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Chapter 17 Organizational Design

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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

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