Organizational Theory and Design

• Organizations exist to create value for stakeholders by coordinating resources to provide goods and services that satisfy needs.

Value Creation

• Value is created by improving efficiency, quality, customer service, and adaptation throughout the input, conversion, and output process.

Organizational Theory

• A framework for understanding how organizations function and interact with their environment, including structure (formal systems) and culture (shared values).

Organizational Design

• Uses organizational theory to create efficient structures and workflows to manage structure and culture in order to achieve goals.

Organizational Change

• Adjusts design elements to improve organizational effectiveness by redesigning structure and culture, moving the organization from a present state to a desired state.

Interrelation of Theory, Design, and Change

• Organizational theory informs design, which is then modified through change to improve performance and create a competitive advantage.

Organization Culture

• Shared values, beliefs, and norms that guide interactions within an organization.

Organization Structure

• The formal system of roles and responsibilities that controls information flow and decision-making.

Organizational Structure Examples

• Functional, divisional, matrix, and team-based structures are common.

Management's Role

• Managers apply organizational theory to optimize workflows and align strategies with the external environment, fostering innovation and responsiveness.

Measuring Organizational Effectiveness

• Effectiveness can be measured via innovation, efficiency, and control.

Contingencies Influencing Design

• Organizational design needs to consider the organization's size, technology, industry stability/environment, and market strategy.

Organizational Stakeholders, Management, and Ethics

Stakeholders

• Organizations must create value for anyone with a stake in the organization.
• They can be either inside or outside stakeholders.

Inside Stakeholders

• Shareholders, managers, and the workforce have a strong influence on the organization.
• Their interests include money, capital, skill, and expertise.

Outside Stakeholders

• Customers, suppliers, government, unions, communities, and the general public.
• Their interests include revenue, inputs, and social and economic infrastructure.

Challenges in Stakeholder Approval

• Organizations face challenges in choosing which stakeholders to satisfy, how to allocate rewards, and balancing short-term with long-term goals.

Top Management Team

• Sets company strategy and long-term goals and reports to the CEO; includes CFO and COO.

Corporate Management

• Members of the top management team are responsible for setting the strategy, such as the Director of Finance and the Director of Marketing.

Divisional Managers

• Divisional managers set policy for their respective divisions.
• Examples include regional managers and unit managers.

Functional Managers

• Functional managers develop core competencies within the organization.
• Examples include HR managers and IT managers.

Management Alignment Issues

• Aligning managerial behavior with organizational goals and controlling unethical behavior are persistent problems.

The Agency Theory

• Highlights the conflict between shareholders and management when authority is delegated downward.

Agency Solution

• Involves using governance mechanisms that align the interests of principals (shareholders) and agents (managers).
• Incentives are offered to encourage cooperation and maximize effectiveness. e.g., stock-based compensation.

Agency Solutions Examples

• Other examples include promotion tournaments, career path opportunities, and blended rewards.

Organizational Ethics

• Ethics guides interactions among stakeholder groups and is shaped by societal, professional, and individual values.

Models for Organizational Ethics

• Utilitarian: Produces the greatest good for the greatest number of people.
• Moral Rights: Maintains and protects the rights of those affected.
• Justice: Distributes benefits and harms equitably among stakeholders.

Professional Ethics

• Moral rules and values specific to a profession, like the Hippocratic oath for doctors.

Individual Ethics

• Moral rules and values guiding an individual's interactions, such as a manager prioritizing fairness and resisting corruption.

Causes of Unethical Behavior

• Unethical behavior stems from personal ethics, self-interest, and outside pressure.

Creating an Ethical Culture

• Accomplished through structure, control, and fostering a culture that supports stakeholder interests.

Managing in Changing Global Environment

Organizational Environment

• Encompasses global forces impacting organizational operations and access to resources.

Environmental Forces

• Includes economic, technological, political, environmental, demographic, cultural, and social forces.

Uncertainty and Complexity

• Environmental uncertainty stems from complexity, dynamism, and richness.

Factors of Uncertainty

- Complexity: Ranges from simple to complex.
- Dynamism: Ranges from stable to unstable.
- Richness: Ranges from rich to poor.

How Factors Connect

• Uncertainty increases as the environment becomes more complex, less stable, and poorer.

Resource Dependency Theory

• Organizations aim to minimize dependence on others for scarce resources while managing symbiotic (suppliers/customers) and competitive (rivals) interdependencies.

Symbiotic Interdependencies

• Involve cooperation between the organization, suppliers, and distributors.

Competitive Interdependencies

• Exist among organizations competing for inputs and outputs.

Transaction Cost Theory

• Organizations minimize costs associated with external resource exchange and internal management by addressing uncertainty, opportunism, and risk.
• Transaction Costs: Negotiation, monitoring, and enforcement costs.

Sources of Transaction Costs

• Environmental uncertainty (rationality), opportunism (market size), and risk (assets).

Interorganizational Strategies

• Reputation building, co-optation, alliances, and mergers/takeovers manage symbiotic and competitive relationships.

Linkage Mechanisms

• Informal methods, like contracts and reputation; formal methods, alliances and mergers secure resources and reduce costs.

Basic Challenges of Organizational Design

Basic Challenges

• Responsibility and Authority
• Task Specificity and Cross-Functional Roles
• Risk Acceptance and Aversion
• Rules Orientation and Customer Service

High-Performing Structure

• Achieved through division of work, coordination of efforts, and motivation and control.

Differentiation and Complexity

• Organizations evolve into complex systems through the assignment of people and resources to tasks.

Vertical Differentiation

• Hierarchical structure that creates authority and reporting relationships.

Horizontal Differentiatio

• The grouping of tasks into roles and roles into subunits (functions and divisions).

Mechanistic Structure

• Characterized by centralized authority, clear hierarchy, standardized tasks, predictability, and inflexibility (e.g., McDonald's).

Organic Structure

• Decentralized, flexible, adaptable, and emphasizes coordination (e.g., Google in its early years).

Centralization vs. Decentralization

• Finding a balance between centralization (control/efficiency) and decentralization (flexibility/adaptability) is a critical challenge.

Contingency Theory

• An organization's structure should be tailored to the level of uncertainty it faces in its external environment. Variables include environmental, structural, and cross-functional integration factors.

Designing Organizational Structure

Hierarchy of Authority

• Developed as corporations grow, increasing the complexity of labor division and coordination.

Hierarchy and Span of Control

• Organizational height depends on the hierarchical structure and span of control and the balance between centralization and decentralization.

Tall Hierarchies (Negative)

• Communication delays, motivational issues, and increased bureaucratic costs.

Principle of Minimum Chain of Command

• Organizations should have the fewest hierarchical levels necessary to achieve goals.

Factors Affecting Span of Contro

• Task complexity and interrelatedness. Fewer spans reduce the hierarchy but clear processes and skilled employees are needed.

The Process of Vertical Differentiatio

• The organizational shape determines how systems will operate. The hierarchy determines the balance between centralized and decentralized systems.

Designing a Hierarchy

• Four elements for effective coordination and motivation:
  • Span of control
  • Centralization vs. Decentralization
  • Role Clarity
  • Motivational strategies

Control Methods

• Design challenges provide methods of control: standardization, formalization, norms and culture, and technology and information systems.

Responses to Design Challenges

• Responses affect the design of the organizational hierarchy through flattening of hierarchies, decentralization, cross-functional teams, and self-managed teams.

Bureaucratic Structure Principles

• Principles include a clear chain of command, specialization, formalization, impersonality, and merit-based advancement.

Why Flatten Hierarchies?

• Organizations are flattening hierarchies and using empowered teams to improve flexibility, cost efficiency, employee empowerment, cross-functional collaboration, retention of talent and adaptation to change.

Organizational Structure: Specialization and Coordination

Functional Structure

• Groups are formed based on similar skills or resources, such as R&D or marketing.
• This promotes horizontal differentiation and effectiveness.

Functional Structure Advantages

• Increased opportunity to learn, efficiency, and accountability.

Functional Structure Disadvantages

• Control problems related to communication, measurement, location, customers, and strategy.
• More products create more competition.
• Functional structures can change to divisional to solve issues.

Changing from Functional to Divisional

• Involves increasing vertical differentiation, increasing horizontal differentiation, and increasing integration.

Product Division Structure

• Centralized support for similar products.

Multidivisional Structure

• Self-contained divisions with coordination from headquarters.

Product Team Structure

• Cross-functional teams focus on product developers.

Divisional Structure

• Includes product, geographic, and market structures.
• Focuses on product lines, regional needs, and catering to customer groups.

Types of Product Structure

- Product structure: Grouped into divisions according to similarities or differences.
- Product divisional structure: Centralized set of services for multiple product lines.
- Multidivisional structure: Support is self-contained and has its own controls.

Types of Management

• Corporate
• Divisional
• Functional

Divisional Structure Pros

• Increases effectiveness, control, growth, and internal labor market opportunities.

Divisional Structure Cons

• Problems managing relationships, problems between divisions, transfer pricing issues, and increased costs.

Geographic Structure

• Divisions are structured based on the requirements of different geographic locations.
• Centralized support functions, such as finance, and decentralized operations, such as regional specifications.

Geographic Structure Pros

• Local responsiveness, efficient resource allocation, scalability, and balanced control.

Geographic Structure Cons

• Duplication of resources, coordination challenges, and competition between divisions.

Market Structure

• Aligns functional skills with different customer groups.
• This is customer-centric, marketing-focused, and responsive to change.

Matrix vs. Product Team Structures

• Matrix Structure: Combines functional and product grouping for flexibility in dynamic markets.

Matrix Structure

- Dual reporting lines, not fixed team member, high flexibility and collaboration.

Matrix Structure Pros

• Fosters cross-functional collaboration, open communication, and maximizes the use of skills.

Matrix StructureCons

• Leads to role conflict and ambiguity and power struggles because of a lack of a hierarchy.

Multidivisional Matrix Structure

• Combines a divisional structure with a matrix to enhance integration and allow for centralized oversight while maintaining divisional autonomy.
• This promotes coordination and divisional autonomy.

Product Team Structure

• Involves a fixed team membership, less flexibility, and focus on product-specific goals with less cross-functional integration. Team has one boss.

Network Structure

• Outsources functions to external partners for cost efficiency and adaptability
• For example, a manufacturer outsources to an overseas company and hires a marketing agency for campaigns.

Network Structure Pros

• Reduces production and bureaucratic costs and enhances organic responsiveness and flexibility.

Network Structure Cons

• Limited suitability, complexity challenges, and situational appropriateness issues.

Conditions for Network Structures

• It ensures the right structure balances specialization, coordination, and responsiveness to achieve strategic goals.

Boundaryless Organizations

• Eliminates traditional hierarchical and physical boundaries, relying on technology for collaboration.

Explore organizational theory, design, and change. Understand organizational culture and stakeholders. Learn how managers use theory to drive change and improve effectiveness.