Fundamentals of Organization Structure Chapter Three Fundamentals of Organization Structure

Three key components in the definition of Organization Structure Organization structure designates formal reporting relationships, including the number of levels in the hierarchy and the span of control of managers and supervisors. Organization structure identifies the grouping together of individuals into departments and of departments into the total organization. Organization structure includes the design of systems to ensure effective communication, coordination, and integration of effort across departments.

A Sample Organization Chart

The Relationship of Organization Design to Efficiency vs The Relationship of Organization Design to Efficiency vs. Learning Outcomes Horizontal Organization Designed for Learning Horizontal structure is dominant Shared tasks, empowerment Relaxed hierarchy, few rules Horizontal, face-to-face communication Many teams and task forces Decentralized decision making ex. Dow Chem. , P & G Dominant Structural Approach Vertical structure is dominant Specialized tasks Strict hierarchy, many rules Vertical communication and reporting systems Few teams, task forces or integrators Centralized decision making Vertical Organization Designed for Efficiency

Vertical Information Linkages Vertical linkages are used to coordinate activities between the top and bottom of an organization and are designed primarily for control of the organization. Structural devices to achieve vertical linkage: -- Hierarchical Referral -- Rules and Plans -- Vertical Information Systems

Ladder of Mechanisms for Horizontal Linkage and Coordination H IGH Teams Full-time Integrators Task Forces Coordination Required Amount of Horizontal Direct Contact LOW Information Systems LOW HIGH Cost of Coordination in Time and Human Resources

Project Manager Location in the Structure President Finance Department Financial Accountant Budget Analyst Management Engineering Product Designer Draftsperson Electrical Marketing Market Researcher Advertising Specialist Planner Purchasing Buyer Project Manager New Product B Product A Product C

Teams Used for Horizontal Coordination at Wizard Software Company President Marketing Vice Pres. Programming Vice Pres Research Vice Pres Videogames Basic Research Supervisor Videogames Sales Manager Videogames Chief Engineer Videogames Product Team Applications and Testing Supervisor Memory Products Sales Manager Memory Products Chief Programmer Memory Products Research Supervisor Memory Products Team Memory Products International Manager Customer Service Manager Procurement Supervisor Advertising Manager

Organization Design Alternatives Required Work Activities Reporting Relationships Departmental Groupings

Organization Design Alternatives Required Work Activities --Departments are created to perform tasks considered strategically important to the company. e.g. Dept. of HR --As organizations grow larger and more complex, more and more functions need to be performed. --Organizations typically define new departments or divisions as a way to accomplish tasks deemed valuable by the organization. --Today, many companies are finding it important to establish departments. such as IT or e-business to take advantage of new technology and new business opportunities.

Organization Design Alternatives Reporting Relationships --Reporting relationships, often called the chain of command, are represented by vertical lines on an organization chart. --The definition of departments and the drawing of reporting relationships defines how employees are to be grouped into departments.

Organization Design Alternatives Departmental Grouping Options --Options for department grouping, including functional grouping, divisional grouping, multifocused grouping (Matrix or Hybrid), horizontal grouping, and modular grouping. (Fig. 3.6) --Departmental grouping affects employees because they share a common supervisor and common resources, are jointly responsible for performance, and tend to identify and collaborate with one another.

Structural Design Options for Grouping Employees into Departments Functional Grouping CEO Engineering Marketing Manufacturing Divisional Grouping Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

Strengths and Weaknesses of Functional Organization Structure Allows economies of scale within functional departments Enables in-depth knowledge and skill development Enables organization to accomplish functional goals Is best with only one or a few products WEAKNESSES: Slow response time to environmental changes May cause decisions to pile on top, hierarchy overload Leads to poor horizontal coordination among departments Results in less innovation Involves restricted view of organizational goals Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,” Organizational Dynamics (Winter 1979): 429.

Strengths and Weaknesses of Divisional Organization Structure Suited to fast change in unstable environment Leads to client satisfaction because product responsibility and contact points are clear Involves high coordination across functions Allows units to adapt to differences in products, regions, clients Best in large organizations with several products Decentralizes decision-making WEAKNESSES: Eliminates economies of scale in functional departments Leads to poor coordination across product lines Eliminates in-depth competence and technical specialization Makes integration and standardization across product lines difficult Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,” Organizational Dynamics (Winter 1979): 431.

Reorganization from Functional Structure to Divisional Structure at Info-Tech R&D Manufacturing Accounting Marketing Info-Tech President Divisional Structure

Structural Design Options for Grouping Employees (Continued) Multifocused Grouping CEO Manufacturing Marketing Product Division 2 Division 1 Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

Structural Design Options for Grouping Employees (Continued) Horizontal Grouping CEO Human Resources Finance Core Process 1 Core Process 2 Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

Geographical Structure for Apple Computer CEO Steve Jobs Apple Europe Pacific France Products Asia Japan Australia Americas Canada Latin America/ Caribbean Sales Service and Marketing to Regions Source: www.apple.com

Dual-Authority Structure in a Matrix Organization President Director Design Mfg Marketing Procure- ment of Product Vice President Vice President Vice President Controller Operations Manager Product Manager A Product Manager B Product Manager C Product Manager D

Strengths and Weaknesses of Matrix Organization Structure Achieves coordination necessary to meet dual demands from customers Flexible sharing of human resources across products Suited to complex decisions and frequent changes in unstable environment Provides opportunity for both functional and product skill development Best in medium-sized organizations with multiple products WEAKNESSES: Causes participants to experience dual authority, which can be frustrating and confusing Means participants need good interpersonal skills and extensive training Is time consuming; involves frequent meetings and conflict resolution sessions Will not work unless participants understand it and adopt collegial rather than vertical-type relationships Requires great effort to maintain power balance Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 429.

Matrix Structure for Worldwide Steel Company President Industrial Relations Vice Mfg. Services Finance Marketing Metallurgy Field Sales Open Die Business Mgr. Ring Products Wheels & Axles Steelmaking Vertical Functions Horizontal Product Lines

A Horizontal Structure Team 3 2 1 Top Management Customer Process Owner Testing Product Planning Research Market Analysis New Product Development Process Distrib. Material Flow Purchasing Procurement and Logistics Process Sources: Based on Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999); John A. Byrne, “The Horizontal Corporation,” Business Week, December 20, 1993, 76-81; and Thomas A. Stewart, “The Search for the Organization of Tomorrow,” Fortune, May 19, 1992, 92-98.

Strengths and Weaknesses of Horizontal Structure Flexibility and rapid response to changes in customer needs Directs the attention of everyone toward the production and delivery of value to the customer Each employee has a broader view of organizational goals Promotes a focus on teamwork and collaboration—common commitment to meeting objectives Improves quality of life for employees by offering them the opportunity to share responsibility, make decisions, and be accountable for outcomes WEAKNESSES: Determining core processes to organize around is difficult and time-consuming Requires changes in culture, job design, management philosophy, and information and reward systems Traditional managers may balk when they have to give up power and authority Requires significant training of employees to work effectively in a horizontal team environment Can limit in-depth skill development Sources: Based on Frank Ostroff, The Horizontal Organization: What the Organization of the Future Looks Like and How It Delivers Value to Customers, (New York: Oxford University Press, 1999); and Richard L. Daft, Organization Theory and Design, 6th ed., (Cincinnati, Ohio: South-Western College Publishing, 1998) 253.

Hybrid Structure Part 1. Sun Petrochemical Products President Functional Structure Chief Counsel Human Resources Director Technology Vice President Financial Services Vice Pres. Product Structure Fuels Vice President Lubricants Vice President Chemicals Vice President Sources: Based on Linda S. Ackerman, “Transition Management: An In-Depth Look at Managing Complex Change,” Organizational Dynamics (Summer 1982): 46-66; and Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999), Fig. 2.1, 34.

Hybrid Structure Part 2. Ford Customer Service Division Vice President and General Manager Functional Structure Finance Strategy and Communication Human Resources Director and Process Owner Teams Teams Parts Supply / Logistics Group Director and Process Owner Horizontal Structure Teams Teams Vehicle Service Group Director and Process Owner Teams Technical Support Group Sources: Based on Linda S. Ackerman, “Transition Management: An In-Depth Look at Managing Complex Change,” Organizational Dynamics (Summer 1982): 46-66; and Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999), Fig. 2.1, 34.

Organization Contextual Variables that Influence Structure (learning vs. efficiency) Environment Chapters 4, 6 Culture Chapter 10 Size Chapter 9 Strategy, Goals Chapter 2 Technology Chapters 7,8 Sources: Adapted from Jay R. Galbraith, Competing with Flexible Lateral Organizations, 2nd ed. (Reading, Mass.: Addison-Wesley, 1994), Ch.1; Jay R. Galbraith, Organization Design (Reading, Mass.: Addison-Wesley, 1977), Ch. 1.

The Relationship of Structure to Organization’s Need for Efficiency vs The Relationship of Structure to Organization’s Need for Efficiency vs. Learning Matrix Structure Horizontal Structure Functional Structure Functional with cross-functional teams, integrators Divisional Structure Modular Structure Horizontal: Coordination Learning Innovation Flexibility Dominant Structural Approach Vertical: Control Efficiency Stability Reliability

Symptoms of Structural Deficiency Decision making is delayed or lacking in quality The organization does not respond innovatively to a changing environment Too much conflict is evident