This chapter discusses organizational design and the factors that influence design choices. It describes the contingency factors of strategy, external environment, technical processes, size, and their relationships. The chapter outlines various forms of organizational design including functional, divisional, hybrid, matrix, and evolving forms like self-managing teams and virtual organizations. It also discusses international and ethical aspects of organizational design decisions.

1. Chapter 17
Organizational Design

2. Learning Goals
• Describe how organizational design
coordinates activities in an organization and
gets information to decision makers
• Discuss the contingency factors of
organizational design
• Distinguish between the organizational
design effects of strategy, external
environment, technical process, and size

3. Learning Goals (Cont.)
• Describe the design features of functional,
divisional, hybrid, and matrix organization
forms
• Explain the characteristics of several forms
of organizations that are likely to evolve in
the future

4. Chapter Overview
• Introduction
• The Contingency Factors of Organizational
Design
• Forms of Organizational Design
• International Aspects of Organizational
Design
• Ethical Issues in Organizational Design

5. Introduction
• Organizational design refers to the way
managers structure their organization to
reach the organization’s goals
• Structural elements include
– Allocation of duties, tasks, and responsibilities
between departments and individuals
– Reporting relationships
– Number of levels

6. Introduction (Cont.)
• Organizational charts show the formal
design or structure. See text book Figure
17.1
• An incomplete picture because of informal
arrangements and underlying behavioral
processes
• Two basic goals of organizational design
– Get information to decision makers
– Coordinate the interdependent parts of an
organization

7. The Contingency Factors of
Organizational Design
• Overview
– External environment: Includes the
organization’s competitors, customers,
suppliers, government, . . .
– Strategy: The plan for reaching the goals of
the organization
– Open systems character of organizations
tightly couples these two factors

8. The Contingency Factors of
Organizational Design (Cont.)
• Overview (cont.)
– Technical process: The system an
organization uses to produce its products or
services
– Size: The number of organization members

9. The Contingency Factors of
Organizational Design (Cont.)
Major tools for
implementation Mission
External
Strategy Achieve
environment Technical process
organization
Forms of goals
organizational design
Relationships Among the Contingency Factors
Roles of organizational culture and size.

10. Strategy
• An organization’s strategy describes long-
term goals and way of reaching the goals
• Describes resource allocation
• Plays a mediating role between the external
environment and the tools of organizational
design
– Note the two headed arrows in the drawings
– Example: Product innovation response

11. Strategy (Cont.)
• Strategy’s mediating role in organizational
design
– “Structure follows strategy”
– “Strategy follows structure”
– In both views, the design of the organization is
a major tool for carrying out the strategy

12. Strategy (Cont.)
Strategy’s mediating role in organizational design (cont.)
“Structure follows strategy”
Choice of an
organizational form
Reach strategic goals

13. Strategy (Cont.)
Strategy’s mediating role in organizational design (cont.)
“Strategy follows structure”
Organizational design is an
environment within which
managers form strategy.
Prevents developing an
Develop effective strategy
effective strategy

14. External Environment
• Managers assess the uncertainty in the
external environment when considering
design decisions
• Can design the organization to increase
information about the environment
• Or make the organization more flexible in
its response to the environment
• Information plays a key role because it can
reduce risk in a manager's predictions about
the future

15. External Environment (Cont.)
• Two elements of environmental
uncertainty
– Complexity of the external environment.
Ranges from simple to complex
• Simple environment has a few similar elements
• Complex environment has many different elements

16. External Environment (Cont.)
– Static to dynamic external environment
• Static external environment is unchanging or slowly
changing
• Dynamic external environment is filled with quickly
moving events that could conflict with each other
• Degree of change creates uncertainty in predicting
future states of the environment

17. External Environment (Cont.)
• Four possible states of the external
environment
– Simple-static: lowest uncertainty
– Complex-dynamic: highest uncertainty
– Simple-dynamic and complex-static
environments are about midway between the
other two
– Example: Internet commerce has created a
complex-dynamic environment for much of the
retail industry

18. Technical Process
• Conversion of inputs to outputs
• Manufacturing, service, or mental processes
• Affects peoples’ behavior in many ways
– Work pace
– Worker control
– Degree of routine
– Predictability
– Interdependence within the process
• Various types of technical processes exist

19. Organization Size
• As size increases, organizations have
– More formal written rules and procedures
– More management levels, unless managers
decentralize
– More complex organizational forms
– Higher coordination requirements because of
complexity
– Size and technical process: more strongly
associated with organizational design in small
organizations than in large organizations

20. Forms of
Organizational Design
• Three major forms: functional, divisional,
and matrix
• Combine functional and divisional designs
to get a hybrid design
• Several variations of the divisional design
• Several evolving forms of organizational
design

21. Organizational Design
by Function
• Groups tasks of the organization according
to the activities they perform
• Typically configured into departments such
as manufacturing, engineering, accounting,
marketing, . . .
• Functional configurations can vary from
one organization to another depending on
tasks and goals

22. Organizational Design
by Function (Cont.)
• Strategy: Focused on a few products or
services in well defined markets with few
competitors
• External environment: stable, simple, little
uncertainty
• Technical process: Routine with little
interdependence with other parts of the
organization
• Size: Small to medium

23. Organizational Design
by Function (Cont.)
• See Figure 17.1 in the text book for an
example
• Each major functional area helps align the
company with each sector
• Marketing, for example, focuses on
customers. It does not manufacture
products. That is the job of the
manufacturing function

24. Organizational Design
by Function (Cont.)
• Line and staff
– Line does the major operating tasks
– Staff gives support and serve in advisory roles.
Emphasizes technical skills within each
function
• Individuals work with others who share
common backgrounds and views
• Homogeneity can lead to narrow views of
the function’s contribution to the
organization

25. Organizational Design
by Function (Cont.)
• Strengths
– Specialization
– Brings specialists together
– Collegial relationships develop among
specialists
– Encourages development of specialized skills
and information sharing
– Clear career paths for specialists

26. Organizational Design
by Function (Cont.)
• Weaknesses
– Does not help managers respond quickly to
external changes
– Emphasis on specialization promotes a tunnel-
vision view of the goal of the function
– Functional design can produce a set of widely
accepted behaviors and perceptions with the
organization

27. Organizational Design
by Division
• Uses decentralization
• Divisions formed around products, services,
locations, customers, programs, or technical
process
• Often evolves from a functional design
• As the external environment changes,
managers may need to diversify its
activities to stay competitive
• A common management reaction to large
organization size

28. Organizational Design
by Division (Cont.)
• Strategy: Focused on different products,
services, customers, or operating locations
• External environment: Complex, fast
changing, with moderate to high uncertainty
• Technical process: Nonroutine and
interdependent with others parts of the
organization
• Size: large

29. Organizational Design
by Division (Cont.)
• Emphasizes decision-making autonomy
throughout the organization
• Has high interpersonal skill demands
because of extensive contacts with people
throughout the organization
• Rewards behavior that goes toward the goal
of decentralization: product, customer,
service, or location

30. Organizational Design
by Division (Cont.)
• Strengths
– Easily adapts to differences in products,
services, clients, location, and the like
– For example, products and differ in how
manufactured and marketed
– Products, services, and customers are highly
visible
– Often appear in division names

31. Organizational Design
by Division (Cont.)
• Weaknesses
– Loses economies of scale because many
functions such as accounting are duplicated
within the divisions
– Technical specialization is more diffuse
compared to a functional design
– Hard to get uniform application of policies and
procedures across divisions

32. Hybrid
Organizational Design
• Hybrid design uses both functions and
divisions
• Managers use a hybrid design to get the
benefits and reduce the weaknesses of the
two configurations
• The divisions decentralize some functions,
and the headquarters location centralizes
others
• Centralized functions often are the costly
ones

33. Hybrid
Organizational Design (Cont.)
• People in different parts of the organization
fulfill different requirements
• Functional areas reward technical expertise
• Functional specialists often support the
divisions
• Divisions do the primary work of the
organization

34. Hybrid
Organizational Design (Cont.)
• Strategy: Focused on many products or
services
• External environment: Fast changing,
moderate to high uncertainty, complex
• Technical process: Both routine and
nonroutine; high interdependence with
functions and divisions
• Size: Large

35. Hybrid
Organizational Design (Cont.)
• Strengths
– Focuses on products, services, and customers
– Adapts well to complex environments
– Economies of scale: expensive shared
resources are centralized and support all
divisions

36. Hybrid
Organizational Design (Cont.)
• Weaknesses
– Focus on division goals can lose total
organization view
– Non-uniform application of organizational
policies
– Potential for high administrative overhead if
staff expands without control
– Potential conflict between division managers
and corporate headquarters. Managers want
autonomy; headquarters wants control

37. Matrix
Organizational Design
• Used when two sectors of the external
environment demand management attention
• Typically responding to the customer and
technical parts of the environment
– Customers have special needs
– Technology changes fast
• Emerged during the 1950s within the U.S.
aerospace industry

38. Matrix
Organizational Design (Cont.)
• Rejects the unity of command principal
described in Chapter 1 of the text book
• Uses multiple authority structures, so that
many people report to two managers
• People from different functional areas work
on various projects

39. Matrix
Organizational Design (Cont.)
• Each person has at least two supervisors or
managers. One supervisor is in the
functional area and the other is in a project
• Mixture of people from the functional areas
varies according the project needs
• Multiple reporting relationships are a basic
feature of matrix organizations
See text book Figure 17.3 for a simplified
matrix organizational design.

40. Matrix
Organizational Design (Cont.)
• Conditions under which an organization
may choose a matrix design
– Pressures from the external environment for a
dual focus
– High uncertainty within the multiple sectors
of the external environment
– Constraints on human and physical resources

41. Matrix
Organizational Design (Cont.)
• High conflict potential because of multiple
authority relationships
• Managers need well-developed conflict
management skills
• Demand high levels of coordination,
cooperation, and communication
• Requires high levels of interpersonal skill

42. Matrix
Organizational Design (Cont.)
• Different matrix uses and forms
– Within specific functional areas such as
marketing. Managers responsible for a brand
or group of brands bring all marketing skills
together to focus on the products
– Temporary forms for specific projects
– Permanent forms for the organization’s on-
going work

43. Matrix
Organizational Design (Cont.)
• Strengths
– Responsive, flexible, efficient use of costly
resources
– Potentially high levels of human motivation
and involvement
– Managers can respond fast to market changes
– Shares scarce and expensive resources
– People get information about a total project, not
only about their specialty

44. Matrix
Organizational Design (Cont.)
• Weaknesses
– High levels of ambiguity because of multiple
authority relationships
– Ambiguity can encourage power struggles
among managers
– Multiple authority relationships can give
opposing demands to people
– High conflict potential can reach dysfunctional
levels and act as significant stressors for people
in matrix organizations

45. Evolving Forms of
Organizational Design
• Several new forms of organizational design
– Self-managing teams, a team-based approach
– A process view of organizational design
focuses on work processes
– The virtual organization. This unusual form
links widely scattered organizations into a
network

46. Self-Managing Teams
• Customer focus and fast changing
environments require decisions at lower
levels in an organization
• Decentralizes decision authority in the
teams
• Decision authority in these teams can focus
on customers, processes, and product design

47. Self-Managing Teams (Cont.)
• Often cross-functional membership
• Helps flatten an organization by removing a
layer of management
• Results in a nimble organization that can
respond to fast changing customer needs

48. A Process View of
Organizational Design
• Discards the view of packaging duties and
tasks along functional or divisional lines
• The organization is a set of interconnected
processes that weave across multiple
functions
• Focuses on the results of a process not on
people’s skills or functions
• People have responsibility for all or part of
a process with decision authority over those
parts

49. The Virtual Organization
• A temporary network of companies or
people that focus on reaching a specific
target
• Information technology links members into
a network no matter where they are in the
world
• Enter agreements to get needed skills or
resources
• Little direct control over functions done by
other members of the network

50. The Virtual Organization (Cont.)
• Features a need for high trust among
members
• Need conflict management and negotiation
skills
• Interdependent in reaching a mutually
desired goal

51. International Aspects
of Organizational Design
• The international context of organizations
increases environmental complexity
• Varying cultural orientations and laws
introduce high uncertainty in the external
environment
• Functional and divisional designs are more
congruent with cultures that want to avoid
uncertainty and accept hierarchical
relationships (Latin American countries and
Japan)

52. International Aspects
of Organizational Design (Cont.)
• Matrix organizations do not work well in
countries that avoid ambiguity (Belgium,
France, and Italy)
• Self-managing teams work well in countries
with socially oriented values (Sweden and
Norway)
• Virtual organizations use communications
and computer technology to span national
boundaries

53. Ethical Issues and
Organizational Design
• Lobbying activities can change an
organization’s external environment. Both
legal and ethical in the United States
• Bribing government officials is illegal
under U.S. law
• Introducing new technologies can displace
workers and cause stress among those who
need to learn the technology

54. Ethical Issues and
Organizational Design (Cont.)
• Ethical issues about reducing the size of an
organization and increasing its efficiency.
A utilitarian analysis looks at the net
benefits of management’s actions
• High conflict and ambiguity of matrix
organizations can act as a significant
stressor
• Moving to the alternative forms is large-
scale organizational change and stress for
many people