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Unit II

Organization design:
Organization design can be defined narrowly, as the process of reshaping organization structure and roles, or it can more effectively be defined as the alignment of structure, process, rewards, metrics and talent with the strategy of the business. Jay Galbraith and Amy Kates have made the case persuasively (building on years of work by Galbraith) that attention to all of these organizational elements is necessary to create new capabilities to compete in a given market. This systemic view, often referred to as the "star model" approach, is more likely to lead to better performance. Organization design may involve strategic decisions, but is properly viewed as a path to effective strategy execution. The design process nearly always entails making trade-offs of one set of structural benefits against another. Many companies fall into the trap of making repeated changes in organization structure, with little benefit to the business. This often occurs because changes in structure are relatively easy to execute while creating the impression that something substantial is happening. This often leads to cynicism and confusion within the organization. More powerful change happens when there are clear design objectives driven by a new business strategy or forces in the market that require a different approach to organizing resources. The organization design process is often defined in phases. Phase one is the definition of a business case, including a clear picture of strategy and design objectives. This step is typically followed by "strategic grouping" decisions, which will define the fundamental architecture of the organization - essentially deciding which major roles will report at the top of the organization. The classic options for strategic grouping are to organize by:

Behavior Function Product or category Customer or market Geography Matrix

Each of the basic building block options for strategic grouping brings a set of benefits and drawbacks. Such generic pros and cons, however, are not the basis for choosing the best strategic grouping. An analysis must be done completed relative to a specific business strategy. Subsequent phases of organization design include operational design of processes, roles, measures and reward systems, followed by staffing and other implementation tasks. The field is somewhat specialized in nature and many large and small consulting firms offer organization design assistance to executives. Some companies attempt to establish internal staff resources aimed at supporting organization design initiatives. There is a substantial body of literature in the field, arguably starting with the work of Peter Drucker in his examination of General Motors decades ago. Other key thinkers built on Drucker's thinking, including Galbraith (1973), Nadler, et al. (1992) and Lawrence & Lorsch (1967).

Organization design can be considered a subset of the broader field of organization effectiveness and organization development, both of which may entail more behaviorally focused solutions to effectiveness, such as leadership behaviors, team effectiveness and the like. Many organizational experts argue for an integrated approach to these disciplines, including effective talent management practices.

Characteristics of effective organizational design

Simplicity

An effective organizational system need not be complex. On the contrary, simplicity in design is an extremely desirable quality. Consider the task of communicating information about the operation of a system and the allocation of its inputs. The task is not difficult when components are few and the relationships among them are straightforward. However, the problems of communication multiply with each successive stage of complexity. The proper method for maintaining simplicity is to use precise definitions and to outline the specific task for each subsystem. Total systems often become complex because of the sheer size and nature of operations, but effectiveness and efficiency may still be achieved if each subsystem maintains its simplicity.

Flexibility

Conditions change and managers should be prepared to adjust operations accordingly. There are two ways to adjust to a changing operating environment: to design new systems or to modify operating systems. An existing system should not be modified to accommodate a change in objectives, but every system should be sufficiently flexible to integrate changes that may occur either in the environment or in the nature of the inputs. For example, a company should not use the same system to build missiles as it uses to build airplanes, nor the same system to sell insurance as the one originally designed to sell magazines. However, it should be possible to modify an existing system to produce different sizes, varieties, or types of the same product or service. A practical system must be well designed but it cannot be entirely rigid. There will always be minor variations from the general plan, and a system should be able to adapt to such changes without excessive confusion. The advantages associated with having a flexible system will become more apparent when we consider the difficulty of administering change.

Reliability

System reliability is an important factor in organizations. Reliability is the consistency with which operations are maintained, and may vary from zero output (a complete breakdown or work stoppage) to a constant or predictable output. The typical system operates somewhere between these two extremes. The characteristics of reliability can be designed into the system by carefully selecting and arranging the operating components; the system is no more reliable than its weakest segment. When the requirements for a particular component such as an operator having unique skills are critical, it may be worthwhile to maintain a standby operator. In all situations, provisions should be made for quick repair or replacement when failure occurs. One valid approach to the reliabilitymaintenance relationship is to use a form of construction that permits repair by replacing a complete

unit. In some television sets, for example, it is common practice to replace an entire section of the network rather than try to find the faulty component. Reliability is not as critical an issue when prompt repair and recovery can be instituted.

Economy

An effective system is not necessarily an economical (efficient) system. For example, the postal service may keep on schedule with mail deliveries but only by hiring a large number of additional workers. In this case, the efficiency of the postal system would be reduced. In another example, inventories may be controlled by using a comprehensive system of storekeeping. However, if the cost of the storekeeping were greater than the potential savings from this degree of control, the system would not be efficient. It is often dysfunctional and expensive to develop much greater capacity for one segment of a system than for some other part. Building in redundancy or providing for every contingency usually neutralizes the operating efficiency of the system. When a system's objectives include achieving a particular task at the lowest possible cost, there must be some degree of trade-off between effectiveness and efficiency. When a system's objective is to perform a certain mission regardless of cost, there can be no trade-off.

Acceptability

Any system, no matter how well designed, will not function properly unless it is accepted by the people who operate it. If the participants do not believe it will benefit them, are opposed to it, are pressured into using it, or think it is not a good system, it will not work properly. If a system is not accepted, two things can happen:(1) the system will be modified gradually by the people who are using it, or (2) the system will be used ineffectively and ultimately fail. Unplanned alterations in an elaborate system can nullify advantages associated with using the system.

Importants of Organisational Design: Company Leadership


Organizational design influences the leadership structure of a company, setting forth reporting relationships and lines of authority reaching from the executive level to the front line. It is important to have a clear map of managerial responsibility and accountability to keep the company running smoothly. Without clear lines of authority, employees in different areas of the company can become misguided or confused, while others find themselves with an unnecessarily high level of supervision. The ideal leadership structure depends on the industry a company is in and the personalities of business owners.

Company Culture
The leadership structure put in place by organizational-design choices can have a direct and lasting effect on company culture. The grouping of employees in various departments and the managerial hierarchy influences the way employees interact with each other on the job. Organizational design can influence the degree to which front-line employees are allowed to solve complex problems on their own rather than involving a manager, for example. An organization designed to make extensive use of telecommuters will result in a company in which workplace relationships are often formed and strengthened solely through online interactions, as another example.

Future Growth
Organizational design choices made in the early stages of a business can either help or hinder growth plans. Organizational designs built to easily accommodate new managers and employees at different levels of the organization can add new positions without making significant structural changes. A company using freelancing telecommuters, for example, can add large numbers of freelancers with a small increase in the number of managers. A company that locates all employees in a small office, on the other hand, must acquire new office space or expand their current office to take on new employees.

Adaptability
Organizational design choices can develop distinct competitive advantages. Savvy business owners continually monitor changes in their industries and markets, looking for opportunities to adapt and develop new competitive advantages. Companies with taller organizational structures and complicated bureaucracies can find it difficult to adapt to changing market conditions, such as a growing use of lean business models or outsourcing in the industry. Companies with less complex organizational structures can find it easier to shift employees around, rework managerial hierarchies and redesign job descriptions for existing employees, all of which can increase efficiency or productivity in response to outside pressures.

Components of the Organizational Design


Six Key Elements in Organizational Design

Organizational design is engaged when managers develop or change an organization's structure.


Organizational Design is a process that involves decisions about the following six key elements: I. Work Specialization Describes the degree to which tasks in an organization are divided into separate jobs. The main idea of this organizational design is that an entire job is not done by one individual. It is broken down into steps, and a different person completes each step. Individual employees specialize in doing part of an activity rather than the entire activity. II. Departmentalization It is the basis by which jobs are grouped together. For instance every organization has its own specific way of classifying and grouping work activities. There are five common forms of departmentalization: 1. Functional Departmentalization. As shown in the Figure 2-1, it groups jobs by functions performed. It can be used in all kinds of organizations; it depends on the goals each of them wants to achieve.

Figure 2-1Functional Departmentalization example

2. Different aspects on this type of departmentalization: Positive Aspects Efficiencies from putting together similar specialties and people with common skills, knowledge, and orientations Coordination within functional area In-depth specialization Negative Aspects Poor communication across functional areas Limited view of organizational goals

3. Product Departmentalization. It groups jobs by product line. Each manager is responsible of an area within the organization depending of his/her specialization Figure 2: Product Departmentalization example Source: Bombardier Annual Report

Different aspects on this type of departmentalization: Positive Aspects Negative Aspects

Allows specialization in particular products and services Managers can become experts in their industry Closer to customers

Duplication of functions Limited view of organizational goals

4. Geographical Departmentalization. It groups jobs on the basis of territory or geography. Figure 2-3: Geographical Departmentalization example

Different aspects on this type of departmentalization: Positive Aspects More effective and efficient handling of specific regional issues that arise Serve needs of unique geographic markets better Negative Aspects Duplication of functions Can feel isolated from other organizational areas

5. Process Departmentalization. It groups on the basis of product or customer flow.

Figure 2-4: Process Departmentalization example

Different aspects on this type of departmentalization: Positive Aspects More efficient flow of work activities Negative Aspects Can only be used with certain types of products

6. Customer Departmentalization. It groups jobs on the basis of common customers Figure 2-5: Customer Departmentalization example

Different aspects on this type of departmentalization: Positive Aspects Customers' needs and problems can be met by specialists Negative Aspects Duplication of functions Limited view of organizational goals

III. Chain of command It is defined as a continuous line of authority that extends from upper organizational levels to the lowest levels and clarifies who reports to whom. There are three important concepts attached to this theory:

Authority: Refers to the rights inherent in a managerial position to tell people what to do and to expect them to do it.

Responsibility: The obligation to perform any assigned duties. Unity of command: The management principle that each person should report to only one manager.

IV. Span of Control It is important to a large degree because it determines the number of levels and managers an organization has. Also, determines the number of employees a manager can efficiently and effectively manage. V. Centralization and Decentralization More Centralization

More Decentralization

Environment is stable Lower-level managers are not as capable or experienced at making decisions as upper-level managers. Lower-level managers do not want to have say in decisions Decisions are significant. Organization is facing a crisis or the risk of company failure. Company is large. Effective implementation of company strategies depends on managers retaining say over what happens.

Environment is complex, uncertain. Lower-level managers are capable and experienced at making decisions. Lower-level managers want a voice in decisions. Decisions are relatively minor. Corporate culture is open to allowing managers to have a say in what happens. Company is geographically dispersed. Effective implementation of company strategies depends on managers having involvement and flexibility to make decisions

VI. Formalization It refers to the degree to which jobs within the organization are standardized and the extent to which employee behavior is guided by rules and procedures. Types of Organizational Designs

Organizational designs fall into two categories, traditional and contemporary. Traditional designs include
simple structure, functional structure, and divisional structure. Contemporary designs would include team structure, matrix structure, project structure, boundaryless organization, and the learning organization. I am going to define and discuss each design in order to give an understanding of the organizational design concept.

I. Traditional Designs 1. Simple Structure A simple structure is defined as a design with low departmentalization, wide spans of control, centralized authority, and little formalization. This type of design is very common in small start up businesses. For example in a business with few employees the owner tends to be the manager and controls all of the functions of the business. Often employees work in all parts of the business and dont just focus on one job creating little if any departmentalization. In this type of design there are usually no standardized policies and procedures. When the company begins to expand then the structure tends to become more complex and grows out of the simple structure. 2. Functional Structure A functional structure is defined as a design that groups similar or related occupational specialties together. It is the functional approach to departmentalization applied to the entire organization. BASIC CHALLENGES OF ORGANIZATIONAL DESIGN
Differentiation is the process of dividing labor. The first design challenge is to determine the level of vertical and horizontal differentiation. In an organization, individuals are assigned specific responsibilities; those with similar skills are grouped into functions, with two or more functions grouped into a division. As organizations grow, they differentiate into five functional roles: support, production, maintenance, adaptive, and managerial. Each role has a horizontal and a vertical dimension. Horizontal differentiation groups people into subunits. Vertical differentiation designs a hierarchy of authority and establishes reporting relationships to connect subunits. The second design challenge is balancing differentiation and integration. As an organization becomes differentiated, more complex integrating mechanisms coordinate activities. The following seven integrating mechanisms, listed from simplest to most complex, are reviewed: 1. Hierarchy of authority 2. Direct contact 3. Liaison role 4. Task force 5. Team 6. Integrating role 7. Integrating department The integrating mechanism must facilitate communication and coordination for effectiveness, but unnecessary mechanisms are costly. The third design challenge is the balance between centralization and decentralization, each with advantages and disadvantages. Distributing decision-making authority influences employee behavior. Centralization results in predictability whereas decentralization fosters innovation. The fourth design challenge is balancing standardization and mutual adjustment. Standardization is facilitated through formalization, written rules, norms, and informal behavioral expectations. Socialization is the process of learning and internalizing norms. Standardization results in predictable behavior. Mutual adjustment relies on judgment rather than formalized rules for problem solving. If an organization desires predictability, it is highly centralized and relies on standardization. For innovation, an organization is decentralized and relies on mutual adjustment.

A mechanistic structure is appropriate in a predictable, stable environment. An organic structure is appropriate in an uncertain, changing environment requiring flexibility. In reality, most organizations are a combination of the two. The contingency approach tailors organizational structure to the sources of uncertainty.

Differentiation
The first design challenge determines how to control and coordinate value creation. An organization must manage differentiation, the process of creating and controlling the division of labor. In a simple organization, division of labor is low with few coordination problems. Growth makes the organization complex with high division of labor and high differentiation. (Fig. 4.1) Notes____________________________________________________________________________________ ________________________________________________________________________________________ ____________________________________________________________________________

Organizational Insight 4.1: The B.A.R. and Grille Restaurant


Growth increases division of labor and differentiation. Two people started the restaurant and performed all the tasks; through growth, they hired 22 people. The owners opened two more restaurants, which increased differentiation. Q: How did Bob and Amanda manage the increasingly complex activities? A. Initially they performed all tasks, but as business increased, Amanda took control of the dining room and Bob managed the kitchen. They hired people to perform specific tasks such as bartending and a manager to oversee maintenance. Bob and Amanda opened two other restaurants and centralized support functions such as purchasing, marketing, and training. Organizational Roles Every position in an organization requires certain behaviors. Task-related behaviors, called organizational roles, determine relationships. As division of labor increases, managers specialize in some roles and hire employees to specialize in others to develop core competences. Because a restaurant manager holds waiters responsible for behavior, the manager has authority. Clearly defined roles and authority relationships give organizations the control to facilitate goal achievement. The relationships between managers and waiters ensure effective customer service. Subunits: Functions and Divisions Those with similar skills or shared resources are grouped into functions; chefs form the kitchen function. Two or more functions are grouped into a division; each restaurant division consists of the dining room and kitchen. Larger organizations have many divisions, and the number of functions and divisions indicates an organizations complexitythe extent of differentiation. (Fig. 4.1) As organizations grow, they differentiate into five functional roles:

1. Support functions handle a companys relationship with its environment and its stakeholders. Support functions include purchasing, sales and marketing, and public relations and legal affairs. 2. Production functions improve organizational efficiency. They include production operations, production control, and quality control. 3. Maintenance functions keep an organization in operation. Maintenance functions include personnel, engineering, and janitorial services. 4. Adaptive functions allow for organizational responses to changes in the environment. Adaptive functions include research and development, market research, and long-range planning. 5. Managerial functions expedite departmental control and coordination. Managers at all levels have roles: top managers formulate strategy; middle managers use resources to meet goals; and lower-level managers direct workers. Notes____________________________________________________________________________________ ________________________________________________________________________________________ ____________________________________________________________________________

Differentiation at the B.A.R. and Grille


Q: What roles did the B.A.R. and Grille develop? A: The services manager handled advertising and bought supplies, a support role. Dividing labor between the kitchen and dining room facilitated production. The accountant, cashiers, and cleaning staff performed maintenance roles. Bob and Amanda ensured good customer service, an adaptive role, and created task and functional relationships, a managerial role. Q. When did the restaurant differentiate into divisions? A. The B.A.R. and Grille differentiated into divisions as additional restaurants were added. The three restaurant divisions had centralized support functions. Large companies have self-contained divisions, each with its own set of five basic functions to offer a competitive advantage. Vertical and Horizontal Differentiation Each role at the restaurant has a vertical and horizontal dimension. (Fig. 4.2) Organizational roles are vertically differentiated according to the hierarchy of authority. Vertical differentiation creates reporting relationships to connect organizational roles and subunits. Lower levels report to higher levels; waiters report to managers. Vertical differentiation provides control over activities. Roles are horizontally differentiated according to tasks, creating a division of labor and grouping into subunits. Busboys and waiters are grouped into functions. Notes____________________________________________________________________________________ ________________________________________________________________________________________ ____________________________________________________________________________ Organizational Design Challenges The first design challenge is selecting the levels of horizontal and vertical differentiation to reach organizational goals. Other design challenges include: balancing differentiation and integration; balancing

centralization and decentralization; balancing standardization and mutual adjustment; and coordinating the formal and informal organizations.

Managerial Implications: Differentiation


Managers should draw an organizational chart to identify the distribution of authority and division of labor. Managers should analyze each persons role and relationships between roles. Managers should analyze relationships between departments to make sure the division of labor creates value.

4.2

Balancing Differentiation and Integration

The second design challenge is to balance differentiation and integration. Horizontal differentiation creates subunits to facilitate specialization; however, subunit orientations, perceiving ones role as a subunit member, emerge as an organization becomes complex.

Integration and Integrating Mechanisms


Subunit orientations make communication and coordination difficult. Integration or coordinating tasks, functions, and divisions, improves coordination and communication. (Table 4.1) The seven integrating mechanisms, from simplest to complex, include: 1. 2. 3. 4. 5. 6. 7. Hierarchy of authority specifies reporting relationships. Direct contact requires managers from different functions to meet to coordinate activities. Liaison role requires a manager to coordinate with other subunit managers. Task forces create a temporary cross-functional committee. Teams require different functional managers to coordinate activities. Integrating roles coordinate two or more functions or divisions. Integrating departments coordinate functions or divisions.

Notes____________________________________________________________________________________ ________________________________________________________________________________________ ____________________________________________________________________________

Refer to Discussion question 3 here to show how integrating mechanisms facilitate communication and coordination.
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Organizational Insight 4.2: Integration at a Movie Studio
Competition from companies that specialize in special effects have changed how movie studios operate. This insight shows how a movie studio was able to remain competitive by becoming more organic. Specifically, they built a state-of-the art office complex that better allowed coordination and cooperation between different departments.

Q. How can Amgen improve communication and coordination? A. Amgen needs to integrate its teams into a hierarchy of authority to provide control so that teams coordinate with functions. As companies become large and complex, communication barriers increase. An organization can create an integrating role, a full-time position to improve communication between divisions. This differs from a liaison role, which is only part-time. An organization with many integrating roles can establish an integrating department.

Differentiation versus Integration


Managers must fit integration to the level of differentiation. Q. What was the level of differentiation and integration at the B.A.R. and Grille? A. Initially, differentiation was low, so the owners ran the restaurant with little integration. More integration is needed as the organization grows, but excessive differentiation or integration increases costs (more managers) and time spent coordinating activities. In balancing integration and differentiation, managers must develop core competences and select integrating mechanisms that foster subunit cooperation. Notes_____________________________________________________________________________

_________________________________________________________________________________ _______________________________________________________________________ 4.3 Balancing Centralization and Decentralization

The third design challenge determines how much decision-making authority to centralize and decentralize. One criticism of the hierarchy of authority is that employees are risk-averse and give tough problems to supervisors; this slows decision making and leads to missed opportunities.

Centralization versus Decentralization of Authority


When top managers make decisions, authority is centralized. When lower-level managers make decisions, authority is decentralized. Q. What are the advantages and disadvantages of centralization? A. Centralization keeps a company focused on goals, but managers become involved in day-to-day decisions and lose sight of strategic or long-term decision making. Q. What are some advantages and disadvantages of decentralization? A. Decentralization offers flexibility and responsiveness, making managers accountable risk-takers. The chance to demonstrate skills and competences motivates managers. Yet, decentralization makes planning and coordination difficult, and the company may lose control of decision making.

Notes_____________________________________________________________________________

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Organizational Insight 4.3: Centralize or Decentralize?


Decentralization can be a disadvantage. United Way suffered from the perception that donations were used for overhead and not for the needy.

Q. Should United Way centralize or decentralize?

A. Consultants felt that the best way to save money and increase efficiency was to reduce the number of local organizations and centralize business functions. United Way had not found the right balance between centralization and decentralization.

Waste Management Inc. gave its subsidiary, Chemical Waste Management, a disposer of hazardous waste, complete authority to make operating decisions. Waste Management Inc. was interested only in the profits.

Q. What problems did Waste Management incur due to its balance of decentralization and centralization? A. The failure to control decision making and the pressure to increase profits led employees to deliberately mishandle waste. Pollution-monitoring equipment was turned off to save disposal costs, and managers were accused of mislabeling containers to avoid disposal costs. The decentralized management style was blamed because there was little involvement from top managers. Managers must select a balance between centralization and decentralization. The optimal balance occurs when middle managers make some decisions, and top managers make strategic decisions. The distribution of authority controls how workers behave; the army discourages risk-taking and maximizes control, so the structure is highly centralized.

Q. What types of companies decentralize authority? A. High-tech companies encourage innovation and risk-taking, so they decentralize authority. Evaluating the balance of authority is ongoing.

4.4

Balancing Standardization and Mutual Adjustment

The fourth design difficulty balances standardization and mutual adjustment. Standardization is the process of following rules and standard operating procedures (SOPs). Mutual adjustment allows for judgment rather than rules to solve problems. Standardization makes actions predictable, and mutual adjustment provides flexibility for responding creatively.

Formalization: Written Rules


The use of written rules and procedures to standardize operations is known as formalization. If formalization and standardization are extensive, there is no room for mutual adjustment. Employees are held accountable for following rules. Q. What companies use formalization extensively? A. The military, UPS, and Federal Express use formalization. Q. Are those companies highly centralized or decentralized? A. Highly formalized companies are generally highly centralized. Companies with a high level of mutual adjustment are highly decentralized. Notes_____________________________________________________________________________

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Socialization: Understood Norms


Rules are formal statements that specify methods for goal attainment, and norms are informal, internalized standards of behavior. Some norms promote effectiveness, and others reduce it. When production workers select a work rate and ratebusters violate the norm by working too fast, they face reprisals. If the norm is to make no changes, managers hesitate to suggest changes. Even if rules change, behavior is unchanged because rules become internalized norms. Socialization means learning norms and unwritten rules.

Standardization versus Mutual Adjustment


It is challenging to balance control through standardization with employee problem solving for mutual adjustment. Some functions, like accounting, require standardization, but others, like R&D, require risk taking. Integrating mechanisms, such as task forces and teams, increase mutual adjustment. Complex, uncertain tasks rely on mutual adjustment. An appropriate balance between standardization and mutual adjustment promotes creative and responsible behavior.

Notes_____________________________________________________________________________

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Refer to Discussion question 4 here to emphasize the role of goals and the environment in balancing centralization vs. decentralization and standardization vs. mutual adjustment.

_______________________________________ _______________________________________ _______________________________________ _________________________________ Focus on New Information Technology: Amazon.com, Part 3
Design choices were driven by the need to ensure that Amazons software effectively linked customers to the Web site. Customer service was the most important element. Q. How did Jeff Bezos structure Amazon.com? A. The desire for good customer service led to a decentralized structure, which empowered employees to meet customers needs. For efficient book distribution and shipping, information systems were standardized, but mutual adjustment improved customer responsiveness. Q. How does Amazon.com coordinate and motivate employees? A. Socialization is the vehicle for coordinating and motivating employees. They learn organizational roles from members of their functions and the norm of providing excellent customer service. Employees receive company stock as a motivator.

Managerial Implications: Challenges

The

Design

Managers should create a map of the principal integrating mechanisms and determine which levels in the hierarchy have responsibility for specific decisions. Managers should list their principal tasks and responsibilities and be aware of the informal norms and values that influence group members.

4.5

Mechanistic and Organic Organizational Structures

Design choices produce mechanistic and organic structures. (Fig. 4.6) Mechanistic structures influence people to behave in a predictable manner. Decision making is highly centralized and roles are clearly defined. (Fig. 4.7a) Q. What is the major integrating mechanism? A. The primary integrating mechanism is the hierarchy. Standardization and formal rules facilitate control and coordination. Emphasis on the hierarchy makes the informal organization aware of status. Promotion is slow and ones career path outlined. This rigid structure is appropriate in stable, unchanging environments.

Organic structures encourage flexibility and decentralize decision making. Roles are loosely defined. Employees perform many tasks and work with people from various functions. (Fig. 4.7b)
Q. What integrating mechanisms are used? A. This structure requires complex integrating mechanisms, such as task forces and teams. Status is based on leadership ability, not a formal position in the hierarchy. Organic structures respond quickly to change. Notes_____________________________________________________________________________

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The Contingency Approach to Organizational Design


Contingencies shape organizational design. The contingency approach customizes structure to the sources of uncertainty. Mechanistic and organic structures are ideals, useful for understanding the effect of structure on behavior, but in reality, organizations mix both structures. Notes____________________________________________________________________________________ ________________________________________________________________________________________ ____________________________________________________________________________

Organizational Insight 4.4: Trader Joes Organic Structure


This case illustrates how a shift to a more organic structure helped an upscale supermarket chain. This is also a good illustration of how the people and the structure are intertwined. In this case, part of the success of the organic structure was due to a policy of promoting from within the highest performing salespeople. The company also created a system in which employees felt like they owned the company.

Lawrence and Lorsch on Differentiation, Integration, and the Environment The number and size of an organizations functions reflect the need to manage exchanges with environmental forces. (Fig. 4.9) Lawrence and Lorsch analyzed three industries with three levels of uncertaintyplastics, food processing, and container manufacturing. They selected companies and measured: (1) differentiation in production, R&D,

and sales departments; (2) differences in subunit or functional orientations, and (3) differences in integrating mechanisms. (Table 4.2)
Research findings: 1. In complex, unstable environments, attitudes vary significantly. Each department creates its own response to environmental issues. 2. In unstable, uncertain environments, informal and decentralized organizations using mutual adjustment are more effective. 3. In stable, certain environments, centralization, formalization, and standardization are more effective. 4. Effective companies match levels of integration with levels of differentiation. Highly differentiated companies have complex integrating mechanisms. To be effective, an organization must adapt its structure to match its environment; Burns and Stalker strengthen this conclusion. Burns and Stalker on Organic versus Mechanistic Structures and the Environment Burns and Stalker found that companies with organic structures were more effective in unstable and changing environments. Companies with mechanistic structures were more effective in a stable environment. Q. Why is an organic structure more effective in a dynamic environment? A. A flat, decentralized structure increases communication, information sharing, and customer responsiveness. A stable environment makes complex decision making unnecessary, transactions are managed easily, and centralized authority is more effective. Burns and Stalker proposed that structure be designed to match the dynamism of the environment. Notes____________________________________________________________________________________ ________________________________________________________________________________________ ____________________________________________________________________________

DISCUSSION QUESTIONS AND ANSWERS


1. Why does differentiation occur in an organization? Distinguish between vertical and horizontal differentiation.
Differentiation occurs because as organizations grow and become more complex, they establish a division of labor. Complex organizations must control and coordinate activities to achieve goals. Vertical differentiation is a hierarchy of authority with reporting relationships established to connect organizational roles and subunits. Horizontal differentiation groups roles according to task responsibilities, establishes division of labor, and forms subunits.

2. Draw an organizational chart of your business school or college. Outline the major roles and functions. How differentiated is it? Do you think the distribution of authority and division of labor are appropriate?
Answers will vary. The hierarchy from top to bottom is president; vice presidents; dean of the business school; and department heads from each of the functional departmentsfinance, management, marketing, accounting, and information systems. Under department heads are faculty members, then student assistants and workers. Horizontally, there are five functions and specializations within each function. Vertically, the hierarchy has several layers. 3. When does an organization need to use complex integrating mechanisms? Why?

As organizations become differentiated, subunit orientations emerge, leading to poor communication and coordination. Complex and highly differentiated organizations, such as those with several divisions, use complex integrating mechanisms to facilitate communication and coordination. In large organizations, division managers never meet, so integrating roles promote communication and coordination.

4.

What factors determine the balance between centralization and decentralization and between standardization and mutual adjustment?

The balance depends on organizational goals and the environment. To discourage risk-taking, the structure is centralized with control through standardization. To encourage risk-taking, the structure is decentralized with control through mutual adjustment. Centralization and standardization promote predictability; decentralization and mutual adjustment promote innovation. Centralization and standardization fit a stable, unchanging environment, whereas decentralization and mutual adjustment fit a changing, uncertain environment.

5.

Under what conditions is an organization likely to prefer (a) a mechanistic structure, (b) an organic structure, or (c) elements of both?

a. An organization prefers a mechanistic structure to encourage predictable behavior in a stable environment. If technology doesnt change and the tasks are simple, a mechanistic structure is preferable. A mechanistic structure is preferred when formalized rules must be followed. b. An organization prefers an organic structure to foster innovation in a changing, uncertain environment, or if a project requires cross-functional coordination. If technology changes and a company has skilled workers, it needs an organic structure. c. Most organizations adopt both a mechanistic and organic structure and simply lean more toward one. The military has a mechanistic structure, but remains flexible, faced with uncertainties on the battlefield. An organization can have rules and centralized decision making, but still decentralize some decisions. A balance between mechanistic and organic structures results in a competitive advantage.

Differentiation and Integration


A basic consideration in the design of organizations is dividing work into reasonable tasks (differentiation) while giving simultaneous attention to coordinating these activities and unifying their results into a meaningful whole (integration). Two guidelines may be followed in grouping activities: 1. Units that have similar orientations and tasks should be grouped together. (They can reinforce each other's common concern and the arrangement will simplify the coordinating task of a common manager). 2. Units required to integrate their activities closely should be grouped together. (The common manager can coordinate them through the formal hierarchy).[4] When units neither have similar orientations nor share their activities, the task of grouping becomes more difficult. For example, when units are similar in nature and function but are also relatively

independent, the manager must base his decision on the most appropriate way to group activities according to his past experience.[4] A difficult task associated with system-subsystem determination is to establish proper boundaries of operations. The more specific and distinct the goals of the operation, the easier it is to set boundaries. Other factors such as the influence of the environment, the availability of men and machines, the time schedule for design and operation, the cost of alternative designs, and the particular biases of the designers must be considered when establishing boundaries. Differentiation is the extent to which tasks are divided into subtasks and performed by individuals with specialised skills. Task differentiation is differentiation by what employees do. Cognitive differentiation is the extent to which people in different units within an organisation think about different things, or think about similar things differently. Integration is the extent to which various parts of an organisation cooperate and interact with each other. Interdependence is the degree to which one unit or person depends on another to accomplish a task. Uncertainty is the extent to which future input, throughput and output factors cannot be forecast accurately. Integration and coordination can be achieved through a variety of mechanism, including rules, goals and values. Rules are applies when is a highly level of uncertainty and low-levels of interdependence. As interdependence and uncertainty grows goals and then values are more effective mechanisms.