Fundamentals of Organization Structure

Organization Structure

Three key components

designation of formal reporting relationships grouping of individuals into departments and of departments into the total organization;
of systems to ensure effective communication, coordination, and integration across departments.

Organization chart
The

visual representation of underlying activities and processes

A Sample Organization Chart

CEO

Vice President Finance

Vice President Manufacturing

Director Human Resources

Chief Accountant

Budget Analyst

Plant Superintendent

Maintenance Superintendent

Training Specialist

Benefits Administrator

Information-Processing Perspective on Structure

The

structure must fit information requirements of the organization linkages are designed primarily for control, linkages that are designed for coordination and collaboration; all organizations need a mix.

Vertical

Horizontal

 Emphasis on VL (ie., efficiency & control) specialized tasks, hierarchy of authority, rules & regulations, formal reporting systems, centralized decision making, few teams/task forces; Emphasis on HL - relaxed hierarchy, few rules, face-to-face commn, many teams/task forces, informal decentralized DM, etc.; But these two extremes have their own disadvantages too, thus need for searching best combination of vertical controls and horizontal collaboration, centralization and decentralization;

The Relationship of Organization Design to Efficiency vs. Learning Outcomes

Horizontal Organization Designed for Learning
Horizontal structure is dominant Shared tasks, empowerment Relaxed hierarchy, few rules Horizontal, face-to-face communication Many teams and task forces Decentralized decision making

Dominant Structural Approach

Vertical structure is dominant Specialized tasks Strict hierarchy, many rules Vertical communication and reporting systems Few teams, task forces or integrators Centralized decision making

Vertical Organization Designed for Efficiency

Structural Design Options for Grouping Employees into Departments

Functional Grouping

CEO

Engineering

Marketing

Manufacturing

Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

Strengths and Weaknesses of Functional Organization Structure

WEAKNESSES: STRENGTHS:

Slow response time to environmental changes Allows economies of scale within functional May cause decisions to pile on top, hierarchy overload departments Leads to poor horizontal Enables in-depth coordination among knowledge and skill departments development Enables organization Results in less innovation to accomplish functional goals Is best with only one or a few products

Source: Adapted from Robert Duncan, What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer, Organizational Dynamics (Winter 1979): 429.

From Functional Structure to Divisional Structure

Functional structure is appropriate if the organization:

Limits itself to producing a small number of similar products Produces those products in one or a few locations Sells them to only one general type of client or customer

Functional to Divisional

However, as organizations grow, they are likely to produce more products, which may be different from each other. Organizations also increase production at a number of location to serve many different types of customers.

Firm Growth as Evolutionary Process

Single Business
Geographic Diversification
(Foreign Sales as %Total Sales)

Product Diversification
(Product Diversity)

Product and Geographic Diversification

Grouping is done based on organizational output

Moving to a Divisional Structure

Organizations most commonly adopt the divisional structure to solve control problems with too many products, regions, or customers.

Divisional structure is dependent on control problem to be solved.

Three types
Product structure Geographic structure Market structure
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Product Structure

Product structure: a divisional structure in which products (goods or services) are grouped into separate divisions according to their similarities or differences Organizations need to decide how to coordinate its product activities with support functions. Product Division structure, Multidivisional structure
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Product Division Structure

Product division structure: a structure in which a centralized set of support functions service the needs of a number of different product lines Divided into product-oriented teams of functional specialists who focus on the needs of one particular product division
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Product Division Structure

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Multidivisional Structure

Organizations that produce a wide range of products typically use the multidivisional structure. A structure in which support functions are placed in self-contained division. Each division has its own set of support functions and controls its own value.

Most Fortune 500 companies use a multidivisional structure.

Allows them to grow and expand their operations while maintaining control over their activities
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Multidivisional Structure

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Multidivisional Structure

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Divisional Structure II: Geographic Structure

When the control problems that companies experience are a function of geography, a geographic divisional structure is appropriate.

Allows the organization to adjust its structure to align its core competences with the needs of customers in different geographic regions
Allows some functions to be centralized and others decentralized
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Geographical Structure for Apple Computer

CEO Steve Jobs

Apple Products

Apple Americas Canada Latin America/ Caribbean Sales Service and Marketing to Regions

Apple Europe France

Apple Pacific Australia

Japan

Asia

Source: www.apple.com

Geographical Departmentalization
Indian oil Refineries division Guwahati Barauni Haldia Pipeline division North West East

Mathura
Gujarat Panipat

Divisional Structure III : Market Structure

A market structure aligns functional skills and activities with the needs of different customer groups.

Each customer group has a different marketing focus, and the job of each group is to develop products to suit the needs of its specific customers.
Each customer group makes use of centralized support function.
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Figure 6-11: Market Structure

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Strengths and Weaknesses of Divisional Organization Structure

STRENGTHS: WEAKNESSES: Suited to fast change in Eliminates economies of unstable environment scale in functional departments Leads to client satisfaction because product responsibility Leads to poor and contact points are clear coordination across product lines Involves high coordination across functions Eliminates in-depth competence and technical Allows units to adapt to specialization differences in products, regions, clients Makes integration and standardization across Best in large organizations with product lines difficult several products Decentralizes decision-making
Source: Adapted from Robert Duncan, What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer, Organizational Dynamics (Winter 1979): 431.

Matrix Structure

The search for better and faster ways to develop products and to respond to customer needs has led companies to adopt a matrix structure.

Can be used when both technical expertise and product innovation and change are important to meet organizational goals
Strong form of horizontal linkage

Matrix structure

A matrix is a rectangular grid

vertical flow of functional responsibility horizontal flow of product responsibility.

The members of the team are called two-boss employees

Matrix Organizational Structure

Chairman CEO Project management Functional managers
Production group Two-boss manager

Production

Engineering

Personnel

Accounting

Project Manager A

Engineering group Two-boss manager

Personnel group Two-boss manager

Accounting group Two-boss manager

Project Manager B

Production group Two-boss manager

Engineering group Two-boss manager

Personnel group Two-boss manager

Accounting group Two-boss manager

Matrix is correct structure when following conditions are met

Pressure exist to share the scare resources across product lines, medium size organization, and moderate number of product line Environmental pressure exists for in-depth skill and frequent new products Environment is uncertain

Strengths and Weaknesses of Matrix Organization Structure

STRENGTHS:

WEAKNESSES:
Causes participants to experience dual authority, which can be frustrating and confusing Means participants need good interpersonal skills and extensive training Is time consuming; involves frequent meetings and conflict resolution sessions Will not work unless participants understand it and adopt collegial rather than vertical-type relationships Requires great effort to maintain power balance

Achieves coordination necessary to meet dual demands from customers Flexible sharing of human resources across products Suited to complex decisions and frequent changes in unstable environment Provides opportunity for both functional and product skill development Best in medium-sized organizations with multiple products

Source: Adapted from Robert Duncan, What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,Organizational Dynamics (Winter 1979): 429.

The Multidivisional Matrix Structure

Multidivisional matrix structure: a structure that provides for more integration between corporate and divisional managers Makes it easier for top executives from divisions and corporate center to cooperate

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The Relative Advantage and Disadvantages of Different Structure

Functional Divisional Matrix Resource efficiency Time efficiency Excellent Poor Moderate

Poor

Good

Moderate

Adaptability

Poor

Good

Moderate

Environment for which best suited

Stable

Heterogeneous

Complex environment multiple demand

Horizontal Structure

The organization chart is being formally structured along horizontal workflow and process A process refer to an organized group of related tasks and activities that work together to transform inputs into outputs that create value to customer Example new product development, customer service

Davenport (1993, p.5) defines a business process as ...a structured, measured set of activities designed to produce a specific output for a particular customer of market.

Hammer and Champy (1993, p.35) defines ... a business process as a collection of activities that takes one or more kinds of input and creates an output that is of value to the customer

Core process groups are the formal organizational departments of the horizontal organization They are not functions differ from traditional vertical silos

As a result of process redesign and vesting of more employees with decision making authority, the CPG is flatter than a functional department CPG typically arranges people in multidisciplinary waysdictated by what is required to deliver the value proposition

Four types of processes.

customer processes which are those processes that add value for external customers. Development processes such as product development, product/market innovation, technology innovation etcetera allow the organization to work effectively on a longer time horizon. planning and control processes focus on particular management tasks.

staff and service processes have to be recognized as well. They play a role as an enabler of all the other types of processes. Frequently cited examples are ICT, human resource management, finance and administration and maintenance.

Xerox

To provide a horizontal view, Xerox identified four core customer-oriented processes:

Time to Market, which focuses on manufacturing and engineering;

Integrated Supply Chain, which deals with the movement of parts and products;
Market to Collection, which includes marketing, sales, and billing; and Customer Service, which provides maintenance and technical support to customers.

A Horizontal Structure
Top Management Team
Process Owner
Market Analysis

Team 1
Research

Team 2
Product Planning

Team 3
Testing

Customer

New Product Development Process

Process Owner
Analysis
Sources: Based on Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999); John A. Byrne, The Horizontal Corporation, Business Week, December 20, 1993, 76-81; and Thomas A. Stewart, The Search for the Organization of Tomorrow, Fortune, May 19, 1992, 92-98.

Team 1
Purchasing

Team 2
Material Flow

Team 3
Distrib.

Customer

Procurement and Logistics Process

Strengths and Weaknesses of Horizontal Structure

STRENGTHS:
Flexibility and rapid response to WEAKNESSES: changes in customer needs Determining core processes to Directs the attention of everyone organize around is difficult and toward the production and delivery of time-consuming value to the customer Requires changes in culture, Each employee has a broader view of job design, management organizational goals philosophy, and information Promotes a focus on teamwork and and reward systems collaborationcommon commitment Traditional managers may balk to meeting objectives when they have to give up Improves quality of life for employees power and authority by offering them the opportunity to Requires significant training of share responsibility, make decisions, employees to work effectively and be accountable for outcomes in a horizontal team environment Can limit in-depth skill development Sources: Based on Frank Ostroff, The Horizontal Organization: What the
Organization of the Future Looks Like and How It Delivers Value to Customers, (New York: Oxford University Press, 1999); and Richard L. Daft, Organization Theory and Design, 6th ed., (Cincinnati, Ohio: South-Western College Publishing, 1998) 253.

Network Structure

A cluster of different organizations whose actions are coordinated by contracts and agreements rather than through a formal hierarchy of authority

Very complex as companies form agreements with many suppliers, manufacturers, and distributors Such agreements are necessary as the organization outsources many of the value creation activities involved in production and marketing goods and services
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Advantages of Network Structures

To the degree that a network partner can perform a specific functional activity reliably, and at a lower cost, production costs are reduced.

Avoids the high bureaucratic costs of operating a complex organizational structure

Allows an organization to act in an organic way
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Disadvantages of Network Structures

A considerable level of mutual adjustment is needed to allow the groups to interact so that they can learn from one another. Difficult to obtain the ongoing learning that builds competences as companies have no incentive to do so

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Hybrid Structure Sun Petrochemical Products

President

Functional Structure

Chief Counsel

Human Resources Director

Technology Vice President

Financial Services Vice Pres.

Product Structure

Fuels Vice President

Lubricants Vice President

Chemicals Vice President

Sources: Based on Linda S. Ackerman, Transition Management: An In-Depth Look at Managing Complex Change, Organizational Dynamics (Summer 1982): 46-66; and Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999), Fig. 2.1, 34.

Hybrid Structure Ford Customer Service Division

Vice President and General Manager Functional Structure Strategy and Communication Human Resources

Finance

Horizontal Structure

Director and Process Owner Director and Process Owner Director and Process Owner

Teams Parts Supply / Logistics Group Teams Vehicle Service Group Teams Technical Support Group

Sources: Based on Linda S. Ackerman, Transition Management: An In-Depth Look at Managing Complex Change, Organizational Dynamics (Summer 1982): 46-66; and Frank Ostroff, The Horizontal Organization, (New York: Oxford University Press, 1999), Fig. 2.1, 34.

Organization Contextual Variables that Influence Structure

Culture Chapter 10
Structure (learning vs. efficiency)

Size Chapter 9

Strategy, Goals Chapter 2

Technology Chapters 7,8

Environment Chapters 4, 6
Sources: Adapted from Jay R. Galbraith, Competing with Flexible Lateral Organizations, 2nd ed. (Reading, Mass.: Addison-Wesley, 1994), Ch.1; Jay R. Galbraith, Organization Design (Reading, Mass.: Addison-Wesley, 1977), Ch. 1.

The Relationship of Structure to Organizations Need for Efficiency vs. Learning

Functional with Functional cross-functional Divisional Matrix Horizontal Modular Structure teams, integrators Structure Structure Structure Structure

Dominant Structural Vertical: Control Approach

Horizontal: Coordination Learning Innovation Flexibility

Efficiency Stability Reliability

Symptoms of Structural Deficiency

Decision making is delayed or lacking in quality The organization does not respond innovatively to a changing environment Too much conflict is evident