Chapter 13

Designing Organizational Structures

McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

13-2

Merritt’s Bakery’s Evolving Organizational Structure

Merritt’s Bakery has grown

over the years, and

throughout this growth the

Tulsa, Oklahoma, company

has adapted its

organizational structure.

13-3

Organizational Structure Defined

• Division of labor and patterns of coordination, communication, workflow, and formal power that direct organizational activities

• Relates to many OB topics (e.g. job design, teams, power, work standards, information flow)

13-4

Division of Labor

Subdividing work into separate jobs assigned to different people

Division of labor is limited by ability to coordinate work

Potentially increases work efficiency

Necessary as company grows and work becomes more complex

13-5

Coordinating Work Activities

1. Informal communication• Sharing information, forming common mental

models• Good for flexibility, nonroutine and ambiguous

situations• Easiest in small firms• Larger firms apply informal communication through

- Liaison roles- Integrator roles- Concurrent engineering

13-6

Coordinating Work Activities

2. Formal hierarchy• Direct supervision• Assigns legitimate power to manage others • Necessary in most firms, but has problems

3. Standardization• Standardized processes (e.g., job descriptions)• Standardized outputs (e.g., sales targets)• Standardized skills (e.g., training)

13-7

Elements ofOrganizational

Structure

Span of Control

Centralization

Department-alization

Formalization

Elements of Organizational Structure

13-8

KenGen’s Flatter Structure

KenGen, Kenya’s leading electricity

generation company, reduced its

hierarchy from 15 layers to just 6

layers. “This flatter structure has

reduced bureaucracy and it has also

improved teamwork,” explains

KenGen executive Simon Ngure.

13-8

13-9

Span of Control

Number of people directly reporting to the next level• Related to coordination through direct

supervision

Wider span of control possible when:1. Other coordinating mechanisms are

present

2. Routine tasks

3. Low employee interdependence

13-9

13-10

Tall vs Flat Structures

As companies grow, they:• Build a taller hierarchy• Widen span, or both

Problems with tall hierarchies• Overhead costs• Worse upward information• Focus power around managers, so

staff less empowered

13-10

13-11

Centralization and Decentralization Centralization -- Formal

decision making authority is held by a few people, usually at the top

Decentralization increases as companies grow

Varying degrees of centralization in different areas of the company• Example: sales decentralized;

info systems centralized

Upper Mgt

Middle Mgt

Front line

Supervisory

Upper Mgt

Middle Mgt

Front line

Supervisory

Upper Mgt

Middle Mgt

Front line

Supervisory

Production SalesInformation

Systems

= locus of decision making authority

13-12

Formalization

The degree to which organizations standardize behavior through rules, procedures, formal training, and related mechanisms.

Formalization increases as firms get older, larger, and more regulated

Problems with formalization• Reduces organizational flexibility• Discourages organizational learning/creativity• Reduces work efficiency• Increases job dissatisfaction and work stress

13-13

TAXI’s Organic Structure

TAXI, Canada’s creative agency of

the decade, has an organic

structure that relies on small

teams, low formalization, and

decentralized decision making. “We

needed a flexible infrastructure, able

to move with the pace of change,”

says co-founder Paul Lavoie (right in

photo with CEO Rob Guenette).

13-14

Mechanistic vs. Organic Structures

Mechanistic Structure• Narrow span of control• High formalization• High centralization

Organic Structure• Wide span of control• Low formalization• Decentralized decisions

13-15

Effects of Departmentalization

Specifies how employees and their activities are grouped together

Three functions:

1. Establishes chain of command

2. Creates common mental models, measures of performance, etc

3. Encourages staff to coordinate through informal communication

13-16

Organizes employees around specific knowledge or other resources (e.g., marketing, production)

CEO

Finance Production Marketing

Functional Organizational Structure

13-17

Evaluating Functional Structures

Benefits• Economies of scale• Supports professional identity and career paths• Easier supervision

Limitations• More emphasis on subunit than organizational

goals • Higher dysfunctional conflict• Poorer coordination -- requires more controls

13-18

Organizes employees around outputs,clients, or geographic areas

Divisional Structure

CEO

HealthcareLightingProducts

Consumer Lifestyle

13-19

Divisional Structure

Different forms of divisional structure• Geographic structure• Product structure• Client structure

Best form depends on environmental diversity or uncertainty

13-20

Globally Integrated Enterprise

Fewer geographic divisions because:• Less need for local representation• Reduced geographic variation• More global clients

Globally integrated enterprise• Connects work processes around the world rather

than replicating them within each country or region• Functional heads are geographically distributed• Firm’s “home” country is no longer focus of

business

13-21

Evaluating Divisional Structures

Benefits• Building block structure -- accommodates growth• Focuses on markets/products/clients

Limitations• Duplication, inefficient use of resources• Specializations are dispersed--silos of knowledge• Revising divisional structure emphasis produces

politics and conflict among executives

13-22

Team-Based Structure

Self-directed work teams Teams organized around work processes Typically organic structure Usually found within divisionalized structure

13-22

13-23

Evaluating Team-Based Structures

Benefits• Responsive, flexible• Lower admin costs• Quicker, more informed decisions

Limitations• Interpersonal training costs• Slower during team development• Role ambiguity increases stress• Problems with supervisor role changes• Duplication of resources

13-24

Audio DeptLeader

SoftwareDept Leader

Art DeptLeader

Game1Project Leader

Game2Project Leader

Game3Project Leader

Matrix Structure (Project-based)

CEO

Employees ( ) are temporarily assigned to a specificproject team and have a permanent functional unit

13-25

Evaluating Matrix Structures

Benefits• Uses resources and expertise effectively• Improves communication, flexibility, innovation • Focuses specialists on clients and products• Supports knowledge sharing within specialty• Solution when two divisions have equal importance

Limitations• Increases goal conflict and ambiguity• Two bosses dilutes accountability• More conflict, organizational politics, and stress

13-26

CoreFirm(USA)

Productdevelopment

partner(France)

Call centerpartner

(Philippines)

Accounting partner(USA)

Package design partner

(UK)

Assembly partner(China)

Network Organizational Structure

Alliance of firms creating a product or service

Supporting firms beehived around a “hub” or “core” firm

13-27

Evaluating Network Structures

Benefits• Highly flexible• Potentially better use of skills and technology• Not saddled with same resources for all products

Limitations• Exposed to market forces• Less control over subcontractors than in-house

13-28

External Environment & Structure

Dynamic

• High rate of change• Use team-based, network, or

other organic structure

Stable

• Steady conditions, predictable change

• Use mechanistic structure

Complex

• Many elements (such as stakeholders)

• Decentralize

Simple

• Few environmental elements• Less need to decentralize

13-29

Diverse

• Several products, clients, regions

• Use divisional form aligned with the diversity

Hostile

• Competition and resource scarcity

• Use organic structure for responsiveness

Integrated

• Single product, client, place• Use functional structure, or

geographic division if global

Munificent

• Plenty of resources and product demand

• Less need for organic structure

External Environment & Structure (con’t)

13-30

Effects of Organizational Size

As organizations grow, they have: More division of labor (job specialization)

Greater use of standardization

More hierarchy and formalization

More decentralization

13-31

Technology and Structure

Technology refers to mechanisms or processes by which an organization turns out its product or service

Two contingencies:• Variability -- the number of exceptions to standard

procedure that tend to occur. • Analyzability -- the predictability or difficulty of the

required work

13-32

Organizational Strategy

Structure follows strategy• Strategy points to the environments in which the

organization will operate• Leaders decide which structure to apply

Innovation strategy• Providing unique products or attracting clients who

want customization

Cost leadership strategy• Maximize productivity in order to offer competitive

pricing

Chapter 13

Designing Organizational Structures