Designing Organizational Structures

Designing Organizational Structures
Chapter 7 Designing Organizational Structures Designing Organizational Structures CHAPTER 7 Every organization has a structure. Traditional structures are more rigid. Contemporary and team-based structures are more flexible and assemble employees to respond quickly to changes. The first decision is to consider what kind of work needs to be done within the firm. The Future of Business The Essentials 4th Edition Gitman & McDaniel © Altrendo Images / Getty Images Prepared by Deborah Baker Chapter 7 Copyright ©2009 by South-Western, a division of Cengage Learning. All rights reserved

Learning Goals CHAPTER 7
Designing Organizational Structures 1 What are the five traditional forms of departmentalization? 2 What contemporary organizational structures are companies using? 3 Why are companies using team-based organizational structures? 4 What tools do companies use to establish relationships within their organizations? CHAPTER 7

Learning Goals (continued)
Chapter 7 Designing Organizational Structures 5 How can the degree of centralization/ decentralization be altered to make an organization more successful? 6 How do mechanistic and organic organizations differ? 7 How does the informal organization affect the performance of the company? 8 What trends are influencing the way businesses organize? CHAPTER 7

Departmentalization Chapter 7 Designing Organizational Structures 1 What are the five traditional forms of departmentalization? 1

The Organizing Process
Chapter 7 Designing Organizational Structures Grouping jobs and employees (departmentalization) Assigning authority and responsibilities (delegation) Determining work activities and dividing up tasks (division of labor) Chapter 6 introduced the key management functions of planning, organizing, leading, and controlling. This chapter focuses specifically on organizing, which is the process of coordinating and allocating a firm’s resources in order to carry out its plans. Organizing includes developing a structure for the people, positions, departments, and activities within the firm. Managers can arrange the structural elements of the firm to maximize the flow of information and the efficiency of work processes. They accomplish this by: Determining work activities and dividing up tasks Grouping jobs and employees Assigning authority and responsibilities. 1

Departmentalization 1 formal organization
Chapter 7 Designing Organizational Structures formal organization The order and design of relationships with a firm; consists of two or more people working together with a common objective and clarity of purpose. The result of the organizing process is a formal organizational structure. 1

Division of Labor 1 division of labor specialization
Chapter 7 Designing Organizational Structures division of labor The process of dividing work into separate jobs and assigning tasks to workers. specialization The degree to which tasks are subdivided into smaller jobs. The process of dividing work into separate jobs and assigning tasks to workers is called division of labor. The degree to which tasks are subdivided into smaller jobs is called specialization. Workers with specialized jobs develop greater skill in doing that job, leading to greater efficiency and consistency. However, it can also result in employees who are disinterested or bored. 1

Departmentalization 1 departmentalization
Chapter 7 Designing Organizational Structures departmentalization The process of grouping jobs together so that similar or associated tasks and activities can be coordinated. After a company divides into jobs the work it needs to do, managers then group the jobs together in similar tasks. This is called departmentalization. 1

Organization Chart 1 President Finance Operations Marketing
Chapter 7 Designing Organizational Structures President Finance Manager, allocations & inventory control Manager, accounting Manager, financial planning Production manager Director of human resources Sales manager Director of customer service Distribution manager Operations Marketing Vice-Presidents An organizational chart is a visual representation of the structured relationships among tasks and the people given the authority to do those tasks. For example, in the organizational chart shown here, each figure represents a job, and each job includes several tasks. 1

Basic Types of Departmentalization
Chapter 7 Designing Organizational Structures Functional Product Process Customer Geographic Based on the primary functions performed Based on the goods/services produced or sold Based on the production process used Based on the primary type of customer served Based on the geographic segmentation of organizational units Five types of departmentalization are commonly used in organizations. Functional departmentalization. Based on the primary functions performed within an organization. Examples are marketing, finance, production. Product departmentalization. Based on the goods or services produced or sold by the organizational unit. Examples are outpatient/emergency services, pediatrics, cardiology. Process departmentalization. Based on the production process used by the organizational unit. Examples are lumber cutting, furniture finishing, shipping. Customer departmentalization. Based on the primary type of customer served by the organizational unit. Examples are wholesale or retail purchasers. Geographic departmentalization. Based on the geographic segmentation of organizational units. Examples are U.S. and Canadian marketing, European marketing, South American marketing. Many large organizations use several types of departmentalization. For instance, a global company may be departmentalized first geographically, then by product line, and finally by functional area. Charts for each type of departmentalization are shown in subsequent slides. 1

Functional Departmentalization
Chapter 7 Designing Organizational Structures President Manufacturing Legal Personnel Finance Engineering Marketing 1 Exhibit 7.2

Product Departmentalization
Chapter 7 Designing Organizational Structures Administrator and CEO Head of cardiology Head of outpatient / emergency pediatrics orthopedics obstetrics / gynecology 1 Exhibit 7.2

Process Departmentalization
Chapter 7 Designing Organizational Structures Plant superintendent Furniture finishing Lumber cutting and treatment assembly Shipping 1 Exhibit 7.2

Customer Departmentalization
Chapter 7 Designing Organizational Structures Vice president, marketing Marketing manager, automotive customers railroad customers aircraft customers military customers 1 Exhibit 7.2

Geographic Departmentalization
Chapter 7 Designing Organizational Structures Vice president, marketing Director, South American marketing U.S. and Canadian European 1 Exhibit 7.2

Line-and-Staff Organization
Chapter 7 Designing Organizational Structures President Corporate attorney Assistant to president Vice president of manufacturing of finance Vice president of marketing Marketing research specialist Advertising Quality- control engineer Internal auditor Sales manager Supervisor Cost accountant Credit analyst Line functions Staff functions 1 Exhibit 7.3

CONCEPT check Chapter 7 Designing Organizational Structures How does specialization lead to greater efficiency and consistency in production? What are the five types of departmentalization? 1

Contemporary Structures
Chapter 7 Designing Organizational Structures 2 What contemporary organizational structures are companies using? 2

Chapter 7 Designing Organizational Structures Matrix Structure Committee Structure Although traditional forms of departmentalization represent how many companies organize their work, newer and more flexible structures are in use at many firms. These types help organizations leverage the diverse skills of their employees. These structures are matrix and committee structures, and are discussed on the following slides. 2

Chapter 7 Designing Organizational Structures matrix structure An organizational structure that combines functional and product departmentalization by bringing together people from different functional areas to work on a special project. The matrix structure combines functional and product departmentalization. It is sometimes used in conjunction with the traditional line-and-staff structure. It brings together people from different functional areas to work on a special project. Each employee has two direct supervisors: the line manager and the project manager. 2

Matrix Structure 2 Advantages Disadvantages Teamwork
Chapter 7 Designing Organizational Structures Advantages Disadvantages Teamwork Efficient use of resources Flexibility Ability to balance conflicting objectives Higher performance Opportunities for development Power struggles Confusion among team members Lack of cohesiveness Advantages and disadvantages of the matrix structure are described above. 2

Matrix Structure 2 Chapter 7 Designing Organizational Structures
Exhibit 7.4 shows a matrix organization with four special project groups, each with its own project manager. 2 Exhibit 7.4

Chapter 7 Designing Organizational Structures committee structure An organizational structure in which authority and responsibility are held by a group rather than an individual. Committees are typically part of a larger line-and-staff organization. Authority is held by a group rather than an individual. Often their role is only advisory, but in other situations, committees have the power to make and implement decisions. Committees can make the coordination of tasks in the organization much easier. 2

Committee Structure 2 Advantages Disadvantages
Chapter 7 Designing Organizational Structures Advantages Disadvantages Coordination of tasks is easier Bring diverse viewpoints to a problem Expand possible solutions Slow to reach decisions Sometimes dominated by a single individual Difficult to hold individuals accountable Meetings seem slow and unproductive Advantages and disadvantages of committee structures are shown on this slide. 2

CONCEPT check Chapter 7 Designing Organizational Structures Why does the matrix structure have a dual chain of command? How does a matrix structure increase power struggles or reduce accountability? What are advantages of a committee structure? Disadvantages? 2

Using Teams Chapter 7 Designing Organizational Structures 3 Why are companies using team-based organizational structures? 3

Group Behavior 3 Organizational strategy
Chapter 7 Designing Organizational Structures Group Behavior Organizational strategy Company policies and procedures Available resources Corporate culture Member characteristics Roles and norms of group members Size and cohesiveness of group Formal Informal A trend in business is the use of teams to accomplish organizational goals. Teams are a special type of organizational group, which can be formal or informal. Formal groups are sanctioned by the organization and are directed toward accomplishing organizational goals. Informal groups are based on social relationships and are not sanctioned by the organization. Factors that affect the behavior of organizational groups are shown on this slide. 3

Group Behavior 3 group cohesiveness
Chapter 7 Designing Organizational Structures group cohesiveness The degree to which group members want to stay in the group and tend to resist outside influences. Increases when: the size of the group is small goals are congruent group has high status rewards are group based group competes with other groups 3

Group Decision Making 3 Strengths
Chapter 7 Designing Organizational Structures Group Decision Making Strengths Groups bring more information and knowledge Groups offer a diversity of perspectives and a greater number of alternatives Results in a higher-quality decision Participation increases likelihood of decision acceptance 3

Group Decision Making 3 Weaknesses
Chapter 7 Designing Organizational Structures Group Decision Making Weaknesses Groups take a longer time to reach a solution Group members may pressure others to conform The process may be dominated by one or a small number of participants Groups lack accountability 3

Work Groups versus Work Teams
Chapter 7 Designing Organizational Structures work groups Share resources and coordinate efforts to help members better perform individual duties and responsibilities. work teams Require coordination and collaboration. Requires the pooling of knowledge, skills, abilities, and resources to achieve a common goal. A work team creates synergy, causing the performance of a team to be greater than the sum of individual contributions. The definitions above help differentiate between work groups and work teams. 3

Building High-Performance Teams
Chapter 7 Designing Organizational Structures Teams practice good communication Great teams have great leaders Employees willing to work together Teams have clearly defined goals Members possess a variety of skills Selecting the appropriate employees for a team is vital. A high-performance team must possess certain characteristics, as shown on this slide. 3

Team Leaders 3 Divide up work so that tasks are not repeated
Chapter 7 Designing Organizational Structures Team Leaders Divide up work so that tasks are not repeated Help members set and track goals Monitor their team’s performance Communicate openly Remain flexible Great teams have great leaders, who are responsible for ensuring the effectiveness of the team. 3

CONCEPT check Chapter 7 Designing Organizational Structures What is the difference between a work team and a work group? Identify and describe three types of work teams. What are some ways to build a high-performance team? 3

Authority— Establishing Organizational Relationships
Chapter 7 Designing Organizational Structures Authority— Establishing Organizational Relationships 4 What tools do companies use to establish relationships within their organizations? 4

Managerial Hierarchy 4 managerial hierarchy
Chapter 7 Designing Organizational Structures managerial hierarchy The levels of management within an organization; typically, includes top, middle, and supervisory management. 4

Managerial Hierarchy 4 authority
Chapter 7 Designing Organizational Structures authority Legitimate power, granted by the organization and acknowledged by employees, that allows an individual to request action and expect compliance. delegation of authority The assignment of some degree of authority and responsibility to persons lower in the chain of command. Individuals who are part of the chain of command have authority over other persons in the organization. Authority is defined above. Most managers delegate some degree of authority and responsibility to others in the chain of command. The delegation of authority makes the employees accountable for outcomes. Typically authority and responsibility move downward through the organization as managers assign activities. Accountability moves upward in the organization as managers in each higher level are held accountable for the actions of their subordinates. 4

Span of Control 4 span of control
Chapter 7 Designing Organizational Structures span of control The number of employees a manager directly supervises; also called span of management. Each firm must decide how many managers are needed at each level of the management hierarchy to supervise the work performed. A manager’s span of control is the number of employees the manager directly supervises. It can be as narrow as 2 or 3 employees, or as wide as 50 or more. In general, the larger the span of control, the more efficient the organization. 4

Chain of Command 4 chain of command
Chapter 7 Designing Organizational Structures chain of command The line of authority that extends from one level of an organization’s hierarchy to the next, from top to bottom, and makes clear who reports to whom. Matrix organizations violate the unity of command principle because employees report to more than one boss. 4

Narrow Span of Control 4 Advantages Disadvantages
Chapter 7 Designing Organizational Structures Advantages Disadvantages Higher degree of control Manager is more familiar with individuals Close supervision can provide immediate feedback More management levels, more expensive Slower decision making Isolation of top management Discourages employee autonomy As Exhibit 7.6 shows, both narrow and wide spans of control have benefits and drawbacks. 4

Wide Span of Control 4 Advantages Disadvantages
Chapter 7 Designing Organizational Structures Advantages Disadvantages Increased efficiency and reduced costs Quicker decision making Greater flexibility Higher levels of job satisfaction Less control Possible lack of familiarity Managers spread thin Lack of coordination or synchronization 4

Optimal Span of Control
Chapter 7 Designing Organizational Structures Factors Determining Optimal Span of Control Nature of task Location of workers Ability of manager to delegate responsibility Interaction and feedback between workers and manager Level of skill and motivation of workers The optimal span of control is determined by the factors shown above. 4

CONCEPT check Chapter 7 Designing Organizational Structures How does the chain of command clarify reporting relationships? What is the role of a staff position in a line-and-staff organization? What factors determine the optimal span of control? 4

Degree of Centralization
Chapter 7 Designing Organizational Structures 5 How can the degree of centralization/ decentralization be altered to make an organization more successful? 5

Chapter 7 Designing Organizational Structures centralization The degree to which formal authority is concentrated in one area or level of an organization. decentralization The process of pushing decision-making authority down the organizational hierarchy. In a highly centralized structure, top management makes most of the key decisions, with very little input from lower-level employees. In contrast, in a decentralized structure, lower-level personnel have more responsibility and power to make and implement decisions. 5

Chapter 7 Designing Organizational Structures Centralization Top management makes most key decisions Managers have broad view of operations and exercise tight financial controls Reduces costs by eliminating redundancy Lower level personnel don’t get leadership opportunities Organization is less responsive to customer demands Characteristics of centralization are shown on this slide. 5

Chapter 7 Designing Organizational Structures Decentralization Quicker decision making Increased levels of innovation and creativity Greater organizational flexibility Faster development of lower-level managers Increased job satisfaction and employee commitment Lower-level personnel may make costly mistakes Increases likelihood of inefficient communication, competing objectives, and duplication of effort Benefits of decentralization can include quicker decision making, increased levels of innovation and creativity, greater organizational flexibility, faster development of lower-level managers, and increased levels of job satisfaction and employee commitment. Decentralization can be risky. If lower-level personnel don’t have the skills and training to perform efficiently, they may make costly mistakes. Decentralization may increase the likelihood of inefficient lines of communication, incongruent or competing objectives, and duplication of effort. 5

Factors Influencing Decision-Making Authority
Chapter 7 Designing Organizational Structures Size of the organization Speed of change in environment Managers’ willingness to give up authority Employees’ willingness to accept more authority Organization’s geographic dispersion As organizations grow and change, they continually reevaluate their structure to determine whether it is helping the company achieve its goals. 5

Chapter 7 Designing Organizational Structures Decentralization is desirable when… Organization is very large Firm is in a dynamic environment where quick decisions must be made Managers are willing to share power with subordinates Employees are willing and able to take more responsibility Company is spread out geographically Decentralization is usually desirable when the organization is large, geographically dispersed, and in a dynamic environment. Managers must be willing to share power with subordinates, and employees are willing and able to accept more responsibility. 5

CONCEPT check Chapter 7 Designing Organizational Structures What are the characteristics of a centralized organization? What are the benefits of a decentralized organization? What factors should be considered when choosing the degree of centralization? 5

Organizational Design Considerations
Chapter 7 Designing Organizational Structures 6 How do mechanistic and organic organizations differ? Structural design generally follows one of the two basic models: mechanistic or organic. 6

Chapter 7 Designing Organizational Structures Mechanistic Organization Relatively high degree of job specialization Rigid departmentalization Many layers of management Narrow spans of control Centralized decision making Long chain of command Tall organizational structure A mechanistic organization is characterized by the traits listed on this slide. This combination of elements results in what is called a tall organizational structure. Examples are the U.S. Armed Forces and the United Nations. 6

Chapter 7 Designing Organizational Structures Organic Organization Relatively low degree of job specialization Loose departmentalization Few layers of management Wide spans of control Decentralized decision making Short chain of command Flat organizational structure In contrast, an organic organization results in a flat organizational structure. Colleges and universities tend to have flat organic structures. 6

Mechanistic versus Organic Structures
Chapter 7 Designing Organizational Structures Firm’s overall strategy Size of the organization Stability of its external environment The decision to create a mechanistic or organic structure is based on factors such as the firm’s overall strategy, the size of the organization, and the stability of its external environment, among others. Although few organizations are purely mechanistic or purely organic, they usually tend toward one type or the other. Smaller companies tend to follow the more organic model, in part because they can! In a simple, stable environment, companies benefit from the efficiencies created by a mechanistic structure. 6

CONCEPT check Chapter 7 Designing Organizational Structures Compare and contrast mechanistic and organic organizations. What factors determine whether an organization should be mechanistic or organic? 6

The Informal Organization
Chapter 7 Designing Organizational Structures 7 How does the informal organization affect the performance of the company? 7

The Informal Organization
Chapter 7 Designing Organizational Structures Functions of the Informal Organization Provides a source of friendships and social contact for organization members Helps employees feel better informed about and connected with what is going on Provides status and recognition not available from the formal organization Aids the socialization of new employees Helps employees to be more aware of what is happening in the workplace Many important relationships with an organization do not show up on an organization chart. These relationships still have an effect on the decisions and performance of employees at all levels of the organization. The network of connections and channels of communication based on these informal relationships is known as the informal organization. Informal communication channels are often referred to as the grapevine, the rumor mill, or the intelligence network. Managers should pay attention to these grapevines because this informal communication channel is a reliable indicator that something is going on. 7

CONCEPT check 7 What is the informal organization?
Chapter 7 Designing Organizational Structures What is the informal organization? How can informal channels of communication be used to improve operational efficiency? 7

Trends in Organizational Structure
Chapter 7 Designing Organizational Structures 8 What trends are influencing the way businesses organize? 8

Reengineering Organizational Structure
Chapter 7 Designing Organizational Structures Reengineering Organizational Structure reengineering The complete redesign of business structures and processes in order to improve operations. “Starting over” “If we were a new company, how would we run this place?” The goal of reengineering is to redesign business processes to achieve improvements in cost control, product quality, customer service, and speed. It should create a more effective organizational structure that is better suited to the current and future competitive climate. 8

Attributes of a Virtual Corporation
Chapter 7 Designing Organizational Structures Technology Opportunism Excellence Trust No borders The virtual corporation is a network of independent companies (suppliers, customers, even competitors) linked by information technology to share skills, costs, and access to one’s markets. This network structure allows companies to quickly exploit rapidly changing opportunities. The key attributes of a virtual corporation are shown above. 8

Keeping a Virtual Team on Track
Chapter 7 Designing Organizational Structures Make conversations more personal to build relationships Be attuned to the mood and nuances of virtual meetings Keep staff engaged and focused Establish one-on-one time with each team member Tips for keeping a virtual team on track are provided by Christopher Rice of Blessing White. 8

Reasons for Outsourcing
Chapter 7 Designing Organizational Structures Reasons for Outsourcing Cost reduction Labor needs For decades, companies have outsourced various functions. Outsourcing today includes a much wider array of business functions, and is evolving from a trend to a way of doing business. Companies outsource for two main reasons: cost reduction and labor needs. Often, work is outsourced to firms in foreign countries. 8

Steps for Outsourcing Success
Chapter 7 Designing Organizational Structures Steps for Outsourcing Success Identify a specific business problem Consider all possible solutions Decide if sending work offshore is the appropriate answer Look for offshore providers with high-caliber systems in place Find an offshore provider that understands their business Challenges with outsourcing include a realism that cost savings aren’t as high as typically expected. Also, the talent pool in developing nations is not as large as some people might think. Despite the challenges, global outsourcing programs can be effective. To be successful in outsourcing efforts, managers must do the following, as shown on this slide. 8

CONCEPT check Chapter 7 Designing Organizational Structures How does technology enable firms to organize as virtual corporations? What are some organizational issues that must be addressed when two large firms merge? 8

Designing Organizational Structures

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