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  1. 1. Organizational Design Chapter 8 Part 3 Organizing Challenges in the 21st Century
  2. 2. <ul><li>Explain why organizational design is important for organizational success. </li></ul><ul><li>Identify the three major components of organizational design. </li></ul><ul><li>Discuss the four types of organizational structure and the strategic conditions under which each might be appropriate. </li></ul><ul><li>Describe the factors that affect an organization’s need for coordination and explain how integrating mechanisms can be used to coordinate organizational activities. </li></ul><ul><li>Explain the concept of locus of decision making and when centralized or decentralized decision making might be appropriate. </li></ul>LEARNING OBJECTIVES When you have finished studying this chapter, you should be able to:
  3. 3. Organizational Design <ul><li>Organizational Design Defined </li></ul><ul><ul><li>A plan for arranging and coordinating the activities of an organization for the purpose of fulfilling its mission and achieving its goals. </li></ul></ul><ul><li>Components of Organizational Design </li></ul><ul><ul><li>Overall organizational design is defined by three primary components: </li></ul></ul><ul><ul><ul><li>Organizational structure </li></ul></ul></ul><ul><ul><ul><li>Integrating mechanisms </li></ul></ul></ul><ul><ul><ul><li>Locus of decision making </li></ul></ul></ul>
  4. 4. Figure 8.1 Dimensions of Organizational Design
  5. 5. Organizational Structure <ul><li>Defines the primary reporting relationships that exist within an organization. </li></ul><ul><ul><li>The chain of command and hierarchy of responsibility, authority, and accountability are established through organizational structure. </li></ul></ul><ul><li>Common Forms of Organizational Structure </li></ul><ul><ul><li>Functional structure </li></ul></ul><ul><ul><li>Divisional structure </li></ul></ul><ul><ul><li>Matrix structure </li></ul></ul><ul><ul><li>Network structure </li></ul></ul>
  6. 6. Functional Structure: Specialization and Efficiency <ul><li>Members of the organization are grouped according to the particular function that they perform within the organization. </li></ul><ul><ul><li>Appropriate when an organization’s greatest source of complexity comes from the diverse tasks that must be performed rather than from its products, geographic markets, or consumer groups. </li></ul></ul>
  7. 7. Figure 8. 2 Functional Structure
  8. 8. Functional Structure <ul><li>Advantages </li></ul><ul><ul><li>Facilitates specialization </li></ul></ul><ul><ul><li>Cohesive work groups </li></ul></ul><ul><ul><li>Improved operational efficiency </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Focus on departmental versus organizational issues </li></ul></ul><ul><ul><li>Difficult to develop generalists needed for top-level management </li></ul></ul><ul><ul><li>Only top-level management held accountable for profitability </li></ul></ul>
  9. 9. Divisional Structures: Providing Focus <ul><li>Members of the organization are grouped on the basis of: </li></ul><ul><ul><li>Common products </li></ul></ul><ul><ul><li>Geographic markets </li></ul></ul><ul><ul><li>Customers served </li></ul></ul>
  10. 10. Types of Divisional Structure <ul><li>Product Divisions </li></ul><ul><ul><li>For organizations with relatively diverse product lines that require specialized efforts to achieve high product quality. </li></ul></ul><ul><li>Geographic Divisions </li></ul><ul><ul><li>For organizations with limited product lines that either have wide geographic coverage or desire to grow through geographic expansion. </li></ul></ul><ul><li>Customer Divisions </li></ul><ul><ul><li>For organizations that have separate customer groups with very specific and distinct needs. </li></ul></ul>
  11. 11. Product Divisional Structure <ul><li>Advantages </li></ul><ul><ul><li>Enhanced coordination. </li></ul></ul><ul><ul><li>Better assessment of manager performance and responsibility. </li></ul></ul><ul><ul><li>Development of generalist managers. </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Managers may lack expertise to operate in wide geographic areas. </li></ul></ul><ul><ul><li>Duplication of resources. </li></ul></ul>
  12. 12. Figure 8. 3 Product Divisional Structure: Clariant Source: From the website Copyright by Clariant 2005. All rights reserved. *Services Production Services, Supply Chain Management, Sourcing, ESHA, IT, International Coordination **Technology Intellectual Property, Innovation & Knowledge Management, New Business Development
  13. 13. Geographic Divisional <ul><li>Advantages </li></ul><ul><ul><li>Allows for focus on specific new markets. </li></ul></ul><ul><ul><li>Good structure for growth along geographic lines. </li></ul></ul><ul><ul><li>Adaptable to local needs. </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Duplication of product or product/technology efforts. </li></ul></ul><ul><ul><li>Coordination and integration are difficult. </li></ul></ul><ul><ul><li>May be difficult to manage diverse product lines. </li></ul></ul>
  14. 14. Figure 8. 4 Geographic Divisional Structure: Canadian National Railway Company Source: “Illinois Central Spurs Reorganization by Canadian National,” Wall Street Journal, 15 April 1999, A4.
  15. 15. Matrix Structure: A Dual Focus <ul><li>A structure in which the tasks of the organization are grouped along two organizational dimensions simultaneously. </li></ul><ul><li>Examples include: </li></ul><ul><ul><li>Product/function </li></ul></ul><ul><ul><li>Product/geographic region </li></ul></ul>
  16. 16. Figure 8. 5 Matrix Structure
  17. 17. Matrix Structure (cont’d) <ul><li>Disadvantages </li></ul><ul><ul><li>Complex, leading to difficulties in implementation </li></ul></ul><ul><ul><li>Behavioral difficulties from “two bosses” </li></ul></ul><ul><ul><li>Time consuming from a planning/coordination perspective </li></ul></ul><ul><li>Advantages </li></ul><ul><ul><li>Can achieve simultaneous objectives </li></ul></ul><ul><ul><li>Managers focus on two organizational dimensions, resulting in more specific job skills </li></ul></ul>
  18. 18. Network Structures: Flexibility <ul><li>An organizational structure that is founded on a set of alliances with other organizations that serve a wide variety of functions. </li></ul><ul><li>An organization that has a core coordinating with other organizations or organizational units. </li></ul>
  19. 19. Figure 8. 6 Network Structure (Building Contractor)
  20. 20. Types of Network Structure <ul><li>Internal Network </li></ul><ul><ul><li>A network structure that relies on internally developed units to provide services to a core organizational unit. </li></ul></ul><ul><li>Stable Network </li></ul><ul><ul><li>A network structure that utilizes external alliances selectively as a mechanism for gaining strategic flexibility. </li></ul></ul><ul><li>Dynamic Network </li></ul><ul><ul><li>A network structure that makes extensive use of outsourcing through alliances with outside organizations. </li></ul></ul>
  21. 21. Network Structure (cont’d) <ul><li>Advantages </li></ul><ul><ul><li>Maximizes the effectiveness of the core unit </li></ul></ul><ul><ul><li>Do more with less resources </li></ul></ul><ul><ul><li>Flexibility </li></ul></ul><ul><li>Disadvantages </li></ul><ul><ul><li>Fragmentation makes it difficult to develop control systems </li></ul></ul><ul><ul><li>Success is dependent on ability to locate sources </li></ul></ul><ul><ul><li>Difficult to develop employee loyalty </li></ul></ul>
  22. 22. Managing Complexity Through Integration <ul><li>Interdependence </li></ul><ul><ul><li>The degree to which work groups are interrelated. </li></ul></ul><ul><li>Primary levels of work group integration: </li></ul><ul><ul><li>Pooled interdependence </li></ul></ul><ul><ul><li>Sequential interdependence </li></ul></ul><ul><ul><li>Reciprocal interdependence </li></ul></ul>
  23. 23. Figure 8. 7 Levels of Work Group Interdependence
  24. 24. Pooled Interdependence <ul><li>Occurs when organizational units have a common resource but no interrelationship with one another. </li></ul>B C D A F E Head- quarters
  25. 25. Sequential Interdependence <ul><li>Occurs when organizational units must coordinate the flow of information, resources, and tasks from one unit to another. </li></ul>A B C
  26. 26. Reciprocal Interdependence <ul><li>Occurs when information, resources, and tasks must be passed back and forth between work groups. </li></ul>A C E F D B
  27. 27. Integrating Mechanisms <ul><li>Methods for managing the flow of information, resources, and tasks within the organization. </li></ul><ul><li>Major categories of integrating mechanisms are: </li></ul><ul><ul><li>General management systems. </li></ul></ul><ul><ul><li>Methods of increasing coordination potential. </li></ul></ul><ul><ul><li>Methods of reducing the need for coordination. </li></ul></ul>
  28. 28. Figure 8. 8 Integrating Mechanisms Source: Adapted by permission, J. R. Galbraith, “Organizational Design: An Information Processing View,” Interfaces 4 (May 1974): 3. Copyright 1974, The Institute of Management Sciences and the Operations Research Society of America (currently INFORMS), 2 Charles Street, Suite 300, Providence, RI 02904 USA.
  29. 29. General Management Systems <ul><li>Some coordination of work units may be achieved through the development of general management systems such as: </li></ul><ul><ul><li>The managerial hierarchy </li></ul></ul><ul><ul><li>Rules and procedures </li></ul></ul><ul><ul><li>Plans and goals </li></ul></ul><ul><li>Such mechanisms form the foundation of an organization’s integration system. </li></ul>
  30. 30. Increasing Coordination Potential <ul><li>Two mechanisms for increasing the coordination potential both vertically and horizontally in the organization are information systems and lateral relationships . </li></ul><ul><ul><li>Information systems facilitate the flow of information up and down the traditional chain of command and across organizational units. </li></ul></ul><ul><ul><li>Lateral relationships exist across work units and serve as mechanisms for exchanging decision-making information. </li></ul></ul>
  31. 31. Boundary Spanning Coordination <ul><li>Lateral relationships that help to integrate and coordinate the activities of the organization. </li></ul><ul><li>Examples include: </li></ul><ul><ul><li>Liaisons </li></ul></ul><ul><ul><li>Committees </li></ul></ul><ul><ul><li>Task forces </li></ul></ul><ul><ul><li>Integrating positions </li></ul></ul><ul><ul><li>Interfunctional work teams </li></ul></ul>
  32. 32. Reducing the Need for Coordination <ul><li>The organization creates “slack resources” that reduce the interdependence of the work groups. </li></ul><ul><li>Actions that reduce the need for coordination: </li></ul><ul><ul><li>Longer lead times </li></ul></ul><ul><ul><li>Larger inventories </li></ul></ul><ul><ul><li>Work units that have only pooled interdependence </li></ul></ul><ul><li>As a result, the need for integrating mechanisms is reduced. </li></ul>
  33. 33. Locus of Decision Making <ul><li>The degree to which decision making is centralized versus decentralized. </li></ul><ul><ul><li>Centralized Decision Making </li></ul></ul><ul><ul><ul><li>Advantage: gives top-level management maximum control. </li></ul></ul></ul><ul><ul><ul><li>Disadvantage: limits the organization’s ability to respond quickly and effectively to changes in the environment. </li></ul></ul></ul><ul><ul><li>Decentralized Decision Making </li></ul></ul><ul><ul><ul><li>Advantage: rapid and effective response to environmental change because the decision makers are the people closest to the situation. </li></ul></ul></ul><ul><ul><ul><li>Disadvantage: top-level managers lose some control. </li></ul></ul></ul>
  34. 34. Mechanistic Versus Organic Systems <ul><li>Mechanistic Systems </li></ul><ul><ul><li>Highly centralized organizations in which decision-making authority rests with top-level management. </li></ul></ul><ul><li>Organic Systems </li></ul><ul><ul><li>Decentralized organizations that push decision making to the lowest levels of the organization in an effort to respond more effectively to environmental change. </li></ul></ul>
  35. 35. The Impact of Environmental Stability <ul><li>Stable Environments </li></ul><ul><ul><li>Environments that experience little change. </li></ul></ul><ul><li>Turbulent Environments </li></ul><ul><ul><li>Environments that are characterized by rapid and significant change. </li></ul></ul><ul><li>Organizational Design for a Changing Environment </li></ul><ul><ul><li>An adaptive organization eliminates bureaucracy limiting employee creativity and brings the decision makers closer to the customer. </li></ul></ul>
  36. 36. Implications for Leaders <ul><li>Remember that organizational design provides an important mechanism for achieving the strategic and operational goals of the organization. </li></ul><ul><li>Understand the makeup of the forms of organizational structure and under what conditions it would be appropriate to use each. </li></ul><ul><li>Understand the potential advantages and disadvantages of the functional, division, matrix, and network structures. </li></ul><ul><li>Look for ways to increase the integration potential of the organization or to reduce the need for integration. </li></ul><ul><li>Understand the circumstances in which centralized or decentralized decision making would work well and how to use each approach. </li></ul>
  37. 37. Implications for Leaders (cont’d) <ul><li>Look for ways to increase the integration potential of the organization or to reduce the need for integration. </li></ul><ul><li>Evaluate the advantages and disadvantages associated with centralized versus decentralized decision making, given the specific circumstances of the organization. </li></ul><ul><li>Strive to develop an adaptive and flexible organization that is effective in a dynamic business environment. </li></ul>
  38. 38. Table 8. 1 Potential Advantages and Disadvantages of Organizational Structures