CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION

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CHAPTER 6 DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION
TEACHING OBJECTIVES
1. To show how to group and coordinate tasks and how an effective organizational design leads to core competences and a competitive advantage. (6.1) 2. To demonstrate that grouping tasks by function is the foundation of horizontal differentiation. (6.1) 3. To illustrate that moving from a functional to a more complex structure increases vertical differentiation, horizontal differentiation, and integration. (6.2) 4. To stress that structure must be evaluated periodically and may need to be changed. (6.2) 5. To show the differences among the three types of product structures: product division, multidivisional, and product team. (6.3) 6. To explain the geographic and market structures. (6.4./6.5) 7. To outline the advantages and disadvantages of a matrix structure. (6.6) 8. To explain the concept of a multidivisional matrix structure. (6.6) 9. To discuss the emerging trends toward network organizations, outsourcing, and the boundaryless organization. (6.7)

CHAPTER SUMMARY
Company tasks are organized to provide customers with goods and services. The functional structure stands as the foundation of horizontal differentiation by creating a division of labor that leads to core competences. Functional structures face control problems as an organization grows and becomes more complex: lack of communication, inability to measure performance, and lack of customer responsiveness. To resolve these issues, a company adopts a more complex structure by increasing vertical differentiation, horizontal differentiation, and integration. The source of control problems, the product, geography, or the customer, determines the type of structure. Three product structures (product division, multidivisional, and product team) are discussed, highlighting both advantages and disadvantages. The geographic structure and the market structure are examined with their advantages and disadvantages. The matrix structure is appropriate when a high level of coordination and a rapid development time are necessary. The advantages and disadvantages of the matrix are reviewed as well as the difference between the matrix and the product team structures. The multidivisional matrix structure offers a high level of coordination among divisions. Structures may need to be changed over time, so managers should continually evaluate the cost/benefit ratio of company structure. Trends in structure include network organizations, outsourcing, and the boundaryless organization, each with advantages and disadvantages. A key issue in organizational design is how to group tasks and coordinate activities to create a competitive advantage. Organizational structure fosters coordination, motivation, and control. The appropriate structure depends on the complexity of activities, the amount of coordination needed, the number of products marketed, the geographical location, and the customer served. Reengineering an organization can increase performance.

PHAM HOANG HIEN

As others assume specialized roles. a financial department and strategic planning department were added. Bezos developed core competences that made Amazon. A. Control Problems in a Functional Structure A functional structure controls people and resources and develops core competences.R. The B. Working closely. peers develop norms and values that increase their effectiveness and loyalty. Then he established the information systems department to implement these systems and interact with customers. Describe Amazon’s functional structure. As a company grows and becomes more complex. which begins when one person assumes a functional task. First. ___________________________________________________________________________ ___________________________________________________________________________ Focus on New Information Technology: Amazon. • Refer to The B. and Grille example above for a good working example of how and why an organization would group by function. As functional abilities increase. People can supervise each other and meet work schedules. Q. a company can attain a core competence and competitive advantage. and Grille grouped waiters and busboys into the dining area function and chefs and kitchen staff into the kitchen function.A.com’s Internet software to link employees to customers. Part 4 Jeff Bezos achieved success due to the functional structure that effectively allowed Amazon.A.1 Functional Structure Functional structure is the bedrock of horizontal differentiation. with people placed in groups based on common skills or common use of resources. By focusing on the best way to divide the total task into functions and recruiting experienced managers. Finally. A company organizes jobs into functional areas to offer consumers high-quality products at reasonable prices. Q. How does the functional structure help a company reach its goals? A. Peer supervision is key if work is complex because supervision from above is difficult. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Advantages of a Functional Structure 1. a functional structure emerges.com competitive.R. 2. People with common skills share information for problem solving or accomplishing a task. Learning from peers increases skills and abilities. each function tries to maintain the company’s PHAM HOANG HIEN . Bezos created R&D to develop and improve in-house software. 3.com.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 62 CHAPTER OUTLINE 6.

Some companies consolidate departments to resolve coordination problems. Q. Communication Problems.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 63 position. similar products at a few production sites and markets to one type of customer. Increasing horizontal differentiation. Increased demand may strain manufacturing to produce products fast enough or in sufficient quantity. and increasing control with rules. Functions communicate poorly because of subunit orientation. 6. (Fig.3) For an entrepreneur. Strategic Problems. This move entails three design choices: Increasing vertical differentiation. a company requires a complex structure. Evaluating the cost and contribution of each function to a product is difficult. division of labor within a function and between functions is a vital design task. Marketing and sales have functional hierarchies. using integrating mechanisms such as task forces and teams to improve coordination between subunits and motivation. 6. Control problems arise. When production expands to more products at more locations and to several types of customers. Increasing integration. New types of customers require customized products to meet their needs.2). Reengineering the design of the functional structure can increase effectiveness. A diagram of task relationships shows if the organization is obtaining the advantages of a functional structure or experiencing disadvantages. centralizing decision-making. Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ PHAM HOANG HIEN Managerial Implications: Functional Structure . resulting in a loss of strategic direction. With regional offices.2 From Functional Structure to Divisional Structure A functional structure best serves a company that produces a few. a company may solve control problems through integrating mechanisms. Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Reengineering Functional Structure to Solve Control Problems Before adopting a more complex and costly structure. increasing the levels in the hierarchy. 6. a company must balance decision-making between centralized functions and regional managers. What problems do functional structures face? A. Solving daily coordination problems prevents top managers from focusing on longterm strategic issues. (Fig. Location Problems. product teams or divisions to overlay a functional grouping. Customer Problems. Measurement Problems.

(Fig.5) Sharing of skills and resources increases a function’s ability to create value across product divisions. tasks are grouped by product and function. complex products cause problems. a geographic structure fits best. centralized support functions at the top is infeasible. The multidivisional structure has a corporate headquarter. _________________________________________________________________________________ _________________________________________________________________________________ PHAM HOANG HIEN . The type of divisional structure depends on the source of control problems.3 Divisional Structure I: Three Kinds of Product Structure As the number of products and/or services increase. 6. What types of companies generally meet this criteria? A. (Fig. multidivision. and paper companies fit a product division structure. Staff members facilitate integration to share information quickly among divisions. organized functionally and responsible for overseeing division managers. An automaker doesn’t know how to market a computer. If multiple locations cause problems. This structure makes subunits easier to manage as a company grows. Vertical differentiation is increased and support functions centralized at the top. A product structure groups products into separate divisions. Support functions can be centralized at the top or grouped for each product division. If many. 6. Divisions are self-contained. A company must determine the difference and complexity of products and coordination methods between support functions and product divisions. Product Division Structure A product division structure with centralized support functions is appropriate when products are similar and target the same market. (Fig. J. Heinz has product divisions with manufacturing facilities and a manager who coordinates with support functions like marketing.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION Moving to a Divisional Structure A divisional structure groups people from different functions to provide customers with goods or services. or product team structure. furniture makers. Multidivisional Structure A multidivisional structure is appropriate if products are different and are sold in many markets. a product structure fits best. a market structure fits best.4) Each support function is grouped into a product-oriented team. These decisions determine a company’s product division. each with their own support functions and control. H. 64 Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 6.6) • Refer to discussion question 2 here to distinguish between a product division and multidivisional structure. Q. Food processors. Because products differ. Unlike a product division structure. 6. If different customer types cause problems. a multidivisional structure can control many businesses.

4. PHAM HOANG HIEN . Q. Functional specialists serve on self-contained. Sharing of divisional information to compare profitability and product development time Still costs soared due to duplication of functions. and layers of hierarchy slowed decision-making. Advantages of a Multidivisional Structure 1. Increased control. GM’s structure had self-contained divisions and a corporate headquarters staff. like General Motors. but kept R&D and purchasing centralized. What companies should use the multidivisional structure? A. How was GM’s structure different from a product division structure? Evaluate GM’s structure. The ability to measure each division’s performance and to allocate resources better 2. but centralized control for economies of scale. Higher bureaucratic costs 5. the price of a product or service sold by one division to another 4. Profitable growth. Determining transfer pricing. because good divisional managers are promoted to corporate management. and corporate managers evaluated performance and created strategic plans. Divisional managers made decisions. and reduces costs. So GM returned design control to the divisions. and strategic planning. Determining what authority to centralize or decentralize from the corporate to the divisional level 2. A. Improvement in employee morale due to divisional decision-making 3. design. An internal labor market. Increased organizational effectiveness. because corporate managers monitor divisional managers and make comparisons. GM’s structure had several benefits: 1. and functional. divisional. Distorted information. Coordination problems from uncooperative divisions competing for resources 3. 2. The poor communication leading to slow development in the multidivisional structure is avoided. and marketing skills. because capital can be allocated to divisions with the greatest potential return on investments. 65 Organizational Insight 6. Sloan developed a multidivisional structure with diversity in R&D. due to a division of labor between corporate and divisional managers. In 1984 competition forced GM to consolidate divisions. Most Fortune 500 companies. but centralized control resulted in look-alike cars. the product team structure customizes products. cost control. resulting in communication problems Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Product Team Structure A hybrid of the product division and the multidivision structures. 3. have a multidivisional structure because it permits growth and retention of control. speeds development time. Disadvantages of a Multidivisional Structure 1.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION Q. There are three management levels: corporate.1: Creating GM’s Multidivisional Structure Alfred Sloan took over GM’s 25 product divisions in 1923 when Ford was highly centralized and achieved economies of scale by producing one model. Sufficient time for corporate managers to focus on strategic issues 4.

Customer demand was high. As it expands globally.9) This structure increases both horizontal and vertical differentiation. The geographic divisional structure permits some functions to be centralized and others to be decentralized. Organizational Insight 6.4 Divisional Structure II: Geographic Structure As a company expands into different regions. and low costs. (Fig. responsible for acquiring inputs. (Organizational Insight 4. development time was seven to eight years compared to Toyota’s three.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION product division teams. 6. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 6. Chrysler traditionally created a product division. The functional approach was ineffective. good quality. Wal-Mart selected a geographic structure. A regional hierarchy is added. Q. 6. Decentralization and integration facilitate rapid decision-making. with a development time of three years. including international operations. This ineffective method was successfully replaced by Chrysler’s product platform teams. (Fig.2: Iacocca Pioneers Chrysler’s Team Structure To develop a car.3 Wal-Mart Goes National Then Global Wal-Mart found the right balance between a mechanistic and organic style of operating and has prospered. A. it needs to organize its core competences to meet the needs of different regional customers. Wal-Mart had to choose a structure complex enough to operate its growing empire and still maintain its mechanistic/organic balance. giving managers input into their region’s product mix to maximize sales. A team manager oversees design and manufacturing activities. and costs were high. Why did Chrysler change to a product team approach? What benefits did this structure provide? A. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ PHAM HOANG HIEN .9) 66 Organizational Insight 6. The product team structure was successfully tested for a new sports car. What structural problems did Wal-Mart face? A. Wal-Mart will further divide up its international division to meet customer needs. Q.6) Q. quality was poor. Store operations are divided into regions. and employees become loyal to product not function. Describe Wal-Mart’s structure.

Disadvantages of a Matrix Structure 1. Cross-functional communication allows members to learn and develop skills. because managers were not competing for customers or resources. 4. (Fig. for dissimilar products. Lack of bureaucratic structure leads to role ambiguity and role conflict. use a geographic structure. What were the advantages of a market structure? A. Each division develop products for its customers but uses centralized support functions.6 Matrix Structure The matrix structure includes both functional and product responsibility. and credit cards. Functional barriers and subunit orientation are reduced. Although both a product team and matrix structure use teams. 2. market research. 6. Control is exerted horizontally via teams. but work under a product manager. To reduce development time through more integration. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 6. The matrix structure is flat with decentralized authority. corporate. to coordinate among different customer types. The product manager leads the team whose members are responsible to both functional and product managers. Managerial Implications: Changing Organizational Structure Functional structures may require change to improve control. a multidivisional structure. consumer. Managers competed for customers. insurance. Q.4: Tailoring Structure to Customers Mellon Bank used a product structure. Centralizing support functions (advertising. use a product development team structure. Structural changes should increase effectiveness. Functional employees remain under a functional head.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 67 6. organizing divisions by CDs. To customize products for different regions.12) Role and authority relationships are ambiguous. Q. This structure permits a quick response to market changes. 6. and computers) saved the bank $2 million. Employee skills are utilized. Advantages of a Matrix Structure 1. a divisional structure is appropriate. divisions did not coordinate. (Fig. For production of many similar products. It is used for a high level of group coordination to respond to changing conditions. PHAM HOANG HIEN . What are the drawbacks of a matrix structure? A. and sales fell. A matrix is an organic structure. matrix team members have two bosses and team membership is not fixed.11) Organizational Insight 6. and government customers. Employees are concerned about both cost and quality. use a market structure.5 Divisional Structure III: Market Structure The customer is the focus in a market structure: commercial. Mellon Bank reorganized. 3. Communication among divisions improved.

Functional experts join an organization to meet a contract and then go to another project. Advantages of Network Structures 1. bureaucratic structure. and distributors. Informal hierarchies emerge in response to uncertainty. Organic organizational behavior 4. Coordination problems emerge.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 2. Partners replaced for unmet performance expectations 5. video teleconferencing.13) Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ • Refer to discussion question 3 here to compare the product structure and the matrix structure. 68 The Multidivisional Matrix Structure A matrix design can enhance a multidivisional structure when placed at the company’s top to increase integration between corporate and division managers. they are not part of the organization. Division heads and corporate executives exchange information and coordinate activities. 4. 6. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ PHAM HOANG HIEN . and computer aided design systems. Difficulty in obtaining ongoing learning to build core competences The Boundaryless Organization The boundaryless organization connects people by computers. a group of organizations which coordinate activities via contracts not a hierarchy. transferring activities to outside organizations such as suppliers. Outsourcing offers increased flexibility and reduced costs. Corporate specialists analyze divisional performance and design action plans. High bureaucratic costs avoided with a flat structure 3. Nike keeps R&D in-house but outsources other functions to companies around the world.7 Network Structure and the Boundaryless Organization Companies are moving towards network structures. _________________________________________________________________________________ _________________________________________________________________________________ 6. but unlike members of a matrix structure. Designing organizational structure is an increasingly complex management activity. Production costs reduced through partners with lower costs 2. Difficulty in replacing partners and keeping proprietary information from competitors 3. Access to low cost foreign sources of inputs and expertise Disadvantages of Network Structures 1. Teams may fight over resources. followed by lack of cost reduction and improved quality 2. 5. manufacturers. 3. (Fig. Network structures are becoming complex. Companies are using outsourcing. Unmet expectations lead managers to increase control resulting in a taller. faxes. Members often refuse transfers to stay with peers.

location issues. Functions develop hierarchies.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 69 DISCUSSION QUESTIONS AND ANSWERS 1. Control increases because corporate managers oversee and measure divisional performance. This reporting structure reduces role conflict and role ambiguity. What are the advantages and disadvantages associated with network structures? Advantages: 1. • A multidivisional structure permits a company to run many businesses. As organizations grow and differentiate. what problems can arise with a functional structure? As a company grows. Balancing control between corporate and regional offices is difficult. Determining the contribution and cost that each function brings to a product is difficult. A multidivisional structure has more integration. 2. which leads to more bureaucracy and a taller hierarchy. and neglect of strategic matters. people rotate and feel unstable. • A multidivisional structure has a corporate headquarters staff. . High bureaucratic costs avoided with a flat structure 3. it encounters control problems: lack of communication. a product team structure avoids conflicts over resources. Top managers spend time on operational and coordination issues. How do the product division structure and the multidivisional structure differ? There are structural differences: • The divisions in a multidivisional structure are independent with their own support functions. and make coordination difficult. the team manager. Access to low-cost foreign sources of inputs and expertise PHAM HOANG HIEN A functional structure is simpler and is used for one business. a product division structure is appropriate for one business. various divisions can have different structures. A company adopts a multidivisional structure because the number and complexity of different products cause control issues. What are the principal differences between a functional structure and a multidivisional structure? Why does a company change from a functional to a multidivisional structure? 5. making responsibilities clear. inability to measure performance. An internal labor market allows for the promotion of divisional managers to corporate positions. Established procedures are used because team membership is fixed. become remote. Why might an organization prefer to use a product team structure rather than a matrix structure? A product team structure allows employees to report to only one boss. Because of a clearly defined hierarchy. Organic organizational behavior 4. not two. Partners replaced for unmet performance expectations 5. 3. A functional design makes product customization difficult. 4. Production costs reduced through partners with lower costs 2. • In a multidivisional structure. Employees may create their own structure. in a matrix. more horizontal and vertical differentiation. neglecting long-term strategic concerns. product structure divisions share centralized support functions. customer concerns. Corporate headquarters is a level with a division of labor between corporate and divisional managers.

as products were related. and updated factories. and functional managers coordinated poorly. the CEO saw that their success resulted from cross-functional teams. jobs. There are two basic positions.S. Caterpillar’s functional approach was outdated. 1. Decisions were removed from those making the product. but competition from the Japanese threatened its position. How did Fites change Caterpillar’s structure to improve its effectiveness? Fites created 4 centralized support divisions and 14 product divisions. Each division had cross-functional PHAM HOANG HIEN . slow development time. The result was higher costs. Make sure they understand that each structural option has its pros and cons. The other position is that the consumer benefits in the long run by organizations running more efficiently. The first is that outsourcing to other countries costs the U. but shared information. This structure was more effective. and is unethical. R&D teams were assigned to specific products. and they need to apply all of the principles discussed in previous chapters to determine the most effective structure. ANALYZING THE ORGANIZATION Students will analyze the structure and problems of their companies. Caterpillar had slow decision-making. department heads such as manufacturing made decisions and sent them down the hierarchy. making managers responsible for all activities and coordination with centralized support functions. and return-on-investment goals. Making the Connection Ask students to find an example of a company that has changed its horizontal differentiation. high costs. What were the problems with Caterpillar’s old organizational structure? Decision-making process was highly centralized. followed by lack of cost reduction and improved quality 2. By observing Japanese manufacturers. Coordination problems emerge. and lower productivity. CASE FOR ANALYSIS A New Caterpillar Emerges Caterpillar was a low-cost manufacturer in the construction equipment industry. Each was a profit center with responsibility for profits and losses. decentralized control. Caterpillar restructured into 14 product and 4 support divisions.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION Disadvantages: 1. 2. Difficulty in replacing partners and keeping proprietary information from competitors 70 ORGANIZATIONAL THEORY IN ACTION Organizational Theory Exercise: Which New Organizational Structure? Small groups examine how to move from a functional structure to one suited for an organization trying to expand into different regions of the country. These problems eroded Caterpillar’s market share. The Ethical Dimension Students examine the ethical issues surrounding outsourcing. and a long production time. and structural changes were needed to remain globally competitive.

In small groups. such as a restaurant that is organized by product instead of function. Manufacturing upgraded its facilities. 2. PHAM HOANG HIEN . 7. Although this would be very costly and a poor dining experience for the customer. 5. divisional (product geographic. and network. divide students into finance. The product manager wants speed and low costs. This exercise should shows control problems associated with a functional structure. and marketing functions of a company that manufactures ice cream. product design. and finance is concerned with costs. Show them how this would make the restaurant very inefficient because it would need wait staff and cooks from multiple departments in order to serve the customer. have students design a really inefficient structure. and the functional manager wants quality. Look up General Motors on the Internet and report to the class about GM’s structure. These changes made Caterpillar compete more effectively. Marketing decisions were decentralized to the regional level for rapid response time. Show how role ambiguity and role conflict arise. Marketing wants to offer many flavors. and manufacturing to work together reduced product development time by 50 percent. and manufacturing to increase productivity. To illustrate the value of a proper structure. Management is too busy resolving coordination problems to determine strategy. students are assigned a structure and will list its advantages and disadvantages and give examples. To illustrate control problems with a functional structure. used product teams. A good discussion topic is how the matrix structure violates Weber’s bureaucratic principles. A role-play demonstrates the problems with a matrix structure. Ask for three students to volunteer. production. One student will be a financial specialist who works on a certain product team and reports to the finance manager and to the product manager. Structures: functional. Requiring marketing. 6. it is a good example to show how important structure really is in an organization. Production says it can produce only three flavors.CHAPTER 6: DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION product teams responsible for marketing. market). and increased productivity 30 percent. matrix. engineering. and what their experiences are with working with multiple bosses. Students will suggest a more appropriate structure. 71 TEACHING SUGGESTIONS 1. 3. If the company also offered yogurt. it could attract more customers. Students get a better flavor of how difficult it is to coordinate activities when they are not all in the same room. 4. separate the functions geographically by using several classrooms. Ask students what they think of this. To make this even more realistic.

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