ORGANIZATIONAL DESIGN

INTRODUCTION

• Process of developing a social architecture for the organization to achieve its purpose

• Congruency among– Strategy– Structure– Work– People– Culture

• Gives an understanding of how various pieces fit together

CHARACTERISTICS

• Functionally efficient• Economically viable• User friendly• Environmentally aligned• Aesthetically appealing• Growth promoting• Change responsive

DETERMINANTS

• Organization goals• Social customs• Beliefs & values of founders• Environmental constraints• Technology• Size of the organization

COMPONENTS

• Work specialization• Departmentalization

– Functional – Product– Process– Geographical– Customer

• Chain of command• Span of control• Centralization vs decentralization• Formalization

TYPES

• Traditional designs– Simple structure– Functional structure– Divisional structure

• Contemporary designs– Team – Matrix– Project– Autonomous internal units– Boundary less organization– Learning organization

BASIC CHALLENGES

• Differentiation

• Differentiation vs integration

• Centralization vs decentralization

• Standardization vs mutual adjustment

DIFFERENTIATION

• Process by which an organization allocates people & resources to organizational tasks

• Establishes task – authority relationships to achieve organizational goals

• Division of labor or degree of specialization

• Simple vs complex organization

ORGANIZATIONAL ROLES

• Set of task related behaviors required of a person by his or her position in an organization

• Clear organization roles facilitate accountability towards use of resources

• System of interlocking roles which promotes authority and hence control

SUBUNITS: FUNCTIONS & DIVISIONS

• People with similar and related roles – grouped

• Function - group of people, working together, who possess similar skills or use same kind of tools, technology or knowledge to perform their jobs

• Division – a subunit that consists of a collection of functions or departments that share responsibility for producing a particular good or service

TYPES OF FUNCTIONS

• Support – legal affairs, sales, marketing

• Production – operations, quality control

• Maintenance – personnel• Adaptive – R&D, marketing research• Managerial - investments

VERTICAL & HORIZONTAL DIFFERENTIATION

• Vertical – way an organization creates reporting relationships to link organizational roles and subunits

• Establishes hierarchy

• Horizontal – way an organization groups tasks into roles and roles into subunits

• Establishes division of labor

DIFFERENTIATION VS INTEGRATION

• Horizontal differentiation results in subunit orientation

• Use of advanced forms of IT to promote coordination, cooperation and communication among subunits

• Managers must achieve an appropriate balance between differentiation and integration

INTEGRATION MECHANISMS

• Process of coordinating various tasks, functions and divisions so they work together – not at cross purposes

• Hierarchy of authority• Direct contact• Liaison role• Task force• Team• Integrating role• Integrating department

CENTRALIZATION VS DECENTRALIZATION

• Vertical differentiation results in decline of responsibility and risk taking

• People do not take advantage of emerging new opportunities

• Decision making gets slower• Organization becomes inflexible – unable

to change and adapt to new developments

• Problem of delegating decision making authority persists

CENTRALIZATION

• Top managers coordinate and keep organization focused on its goals

• Top managers get overloaded with operational decision making

• Little time to spend on long term strategic decision making

DECENTRALIZATION

• Promotes flexibility and responsiveness • Managers assume greater responsibility• Take potentially successful risks• More motivated to display their personal

competencies• Planning and coordination becomes very

difficult• Managers might pursue their own

functional goals and objectives

STANDARDIZATION VS MUTUAL ADJUSTMENT

• Employees tend to follow written & unwritten guidelines too rigidly without adaptation

• Stifles creativity and innovation – lack of responsiveness to unusual circumstances

• Standardization – conformity to specific models or examples that are considered proper in a given situation

• Mutual adjustment – compromise that emerges when decision making and coordination are evolutionary processes and people use judgment rather than standardized rules

• Formalization vs socialization

MECHANISTIC STRUCTURES

• Individual specialization – clear definition of roles

• Simple integrating mechanisms – hierarchy

• Centralization - communication mostly vertical

• Standardization – used for organizational control

• Highly status conscious – promotions slow, steady and hierarchical

• Best suited for organizations with stable environment

• No room for creativity and innovation

• Work process is predictable

• Designed to induce people to behave in predictable, accountable ways

ORGANIC STRUCTURES

• Joint specialization – work together to find the best way of performing a task

• Complex integrating mechanisms – task forces and teams

• Decentralization – delegation of authority to all levels

• Most communication is lateral• Mutual adjustment – informal rules and

norms emerge from the interactions

• Promote flexibility – people initiate change

• Develop personal competence, expertise and innovation

• Status conferred by the ability to provide creative leadership

• Facilitates quick decision making

CONTINGENCY APPROACH

• Choice of structure depends on the particular situation an organization faces

• Design should be tailored to meet the uncertainty

• Structure should be designed to meet all contingencies

• Fit between the structure and the external environment

ORGANIZATIONAL DESIGN IN A CHANGING GLOBAL ENVIRONMENT

VALUE CREATION CYCLE

• Ability to obtain scarce resources• Create an organizational strategy• Invest resources to develop core

competences• Gain competitive advantage• Increase in ability to obtain scarce

resources

SOURCE OF CORE COMPETENCES

• Specialized resources – functional & organizational

• Functional resources – skills possessed by functional personnel

• Organizational resources – skills of top management team, possession of valuable resources

• Coordination ability – ability to coordinate functional and organizational resources to create maximal value

GLOBAL EXPANSION & CORE COMPETENCES

• Transfer of core competences abroad

• Establishment of global network

• Gain access to global resources and skills

• Using global learning to enhance core competences

LEVELS OF STRATEGY

• Functional level

• Business level

• Corporate level

• Global level

FUNCTIONAL LEVEL STRATEGY

• Plan of action to strengthen functional & organizational resources as well as coordination abilities

• Investment in R&D• Innovative approaches to marketing• Training & Development to technical &

human resources• Scan & understand changes in the

environment

COMPETITIVE ADVANTAGE @ FUNCTIONAL LEVEL

• Perform functional activities at a lower cost than rivals so as to lower prices of goods

• Perform functional activities in a way that allows differentiation of products by attaching unique qualities, so it can charge higher or premium prices

LOW COST & DIFFERENTIATION STRATEGIES

• Manufacturing – Development of skill in flexible manufacturing technology– Increase in product quality & reliability

• Human resource management– Reduction of turnover & absenteeism– Hiring of highly skilled personnel– Development of innovative training programs

• Materials management– Use of JIT inventory systems– Long term relationships with suppliers & customers– Provide high quality inputs – Enable efficient distribution and disposal of outputs

• Sales & marketing– Increased demand & lower production costs– Targeting of customer groups– Tailoring products to customers– Promoting brand names

• Research & development– Improved efficiency of manufacturing

technology– Creation of new product– Improvement of exiting products

STRUCTURE & CULTURE• Flat decentralized structure and small teams• Use of incentive pay systems• Work environment promoting creativity & innovation• Strong property rights to employees – job tenure, share in profits• Use of mutual adjustment & socialization• Room for each function to develop core competence

BUSINESS LEVEL STRATEGY

• Plan to combine functional core competences in order to position the organization so that it has competitive advantage in its domain

• Responsibility of top management team• Select the domain for competing in• Position the organization such as to

manage the specific & general environment and enlarge its domain

• Low cost

• Focused low cost

• Differentiation

• Focused differentiation

LOW COST & DIFFERENTIATION STRATEGIES

BUSINESS LEVEL STRATEGY & STRUCTURE

DIFFERENTIATION STRATEGY

• Deal with different products & customer groups

• Rapidly changing environment• Frequent new product

development• Complex structure• Decentralized decision making• High differentiation• High integration• Organic structure• Matrix, product team structure

LOW COST STRATEGY

• Limited products & customer groups

• Almost stable environment• New product only if

constant demand assured• Simple structure• Centralized decision

making• Low differentiation• Low integration• Mechanistic structure• Product, market,

geographic or functional structure

BUSINESS STRATEGY & CULTURE

• Subunit orientation to be prevented• Low cost strategy– Values of economy & frugality– Top managers with few trappings of luxury– Functions to develop goals that reflect values of

economy

• Differentiation strategy– Values that promote innovation & responsiveness

to customers– Product development & marketing at centre stage– Values of quality, excellence & uniqueness

CORPORATE LEVEL STRATEGY

• Plan to use and develop core competences so that the organization can not only protect and enlarge its existing domain but can also expand into new domains

• Search for new domains to create value from the use of its low cost or differentiation strategies

• Responsibility of corporate level managers

STRATEGIES

• Vertical integration

• Related diversification

• Unrelated diversification

CORPORATE STRATEGY & STRUCTURE

• Vertical integration – Use of multi divisional structure– Self contained operating divisions supported by

corporate head quarters• Related diversification– Lateral communication between divisions– Vertical communication between divisions &

corporate headquarters– Coordination problem is intense– Divisions fight for resource– Large corporate headquarters staff

• Unrelated diversification– Use of conglomerate structure– Each unrelated business is a self

contained division– Small corporate headquarters staff– Low bureaucratic costs

CORPORATE STRATEGY & CULTURE

• Norms & values that emphasize cooperation between divisions

• Common corporate language

• Conglomerate structure – no necessity for cooperation

GLOBAL EXPANSION STRATEGY

• Choosing the best strategy to expand into overseas markets to obtain scarce resources and develop core competencies

• Multidomestic strategy• International strategy• Global strategy• Transnational strategy

• Allocation of authority & responsibility between managers at home & abroad

• Selection of organizational structure that allows best use of resources

• Selection of right kinds of integration & control mechanisms and organizational culture

MULTIDOMESTIC STRATEGY

• Oriented towards local responsiveness• Decentralized control to subsidiaries and

divisions in each country• Customized products to serve local

markets• ROI, growth in market share and operation

costs – performance evaluation• Forming of world regions• No high integrating mechanisms needed• Duplication of specialist activities across

countries raises overall costs

INTERNATIONAL STRATEGY

• R&D and marketing centralized • Other value creation functions

decentralized to national units• Global product group structure • Product group headquarters –

coordination & organization• Reduced transaction costs• Loss of control, conflict and lack of

cooperation

GLOBAL STRATEGY

• Manufacturing & value chain activities at a global location which promotes efficiency

• High level of integrating mechanism• Centralized control• Product group structure• Product group HQ – coordination,

choice of location for other activities

TRANSNATIONAL STRATEGY

• Achieve both local responsiveness and reduced cost

• Global matrix structure• Decentralized control to overseas

managers• High level of integration

ORGANIZATIONAL DESIGN & TECHNOLOGY

TECHNOLOGY

• Combination of skills, knowledge, abilities, techniques, materials, machines, computers, tools and other equipment that people use to convert or change raw materials into valuable goods and services

• Technology at three levels– Individual– Functional or departmental– Organizational – mass production & craftswork

TECHNOLOGY & ORGANIZATIONAL EFFECTIVENESS

• Input stage– Handle relationships with suppliers– HR techniques to manage labor resources– Use of techniques to obtain efficient capital

• Conversion stage– Use of best technology to add greatest value to

the input at least cost of organizational resources

• Output stage– Effective disposal of goods & services– Competence in quality control, marketing & selling

THEORIES OF TECHNOLOGY

• Theory on technical complexity• Theory on routine & complex tasks• Theory on task interdependence• Used by managers to– Choose the technology that will most

effectively perform value creation– Design a structure that allows the

organization to operate effectively

TECHNICAL COMPLEXITY THEORY : JOAN WOODWARD

• Programmed technology– Technology specified in advance – Tasks can be standardized – Work process made more predictable

• Technical complexity– Extent to which production process can be

programmed so that it can be controlled and made predictable

• Three types of production technology– Small batch & unit technology– Large batch & mass production technology– Continuous process technology

SMALL BATCH & UNIT TECHNOLOGY

• Make customized or low quantities of products

• Lowest on technical complexity• People’s skills & knowledge more important

than machines• Conversion process flexible to suit the

orders of customers• Suited to make new or complex products• Relatively expensive to operate• Fashion designers, jewelry, furniture

LARGE BATCH & MASS PRODUCTION

• Increased level of technical complexity with more use of machines and equipments

• Massive volumes of standardized products

• Tasks specified and programmed in advance

• Production process highly controllable

• Less production costs and hence lower prices

CONTINUOUS PROCESS TECHNOLOGY

• Height of technical complexity• Conversion process entirely

automated & mechanized• Employees to manage exceptions

and breakdowns• Production rarely stops• Lowest production costs• Oil refineries, chemical industries

TECHNICAL COMPLEXITY & ORGANIZATIONAL STRUCTURE

STRUCTURAL CHARACTERISTICS

SMALL BATCH LARGE BATCH CONTINUOUS PROCESS

Levels in the hierarchy

3 4 6

Span of control of CEO

4 7 10

Span of control of first line supervisor

23 48 15

Ratio of managers to non managers

1 to 23 1 to 16 1 to 8

Shape of organization

Relatively flat with narrow span of

control

Relatively tall with wide span of

control

Very tall with very narrow span of

control

Type of structure Organic Mechanistic Organic

Cost of operation High Medium Low

TECHNOLOGICAL IMPERATIVE

• Argument that technology determines structure

• Strategic choices on type of products, type of markets – influence choice of structure for large organizations

• Technology influences choice of structure for small organizations and departments

ROUTINE & COMPLEX TASKS: CHARLES PERROW

• Complexity of tasks influence the complexity of technology involved to perform them

• Task variability– Number of exceptions – new or unexpected

situations that a person encounters while performing a task

• Task analyzability– Degree to which search and information

gathering activity is required to solve a problem

TECHNOLOGY TYPES

• Routine manufacturing

• Crafts work

• Engineering production

• Non routine research

ROUTINE MANUFACTURING

• Low task variability with high task analyzability

• Few exceptions with little search behavior

• Mass production settings• Standard procedures• Low cost advantages • Fast food restaurants

CRAFTSWROK

• Low task variability and low task analyzability

• Adapt existing procedures to new situations

• Find new techniques to handle existing problems more effectively

• Furniture, fashion designers, jewelry

ENGINEERING PRODUCTION

• High task variability with high task analyzability

• Too many exceptions but finding a solution is easy

• Well established standard procedures to handle exceptions effectively

• Solving a problem is just identifying and applying the right technique

• Architects

NON ROUTINE RESEARCH

• High task variability and low task analyzability

• Most complex and least routine

• High tech R&D activities

• Organization’s top management team

ORGANIZATIONAL STRUCTURE

STRUCTURAL CHARACTERISTIC

ROUTINE TASKS COMPLEX TASKS

Standardization High Low

Mutual adjustment Low High

Specialization Individual Joint

Formalization High Low

Hierarchy of authority Tall Flat

Decision making Centralized Decentralized

Overall structure Mechanistic Organic

TASK INTERDEPENDENCE: JAMES D.THOMPSON

• Manner in which different organizational tasks are related to one another

• Low task interdependence – individual specialization

• High task interdependence – joint specialization• Pooled interdependence & mediating

technology• Sequential interdependence & long linked

technology• Reciprocal interdependence & intensive

technology

MEDIATING TECHNOLOGY

• Each part of the organization contributes separately to the performance of the organization

• Mediating technology – work process activities performed independently of one another

• Franchisee operations, banking operations• High level of standardization• Relatively inexpensive to operate

LONG LINKED TECHNOLOGY

• Actions of one person or department directly affect the actions of the next

• Long linked technology – work process activities performed in series

• Mass production technology• Errors get magnified easily – hence high

level of coordination mandated• Programming of conversion process • Use of slack resources• Use of vertical integration

INTENSIVE TECHNOLOGY

• Activities of all people and all departments fully depend on one another

• Technical complexity declines• Work process becomes more complex • Sequencing of tasks – not possible• High level of coordination• Relatively expensive• Mutual adjustment and flat structure• Self managed teams• Specialism – producing narrow range of products

MASS PRODUCTION TO ADVANCED MANUFACTURING

• Use of dedicated machines, fixed workers and standardized procedures

• Stockpiling of resources to meet exceptions

• Fixed automation with high technical complexity, routine tasks & sequential interdependence

• Expensive and difficult to produce new products to suit changing customer preferences

ADVANCED MANUFACTURING TECHNOLOGY

• Innovations in materials technology and knowledge that change the work process of traditional mass production organizations

• Allows customization and hence increased demand

• Allows incorporation of changes quickly• Flexible, lean and computer aided

production

INNOVATIONS IN MATERIAL TECHNOLOGY

• Technology that comprises machinery, other equipments and computers

• CAD – advanced manufacturing technique that simplifies the design process

• CAMM – pull approach• JIT inventory system• Flexible manufacturing technology• Computer integrated manufacturing