1. 1 Session Three Fundamentals of Organization Structure

2. Top Management Responsibilities Determine the organization’s purpose Determine the organization’s goals in order to enact and fulfill the purpose Develop strategy to achieve the goals Design the organization to enact the strategy given the demands of:  Changing and uncertain stakeholders  Changing and uncertain environment 2

3. Environment/Goals/Strategy/Structure Analysis Process 3 External Environmental Assessment Internal Environmental Assessment 2. Goals3. Strategy4. Structure 6. Outcome Assessment – have you been successful? Learning or Efficiency Learning or Efficiency 1. Tells you what you should do 5. Outcome

4. 4 Selecting Strategy and Design to Achieve Organizational Goals 1. Goals  Where you want to go 2. Strategy  How you are going to get there. A plan for interacting with the competitive environment to achieve organizational goals. 3. Structure  How you can do what you need to do to implement strategy and achieve goals Environment Goals Strategy Structure

5. Selecting Structure to Implement Organizational Strategy Different structures better allow the implementation of certain types of strategies We need to understand the theoretical types of organizational structure to see which ones fit which types better allow the implementation of types of strategies, which in turn best achieve the desired goals Looking to understand the types and how to create them 5

6. 6 A Sample Organization Chart

7. 7 The Relationship of Organization Design to Efficiency vs. Learning Outcomes Horizontal Organization Designed for Learning Vertical Organization Designed for Efficiency Dominant Structural Approach Horizontal structure is dominant Shared tasks, empowerment Relaxed hierarchy, few rules Horizontal, face-to-face communication Many teams and task forces Decentralized decision making Vertical structure is dominant Specialized tasks Strict hierarchy, many rules Vertical communication and reporting systems Few teams, task forces or integrators Centralized decision making

8. 8 Vertical and Horizontal Linkages in Organizations Vertical – emphasis on efficiency and control  Specialized tasks  Strict hierarchy, many rules  Vertical communication and reporting  systems  Few teams, task forces or integrators  Centralized decision making

9. 9 Vertical and Horizontal Linkages in Organizations Horizontal – emphasis on learning  Shared tasks, empowerment  Relaxed hierarchy, few rules  Horizontal, face-to-face  communication  Many teams and task forces  Decentralized decision making

10. 10 Vertical Information Linkages Used to delineate activities between different levels of an organization Designed mainly to facilitate control and create efficiency Formalized systems

11. 11 Vertical Information Linkages Hierarchical referral  Chain of command to pass information up and down the organization Rules and plans  Procedures for responding to routine or repetitive tasks without communicating up the hierarchy Vertical information systems  Reports that pass information up and down the hierarchy without face-to-face communication

12. 12 Horizontal Information Linkages Primarily designed to overcome barriers between departments and coordinate employees in unity of effort Bring people together for learning, creativity and teamwork Used to aid rather than control activities

13. 13 Horizontal Information Linkages Information systems – knowledge sharing Direct contact - creation of a liaison person located in one department but responsible for communicating and coordinating with another Task forces – temporary committees composed of representatives from many departments

14. 14 Horizontal Information Linkages Full-time integrator – product/project/ program/brand manager located outside of the various departments but is responsible for coordinating several departments  Need excellent people skills, be able to span boundaries of departments with different priorities and perspectives  Must be able to build trust and coalitions and resolve problems

15. 15 Project Manager Location in the Structure President Finance Department Financial Accountant Budget Analyst Management Accountant Engineering Department Product Designer Draftsperson Electrical Designer Marketing Department Market Researcher Advertising Specialist Market Planner Purchasing Department Buyer Project Manager New Product B Project Manager New Product A Project Manager New Product C

16. 16 Horizontal Information Linkages Teams  Permanent task forces that are used with full-time integrators when activities require strong coordination over a long time across several functions  Virtual teams – one made up of organizationally or geographically dispersed members who are linked through technology

17. 17 Ladder of Mechanisms for Horizontal Linkage and Coordination HIGHLOW Information Systems Direct Contact Task Forces Full-time Integrators Teams Amount of Horizontal Coordination Required Cost of Coordination in Time and Human Resources H IGH

18. 18 Structural Design Options for Grouping Employees into Departments Places employees who perform similar functions, bring similar knowledge and skills, together EngineeringMarketingManufacturing CEO Functional Grouping Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

19. 19 Strengths and Weaknesses of Functional Organization Structure STRENGTHS:  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 Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,” Organizational Dynamics (Winter 1979): 429.

20. 20 Strengths and Weaknesses of Functional Organization Structure 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.

21. 21 Structural Design Options for Grouping Employees into Departments Organizing people together according to what the firm produces Divisional Grouping Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68. Product Division 1 Product Division 2 Product Division 3 CEO

22. 22 Strengths and Weaknesses of Divisional Organization Structure STRENGTHS:  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 Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,” Organizational Dynamics (Winter 1979): 431.

23. 23 Strengths and Weaknesses of Divisional Organization Structure 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.

24. 24 Structural Design Options for Grouping Employees (Continued) The organization embraces two structural groupings simultaneously – matrix or hybrid Multifocused Grouping CEO ManufacturingMarketing Product Division 2 Product Division 1 Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

25. 25 Product Manager A Product Manager B Product Manager C Product Manager D Director of Product Operations Design Vice President Mfg Vice President Marketing Vice President Controller Procure- ment Manager President Dual-Authority Structure in a Matrix Organization

26. 26 Matrix Structure Appropriate when the organization’s structure needs to be multifocused (i.e. product and function) at the same time Strong form of horizontal linkage Product and functional managers have equal authority – similar to integrator roles

27. 27 Matrix Structure – Conditions Pressure exists to share scarce resources across product lines  Medium sized business that needs to be flexible in its use of resources Environmental pressure exists for two or more outputs  Balance of power between functions and products

28. 28 Matrix Structure – Conditions Environment is uncertain and complex  Frequent changes and high interdependence between departments needs lots of coordination and information sharing (vertical and horizontal)

29. 29 STRENGTHS:  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 Strengths and Weaknesses of Matrix Organization Structure Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 429.

30. 30 STRENGTHS:  Provides opportunity for both functional and product skill development  Best in medium-sized organizations with multiple products Strengths and Weaknesses of Matrix Organization Structure Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 429.

31. 31 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 Strengths and Weaknesses of Matrix Organization Structure Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 429.

32. 32 WEAKNESSES:  Will not work unless participants understand it and adopt collegial rather than vertical-type relationships  Requires great effort to maintain power balance Strengths and Weaknesses of Matrix Organization Structure Source: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,”Organizational Dynamics (Winter 1979): 429.

33. 33 Structural Design Options for Grouping Employees (Continued) Employees are organized around core work processes. All people who work on a core process are brought together in a group rather than separated into functional departments Horizontal Grouping CEO FinanceHuman Resources Core Process 2 Core Process 1 Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

34. 34 A Horizontal Structure 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. Team 3 Team 2 Team 1 Top Management Team 3 Team 2 Team 1 Customer Process Owner Process Owner Testing Product Planning Research Market Analysis New Product Development Process Distrib. Material Flow Purchasing Analysis Procurement and Logistics Process

35. 35 Horizontal Structure Organizes employees around core processes Supporting activities cross processes (i.e. HR) Generally made after a shift in focus – business process reengineering

36. 36 Horizontal Structure Structure based on core processes rather than tasks  Processes  Business Development, Technical Support  Tasks  Market Research, Call Centres Self-directed teams rather than individuals Process owners are responsible for all tasks within the core process

37. 37 Horizontal Structure Team members provided skills, tools, motivation, and authority to manage processes and cross-trained to perform each other’s jobs Freedom to think creatively and flexibly

38. 38 Horizontal Structure Customer driven rather than task driven  Effectiveness measured by end-of-process performance objectives Culture of openness, trust and collaboration focused on continuous improvement

39. 39 Strengths and Weaknesses of Horizontal Structure STRENGTHS:  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 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, 6 th ed., (Cincinnati, Ohio: South-Western College Publishing, 1998) 253.

40. 40 Strengths and Weaknesses of Horizontal Structure STRENGTHS:  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 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, 6 th ed., (Cincinnati, Ohio: South-Western College Publishing, 1998) 253.

41. 41 Strengths and Weaknesses of Horizontal Structure 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 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, 6 th ed., (Cincinnati, Ohio: South-Western College Publishing, 1998) 253.

42. 42 Strengths and Weaknesses of Horizontal Structure WEAKNESSES:  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, 6 th ed., (Cincinnati, Ohio: South-Western College Publishing, 1998) 253.

43. Virtual Network Structure Many organizations OUTSOURCE secondary nor non-core operations to other organizations (geography is not a limiting factor) as a way of improving efficiency – can allocate more resources to competitive advantage generating competencies Non-core activities: accounting, legal, marketing, manufacturing 43

44. Virtual Network Structure STRENGTHS  More flexible and faster responses  More efficient allocation of resources could lead to better effectiveness  Better access to better, innovative expertise – R&D  Reduced labour costs  More focused organization 44

45. Virtual Network Structure WEAKNESSES  Hard to determine core processes  Requires change in culture, job design, management philosophy, IS and rewards  Much coordination needed  Control is reduced  Agency concerns 45

46. 46 Functional Structure Hybrid Structure Part 1. Sun Petrochemical Products President Technology Vice President Financial Services Vice Pres. Human Resources Director Chief Counsel Chemicals Vice President Lubricants Vice President Fuels Vice President Product Structure 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.

47. 47 Hybrid Structure Part 2. Ford Customer Service Division Director and Process Owner Director and Process Owner 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. Human Resources Strategy and CommunicationFinance Vice President and General Manager Teams Director and Process Owner Teams Technical Support Group Vehicle Service Group Parts Supply / Logistics Group Functional Structure Horizontal Structure Teams

48. 48 The Relationship of Structure to Organization’s Need for Efficiency vs. Learning Horizontal Structure Dominant Structural Approach Horizontal: Coordination Learning Innovation Flexibility Vertical: Control Efficiency Stability Reliability Matrix Structure Divisional Structure Functional with cross-functional teams, integrators Functional Structure Modular Structure

49. Structural Alignment Need to find and then implement the right balance of vertical and horizontal control Vertical  Efficiency and stability  Best in predictable, simple, stable environments, with efficiency goals and low-cost strategies Horizontal  Effectiveness, learning and flexibility  Best in uncertain, complex, dynamic environments with effectiveness goals and differentiation strategies 49

50. 50 Symptoms of Structural Deficiency Organizational structure needs to be evaluated periodically to make sure there are no deficiencies:  Decision making is delayed or lacking in quality  The organization does not respond innovatively to a changing environment  Employee performance declines and goals are not being met  Too much conflict is evident