Session 5: Org structure

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Session 5 Org structure Hierarchy
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What is social or org hierarchy?

• An organizational example

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Why we can NOT eliminate hierarchy?

• Can you think about some reasons?
• In your life?
• In your school?
• In your community?
• In this nation?
• Max Weber
• Rational-legal-authority perspective
• Why is it rational?
• Provide social order to the society and human
  life
• Provide a third-party arbiter who can arbitrate
  among people at the some social level
• As a result reduce conflict
• Thus, hierarchy become a legalized and prevalent
  form of organizing

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Why we can NOT eliminate hierarchy?

• A Transaction Cost perspective
• Market vs. organizational hierarchy as
  alternative of governance
• Markets tend to fail
• People are bounded rational
• People are easy to become opportunistic
• Transaction through market become very costly
• Market fails as a form of governance
• Hierarchical organization become the alternative
• Against opportunism by putting the two parties of
  the transaction under the same roof
• Reduce social loafing and free riding
• Allocation of resources by a third part (the boss)

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Why we can NOT eliminate hierarchy?

• An Agent Theory perspective
• Principal vs. Agent
• Principal the person who entrust
• Agent the person who is entrusted by the
  principal
• Are there any problems in the principal-agent
  relation?
• Adverse selection before entrusting
• Moral risk after entrusting
• Any example of Adverse Selection Moral Risk?
• Adverse Selection old car market
• Moral Risk insurance, a safe car vs. unsafe car
  dilemma
• The necessary of monitoring
• Leading to hierarchy
• Principal at the higher level
• Agent at the lower level
• Organization is the sum of all principal-agent
  contracts

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Why we can NOT eliminate hierarchy?

• Can we always make decision for ourselves?
• our boss decide
• what we produce
• What is the goal
• etc
• The Decision-Making Hierarchy
• Assign tasks
• Determine who can make decisions and specify how
  they should be made
• Perform tasks
• Implement decisions that have been made
• Distribute Authority
• Determine whether the organization is to be
  centralized or decentralized

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Organizational structure

• A simple example

President
R D
Manufacturing
Accounting
Marketing
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Organizational Structure

• Organizational Structure
• The sum of the ways an organization divides its
  labor into distinct tasks and then coordinates
  them.
• Organizational charts
• Illustration of relationships among units and
  lines of authority among supervisors and
  subordinates

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Determinants of org structure

• Contextual Determinants
• 1. Size (of the social system, i.e., number of
  people)
• 2. Technology (nature of the task in the
  production subsystem)
• 3. Environment (elements outside the
  organization affecting it)
• 4. Goals (unique purposes of the organization)
• 5. Strategy (competitive techniques)
• 6. Culture (shared values, beliefs and norms)

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Contextual Determinants
Environment
Org structure
Strategy
Technology
Human Resources
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Determinants of org structure

• Structural determinants
• 1. Formalization (amount of written
  documentation)
• 2. Specialization (degree of division of labor)
• 3. Standardization (degree in which similar work
  is done in uniform manner)
• 4. Hierarchy of authority (who reports to whom
  and span of control)
• 5. Complexity (number of activities or
  subsystems-vertical, horizontal, special)
• 6. Centralization (hierarchical level with
  decision making power)
• 7. Professionalism (level of formal education
  and training of employees)
• 8. Personnel configuration (deployment, e.g.,
  admin., clerical, and Prof.. staff ratio)

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Organizational structure

• Chain of Command
• continuous line of authority
• extends from upper organizational levels to the
  lowest levels
• and clarifies who reports to whom
• Authority
• the rights inherent in a managerial position to
  tell people what to do and to expect them to do
  it
• Responsibility
• the obligation to perform any assigned duties
• Are these concepts still relevant today?
• information technology ?
• employee empowerment ?

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Specialization Departmentalization
SPECIALIZATION
What needs to be done, and who will do it?
DEPARTMENTALIZATION
Customer
Geographic
Product
Functional
Process
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How much specialization is a good specialization
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Cognitive Differentiation

• The extent to which people in different units
  within an organization think about different
  things or about similar things differently.

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Centralization vs. Decentralization

• Centralization
• the degree to which decision making is
  concentrated at a single point in the
  organization
• top-level managers make decisions with little
  input from subordinates in a centralized
  organization
• Decentralization
• the degree to which decisions are made by
  lower-level employees
• distinct trend toward decentralized decision
  making

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Centralization vs. Decentralization
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Centralization vs. Decentralization
Centralized
Top managers hold most decision-making authority
Decentralized
Lower level managers hold significant
decision-making authority
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Span of Control

• number of employees that a manager can
  efficiently and effectively manage
• determines the number of levels and managers in
  an organization
• appropriate span influenced by
• the skills and abilities of employees
• the complexity of tasks performed
• availability of standardized procedures
• Sophistication of organizations information
  system

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Span of control
Relatively narrow span of control
Relatively wide span of control
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Tight Control
Loose Control
Certain Routine Large Efficiency Functional,
Centralized Bureaucratic Formal Info.
System Infrequent Rational Analysis Cooperation
Uncertain Nonroutine Small Effectiveness Matrix,
Decentralized Clan Face-to-Face Frequent Trial
and Error Conflict
Environment Technology Size Goals Structure
Control Mechanism Communication Innovation De
cision-Making Interdepartmental Relationships
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standardization

• the degree to which jobs within the organization
  are standardized
• Removes the need for employees to consider
  alternatives
• Extent to which employees behavior is guided by
  rules and procedures
• employee allowed minimal discretion in highly
  formalized/standardized jobs
• explicit job descriptions
• clearly defined procedures

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Mechanistic structure

• Run like a machine
• Individuals and functions behave in predictable
  ways
• People or department are held accountable for
  their actions
• When does it work well?
• The environment is certain and change is little
• The task is also certain the work is repeating
• The production is massive and the same
• People are willing to obey
• When does it NOT work well?
• When the environment is uncertain
• When the change is quick and unpredictable
• When task is uncertain and subtle

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Organic structure

• Run like an organism or a creature
• Individuals and functions can behave flexibly
• respond quickly to frequently changing and
  unusual situations
• Suitable for innovation
• Suitable for self-management
• Any drawbacks?
• People department are NOT organs
• May lead to competition instead of cooperation

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Comparison between mechanism vs. organism

• Mechanism
• More hierarchical centralized
• top-down communication decision making
• Standardized processes, works, and procedures
• Clear tasks, divisions, and roles

• Organism
• Less hierarchy more delegation
• Horizontal communication decision making
• More task groups, more interaction and flow of
  human resources
• Flexible labor division, roles, and task

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Contingency Factors

• Strategy and Structure
• structure should facilitate the achievement of
  goals
• strategy and structure should be closely linked
• Innovation
• need the flexibility and free flow of information
  of the organic structure
• Cost minimizing
• seek efficiency, stability, and tight controls of
  mechanistic structure

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Contingency Factors

• Technology and Structure
• Technology converts inputs into outputs
• mechanistic structure supports routine technology
• organic structure supports non-routine technology
• Environmental Uncertainty and Structure
• one way to reduce environmental uncertainty is to
  adjust the organizations structure
• with greater stability, mechanistic structures
  are more effective
• mechanistic structures are not equipped to
  respond to rapid environmental change
• the greater the uncertainty, the greater the need
  for an organic structure

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Types of org structure

• Simple Structure
• Functional Structure (U form)
• Divisional Structure (M form)
• Hybrid Structure
• Matrix Structure

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Simple Structure

• low departmentalization, wide spans of control,
  authority centralized in a single person, and
  little formalization
• when an organization starts/entrepreneur
• commonly used by small businesses
• as organizations increase in size, the structure
  tends to become more specialized and formalized

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Functional Structure
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Functional Structure

• Context
• Environment Low uncertainty, stable
• Technology Routine, low interdependence
• Size Small to large
• Goals Internal efficiency, technical
  specialization and quality
• INTERNAL SYSTEMS
• Operative goals Functional goal emphasis
• Planning and budgeting Cost basis-budget,
  statistical reports
• Formal authority Functional managers

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Functional Structure

• STRENGTHS
• 1. Economies of scale within functions
• 2. In-depth skill development
• 3. Best in small-to medium-size organizations
• 4. Best when only one or a few products
• WEAKNESSES
• 1. Slow response time to environmental changes
• 2. Decisions may pile on top,hierarchy overload
• 3. Poor interunit coordination
• 4. Less innovation
• 5. Restricted view of organization goals

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Divisional Structure

• Product structure
• divisions created according to the type of
  product or service.
• Geographic structure
• divisions based on the area of a country or world
  served.
• Market structure
• divisions based on the types of customers served.

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Divisional Structure

• Product structure

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Divisional Structure

• Geographic structure

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Divisional Structure

• Market structure

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Divisional Structure

• CONTEXT
• Structure Product or Divisional
• Environment Moderate uncertainty from complexity
  changing
• Technology Nonroutine, high interdependence
  among departments
• Size Large
• Goals External effectiveness, adaptation, client
  satisfaction
• Dominant Competitive Issue Market segments
• INTERNAL SYSTEMS
• Operative goals Product line/location/market
  emphasis
• Planning and budgeting Profit center basis-cost
  and income
• Formal authority Division managers

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Divisional Structure

• STRENGTHS
• 1. Is suited to fast change in unstable
  environment
• 2. Leads to client satisfaction because product
  responsibility and contact
• points are clear
• 3. Involves high coordination across functions
• 4. Allows units to adapt to differences in
  products, regions, clients
• 5. Is best in large organizations with several
  products
• 6. Decentralizes decision making
• WEAKNESSES
• 1. Eliminates economies of scale in functional
  departments
• 2. Leads to poor coordination across product
  lines
• 3. Eliminates in-depth competence and technical
  specialization
• 4. Makes integration and standardization across
  product lines difficult.

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Hybrid Structure
President
Chief Counsel
Director Human Resources
Vice-President Technology
Sr. Vice-Pres., Resources Strategy
Vice-President, Financial Services
Director, Public Affairs
Vice-President, Chemicals
Vice-President, Lubricants/ Waxes
Vice-President, Fuels
Vice-President, Facilities
Vice-President, Raw Materials
Six Refineries
Marketing
Marketing
Marketing
Director, Planning Environment Assessment
Planning and Economics
Planning and Economics
Planning and Economics
Supply and Distribution
Supply and Distribution
Supply and Distribution
Manufacturing
Manufacturing
Manufacturing
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Org Structure in an International Environment

• Global geographic structure different divisions
  serve each world region.
• Customer needs vary between regions.
• Global product structure
• Customers in different regions buy similar
  products
• firms keep most functional work at home
• set up a division to market product abroad.

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Matrix Structure

• managers group people by function and product
  teams simultaneously
• assigns specialists from different functional
  departments to work on projects led by project
  managers
• adds vertical dimension to the traditional
  horizontal functional departments
• creates a dual chain of command
• project managers have authority in areas relative
  to the projects goals
• functional managers retain authority over human
  resource decisions (e.g., promotions)
• violates unity of command

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Matrix Structure
President
Director of Product Operations
Vice-President Design
Vice-President Manufacturing
Vice-President Marketing
Controller
Procurement Manager
Product Manager A
Product Manager B
Product Manager C
Product Manager D
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Matrix Structure

• Context
• Environment High uncertainty
• Technology Nonroutine, many interdependencies
• Size Moderate, a few product lines
• Goals Dual-product innovation and technical
  specialization
• Internal Systems
• Operative goals Equal product and functional
  emphasis
• Planning and budgeting Dual systems-by function
  and by product line
• Formal authority Joint between functional and
  product heads
• Information and Linkages Direct contact among
  matrix personnel

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Matrix Structure

• Strength
• 1. Achieves coordination necessary to meet dual
  demands from environment
• 2. Flexible sharing of human resources across
  products
• 3. Suited to complex decisions and frequent
  changes in unstable environment
• 4. Provides opportunity for functional and
  product skill development
• 5. Best in medium-size organizations with
  multiple products

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Matrix Structure

• Weakness
• 1. Causes participants to experience dual
  authority, which can be frustrating and confusing
• 2. Means participants need good interpersonal
  skills and extensive training
• 3. Is time-consuming-frequent meetings and
  conflict resolution sessions
• 4. Will not work unless participants understand
  it and adopt collegial rather than vertical-type
  relationships
• 5. Requires dual pressure from environment to
  maintain power balance

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Why do people work in a highly structured
hierarchy?

• Rational reasons
• Legal-authority reasons
• Transaction cost reasons
• Principal-agent reasons
• Irrational reasons?
• People obey orders because..?

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Obedience

• Due to external pressure, people have to change
  their attitudes and behaviors, and make them in
  accordance with external requirements

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Obedience

• Milgrams experiment

• Design of the experiment
• The effects of electric shock on students
  learning skill
• Teacher subject
• Student coordinator experimenters partner
• If the student gives the wrong answer, teacher
  will give the student electric shocks
• Electric shocks from 15 volts to 450 volts
• Real purpose of the experiment
• When will teacher stop the electric shock ?
• Why do people obey authority?

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Milgrams experiment subjects
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Milgrams experiment subjects

• Shock Level Victim Behavior
  Giving Shock
• Slight (15 volts)
  100
• Moderate
  100
• Strong 100
• Very Strong
  100
• Intense victim screams 88
• Extreme intensity victim pounds on wall
  70
• Danger severe shock victim is silent
  68
• xxx (450 volts) victim is silent
  65

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Factors that influence obedience

• Authority of the commander
• Morality of the subjects
• How close is the authority to you?
• How far are the victims to you?

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Case preview Apple Computer

• Analyze the contextual dimensions of Apple and
  how they evolved over time. How did these
  dimensions affect Apple's structure?
• Analyze each structural change. Was each
  appropriate? Do you think their frequency was
  disruptive or energizing?
• Does your view of Apples organization type
  change when you analyze the organization over
  time, rather than at one moment in time?
• Do some research at home, find out whats going
  now at Apple computer?
• NO NEED to write the short essay, but be prepared
  to discuss next class