Ch17

Chapter 17Organizational Design

Learning Goals

• Describe how organizational design coordinates activities in an organization and gets information to decision makers

• Discuss the contingency factors of organizational design

• Distinguish between the organizational design effects of strategy, external environment, technical process, and size

Learning Goals (Cont.)

• Describe the design features of functional, divisional, hybrid, and matrix organization forms

• Explain the characteristics of several forms of organizations that are likely to evolve in the future

• Introduction

• The Contingency Factors of Organizational Design

• Forms of Organizational Design

• International Aspects of Organizational Design

• Ethical Issues in Organizational Design

Chapter Overview

Introduction

• Organizational design refers to the way managers structure their organization to reach the organization’s goals

• Structural elements include– Allocation of duties, tasks, and responsibilities

between departments and individuals– Reporting relationships– Number of levels

Introduction (Cont.)

• Organizational charts show the formal design or structure. See text book Figure 17.1

• An incomplete picture because of informal arrangements and underlying behavioral processes

• Two basic goals of organizational design– Get information to decision makers– Coordinate the interdependent parts of an

organization

The Contingency Factors of Organizational Design

• Overview– External environment: Includes the

organization’s competitors, customers, suppliers, government, . . .

– Strategy: The plan for reaching the goals of the organization

– Open systems character of organizations tightly couples these two factors

The Contingency Factors of Organizational Design (Cont.)

• Overview (cont.)

– Technical process: The system an organization uses to produce its products or services

– Size: The number of organization members

The Contingency Factors of Organizational Design (Cont.)

Externalenvironment

Strategy

Major tools forimplementation

Technical processForms of

organizational design

Mission

Achieveorganization

goals

Roles of organizational culture and size.

Relationships Among the Contingency Factors

Strategy

• An organization’s strategy describes long-term goals and way of reaching the goals

• Describes resource allocation

• Plays a mediating role between the external environment and the tools of organizational design– Note the two headed arrows in the drawings– Example: Product innovation response

Strategy (Cont.)

• Strategy’s mediating role in organizational design– “Structure follows strategy”– “Strategy follows structure”– In both views, the design of the organization is

a major tool for carrying out the strategy

Strategy (Cont.)

“Structure follows strategy”

Choice of anorganizational form

Reach strategic goals

Strategy’s mediating role in organizational design (cont.)

Strategy (Cont.)

“Strategy follows structure”

Organizational design is anenvironment within whichmanagers form strategy.

Develop effective strategy Prevents developing aneffective strategy

Strategy’s mediating role in organizational design (cont.)

External Environment

• Managers assess the uncertainty in the external environment when considering design decisions

• Can design the organization to increase information about the environment

• Or make the organization more flexible in its response to the environment

• Information plays a key role because it can reduce risk in a manager's predictions about the future

External Environment (Cont.)

• Two elements of environmental uncertainty– Complexity of the external environment.

Ranges from simple to complex• Simple environment has a few similar elements

• Complex environment has many different elements

External Environment (Cont.)

– Static to dynamic external environment• Static external environment is unchanging or slowly

changing

• Dynamic external environment is filled with quickly moving events that could conflict with each other

• Degree of change creates uncertainty in predicting future states of the environment

External Environment (Cont.)

• Four possible states of the external environment– Simple-static: lowest uncertainty– Complex-dynamic: highest uncertainty– Simple-dynamic and complex-static

environments are about midway between the other two

– Example: Internet commerce has created a complex-dynamic environment for much of the retail industry

Technical Process

• Conversion of inputs to outputs• Manufacturing, service, or mental processes• Affects peoples’ behavior in many ways

– Work pace– Worker control– Degree of routine– Predictability– Interdependence within the process

• Various types of technical processes exist

Organization Size

• As size increases, organizations have– More formal written rules and procedures– More management levels, unless managers

decentralize– More complex organizational forms– Higher coordination requirements because of

complexity– Size and technical process: more strongly

associated with organizational design in small organizations than in large organizations

Forms ofOrganizational Design

• Three major forms: functional, divisional, and matrix

• Combine functional and divisional designs to get a hybrid design

• Several variations of the divisional design

• Several evolving forms of organizational design

Organizational Designby Function

• Groups tasks of the organization according to the activities they perform

• Typically configured into departments such as manufacturing, engineering, accounting, marketing, . . .

• Functional configurations can vary from one organization to another depending on tasks and goals

Organizational Designby Function (Cont.)

• Strategy: Focused on a few products or services in well defined markets with few competitors

• External environment: stable, simple, little uncertainty

• Technical process: Routine with little interdependence with other parts of the organization

• Size: Small to medium

Organizational Designby Function (Cont.)

• See Figure 17.1 in the text book for an example

• Each major functional area helps align the company with each sector

• Marketing, for example, focuses on customers. It does not manufacture products. That is the job of the manufacturing function

Organizational Designby Function (Cont.)

• Line and staff– Line does the major operating tasks– Staff gives support and serve in advisory roles.

Emphasizes technical skills within each function

• Individuals work with others who share common backgrounds and views

• Homogeneity can lead to narrow views of the function’s contribution to the organization

Organizational Designby Function (Cont.)

• Strengths– Specialization– Brings specialists together– Collegial relationships develop among

specialists– Encourages development of specialized skills

and information sharing– Clear career paths for specialists

Organizational Designby Function (Cont.)

• Weaknesses– Does not help managers respond quickly to

external changes– Emphasis on specialization promotes a tunnel-

vision view of the goal of the function– Functional design can produce a set of widely

accepted behaviors and perceptions with the organization

Organizational Designby Division

• Uses decentralization• Divisions formed around products, services,

locations, customers, programs, or technical process

• Often evolves from a functional design• As the external environment changes,

managers may need to diversify its activities to stay competitive

• A common management reaction to large organization size

Organizational Designby Division (Cont.)

• Strategy: Focused on different products, services, customers, or operating locations

• External environment: Complex, fast changing, with moderate to high uncertainty

• Technical process: Nonroutine and interdependent with others parts of the organization

• Size: large

Organizational Designby Division (Cont.)

• Emphasizes decision-making autonomy throughout the organization

• Has high interpersonal skill demands because of extensive contacts with people throughout the organization

• Rewards behavior that goes toward the goal of decentralization: product, customer, service, or location

Organizational Designby Division (Cont.)

• Strengths– Easily adapts to differences in products,

services, clients, location, and the like– For example, products and differ in how

manufactured and marketed– Products, services, and customers are highly

visible– Often appear in division names

Organizational Designby Division (Cont.)

• Weaknesses– Loses economies of scale because many

functions such as accounting are duplicated within the divisions

– Technical specialization is more diffuse compared to a functional design

– Hard to get uniform application of policies and procedures across divisions

HybridOrganizational Design

• Hybrid design uses both functions and divisions

• Managers use a hybrid design to get the benefits and reduce the weaknesses of the two configurations

• The divisions decentralize some functions, and the headquarters location centralizes others

• Centralized functions often are the costly ones

HybridOrganizational Design (Cont.)

• People in different parts of the organization fulfill different requirements

• Functional areas reward technical expertise

• Functional specialists often support the divisions

• Divisions do the primary work of the organization

HybridOrganizational Design (Cont.)

• Strategy: Focused on many products or services

• External environment: Fast changing, moderate to high uncertainty, complex

• Technical process: Both routine and nonroutine; high interdependence with functions and divisions

• Size: Large

HybridOrganizational Design (Cont.)

• Strengths– Focuses on products, services, and customers– Adapts well to complex environments– Economies of scale: expensive shared

resources are centralized and support all divisions

HybridOrganizational Design (Cont.)

• Weaknesses– Focus on division goals can lose total

organization view– Non-uniform application of organizational

policies– Potential for high administrative overhead if

staff expands without control– Potential conflict between division managers

and corporate headquarters. Managers want autonomy; headquarters wants control

MatrixOrganizational Design

• Used when two sectors of the external environment demand management attention

• Typically responding to the customer and technical parts of the environment– Customers have special needs– Technology changes fast

• Emerged during the 1950s within the U.S. aerospace industry

MatrixOrganizational Design (Cont.)

• Rejects the unity of command principal described in Chapter 1 of the text book

• Uses multiple authority structures, so that many people report to two managers

• People from different functional areas work on various projects

MatrixOrganizational Design (Cont.)

• Each person has at least two supervisors or managers. One supervisor is in the functional area and the other is in a project

• Mixture of people from the functional areas varies according the project needs

• Multiple reporting relationships are a basic feature of matrix organizations

See text book Figure 17.3 for a simplifiedmatrix organizational design.

MatrixOrganizational Design (Cont.)

• Conditions under which an organization may choose a matrix design– Pressures from the external environment for a

dual focus– High uncertainty within the multiple sectors

of the external environment– Constraints on human and physical resources

MatrixOrganizational Design (Cont.)

• High conflict potential because of multiple authority relationships

• Managers need well-developed conflict management skills

• Demand high levels of coordination, cooperation, and communication

• Requires high levels of interpersonal skill

MatrixOrganizational Design (Cont.)

• Different matrix uses and forms– Within specific functional areas such as

marketing. Managers responsible for a brand or group of brands bring all marketing skills together to focus on the products

– Temporary forms for specific projects– Permanent forms for the organization’s on-

going work

MatrixOrganizational Design (Cont.)

• Strengths– Responsive, flexible, efficient use of costly

resources– Potentially high levels of human motivation

and involvement– Managers can respond fast to market changes– Shares scarce and expensive resources– People get information about a total project, not

only about their specialty

MatrixOrganizational Design (Cont.)

• Weaknesses– High levels of ambiguity because of multiple

authority relationships– Ambiguity can encourage power struggles

among managers– Multiple authority relationships can give

opposing demands to people– High conflict potential can reach dysfunctional

levels and act as significant stressors for people in matrix organizations

Evolving Forms ofOrganizational Design

• Several new forms of organizational design– Self-managing teams, a team-based approach– A process view of organizational design

focuses on work processes– The virtual organization. This unusual form

links widely scattered organizations into a network

Self-Managing Teams

• Customer focus and fast changing environments require decisions at lower levels in an organization

• Decentralizes decision authority in the teams

• Decision authority in these teams can focus on customers, processes, and product design

Self-Managing Teams (Cont.)

• Often cross-functional membership

• Helps flatten an organization by removing a layer of management

• Results in a nimble organization that can respond to fast changing customer needs

A Process View ofOrganizational Design

• Discards the view of packaging duties and tasks along functional or divisional lines

• The organization is a set of interconnected processes that weave across multiple functions

• Focuses on the results of a process not on people’s skills or functions

• People have responsibility for all or part of a process with decision authority over those parts

The Virtual Organization

• A temporary network of companies or people that focus on reaching a specific target

• Information technology links members into a network no matter where they are in the world

• Enter agreements to get needed skills or resources

• Little direct control over functions done by other members of the network

The Virtual Organization (Cont.)

• Features a need for high trust among members

• Need conflict management and negotiation skills

• Interdependent in reaching a mutually desired goal

International Aspectsof Organizational Design

• The international context of organizations increases environmental complexity

• Varying cultural orientations and laws introduce high uncertainty in the external environment

• Functional and divisional designs are more congruent with cultures that want to avoid uncertainty and accept hierarchical relationships (Latin American countries and Japan)

International Aspectsof Organizational Design (Cont.)• Matrix organizations do not work well in

countries that avoid ambiguity (Belgium, France, and Italy)

• Self-managing teams work well in countries with socially oriented values (Sweden and Norway)

• Virtual organizations use communications and computer technology to span national boundaries

Ethical Issues andOrganizational Design

• Lobbying activities can change an organization’s external environment. Both legal and ethical in the United States

• Bribing government officials is illegal under U.S. law

• Introducing new technologies can displace workers and cause stress among those who need to learn the technology

Ethical Issues andOrganizational Design (Cont.)

• Ethical issues about reducing the size of an organization and increasing its efficiency. A utilitarian analysis looks at the net benefits of management’s actions

• High conflict and ambiguity of matrix organizations can act as a significant stressor

• Moving to the alternative forms is large-scale organizational change and stress for many people