Dan C. Lungescu, PhD, assistant professor2015-2016

ManagementPart III: Organizing

Ch. 10. Organization design

Course outline

Part I: Introduction

Part II: Planning

Part III: Organizing

Part IV: Leading

Part V: Controlling

Management

Part III outline

Part III: Organizing

Ch. 9. Organizational structure

Ch. 10. Organization design

Ch. 11. Human resource management

Management

Learning objectives

After studying this chapter, you should:

Summarize current views about the link between strategy and organization structure.

Explain the functional, divisional, hybrid, and matrix types of departmentalization.

List the major advantages and disadvantages of each type of departmentalization, as well as discuss the basic circumstances under which each is likely to be effective.

Assess how contingency factors, such as technology, size, and environment, impact organization structure.

Chapter 10 outline

A. Designing organization structures

B. Assessing structural alternatives

C. Weighing contingency factors

A. Designing organization structures

Outline » A. Designing organization structures

Which comes first: strategy or structure?

Major companies generally follow a pattern of strategydevelopment and then structural change, rather than the reverse.

Strategy first

Organizations often change their strategies in order to better utilize their resources to fuel growth.

Factors influencing organization design

Outline » A. Designing organization structures » Factors influencing organization design

STRATEGY

Organization structure:

Functional Divisional HybridMatrix

Organizational goals (efficiency

and effectiveness)

Structural methods for promoting innovation

Contingency factors:

Technology Size Environment

B. Assessing structural alternatives

Outline » B. Assessing structural alternatives

Four most common types of departmentalization:

I. Functional

II. Divisional

III. Hybrid

IV. Matrix

I. Functional structure

Outline » B. Assessing structural alternatives » I. Functional structure

President

Vice President

Operations

Vice President Finance

Vice President

Sales

Vice President

R&D

Vice President Marketing

Vice President

HR

Positions are grouped according to their main functional (orspecialized) area – positions are combined into units on the basis ofsimilarity of expertise, skills, and work activities.

Functional structure

Common functions

Outline » B. Assessing structural alternatives » I. Functional structure » Common functions

Combines activities directly related to manufacturing a product or delivering aservice.

Production (operations)

Focuses on the promotion and sale of products and services.

Marketing

Responsible for attracting and retaining organization members and enhancing theireffectiveness.

Human resources

Concerned with obtaining and managing financial resources.

Finance

Deals with financial reporting to meet the legal matters affecting the organization.

Accounting

Responsible for producing unique ideas and methods that will lead to new and/orimproved products and services.

Research and development

Advantages of functional structure

Outline » B. Assessing structural alternatives » I. Functional structure » Advantages

In-depth development of expertise

Clear career path within function

Efficient use of resources

Possible economies of scale

Ease of coordination within function

Potential technical advantage over competitors

Disadvantages of functional structure

Outline » B. Assessing structural alternatives » I. Functional structure » Disadvantages

Slow response time on multifunctional problems

Backlog of decisions at top of hierarchy

Bottlenecks due to sequential tasks

Restricted view of organization among employees

Inexact measurement of performance

Narrow training for potential managers

Uses of functional structure

Outline » B. Assessing structural alternatives » I. Functional structure » Uses

Small and medium-size organizations that are not so large as tomake coordination across functions difficult – such organizationsfrequently have a limited number of related products or services ordeal with a relatively homogeneous set of customers or clients.

Small or medium-size organizations

Large or more diverse organizations, such as insurance companies,that operate in relatively stable environments in which changeoccurs at a slow enough rate for the various functions to coordinatetheir efforts.

Stable environments

Large organizations when considerable coordination is requiredamong products.

Inter-related products

II. Divisional structure

Outline » B. Assessing structural alternatives » II. Divisional structure

President

Vice PresidentDivision A

Vice PresidentDivision B

Vice PresidentDivision C

Positions are grouped according to similarity of products, services,or markets.

Divisional structure

Major forms: product divisions, geographic divisions, customer divisions.

1. Product divisions

Outline » B. Assessing structural alternatives » II. Divisional structure » 1. Product divisions

President

Vice PresidentBeverage Division

Vice PresidentFrozen Food Division

Vice PresidentCereals Division

Divisions are created to concentrate on a single product or service orat least a relatively homogeneous set of products or services.

Product divisions

2. Geographic divisions

Outline » B. Assessing structural alternatives » II. Divisional structure » 2. Geographic divisions

Divisions are designed to serve different geographic areas.

Geographic divisions

President

Vice PresidentEastern Region

Vice PresidentCentral Region

Vice PresidentWestern Region

3. Customer divisions

Outline » B. Assessing structural alternatives » II. Divisional structure » 3. Customer divisions

Divisions are set up to service particular types of clients orcustomers.

Customer divisions

President

Vice PresidentConsumer Products

Vice PresidentCommercial Products

Vice PresidentInstitutional Products

Advantages of divisional structure

Outline » B. Assessing structural alternatives » II. Divisional structure » Advantages

Fast response to environmental change

Simplified coordination across functions

Simultaneous emphasis on division goals

Strong orientation to customer requirements

Accurate measurement of division performance

Broad training in general management skills

Disadvantages of divisional structure

Outline » B. Assessing structural alternatives » II. Divisional structure » Disadvantages

Duplication of resources in each division

Reduction of in-depth expertise

Heightened competition among divisions

Limited sharing of expertise across divisions

Restriction of innovation to divisions

Neglect of overall goals

Uses of divisional structure

Outline » B. Assessing structural alternatives » II. Divisional structure » Uses

Large organizations in which there are substantial differences amongeither the products or services, geographic areas, or customersserved.

Large organizations with multiple targets

III. Hybrid structure

Outline » B. Assessing structural alternatives » III. Hybrid structure

President

Function 1 Function 2

Zone A Zone B

Function 3 Function 4

Zone C

Functionaldepartments

Geographicdivisions

Adopts parts of both functional and divisional structures at thesame level of management.

Hybrid structure

Advantages and disadvantages of HS

Outline » B. Assessing structural alternatives » III. Hybrid structure » Pros and cons

Advantages:

Disadvantages:

Alignment of corporate and divisional goals

Functional expertise and/or efficiency

Adaptability and flexibility in divisions

Conflicts between corporate departments and divisions

Excessive administrative overhead

Slow response to exceptional situations

Uses of hybrid structure

Outline » B. Assessing structural alternatives » III. Hybrid structure » Uses

Organizations that not only face considerable environmentaluncertainty that can best be met through a divisional structure butalso require functional expertise and/or efficiency.

Uncertain environments + functional expertise

Medium-size or large organizations that have sufficient resources tojustify divisions as well as some functional departmentalization.

Powerful organizations

IV. Matrix structure

Outline » B. Assessing structural alternatives » IV. Matrix structure

President

Engineering R&D Operations Marketing Finance

ManagerBusiness A

ManagerBusiness B

ManagerBusiness C

Matrixbosses

Two-boss employees

Superimposes a horizontal set of divisional reporting relationshipsonto a hierarchical functional structure.

Matrix structure

Advantages of matrix structure

Outline » B. Assessing structural alternatives » IV. Matrix structure » Advantages

Decentralized decision making

Strong project or product coordination

Improved environmental monitoring

Fast response to change

Flexible use of human resources

Efficient use of support systems

Disadvantages of matrix structure

Outline » B. Assessing structural alternatives » IV. Matrix structure » Disadvantages

High administrative costs

Potential confusion over authority and responsibility

Heightened prospects for interpersonal conflicts

Excessive focus on internal relations

Overemphasis on group decision making

Possible slow response to change

C. Weighing contingency factors

Outline » C. Weighing contingency factors

The best structure for a given organization depends on such contingency factors as:

I. Technology

II. Size

III. Environment

I. Technology

Outline » C. Weighing contingency factors » I. Technology

The knowledge, tools, equipment, and work techniques used by anorganization in delivering its product or service.

Technology

Two critical aspects:

a. Technological complexity

b. Technological interdependence

a. Technological complexity

Outline » C. Weighing contingency factors » I. Technology » a. Technological complexity

Products are custom-produced to meet customer specifications, orthey are made in small quantities primarily by craft specialist.

1. Unit and small-batch production

Products are manufactured in large quantities, frequently on anassembly line.

2. Large-batch and mass production

Products are liquids, solids, or gases that are made through acontinuous process.

3. Continuous-process production

b. Technological interdependence

Outline » C. Weighing contingency factors » I. Technology » b. Technological interdependence

The degree to which different parts of the organization mustexchange information and materials in order to perform theirrequired activities.

Technological interdependence

A relationship in which units operate independently but their individualefforts are important to the success of the organization as a whole.

1. Pooled interdependence

A relationship in which one unit must complete its work before the next unitin the sequence can begin work.

2. Sequential interdependence

A relationship in which one unit’s outputs become inputs to the other unitand vice versa.

3. Reciprocal interdependence

II. SizeFour trends identified of size effects on structure:1. As organizations grow, they are likely to add more departments

and levels, making their structures increasingly complex. With functional structures, such growth creates pressure for a change to some type of divisional structure.

2. Growing organizations tend to take on an increasing number of staff positions in order to help top management cope with the expanding size. This tendency levels off when a critical mass of staff has been achieved, but it helps lead to the third trend.

3. Additional rules and regulations seem to accompany organizational growth. While such guidelines can be useful in achieving vertical coordination, the unchecked proliferation of additional rules and regulations may lead to excessive formalization and lower efficiency.

4. As organizations grow larger, they tend to become more decentralized. This is probably due in part to the additional rules and regulations that set guidelines for decision making at lower levels.

Outline » C. Weighing contingency factors » II. Size

III. Environment

Outline » C. Weighing contingency factors » III. Environment

Two major issues:

a. Effects on the organization as a whole: environmental stability » MECHANISTIC and ORGANIC characteristics

b. Effects on various units within the same organization » DIFFERENTIATION and INTEGRATION

a. Mechanistic versus organic

Outline » C. Weighing contingency factors » III. Environment » a. Mechanistic versus organic

The firms that operate in a stable environment tend to haverelatively mechanistic characteristics: highly centralized decisionmaking, many rules and regulations, mainly hierarchicalcommunication channels, emphasis on vertical coordination, limiteddelegation from one level of management to the next.

Stable » mechanistic

The firms that operate in a highly unstable and uncertainenvironment are far more likely to have relatively organiccharacteristics: decentralized decision making, few rules andregulations, both hierarchical and lateral communication channels,much of the emphasis on horizontal coordination, considerabledelegation from one level to the next.

Unstable » organic

b. Differentiation versus integration

Outline » C. Weighing contingency factors » III. Environment » b. Differentiation vs. integration

The extent to which organization units differ from one another interms of the behaviors and orientations of their member and theirformal structures.

Differentiation

The extent to which there is collaboration among departments thatneed to coordinate their efforts.

Integration

Dan C. Lungescu, PhD, assistant professor2015-2016