1. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-1 Chapter 11: Designing Organizational Structure Text by Charles W. L. Hill Gareth R. Jones Multimedia Slides by Milton M. Pressley Univ. of New Orleans

2. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-2 Preview 4 4The Role of Organizational Structure 4 4Vertical Differentiation 4 4Horizontal Differentiation 4 4Integration and Integrating Mechanisms

3. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-3 The Role of Organizational Structure Organizational Structure DefinedOrganizational Structure Defined Building BlocksBuilding Blocks –Differentiation VerticalVertical HorizontalHorizontal –Integration Bureaucratic CostsBureaucratic Costs

4. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-4 Figure 11.1: How Organizational Design Increases Profitability Economizes on the Bureaucratic Costs of Organizational Structure Enhances a Company’s Value-Creation Skills Leading to a Low-cost Advantage Leading to Differentiation Advantages and Ability to Charge a Premium Price Which Increases Profit Good Organizational Design

5. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-5 Vertical Differentiation Span of ControlSpan of Control

6. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-6 Figure 11.2: Tall and Flat Structures 8 7 6 5 4 3 2 1 3 2 1 Tall Structure (8 levels) Flat Structure (3 levels) Vertical Differentiation Span of ControlSpan of Control

7. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-7 Vertical Differentiation (Continued) Problems with Tall Hierarchies

8. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-8 Figure 11.3: Relationship Between Company Size and Number of Hierarchical Levels Employees Number of Hierarchical Levels 1000 2000 3000 10,000 10 9 8 7 6 5 4

9. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-9 Vertical Differentiation (Continued) Minimum Chain of Command PrincipleMinimum Chain of Command Principle Problems with Tall Hierarchies

10. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-10 Figure 11.4: Sources of Bureaucratic Costs Number of Middle Managers Motivational Problems Coordination Problem Information Distortion Bureaucratic Costs

11. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-11 Vertical Differentiation (Continued) Coordination ProblemsCoordination Problems Information DistortionInformation Distortion Motivational ProblemsMotivational Problems Number of Middle ManagersNumber of Middle Managers Problems With Tall Hierarchies Minimum Chain of Command Principle Minimum Chain of Command Principle

12. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-12 Vertical Differentiation (Continued) Centralization DefinedCentralization Defined Decentralization DefinedDecentralization Defined Advantages of DecentralizationAdvantages of Decentralization –Information Overload Reduction –Increase of Motivation and Accountability (Increases Flexibility and Reduces Bureaucratic Costs) –Fewer Managers Needed (Reduced Bureaucratic Costs) Centralization or Decentralization?

13. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-13 Advantages of CentralizationAdvantages of Centralization –Easier Coordination of Activities Needed to Pursue Firm’s Strategy –Decisions Fit Broad Organizational Objectives –Strong, Focused Leadership Allows for Speedy Decision Vertical Differentiation (Continued) Centralization or Decentralization?

14. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-14 Horizontal Differentiation Simple StructureSimple Structure Functional StructureFunctional Structure

15. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-15 Figure 11.5: Functional Structure CEO Engineer- ing Engineer- ing Research and Devel- opment Research and Devel- opment Sales and Marketing Sales and Marketing Materials Manage- ment Materials Manage- ment Manufact- uring Manufact- uring

16. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-16 Horizontal Differentiation (Continued) Simple StructureSimple Structure Functional StructureFunctional Structure Advantages of Functional StructuresAdvantages of Functional Structures –People Learn from Each Other and Become More Specialized and Productive –Gives Managers Greater Control of Organizational Activities

17. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-17 Horizontal Differentiation (Continued) Problems With Functional StructuresProblems With Functional Structures –Communications Problems –Measurement Problems –Location Problems –Strategic Problems

18. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-18 Multidivisional Structure Two Main InnovationsTwo Main Innovations –Each SBU in Its Own Self-Contained Division –Office of Corporate Headquarters Staff Monitors and Exercises Financial Control Over Divisional Activities

19. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-19 Figure 11.6: Multidivisional Structure Oil Division (Functional Structure) Pharmaceuticals Division (Product Team Structure) Plastics Division (Matrix Structure) Typical Chemical Company Corporate Headquarters Staff CEO

20. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-20 Multidivisional Structure (Continued) Strategic ResponsibilityStrategic Responsibility Two Main Innovations Two Main Innovations - Each SBU in Its Own Self-Contained Division Division - Office of Corporate Headquarters Staff Monitors and Exercises Financial Control Over Divisional Activities Monitors and Exercises Financial Control Over Divisional Activities Operating Responsibility Operating Responsibility

21. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-21 Multidivisional Structure (Continued) Enhanced Corporate Financial ControlEnhanced Corporate Financial Control Enhanced Strategic ControlEnhanced Strategic Control GrowthGrowth Stronger Pursuit of Internal EfficiencyStronger Pursuit of Internal Efficiency Advantages of Multidivisional Structure Advantages of Multidivisional Structure

22. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-22 Multidivisional Structure (Continued) Difficulty of Establishing the Divisional- Corporate Authority RelationshipDifficulty of Establishing the Divisional- Corporate Authority Relationship Distortion of InformationDistortion of Information Competition for ResourcesCompetition for Resources Transfer PricingTransfer Pricing Short-Term Research and Development FocusShort-Term Research and Development Focus Bureaucratic CostsBureaucratic Costs Disadvantages of Multidivisional Structure Disadvantages of Multidivisional Structure

23. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-23 Matrix Structure Matrix Structure DefinedMatrix Structure Defined

24. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-24 Figure 11.7: Two Boss Employees R&D Finance R&D Sales & Marketing Purchasing Proj/Product Mgrs Proj A Proj C Proj B Proj D Functional Managers President

25. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-25 Matrix Structure (Continued) Speedy Product DevelopmentSpeedy Product Development Autonomy and Flexibility Suitable for Professional EmployeesAutonomy and Flexibility Suitable for Professional Employees Makes Maximum Use of Employee Skills As Existing Projects are Completed and New Projects DevelopMakes Maximum Use of Employee Skills As Existing Projects are Completed and New Projects Develop Leaves Top Management Free to Concentrate on Strategic IssuesLeaves Top Management Free to Concentrate on Strategic Issues Advantages Advantages

26. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-26 Matrix Structure (Continued) High Bureaucratic CostsHigh Bureaucratic Costs High New Project Startup CostsHigh New Project Startup Costs Conflict Between Functions and Projects Over ResourcesConflict Between Functions and Projects Over Resources Difficult to Operate Because Task and Role Relationships Become ComplexDifficult to Operate Because Task and Role Relationships Become Complex Disadvantages Disadvantages

27. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-27 Product Team Structure Product Team Structure DefinedProduct Team Structure Defined

28. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-28 Figure 11.8: Product Team Structure Sales and Marketing R&D Materials Management Engineering CEO Product Teams Manufacturing Units

29. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-29 Product Team Structure (Continued) Product Team Structure DefinedProduct Team Structure Defined Advantages Similar to Matrix Structure (But, Easier and Less Costly to Operate)Advantages Similar to Matrix Structure (But, Easier and Less Costly to Operate)

30. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-30 Geographic Structure Geographic Structure DefinedGeographic Structure Defined

31. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-31 Figure 11.9: Geographic Structure Regional Operations Central Operations CEO

32. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-32 Geographic Structure (Continued) More Responsive to Regional Customers’ NeedsMore Responsive to Regional Customers’ Needs Reduces Transportation CostsReduces Transportation Costs Provides More Control Than Functional StructureProvides More Control Than Functional Structure Economies of Scale AchievedEconomies of Scale Achieved Reduction of Coordination and Communications ProblemsReduction of Coordination and Communications Problems Advantages Advantages

33. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-33 Integration and Integrating Mechanisms IntegrationIntegration Relationship Between Differentiation and IntegrationRelationship Between Differentiation and Integration Forms of Integrating MechanismsForms of Integrating Mechanisms – Direct Contact – Interdepartmental Liaison Roles – Temporary Task Forces – Permanent Teams – Integrating Roles – Integrating Departments – Matrix Structure

34. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-34 Table 11.1: Types and Examples of Integrating Mechanisms

35. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-35 Table 11.1: Types and Examples of Integrating Mechanisms

36. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-36 Figure 11.10: Forms of Integrating Mechanisms Production Sales (a) Liaison Role

37. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-37 Table 11.1: Types and Examples of Integrating Mechanisms

38. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-38 Table 11.1: Types and Examples of Integrating Mechanisms

39. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-39 Figure 11.10: Forms of Integrating Mechanisms (Continued) Sales Production Engineering Research & Develop- ment (b) Task Force or Team

40. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-40 Table 11.1: Types and Examples of Integrating Mechanisms

41. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-41 Figure 11.10: Forms of Integrating Mechanisms (Continued) (c) Integrating Role Plastics Division Oil Division Integrating Role Integrating Role

42. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-42 Table 11.1: Types and Examples of Integrating Mechanisms

43. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-43 Table 11.1: Types and Examples of Integrating Mechanisms

44. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-44 Integration and Integrating Mechanisms (Continued) IntegrationIntegration Relationship Between Differentiation and IntegrationRelationship Between Differentiation and Integration Forms of Integrating MechanismsForms of Integrating Mechanisms – Direct Contact – Interdepartmental Liaison Roles – Temporary Task Forces – Permanent Teams – Integrating Roles – Integrating Departments – Matrix Structure Integration and ControlIntegration and Control

45. Copyright  1998 by Houghton Mifflin Company. All rights reserved. 11-45 Chapter Summary   THE ROLE OF ORGANIZATIONAL STRUCTURE   VERTICAL DIFFERENTIATION   HORIZONTAL DIFFERENTIATION   INTEGRATION AND INTEGRATING MECHANISMS