Chapter 6 With Notes

Designing
Organizational
Structure:
Specialization and
Coordination
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall 6-1

 Explain why most organizations initially have a
functional structure and why, over time,
problems arise with this structure that require
a change to a more complex structure
 Distinguish among three kinds of divisional
structures (product, geographic, and market),
describe how a divisional structure works, and
explain why many organizations use this
structure to coordinate organizational activities
and increase their effectiveness
Copyright © 2013 Pearson Education, Inc. Publishing as Prentice Hall

6-2
 Discuss how the matrix and product team
structures differ, and why and when they
are chosen to coordinate organizational
activities
 Identify the unique properties of network
structures and the conditions under which
they are most likely to be selected as the
design of choice

6-3
 It is a design that groups people together on the
basis of their common expertise and experience
or because they use the same resources
 Functional structure is the bedrock of horizontal
differentiation
 An organization groups tasks into functions to
increase the effectiveness with which it achieves
its principal goal of providing customers with
high-quality products at competitive prices


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 Provides people with the opportunity to learn
from one another and become more specialized
and productive.
(the division of labor, a major source of increased
effectiveness)
 People who are grouped together by common
skills can supervise one another and control
each other’s behavior
 People develop norms and values that allow
them to become more effective at what they do
leading to commitment organizational values.

6-7
1. Communication problems
2. Measurement problems
3. Location problems
4. Customer problems
5. Strategic problems

6-8
As more organizational functions develop, each
with its own hierarchy, they become
increasingly distant from one another.
They develop different subunit orientations

and differences in perception that create
communication problems and reduce
coordination and mutual adjustment.

2-9
As organizations grow and the number and
complexity of their functions and products
increase, the information needed to measure the
contribution of any one function or product to
overall profitability is often difficult to obtain.
The cost of each function’s contribution to the
development of each product becomes
increasingly difficult to measure and without this
measure, exercising control becomes difficult.

2-10
As a company grows, it may need to set up
shop and establish manufacturing or sales
facilities in different geographic regions to
serve customers better.
Geographic spread can pose a control problem
within a functional structure when centralized
control from one geographic location prevents
manufacturing, sales, and other support
activities to become responsive to the needs of
each region that the company has expanded to

2-11
As the range and quality of an organization’s
products increase, more and more customers
are attracted to the organization and they have
different kinds of needs.
Servicing the needs of new kinds of customer
groups and tailoring products to their tastes
are relatively difficult in a functional structure
and lack of judgment in this regard may lead to
lost sales opportunities.

2-12
As an organization becomes more complex,
top managers may be forced to spend so much
time finding solutions to everyday coordination
problems that they have no time to address the
longer-term strategic problems facing the
company.
This may lead to the organization losing
direction.

2-13
 Managers can solve control problems by
redesigning the functional structure to
increase integration between functions
 Instead of having separate functions with
their own hierarchies, many organizations
have recognized the need to alter this design
and have combined those activities into one
function

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 Functional structure is appropriate if the
organization:
 Limits itself to producing a small number of
similar products
 Produces those products in one or a few locations
 Sells them to only one general type of client or
customer
 When production expands to more products at
more locations and to several types of customers, a
company requires a complex structure.

6-11
A new structure is needed that will
 Increase manager’s control of individual subunits
 Integrate the operation of the whole company and
ensure subunits are meeting organizational goals
While adopting a more complex structure, managers
focus on three design choices and the move to a
complex structure normally involves changes in all
three characteristics.

6-12
This more complex structure is based on:
increasing vertical differentiation by increasing
the levels in the hierarchy, centralizing decision
making, and increasing control with rules.
increasing horizontal differentiation, product
teams, or divisions to overlay a functional
grouping.
increasing integration, using integrating
mechanisms, such as task forces and teams, to
improve coordination between subunits and
motivation

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 The structure that organizations most commonly
adopt to solve the control problems that result
from producing many different kinds of products in
many different locations for many different types of
customers is the divisional structure
 Divisional structure: A structure in which functions
are grouped together according to the specific
demands of products, markets, or customers
 The goal behind the change to a divisional
structure is to create smaller, more manageable
subunits within an organization.

6-16
 The type of divisional structure managers select
depends on the specific control problems.
If the control problem is due to the number and
complexity of products, the organization divides
its activities by product and uses a product
structure
 Product structure: A divisional structure in which
products (goods or services) are grouped into
separate divisions according to their similarities or
differences to increase control
 Organizations need to decide how to coordinate
its product activities with support functions
6-17
 If the control problem is due to the number
of locations in which the organization
produces and sells its products, the
organization divides its activities by region
and uses a geographic structure
 If the control problem is due to the need to
service a large number of different customer
groups, the organization divides its activities
by customer group and uses a market
structure.

2-23
An organization whose products are broadly similar
and aimed at the same market will choose to centralize
support services and use a product division structure.
An organization whose products are very different and

that operates in several different markets or industries
will choose a multidivisional structure.
An organization whose products are very complex

technologically or whose characteristics change rapidly
to suit changing customer needs will choose a product
team structure.

2-24
 A product division structure is characterized by
the splitting of the manufacturing function into
several different product lines or divisions; a
centralized set of support functions then services
the needs of all these product divisions
each product division uses the services of the
central support function.
each support function is divided into product-
oriented teams of functional specialists who
focus on the needs of one particular product
division

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 A multidivisional structure is a structure in
which each product division is given its own
set of support functions so they become self-
contained divisions.
 This structure has two innovative advances over the
product division structure:
1. independence of each division
2. corporate headquarters staff.

6-21
 For divisions to be self-contained, each
division has its own set of support functions
and controls its own value-creation activities.
because it is impossible for one centralized set

of support functions to service the needs of
totally different products leading to greater
horizontal differentiation.

2-29
 composed of corporate managers who are
responsible for overseeing the activities of the
divisional managers heading up the different
divisions.
 The corporate headquarters staff is functionally
organized, and one of the tasks of corporate
managers is to coordinate the activities of the
divisions.
 This layer in the hierarchy plays an integrating role
and increases vertical differentiation.

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1. Increased Organizational Effectiveness:
In a multidivisional structure there is a clear
division of labor between corporate and divisional
managers with divisional managers being
responsible for the day-to-day operations of their
respective divisions and corporate managers being
responsible for long-term planning for the
corporation as a whole. This leads to greater
organizational effectiveness.

6-23
2. Increased Control: The extra control provided by
the corporate office encourages the stronger pursuit
of internal organizational efficiency by divisional
managers. The divisional managers being accountable to the
corporate managers may curb their inclination to increase the
size of their personal staff and help rein in costs.
3. Profitable Growth: When individual profitability can
be clearly evaluated, then corporate headquarters
can identify the divisions in which an investment of
capital will yield the highest returns and this will
enable them to make better capital resource
allocation decisions to promote corporate growth

2-33
4. Internal Labor Market:
The most able divisional managers are
promoted to become corporate managers.
Thus divisional managers always have an
incentive to perform well because superior
performance results in promotion to high
office.

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6-24
1. Managing the Corporate–Divisional Relationship:
The central management problem posed by a multidivisional
structure is how much authority to centralize at the corporate
level and how much authority to decentralize to the operating
divisions, and the organization has to strive to maintain this
balance at all times.
2. Coordination Problems between Divisions: divisions
may begin to compete for resources, and rivalry between
them may prevent them from cooperating. Such rivalry
can lower organizational performance when a company’s
effectiveness depends on the divisions’ sharing of
knowledge and information about innovations to enhance
the performance of all divisions.

6-25
3.Transfer Pricing: Problems between divisions often
revolve around the transfer price—the price at which one
division sells a product or information about innovations
to another division. To maximize its own return on
investment, one division will want a high transfer price,
but that will penalize the other division, which is, after all,
part of the same organization.
4.Communication Problems: Communication problems,
such as distortion of information, are common in tall
hierarchies and these problems are rampant in
multidivisional structures because they tend to be the
tallest of all organizational structures and the gap
between the corporate center and the divisions is
especially large.
6-25
5.Bureaucratic Costs: Multidivisional structures are
very expensive to operate as each division has a full
complement of support functions, including R&D.
Thus there is extensive duplication of activities
within the organization—plus there are the costs of
corporate headquarters managers and these costs
must be continually evaluated against the benefits
the company obtains from this structure.

6-25
A product team structure is a cross between the product
division structure and the multidivisional structure.
It is a divisional structure in which specialists from the
support functions are combined into product
development teams that specialize in the needs of a
particular kind of product.
Each team is a self-contained division headed by a
product team manager who supervises the operational
activities associated with developing and manufacturing a
product.

6-26
 The product teams focus on the needs of one
product (or client) or a few related products, and
are ideally committed to their product team
 This structure is more decentralized than product

division structures; it allows for greater integration
and collaboration and is the second most common
method organizations use to group activities, after
grouping them by function.

2-40
6-27
 A divisional structure in which divisions are
organized according to the requirements of
the different locations in which an
organization operates
 Allows the organization to adjust its
structure to align its core competences with
the needs of customers in different
geographic regions
 Allows some functions to be centralized and
others decentralized

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 A market structure aligns functional skills and
activities with the product needs of different
customer groups
 Marketing, not manufacturing, determines how
managers decide how to group organizational
activities into divisions
 Each customer division has a different marketing
focus, and the job of each division is to develop
products to suit the needs of its specific customers
 Each customer group makes use of centralized
support function

6-30
 As the market structure focuses the activities
of the whole organization on the needs of the
customer, the organization can quickly sense
changes in its market and transfer skills and
resources to satisfy the changing needs of
this vital stakeholder group

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 Managers must be sensitive to the need to change
a functional structure to improve the control of
organizational activities.
 They must consider using the appropriate form of
divisional structures based on the specific control
problems they experience.
 Finally, they must objectively evaluate the costs and
benefits associated with moving to a new
organizational structure to estimate its worth in
terms of organizational effectiveness

2-47
 Matrix structure: People and resources are
grouped in two ways simultaneously:
 By function
 By project or product
Vertical flow of functional responsibility
Horizontal flow of product responsibility
The organization is very flat with minimal
hierarchal levels within each function and
decentralized authority

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 The team is the basic building block of the
matrix structure and the principal mechanism
for coordination and integration.
 The matrix relies on minimal vertical control
from the formal hierarchy and maximal
horizontal control from the use of integrating
mechanisms-teams-which promote mutual
adjustment.( responsibility forces team
members to cooperate to get the job done)
 Matrix structures are principal form of
organic structures.
2-50
First: Team members in the product team structure
have only one boss:the product team manager.
Team members in the matrix structure have two
bosses the product manager and the functional
manager.(they must juggle the conflicting demands
of the function and the product)
Second: in the matrix structure team membership is
not fixed. team members move from team to team,
to where their skills are most needed.

2-51
6-33
1.The use of cross-functional teams reduces
functional barriers and subunit orientation
This makes the organization more flexible and able to respond
quickly to changing product and customer needs.
2.Opens up communication between functional
specialists and facilitate technological progress.
3.The matrix enables an organization to maximize
its use of skilled professionals, who move from
product to product as needed
4.The dual functional and product focus promotes
concern for both cost and quality

6-34
 Matrix lacks a control structure that leads
employees to develop stable expectations of one
another. It may create role conflict.
 The lack of a clearly defined hierarchy of authority
can lead to conflict between functions and product
teams over the use of resources
 People are likely to experience a vacuum of
authority and responsibility (informal leaders
emerge within teams)

6-35
 Matrix structures are not designed to be used
in everyday organizational situations.
 They are mainly appropriate when a high level
of coordination between functional specialists
is needed because an organization must
respond quickly to a changing environment.
 Companies may choose to overlay functional
structure or a product division structure with
product teams.

2-55
 A matrix structure created at the top of an
organization with a multidivisional structure.
 provides for more integration between corporate
and divisional managers and between divisional
managers
 Makes it easier for top executives from divisions
and corporate headquarters to cooperate and
jointly coordinate organizational activities
 Used in large international companies that operate
globally.

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 It is the structure of a large complex organizations
that has many divisions and simultaneously uses
many different types of organizational structure.
 Each product division’s manager selects the
structure (functional, product, geographic) that
best meets the needs of their particular
environment and strategy and allows
responsiveness to customers’ needs

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 A cluster of different organizations whose
actions are coordinated by contracts and
agreements rather than through a formal
hierarchy of authority.
 Very complex as companies form
agreements with a whole range of suppliers,
manufacturers, and distributors to
outsource many of the value creation
services needed to produce and market
goods and services.

6-40
1.Production costs are reduced if the organization
can find a network partner that can perform a
specific functional activity reliably and at a lower
cost.
2.Avoids the high bureaucratic costs of operating a
complex organizational structure
3.Allows an organization to act in an organic way
4.If network partners fail to perform, they can be
easily replaced
5.Organizations gain access to low-cost overseas
sources of inputs and functional expertise.

6-41
 A considerable level of mutual adjustment
is needed to allow the groups to interact so
that they can learn from one another and
constantly improve the product
 Ability to control a complex value- creation
process is difficult because managers lack
the means to effectively coordinate and
motivate the various network partners

6-42
 Boundaryless organization: composed of people
who are linked by computers, faxes, CAD systems,
and video conferencing.
 Independent functional experts who form an
alliance with an organization, fulfill their
contractual obligations, and then move on to the
next project.
 The use of outsourcing and the development of
network organization are increasing rapidly as
organizations recognize the many opportunities
they offer to reduce costs and increase flexibility

6-43
 It is the trade that takes place between companies,
and between companies and individual customers,
using IT and the Internet
 Business-to-business (B2B): trade that takes place
between companies that links and coordinates the
value chains of different companies
 B2B marketplace - Industry-specific trading
network connecting buyers and sellers

6-44
 Business-to-customer (B2C): Trade that
takes place between a company and its
network of individual customers using IT
and the Internet

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photocopying, recording, or otherwise, without the prior written permission of the
publisher. Printed in the United States of America.
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Designing

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They develop different subunit orientations

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An organization whose products are very different and

An organization whose products are very complex

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because it is impossible for one centralized set

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 This structure is more decentralized than product

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