What is Organizational Structure?

Organization structure involves arranging organizational activities in such a way that it creates maximum value. The structure of the organization can be defined simply as the ways in which labor is divided into distinct tasks (which is a specialization decision) and the method through which coordination is achieved among these tasks. A good structure is one that increases the value created (consistent with a differentiation advantage) which decreases bureaucratic costs, which should provide a cost advantage.

12. Understand the basic building blocks (vertical differentiation, horizontal differentiation, integration)

There are three basic choices a firm has to make regarding the structure of the organization. These choices are called structure decisions.

Vertical Differentiation Decisions (specialization) The vertical differentiation decision determines the number of levels a firm has (how tall is the organization?) and determines how centralized or decentralized authority will be (how is the organization distributed?)

Problem of tall structures with principle of minimum chain of command This is a vertical differentiation issue. Integration Decision (coordination) The integration decision determines how each of the organizational activity units is coordinated. There are four main issues that challenge “tall” organizations. .Horizontal Differentiation Decision (specialization) The horizontal differentiation decision determines how wide the organization will be. 13.

2) Tall organizations suffer more from information distortion (the more information is repeated. 14. This leads to inflexibility.1) Tall organizations tend to have communication and coordination problems because of the time required to for information to go from the top to the bottom of the structure and vice versa. multidivisional. 3) Tall organizations suffer more motivational problems (people in chain feel less responsible for the outcome). the more it gets distorted). 4) Tall organizations often have too many middle managers. Pros and Cons of “Functional Structure” This is a horizontal differentiation issue. There are four types of horizontal differentiation structures: simple. and hybrid. functional. .

Disadvantages of a Functional Structure (severe when a company expands) . A. Advantages of a Functional Structure 1) employees can learn from each other and get a better at the job 2) communication within the function is enhanced 3) employees can monitor each other (especially true in R&D) 4) units are fairly easy to control (little hierarchies emerge) 5) there are enhanced economies of scale B.In the functional structure. people who are performing similar tasks using similar equipment are grouped together in functional units.

The disadvantages of a firm with a functional structure may lead the firm to reorganize as a multidivisional structure. competitor analysis. Strategic Business Unit In essence. Strategic Business Unit or SBU is understood as a business unit within the overall corporate identity which is .1) communication outside the function is impaired due to function “orientation” 2) there are measurements problems (what is the contribution of X to the firm?) 3) there are location/autonomy problems that come with geographic expansion 4) 1 – 3 above result in strategic problems because the managers are taking care of these operational issues instead of focusing on strategic decisions. the SBU is a profit making area that focuses on a combination of product offer and market segment. if there's a big enough market niche for a product we can supply. A Strategic Business Unit emerges at the cross-over between: A product offering that the company could make and A reachable market segment that has a high value profit potential. and marketing campaign. That is to say. then we may want to create a SBU that focuses on that opportunity. requiring its own marketing plan.

distinguishable from other business because it serves a defined external market where management can conduct strategic planning in relation to products and markets. they are best thought of as being composed of a number of businesses (or SBUs). objectives and competitors and these will often be different from those of the parent company. or can simply be a smaller part of a company set up to perform a specific task. These organizational entities are large enough and homogeneous enough to exercise control over most strategic factors affecting their performance. The SBU has its own business strategy. largely as a result of General Electric's many units. They are managed as self contained planning units for which discrete business strategies can be developed. facing a well-defined set of competitors. The external (market) dimension of a business is the relevant perspective for the proper identification of an SBU. The organization of the business unit is determined by the needs of the market. In the broader domain of strategic management. A Strategic Business Unit can encompass an entire company. which are sold to a uniform set of customers. . This approach entails the creation of business units to address each market in which the company is operating. the phrase "Strategic Business Unit" came into use in the 1960s. The unique small business unit benefits that a firm aggressively promotes in a consistent manner. An SBU is an sole operating unit or planning focus that does not group a distinct set of products or services. When companies become really large.

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