Basic Organization Designs

1. © 2008 Prentice Hall, Inc. All rights reserved. Basic Organization Designs

2. © 2008 Prentice Hall, Inc. All rights reserved. 5–2 L E A R N I N G O U T C O M E S Identify and define the six elements of organization structure. Describe the advantages and disadvantages of work specialization. Contrast authority and power. Identify the five different ways by which management can departmentalize. Contrast mechanistic and organic organizations. Summarize the effect of strategy, size, technology, and environment on organization structures.

3. © 2008 Prentice Hall, Inc. All rights reserved. 5–3 L E A R N I N G O U T C O M E S (cont’d) Contrast the divisional and functional structures. Explain the strengths of the matrix structure. Describe the boundaryless organization and what elements have contributed to its development. Explain what is meant by the term learning organization. Describe what is meant by the term organization culture.

4. Six Basic Elements of Organization Structure Work Specialization Unity of Command Span of Control Authority & Responsibility Centralization Versus Decentralization Departmentalization © 2008 Prentice Hall, Inc. All rights reserved. 5–4

5. © 2008 Prentice Hall, Inc. All rights reserved. 5–5 The Elements of Structure Work Specialization Involves having each discrete step of a job done by a different individual rather than having one individual do the whole job. This way workers will not be working below their level of skill. Concept introduced by Adam Smith Organizational design is the process by which managers alter the structure of their organization to meet the implementation demands of its chosen strategy. Division of labor, or work specialization, describes the degree to which organizational tasks are subdivided into separate jobs. An entire job is not done by one person. Instead, it is divided into discrete steps, each one completed by a different person. Organizational design is the process by which managers alter the structure of their organization to meet the implementation demands of its chosen strategy. Division of labor, or work specialization, describes the degree to which organizational tasks are subdivided into separate jobs. An entire job is not done by one person. Instead, it is divided into discrete steps, each one completed by a different person.

6. © 2008 Prentice Hall, Inc. All rights reserved. 5–6 EXHIBIT 5–1 Economies and Diseconomies of Work Specialization

7. © 2008 Prentice Hall, Inc. All rights reserved. 5–7 Organizational Structure: Control Chain of Command The continuous line of authority that extends from upper organizational levels to the lowest levels and clarifies who reports to whom. It helps employees answer questions such as: Who do I go to if I have a problem To whom I am ultimately responsible Unity of Command The management principle that no person should report to more than one boss. An employee who has to report to two or more persons may have to cope with conflicting demands or priorities. How many employees can a manager efficiently and effectively direct? Some advocate small spans of control because they help managers maintain close control; but, there are several drawbacks: they require more managers and are more costly, they retard vertical communication, and they foster tight controls and limited employee autonomy. In contrast, wide spans of control reduce costs, cut overhead, expedite decision making, increase flexibility, empower employees, and promote customer contact. All things being equal, the broader the span of control, the more efficient the organization. Organizational variables that influence how a company will determine an appropriate span of control: similarity and complexity of employee tasks, the proximity of employees, the presence of standardized procedures, the capabilities of the information management system, the strength of the firm’s value system, and the preferred style of management. How many employees can a manager efficiently and effectively direct? Some advocate small spans of control because they help managers maintain close control; but, there are several drawbacks: they require more managers and are more costly, they retard vertical communication, and they foster tight controls and limited employee autonomy. In contrast, wide spans of control reduce costs, cut overhead, expedite decision making, increase flexibility, empower employees, and promote customer contact. All things being equal, the broader the span of control, the more efficient the organization. Organizational variables that influence how a company will determine an appropriate span of control: similarity and complexity of employee tasks, the proximity of employees, the presence of standardized procedures, the capabilities of the information management system, the strength of the firm’s value system, and the preferred style of management.

8. © 2008 Prentice Hall, Inc. All rights reserved. 5–8 Organizational Structure: Control Span of Control The number of subordinates a manager can direct efficiently and effectively. How many workers can a manager effectively manage? How many employees can a manager efficiently and effectively direct? Some advocate small spans of control because they help managers maintain close control; but, there are several drawbacks: they require more managers and are more costly, they retard vertical communication, and they foster tight controls and limited employee autonomy. In contrast, wide spans of control reduce costs, cut overhead, expedite decision making, increase flexibility, empower employees, and promote customer contact. All things being equal, the broader the span of control, the more efficient the organization. Organizational variables that influence how a company will determine an appropriate span of control: similarity and complexity of employee tasks, the proximity of employees, the presence of standardized procedures, the capabilities of the information management system, the strength of the firm’s value system, and the preferred style of management. How many employees can a manager efficiently and effectively direct? Some advocate small spans of control because they help managers maintain close control; but, there are several drawbacks: they require more managers and are more costly, they retard vertical communication, and they foster tight controls and limited employee autonomy. In contrast, wide spans of control reduce costs, cut overhead, expedite decision making, increase flexibility, empower employees, and promote customer contact. All things being equal, the broader the span of control, the more efficient the organization. Organizational variables that influence how a company will determine an appropriate span of control: similarity and complexity of employee tasks, the proximity of employees, the presence of standardized procedures, the capabilities of the information management system, the strength of the firm’s value system, and the preferred style of management.

9. Span of Control Depends on the experience and training of the workers Depends on the similarity of employee tasks Depends on the availability of technology at their command Depends on the strength of organizations value system. © 2008 Prentice Hall, Inc. All rights reserved. 5–9

10. © 2008 Prentice Hall, Inc. All rights reserved. 5–10 EXHIBIT 5–2 Chain of Command

11. © 2008 Prentice Hall, Inc. All rights reserved. 5–11 Organizational Structure: Control (cont’d) Authority The rights inherent in a managerial position to give orders and expect them to be obeyed. This authority glues the organization together. The authority is with the person or the position? Power An individual’s capacity to influence decisions Responsibility An obligation to perform assigned activities Authority refers to the rights inherent in a managerial position, such as giving orders and expecting that the orders will be obeyed. Authority, therefore, is related to one’s position within an organization and ignores the personal characteristics of the individual manager. When managers delegate authority, they must allocate commensurate responsibility to perform. How does the contemporary view of authority and responsibility differ from the historical view? Early management scholars assumed that the authority and rights inherent in one’s formal position were the sole source of influence; so, managers were all powerful. Authority refers to the rights inherent in a managerial position, such as giving orders and expecting that the orders will be obeyed. Authority, therefore, is related to one’s position within an organization and ignores the personal characteristics of the individual manager. When managers delegate authority, they must allocate commensurate responsibility to perform. How does the contemporary view of authority and responsibility differ from the historical view? Early management scholars assumed that the authority and rights inherent in one’s formal position were the sole source of influence; so, managers were all powerful.

12. © 2008 Prentice Hall, Inc. All rights reserved. 5–12 Types of Organizational Authority Line Authority The position authority (given and defined by the organization) that entitles a manager to direct the work of operative employees. Staff Authority Positions that have some authority (e.g., organization policy enforcement) but that are created to support, assist, and advise the holders of line authority. Early management writers distinguished between two forms of authority: line and staff. Line authority entitles a manager to direct the work of an employee. It is the employer-employee relationship that extends from the top of the organization to the lowest echelon, according to the chain-of-command (see the following chart). Early management writers distinguished between two forms of authority: line and staff. Line authority entitles a manager to direct the work of an employee. It is the employer-employee relationship that extends from the top of the organization to the lowest echelon, according to the chain-of-command (see the following chart).

13. © 2008 Prentice Hall, Inc. All rights reserved. 5–13 EXHIBIT 5–3 Line Versus Staff Authority

14. Authority Versus Power © 2008 Prentice Hall, Inc. All rights reserved. 5–14

15. Authority Versus Power Authority: Authority is the right, the legitimacy of which is based on the authority figure’s position in the organization Power: The individual capacity to influence decisions © 2008 Prentice Hall, Inc. All rights reserved. 5–15

16. © 2008 Prentice Hall, Inc. All rights reserved. 5–16 EXHIBIT 5–4 Authority Versus Power

17. © 2008 Prentice Hall, Inc. All rights reserved. 5–17 EXHIBIT 5–5 Types of Power

18. © 2008 Prentice Hall, Inc. All rights reserved. 5–18 Building a Power Base

19. © 2008 Prentice Hall, Inc. All rights reserved. 5–19 Centralization And Decentralization Centralization A function of how much decision-making authority is pushed down to lower levels in an organization; the more centralized an organization, the higher the level at which decisions are made. Decentralization The pushing down of decision-making authority to the lowest levels of an organization. The term centralization refers to the degree to which decision making is concentrated at a single point in the organization. The term decentralization means that significant input is provided by lower-level personnel. Traditional organizations were structured in a pyramid, with power and authority centralized at the top. In order to respond to the dynamics of the contemporary marketplace, organizations today are more decentralized to solve problems more quickly and to obtain increased employee input and commitment to organizational goals. However, while many production decisions are pushed down to lower levels in the organization, or even outside to some suppliers, financial and product distribution decisions still remain in the hands of senior management The term centralization refers to the degree to which decision making is concentrated at a single point in the organization. The term decentralization means that significant input is provided by lower-level personnel. Traditional organizations were structured in a pyramid, with power and authority centralized at the top. In order to respond to the dynamics of the contemporary marketplace, organizations today are more decentralized to solve problems more quickly and to obtain increased employee input and commitment to organizational goals. However, while many production decisions are pushed down to lower levels in the organization, or even outside to some suppliers, financial and product distribution decisions still remain in the hands of senior management

20. © 2008 Prentice Hall, Inc. All rights reserved. 5–20 EXHIBIT 5–6 Types of Departmentalization

21. EXERCISE © 2008 Prentice Hall, Inc. All rights reserved. 5–21

22. Exercise © 2008 Prentice Hall, Inc. All rights reserved. 5–22

23. © 2008 Prentice Hall, Inc. All rights reserved. 5–23 Contingency Variables Affecting Structure

24. © 2008 Prentice Hall, Inc. All rights reserved. 5–24 Contingency Variables Affecting Structure (cont’d) Mechanistic Organization The bureaucracy: a structure that is high in specialization, formalization, and centralization Organic Organization An adhocracy: a structure that is low in specialization, formalization, and centralization Structure follows the organization’s chosen strategy—change strategy, change structure. The structure that an organization selects to achieve its objectives is based on strategy. After studying nearly 100 large companies, Alfred Chandler concluded that changes in corporate strategy foster changes in an organization’s structure. Specifically, he found that organizations usually begin with a single product or line. The simplicity of the strategy requires only a simple form of structure. As organizations grow, their strategies become more elaborate and ambitious. To exemplify this structure-strategy relationship, consider that organizations pursuing a differentiation strategy must innovate to survive; so, because it is flexible and adaptable, an organic structure complements this strategy. A cost-leadership strategy, on the other hand, seeks stability and efficiency. A mechanistic structure would be best for this type of strategy. While the size of an organization significantly influences its structure, the relationship is non-linear. Large organizations (2,000+ employees) have more specialization, departmentalization, vertical levels, rules, and regulations than do smaller organizations. However, size affects the organization at a decreasing rate and becomes less important as an organization expands. The structure that an organization selects to achieve its objectives is based on strategy. After studying nearly 100 large companies, Alfred Chandler concluded that changes in corporate strategy foster changes in an organization’s structure. Specifically, he found that organizations usually begin with a single product or line. The simplicity of the strategy requires only a simple form of structure. As organizations grow, their strategies become more elaborate and ambitious. To exemplify this structure-strategy relationship, consider that organizations pursuing a differentiation strategy must innovate to survive; so, because it is flexible and adaptable, an organic structure complements this strategy. A cost-leadership strategy, on the other hand, seeks stability and efficiency. A mechanistic structure would be best for this type of strategy. While the size of an organization significantly influences its structure, the relationship is non-linear. Large organizations (2,000+ employees) have more specialization, departmentalization, vertical levels, rules, and regulations than do smaller organizations. However, size affects the organization at a decreasing rate and becomes less important as an organization expands.

25. © 2008 Prentice Hall, Inc. All rights reserved. 5–25 EXHIBIT 5–7 Mechanistic Versus Organic Organizations

26. © 2008 Prentice Hall, Inc. All rights reserved. 5–26 Technology and Structure Unit Production Production in terms of units or small batches Mass Production Production in terms of large batch manufacturing Process Production Production in terms of continuous processing Organizations use technology to transform inputs into outputs. The British scholar, Joan Woodward, studied small manufacturing firms in England and categorized them based on the sizes of their production runs. She reached two conclusions: (1) distinct relationships exist between a firm’s technology classification and its structure; (2) organizational effectiveness is contingent upon “fit” between technology and structure. Her study, like many others, focused on the processes or methods that companies can use to transform inputs into outputs and how they differ according to degree of routineness. Organic organizations are most effective in dynamic, uncertain environments. Mechanistic organizations are ill-equipped to function in such environments and are most effective in stable environments. To compete in the global village, many managers have redesigned their organizations to make them more organic. Organizations use technology to transform inputs into outputs. The British scholar, Joan Woodward, studied small manufacturing firms in England and categorized them based on the sizes of their production runs. She reached two conclusions: (1) distinct relationships exist between a firm’s technology classification and its structure; (2) organizational effectiveness is contingent upon “fit” between technology and structure. Her study, like many others, focused on the processes or methods that companies can use to transform inputs into outputs and how they differ according to degree of routineness. Organic organizations are most effective in dynamic, uncertain environments. Mechanistic organizations are ill-equipped to function in such environments and are most effective in stable environments. To compete in the global village, many managers have redesigned their organizations to make them more organic.

27. © 2008 Prentice Hall, Inc. All rights reserved. 5–27 Organization Design Applications Simple Structure Is low in specialization and formalization but high in centralization. Functional Structure Has similar and related occupational specialties that are grouped together. Divisional structure Is made up of self-contained units. Placing organizations into only two categories—mechanistic and organic—does not capture the nuances and realities of modern organizations. The following slides present a number of practical organization design options. We will start with the simple structure—the form that almost all new organizations begin with and that continues to be used by managers of small businesses. Popular in small businesses owned and managed by same person, the simple structure has several characteristics: a low degree of departmentalization, wide spans of control, centralized authority, little formalization, and a flat structure. This fast, flexible structure is inexpensive to maintain and promotes clear accountability. However, as the organization grows, low formalization and high centralization can cause information over-load at the top. And, this structure is risky because everything depends on one person. Placing organizations into only two categories—mechanistic and organic—does not capture the nuances and realities of modern organizations. The following slides present a number of practical organization design options. We will start with the simple structure—the form that almost all new organizations begin with and that continues to be used by managers of small businesses. Popular in small businesses owned and managed by same person, the simple structure has several characteristics: a low degree of departmentalization, wide spans of control, centralized authority, little formalization, and a flat structure. This fast, flexible structure is inexpensive to maintain and promotes clear accountability. However, as the organization grows, low formalization and high centralization can cause information over-load at the top. And, this structure is risky because everything depends on one person.

28. © 2008 Prentice Hall, Inc. All rights reserved. 5–28 EXHIBIT 5–8 Functional Structure

29. © 2008 Prentice Hall, Inc. All rights reserved. 5–29 EXHIBIT 5–9 Divisional Structure

30. © 2008 Prentice Hall, Inc. All rights reserved. 5–30 Other Organizational Structures Matrix Structure Is comprised of specialists from functional departments who are assigned to work on one or more projects led by a project manager. Team-Based Structure Consists entirely of work groups or teams. Boundaryless Organization Is not defined or limited by boundaries or categories imposed by traditional structures. eBay has no inventory, no warehouses, no sales force yet trades nearly $10billion worth of goods each yeras The matrix structure assigns functional specialists to interdisciplinary teams that are supervised by project leaders. This structure combines product departmentalization and functional departmentalization. In smaller companies, the team structure can define the entire organization. More often, especially in larger organizations, the team structure complements what is typically a bureaucracy. Such an arrangement allows the organization to achieve the efficiency of standardization while gaining flexibility. The boundaryless organization is made possible by networked computers that expedite communication across intra-organizational and inter-organizational boundaries. The elimination of boundaries in contemporary organizations is being driven by global markets and competitors, innovative technology, and volatile business environments. This method minimizes the chain of command, limits spans of control, and replaces departments with empowered teams. Cross-hierarchical teams, participative decision making, and 360 degree performance appraisals dismantle vertical boundaries. Cross-functional teams, project-driven activities, lateral transfers, and job rotation minimize horizontal boundaries. Globalization, strategic alliances, customer-organization linkages, and telecommuting overcome external boundaries. The matrix structure assigns functional specialists to interdisciplinary teams that are supervised by project leaders. This structure combines product departmentalization and functional departmentalization. In smaller companies, the team structure can define the entire organization. More often, especially in larger organizations, the team structure complements what is typically a bureaucracy. Such an arrangement allows the organization to achieve the efficiency of standardization while gaining flexibility. The boundaryless organization is made possible by networked computers that expedite communication across intra-organizational and inter-organizational boundaries. The elimination of boundaries in contemporary organizations is being driven by global markets and competitors, innovative technology, and volatile business environments. This method minimizes the chain of command, limits spans of control, and replaces departments with empowered teams. Cross-hierarchical teams, participative decision making, and 360 degree performance appraisals dismantle vertical boundaries. Cross-functional teams, project-driven activities, lateral transfers, and job rotation minimize horizontal boundaries. Globalization, strategic alliances, customer-organization linkages, and telecommuting overcome external boundaries.

31. © 2008 Prentice Hall, Inc. All rights reserved. 5–31 EXHIBIT 5–10 Sample Matrix Structure

32. © 2008 Prentice Hall, Inc. All rights reserved. 5–32 The Learning Organization An organization that has developed the capacity to continuously adapt and change because all members take an active role in identifying and resolving work-related issues.

33. © 2008 Prentice Hall, Inc. All rights reserved. 5–33 EXHIBIT 5–11 Characteristics of a Learning Organization

34. © 2008 Prentice Hall, Inc. All rights reserved. 5–34 Organization Culture Organization Culture Is a system of shared meanings within an organization that determine how employees act. Has shared values in its cultural elements: Stories, rituals, material symbols, and language unique to the organization Results from the interaction between: The founders’ biases and assumptions What the first employees learn subsequently from their own experiences. Influences structure: Strong culture substitutes for rules and regulations. The term organization culture refers to a system of meaning that members share and that distinguishes the organization from others. This system strongly influences how employees will behave while they are at work. The culture of an organization can be analyzed based on how it rates on ten characteristics, which are relatively stable and predictable over time. The term organization culture refers to a system of meaning that members share and that distinguishes the organization from others. This system strongly influences how employees will behave while they are at work. The culture of an organization can be analyzed based on how it rates on ten characteristics, which are relatively stable and predictable over time.

35. © 2008 Prentice Hall, Inc. All rights reserved. 5–35 EXHIBIT 5–12 10 Characteristics of Organization Culture

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37. Any Questions? Thank you © 2008 Prentice Hall, Inc. All rights reserved. 5–37