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Strategic Management: Organizational Design


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There are a number of factors that differentiate small-business operations from large-business operations, one of which is the implementation of a formal organizational structure. Organizational structure is important for any growing company to provide guidance and clarity on specific human resources issues, such as managerial authority. Small-business owners should begin thinking about a formal structure early in the growth stage of their business.

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Strategic Management: Organizational Design

  1. 1. +Unit 3: Organizational Design & StrategyLesson 7: Strategic Organizational Design
  2. 2. + 2 Objectives  What are organizations & what is the importance of their structure?  Factors in designing the structure of the organization  Structure & configuration of classic organizations  Structure & configuration of modern organizations  What are the different relationships between strategy & organizational structure?RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  3. 3. + 3 What is an organization?  Specific configuration of structure, people, task, and techniques  Structure describes the form of departments, and hierarchy. It influences the organization’s efficiency & effectiveness  People incorporate the skills, attitudes, and social interaction of the members of the organization  Task depicts the goals of the individual & the organization  Techniques explain the methods and approach used to perform tasksRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  4. 4. + 4 What is organizational structure?  Mechanism of mobilizing human, physical, financial, and information resources at all levels of the system | Framework by which an organization communicates, develops goals, and then works on achieving these goals  Important factor in organization’s performance; not only affects strategy, it affects other areas like stability, workflow, size & life cycle, and corporate culture  Provides guidelines on  Division of work into activities  Linkage between different functions  Hierarchy  Authority structure & relationshipRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  5. 5. + 5 Principles of organizational structure (1/2)  Principles of organizational structure are the methods by which the organization maintains that structure, and the processes it uses to keep the structure efficient.  Hierarchy of command: One of the principles that holds an organizational structure together is the hierarchy of command. Respect for the authority of management and the executive team creates a functional line of communication. Everyone in the company can follow the trail of responsibility for projects, and employees understand who they report to and how the management structure affects their jobs.  Role Definition: An efficient organizational structure helps to properly define everyones role within the company. A clear definition of the responsibilities and standing of each person within the company creates an understanding of what is expected from each individual, and how individual performance can affect the efficiency of the entire organization.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  6. 6. + 6 Principles of organizational structure (2/2)  Evaluating Outcomes: Monitoring the outcome of individual projects, as well as the ongoing performance evaluation of individual employees, helps to determine the strengths and weaknesses in the organizational structure. The weaknesses can be dealt with either through training, reallocation of company assets such as equipment, or eliminating ineffective employees or those performing duplicate tasks. The strengths of the organization can be amplified to help identify future managers of the company, determine successful processes that can be used in future projects, and improve the processes used to reach future company goals.  Altering Organizational Structure: One of the key principles of organizational structure is the ability to remain dynamic and change to suit the needs of the company. Some of the elements that necessitate change in an organizational structure include changing customer needs, a change in company management, new technology, and reacting to the activities of your competition.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  7. 7. + 7 Benefits of organizational structure? (1/3)  Streamline Operations  Organizational structures can help companies streamline business operations | Organizing business functions into departments ensures business operations are completed and effective and efficient manner | Companies may save money by reducing the number of similar business functions completed by multiple departments  Improve Decision Making  Companies can use organizational structure to improve their business decision making process | Organizational structures can be designed to promote the flow of information from frontline operations to managers responsible for making business decisions | Executive level management can use organizational structure channels for sending information to managers or employees responsible for completing business functions.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  8. 8. + 8 Benefits of organizational structure? (2/3)  Operate Multiple Locations  As small businesses continue to grow and expand, they may open multiple locations in local, regional or domestic economic markets | Organizational structures help business owners create a management chain to ensure all business locations operate according to the company’s standard procedures. Business owners rely on organizational structures because the owner may not be able to visit each location in a timely manner.  Improve Employee Performance  Organizational structures often outline employee tasks and which manager is responsible for overseeing each employee.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  9. 9. + 9 Benefits of organizational structure? (3/3)  Focus on Customer Service & Sales  Companies using a well- defined organizational structure should be able to spend more time focusing on customer service rather than correcting operational issues | Companies may also focus on increasing sales revenues and profits from business operations by meeting consumer needs and wants.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  10. 10. + 10 What is an organizational chart?  Visual representation of underlying activities & processes being undertaken by the organization  Key components  Formal reporting relationships including number of levels in the hierarchy and span of control of managers & supervisors  Grouping of individuals into departments & of departments into the total organization  Underlying principle  Vertical linkages primarily show control; Vertical control best associated with goals of efficiency & stability  Horizontal linkages indicate the coordination & collaboration; Horizontal coordination is associated with learning, innovation & flexibilityRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  11. 11. + 11 Factors considered during organizational design (1/2)  Primary objective: Ensure clarity, understanding, de- centralization, stability, and adaptability  Organizational structure has become important because of  Size, Global spread, and complexity of the modern business firm  Expanding markets, new competitors, proliferation of products, need for instant communication, and fierce focus on asset values  Relationship between people, both internally & externally  4 basic principles during organizational design  Specialization is division of work into components in which people specialize.  Vertical – kinds of work at different levels in the organization  Horizontal – division into departmentsRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  12. 12. + 12 Factors considered during organizational design (2/2)  4 basic principles during organizational design, (cont’d)  Coordination is integration of activities of these specialized units towards a common objective. Involves placement of different units in the organization together or separately and deciding on patterns of relationship & communication  Unity of Command, Authority & Responsibility, Span of Control, Departmentalization  Centralization is whether decision making is delegated to lower levels (De-centralized) or concentrated at the top (Centralized)  Design of systems should ensure effective communication, coordination, and integration across departments  Formalization refers to the extent to which rules & regulations permeate the organization. Defines the formal relationship in the organization  Finding the right balance between vertical control & horizontal coordination is an important design decisionRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  13. 13. + 13 Traditional organizational structures (1/6)  Simple structure  Single product or owner driven organization  Little or no separation of management responsibilities & no clear definition of functional division of labor  Emphasis is on direct control & communication for increasing businessRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  14. 14. 14RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  15. 15. + 15 Traditional organizational structures (2/6)  Functional designs  Structured around a CEO & limited corporate staff  Activities are grouped together by common functions & functional managers play critical role (Production, Marketing, R&D, Accounting, etc.)  Each functional unit has different set of duties & responsibilitiesRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  16. 16. + 16 Traditional organizational structures (3/6)  Functional Designs, (cont’d)  Advantages: Provides functional clarity | Specialization is built into the organizational structure | Promotes economies of scale & makes it best suited for cost leadership strategy | Suits Small-Medium sized organizations producing limited line of products where dominant competitive issues are cost, efficiency & quality  Disadvantages: Functional area managers tend to develop a narrow focus on local issues instead of overall strategic issues | Rivalry between departments | Coordination & delegating responsibility among departments become increasingly difficult | Routine, repetitive jobs leading to poor productivity | Slow to respond to environmental changesRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  17. 17. 17RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  18. 18. + 18 Traditional organizational structures (4/6)  Divisional Structure  Departments are grouped together based on organizational outputs | Each division represents a separate business or profit center  All activities for a single project or purpose are brought under one manager | Easy to fix accountability, procedures & systems can be standardized leading to better integration across different specialtiesRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  19. 19. + 19 Traditional organizational structures (5/6)  Divisional Structure, (cont’d)  Advantages: Enables more accurate monitoring of the performance of each business | Facilitates comparison between divisions | Improves resource allocation | Motivates managers of poorly performing divisions to look for ways to improve | Suited to fast change in an unstable environment, enhanced corporate financial control, and stronger pursuit of internal efficiency  Disadvantages: Creates functional departments in each division leading to duplication of effort | Economies of scale in functional departments are reduced | Little incentive to promote cooperation among divisions | Inter divisional trading becomes complex leading to reduced transparency in operations | Conflicts between division & headquarters on allocation of resources & support servicesRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  20. 20. + 20 Traditional organizational structures (6/6)  Geographical Structure  Based on the concept of market segmentation | Organization’s users or customers are grouped together by geographical area  Relevance: Markets, legal framework, culture & economic conditions of particular geographical region impacts organizational performance  Form of the multi-divisional organizational structure  Skills & capabilities of board members with respect to dealing with complex issues is importantRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  21. 21. + 21 Modern Organizational Structures  Matrix Organization  Attempt to combine the advantages of the pure functional & divisional structure | Ideally suited for companies which are ‘project-driven’  Each project manager reports directly to the VP / GM | Each project represents a potential profit center, the power & authority used by project manager comes directly from VP/GM | Project Manager has Advantages total responsibility & accountability for success of Project cost is minimized as resources are project shared | Authority & responsibility are  Functional departments have shared responsibility to maintain Disadvantages technical excellence on project Role Conflict, Role ambiguity, & Role OverloadRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  22. 22. + 22 Modern Organizational Structures  Horizontal Structure  Also referred as ‘Flat organizations’ has few or no levels of intervening management between staff & managers  Principle, well-trained workers will be more productive when directly involved in decision- making process | Promotes employee involvement through decentralized decision-making process Advantages  Generally possible only in Lower costs as non-vital functions can be smaller organizations or outsourced | More adaptable to change | individual units within large Encourages open communication & organizations collaboration | Higher innovation & creativityRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  23. 23. + 23 Modern Organizational Structures  Virtual Organization  Boundary-less organization | Doesn’t exist physically but enabled by software | Exists within a network of alliances, using the internet  Self management within teams & units | Continually changing participants | Goal oriented  Why Virtual Organizations?  Globalization, with growing trends to include global customers  Rapidly changing needs Advantages Appropriate for short-term initiatives with clearly  Increasingly specialized defined products or outcomes | Responsive to products & services rapidly changing environment | Non-existent  Ability to quickly pool expert overhead costs resources Disadvantages  Creation of communities of High dependence on technology for excellence communication | Unstable or difficult to manage | highly dependent on individuals & their interestsRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  24. 24. + 24 Organizational structure & effectiveness (1/6)  The decision for organizational structure usually lies with top management. The size of a company is sometimes the determining factor as to organizational structure effectiveness.  Significance  Larger companies often benefit from a taller organizational structure. A tall organizational structure contains lots of management levels. Decision makers dole out tasks and projects in which they hold subordinates accountable. Upper management knows what strategies they wish to implement and, subsequently, get all subordinates working together to effectively meet company goals.  Contrarily, small companies will often use flat organizational structures. It is more effective for smaller companies to complete task and projects without waiting on decisions from multiple managers. A flat structure is often more effective in completing tasks and projects faster. Small companies are often in a rapid growth state. Company owners and employees must make quick decisions.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  25. 25. + 25 Organizational structure & effectiveness (2/6)  Types of Structures  Some companies may feel a divisional (product) organizational structure is most effective for their needs. For example, department stores are heavily focused on various product-oriented departments. A divisional (product) organization structure may work best for department stores because product expertise is required to effectively manage specific departments. For example, the buying process may vary by type of product. In addition, managers in certain departments may be more experienced in terminology related to their special products  Contrarily, a company may deem a functional organizational structure works best for them. Departments that are divided by functional areas, including marketing and engineering, may be more effective in grouping people of special talents together. For example, a marketing team will often be much more effective working together when testing a new product concept.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  26. 26. + 26 Organizational structure & effectiveness (3/6)  Customers  Some companies may deal with a diverse group of customers. For example, a software company that sets up electronic bill-paying may target consumers, banks, corporations and health clubs. Consequently, the software company may organize its structure by customer type. Organizing by customer type may be more effective than other organizational structures because the products and procedures may vary greatly among customer type.  Benefits  The benefits that companies wish to achieve with various organizational structures include increased communication, efficient use of resources and even chain of command. For example, a company will usually develop an organizational structure that facilitates communication through various management levels. That way timely decisions can be made by the right individuals. Companies also want to make efficient use of resources and avoid any duplication of efforts. Companies that can eliminate duplication resources, including labor or raw materials, tend to operate more effectively.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  27. 27. + 27 Organizational structure & effectiveness (4/6)  Considerations  Some companies may need to decentralize their organizational structure geographically. For example, a company that relies heavily on direct sales may need to decentralize its sales and marketing functions by region. Consumer product companies sometimes decentralize sales and marketing functions because consumer tastes vary per region. A geographically decentralized organizational structure can also be more effective because production facilities are spread out. Consequently, a production facility in Gurgaon would likely get products to North India quicker than one in Coimbatore.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  28. 28. + 28 Organizational structure & effectiveness (5/6)  Type of Strategy  A ‘low-price strategy’ will require an organization structure that ensures cost efficient operation with emphasis on cost control  A ‘differentiation strategy’ needs organization to possess high degree of creativity to develop & sustain product or service quality which provide competitive advantage  Technology  Mass production requires standardization of processes, centralization with greater control & direction by senior management  Organizations with less standardized operational processes are likely to have more informal decision-making processesRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  29. 29. + 29 Organizational structure & effectiveness (6/6)  Nature of Environment  In simple & static environment, organizations can gear for operational efficiency  With increasing complexity, there is need to devolve decision-making responsibilities to lower levels or specialists  Size  Increase in organizational size increases the number of hierarchical levels  External Environment  Factors such as economic conditions, changes in market conditions, advances in technology, legal & political conditions  People  Depending on nature of work, organizations accommodate psychological needs of employees. Example, organization in manufacturing has different structure from organization involved in software developmentRIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  30. 30. + 30 Indications of an ineffective organizational structure (1/4)  Breakdown in communication  If departments are no longer efficiently sharing information and processing data as they should be, then that is a problem with organizational communication.  One of the causes of a breakdown in company communication is that departments have begun to act on their own. There are many reasons why this could happen including a lack of trust between departments, the feeling by one department that another department is incapable of performing its job or incompetent management in the departments.  The departments bypass the organizational structure and communication begins to break down.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  31. 31. + 31 Indications of an ineffective organizational structure (2/4)  Quality Control Issues  Organizational structure comes with a series of checks and balances that are designed to perform certain levels of quality control.  Examples, The engineering department and the marketing department work together to create instruction manuals for products that the general public can use. Accounting works with Sales to discuss client accounts and keep sales moving.  When the organizational structure begins to deteriorate, these checks and balances will stop. The marketing group starts to create instruction manuals without extensive input from the marketing group and information gets left out.  If quality control is becoming an issue, it may be because the organizational structure is breaking down.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  32. 32. + 32 Indications of an ineffective organizational structure (3/4)  Low Morale  When departments are not communicating and individuals within those departments are getting reprimanded, morale in the company will begin to suffer.  Employees start to ignore the organizational structure because of fear of discipline, they do not trust their manager or they no longer feel included in the overall success or operation of the company.  In some cases employees may have multiple managers due to a breakdown in the company hierarchy, and this will cause confusion.  An alienated workforce with low morale is a product of a failing organizational structure.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  33. 33. + 33 Indications of an ineffective organizational structure (4/4)  Customer Service  An ineffective corporate structure sometimes lacks the ability to monitor interactions with the customers.  Example, If the sales group is not required to report customer issues to the customer service group, then the customer service people will be unaware of the problem if it should occur again.  In an ineffective organizational structure, there is no cohesive way of handling customer issues. When customers contact the company, they may get three different answers if they talk to three different people. This causes a problem with customer retention and ongoing revenue.RIMS, Bangalore | PGDM 2nd Year, Strategic Management April 18, 2012
  34. 34. Hardy Alexander Founder & Director | Triune Global Bangalore – 560077 Contact: +91 96864 48698 Email: My Blog: +Thank you April 18, 2012 RIMS, Bangalore | PGDM 2nd Year, Strategic Management 34