PART FOUR

C H A P T E R T E N

Organizational Structure and Design

Lecture Outline

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Introduction Defining Organizational Structure Work Specialization Departmentalization Chain of Command Span of Control Centralization and Decentralization Formalization Organizational Design Decisions Mechanistic and Organic Organizations Contingency Factors Strategy and Structure Size and Structure Technology and Structure Environmental Uncertainty and Structure Common Organizational Designs Traditional Organizational Designs Simple Structure Functional Structure Divisional Structure Contemporary Organizational Designs Team Structures Matrix and Project Structures The Boundaryless Organization Todays Organizational Design Challenges Keeping Employees Connected Building a Learning Organization Managing Global Structural Issues

How

can we design an organizational structure that will help us accomplish our companys goals? Should our structure be tall or flat? Traditional or contemporary? Will our chosen design enhance our capacity to continuously learn, adapt, and change in a dynamic global environment? As tomorrows managers, many of your students will soon face these questions. In Chapter Ten, students learn about various elements of organizational structure, the contingency factors that influence organizational design, and traditional and contemporary design. In addition, they will study design challenges encountered by managers who work in a variety of organizational structures. A Managers Dilemma tells of Penny Bakers predicament as CEO and founder of National BankCard Systems. In the early years of his company, Penny was successful in using a management style and structure that encouraged friendliness between his employees and management, including frequent socializing outside of the workplace. As BankCard Systems prospered and the number of employees increased, some workers became too complacent in the lessthan-formal atmosphere at work. Penny had to fire two employees and realized that changes must be made in his management style. Students are asked to put themselves in Pennys shoes. How should this CEO restructure his company to promote an atmosphere in which employees have fun but maintain a respectful, businesslike working relationship with management?

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Many PowerPoint Slides, including both original text art and newly created images, have been developed and are available for you to coordinate with Chapter Ten materials presentation. ANNOTATED OUTLINE 1. INTRODUCTION Designing organizational structure involves the process of organizing (the second management function) and plays an important role in the success of a company. Materials I Plan to Use:

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2.

DEFINING ORGANIZATIONAL STRUCTURE Managers need to establish structural designs that will best support and allow employees to do their work effectively and efficiently. A. Several important terms must be defined in order to understand the elements of organizational structure and design: 1. Organizing is arranging and structuring work to accomplish the organizations goals. This process has several purposes, as shown in Exhibit 10-1 and PowerPoint slide 10-6. Materials I Plan to Use:

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Q & A

10.1 If Im a lower-level manager, what kinds of organizing will I be doing?

2. Organizational structure is the formal arrangement of jobs within an organization. NOTES Materials I Plan to Use:

3. Organizational design is developing or changing an organizations structure. This 134

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process involves decisions about six key elements: work specialization, departmentalization, chain of command, span of control, centralization/ decentralization, and formalization. Chapter Ten examines each of these structural elements. Materials I Plan to Use:

B.

Work specialization is dividing work activities into separate job tasks. Most of todays managers regard work specialization as an important organizing mechanism, but not as a source of ever-increasing productivity. Materials I Plan to Use:

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Q & A

10.2 Do teams undermine work specialization?

Thinking Critically About Ethics

Workplace Values and Workplace Skills

This critical thinking exercise asks students to ponder an organizations responsibility to its workers whose skills have become obsolete. Considering the rapid pace of technological change, workers jobs will (and must) grow and change. What ethical implications does this fact bring to organizational reality? This critical thinking exercise provides an excellent opportunity for debate about personal versus organizational responsibility. Divide students into teams and have one team assume the perspective that it is the individuals responsibility to ensure that his/her skills grow with the changing nature of the workplace. The other team should take the perspective that it is the organizations responsibility to develop workers so that their skills will be current. Ask each team to present its arguments. A factor that might be considered in this class discussion could be workers ages. Many baby boomers in the workforce have different skills and methods of working than do younger Generation Xers. These generational differences can cause tension and friction in the workplace. Should age discrimination legislation be a consideration when an organization requires its workers to take responsibility for keeping their skills up to date?

C.

When work tasks have been defined, they must be arranged in order to accomplish organizational goals. This process, known as departmentalization, is the basis by which jobs are grouped. There are five major 135

ways to departmentalize (see Exhibit 10-2 and PowerPoint slide 10-8): 1. Functional departmentalization groups jobs by functions performed. 2. Product departmentalization groups jobs by product line. 3. Geographical departmentalization groups jobs on the basis of geographical region. 4. Process departmentalization groups jobs on the basis of product or customer flow. 5. Customer departmentalization groups jobs on the basis of specific and unique customers who have common needs. 6. Popular trends in departmentalization include the following: a. Customer departmentalization continues to be a highly popular approach because it allows better monitoring of customers needs and responds to changes in the needs of customers. b. Cross-functional teams, which are work teams composed of individuals from various functional specialties, are being used along with traditional departmental arrangements. NOTES Materials I Plan to Use:

D.

The chain of command is the line of authority extending from upper organizational levels to the lowest levels, which clarifies who reports to whom. Three concepts related to chain of command are authority, responsibility, and unity of command. 1. Authority is the rights inherent in a managerial position to tell people what to do and to expect them to do it. Materials I Plan to Use:

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Q & A

10.3 Are authority and power the same thing?

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2. 3.

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

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E. NOTES

Span of control is the number of employees a manager can efficiently and effectively manage. Materials I Plan to Use:

Q & A

10.4 Whats the most effective span of control?

1.

2.

The span of control concept is important because it determines how many levels and managers an organization will have. (See Exhibit 10-3 and PowerPoint slide 10-17 for an example.) What determines the ideal span of control? Contingency factors such as the skills and abilities of the manager and the employees, the characteristics of the work being done, similarity and complexity of employee tasks, the physical proximity of subordinates, the degree to which standardized procedures are in place, the sophistication of the organizations information system, the strength of the organizations culture, and the preferred style of the manager influence the ideal number of subordinates. 3. The trend in recent years has been toward wider (larger) spans of control.

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F.

The concepts of centralization and decentralization address who, where, and how decisions are made in organizations. 1. Centralization is the degree to which decision making is concentrated at upper levels of the organization. 2. Decentralization is the degree to which lowerlevel employees provide input or actually make decisions. Materials I Plan to Use:

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Focus on Leadership

When Theres No One There: The Challenges of Online Leadership

A number of your students have likely taken or are presently enrolled in a class that is delivered online. Classes taught on the Internet serve many positive purposes, including meeting the needs of students who are unable to take some classes in a traditional classroom setting. However, the nature of teaching and learning online poses particular challengeschallenges that are similar to those faced by corporate leaders who must sometimes lead online. Ask students who have participated in an Internet class to share with the class their impressions of the effectiveness of this type of course offering. Students descriptions might include their reactions to questions such as the following:

Was the online course delivered in a way that enabled you to learn the necessary skills and knowledge about the subject you were studying? If so, what role did effective communication play in the success of this course?

What communication methods used by your online instructor added to the value of the course? What would you have changed regarding the delivery of the course?

What particular challenges did you encounter in communicating online that you do not face in a traditional classroom setting? How do you think your experience in taking Internet classes may help to prepare you for online leadership as a manager in the future?

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10.5 Do specialization, formalization, and narrow spans of control encourage or discourage organizational politics? PRISM #10

Practical Inte rac ti ve Sk il l s Modul es

Ask students to go to the Web to complete PRISM #10 on delegating. 3. 4. 5. The current trend is toward decentralizing decision making in order to make organizations more flexible and responsive. Employee empowerment is giving employees more authority (power) to make decisions. A number of factors influence the degree of centralization or decentralization in an organization (see Exhibit 10-4 and PowerPoint slides 10-19 and 10-20).

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Self- Assessment Library

Exercise in Delegation

As organizations become more decentralized, managers must be able to delegate more freely. Employee empowerment increases the decision-making discretion of employees at lower levels in the organization. Students should complete the SAL #III.B.2 How Willing Am I to Delegate? in the context of organization design. Students should consider the following:
n n n

What did you learn about yourself in doing this exercise? Did anything surprise you about your assessment? What implications does your score have for working in an employee empowered organization? How could this information help you as a manager? G. Formalization refers to the degree to which jobs within an organization are standardized and the extent to which employee behavior is guided by rules and procedures. 1. In a highly formalized organization, employees have little discretion, and a high level of consistent and uniform output exists. Formalized organizations have explicit job descriptions, many organizational rules, and clearly defined procedures. Materials I Plan to Use: 139

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Q & A

10.6 What are the pros and cons of high formalization?

Passpo rt

Passport Part 4 Scenario 1

Have students complete Passport Part 4 Scenario 1 on delegating

2. 3. 4.

In a less-formalized organization, employees have much freedom and can exercise discretion in the way they do their work. Formalization not only fosters relatively unstructured job behaviors, but also eliminates the need for employees to consider alternatives. The degree of formalization can vary widely between organizations and even within organizations.

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3.

ORGANIZATIONAL DESIGN DECISIONS Organizations do not have identical structures. Even companies of comparable size do not necessarily have similar structures. A. Mechanistic and Organic Organizational Forms (See Exhibit 10-5 and PowerPoint slide 10-23.) 1. A mechanistic organization is an organizational design that is rigid and tightly controlled. It is characterized by high specialization, rigid departmentalization, narrow spans of control, high formalization, a limited information network, and little participation in decision making by lowerlevel employees. Materials I Plan to Use:

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Q & A

10.7 When is an organic structure best? When is a mechanistic structure best?

2.

An organic organization is an organizational design that is highly adaptive and flexible. It is 140

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characterized by little work specialization, minimal formalization, and little direct supervision of employees. Under what circumstances is each design favored? It depends on contingency variables.

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B. Contingency Factors Appropriate organizational structure depends upon four contingency variables: 1. Strategy and structure The organizations strategy is of the contingency variables that influences organizational design. a. Alfred Chandler originated the strategystructure relationship. His finding that structure follows strategy indicates that as organizations change their strategies, they must change their structure to support that strategy. b. Most current strategy-structure frameworks focus on three strategy dimensions: 1) Innovation needs the flexibility and free flow of information present in the organic organization. 2) Cost minimization needs the efficiency, stability, and tight controls of the mechanistic organization. 3) Imitation uses some of the characteristics of both mechanistic and organic organizations. Materials I Plan to Use:

Q & A

10.8 Whats the contingency approach to organization design?

2.

Size and structure Considerable historical evidence indicates that an organizations size significantly affects its structure. Larger organizations tend to have more specialization, departmentalization, centralization, and formalization, although the size-structure relationship is not linear. 141

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3.

Technology has been shown to affect an organizations choice of structure. a. Every organization uses some form of technology to transform inputs into outputs. b. Joan Woodwards study of structure and technology shows that organizations adapt to their technology. She found that three distinct technologies have increasing levels of complexity and sophistication. 1) Unit production is the production of items in units or small batches. 2) Mass production is the production of items in large batches. 3) Process production is the production of items in continuous processes. c. Woodward found in her study of these three groups that distinct relationships exist among these technologies, the subsequent structure of the organization, and the effectiveness of the organization. Exhibit 10-6 and PowerPoint slide 10-28 provide a summary of these findings.

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4.

Environmental uncertainty and structure Environmental uncertainty is the final contingency factor that has been shown to affect organizational structure. Environmental uncertainty may be managed by making adjustments in the organizations structure. The more uncertain the environment, the more flexible and responsive the organization needs to be.

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Q & A

10.9 How is information technology changing organization structure?

Q & A

10.10 Has the bureaucracy become obsolete?

4.

COMMON ORGANIZATIONAL DESIGNS A. Traditional Organizational Designs A number of different organizational designs can be found in todays organizations. Exhibit 10-8 summarizes the strengths and weaknesses of each of these designs. 1. A simple structure is an organizational design with low departmentalization, wide spans of control, authority centralized in a single person, and little formalization. a. Strengths of the simple structure are its flexibility, speed, and low maintenance costs. b. The major limitation of a simple structure is that it is most effective when used in small organizations. Materials I Plan to Use:

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As an organization grows, its structure tends to become more specialized and formalized. When contingency factors favor a bureaucratic or mechanistic design, one of the following two options is likely to be used: a. A functional structure is an organizational design that groups similar or related occupational specialties together. b. A divisional structure is an organizational structure made up of separate, semiautonomous units or divisions. Materials I Plan to Use:

B.

Contemporary Organizational Designs Many of todays organizations are finding that traditional hierarchical organizational designs are not appropriate for their increasingly dynamic and complex business environments. 143

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Team structures One of the newer concepts in organizational design is team structure, an organizational structure in which the entire organization is made up of work groups or teams.

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Q & A

10.11 Would a team-based structure still have departments?

2.

Matrix and project structures Other variations in organizational arrangements are based on the fact that many of todays organizations deal with work activities of different time requirements and magnitude. a. One of these arrangements is the matrix structure, an organizational structure that assigns specialists from different functional departments to work on one or more projects. (See Exhibit 10-9 and PowerPoint slide 10-35.) b. Another of these designs is the project structure, an organizational structure in which employees continuously work on projects.

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Q & A

10.12 Doesnt a matrix structure cause more problems than it solves?

3.

The Boundaryless Organization Another approach to organizational design is the boundaryless organization, an organization whose design is not defined by, or limited to, the horizontal, vertical, or external boundaries imposed by a predefined structure.

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Q & A

10.13 Doesnt the boundaryless organization undermine everything positive about formal structures?

4.

The Virtual Organization A virtual organization operates with a small core of full-time employees, while hiring outside specialists to work on projects temporarily as needed.

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The Network Organization A network organization uses its own employees to do some work activities, while using networks of outside suppliers to provide other needed product components or work processes.

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C.

Todays Organizational Design Challenges Many of todays organizations are finding that traditional hierarchical organizational designs are not appropriate for their increasingly dynamic and complex business environments. 1. Keeping employees connected Todays managers face the major challenge of keeping their employees connected to the organization, since these employees are often situated in widely dispersed locations and are constantly moving. 2. Building a learning organization Many organizations have adopted the organizational philosophy of a learning organization, which is an organization that has developed the capacity to continuously learn, adapt, and change. ITs Impact on Organizational Design: The Good and the Bad 145

Managing IT

Many of your students will be knowledgeable about some of the fascinating technologies that are currently changing the way work is accomplished in todays business environment. The following activity should enhance students understanding of these technological capabilities and give them an opportunity to enhance their communication and presentation skills. After discussing Managing ITITs Impact on Organizational Design: The Good and the Bad in class, ask your students to do research on the latest technologies used in the business world. Each student should locate information (including a photograph when applicable) describing one new technological innovation used by businesspersons to accomplish work more effectively and efficiently. The student should make one PowerPoint slide illustrating the nature and purpose of this new technological innovation. Students can present their slides to the class along with a brief description of the product or technology. A number of Internet sites could serve as a valuable resource when students conduct their research. One such site is [http://www.businessweek.com/technology/reviews/].

3.

Managing global structural issues a. Researchers have concluded that although structures of organizations around the globe are similar, cultural uniqueness is maintained because of differences in behavior within companies in different areas of the world. b. These differences imply that managers must be aware and respectful of the values and practices of different cultures in todays worldwide business environment.

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Q & A

10.14 What would a learning organization do differently from other organizations?

Q & A

10.15 Whats a learning organization really like in practice?

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Self- Assessment Library

Organizational Structure

The design of organizational structure facilitates different forms of managing and decision making. From the Self-Assessment Library, ask your students to complete SAL #III.A.1 What Type of Organization Structure Do I Prefer? Students may consider the following questions:
n n n

What did you discover about yourself in doing this exercise? Did anything surprise you about your assessment? In what type of organizational structure do you think you would be most comfortable? Why? How do you think this awareness could help you in the future as a manager or employee in another level of an organization?

Answer s to Thi n k i n g About Manage me n t Iss ue s

1.

Can an organizations structure be changed quickly? Why or why not? The speed with which structural changes can be implemented depends partly upon an organizations size. A small organization is usually able to change its structure more rapidly than a larger one because a smaller company has fewer employees who are involved in the restructuring process. However, a large organization can change its structure and often does in response to changing environmental conditions and changing strategies. Would you rather work in a mechanistic or an organic organization? Why? Students answers to this question will vary. Many students prefer the structure provided by a mechanistic organization, whereas others would be less productive in an organization with structural rigidity. Note that SAL #III.A.1 What Type of Organization Structure Do I Prefer? addresses whether each of your students would like to work in a bureaucracy (a mechanistic organization). Students might want to revisit this assessment in answering this question. What types of skills would a manager need to effectively work in a project structure? In a boundaryless organization? In a learning organization? In all of these types of organizations, flexibility and adaptability are critical. In the project structure, conflict management skills are particularly useful. In a boundaryless organization, the ability to interact effectively with people at all levels and in all areas of the organization is crucial to success. In a learning 147

2.

3.

organization, a manager needs the ability to communicate both by listening and by speaking because of the frequency and importance of sharing information in this type of organization. 4. The boundaryless organization has the potential to create a major shift in our living and working patterns. Do you agree or disagree? Explain. Students responses to this will vary. This question could serve as an interesting springboard for a class debate. Students could break into teams, with each team taking the opposite position in the debate. Give students an opportunity to discuss their strategy as a team before presenting their viewpoints to the class. With the availability of advanced information technology that allows an organizations work to be done anywhere at any time, is organizing still an important managerial function? Why or why not? Although an organizations work may be done anywhere at any time, organizing remains a vital managerial function because the work that must be accomplished still must be divided, grouped, and coordinated.

5.

WORKING TOGETHERTeam- Based Exercise Form groups of three to four students and give several groups the designation effective delegating and other groups the designation ineffective delegating. After reading the Skills Module on Delegating, each group should develop a role-play situation demonstrating delegation according to their designation (effective or ineffective delegating). Have each group present their role-play scenario to the class. In lieu of this role-play activity, you might encourage students to describe situations of effective or ineffective delegating they have experienced in work situations or other group situations.
Answer s to Case Appl icat ion Quest ion s

Fixing Whats Broken: HPs Structural Challenge 1. Describe the structural problems HP had. When Mark Hurd assumed his new role as CEO of HP, he soon realized that many of the companys structural problems were related to the fact that eleven layers of management separated him from HPs customers. Top corporate customers of the company told him that they did not know whom to contact at HP to respond to their questions. HPs head of corporate technology said that she had to wait three months to secure 148

approval to hire 100 sales specialists. Moreover, HPs salespeople were able to spend only about one-third of the time with customers; the remainder of their workday was spent in negotiating the bureaucracy inside of HP. 2. How did Mark Hurd decide to address his companys structural problems? What do you think of his changes? How do you think the companys customers responded to these changes? How about the companys executives and sales force? In attempting to remedy the structural problems at his company, Mark Hurd first terminated the employment of underperformers and eliminated three layers of sales management. He also eliminated one sales group and merged those sales representatives into the remaining sales groups. Company executives and members of the sales force are likely pleased that the increased efficiency in the organization enables them to make decisions more quickly and to spend more time interacting with customers. Customers must be more satisfied to see that their needs and concerns are being met more effectively and efficiently. Would a more mechanistic or a more organic structure be appropriate for HP? Why? Considering the rapidly changing nature of the products, and particularly the services, offered by HP, the appropriate structure for this company would have many characteristics of an organic structure. Changing times and intense competition within its industry require that HP be quickly responsive and proactive in its corporate strategy; an organic structure would be more conducive to this type of strategy. What role do you think organizational structure plays in an organizations efficiency and effectiveness? Explain. Organizational structure plays a key role in enabling a company to function smoothly, to remain responsive to its internal and external stakeholders, and to adapt to changes in the marketplace. Innovation is facilitated by fewer layers of management, and students have already learned that the survival and success of a company is usually dependent upon its ability to function as a learning organization that promotes innovation.

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ADDITIONAL CHAPTER INFORMATION You may want to visit the following URL: [http://www.peoplesoft.com/media/zh/pdf/oct02_story1.pdf]. Here you will find an article entitled FedEx Delivers Employee Empowerment and Process: Improvement in Real Time with PeopleSoft 8 HRMS. Read how globally 149

distributed firms can utilize technology in creating learning organizations and in empowering employees.

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