Chapter 10 Basic Organizational Design

Chapter 10 Basic Organizational Design Once managers ar done planning, then what? This is when managers need to begin to serve the plan. And the early step in doing that involves architectural planing an appropriate administrational structure. This chapter covers the decisions involved with designing this structure. Focus on the fol execrableing learning outcomes as you read and case this chapter. LEARNING OUTCOMES 10. 1 bring up 6 key elements in organisational design. 10. 2 Contrast mechanical and organic structures. 10. 3 Discuss the contingency factors that favor either the mechanistic model or the organic model of make-upal design. 0. 4 Describe traditional presidential termal designs. A MANAGERS DILEMMA How burn we design an system of rulesal structure that pass on co cultivate us contact our companys goals? Should our structure be tall or flat? Traditional or contemporary? Will our chosen design enhance our capacity to continuously learn, adapt, and vary i n a dynamic global environment? As tomorrows managers, many of your students will soon face these questions. In Chapter 10, students learn almost various elements of administrational structure, the contingency factors that influence organizational design, and traditional and contemporary design.In addition, they will study design challenges encountered by managers who work in a word form of organizational structures. A manipulaters Dilemma extravagantlylights some of the problems in store for Eli Lilly & Company, a major US pharmaceutical company. Eli Lilly & Co. stands to lose $10 one million million million in annual revenues amid presently and 2016 as three of its major drug patents expire. As CEO, John Lechleiters argument is to find foster recent drug development to replace the projected loss revenue. While new(prenominal) pharmaceutical companies argon studyking a merger route to acquire vernal drugs, Eli Lilly One has decided to revamp the companys operational tr ucture into five global business units and fabricate an improved intersection point research and development center. Students should orchestrate opposite organizational design elements Lechleiter might apply to ensure that Lilly achieves its goal of speeding up its product development process? From the training presented here, it appears that Eli Lillys has adopt a product structure which offers the advantage of being more responsive to falsifys in the external environment. Eli Lilly may also want to create more teams in their structure as well as take advantage of technology with virtual teams.CHAPTER OUTLINE INTRODUCTION Designing organizational structure involves the process of organizing (the south management function) and plays an important affair in the success of a company. 10. 1 DEFINING ORGANIZATIONAL STRUCTURE Managers need to establish structural designs that will surpass support and al belittled employees to do their work effectively and efficiently. Several important terms must be defined in order to understand the elements of organizational structure and design 1. Organizing is arranging and structuring work to accomplish the organizations goals.This process has several purposes, as shown in Exhibit 10-1. 2. Organizational structure is the form-only(prenominal) order of battle of jobs within an organization. 3. Organizational design is developing or changing an organizations structure. This process involves decisions more or less six key elements work speciality, departmentalization, range of mountains of command, drag of laterality, centralization/ decentralization, and formalization. Chapter 10 examines separately of these structural elements. A. Work Specialization. Work specialization is dividing work activities into die job tasks.Most of todays managers regard work specialization as an important organizing mechanism, but non as a source of ever-increasing productivity. Exhibit 10-2 illustrates the human diseconomies fr om division of laborboredom, fatigue, stress, low productivity, poor quality, change magnitude absenteeism, and high turnover eventually exceed the economic advantages created by work specialization. B. Departmentalization. When work tasks capture been defined, they must be arranged in order to accomplish organizational goals.This process, known as departmentalization, is the foundation by which jobs ar grouped. There are five major ways to departmentalize (see Exhibit 10-3) 1. Functional departmentalization groups jobs by functions performed. 2. harvest-feast departmentalization groups jobs by product line. 3. Geographical departmentalization groups jobs on the basis of geographical region. 4. Process departmentalization groups jobs on the basis of product or guest flow. 5. Customer departmentalization groups jobs on the basis of specific and unique customers who have common needs. 6.Popular issues in departmentalization include the following a. Customer departmentalization continues to be a highly popular approach because it allows demote monitor of customers needs and responds to changes in the needs of customers. b. Cross-functional teams, which are work teams composed of individuals from various functional specialties, are being utilize along with traditional departmental arrangements. C. drawstring of look out over. The chemical chain of command is the line of authority ex rangeing from upper organizational levels to the lowest levels, which clarifies who reports to whom.Three concepts related to chain of command are authority, responsibility, and unity of command. 1. Authority is the put inhts inherent in a managerial position to tell people what to do and to expect them to do it. a. The acceptance theory of authority proposed by Chester Barnard says that authority comes from the willingness of subordinates to accept it. Barnard contended that subordinates will accept orders only if the following conditions are satisfied 1. They understand the order. 2.They olfactory modality the order is consistent with the organizations purpose. 3. The order does not conflict with their private beliefs. 4. They are able to perform the task as directed. b. Line authority entitles a manager to direct the work of an employee. It is the employeremployee authority relationship that extends from the top of the organization to the lowest echelon, according to the chain of command, as shown in Exhibit 10-4. c. Staff authority functions to support, assist, advise, and generally reduce some of their cultureal burdens.Exhibit 10-5 illustrates line and staff authority. 2. Responsibility is the compact to perform any assigned duties. 3. Unity of command is the management principle that each person should report to only one manager. D. Span of Control. Span of control is the number of employees a manager can efficiently and effectively manage. 1. The span of control concept is important because it determines how many levels and managers an o rganization will have. (See Exhibit 10-6 for an example) 2. What determines the exemplification span of control?Contingency factors such as the skills and abilities of the manager and the employees, the characteristics of the work being done, similarity and complexity of employee tasks, the physical proximity of subordinates, the degree to which standardized procedures are in place, the sophistication of the organizations information system, the strength of the organizations culture, and the preferred style of the manager influence the ideal number of subordinates. 3. The trend in recent years has been toward wider ( grandr) spans of control. E. Centralization and Decentralization.The concepts of centralization and decentralization address who, where, and how decisions are made in organizations. 1. Centralization is the degree to which decision making is backbreaking at upper levels of the organization. 2. Decentralization is the degree to which lower-level employees provide input or actually make decisions. 3. The current trend is toward decentralizing decision making in order to make organizations more flexible and responsive. 4. Employee empowerment is giving employees more authority (power) to make decisions. . A number of factors influence the degree of centralization or decentralization in an organization (see Exhibit 10-7). F. formalization refers to the degree to which jobs within an organization are standardized and the extent to which employee behavior is guided by rules and procedures. 1. In a highly formalized organization, employees have little discretion, and a high level of consistent and uniform output exists. Formalized organizations have explicit job descriptions, many organizational rules, and clearly defined procedures. 2.In a less-formalized organization, employees have such(prenominal) freedom and can exercise discretion in the way they do their work. 3. Formalization not only fosters relatively unstructured job behaviors, but also el iminates the need for employees to consider alternatives. 4. The degree of formalization can vary widely between organizations and even within organizations. 10. 2 MECHANISTIC AND ORGANIC STRUCTURES Organizations do not have identical structures. Even companies of comparable size do not inevitably have similar structures. A. Two Models of Organizational Design. See Exhibit 10-8) 1. A mechanistic organization is an organizational design that is rigid and bastardlyly controlled. It is characterized by high specialization, rigid departmentalization, narrow spans of control, high formalization, a limited information network, and little participation in decision making by lower-level employees. 2. An organic organization is an organizational design that is highly adaptive and flexible. It is characterized by little work specialization, minimal formalization, and little direct supervision of employees. 3.Under what circumstances is each design favored? It depends on contingency variable s. 10. 3 CONTINGENCY FACTORS Appropriate organizational structure depends upon four contingency variables A. Strategy and structure. The organizations outline is one of the contingency variables that influences organizational design. 1. Alfred Chandler originated the strategy-structure relationship. His finding that structure follows strategy indicates that as organizations change their strategies, they must change their structure to support that strategy. . Most current strategy/structure frameworks focus on three strategy dimensions a) Innovation needs the flexibleness and free flow of information present in the organic organization. b) Cost minimization needs the efficiency, stability, and tight controls of the mechanistic organization. c) Imitation uses some of the characteristics of both mechanistic and organic organizations. B. Size and structure. Considerable historical evidence indicates that an organizations size significantly affects its structure.Larger organizations te nd to have more specialization, departmentalization, centralization, and formalization, although the size-structure relationship is not linear. C. Technology has been shown to affect an organizations choice of structure. 1. Every organization uses some form of technology to transfigure inputs into outputs. 2. Joan Woodwards study of structure and technology shows that organizations adapt to their technology. She found that three distinct technologies have increasing levels of complexity and sophistication. a) Unit performance is the production of items in units or small batches. ) Mass production is the production of items in large batches. c) Process production is the production of items in continuous processes. 3. Woodward found in her study of these three groups that distinct relationships exist among these technologies, the subsequent structure of the organization, and the effectiveness of the organization. Exhibit 10-9 and provides a summary of these findings. LEADERS WHO MAK E A DIFFERENCE As the first female CEO of Avon, Andrea Jung has held that position for a decadethe most-tenured female CEO in the Fortune 500. Ms.Jung clearly understands the importance of organizational design in percentage her global company prosper in good times and bad. This part of her job is especially challenging considering that 70 percent of Avons sales are in developing countries. Ms. Jung has made tough decisions to restructure, refocus, and redefine the companys strategies and created an organizational design to help it continue its success as the leading womens beauty products company. D. Environmental un acceptedty and structure Environmental uncertainty is the final contingency factor that has been shown to affect organizational structure.Environmental uncertainty may be managed by making ad conscionablements in the organizations structure. The more uncertain the environment, the more flexible and responsive the organization needs to be. 10. 4 TRADITIONAL ORGANIZATIO NAL DESIGNS A number of different organizational designs can be found in todays organizations. Exhibit 10-8 summarizes the strengths and weaknesses of each of these designs. A. A simple structure is an organizational design with low departmentaliza-tion, wide spans of control, authority centralized in a single person, and little formalization. . Strengths of the simple structure are its flexibility, speed, clear accountability and low maintenance costs. 2. The major limitation of a simple structure is that it is most effective when used in small organizations. B. As an organization grows, its structure tends to do more specialized and formalized. When contingency factors favor a bureaucratic or mechanistic design, one of the following two options is likely to be used 1. A functional structure is an organizational design that groups similar or related occupational specialties together. . A divisional structure is an organizational structure made up of separate, semiautonomous units or divisions. LETS GET REAL MY RESPONSE Cindy Brewer Customer Contact Channel Manager Sears Holdings Corporation Loves Park, IL Cindy offers several recommendations for Eli Lilly & Company. To better the structure of the organization, she recommends the use of more flexible structures, i. e. a divisional and organic structure, while at the same time including a mechanistic structure to help speed up certain aspects of the drug approval process.Her final recommendation, to create cross-functional teams across the business units to share best practices and key learning to increase the product development process is an insightful one in that it leverages the power of teams to aid in the decision making process and at the same time create a learning/innovation based climate. Answers to Review and Discussion Questions 1. Discuss the traditional and contemporary views of each of the six key elements of organizational design. Traditionally, work specialization was viewed as a way to divide work activities into separate job tasks.Todays view is that it is an important organizing mechanism but it can lead to problems. The chain of command and its companion conceptsauthority, responsibility, and unity of commandwere viewed as important ways of pleading control in organizations. The contemporary view is that they are less relevant in todays organizations. The traditional view of span of control was that managers should directly supervise no more than five to six individuals. The contemporary view is that the span of control depends on the skills and abilities of the manager and the employees and on the characteristics of the situation. . Can an organizations structure be changed quickly? Why or why not? Should it be changed quickly? Explain. The speed with which structural changes can be implemented depends partly upon an organizations size. A small organization is usually able to change its structure more rapidly than a larger one because a smaller company has fewer em ployees who are involved in the restructuring process. However, a large organization can change its structure and often does in response to changing environmental conditions and changing strategies. 3. Contrast mechanistic and organic organizations.A mechanistic organization is a rigid and tightly controlled structure. An organic organization is highly adaptive and flexible. 4. Would you rather work in a mechanistic or an organic organization? Why? Students answers to this question will vary. Many students prefer the structure provided by a mechanistic organization, whereas new(prenominal)s would be less productive in an organization with structural rigidity. Note that SAL III. A. 1 What Type of Organization Structure Do I Prefer? addresses whether each of your students would like to work in a bureaucracy (a mechanistic organization).Students might want to revisit this assessment in answering this question. 5. Explain the contingency factors that affect organizational design. An o rganizations structure should support the strategy. If the strategy changes, the structure also should change. An organizations size can affect its structure up to a certain point. Once an organization reaches a certain size (usually around 2,000 employees), its fairly mechanistic. An organizations technology can affect its structure. An organic structure is most effective with unit production and process production technology.A mechanistic structure is most effective with mass production technology. The more uncertain an organizations environment, the more it needs the flexibility of an organic design. 6. Contrast the three traditional organizational designs. A simple structure is one with low departmentalization, wide spans of control, authority centralized in a single person, and little formalization. A functional structure groups similar or related occupational specialties together. A divisional structure is made up of separate business units or divisions. 7.With the availabilit y of advanced information technology that allows an organizations work to be done anywhere at any time, is organizing close up an important managerial function? Why or why not? Although an organizations work may be done anywhere at any time, organizing remains a vital managerial function because the work that must be accomplished still must be divided, grouped, and coordinated. 8. Researchers are now saying that efforts to simplify work tasks actually have negative results for both companies and their employees. Do you agree? Why or why not? Studies as far-off back as 1924 show that simplified jobs lead to boredom.In 1950 other researchers found that highly segmented and simplified jobs resulted in lower employee morale and output. Other consequences of low employee motivation include absenteeism and high employee turnover, both very costly for businesses. ETHICS DILEMMA Shortly after the BP oil spill, BP engaged in a budge to improve their image including buying domain names tha t referred to terms like oil spill and oil spill claims. A company spokeswoman said the strategy is to assist those who are most impacted and help them find the right forms and the right people quickly and effectively. Is this an ethical issue? What ethical concerns do students see in BP doing this? What stakeholders might be affected by BPs actions (buying the search terms)? In what ways might these stakeholders be affected? While some students may not see this as unethical, there is a question as to whether BP acquired the domain names to better inform the public or to control information access. By controlling information, BP could put their spin on events or even keep the domain names idle so that they could not be used by others to distribute negative information about the company actions.Ultimately, with a disaster as large as this one, there were many stakeholders affected fisherman, rig workers, hotel owners, management, and employees. Without access to information, these stakeholders may be unaware of their rights to sue or file claims against BP. SKILLS EXERCISE DEVELOPING YOUR EMPOWERING PEOPLE (DELEGATING) SKILLS A managers job is to do things through with(predicate) other people. This requires that a manager learn to trust and empower those they supervise. In this exercise, the author gives five behaviors for effective delegation.Students are to then to read through the scenario and write a paper describing how they would handle the situation described. In the scenario, Ann is already following several of guidelines given for recommendation, by clarifying the assignment and allowing Ricky to participate. In Rickys contact with top, he will have to follow his Bosss lead and follow the recommendations as well. He should first clarify the assignment and what Bill will be able to include (and not include) in the manual. It will also be a good idea if Ricky and Bill get other employees input on the policy manual since it will be used by everyone in the organization.Finally, Ricky should establish a feedback channel so that Bill can ask questions and Ricky can keep tract of Bills progress. WORKING TOGETHER TEAM EXERCISE Form groups of three to four students and have each group choose an organization with which students in the group are familiar (where students work, a student organization to which they belong, your college or university, etc. ). Have students draw an organization chart of this organization. Students should show departments (or groups) and especially be conscientious to get the chain of command correct.Students should be prepared to share their chart with the anatomy. If this is done outside of class as an assignment, it may be a good idea to have students use Microsoft PowerPoint to prepare the chart. PowerPoint has an option to draw organizational charts in the Smartart menu. Your Turn to be a Manager Find three different examples of organizational charts. In a report, describe each of them. Try to decip her the organizations use of organizational design elements, especially departmentalization, chain of command, centralizationdecentralization, and formalization. Survey at least 10 different managers about how many employees they supervise. Also ask them whether they feel they could supervise more employees or whether they feel the number they supervise is too many. Graph your survey results and write a report describing what you found. Draw some conclusions about span of control. Draw an organizational chart of an organization with which youre familiar (where you work, a student organization to which you belong, your college or university, etc. ). Be very careful in showing the departments (or groups) and especially be careful to get the chain of command correct.Be prepared to share your chart with the class. Using the organizational chart you just created, redesign the organizations structure. What structural changes might make this organization more efficient and effective? Wri te a report describing what you would do and why. Be sure to include an example of the original organizational chart as well as a chart of your proposed revision of the organizational structure. Steves and bloody shames suggested readings Gary Hamel, The Future of Management (Harvard Business School Press, 2007) Thomas Friedman, The World Is Flat 3. (Picador, 2007) Harold J. Leavitt, Top Down Why Hierarchies Are Here to Stay and How to Manage Them More Effectively (Harvard Business School Press, 2005) and Thomas W. Malone, The Future of Work (Harvard Business School Press, 2004). Choose one of the three topics discussed in the section on todays organizational design challenges. Research this topic and write a paper about it. Focus on finding current information and current examples of companies dealing with these issues. In your own words, write down three things you learned in this chapter about being a good manager. Self-knowledge can be a powerful learning tool. Go to mymanage mentlab and complete these self-assessment exercises How Well Do I Handle Ambiguity? What Type of Organizational Structure Do I Prefer? How Good Am I at Playing Politics? How Willing Am I to Delegate? Using the results of your assessments, identify personal strengths and weaknesses. What will you do to reinforce your strengths and improve your weaknesses? Answers to Case Application Questions Ask Chuck 1. Describe and evaluate what Charles Schwab is doing. It is easy for a company to lose sight of their goals.While other lines of business may be potential money makers, going beyond a firms core competence can lead a firm into financial trouble. In this case, students should see how Charles Schwab has stayed true to its primary business making stock trades for investors who make their own financial decisions. Another goal of Schwab is customer service. In the example of Cheryl Pasquale, we can see how she uses the companys information system to closely monitor her sales representati ves to make sure they are meeting the needs of customers. 2.How might the companys culture of not buying into hype and not taking excessive risks affect its organizational structural design? Schwabs conservative culture would foster a simple structure characterized by low departmentalization, wide spans of control, centralized authority, and little formalization. This structure fast, flexible, inexpensive to maintain and has clear lines of accountability. 3. What structural implicationsgood and badmight Schwabs intense focus on customer feedback have? Schwabs focus on customer feedback would indicate a flexible structure that is able to adapt to meet customer demands.This structure would allow employees to spend more time and energy devote to improving relationships with customers and possibly provide for exceptions to improve customer satisfaction. On the other hand, building strong customer relationships takes time and money. By paying so much attention to the customer there is t he potential loss of efficiency that Schwab has to maintain to keep stock transactions low. 4. Do you think this arrangement would work for other types of organizations? Why or why not? This type of customer focus would not work well for firms that operate on a thin margin.For example, manufacturing firms that operate in the maturity phase of the industry life cycle focus on keeping production costs as low as possible. This arrangement may also not work well in situations where organizations are set up around processes. A New Kind of Structure 1. Describe and evaluate what Pfizer is doing. What Jordan Cohen has created at Pfizer is a network organization. Its a form of the boundaryless organization structure where company employees concentrate on the important aspects of the job, i. e. hose elements that are related to the companys core competencies, and other tasks are outsourced to another organization. 2. What structural implicationsgood and baddoes this approach have? (Think in terms of the six organizational design elements. ) Have students break into groups and discuss how the advantages and disadvantages of using a network organizational structure from the perspective of Work Specialization Departmentalization Chain Of Command Span Of Control Centralization And Decentralization Formalization Some groups may be assigned more than one design element.For more information on Pfizers new structure, go to the web 3. Do you think this arrangement would work for other types of organizations? Why or why not? The network organization design used by Pfizer has helped to balance recent layoffs the company experienced after a nearly $4 billion yearly budget cut. agree to managers in the Fast Company article, the OOF has cut some project costs by 100%. While this program has been a success for Pfizer, it may not be realistic for other companies that either (a) have not experienced such deep cuts in personnel department, or (b) have such high personnel costs. . What role do you think organizational structure plays in an organizations efficiency and effectiveness? Explain. Organizational structure plays a key role in enabling a company to function smoothly, to remain responsive to its internal and external stakeholders, and to adapt to changes in the marketplace. Innovation is facilitated by fewer layers of management, and students have already learned that the survival and success of a company is usually dependent upon its ability to function as a learning organization that promotes innovation.