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Designing Organization Structure  181

CHAPTER 10

DESIGNING ORGANIZATION STRUCTURE

CHAPTER OUTLINE

What Are Your Leadership Beliefs?


I. Organizing the Vertical Structure
A. Work Specialization
B. Chain of Command
New Manager Self-Test: Authority Role Models
A. Span of Management
B. Centralization and Decentralization
II. Departmentalization
A. Vertical Functional Approach
B. Divisional Approach
C. Matrix Approach
D. Team Approach
E. Virtual Network Approach
III. Organizing for Horizontal Coordination
A. The Need for Coordination
B. Task Forces, Teams, and Project Management
C. Relational Coordination
IV. Factors Shaping Structure
A. Structure Follows Strategy
B. Structure Fits the Technology

ANNOTATED LEARNING OBJECTIVES


After studying this chapter, students should be able to:

1. Discuss the fundamental characteristics of organizing and explain work specialization, chain
of command, span of management, and centralization versus decentralization.

Organizing is the deployment of organizational resources to achieve strategic goals. Organizing


is important because it follows the management function of planning. Planning and strategy
define what to do; organizing defines how to do it. Organization structure is a tool that managers
use to harness resources for getting things accomplished. The deployment of resources is
reflected in the organization's division of labor into specific departments and jobs, formal lines of
authority, and mechanisms for coordinating diverse organization tasks.

Work specialization, sometimes called division of labor, is the degree to which organizational
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182  Chapter 10

tasks are subdivided into separate jobs. When work specialization is extensive, employees
specialize in a single task. Jobs tend to be small, but they can be performed efficiently.

The chain of command is an unbroken line of authority that links all employees in an
organization and shows who reports to whom.

The span of management is the number of employees reporting to a supervisor. Sometimes


called the span of control, this characteristic of structure determines how closely a supervisor can
monitor subordinates. The average span of control used in an organization determines whether
the structure is tall or flat. A tall structure has an overall narrow span and more hierarchical
levels. A flat structure has a wide span, is horizontally dispersed, and has fewer hierarchical
levels.

Centralization and decentralization pertain to the hierarchical level at which decisions are made.
Centralization means that decision authority is located near the top of the organization. With
decentralization, decision authority is pushed downward to lower organization levels.

2. Describe functional and divisional approaches to structure.

Functional structure is the grouping of positions into departments based on similar skills,
expertise, work activities, and resource use. A functional structure can be thought of as
departmentalization by organizational resources because each type of functional activity such as
accounting, human resources, engineering, and manufacturing, represent specific resources for
performing the organization's task. People and facilities representing a common organizational
resource are grouped together into a single department.

Divisional structure occurs when departments are grouped together based on similar
organizational outputs. In the divisional structure, divisions are created as self-contained units
for producing a single product. Each functional department resource needed to produce the
product is assigned to one division. In a functional structure, all engineers are grouped together
and work on all products whereas, in a divisional structure, separate engineering departments are
established within each division. Each department is smaller and focuses on a single product
line. Departments are duplicated across product lines.

3. Explain the matrix approach to structure and its application to both domestic and
international organizations.

The matrix structure uses functional and divisional structures simultaneously in the same part of
the organization. The matrix structure has dual lines of authority. The functional hierarchy of
authority runs vertically, and the divisional hierarchy of authority runs horizontally. The matrix
approach to structure provides a formal chain of command for both the functional and divisional
relationships. The matrix structure is typically used when the organization experiences
environmental pressure for both a strong functional departmentalization and a divisional
departmentalization. Global corporations often use the matrix structure. The problem for global
companies is to achieve simultaneous coordination of various products within each country or
region and for each product line. The two lines of authority typically are geographic and
product, and the matrix provides excellent simultaneous coordination. It is an organizational
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Designing Organization Structure  183

structure that deliberately violates Fayol’s principle of unity of command.

4. Describe the contemporary team and virtual network structures and why they are being
adopted by organizations.

The implementation of team concepts has been a widespread trend in departmentalization. The
vertical chain of command is a powerful means of control, but moving decisions through the
hierarchy takes much time and keeps responsibility at the top. The trend is to delegate authority,
push responsibility to the lowest possible levels, and create participative teams that engage the
commitment of workers. This approach enables organizations to be more flexible and responsive
in a competitive global environment. The dynamic network organization is another approach to
departmentalization. Using the network structure, the organization divides major functions into
separate companies that are brokered by a small headquarters organization. The network
approach is revolutionary because it is difficult to answer the question, “Where is the
organization?” This organizational approach is especially powerful for international operations.

5. Explain why organizations need coordination across departments and hierarchical levels,
and describe mechanisms for achieving coordination.

Coordination refers to the quality of collaboration across departments. It is required whether


there is a functional, divisional, or team structure. Coordination problems are amplified in the
global arena, because units differ not only by goals and work activities but by distance, time,
culture, and language. Coordination is the outcome of information and cooperation; managers
can design systems and structures to promote horizontal coordination. The vertical structure is
flattened, with perhaps only a few senior executives in traditional support functions such as
finance or human resources. A task force is a temporary team or committee designed to solve a
short-term problem involving several departments. Task force members represent their
departments and share information that enables coordination. Companies also set up cross-
functional teams for coordination. Companies also use project managers, responsible for
coordinating the activities of several departments on a full-time basis for the completion of a
specific project. Reengineering is the radical redesign of business processes to achieve dramatic
improvements in cost, quality, service, and speed. Because the focus of reengineering is on
process rather than function, reengineering generally leads to a shift away from a strong vertical
structure.

6. Identify how structure can be used to achieve an organization’s strategic goals.

Structure depends on a variety of contingencies. The right structure is “designed to fit” the
contingency factors of strategy, environment, and technology. These three areas are changing for
organizations, creating a need for stronger horizontal coordination. Two strategies proposed by
Porter are differentiation and cost leadership; these strategies require different structural
approaches. The pure functional structure is appropriate for achieving internal efficiency goals.
The vertical functional structure uses task specialization and a chain of command. It does not
enable the organization to be flexible or innovative. Horizontal teams are appropriate when the
primary goal is innovation and flexibility. The firm can differentiate itself and respond quickly
to change. Other forms of structure represent intermediate steps on the firm’s path to efficiency
or innovation. The functional structure with cross-functional teams and project teams provides
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184  Chapter 10

greater coordination and flexibility than the pure functional structure. The divisional structure
promotes differentiation because each division can focus on specific products and customers.

7. Define production technology and explain how it influences organization structure.

Technology includes the knowledge, tools, techniques, and activities used to transform
organizational inputs into outputs. Joan Woodward described three types of manufacturing
technology.
a. Small-batch and unit production. Small-batch production firms produce goods in
batches of one or a few product products designed to customer specification. Examples
include custom clothing, special-order machine tools, space capsules, satellites, and
submarines.
b. Large-batch and mass production. Mass production technology is distinguished by
standardized production runs in which a large volume of products is produced and all
customers receive identical products. This technology makes greater use of machines
than does small-batch production. Examples include automobiles, tobacco products, and
textiles.
c. Continuous process production. In continuous process production, the entire workflow
is mechanized in a sophisticated and complex form of production technology. The
process runs continuously and therefore has no starting or stopping. Human operators are
not part of actual production because machinery does all the work. Examples include
chemical plants, distilleries, petroleum refineries, and nuclear power plants.

Service organizations include consulting companies, law firms, brokerage houses, airlines,
hotels, advertising companies, amusement parks, and educational organizations. Service
technology also characterizes departments such as legal, human resources, finance, and market
research in large corporations. Service technology involves:
 intangible output—services are perishable and, unlike physical products, cannot be stored
in inventory; and
 direct contact with customers—employees and customers interact directly to provide and
purchase the service. Production and consumption are simultaneous.

LECTURE OUTLINE

WHAT ARE YOUR LEADERSHIP BELIEFS?

The fit between a new manager and the organization is often based on personal beliefs about the
role of leaders. Things work best when organization design matches a new manager’s beliefs
about his or her leadership role. This exercise helps students identify whether their leadership
beliefs are primarily position based or nonhierarchical.

I. ORGANIZING THE VERTICAL STRUCTURE Exhibit 10.1

Organizing is the deployment of organizational resources to achieve strategic goals.


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Designing Organization Structure  185

It is important because it follows from strategy. Strategy defines what to do, and organizing
defines how to do it. The organizing process leads to the creation of organization structure,
which defines how tasks are divided, resources are deployed, and departments are
coordinated.

Organization structure refers to:


 Formal tasks assigned to individuals and departments;
 Formal reporting relationships including lines of authority, decision responsibility,
number of hierarchical levels, and span of managers' control; and
 Design of systems for coordination of employees across departments.

The organization chart is the visual representation of an organization's structure that


portrays the characteristics of vertical structure. It delineates the chain of command,
indicates departmental tasks and how they fit together, and provides order and logic for the
organization. There are several important features of the vertical structure

A. Work Specialization

1. A fundamental principle is that work can be performed more efficiently if employees


are allowed to specialize. Work specialization, sometimes called division of labor, is
the degree to which organizational tasks are subdivided into separate jobs.
Production is efficient because employees perform small, well-defined tasks.

2. Organizations are moving away from this principle because too much specialization
leads to employees being isolated and doing only a single boring job. Many
companies are enlarging jobs to provide greater challenges or assigning teams to tasks
so employees can rotate among the jobs performed by the team.

B. Chain of Command

1. The chain of command is an unbroken line of authority that links all persons in an
organization and shows who reports to whom. It is associated with two underlying
principles. Unity of command means that each employee is held accountable to only
one supervisor. The scalar principle refers to a clearly defined line of authority in the
organization that includes all employees.

2. Authority, Responsibility, and Delegation

a. The chain of command illustrates the authority structure of the organization.


Authority is the formal and legitimate right of a manager to make decisions, issue
orders, and allocate resources to achieve organizational outcomes. Authority is
distinguished by three characteristics.

 Authority is vested in organizational positions, not people. People in the same


position have the same authority because of the position they hold.
 Authority flows down the vertical hierarchy. Positions at the top have more
formal authority than those at the bottom.
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186  Chapter 10

 Authority is accepted by subordinates. The acceptance theory of authority


argues that a manager has authority only if subordinates choose to accept the
commands.

b. Responsibility is the duty to perform the task or activity an employee has been
assigned. Managers are assigned the authority commensurate with responsibility.
Accountability is the mechanism through which authority and responsibility are
brought into alignment. Those with authority and responsibility are subject to
justifying task outcomes to those above them in the chain of command.

c. Delegation is another concept related to authority; it is the process managers use


to transfer authority and responsibility to positions below them in the hierarchy.
Organizations encourage managers to delegate authority to the lowest possible
level to gain flexibility to meet customer needs and adapt to the environment.

NEW MANAGER SELF TEST: AUTHORITY ROLE MODELS

Expectations about authority for a new manager are often based on experiences with their first
authority figures and role models—Mom and Dad. To understand authority role models, students
think about each statement as it applies to the parent or parents who made primary decisions
about raising them. .Authoritarian expectations fit in a traditional vertical structure with fixed
rules and a clear hierarchy of authority. Flexible authority expectations typically would fit with
horizontal organizing, such as managing teams, projects, and reengineering.

Discussion Question #1: If you wanted to add a group of big data scientists to a large
organization such as PepsiCo, would you centralize the scientists in a central pool at
headquarters or decentralize them to separate divisions? Discuss your reasons.

NOTES________________________________________________________________________
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3. Line and Staff Authority

a. Line departments perform tasks that reflect the organization's primary goal and
mission. In a software company, line departments make and sell the product.
Line authority means that managers have formal authority to direct and control
immediate subordinates.

b. Staff departments include all those who provide specialized skills in support of
line departments. The finance department of software firm has staff authority.
Staff authority is narrower than line authority and includes the right to advise,
recommend, and counsel in the staff specialists' area of expertise.

C. Span of Management Exhibit 10.2

1. The span of management, or span of control, is the number of employees reporting


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Designing Organization Structure  187

to a supervisor. This characteristic of structure determines how closely a supervisor


can monitor subordinates.

2. Factors that determine the span of management include:

a. Work performed by subordinates is stable and routine.

b. Subordinates perform similar work tasks.

c. Subordinates are concentrated in a single location.

d. Subordinates are trained and need little direction in performing tasks.

e. Rules and procedures defining task activities are available.

f. Support systems and personnel are available for the manager.

g. Little time is required in nonsupervisory activities such as coordination with other


departments or planning.

h. Managers' personal preferences favor a large span.

3. The average span of control used in an organization determines whether the structure
is tall or flat. A tall structure has an overall narrow span of management and more
levels in the hierarchy. A flat structure has a wide span, is horizontally dispersed,
and has fewer hierarchical levels. The trend is toward wider spans of control as a way
to facilitate delegation.

D. Centralization and Decentralization

1. Centralization and decentralization pertain to the hierarchical level at which decisions


are made. Centralization means that decision authority is located near the top of the
organization. With decentralization, decision authority is pushed down the chain of
command to lower organization levels. The trend is toward decentralization, which
uses workers' skills, relieves top managers, has well-informed people make decisions,
and permit rapid response. Factors that influence centralization versus
decentralization include:

a. Greater change and uncertainty in the environment are usually associated with
decentralization.

b. The amount of centralization or decentralization should fit the firm’s strategy.

c. In times of crisis or risk of company failure, authority may be centralized at the


top.

Discussion Question #8: Experts say that organizations are becoming increasingly
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188  Chapter 10

decentralized, with authority, decision-making responsibility, and accountability being pushed


farther down into the organization. How will this trend affect what will be asked of you as a new
manager?

NOTES________________________________________________________________________
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II. DEPARTMENTALIZATION Exhibit 10.3

Departmentalization is the basis for grouping individuals into departments and departments
into the total organization. Managers make choices about how to use the chain of command
to group people together to perform their work. Five approaches to structural design reflect
different uses of the chain of command in departmentalization.

A. Vertical Functional Approach Exhibit 10.4

1. What It Is

a. Functional structure is the grouping of positions into departments based on


similar skills, expertise, work activities, and resource use. People, facilities, and
other resources representing a common organizational resource are grouped
together into a single department.

2. How It Works

a. The major departments under the president are groupings of similar expertise and
resources, such as accounting, human resources, production, and marketing. Each
of the functional departments is concerned with the organization as a whole. The
functional structure is a strong vertical design. Information flows up and down
the vertical hierarchy, and the chain of command converges at the top of the
organization.

b. People in a department communicate primarily with others in the same


department to coordinate work and accomplish tasks or implement decisions.
Managers and employees are compatible because of similar training and
expertise.

Discussion Question #3: An organizational consultant was heard to say, “Some aspect of
functional structure appears in every organization.” Do you agree? Explain.

NOTES________________________________________________________________________
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B. Divisional Approach
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Designing Organization Structure  189

1. What It Is

a. The divisional structure occurs when departments are grouped together based on
organizational outputs. Diverse departments are brought together to produce a
single organizational output. The divisional structure is sometimes called a
product structure, program structure, or self-contained unit structure. Most large
corporations have separate divisions that perform different tasks, use different
technologies or serve different customers.

2. How It Works

a. Divisions are created as self-contained units with separate functional departments


for each division. For example, separate engineering departments are created
within each division, and each department is similar and focuses on a single
product. The primary difference between divisional and functional structures is
that in divisional structures, the chain of command from each function converges
lower in the hierarchy and differences of opinion would be resolved at the
divisional level rather than by the president.

3. Geographic- or Customer-Based Divisions Exhibit 10.5

a. Grouping company activities by geographic region or customer group is an


alternative for assigning divisional responsibility. In this structure, all functions
in a specific country or region report to the same division manager. The structure
focuses company activities on local market conditions; competitive advantage
comes from the selling a product adapted to a given country.

Discussion Question #4: Some people argue that the matrix structure should be adopted only as
a last resort because the dual chains of command can create more problems than they solve.
Discuss. Do you agree or disagree? Why?

NOTES________________________________________________________________________
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C. Matrix Approach Exhibit 10.6, Exhibit 10.7

1. What It Is

a. The matrix approach combines aspects of both functional and divisional


structures simultaneously in the same part of the organization. The matrix has
dual lines of authority. The functional hierarchy of authority runs vertically,
providing traditional control within functional departments. The divisional
hierarchy runs horizontally, providing coordination across departments. The
matrix structure supports a formal chain of command for both the functional
(vertical) and divisional (horizontal) relationships.
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190  Chapter 10

2. How It Works

a. The dual lines of authority make the matrix structure unique. The success of the
matrix structure depends on the abilities of people in key matrix roles.

 Two-boss employees report to two supervisors simultaneously and must


resolve conflicting demands from the matrix bosses.
 The matrix boss is the product or functional boss who is responsible for one
side of the matrix.
 The top leader oversees both the product and functional chains of command
and is responsible for the entire matrix.

Discussion Question #4: Some people argue that the matrix structure should be adopted only as
a last resort because the dual chains of command can create more problems than they solve.
Discuss. Do you agree or disagree? Why?

NOTES________________________________________________________________________
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______________________________________________________________________________

D. Team Approach

1. What It Is

a. The team approach is probably the most widespread trend in departmentalization.


The vertical chain of command is a powerful means of control, but passing all
decisions up the hierarchy takes too long and keeps responsibility at the top.
Managers can delegate authority, push responsibility to lower levels, and be more
flexible and responsive in the competitive global environment.

2. How It Works

a. Cross-functional teams consist of employees from various functional


departments, responsible to meet as a team and resolve mutual problems. Team
members report to their functional departments, but also to the team. These teams
provide needed horizontal coordination to complement existing functional or
divisional structures.

b. Permanent teams are groups of employees brought together in a way similar to a


formal department. Emphasis is on horizontal communication and information
sharing because representatives from all functions coordinate to complete a
specific task. Authority is pushed down to lower levels, and front-line employees
are given the freedom to make decisions and take action on their own.

c. With a team-based structure, the entire organization is made up of horizontal


teams that coordinate their work with customers to accomplish the organization’s
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Designing Organization Structure  191

goals.

Discussion Question #2: How does relational coordination differ from teams and task forces?
Do you think relational coordination seems more valuable for a service technology or a
manufacturing technology? Explain your answer.

NOTES________________________________________________________________________
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E. Virtual Network Approach

1. What It Is

a. The most recent approach to departmentalization extends the idea of horizontal


coordination beyond the boundaries of the organization. Outsourcing, which
means farming out certain activities, has become a significant trend. Partnerships,
alliances, and other collaborative forms are now a leading approach to
accomplishing strategic goals.

b. Some organizations take this networking approach to the extreme to create a new
kind of structure. The virtual network structure disaggregates major functions
to separate companies that are brokered by a small headquarters organization.

2. How It Works Exhibit 10.8

a. The organization may be viewed as a central hub surrounded by a network of


outsider specialists. Services such as accounting are outsourced to separate
organizations that are connected electronically to the central office. Networked
computer systems, collaborative software, and the Internet enable organizations to
exchange data and information rapidly and seamlessly. Networks allow a
company to concentrate on what it does best and contract out other activities to
companies with distinctive competence in those areas.

b. In similar networking approach called the modular approach, a manufacturing


firm uses outside suppliers to provide large chunks of a product, which are then
assembled into a final product by a few workers.

Discussion Question #5: What is the virtual network approach to structure? Is the use of
authority and responsibility different compared with other forms of departmentalization?
Explain.

NOTES________________________________________________________________________
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F. Advantages and Disadvantages of Each Structure Exhibit 10.9


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192  Chapter 10

1. Functional Approach

a. Grouping employees by common task permits efficient resource use and


economies of scale. Departments enhance in-depth skill specialization and
development, and centralized decision making at the top provides unified
direction.

b. Disadvantages include barriers that exist across departments resulting in poor


communication and coordination and slow response to changes. Innovation and
change require involvement of several departments, and decisions pile up at the
top of the hierarchy creating delay

2. Divisional Approach

a. The organization is flexible and responsive to change because each unit is small
and tuned in to its environment. Concern for customer's needs is high and
coordination across functional departments is better because employees are
grouped and committed to a product.

b. Coordination across divisions is often poor. Duplication of resources and the high
cost of running separate divisions is a major disadvantage. The organization loses
efficiency and economies of scale, and there may be a lack of technical depth and
specialization.

3. Matrix Approach

a. The matrix can by highly effective in a complex, rapidly changing environment in


which flexibility and adaptability are important. Conflict and frequent meetings
allow new issues to be raised and resolved. The matrix makes efficient use of
human resources because specialists can be transferred from one division to
another.

b. Frustration and confusion arising from the dual chain of command can be a
significant problem, as can high conflict between the two sides of the matrix, and
time lost in meetings. Mangers spend a great deal of time coordinating meetings,
taking time away from core work activities.

4. Team Approach

a. The team approach eliminates barriers across departments, increases cooperation


and compromise, and enables the firm to quickly adapt to requests and
environmental changes which speeds up decision making. Another advantage is
better morale and enthusiasm as a result of increased employee involvement.

b. Disadvantages include dual loyalties and conflict, time and resources spent on
meetings, and too much decentralization. Team members can often lose sight of
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Designing Organization Structure  193

the big picture of the organization.

5. Virtual Network Approach

a. The biggest advantages are flexibility and competitiveness on a global scale,


drawing on resources and expertise worldwide. The virtual network structure is
the leanest of all because little supervision is required. There may only be two or
three levels of hierarchy, if that many, compared to ten or more in traditional
firms.

b. Lack of hands-on control is a significant disadvantage. Each partner in the


network acts in its own self-interest. Weak and ambiguous boundaries create
higher uncertainty and greater demands on managers for defining shared goals,
coordinating activities, managing relationships, and keeping people focused.
Employee loyalty can weaken and employees may feel concerned that they can be
replaced by contract services.

Discussion Question #10: Would you expect the structure of a company such as Facebook that
operates almost entirely online to differ from the structure of a bricks-and-mortar company such
as AT&T that uses the Internet for some things, such as customer service and business-to-
business transactions? Why or why not?

NOTES_______________________________________________________________________
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III. ORGANIZING FOR HORIZONTAL COORDINATION

A. The Need for Coordination Exhibit 10.10

1. As organizations grow and evolve, new positions and departments are added, and
senior managers have to find a way to tie all of these departments together.
Coordination refers to the task of collaborating across departments. It is required
whether there is a functional, divisional, or team structure.

2. Coordination problems are amplified in the global arena because units differ not only
by goals and work activities but by distance, time, culture, and language.
Coordination is the outcome of information and cooperation. Managers can design
systems and structures to promote horizontal coordination and collaboration.

B. Task Forces, Teams, and Project Management Exhibit 10.11

1. A task force is a temporary team or committee designed to solve a problem involving


several departments. Task force members represent their departments and share
information that enables coordination. Companies also set up cross-functional teams
for coordination which work with continuing rather than temporary problems that
might exist for several years.
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194  Chapter 10

2. A project manager is responsible for coordinating the activities of several


departments for the completion of a specific project. A distinctive feature of a project
manager is that the person is not a member of one of the departments being
coordinated. Project managers need excellent people skills. They use expertise and
persuasion to achieve coordination among various departments.

C. Relational Coordination

1. Relational coordination refers to frequent, timely, problem-solving communication


carried out through employee relationships of shared goals, knowledge, and mutual
respect.

2. It is not based on formal coordination roles or mechanisms.

Discussion Question #6: The Hay Group published a report that some managers have
personalities suited to horizontal relationships such as project management that achieve results
with little formal authority. Other managers are more suited to operating roles with much
formal authority in a vertical structure. What type of structure—functional, matrix, team, or
virtual network—do you believe your personality would best fit? Which structure would be the
most challenging for you? Give your reasons.

NOTES_______________________________________________________________________
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IV. FACTORS SHAPING STRUCTURE

A. Structure Follows Strategy Exhibit 10.12, Exhibit 10.13

1. Porter’s strategies of differentiation and cost leadership typically require different


structural approaches. A simplified continuum illustrates how structural approaches
are associated with strategic and environmental goals. The terms mechanistic and
organic refer to organizations where efficiency is the goal in a stable environment and
organizations where innovation is the goal in a rapidly-changing environment,
respectively.

2. The pure functional structure is appropriate for achieving internal efficiency goals,
but it does not enable the organization to be flexible or innovative. A horizontal team
structure is appropriate when the primary goal is innovation and flexibility. The firm
can differentiate itself and respond quickly to change.

3. Other forms of structure represent intermediate steps on the firm’s path to efficiency
or innovation. The functional structure with cross-functional teams and project teams
provides greater coordination and flexibility than the pure functional structure. The
divisional structure promotes differentiation because each division can focus on
specific products and customers.
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Designing Organization Structure  195

B. Structure Fits the Technology

Technology includes the knowledge, tools, techniques, and activities used to transform
organizational inputs into outputs.

1. Woodward’s Manufacturing Technology Exhibit 10.14

a. Small-batch and unit production. Small-batch production firms produce goods


in batches of one or a few products designed to customer specification. Examples
include custom clothing, special-order machine tools, space capsules, satellites,
and submarines.

b. Large-batch and mass production. Mass production technology is distinguished


by standardized production runs in which a large volume of products is produced
and all customers receive identical products. Examples include automobiles,
tobacco products, and textiles.

c. Continuous process production. In continuous process production, the entire


work flow is mechanized in a sophisticated and complex form of production
technology. The process runs continuously and therefore has no starting or
stopping. Examples include chemical plants, distilleries, petroleum refineries,
and nuclear power plants.

Discussion Question #9: The chapter suggested that structure should be designed to fit strategy.
Some theorists argue that strategy should be designed to fit the organization’s structure. With
which theory do you agree? Explain.

NOTES________________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

2. Service Technology

a. Service organizations include consulting companies, law firms, brokerage houses,


airlines, hotels, advertising companies, amusement parks, and educational
organizations. Service technology also characterizes departments such as legal,
human resources, finance, and market research in large corporations. Service
technology involves:

 Intangible output. Services are perishable and, unlike physical products,


cannot be stored in inventory.

 Direct contact with customers. Employees and customers interact directly to


provide and purchase the service. Production and consumption are
simultaneous. Service firm employees have direct contact with customers.

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196  Chapter 10

Discussion Question #7: Describe the primary differences between manufacturing and service
technology. How do these differences influence the type of structure that will be most effective?

NOTES_______________________________________________________________________
______________________________________________________________________________
______________________________________________________________________________

Answers to End-of-Chapter Discussion Questions

1. If you wanted to add a group of big data scientists to a large organization such as PepsiCo,
would you centralize the scientists in a central pool at headquarters or decentralize them to
separate divisions? Discuss your reasons.

I would decentralize the big data scientists to separate divisions. With decentralization,
decision authority is pushed down the chain of command to lower organization levels. The
trend is toward decentralization, which would use the big data scientists’ skills, relieves top
managers, allows the scientists to make decisions, and permits rapid response. Factors that
influence centralization versus decentralization include:
 Greater change and uncertainty in the environment are usually associated with
decentralization.
 The amount of centralization or decentralization should fit the firm’s strategy.

2, How does relational coordination differ from teams and task forces? Do you think relational
coordination seems more valuable for a service technology or a manufacturing technology?
Explain your answer.

Relational coordination refers to frequent, timely, problem-solving communication carried out


through employee relationships of shared goals, knowledge, and mutual respect.

Teams, which are the most widespread trend in departmentalization, consist of the vertical chain
of command as the powerful means of control; however, passing all decisions up the hierarchy
takes too long and keeps responsibility at the top. A task force is a temporary team or committee
designed to solve a problem involving several departments. Task force members represent their
departments and share information that enables coordination. Companies also set up cross-
functional teams for coordination which work with continuing rather than temporary problems
that might exist for several years.

As an organization grows and evolves, new positions and departments are added to meet the
changing needs, and it grows more complex performing incredibly diverse activities. This leads
to a need for coordination among these departments.

Relational coordination, which is the highest level of horizontal coordination, seems more
valuable for a service technology than for a manufacturing technology. Service technology
characterizes departments such as legal, human resources, finance, and market research in large
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Designing Organization Structure  197

corporations. Service technology involves intangible output—services are perishable and,


unlike physical products, cannot be stored in inventory; and direct contact with customers—
employees and customers interact directly to provide and purchase the service. And also,
production and consumption are simultaneous. Therefore, relational coordination would prove
to be more valuable in such an organization as it is not based on formal coordination roles or
mechanisms; rather it is part of the very fabric and culture of the organization. People can share
information freely across departmental boundaries, and interact on a continuous basis to share
knowledge and solve problems.

3. An organizational consultant was heard to say, “Some aspect of functional structure appears in
every organization.” Do you agree? Explain.

The consultant is probably correct. In all organizations, people who do similar jobs are grouped
together in functional departments. For example, functional departments exist in a divisional
structure, although they are smaller than if the organization had a functional structure. The
hybrid structure and the matrix structure also take advantage of functional departments. Thus, at
the lowest levels in all organizations, there are functional groupings. These functional
departments, however, may be grouped together into a divisional, matrix, hybrid, or functional
structure for the organization as a whole.

4. Some people argue that the matrix structure should be adopted only as a last resort
because the dual chains of command can create more problems than they solve. Discuss. Do you
agree or disagree? Why?

Many experts would agree that the matrix structure should be adopted only after other structures
have been tried. If the organization is in a functional structure and that doesn’t work, and then
reorganizes into a divisional structure and that doesn’t work either, a matrix structure may be
appropriate. The matrix structure requires extensive training to help people understand the dual
hierarchies, and it may take one or two years to complete the implementation. Often, after the
matrix structure has been implemented, it evolves back into either a functional or divisional
structure if one side of the matrix becomes more powerful than the other. Dual chains of
command create more problems than they solve if the matrix structure is not suited to the
situation. The situation must demand equality along the two lines of authority, the sharing of
functional resources across divisions, and a rapid response to a changing environment. Recent
thinking on organization structure suggests that the matrix is appropriate in only a few situations.
Most organizations can get by with other forms, such as a functional structure with lateral
relationships, to meet the needs for coordination.

5. What is the virtual network approach to structure? Is the use of authority and
responsibility different compared with other forms of departmentalization? Explain.

In the virtual network approach, the organization becomes a small central broker, electronically
connected to other organizations that perform vital functions. Each department is an independent
contracting service to the broker for a profit and can be located anywhere. The central broker, or
headquarters, has only contractual arrangements with the departments and, therefore, very little
authority. Total responsibility for the component of the product or service is given to each
department, and each has complete authority over its own operation. The major difference is that
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198  Chapter 10

the headquarters has very little control over the departments and cannot exercise authority over
them very well.

6. The Hay Group published a report that some managers have personalities suited to
horizontal relationships such as project management that achieve results with little formal
authority. Other managers are more suited to operating roles with much formal authority in a
vertical structure. What type of structure—functional, matrix, team, or virtual network—do you
believe your personality would best fit? Which structure would be the most challenging for you?
Give your reasons.

Students should demonstrate a clear understanding of the structures they select, and how those
structures work, as they explain why they would feel more comfortable or more challenged
operating within those structures. Students who seek more formal authority should be more
comfortable with a functional or matrix structure and more challenged by a team or virtual
network structure. Students who seek more flexibility and autonomy should be more
comfortable with a team or virtual network structure and more challenged by a functional or
matrix structure.

7. Describe the primary differences between manufacturing and service technology. How do
these differences influence the type of structure that will be most effective?

Joan Woodward described the following three types of manufacturing technology:


 Small-batch and unit production.
 Large-batch and mass production.
 Continuous process production.
The difference among these manufacturing technologies is technical complexity which is the
degree to which machinery is involved in the production to the exclusion of people. With a
complex technology, employees are hardly needed except to monitor the machines. Woodward
found that the relationship between the structure and technology was directly related to company
performance. Low-performing firms tend to deviate from the preferred structural form, often
adopting a structure appropriate for another type of technology.

Service organizations include consulting companies, law firms, brokerage houses, airlines,
hotels, advertising companies, amusement parks, and educational organizations. Service
technology also characterizes departments such as legal, human resources, finance, and market
research in large corporations. Service technology involves:
 Intangible output—services are perishable and, unlike physical products, cannot be stored in
inventory; and
 Direct contact with customers—employees and customers interact directly to provide and
purchase the service. Production and consumption are simultaneous.
One distinct feature of service technology that directly influences structure is the need for
employees to be close to customers.

8. Experts say that organizations are becoming increasingly decentralized, with authority,
decision-making responsibility, and accountability being pushed farther down into the
organization. How will this trend affect what will be asked of you as a new manager?

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Designing Organization Structure  199

The trend toward increased decentralization, with authority, decision-making responsibility, and
accountability being pushed farther down into the organization will require new managers to
have good delegating skills and very strong interpersonal skills. They must be able to work
effectively in a flexible environment in which they rely on subordinates to make a wide variety
of important decisions. New managers in such an environment must be able to work through
cooperation and influence rather than by telling others what to do.

9. The chapter suggested that structure should be designed to fit strategy. Some theorists argue
that strategy should be designed to fit the organization’s structure. With which theory do you
agree? Explain.

If the company is an already existing company, the argument for adapting strategy to structure is
stronger simply because the structure may be very difficult to change. It does not make much
sense for a local, bricks-and-mortar “mom and pop” store to have a multidomestic strategy; a
small company like that will not have the resources to pursue such a strategy. If the company is
new, the argument for adapting structure to strategy is stronger. The major point to understand is
that structure and strategy must be compatible, regardless of which comes first.

10. Would you expect the structure of a company such as Facebook that operates almost
entirely online to differ from the structure of a bricks-and-mortar company such as AT&T that
uses the Internet for some things, such as customer service and business-to-business
transactions? Why or why not?

Both companies are service organizations, but because AT&T provides Internet, television, and
telephone services to its customers, all of which require installation and/or repair work, it must
operate a “field” service component to meet these requirements. Facebook doesn’t need a field
operation. AT&T also operates bricks-and-mortar stores across the country to sell their services
and mobile phone products. The field service and stores components of AT&T’s structure not
only require the inclusion of entirely different categories of employees from Facebook, but also
involve the operation and maintenance of equipment and vehicles, which Facebook also does
not require. As a result, the structures of the two companies will be quite different.

Apply Your Skills: Experiential Exercise


Organic Versus Mechanistic Organization Structure

Students interview an employee at their university, such as a department head or secretary. The
employee will answer questions about his or her job and organizational conditions. Students will
then answer the same set of questions for a job that they have held.

A score of 52 or above suggests that a student or the other respondent is working in an organic
organization. The score reflects a loose, flexible structure that is often associated with uncertain
environments and small-batch or service technology. People working in this structure feel
empowered. Many organizations today are moving in the direction of flexible structures and
empowerment

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200  Chapter 10

A score of 26 or below suggests a mechanistic structure. This structure uses traditional control
and functional specialization, which often occurs in a certain environment, a stable organization,
and routine or mass-production technology. People in this structure may feel controlled and
constrained. Students can discuss the pros and cons of organic versus mechanistic structure.

Apply Your Skills: Small Group Breakout

Family Business

In this exercise, students assume the role of consultant to a family business and rank the priority
of departmental functions in order of importance for assigning additional resources to improve
business in the future. Students rank functions individually first, then discuss their individual
rankings in groups and develop a group ranking. Finally, they analyze what they learned about
organizational structure and design from the exercise.

Apply Your Skills: Ethical Dilemma

A Matter of Delegation

1. Prepare a memo to Golopolus, summarizing the new safety guidelines that affect the
Rockingham product line and requesting his authorization for implementation.

This course of action would probably have no effect. Golopolus is already aware of the
guidelines and hasn’t done anything about them yet.

2. Mind your own business. Golopolus hasn’t said anything about the new guidelines and you
don’t want to overstep your authority. You’ve been unemployed and need this job.

Tom Harrington is in a tough position. He feels loyalty to his boss, but he is also concerned
about product safety as well as the company’s reputation. This option would clearly be
unethical. Harrington is aware of the safety guidelines, which have been devised to ensure
the safety of children, so he cannot just “look the other way.”

3. Send copies of the reports anonymously to the operations manager, who is Golopolus’s boss.

The operations manager is ultimately responsible for whether Rockingham’s toys meet
federal guidelines and he or she needs to be aware of what those guidelines are. By sending
the reports to the operations manager anonymously, Harrington does not have to criticize his
boss or accuse him of wrong-doing; but he is making sure that higher-level managers are
aware of the new safety standards. Tom is right that he does not have the authority to
monitor the federal regulations, but the operations manager does have that authority.

Apply Your Skills: Case for Critical Analysis


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Designing Organization Structure  201

Abraham’s Grocery Store

1. Based on the information available in the case, sketch a picture of the original structure
within an Abraham’s store and the store managers’ relationship with district specialist
managers. What type of structure is this? Explain.

The original structure within the store was a functional structure which can be represented as
below:
PRESIDENT

Meat Grocery Produce


Department Department Department

District Meat District Store District Produce


Manager Supervisor Manger
Specialist Specialist

Store Meat Store/Grocery Produce


Department Department Department
Manager Manager Manager

Functional structure is the grouping of positions into departments based on similar skills,
expertise, work activities, and resource use. The major departments under the president are
groupings of similar expertise and resources, such as the meat, grocery, and produce
departments. Each of the functional departments is concerned with the organization as a
whole. This functional structure is a strong vertical design. Information flows up and down
the vertical hierarchy, and the chain of command converges at the top of the organization. It
does not enable the organization to be flexible or innovative and reflects barriers across the
departments.

2. Based on the information available in the case, sketch a picture of the consultant’s
recommended structure within the store and the relationship of store department managers
with district specialist managers. What type of structure is this? Explain.

The consultant’s recommended structure within the store is a divisional structure. Divisional
structure occurs when departments are grouped together based on similar organizational
outputs. In the divisional structure, divisions are created as self-contained units for producing
a single product. The new divisional structure recommended by the consultant within the

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202  Chapter 10

store and the relationship of store department managers with district specialist managers are
represented as below:

PRESIDENT

District Store Supervisor

Store Manager
District Meat District Produce
Specialist Specialist

Meat Department Grocery Department Produce Department


Manager Manager Manager

3. What are some of the advantages and disadvantages you see for the two types of structures?
Which structure do you think will work best for Abraham’s? Why?

Advantages of functional structure:


 Grouping employees by common task permits economies of scale and efficient resource
use.
 Functional structure enhances development of in-depth skills because people work on a
variety of related problems and are associated with other experts within the department.
 The convergence of the chain of command at the top offers a way to centralize decision
making and provide unified direction from top managers.

Disadvantages of functional structure:


 Barriers exist across departments.
 Communication and coordination are poor as people are separated into distinct
departments, causing a slow response to environmental change.
 Innovation and change require involvement of several departments.
 Decisions involving more than one department may pile up at the top of the organization
and be delayed..

Advantages of divisional structure:


 Organization will be more flexible and responsive to change.
 Coordination across functional departments is better because employees are grouped
together in a single location and committed to one product line

Disadvantages of divisional structure:


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Designing Organization Structure  203

 Poor coordination across division


 Duplication of resources and the high cost of running separate divisions
 Loss of efficiency and economies of scale
 Small size of departments within each division may result in a lack of technical
specialization, expertise, and training.

Divisional structure will work best for Abraham’s as it will ensure more coordination across
the departments and also be more flexible and responsive to change.

On the Job Video Case Answers

Honest Tea: Designing Organization Structure

1. What are some of Seth Goldman’s responsibilities as “TeaEO” of Honest Tea? Provide at
least three detailed examples.

Seth is in charge of sourcing the tea, managing the production of the tea, overseeing the
bottling of the tea, and managing the distribution of the tea.

2. How does Goldman’s experience as the founder of the company influence his ability to
delegate?

As the entrepreneur who started the company and developed it according to his vision, Seth
would have difficulty delegating tasks. He tried to solve the bottling of Honest Tea by
owning and managing the bottling company. This took him away from his mission of
developing low-sugar, healthy drinks. Ultimately, he sold the company and delegated the
bottling of his products to someone else. As the company has grown, Seth has realized that
delegating decision making to lower-level managers and employees can be
highly motivating and improve speed, flexibility, and creativity.

3. Referring to Woodward’s research on manufacturing technology and structure, how would


you categorize Honest Tea’s production? In what ways has this probably influenced the
company’s structure?

According to Woodward’s research on manufacturing technology and structure, Honest Teas


would be categorized as small-batch production. Small-batch production firms produce goods
in batches of one or a few products designed to specification. This technology also is used to
make large, one-of-a-kind products. Honest Teas started by producing three different lo-
calorie products and has now grown to produce thirty different products in batches. In small-
batch manufacturing, human beings are a large part of the process. Tea leaves are sourced in
developing nations and harvested by local agricultural workers. Then the tea drinks are
processed and bottled in the Maryland.

Small batch production companies to include Honest Teas have a structure than is organic,
low centralization, high verbal (horizontal) communication and low written (vertical)
communication as outlined in Exhibit 10. 14.
1. Which of the five approaches to structural design is used at Modern Shed, and how are the
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204  Chapter 10

company’s departments organized and coordinated?

Modern Shed uses the virtual network approach to departmentalization. The Seattle shed
builder has a core hub of just 12 to 14 employees (mostly designers and managers). These top
managers outsource most aspects of business operations to outside specialists. As discussed in
the video, Modern Shed’s marketing and sales activities are outsourced to independent
marketing consultants. The company’s manufacturing process involves close collaboration with
dozens of outside vendors who specialize in the creation and delivery of components used in
the sheds—everything from paneling and electric to hardware and transport. The contractors
coordinate through monthly conference calls, and they come together to build projects and
product lines planned by Modern Shed’s Seattle office.

2. What are the advantages and disadvantages of Modern Shed’s organizational structure?

The advantages of operating as a virtual network include fast response to market needs; access
to marketing, manufacturing, and sales personnel, without the overhead costs; and the capacity
to serve a rapidly changing niche market. Disadvantages of a virtual network include lack of
control over outside supply chain partners, high demands on managers in the company’s core
hub, and tenuous loyalty from independent contractors.

3. How did Ryan Smith determine whether his company needed a mechanistic structure with a
formal vertical hierarchy or an organic one involving free-flowing partnerships?

A firm’s organizational structure is determined largely by the company’s business strategy.


Modern Shed designs innovative and customizable studio dwellings for a rapidly changing
niche market. The company’s virtual network structure allows for greater innovation,
flexibility, and differentiation. Company size is another factor in Smith’s choice of
organizational design. Whereas large manufacturers have the equipment and personnel to
create and assemble products in house, Modern Shed is a small start up company with few
resources. The company’s small size and limited resources force owner Ryan Smith to
outsource many business processes.

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