Chapter 5 Organization Design

Chapter 5
Basic Organization Designs
Chapter 5, Stephen P. Robbins, Mary Coulter, and Nancy Langton, Fundamentals of Management, Fifth Canadian Edition Copyright 2008 Pearson Education Canada
5-1
LEARNING OUTLINE
Follow this Learning Outline as you read and study this chapter
Defining Organizational Structure

Discuss the traditional and contemporary view of work specialization Describe each of the five forms of departmentalization. Explain cross-functional teams Define chain of command, authority, responsibility, and unity of command Discuss the traditional and contemporary views of chain of command Discuss the traditional and contemporary views of span of control
5-2
LEARNING OUTLINE (contd)

Defining Organizational Structure (contd)

Explain what factors influence the amount of centralization and decentralization in an organization
Explain how formalization is used in organizational design
Organizational Design Decisions

Contrast mechanistic and organic organizations Explain the relationship between an organizations strategy and structure Explain how an organizations size affects its structure
5-3
LEARNING OUTLINE (contd)

Organizational Design Decisions (contd)

Discuss Woodwards findings on the relationship of technology and structure Explain how environmental uncertainty affects an organizations structure
Common Organizational Designs

Contrast the three traditional organizational designs Explain team-based, matrix, and project structures Discuss the design of virtual, network, and modular organizations Describe the characteristics of a learning organization
5-4
Organization Structure
The framework
for dividing,
Organization Design
Developments in
or changes to
assigning, and
coordinating work
the structure of
an organization
Exhibit 5.1 Purposes of Organizing

Divides work to be done into specific jobs and departments Assigns tasks and responsibilities associated with individual jobs Coordinates diverse organizational tasks Clusters jobs into units Establishes relationships among individuals, groups, and departments Establishes formal lines of authority Allocates and deploys organizational resources
5-6
Defining Organizational Structure

Organizational Structure
The formal arrangement of jobs within an organization
Organizational Design
A process involving decisions about six key elements:
Work specialization Departmentalization Chain of command Span of control Centralization and decentralization Formalization
5-7
Key Elements of Organization Structure (142)

Work Specialization Centralization & Decentralization
Formalization
Chain of Command
(Authority vs. Responsibility)
Span of Control
Departmentalization
Organizational Structure
Work Specialization
The degree to which tasks in the organization are divided into separate jobs with each step completed by a different person
Overspecialization can result in human diseconomies from boredom, fatigue, stress, poor quality, increased absenteeism, and higher turnover
5-9
Organizational Structure (contd)

Formalization
The degree to which jobs within the organization are standardized and the extent to which employee behavior is guided by rules and procedures
Highly formalized jobs offer little discretion over what is to be done Low formalization means fewer constraints on how employees do their work
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Chain of Command
The continuous line of authority that extends from upper levels of an organization to the lowest levels of the organization and clarifies who reports to whom
5-11
Authority vs. Responsibility

Rights inherent in managerial position to give orders and expect them to be followed
Related to ones position-not the characteristics of person
Obligation to perform
Goes hand-in-hand with authority
Organizational Structure: Control (contd)

Authority
The rights inherent in a managerial position to give orders and expect them to be obeyed.
Power
An individuals capacity to influence decisions.
Responsibility
An obligation to perform assigned activities.
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Copyright 2005 Prentice Hall, Inc. All rights reserved.
Coercive Referent
Reward
Power
Expert Legitimate

Authority The rights inherent in a managerial position to tell people what to do and to expect them to do it Responsibility The obligation or expectation to perform. Responsibility brings with it accountability (the need to report and justify work to managers superiors) Unity of Command The concept that a person should have one boss and should report only to that person Delegation The assignment of authority to another person to carry out specific duties
5-15

Line vs. Staff Authority (Exhibit 5-3, p.146)
Line managers are responsible for the essential activities of the organization, including production and sales. Line managers have the authority to issue orders to those in the chain of command
The president, the production manager, and the sales manager are examples of line managers
Staff managers have advisory authority, and cannot issue orders to those in the chain of command (except those in their own department)
5-16

Centralization The degree to which decision making is concentrated at a single point in the organization
Organizations in which top managers make all the decisions and lower-level employees simply carry out those orders
Decentralization The degree to which lower-level employees provide input or actually make decisions Employee Empowerment
Increasing the decision-making discretion of employees
5-17
Figure 5.4a Factors that Influence the Amount of Centralization

More Centralization
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 a 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
5-18
Figure 5.4b Factors that Influence the Amount of Decentralization

More Decentralization
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
5-19

Span of Control
The number of employees who can be effectively and efficiently supervised by a manager Width of span is affected by:
Skills and abilities of the manager and the employees Characteristics of the work being done Similarity of tasks Complexity of tasks Physical proximity of subordinates Standardization of tasks Sophistication of the organizations information system Strength of the organizations culture Preferred style of the manager
5-20
Exhibit 5.3 Contrasting Spans of Control

Members at Each Level
(Highest)
Organizational Level
Assuming Span of 4 1
4 16 64
Assuming Span of 8 1
8 64 512
1
2 3 4
5
6 7 (Lowest)
256
1024 4096 Span of 4: Employees: = 4096 Managers (level 16) = 1365
4096
Span of 8: Employees: Managers (level 14)
= 4096 = 585
5-21
Departmentalization by Type
Functional
Grouping jobs by functions performed
Process
Grouping jobs on the basis of product or customer flow
Product
Grouping jobs by product line
Customer
Grouping jobs by type of customer and needs
Geographical
Grouping jobs on the basis of territory or geography
5-22
Exhibit 5.2a Functional Departmentalization

Plant Manager
Manager
Engineering
Manager
Manager Manufacturing
Manager
Human Resources
Manager Purchasing
Accounting
+ Efficiencies from putting together similar specialties and people with common skills, knowledge, and orientations
+ Coordination within functional area

+ In-depth specialization Poor communication across functional areas Limited view of organizational goals
5-23
Exhibit 5.2b Geographical Departmentalization
Vice-President for Sales

Sales Director Western Region Sales Director Prairies Region Sales Director Central Region Sales Director Eastern Region
+ More effective and efficient handling of specific regional issues that arise + Serve needs of unique geographic markets better Duplication of functions Can feel isolated from other organizational areas
5-24
Exhibit 5.2c Product Departmentalization

Bombardier, Ltd.
Mass Transit Sector
Recreational & Utility Vehicles Sector
Rail Products Sector

Rail and Diesel Products Division
Mass Transit Division Recreational Products Division
Bombardier-Rotax (Vienna) Logistic Equipment Division
Industrial Equipment Division
BombardierRotax (Gunskirchen)
+ + +
Allows specialization in particular products and services Managers can become experts in their industry Closer to customers Duplication of functions Source: Bombardier Annual Report. Limited view of organizational goals
5-25
Exhibit 5.2d Process Departmentalization

Plant Superintendent
Sawing Department Manager Planning and Milling Department Manager Assembling Department Manager Lacquering and Sanding Department Manager Finishing Department Manager Inspection and Shipping Department Manager
+ More efficient flow of work activities Can only be used with certain types of products
5-26
Exhibit 5.2e Customer Departmentalization
Director of Sales
Manager Retail Accounts Manager Wholesale Accounts Manager Government Accounts
+ Customers needs and problems can be met by specialists Duplication of functions Limited view of organizational goals
5-27
Organizational Design Decisions

Mechanistic Organization A rigid and tightly controlled structure
High specialization Rigid departmentalization Narrow spans of control High formalization Limited information network (mostly downward communication) Low decision participation by lower-level employees
Organic Organization Highly flexible and adaptable structure

Nonstandardized jobs Fluid team-based structure Little direct supervision Minimal formal rules Open communication network Empowered employees
5-28
Exhibit 5.5 Mechanistic Versus Organic Organization

Mechanistic High Specialization Rigid Departmentalization Clear Chain of Command Narrow Spans of Control Centralization High Formalization Organic Cross-Functional Teams Cross-Hierarchical Teams Free Flow of Information Wide Spans of Control Decentralization Low Formalization
5-29
Structural Contingency Factors

Structural decisions are influenced by:
Overall strategy of the organization
Organizational structure follows strategy
Size of the organization

Firms change from organic to mechanistic organizations as they grow in size
Technology use by the organization

Firms adapt their structure to the technology they use
Degree of environmental uncertainty

Dynamic environments require organic structures; mechanistic structures need stable environments
5-30
Strategy Frameworks:
Innovation
Structural Contingency Factors (contd)
Pursuing competitive advantage through meaningful and unique innovations favours an organic structuring
Cost minimization
Focusing on tightly controlling costs requires a mechanistic structure for the organization
Imitation
Minimizing risks and maximizing profitability by copying market leaders requires both organic and mechanistic elements in the organizations structure
5-31

Strategy and Structure
Achievement of strategic goals is facilitated by changes in organizational structure that accommodate and support change
Size and Structure

As an organization grows larger, its structure tends to change from organic to mechanistic with increased specialization, departmentalization, centralization, and rules and regulations
5-32

Technology and Structure
Organizations adapt their structures to their technology Woodwards classification of firms based on the complexity of the technology employed:
Unit production of single units or small batches Mass production of large batches of output Process production in continuous process of outputs
Routine technology = mechanistic organizations Nonroutine technology = organic organizations

5-33
Technology and Structure

Unit production
Production in terms of units or small batches
Mass production
Production in terms of large batch manufacturing
Process production
Production in terms of continuous processing
534
Exhibit 5.6 Woodwards Findings on Technology, Structure, and Effectiveness
5-35

Environmental Uncertainty and Structure
Mechanistic organizational structures tend to be most effective in stable and simple environments The flexibility of organic organizational structures is better suited for dynamic and complex environments
5-36
Common Organizational Designs

Traditional Designs
Simple Structure
Low departmentalization, wide spans of control, centralized authority, little formalization
Functional Structure
Departmentalization by function
Operations, finance, human resources, and product research and development
Divisional Structure
Composed of separate business units or divisions with limited autonomy under the coordination and control of the parent corporation
5-37
Exhibit 5.7 Strengths and Weaknesses of Common Traditional Organizational Designs
5-38
Organizational Designs (contd)

Contemporary Organizational Designs
Team Structures
The entire organization is made up of work groups or self-managed teams of empowered employees
Matrix Structures
Specialists for different functional departments are assigned to work on projects led by project managers Matrix participants have TWO managers
Project Structures
Employees work continuously on projects, moving on to another project as each project is completed
5-39
Exhibit 5.9 A Matrix Organization in an Aerospace Firm

Design Engineering Manufacturing Contract Administration Purchasing Accounting Human Resources (HR) Alpha Project Design Group Manufacturing Group Contract Group Purchasing Group Accounting Group HR Group
Beta Project
Design Group
Manufacturing Group
Contract Group
Purchasing Group
Accounting Group
HR Group
Gamma Project
Design Group
Manufacturing Group
Contract Group
Purchasing Group
Accounting Group
HR Group
Omega Project
Design Group
Manufacturing Group
Contract Group
Purchasing Group
Accounting Group
HR Group
5-40

Boundaryless Organization
A flexible and an unstructured organizational design that is intended to break down external barriers between the organization and its customers and suppliers Removes internal (horizontal) boundaries:
Eliminates the chain of command Has limitless spans of control Uses empowered teams rather than departments
Eliminates external boundaries:

Uses virtual, network, and modular organizational structures to get closer to stakeholders
5-41
Removing Boundaries
Virtual Organization An organization that consists of a small core of fulltime employees and that temporarily hires specialists to work on opportunities that arise Network Organization A small core organization that outsources its major business functions (e.g., manufacturing) in order to concentrate on what it does best Modular Organization A manufacturing organization that uses outside suppliers to provide product components for its final assembly operations
5-42
Outsourcing Issues
Problems in Outsourcing
Choosing the wrong activities to outsource Choosing the wrong vendor Writing a poor contract Failing to consider personnel issues Losing control over the activity Ignoring the hidden costs Failing to develop an exit strategy (for either moving to another vendor, or deciding to bring the activity back inhouse)
5-43

Learning Organization
An organization that has developed the capacity to continuously learn, adapt, and change through the practice of knowledge management by employees Characteristics of a learning organization:
An open team-based organization design that empowers employees Extensive and open information sharing Leadership that provides a shared vision of the organizations future; support; and encouragement A strong culture of shared values, trust, openness, and a sense of community
5-44
Exhibit 5.10 Characteristics of a Learning Organization
5-45
Exhibit 5.8 Contemporary Organizational Designs
5-46
Organization Culture
Organization culture (10 Characteristics, p.160)
A system of shared meaning within an organization that determines, to a large degree, how employees act Shared values are shown in cultural elements:
Stories, rituals, material symbols, and language unique to the organization
Results from the interaction between:

The founders biases and assumptions What the first employees learn subsequently from their own experiences.
547

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Chapter 5

Basic Organization Designs

Defining Organizational Structure

LEARNING OUTLINE (contd)

Defining Organizational Structure (contd)

Explain how formalization is used in organizational design

Organizational Design Decisions

LEARNING OUTLINE (contd)

Organizational Design Decisions (contd)

Common Organizational Designs

Exhibit 5.1 Purposes of Organizing

Defining Organizational Structure

Key Elements of Organization Structure (142)

Organizational Structure (contd)

Organizational Structure (contd)

Authority vs. Responsibility

Organizational Structure: Control (contd)

Organizational Structure (contd)

Organizational Structure (contd)

Organizational Structure (contd)

Figure 5.4a Factors that Influence the Amount of Centralization

Figure 5.4b Factors that Influence the Amount of Decentralization

Organizational Structure (contd)

Exhibit 5.3 Contrasting Spans of Control

Span of 8: Employees: Managers (level 14)

Exhibit 5.2a Functional Departmentalization

+ Coordination within functional area

Exhibit 5.2b Geographical Departmentalization

Vice-President for Sales

Exhibit 5.2c Product Departmentalization

Rail Products Sector

Mass Transit Division Recreational Products Division

Bombardier-Rotax (Vienna) Logistic Equipment Division

Industrial Equipment Division

Exhibit 5.2d Process Departmentalization

Exhibit 5.2e Customer Departmentalization

Organizational Design Decisions

Organic Organization Highly flexible and adaptable structure

Exhibit 5.5 Mechanistic Versus Organic Organization

Structural Contingency Factors

Size of the organization

Technology use by the organization

Degree of environmental uncertainty

Structural Contingency Factors (contd)

Structural Contingency Factors (contd)

Size and Structure

Structural Contingency Factors (contd)

Routine technology = mechanistic organizations Nonroutine technology = organic organizations

Technology and Structure

Exhibit 5.6 Woodwards Findings on Technology, Structure, and Effectiveness

Structural Contingency Factors (contd)

Common Organizational Designs

Exhibit 5.7 Strengths and Weaknesses of Common Traditional Organizational Designs

Organizational Designs (contd)

Exhibit 5.9 A Matrix Organization in an Aerospace Firm

Organizational Designs (contd)

Eliminates external boundaries:

Organizational Designs (contd)

Exhibit 5.10 Characteristics of a Learning Organization

Exhibit 5.8 Contemporary Organizational Designs

Results from the interaction between:

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