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Chapter 11: Organizational Structure

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1 Chapter 11: Organizational Structure
Chapter 11 focuses on organizational structure. After reading this chapter, you should be able to understand the following objectives: Define organizational structure and understand what it consists of and describe the major elements of an organizational structure. Also, you should understand what organizational design is and what the organizational design process depends on. You should be able to describe some of the more common organizational forms that an organization might adopt for its structure. Finally, you should be able to describe the steps organizations can take to reduce the negative effects of restructuring and understand how restructuring affects job performance and organizational commitment. McGraw-Hill/Irwin Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

2 Organizational Structure
Organizational structure formally dictates how jobs and tasks are divided and coordinated between individuals and groups within the company. An organizational chart is a drawing that represents every job in the organization and the formal reporting relationships between those jobs. An organization's structure often has a significant impact on it financial performance and its ability to manage employees. An organizational structure formally dictates how jobs and tasks are divided and coordinated between individuals and groups within the company. They can be relatively simple as when there are between five and twenty employees, but organizational structures grown in complexity as the number of employees, divisions, and product lines increase. The organizational chart is a graphical representation of the organization that shows every job in the company and the formal reporting relationships between those jobs. Figure 11-1 provides an example of two organizational structures. The top figure is considerably complex. The bottom is very simple.

3 Elements of Organizational Structure
Work specialization is the way in which tasks in an organization are divided into separate jobs. Also known as division of labor. Assembly line worker. Chain of command within an organization essentially answers the question “Who reports to whom?” Specific flow of authority down through the levels of an organization’s structure. Span of control represents how many employees the manager is responsible for in the organization. Narrow spans of control allow managers to be much more hands-on with employees. There are five structural dimensions that we will consider. The first is work specialization and is defined as the degree to which tasks in an organization are divided into separate jobs. This is known as the division of labor. Individuals may perform single tasks or combinations of more complex tasks. The chain of command is the dimension of organizational structure that establishes who reports to whom in the organization. This flow of authority is designed to attain order, control, and predictable performance. The third dimension is called span of control. A manager's span of control represents how many employees he or she is responsible for in the organization. Narrow spans of control exist when managers are responsible for relatively few numbers of employees. Wide spans of control exist where there are many employees reporting to a single manager. 11-3

4 Elements of Organizational Structure, Cont’d
Centralization reflects where decisions are formally made in organizations. A company is high in formalization when there are many specific rules and procedures used to standardize behaviors and decisions. Necessary coordination mechanism that organizations rely on to get a standardized product or deliver a standardized service. The dimension of centralization reflects where the decisions are formally made in the organization. If only the top manages within a company have the authority to make final decisions, we would say that the organization has a highly centralized structure. If decision making authority is delegated town to lower level employees and organization could be said to have a decentralized structure. Decentralization becomes more necessary as an organization becomes larger and more complex. When a company has many specific rules and procedures that are used to standardize behaviors and decisions, we say that the company is high in formalization. Rules and procedures are necessary for control in every organization. Formalization is a necessary coordination mechanisms that organizations rely on to get a standardized product or deliver a standardized service. Figure 11-2 provides the graphical illustration of the relationship between span of control and organizational performance. As you can see, there is an optimum span of control somewhere between narrow and wide. If the span of control is either too narrow or too wide, performance suffers. Table 11-1 in the textbook summarizes our discussion for each of the organizational structure dimensions of work specialization, chain of command, span of control, centralization, and formalization. 11-4

5 Elements in Combination
Mechanistic organizations are efficient, rigid, predictable, and standardized organizations that thrive in stable environments. Rigid and hierarchical chain of command, high degrees of work specialization, centralization of decision making, and narrow spans of control. Organic organizations are flexible, adaptive, outward-focused organizations that thrive in dynamic environments. Low levels of formalization, weak or multiple chains of command, low levels of work specialization, and wide spans of control. There are some organizational elements that are intuitively apparent. For example, narrow spans of control tend to be associated with centralization in decision making. Higher levels of work specialization tend to require high levels of formalization. Many of the organizational elements represent a sort of struggle between efficiency and flexibility. Mechanistic organizations are efficient, rigid, predictable, and standardized organizations. They thrive in stable environments. They are typified by high levels of formalization, an hierarchical chain of command, high degrees of work specialization, narrow spans of control, and centralization in decision making. Organic organizations are more flexible, adaptive, and thrive in dynamic environments. These organizations rely on low levels of formalization, low levels of work specialization, and wide spans of control. 11-5

6 Organizational Design
Organizational design is the process of creating, selecting, or changing the structure of an organization. An organizations business environment consists of its customers, competitors, suppliers, distributors, and other factors external to the firm, all of which have an impact on organizational design. Stable environments do not change frequently, and any changes that do occur happen very slowly. Dynamic environments change on a frequent basis and require organizations to have structures that are more adaptive. Ideally, organizations don't just allow a structure to develop on its own. There is a proactive design in mind. Therefore, organizational design is the process of creating, selecting, or changing the structure of an organization. The business environment has an impact on organizational design. The business environment consists of the customers, competitors, suppliers, distributors, and other factors external to the firm. One of the biggest single factors in the environment's effect on organizational structure is whether the outside environment is stable or dynamic. Stable environments do not change frequently and changes that do occur happen slowly. Dynamic environments change on a frequent basis and require organizations to have structures that are more adaptive. 11-6

7 Organizational Design, Cont’d
A company strategy describes an organization’s objectives and goals and how it tries to capitalize on its assets to make money. Low-cost product strategy rely on selling products at the lowest possible cost. Differentiation strategy believes that people will pay more for a product that is unique in some way. An organization’s technology is the method by which it transforms inputs into outputs. Company size refers to the total number of employees, and structure. Another factor that influences organizational design is the company strategy. This describes an organization's objectives and goals and how it tries to capitalize on its assets to make money. There are two common strategies that revolve around being either a low cost producer or a differentiator. Low cost producers rely on selling products at the lowest possible cost. A differentiation strategy often hinges on adjusting to changing environments quickly, which often makes an organic structure more appropriate. The technology of the organization is the method by which it transforms inputs into outputs. Finally, company size represents a significant relationship to the structure. Company size is defined as the total number of employees. As companies become larger, they need to rely on some combination of specialization, formalization and centralization to control their activities. 11-7

8 Common Organizational Forms
Simple structures are perhaps the most common form of organizational design, primarily because there are more small organizations than large ones. A bureaucratic structure is an organizational form that exhibits many of the facets of the mechanistic organization. Designed for efficiency and rely on high levels of work specialization, formalization, centralization of authority, rigid and well-defined chains of command, and relatively narrow spans of control. We have discussed how an organization's business environment, strategy, technology, and size determine why some organizational structures are more effective than others. Which structures do most organizations utilize? Let's turn to a discussion of some of the most common organizational forms. Simple structures are the most common form of organizational design. This is so because there are more small organizations than there are large one. More than 80 percent of organizations have fewer than 19 employees. A bureaucratic structure is an organizational form that exhibits many of the facets of the mechanistic organization. They are designed for efficiency and rely on high levels of work specialization, formalization, centralization of authority, rigid and well defined chains of command and relatively narrow spans of control. Figure 11-3 provides a simple organizational structure for a small restaurant. Remember, more than 80 percent of organizations employ 19 or fewer employees. 11-8

9 Bureaucratic Structures
Functional structure is an organizational form in which employees are grouped by the functions they perform for the organization. There are different types of bureaucratic structures that we will discuss. The first and most basic type is the functional structure. As you can see in Figure 11-4, a functional structure groups employees by the functions they perform in the organization. Examples of functions include marketing, finance, manufacturing, human resources, and information technology. 11-9

10 Multi-Divisional Structures
Multi-divisional structures are bureaucratic organizational forms in which employees are grouped into divisions around products, geographic regions, or clients. Product structures group business units around different products that the company produces. Multi divisional structures are bureaucratic organizational forms in which employees are grouped into divisions that are centered around products, geographic regions, or customers. Each of the divisions operates relatively autonomously for the others and has its own functional groups within them. Figure 11-4 provides an example of a multi divisional structure based on products. 11-10

11 Multi-Divisional Structures, Cont’d
Geographic structures are generally based around the different locations where the company does business. Figure 11-4 provides an example of a multi divisional structure based on geographic location. As you can see, the geographic divisions in this example are North American, Europe, Asia, Middle East, and Australia. The divisions are usually determined by the different locations where the company does business. 11-11

12 Multi-Divisional Structures, Cont’d
Client structure is an organizational form in which employees are organized around serving customers. The multi divisional structure based on client or customer is illustrated in Figure As you can see, a client structure is an organizational form where employees are organized around serving different customer groups. The example here shows the clients or customers in the areas of government contracts, direct consumer sales, internet sales, and large company contracts. 11-12

13 Matrix Structures Matrix structures are a more complex form of organizational design that tries to take advantage of two types of structures at the same time. The matrix represents a combination of a functional structure and a product structure. A more complex form of organizational design that tries to take advantage of two types of structures at the same time is called a matrix structure. The matrix represents a combination of a functional structure and a product structure. The matrix (shown in Figure 11-5) allows an organization to put together very flexible teams based on the experiences and skills of their employees. The matrix also gives each employee two chains of command, two groups with which to interact, and two sources of information to consider. This can be stressful. 11-13

14 Restructuring The process of changing an organization’s structure is called restructuring. Steps in restructuring Recognize the need to change Restructure Helping restructuring to succeed Manage layoff survivors (employees that remain with the company following a layoff) One of the best ways to help layoff survivors adjust is to do things that give them a stronger sense of control. Restructuring efforts come in a variety of shapes and sizes. Some organizations change from a client based structure to a functional structure or vice versa. The most common form of restructuring recently has been a flattening of the organization. This is done primarily to reduce costs or to provide a larger return to stakeholders. In most restructuring efforts, there are layoffs. 11-14

15 How Important is Structure?
Restructuring has a small negative effect on task performance, likely because changes in specialization, centralization, or formalization may lead to confusion about how exactly employees are supposed to do their jobs, which hinders learning and decision making. Restructuring has a more significant negative effect on organizational commitment however. Restructuring efforts can increase stress and jeopardize employees’ trust in the organization. To some extend, an organization's structure provides the foundation for almost everything in organizational behavior. Thus, structure is very important. Because there are so many different organizational forms, it is nearly impossible to give an accurate representation of the impact of organizational structure on job performance. Changes to an organization's structure can have negative effects on the employees who work for the company. Restructuring has a small negative effect on task performance, likely because changes in specialization, centralization, or formalization may lead to confusion about how exactly employees are supposed to do their jobs, which hinders learning and decision making. Restructuring has a more significant negative effect on organizational commitment however. Restructuring efforts can increase stress and jeopardize employees’ trust in the organization. As shown in Figure 11-6, research has shown that restructuring has a weak negative effect on performance. Task performance tends to be somewhat lower in organizations that restructure. Not much is known, however, about the impact of restructuring on citizenship behavior or counterproductive behavior. Restructuring has a moderate negative effect on commitment. Affective commitment tends to be lower in organizations that restructure. Not much is known about the impact of restructuring on continuance commitment or normative commitment. 11-15


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