization Pluses Lean and simple –Good fit to small, young, focused organizations Functions are efficiently deployed Breeds strong, highly-developed functions Good fit to strategy based on functional capabilities Good fit to a stable, homogenous environment Good coordination of functions across products & markets Minuses High interdependence –Problem of hand-offs & functions becoming “silos” –Puts a heavy coordination burden on top management Poor development of GM skills Hard to monitor performance Poor fit to these strategies: –Diversification –Product, customer, or region focus Poor fit to turbulent, heterogeneous environment

33. 33 Product organization Pluses Low interdependence –easy monitoring of division performance –Ease of acquisition absorption –Frees top execs for strategy Coordinate by standards High decentralization Skills tailored to products & markets Develops GM skills Good fit to turbulent, heterogeneous environment Good fit to these strategies: –Diversification –Product/customer/region focus Minuses Poor within-function coordination Breeds weak functions Breeds inbred division cultures –Lack of strong corporate identity High redundancy and cost Management by the numbers –Headquarters out of touch –Rigid, short-term performance standards Excessive scale & sprawl

34. 34 Hybrid forms Most large firms are functional/product hybrids: some functions are centralized others are decentralized to the division level Trend in recent years has been to centralize functions & consolidate divisions

35. 35 Lou Gerstner, CEO of IBM on organizational design “I was wrestling with decentralization because at heart I’m a decentralizer, but as I was looking at mail and customer reports, it became increasingly clear to me that the real issue of effectiveness, of winning in the marketplace, was finding ways to make the company work horizontally.” Gerstner has been designing ways to decentralize what he calls, “the things that matter in running a business” but reinforce the things that benefit from size. That means decentralizing some things and centralizing others. “So, while unit managers can expect to define their customers, design their own products, manage most of their costs, and set prices, they’ll be expected to cooperate more on such issues as technology and product announcements, such as the power PC”

36. 36 CEO Marketing & Sales Product Division A Product Division B A Manu- facturing A Engineering Hybrid form

37. 37 CEO Product Division A Product Division B Product Division C B Human Resources B Engineering Human Resources Legal Hybrid form

39. 39 Next time: Allentown Materials Case Steps in preparation: 1.Assess Allentown’s problems in relation to its strategy and environment 2.Consider all the issues in the case but focus on the strategic design issues of grouping (differentiation) and linking (integration). 3.Analyze cause and effect relationships behind problems »Work back from immediate to root causes »Assess importance of cause-and-effect chains 4.Devise solutions that: »Impact causes »Are consistent and realistic 5.Think about an implementation plan that: »Has few negative spillovers (unintended consequences) »That minimizes alignment problems »That minimizes resistance