Designing Organizational Structure

Designing organizational structure

Designing organizational structure
 Aim: to find designs that are efficient and yet flexible
Organizing—arranging and structuring work to accomplish organizational goals
Organizational design—the process of developing or changing an organization’s structure
Organizational structure—the formal arrangement of jobs within an organization
Organizational chart—the visual representation of an organization’s structure
 Management writers, such as
 Henri Fayol and Max Weber, offered structural principles for managers to follow
 Rules and regulations
 Impersonality
 Division of work
 Unity of command
 Unity of direction
Purpose of organizing
 Divide work to be done into specific jobs and departments
 Assign tasks and responsibilities associated with individual jobs
 Establish relationships among individuals, groups, and departments
 Establish formal lines of authority
 Allocate and deploy organizational resources
Six key elements of organizational design
 When managers create or change the structure of an organization, they’re engaged in
organizational design
 The process involves decision about six key elements
1. Work specialization (division of labor): degree to which activities are subdivided into
separate job tasks
 Some tasks require highly developed skills
 Others are done by employees with lower skill levels
 Why do we need division of labor?
 If all workers were engaged in all the steps of a job they would be working below
their skills levels and all workers would be paid at highly skilled rates to do easy
tasks (inefficient use of resources)
 E.g., you rarely find a cardiac surgeon closing up a patient after surgery;
Doctors in residence usually stitch and staple the patient after the surgeon
has finished the surgery
 In early days, because specialization was not widely practiced, its introduction
generated higher productivity
 At some point, the human diseconomies exceed the economic advantage due to:
boredom; fatigue; stress; low productivity; poor quality; increased absenteeism; high
turnover

 Today’s view
 Most managers today see work specialization as an important organizing
mechanism but not as a source of ever-increasing productivity
 They recognize economies it provides but also recognize the problems it creates
when carried to the extreme including: job dissatisfaction, poor mental health,
and a low sense of accomplishment
 Many organizations specialize:
McDonald’s: saving money and time (efficiency)
Hockey Teams: no hockey team has one player both goalie and center position)
 Other organizations, have increased job breadth:
Bolton, Ontario-based Husky Injection Molding Systems and Ford Australia
2. Departmentalization
 Once job tasks have been divided up, common job tasks have to be grouped back
together so that they can be done in a coordinated way
 Departmentalization: the basis on which jobs are grouped together is called
departmentalization
 Five common forms of departmentalization are used, although an organization may
develop its own unique classification
 Functional: grouping jobs by functions performed

 Product: grouping jobs by product line

 Geographical: grouping jobs on the basis of territory or geography

 Process departmentalization: grouping jobs on the basis of product or customer

flow

 Customer departmentalization: grouping jobs on the basis of common customers

 Today’s view
 Most large organizations continue to use combinations of types of
departmentalization
 Black & Decker:
 Its divisions along functional lines
 Its manufacturing units around processes
 Its sales around geographic regions
 Its sales regions around customer groupings
 One popular departmentalization—customer departmentalization
 Because getting and keeping customers is essential for success
 Another popular trend is the use of teams
 Complex tasks require diverse skills
 Cross-functional teams—work teams made up of individuals who are experts
in various functional specialties
3. Chain of command
 The continuous line of authority that extends from the top of the organization to the
lowest level and clarifies who reports to whom
 Helps employees with equations such as:
 ‘Who do I report to?’
 ‘Who do I go to if I have a problem?’
 Three concepts related to chain of command: authority, responsibility, unity of
command
Authority: the rights inherent in a managerial position to tell people what to do and to
expect them to do it
 Position theory—authority is related to one’s position within an organization
 Belief that it has nothing to do with the personal characteristics of an
individual manager
 Acceptance theory—(Chester Barnard) authority comes not from the rights of the
manager but from the willingness of subordinates to accept the authority
Subordinates will accept orders only if the following conditions are satisfied:
 The understand the order
 They feel the order is consistent with the organization’s purpose
 The order does not conflict with their personal beliefs
 They are able to perform the task as directed
 Early management writers also distinguished between
 Line authority—authority that entitles a manager to direct the work of an
employee
 Line functions—directly related to the main goals of the organization
 E.g., manufacturing company, manufacturing & sales departments
 Staff authority—positions with some authority that have been created to
support, assist, and advise those holding line authority
E.g., finance & HR in a manufacturing company
 When managers use their authority to assign tasks, employees take on an
obligation to perform those assigned duties
 Responsibility—the obligation or expectation to perform any assigned duties
Once given responsibility, employees are accountable for their performance
 Accountable—required or expected to justify actions or decisions
 Assigning work authority without responsibility and accountability can create
opportunities for abuse
 No one should be held responsible or accountable for tasks that he or she has no
authority to complete
Unity of command—the management principle that each person should report to only
one manager
 Without unity of command, conflicting demands from multiple bosses may create
problems
 Chain of command—today’s view
 Early management theorists believed that: chain of command, authority,
responsibility, and unity of command were essential
 Times have changed. Those elements are far less important today
 E.g., Michelin Canada—chain of command replaced with ‘birdhouse
meetings', employees meet for five minutes at regular intervals
 Instead of being bosses shop managers are enablers
 Information technology also has made such concepts less relevant today.
Employees have easy access to information
 Many employees, find themselves reporting to more than one boss, thus violating
the unity of command principle
 Such arrangements work if: communication, conflict, and other issues are
managed well by all involved parties
4. Span of control
 How many employees can a manager manage effectively and efficiently?
 Span of control—the number of employees a manager can efficiently and effectively
manage
 It determines the number of levels and managers
 The wider the span of control, the more efficient the organization
 Today’s view
 There is no magic span of control number. Many factors influence SOC
 Skills and abilities of the managers
 Skills and abilities of the employees
 Characteristics of the work being done
 The trend has been toward larger spans of control consistent with managers’
efforts to:
 Speed up decision making
  Increase flexibility
 Get closer to customers
 Empower employees
 Reduce costs
 PepsiCo’s Gamesa Cookie Plant in Mexico, 56 employees now report to each
manager
5. Centralization/decentralization
 When organizing, at what organizational level do you want decisions to be made?
 Centralization—the degree to which decision making takes place at upper levels of the
organization
 Decentralization—he degree to which lower-level employees provide input
(consultation) or actually make decisions
 Centralization/Decentralization are not an either-or concepts
An organization is never completely centralized or decentralized
 In traditional organizations, centralized decisions were the most prominent
 Organizations today have become more complex and responsive to dynamic changes in
their environments
 Factors that affect centralization/decentralization
More centralization
 Environment is stable
 Lower-level managers are not as capable or experienced at making decisions as
upper-level managers
 Lower-level managers do not what to a say in decisions
 Decisions are relatively minor
 Organization is facing a crisis or the risk of company failure
 Company is large
 Effective implementation of company strategies depends on managers retaining
say over what happens
More decentralization
 Environment is complex, uncertain
 Lower-level managers are capable and experienced at making decisions
 Lower-level managers want a voice in decisions
 Decisions are significant
 Corporate culture is open to allowing managers a say in what happens
 Company is geographically dispersed
 Effective implementation of company strategies depends on managers having
involvement and flexibility to make decisions
 Today’s view
 As organizations become more flexible and responsive, there is a distinct trend
toward decentralizing decision making
 This trend, also known as employee empowerment, gives employees more
authority (power) to make decisions
 Employee empowerment—giving employees more authority (power) to make
decisions
 6. Formalization
 The degree to which jobs within the organization are standardized and the extent to
which employee behavior is guided by rules and procedures
 In highly formalized organizations employees have little discretion over:
 What’s done
 When it’s done
 How it’s done
 Today’s view
 Some degree of formalization is necessary for consistency and control
 Many organizations seem to be less reliant on strict rules and standardization to
guide and regulate employee behavior
Mechanistic and organic structures
How do managers decide what organizational design to use?
 It depends upon certain contingency factors
 We look at two generic models and the contingency factors that favor each
 Mechanistic organization—an organization design that is rigid and tightly controlled
McDonald’s
 High specialization
 Rigid departmentalization
 Clear chain of command
 Narrow spans of control
 Centralization
 High formalization
 Organic organization—an organizational design that is highly adaptive and flexible
Wikipedia (organic & mechanistic)
 Cross-functional teams
 Cross-hierarchical teams
 Free flow of information
 Wide spans of control
 Decentralization
 Low formalization
Contingency factors affecting structural choice
Strategy and structure
 An organization’s structure should facilitate goal achievement
 Alfred Chandler initially researched this relationship
 He studies several large U.S. companies and concluded that changes in corporate strategy
led to changes in corporate strategy led to changes in an organization’s structure that
support the strategy
 Certain structural designs work best with different organizational strategies
 Organic structure works well when an organization is pursing meaningful and unique
innovations (flexible and free-flowing information)
 The mechanistic organization works best for companies that want to tightly control
costs (efficiency, stability, and tight controls)
Size and structure
 Organization’s size significantly affects its structure
 Large organizations tend to have more:
 Specialization
 Departmentalization
 Centralization
 Rules and regulations than do small organizations
Technology and structure
 Every organization uses some form of technology to convert its inputs into outputs
 Unit production—the production of items in units or small batches
 Mass production—the production of items in large batches
 Process production—the production of items in continuous process
 The more routine the technology, the more mechanistic the structure can be
 Organizations with more non-routine technology are more likely to have organic
structures
 E.g., custom furniture building or online education
Environmental uncertainty and structure
 Some organizations face relatively stable and simple environments; others face dynamic and
complex environments
 The greater the uncertainty—flexibility offered by an organic structure
 Stable, simple environments—mechanistic structures tend to be most effective
Todays’ view
 Many managers are restructuring their organizations to be lean, fast, and flexible
 World-wide economic downturns
 Global competition
 Accelerated product innovation by competitors
 Increased demands from customers for high quality
 Faster deliveries are dynamic environmental forces
 We are seeing organizations become more organic
 Mechanistic organizations are not equipped to respond to rapid environmental change and
environmental uncertainty
Traditional organizational designs
Simple, functional & divisional
 Simple structure—organizational structure with low departmentalization, wide spans of
control, authority centralized in a single person, and little formalization
 Functional structure—an organizational structure that groups similar or related occupational
specialties together
 Divisional structure—an organizational structure that consists of separate business units or
divisions
Contemporary organizational designs
Team structures matrix and project structures boundary-less organizations learning organizations
 Traditional designs often aren’t appropriate for today’s increasingly dynamic and complex
environment
 Organizations need to be lean, flexible, and innovative; they need to be more organic
 Managers are finding creative ways to structure and organize work—contemporary designs:
  Team structures
 Matrix and project structures
 Boundary-less organizations
 Learning organizations
 Team structure
 What it is: a structure in which the entire organization is made up of work groups or
teams
 Advantages: employees are more involved and empowered; reduced barriers among
functional areas
 Disadvantages: no clear chain of command; pressure on teams to perform
 Matrix-project structure
 What it is: in a matrix structure, specialists from different functional areas are assigned
to work on projects and then return to their areas when the project is completed. In a
project structure, employees continuously work on projects. As one project is
completed, employees move on to the next project
 Advantages: fluid and flexible design that can respond to environmental changes.
Faster design making
 Disadvantages: complexity of assigning people to projects. Task and personality
conflicts

Boundary-less organization
 Boundary-less organization—an organization whose design is not defined by, or limited to,
the horizontal, vertical, or external boundaries imposed by a predefined structure
 Virtual organization—an organization that consists of a small core of full-time
employees and outside specialists temporarily hired as needed to work on projects
 Network organization—an organization that uses its own employees to do some work
activities and networks of outside suppliers to provide other needed product
components or work processes
 What it is: a structure not defined by or limited to artificial horizontal, vertical, or
external boundaries; includes virtual and network types of organizations
 Advantages: highly flexible and responsive; utilizes talent wherever it is found
 Disadvantages: lack of control; communication difficulties
Learning organizations
 Learning organizations—an organization that has developed the capacity to continuously
learn, adapt, and change
 What it is: a structure in which employees continually acquire and share new
 knowledge and apply that knowledge
 Advantages: sharing of knowledge throughout organization; sustainable source of
competitive advantage
 Disadvantages: reluctance on part of employees to share knowledge for fear of losing
their power; large numbers of experienced employees on the verge of retiring