Organizational Structure and Design 1 The importance

Organizational Structure and Design 1

The importance of organizational structure l “Your box on the org chart is your world” l Poor structural choices can have enormous costs: l 2 Priorities are set wrong, communication becomes difficult and slow, coordination and motivation suffers.

Structure: Fundamental Concepts l Organizational Structure: – l Two pillars: – – 3 The formal framework by which job tasks are divided, grouped, and coordinated. Specialization: Dividing the work up Coordination: Keeping everyone working in sync

Four major kinds of organizational structures l l l 4 Simple “structure” Functional “structure” Divisional “structure” Matrix “structure” Identify the “structure” by looking at the top two lines of the org chart (CEO and reports).

First: The simple structure The Organization Chart Boss Money Guy 5 Marketing Guy Legal Guy

Simple structure l l l Everyone reports to “the boss” Job definitions are often fairly informal Advantages – l Key limitations: – – 6 Low-cost (low overhead), flexible, adaptive Relies on the boss - is as good or bad as s/he is. Only usable for very small organizations

Next: the Functional Structure Boss Finance Sales Accountant East Toy Marketing Corporate Accountant West Food Marketing Customers Accountant Central 7 Marketing Clothes Mktg. t Retailers

Functional Structure l Functional Structure - groups similar jobs together into a series of departments, each headed by a manager – – l Advantages – Specialization, efficiency and size – – – 8 Functions: Marketing, Sales, Finance, Manufacturing, etc. Can be expanded to multiple organizational levels Probably the “standard” concept of an organization Departments by product, customer, place… – Allows for high specialization Little duplication of resources Can achieve huge economies of scale in production Huge organizations become possible with multiple levels

Which type of departmentalization is the right one? l Mirror the complexity of your environment – – l Functional: – l – If responding to differences in regions is crucial If environment is simple, but costs of travel / transport are high Product or Customer: – 9 If efficiency is paramount and differences across place, product, customer are limited. The default choice. Place: – l If its simple, be efficient (functional) Otherwise, be responsive by specializing around the complexity If there are major differences across products (design, manufacture, sales process) or customers, respectively.

Departmentalization Examples l l With the internet you find a substantial fraction of your customers would like to buy online. How do your change your departmentalization? l Over time you realize that selling to the government agencies requires distinctive skills and processes. Its a growing part of your business. How do you change your departmentalization? l 10 You sell to customers that look pretty much the same nationally. Your product line often requires several site visits to close the sale. A single sales rep can have a pretty good handle on the whole line. How do you departmentalize your salespeople? Success leads you to expand the product line. Now no one sales rep to can stay on top of the whole line. How do you change your departmentalization now? What does this do to your efficiency?

The key problem with functional structures in large org’ns: “Silos” “SILOS” (Functions) l l As functional organizations grow, the # of organizational levels increase. You get the “Silo” effect: – – n 1) slow communication and decisions, action is up and down the hierarchy not across it. 2) preoccupation with departmental rather than organizational goals. AND “Throwing it over the wall”: Doing your job without really involving the next group/function o The next group first sees the project once your group is finished. o 11

Pushing the Limits: When functional structures lose effectiveness l l What if you have a lot of (different) businesses? What if you operate in a lot of countries? What if you have many (different) customers? These situations are difficult to handle with functional structures because such structures tend to be “one-size-fits all. ” – 12 Loyalties are ultimately to the function rather than to a specific business, country or customer.

Answer: The Divisional Structure l Divisional Structure: Organizational structure made up of separate, semiautonomous units called “divisions”. – – l Adopted where organizations faces too much complexity for functional structure to cope. – 13 Each division produces specific products, operates in specific geographies, or serves specific customers. Each division has a full complement of functions (e. g. , R&D, marketing, sales, production, human resources, finance) Many different products, or many regions (countries) or very different customers (e. g. , government, large business, consumer).

Divisional Structure Examples: General Electric Johnson & Johnson Divisions just are a group of functional departments all living underneath one of the other types of departmentalization And underneath that, perhaps yet another type of departmentalization

Advantages and Disadvantages of the Divisional Structure l Advantage: – Each division specializes on a specific product, region or customer, and so performs better l l l Disadvantages: – Resources are duplicated across divisions l – For example, separate manufacturing plants instead of larger, more efficient ones that could have produced products for multiple divisions Divisions find it tough to cooperate with other divisions l l 15 Leads to more focused, customized (thus effective) strategies Leads to higher responsiveness = better meets customer needs. Divisions and heads of divisions are often in competition with each other Incentives for cooperation is weak; the whole idea is to focus on your business, not the broader welfare of the entire organization

Matrix Structure: If there are 2 complex dimensions l Simultaneously groups people by the function of which they are a member and by the product team that they are currently working on. – l When is it necessary? – – – 16 Example: Boeing engineers report to the design function, but also to a project manager for the particular airliner (i. e. , 767) they design / build Develop new products rapidly Maximize communication and cooperation Innovation & Creativity

Matrix Design Can be projects or products CEO MKT PROJ A PROJ B PROJ C ACCT ENGR R&D SALES

What its like in the matrix … l l l 18 l You’re Erik, the General manager of the US Relays Business Unit for ABB. You are in charge of a factory, a sales force, and several engineers who usually do product engineering (coming up with custom solutions for with specific customers), plus staff people (some product marketing, finance, HR, etc. ). You are a “division” You are “in the matrix. ” You report to the global head of Relays (Steve), and the National Sales Manager for the US (Heather). You are worried about this quarter. You were expecting to just make your sales goal. You were counting on two of your engineers back from a project developing a common worldwide manufacturing platform – a project that is very important to the global head of Relays. Now you receive a call. Its Ece, one of the engineers … After that call, you call Heather, the National Sales Manager Then you call Steve, the global head of Relays.

The second pillar of structure: Coordination l Coordination keeps things in sync l Coordination occurs: – Within the job l – Vertically: Up and down the organization l l l – Hierarchy & Authority Chain of Command Centralization / Decentralization Horizontally: Across departments l 19 Formalization Integrating Mechanisms

Coordinating at the job level: Formalization l Formalization: the degree to which jobs are guided by standardized rules and procedures. Higher formalization means: – – – l High formalization is appropriate when: – – – l Jobs are relatively simple and routine Importance of consistency is high Example: Department of motor vehicles Low formalization is usually coupled with mutual adjustment – – 20 More explicit job descriptions More clearly defined procedures Less discretion for workers Mutual adjustment – workers agree between themselves on an ongoing basis, how to coordinate their work Example: Jazz band

Coordinating Vertically: Hierarchy l Hierarchy: An organization’s chain of command that defines the relative authority each manager has. – – – Authority: The power to hold people accountable for their actions and to decide how to use of organizational resources. Chain of command: The continuous line of authority from top to bottom of an organization Unity of command - a person should report to only one manager l l Hierarchy is powerful but inherently limited – – l 21 Violating unity of command: In a family-owned manufacturing firm, the owner’s brother is on the board of directors. He frequently visits the factory floor and demands that product designs be changed. Managers don’t have time or knowledge to make all decisions “Silos” – hierarchies lead to vertical information flows Reports of the death of hierarchy are greatly exaggerated…

What level in the hierarchy decides? Centralization and Decentralization l Centralization: The degree to which decisions are made at higher organizational levels – – l Decentralization: The degree to which decisions are made at lower levels – – l Example of decentralizing: Increasing spending that can occur without higher level authorization. Distinct trend toward decentralization Which level is best placed to decide? – – 22 Example of centralization: Adding a requirement that senior managers approve expenditures above a certain level. Centralized organizations – “Command control” model Higher levels: More experience, knowledge of organization and environment as a whole. Lower levels: Often have more current knowledge of specific features of the environment (for example, a specific market or technology).

Coordinating Horizontally: Integrating Mechanisms l What is integration? – l Coordination across departments What are integrating mechanisms? – Structural arrangements to increase coordination across horizontal boundaries. l – l Integrating mechanisms are the horizontal counterpart to hierarchy Why do we need integration? – – 23 For example, a task force charged with coordinating a new product introduction Hierarchy has limited capability to coordinate across departments Integrating mechanisms augment hierarchy

What are some integrating mechanisms?

Forms of Integrating Mechanisms

Black and Decker goes to Product Teams l Black and Decker needed to bring new ideas to market faster and lower costs as they are faced with mature markets and overseas competitors. – – – 26 Use a product team as an integrating mechanism between functions. Pull a person or two each out of R&D, marketing, sales, manufacturing, finance and have them assigned full-time to a product team with a broadly-defined goal such as come up with a better cordless drill than anything out there. The team approach met Black and Decker’s needs by cutting through silo-type barriers, yet the overall efficiency of a functional structure is retained once the product is developed.