Topic 14: Organizational Structure

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1 Topic 14: Organizational Structure Organizational design - is the process by which managers select and manage various dimensions and components of organizational structure and culture so that an organization can achieve its goals. Organizational structure - is the formal system of task and reporting relationships that controls, coordinates, and motivates employees so that they cooperate to achieve an organization's goals. Your task as a manager is to create an organizational structure and culture that: 1. Encourages employees to work hard and to develop supportive work attitudes 2. Allows people and groups to cooperate and work together effectively. Structure and culture affect: 1. Behavior 2. Motivation 3. Performance 4. Teamwork and cooperation 5. Intergroup and Interdepartmental relationships What bearing does organizational design have on organizational behavior? The way a structure or culture is designed or evolves over time affects the way people and groups behave within the organization. Once an organization decides how it wants its members to behave, what attitudes it wants to encourage, and what it wants its members to accomplish, it can then design its structure and encourage the development of the cultural values and norm to obtain these desired attitudes, behaviors, and goals. How does an organization determine which attitudes and behaviors a encourage? An organization bases these design decisions on the contingencies it faces (a contingency is any event that might possibly occur and thus must be taken into account in planning). (1 of 11)5/21/2010 3:14:54 PM

2 The three major contingencies that determine what kind of structure and culture an organization designs: 1. Organization's environment 2. Technology an organization uses 3. Organization's strategy. Differentiation: Grouping Organizational Activities Differentiation - is the grouping of people and tasks into functions and divisions to produce goods and services.' Function - is a set of people who work together and perform the same types of tasks or hold similar positions in an organization. As organizations grow and their division of labor into various functions increases, they typically differentiate further into divisions. As Campbell Soup started to produce different kinds of products, it created separate product divisions, each of which had its own food research, quality, and manufacturing functions. A division is a group of functions created to allow an organization to produce and dispose of its goods and services to customers. In developing an organizational structure, managers must decide how to differentiate and group an organization's activities by function and division in a way that achieves organizational goals effectively.' The result of this process can be most easily seen in an organizational chart that shows the relationship between an organization's functions and divisions. Functional Structure Functional structure - groups people together because they hold similar positions in an organization, perform a similar set of tasks, or use the same kind of skills. This division of labor and specialization allows an organization to become more (2 of 11)5/21/2010 3:14:54 PM

3 effective. Advantages Of A Functional Structure Coordination Advantages 1. Easy communication among specialists - People grouped together according to similarities in their positions can easily communicate and share information with each other. 2. Quick decisions - People who approach problems from the same perspective can often make decisions more quickly and effectively than can people whose perspectives differ. 3. Learning - Makes it easier for people to learn from one another's experiences. Thus a functional structure helps employees improve their skills and abilities and thereby enhances individual and organizational performance. Motivation Advantages 1. Facilitates performance evaluation for supervisor - Supervisors are in a good position to monitor individual performance, reward high performance, and discourage social loafing. Functional supervisors find monitoring easy because they usually possess high levels of skill in the particular function. 2. Facilitates performance evaluation for peers - Allows group members to monitor and control one another's behavior and performance levels. 3. Creates teamwork - Can also lead to the development of norms, values, and group cohesiveness that promote high performance. 4. Creates a career ladder - Functional managers and supervisors are typically workers who have been promoted because of their superior performance. Disadvantages Of A Functional Structure 1. Serving needs of all products - When the range of products or services that a company produces increases, the various functions can have difficulty efficiently servicing the needs of the wide range of products. Imagine the coordination problems that would arise, for example, if a company started to make cars, then went into computers, and then went into clothing but used the same sales force to sell all three products. Most salespeople would not be able to learn enough about all three products to provide good customer service. 2. Coordination - As organizations attract customer with different needs, they may find it hard to service these different needs by using a single set of functions. (3 of 11)5/21/2010 3:14:54 PM

4 3. Serving needs of all regions - As companies grow, they often expand their operations nationally, and servicing the needs of different regional customers by using a single se of manufacturing, sales, or purchasing functions becomes very difficult. Divisional Structures: Product, Market, And Geographic A divisional structure that overlays functional groupings allows an organization to coordinate intergroup relationships more effectively than does a functional structure. Product Structure Each product division contains the functions necessary to that service the specific goods or services it produces. What are the advantages of a product structure? Increases the division of labor so that the number similar products can be increased (such as a wider variety of appliances like stoves, or ovens) expand into new markets and produce totally new kinds of products (such as when an appliance maker starts to produce computers or ai planes). Market Structure Market Structure - Group functions into divisions that can be responsive to the needs of particular types of customers. Geographic Structure An organization facing the problem of controlling its activities on a national or international level is likely to use a geographic structure and group functions into regional divisions to service customers in different geographic areas. Each geographic division has access to a full set of the functions it needs to provide its goods and services. Advantages Of A Divisional Structure (4 of 11)5/21/2010 3:14:54 PM

5 Coordination Advantages 1. Quality products and customer service - Functions are able to focus their activities on a specific kind of good, service, or customer. This narrow focus helps a division to create high-quality products and provide high-quality customer service. 2. Facilitates communication - between functions improve decision making, thereby increasing performance. 3. Customized management and problem solving - A geographic structure puts managers closer to the scene of operations than are managers at central headquarters. Regional managers are well positioned to be responsive to local situations such as the needs of regional customers and to fluctuations in resources. Thus regional divisions are often able to find solutions to regionspecific problems and to use available resources more effectively than are managers at corporate headquarters. 4. Facilitates teamwork - People are sometimes able to pool their skills and knowledge and brainstorm new ideas for products or improved customer service. 5. Facilitates decision making - As divisions develop a common identity and approach to solving problems, their cohesiveness in- creases, and the result is improved decision making. Motivation Advantages 1. Clear connection between performance and reward - A divisional structure makes it relatively easy for organizations to evaluate and reward the performance of individual divisions and their managers and to assign rewards in a way that is closely linked to their performance. Corporate managers can also evaluate one regional operation against another and thus share ideas between regions and find ways to improve performance. 2. Customized service - regional managers and employees are close to their customers and may develop personal relationships with them-relationships that may give those managers and employees extra incentive to perform well. 3. Identification with division - employees' close identification with their division can increase their commitment, loyalty, and job satisfaction. Disadvantages Of A Divisional Structure High operating and managing costs - because each division has its own set of functions, operating costs- the costs associated with managing an organization-increase. The number of managers in an organization, for example, increases, because each division (5 of 11)5/21/2010 3:14:54 PM

6 has its own set of sales managers, manufacturing managers, and so on. There is also a completely new level of management, the corporate level, to pay for. Poor communication between divisions - Divisional structures normally have more managers and more levels of management than functional structures have, communications problems can arise as various managers at various levels in various divisions attempt to coordinate their activities. Conflicts among divisions - divisions may start to compete for organizational resources and may start to pursue divisional goals and objectives at the expense of organizational ones. Matrix Structure A complex form of differentiation that some organizations use to control their activities results in the matrix structure, which simultaneously groups people in two ways- by the function of which they are a member and by the product team on which they are currently working. In practice, the employee who are members of the product teams in a matrix structure have two bosses-a functional boss and a product boss. Coordination Advantages 1. Facilitates rapid product development 2. Maximizes communication and cooperation between team members 3. Facilitates innovation and creativity 4. Facilitates face-to-face problem solving (through teams) 5. Provides a work setting in which managers with different functional expertise can cooperate to solve non-programmed decision-making problems. 6. Facilitates frequent changes of membership in product teams Motivation Advantages The matrix structure provides a work setting in which such employees are given the freedom and autonomy to take responsibility for their work activities. Disadvantages of a Matrix Structure (6 of 11)5/21/2010 3:14:54 PM

7 1. Increase role conflict and role ambiguity - Two bosses making conflicting demands on a two-boss employee cause role conflict. Reporting relationships in the matrix makes employees vulnerable to role ambiguity. 2. High levels of work stress - Conflict and ambiguity can increase feelings of stress. Difficulty employees have in demonstrating their personal contributions to team performance because they move so often from one team to another. 3. Limited opportunities for promotion - because most movement is lateral, from team to team, not vertical to upper management positions. The extent of these problems explains why matrix structures are used only by companies that depend on rapid product development for their survival and that manufacture products designed to meet specific customer needs. Matrix structures are especially common in high-tech and biotechnology companies. Differentiation Summary 1. Examine the way your organization groups its activities by function, and determine whether this grouping meets the organization's current product or customer needs. 2. If the number of goods and services you are producing has increased, examine whether you should change to a product structure. 3. If you are currently servicing the needs of a number of different groups of customers, examine whether you should change to a market structures 4. If you are expanding nationally, examine whether you should change to a geographic structure. 5. If your current need is to speed the development of new products, examine whether you should choose a matrix structure. Integration: Mechanisms for Increasing Coordination Tall and Flat Hierarchies The larger and more complex an organization is, the taller is its hierarchy. Tall organizations have many levels in the hierarchy relative to their size; flat organizations have few. Problems of integrating between hierarchical levels emerge when an organization's hierarchy becomes too tall. (7 of 11)5/21/2010 3:14:54 PM

8 More specifically, communication and decision-making problems start to occur. As the number of management levels increases, the time it takes to send messages up and down the hierarchy increases and decision making slows. Information passed from person to person can be distorted or filtered as messages become garbled and managers naturally interpret messages according to their own interests. These problems further reduce the quality of decision making. Decentralizing Authority To reduce the communication and decision-making problems that accompany a hierarchy's growth, organizations may prefer decentralization to centralization, choosing to distribute authority to managers at all levels of the hierarchy and giving them responsibility for making decisions. Authority is said to be centralized when only managers at the top of an organization can make important decisions. Authority is decentralized when managers throughout the hierarchy are allowed to make significant decisions. What are the benefits of decentralization of authority? 1. Communication and decision-making problems because lower-level managers do not have to continually consult or report up the hierarchy to their superiors. 2. At the same time, greater job responsibilities can increase motivation by making lower-level jobs more interesting and rewarding. Mutual Adjustment Mutual adjustment - the ongoing informal communication among different people and functions that is necessary for an achieve its goals. Mutual adjustment makes an organization's structure work smoothly, and managers must constantly make efforts to promote it and do all they can to facilitate communication and the free flow of information among functions. (8 of 11)5/21/2010 3:14:54 PM

9 Mutual adjustment, for example, prevents the emergence of different orientations that can cause significant communication and decision-making problems between functions and divisions. An organization has to build into its structure integrating mechanism that facilitate mutual adjustment and make it easy for managers and employees in different functions and divisions to meet and coordinate their activities. Direct Contact In using direct contact, managers from different function try to establish face-to-face working relationships that allow them to solve common problems informally, without having to go through the formal channels of authority in the hierarchy. Liaison Roles Recognizing the importance of direct contact, organizations often establish liaison roles that give specific functional managers the formal responsibility of maintaining a high level of direct contact with managers in another function. To facilitate communication and effective decision making, managers in liaison roles meet regularly to exchange information, and members of one function transmit requests to other functions through these liaison personnel. Over time, the personal working relationships that develop among managers performing liaison roles enhance coordination and integration throughout the organization. Teams and Task Forces When two or more functions are involved in decision making, organizations often create interfunctional teams and task forces to facilitate communication and cooperation. Standardization The third principal tool that organizations can use to control their activities and integrate functions and divisions is standardization-the development of routine responses to recurring problems or opportunities that specify how individual and functions are to coordinate their actions to accomplish organizational goals. Standardizing Inputs (9 of 11)5/21/2010 3:14:54 PM

10 Organizational inputs include the skills and capabilities of managers and workers, the quality of the raw materials and component parts used to make products, and the machinery and computers used in the production process. Organizations can standardize the skills of their managers and workers by requiring them to have certain qualifications and experiences. Organizations that recruit and select workers who meet stringent criteria can be relatively confident that their employees will respond in appropriate ways to uncertain events. Standardizing Throughputs To standardize throughputs (the conversion processes that an organization uses to convert inputs into outputs), organizations develop performance programs that specify the behaviors they expect from their employees. When behaviors are specified, both individuals and groups act consistently in ways that allow an organization to achieve its goals. The principal way in which organizations standardize behaviors is by the use of rules and standard operating procedures (SOPS)." Because rules and SOPs specify the series of actions or decisions that employees are expected to perform in a given situation, they standardize employee responses to the situation. Formalization - is the use of rules and standard operating procedures to control an organization's activities. The more an organization can rely on formalization to specify required behaviors, the less it needs to use either direct supervision from the hierarchy or mutual adjustment. Formalization can result in lower operating costs and thus increased organizational performance. Once rules have been developed, they are inexpensive to use and cost little to implement and maintain. (10 of 11)5/21/2010 3:14:54 PM

11 All that is required is that new employees be taught the appropriate rules to follow in certain situations. Although some rules are necessary to the smooth running of an organization, too many rules can give rise to a number of problems: 1. Excessive formalization can straitjacket employees and prevent them from responding creatively and flexibly to new situations. 2. Employees' inclination to obey rules without thinking about their consequences can reduce the quality of organizational decision making. 3. Too much emphasis on the use of existing rules and performance programs can make it especially difficult for an organization to make changes and develop new rules. Standardizing Outputs - Organizations can standardize outputs, the goods and services they produce, by specifying the level of performance they require from their employees and setting standards by which to measure actual employee outputs. Instead of specifying the behaviors the organization can expect from its employees (as rules and SOPs do), the organization specifies what the outputs of its employees must be for the organization to achieve its goals." Organizations try to standardize an employee's output by specifying sales goals for salespeople, such as how much they should sell each month or how many customers they should visit each day. Specifying goals for researchers is more difficult because their work is so long-term and complex, but an R&D function can be measured by the number of new products it develops or the number of new patents it files. (11 of 11)5/21/2010 3:14:54 PM

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