1. Chapter 17 Organizational Design
Chapter 17: Organizational Design: Contingency and Configuration Views
24 April 1997
Chapter 17 Organizational Design 1

2. Learning Goals
Describe how organizational design coordinates activities in an organization and gets information to decision makers
Discuss the contingency factors of organizational design
Distinguish between the organizational design effects of strategy, external environment, technical process, and size

3. Learning Goals (Cont.)
Describe the design features of functional, divisional, hybrid, and matrix organization forms
Explain the characteristics of several forms of organizations that are likely to evolve in the future

4. Chapter Overview Introduction
The Contingency Factors of Organizational Design
Forms of Organizational Design
International Aspects of Organizational Design
Ethical Issues in Organizational Design

5. Introduction
Organizational design refers to the way managers structure their organization to reach the organization’s goals
Structural elements include
Allocation of duties, tasks, and responsibilities between departments and individuals
Reporting relationships
Number of levels

6. Introduction (Cont.)
Organizational charts show the formal design or structure. See text book Figure 17.1
An incomplete picture because of informal arrangements and underlying behavioral processes
Two basic goals of organizational design
Get information to decision makers
Coordinate the interdependent parts of an organization

7. The Contingency Factors of Organizational Design
Overview
External environment: Includes the organization’s competitors, customers, suppliers, government, . . .
Strategy: The plan for reaching the goals of the organization
Open systems character of organizations tightly couples these two factors

8. The Contingency Factors of Organizational Design (Cont.)
Overview (cont.)
Technical process: The system an organization uses to produce its products or services
Size: The number of organization members

9. The Contingency Factors of Organizational Design (Cont.)
Major tools for implementation Technical process Forms of organizational design
Mission Achieve organization goals
External environment
Strategy
Relationships Among the Contingency Factors
Roles of organizational culture and size.

10. Strategy
An organization’s strategy describes long-term goals and way of reaching the goals
Describes resource allocation
Plays a mediating role between the external environment and the tools of organizational design
Note the two headed arrows in the drawings
Example: Product innovation response

11. Strategy (Cont.) Strategy’s mediating role in organizational design
“Structure follows strategy”
“Strategy follows structure”
In both views, the design of the organization is a major tool for carrying out the strategy

12. Choice of an organizational form
Strategy (Cont.)
Strategy’s mediating role in organizational design (cont.)
“Structure follows strategy”
Choice of an organizational form
Reach strategic goals

13. Strategy (Cont.)
Strategy’s mediating role in organizational design (cont.)
“Strategy follows structure”
Organizational design is an environment within which managers form strategy.
Prevents developing an effective strategy
Develop effective strategy

14. External Environment
Managers assess the uncertainty in the external environment when considering design decisions
Can design the organization to increase information about the environment
Or make the organization more flexible in its response to the environment
Information plays a key role because it can reduce risk in a manager's predictions about the future

15. External Environment (Cont.)
Two elements of environmental uncertainty
Complexity of the external environment. Ranges from simple to complex
Simple environment has a few similar elements
Complex environment has many different elements

16. External Environment (Cont.)
Static to dynamic external environment
Static external environment is unchanging or slowly changing
Dynamic external environment is filled with quickly moving events that could conflict with each other
Degree of change creates uncertainty in predicting future states of the environment

17. External Environment (Cont.)
Four possible states of the external environment
Simple-static: lowest uncertainty
Complex-dynamic: highest uncertainty
Simple-dynamic and complex-static environments are about midway between the other two
Example: Internet commerce has created a complex-dynamic environment for much of the retail industry

18. Technical Process Conversion of inputs to outputs
Manufacturing, service, or mental processes
Affects peoples’ behavior in many ways
Work pace
Worker control
Degree of routine
Predictability
Interdependence within the process
Various types of technical processes exist

19. Organization Size As size increases, organizations have
More formal written rules and procedures
More management levels, unless managers decentralize
More complex organizational forms
Higher coordination requirements because of complexity
Size and technical process: more strongly associated with organizational design in small organizations than in large organizations

20. Forms of Organizational Design
Three major forms: functional, divisional, and matrix
Combine functional and divisional designs to get a hybrid design
Several variations of the divisional design
Several evolving forms of organizational design

21. Organizational Design by Function
Groups tasks of the organization according to the activities they perform
Typically configured into departments such as manufacturing, engineering, accounting, marketing, . . .
Functional configurations can vary from one organization to another depending on tasks and goals

22. Organizational Design by Function (Cont.)
Strategy: Focused on a few products or services in well defined markets with few competitors
External environment: stable, simple, little uncertainty
Technical process: Routine with little interdependence with other parts of the organization
Size: Small to medium

23. Organizational Design by Function (Cont.)
See Figure 17.1 in the text book for an example
Each major functional area helps align the company with each sector
Marketing, for example, focuses on customers. It does not manufacture products. That is the job of the manufacturing function

24. Organizational Design by Function (Cont.)
Line and staff
Line does the major operating tasks
Staff gives support and serve in advisory roles. Emphasizes technical skills within each function
Individuals work with others who share common backgrounds and views
Homogeneity can lead to narrow views of the function’s contribution to the organization

25. Organizational Design by Function (Cont.)
Strengths
Specialization
Brings specialists together
Collegial relationships develop among specialists
Encourages development of specialized skills and information sharing
Clear career paths for specialists

26. Organizational Design by Function (Cont.)
Weaknesses
Does not help managers respond quickly to external changes
Emphasis on specialization promotes a tunnel-vision view of the goal of the function
Functional design can produce a set of widely accepted behaviors and perceptions with the organization

27. Organizational Design by Division
Uses decentralization
Divisions formed around products, services, locations, customers, programs, or technical process
Often evolves from a functional design
As the external environment changes, managers may need to diversify its activities to stay competitive
A common management reaction to large organization size

28. Organizational Design by Division (Cont.)
Strategy: Focused on different products, services, customers, or operating locations
External environment: Complex, fast changing, with moderate to high uncertainty
Technical process: Nonroutine and interdependent with others parts of the organization
Size: large

29. Organizational Design by Division (Cont.)
Emphasizes decision-making autonomy throughout the organization
Has high interpersonal skill demands because of extensive contacts with people throughout the organization
Rewards behavior that goes toward the goal of decentralization: product, customer, service, or location

30. Organizational Design by Division (Cont.)
Strengths
Easily adapts to differences in products, services, clients, location, and the like
For example, products and differ in how manufactured and marketed
Products, services, and customers are highly visible
Often appear in division names

31. Organizational Design by Division (Cont.)
Weaknesses
Loses economies of scale because many functions such as accounting are duplicated within the divisions
Technical specialization is more diffuse compared to a functional design
Hard to get uniform application of policies and procedures across divisions

32. Hybrid Organizational Design
Hybrid design uses both functions and divisions
Managers use a hybrid design to get the benefits and reduce the weaknesses of the two configurations
The divisions decentralize some functions, and the headquarters location centralizes others
Centralized functions often are the costly ones

33. Hybrid Organizational Design (Cont.)
People in different parts of the organization fulfill different requirements
Functional areas reward technical expertise
Functional specialists often support the divisions
Divisions do the primary work of the organization

34. Hybrid Organizational Design (Cont.)
Strategy: Focused on many products or services
External environment: Fast changing, moderate to high uncertainty, complex
Technical process: Both routine and nonroutine; high interdependence with functions and divisions
Size: Large

35. Hybrid Organizational Design (Cont.)
Strengths
Focuses on products, services, and customers
Adapts well to complex environments
Economies of scale: expensive shared resources are centralized and support all divisions

36. Hybrid Organizational Design (Cont.)
Weaknesses
Focus on division goals can lose total organization view
Non-uniform application of organizational policies
Potential for high administrative overhead if staff expands without control
Potential conflict between division managers and corporate headquarters. Managers want autonomy; headquarters wants control

37. Matrix Organizational Design
Used when two sectors of the external environment demand management attention
Typically responding to the customer and technical parts of the environment
Customers have special needs
Technology changes fast
Emerged during the 1950s within the U.S. aerospace industry

38. Matrix Organizational Design (Cont.)
Rejects the unity of command principal described in Chapter 1 of the text book
Uses multiple authority structures, so that many people report to two managers
People from different functional areas work on various projects

39. Matrix Organizational Design (Cont.)
Each person has at least two supervisors or managers. One supervisor is in the functional area and the other is in a project
Mixture of people from the functional areas varies according the project needs
Multiple reporting relationships are a basic feature of matrix organizations
See text book Figure 17.3 for a simplified matrix organizational design.

40. Matrix Organizational Design (Cont.)
Conditions under which an organization may choose a matrix design
Pressures from the external environment for a dual focus
High uncertainty within the multiple sectors of the external environment
Constraints on human and physical resources

41. Matrix Organizational Design (Cont.)
High conflict potential because of multiple authority relationships
Managers need well-developed conflict management skills
Demand high levels of coordination, cooperation, and communication
Requires high levels of interpersonal skill

42. Matrix Organizational Design (Cont.)
Different matrix uses and forms
Within specific functional areas such as marketing. Managers responsible for a brand or group of brands bring all marketing skills together to focus on the products
Temporary forms for specific projects
Permanent forms for the organization’s on-going work

43. Matrix Organizational Design (Cont.)
Strengths
Responsive, flexible, efficient use of costly resources
Potentially high levels of human motivation and involvement
Managers can respond fast to market changes
Shares scarce and expensive resources
People get information about a total project, not only about their specialty

44. Matrix Organizational Design (Cont.)
Weaknesses
High levels of ambiguity because of multiple authority relationships
Ambiguity can encourage power struggles among managers
Multiple authority relationships can give opposing demands to people
High conflict potential can reach dysfunctional levels and act as significant stressors for people in matrix organizations

45. Evolving Forms of Organizational Design
Several new forms of organizational design
Self-managing teams, a team-based approach
A process view of organizational design focuses on work processes
The virtual organization. This unusual form links widely scattered organizations into a network

46. Self-Managing Teams
Customer focus and fast changing environments require decisions at lower levels in an organization
Decentralizes decision authority in the teams
Decision authority in these teams can focus on customers, processes, and product design

47. Self-Managing Teams (Cont.)
Often cross-functional membership
Helps flatten an organization by removing a layer of management
Results in a nimble organization that can respond to fast changing customer needs

48. A Process View of Organizational Design
Discards the view of packaging duties and tasks along functional or divisional lines
The organization is a set of interconnected processes that weave across multiple functions
Focuses on the results of a process not on people’s skills or functions
People have responsibility for all or part of a process with decision authority over those parts

49. The Virtual Organization
A temporary network of companies or people that focus on reaching a specific target
Information technology links members into a network no matter where they are in the world
Enter agreements to get needed skills or resources
Little direct control over functions done by other members of the network

50. The Virtual Organization (Cont.)
Features a need for high trust among members
Need conflict management and negotiation skills
Interdependent in reaching a mutually desired goal

51. International Aspects of Organizational Design
The international context of organizations increases environmental complexity
Varying cultural orientations and laws introduce high uncertainty in the external environment
Functional and divisional designs are more congruent with cultures that want to avoid uncertainty and accept hierarchical relationships (Latin American countries and Japan)

52. International Aspects of Organizational Design (Cont.)
Matrix organizations do not work well in countries that avoid ambiguity (Belgium, France, and Italy)
Self-managing teams work well in countries with socially oriented values (Sweden and Norway)
Virtual organizations use communications and computer technology to span national boundaries

53. Ethical Issues and Organizational Design
Lobbying activities can change an organization’s external environment. Both legal and ethical in the United States
Bribing government officials is illegal under U.S. law
Introducing new technologies can displace workers and cause stress among those who need to learn the technology

54. Ethical Issues and Organizational Design (Cont.)
Ethical issues about reducing the size of an organization and increasing its efficiency. A utilitarian analysis looks at the net benefits of management’s actions
High conflict and ambiguity of matrix organizations can act as a significant stressor
Moving to the alternative forms is large-scale organizational change and stress for many people