Organizational Structure and Design

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Organizational Structure and Design
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The importance of organizational structure

• Your box on the org chart is your world
• Poor structural choices can have enormous costs
• Priorities are set wrong, communication becomes
  difficult and slow, coordination and motivation
  suffers.

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Structure Fundamental Concepts

• Organizational Structure
• The formal framework by which job tasks are
  divided, grouped, and coordinated.
• Two pillars
• Specialization Dividing the work up
• Coordination Keeping everyone working in sync

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Four major kinds of organizational structures

• Simple structure
• Functional structure
• Divisional structure
• Matrix structure
• Identify the structure by looking at the top
  two lines of the org chart (CEO and reports).

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First The simple structure
The Organization Chart
Boss
Marketing Guy
Legal Guy
Money Guy
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Simple structure

• Everyone reports to the boss
• Job definitions are often fairly informal
• Advantages
• Low-cost (low overhead), flexible, adaptive
• Key limitations
• Relies on the boss - is as good or bad as s/he
  is.
• Only usable for very small organizations

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Next the Functional Structure
Boss
Marketing
Sales
Finance
Accountant East
Toy Marketing
Corporate
Accountant West
Food Marketing
Customers
Accountant Central
Clothes Mktg.t
Retailers
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Functional Structure

• Functional Structure - groups similar jobs
  together into a series of departments, each
  headed by a manager
• Functions Marketing, Sales, Finance,
  Manufacturing, etc.
• Can be expanded to multiple organizational levels
• Probably the standard concept of an
  organization
• Departments by product, customer, place
• Advantages Specialization, efficiency and size
• Allows for high specialization
• Little duplication of resources
• Can achieve huge economies of scale in production
• Huge organizations become possible with multiple
  levels

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Which type of departmentalization is the right
one?

• Mirror the complexity of your environment
• If its simple, be efficient (functional)
• Otherwise, be responsive by specializing around
  the complexity
• Functional
• If efficiency is paramount and differences across
  place, product, customer are limited. The
  default choice.
• Place
• If responding to differences in regions is
  crucial
• If environment is simple, but costs of travel /
  transport are high
• Product or Customer
• If there are major differences across products
  (design, manufacture, sales process) or
  customers, respectively.

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Departmentalization Examples

• You sell to customers that look pretty much the
  same nationally. Your product line often
  requires several site visits to close the sale.
  A single sales rep can have a pretty good handle
  on the whole line. How do you departmentalize
  your salespeople?
• With the internet you find a substantial fraction
  of your customers would like to buy online. How
  do your change your departmentalization?
• Over time you realize that selling to the
  government agencies requires distinctive skills
  and processes. Its a growing part of your
  business. How do you change your
  departmentalization?
• Success leads you to expand the product line.
  Now no one sales rep to can stay on top of the
  whole line. How do you change your
  departmentalization now? What does this do to
  your efficiency?

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The key problem with functional structures in
large orgns Silos

• As functional organizations grow, the of
  organizational levels increase.
• You get the Silo effect
• 1) slow communication and decisions, action is up
  and down the hierarchy not across it.
• 2) preoccupation with departmental rather than
  organizational goals.

• AND Throwing it over the wall
• Doing your job without really involving the
  next group/function
• The next group first sees the project once your
  group is finished.

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Pushing the Limits When functional structures
lose effectiveness

• What if you have a lot of (different) businesses?
• What if you operate in a lot of countries?
• What if you have many (different) customers?
• These situations are difficult to handle with
  functional structures because such structures
  tend to be one-size-fits all.
• Loyalties are ultimately to the function rather
  than to a specific business, country or customer.

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Answer The Divisional Structure

• Divisional Structure Organizational structure
  made up of separate, semiautonomous units called
  divisions.
• Each division produces specific products,
  operates in specific geographies, or serves
  specific customers.
• Each division has has a full complement of
  functions (e.g., RD, marketing, sales,
  production, human resources, finance)
• Adopted where organizations faces too much
  complexity for functional structure to cope.
• Many different products, or many regions
  (countries) or very different customers (e.g.,
  government, large business, consumer).

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DivisionalStructure
Examples General Electric Johnson Johnson
Divisions just are a group of functional
departments all living underneath one of
the other types of departmentalization
And underneath that, perhaps yet another type of
departmentalization
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Advantages and Disadvantages of the Divisional
Structure

• Advantage
• Each division specializes on a specific product,
  region or customer, and so performs better
• Leads to more focused, customized (thus
  effective) strategies
• Leads to higher responsiveness better meets
  customer needs.
• Disadvantages
• Resources are duplicated across divisions
• For example, separate manufacturing plants
  instead of larger, more efficient ones that could
  have produced products for multiple divisions
• Divisions find it tough to cooperate with other
  divisions
• Divisions and heads of divisions are often in
  competition with each other
• Incentives for cooperation is weak the whole
  idea is to focus on your business, not the
  broader welfare of the entire organization

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Matrix Structure If there are complex
dimensions
2

• Simultaneously groups people by the function of
  which they are a member and by the product team
  that they are currently working on.
• Example Boeing engineers report to the design
  function, but also to a project manager for the
  particular airliner (i.e., 767) they design /
  build
• When is it necessary?
• Develop new products rapidly
• Maximize communication and cooperation
• Innovation Creativity

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Matrix Design
Can be projects or products
CEO
MKT
ACCT
ENGR
RD
SALES
PROJ A
PROJ B
PROJ C
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What its like in the matrix

• Youre Erik, the General manager of the US Relays
  Business Unit for ABB. You are in charge of a
  factory, a sales force, and several engineers who
  usually do product engineering (coming up with
  custom solutions for with specific customers),
  plus staff people (some product marketing,
  finance, HR, etc.). You are a division
• You are in the matrix. You report to the
  global head of Relays (Steve), and the National
  Sales Manager for the US (Heather).
• You are worried about this quarter. You were
  expecting to just make your sales goal. You were
  counting on two of your engineers back from a
  project developing a common worldwide
  manufacturing platform a project that is very
  important to the global head of Relays.
• Now you receive a call. Its Ece, one of the
  engineers
• After that call, you call Heather, the National
  Sales Manager
• Then you call Steve, the global head of Relays.

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The second pillar of structure Coordination

• Coordination keeps things in sync
• Coordination occurs
• Within the job
• Formalization
• Vertically Up and down the organization
• Hierarchy Authority
• Chain of Command
• Centralization / Decentralization
• Horizontally Across departments
• Integrating Mechanisms

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Coordinating at the job level Formalization

• Formalization the degree to which jobs are
  guided by standardized rules and procedures.
  Higher formalization means
• More explicit job descriptions
• More clearly defined procedures
• Less discretion for workers
• High formalization is appropriate when
• Jobs are relatively simple and routine
• Importance of consistency is high
• Example Department of motor vehicles
• Low formalization is usually coupled with mutual
  adjustment
• Mutual adjustment workers agree between
  themselves on an ongoing basis, how to coordinate
  their work
• Example Jazz band

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Coordinating Vertically Hierarchy

• Hierarchy An organizations chain of command
  that defines the relative authority each manager
  has.
• Authority The power to hold people accountable
  for their actions and to decide how to use of
  organizational resources.
• Chain of command The continuous line of
  authority from top to bottom of an organization
• Unity of command - a person should report to only
  one manager
• Violating unity of command In a family-owned
  manufacturing firm, the owners brother is on the
  board of directors. He frequently visits the
  factory floor and demands that product designs be
  changed.
• Hierarchy is powerful but inherently limited
• Managers dont have time or knowledge to make all
  decisions
• Silos hierarchies lead to vertical
  information flows
• Reports of the death of hierarchy are greatly
  exaggerated

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What level in the hierarchy decides?Centralizatio
n and Decentralization

• Centralization The degree to which decisions are
  made at higher organizational levels
• Example of centralization Adding a requirement
  that senior managers approve expenditures above a
  certain level.
• Centralized organizations Command and control
  model
• Decentralization The degree to which decisions
  are made at lower levels
• Example of decentralizing Increasing spending
  that can occur without higher level
  authorization.
• Distinct trend toward decentralization
• Which level is best placed to decide?
• Higher levels More experience, knowledge of
  organization and environment as a whole.
• Lower levels Often have more current knowledge
  of specific features of the environment (for
  example, a specific market or technology).

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Coordinating Horizontally Integrating Mechanisms

• What is integration?
• Coordination across departments
• What are integrating mechanisms?
• Structural arrangements to increase coordination
  across horizontal boundaries.
• For example, a task force charged with
  coordinating a new product introduction
• Integrating mechanisms are the horizontal
  counterpart to hierarchy
• Why do we need integration?
• Hierarchy has limited capability to coordinate
  across departments
• Integrating mechanisms augment hierarchy

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What are some integrating mechanisms?
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Forms of Integrating Mechanisms
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Black and Decker goes to Product Teams

• Black and Decker needed to bring new ideas to
  market faster and lower costs as they are faced
  with mature markets and overseas competitors.
• Use a product team as an integrating mechanism
  between functions.
• Pull a person or two each out of RD, marketing,
  sales, manufacturing, finance and have them
  assigned full-time to a product team with a
  broadly-defined goal such as come up with a
  better cordless drill than anything out there.
• The team approach met Black and Deckers needs by
  cutting through silo-type barriers, yet the
  overall efficiency of a functional structure is
  retained once the product is developed.