Organizational Structure Design PDF

§6 Designing organiza onal structure: specializa on and coordina on 6.1 Func onal structure A func on structure is a design that groups people into separate funcons or departments because they share common skills and experse because they make use of the same resources. Funcon structure is the fou...

§6 Designing organiza onal structure: specializa on and coordina on 6.1 Func onal structure A func on structure is a design that groups people into separate funcons or departments because they share common skills and experse because they make use of the same resources. Funcon structure is the foundaon of horizontal di*erenaon. An organizaon groups di*erent tasks into separate funcons to increase the e*ecveness with which it achieves its principal goal: providing customers with high-quality products at compeve prices. Di*erent funcons are formed as an organizaon responds to increasingly complex task requirements as they grow (more funcons and more specializaon within each funcon). Advantages of a func onal structure Funconal structure provides people with the opportunity to learn from one another and become more specialized and producve. Besides, people who are grouped together by common skills can supervise one another and control one another’s behaviour. Finally, people in a funcon who work 25 closely with one another over extended me periods develop norms and values that allow them to become more e*ecve at what they do. Control problems in a func onal structure The problem facing a successful organizaon is how to keep control of increasingly complex acvies as it grows and di*erenates. As it produces more products, become geographically diverse, or faces increasing compeon for customers, control problems impede managers’ ability to coordinate organizaonal acvies. - - - Communicaon problems: as more organizaonal funcons develop, each with its own hierarchy, they become increasingly distant from each other. Communicaon problems reduce the level of coordinaon and mutual adjustment among funcons; Measurement problems: The informaon needed to measure the contribuon of any one funcon or product to overall protability is o2en di;cult to obtain. The reason is that the cost of each funcon’s contribuon to the development of each product becomes increasingly di;cult to measure; Locaon problems: geographic spread can pose a control problem within a funconal structure; Customer problems: the ability to idenfy and sasfy customer needs may fall short, and sales opportunies are lost; Strategic problems: top managers may be forced to spend so much me nding soluons to everyday coordinaon problems that they have no me to address the longer-term strategic problems facing the company. Solving control problems in a func onal structure The problems of the funconal structure can be solved by redesigning the funconal structure to increase integraon between funcons. 6.2 From func onal structure to divisional structure If an organizaon (1) limits itself to producing a small number of similar products, (2) produces those products in one or a few locaons, and (3) sells them to only one major type of customer, managers will be able to solve many of the control problems associated with the funconal structure. When organizaons grow, what is needed is a structure that will simultaneously (1) increase manager’s control of its di*erent individual subunits so that subunits can be9er meet product and customer needs, and (2) allow managers to control and integrate the operaon of the whole company to ensure all its subunits are meeng organizaonal goals. Managers regain control of their organizaons when they decide to adopt a more complex structure, which is the result of three design choices: 1. An increase in vercal di*erenaon, which involves: a. increasing the number of levels in the hierarchy; b. deciding how much decision-making authority to centralize at the top; c. deciding how much to use rules, SOPs, and norms to standardize the low-level. 2. An increase in horizontal di*erenaon, which involves overlaying in funconal grouping of acvies with some other kind of subunit grouping. 3. An increase in integraon between the subunits. Moving to a divisional structure 26 A divisional structure groups funcons according to the specic demands of products, markets, or customers. The goal behind the change to a divisional structure is to create smaller, more manageable subunits within an organizaon. There are three types, which can be chosen based on complexity of the area: product structure, geographic structure and a market structure. 6.3 Divisional structure I: Three kinds of product structure As an organizaon increases the kinds of goods it manufactures or the services it provides, a funconal structure becomes less e*ecve at coordinang task acvies. A product structure is a divisional structure in which products (goods or services) are grouped into separate divisions, according to their similaries or di*erences, to increase control. An organizaon can make two choices: (1) centralize the support funcons at the top of the organizaon so one set of support funcons services all the di*erent product divisions, or (2) create mulple sets of support funcons, one for each product division. → An organizaon whose products are broadly similar and aimed at the same market will choose to centralize support services and use a product division structure. An organizaon whose products are very di*erent and that operates in several di*erent markets will choose a mul divisional structure. An organizaon whose products are very complex technologically or whose characteriscs change rapidly to suit changing customer needs will choose a product team structure. Product division structure A product division structure is characterized by the spli3ng of the manufacturing funcon into several di*erent product lines or divisions; a centralized set of support funcons then services the needs of all these product divisions (e.g. food processors, furniture makers, personal care products, etc.). Each product division manager is responsible for his or her division’s product and coordinates with the central support funcons like markeng and materials management to make e*ecve use of their skills. The role of product division managers adds a level to the hierarchy of authority and so increases the vercal di*erenaon in an organizaon. Mul divisional structure Managing complex and diverse value-creaon acvies requires a mul divisional structure, a structure in which each product division is given its own set of support funcons so they become self-contained divisions. This means that each division has its own set of support funcons and controls its own value-creaon acvies, that’s the rst innovaon. The second innovaon in a muldivisional structure is a corporate headquarters sta*, composed of corporate managers who are responsible for overseeing the acvies of the 27 divisional managers heading up the di*erent divisions → increase of vercal di*erenaon, because corporate managers form an addional level in the hierarchy. Compared to a funconal and product division structure, a muldivisional structure provides addional di*erenaon and integraon, which facilitate the control of more complex acvies. Another di*erence is that a muldivisional structure is designed to allow a company to operate in many di*erent businesses. Most Fortune 500 companies use a muldivisional structure because it allows them to grow and expand their operaons while maintaining control over their acvies. Advantages of a mul divisional structure - - Increased organizaonal e*ecveness: there’s a clear division of labour between divisional and corporate managers, which generally increases the organizaonal e*ecveness; Increased control: corporate managers monitor the performance of divisional managers; this extra control encourages the stronger pursuit of internal organizaonal e;ciency by divisional managers; Protable growth: when each division is its own prot centre, headquarters can idenfy the divisions in which an investment of capital will yield the highest returns; Internal labour market: the most able divisional managers are promoted to become corporate managers, which is a big movaon. Disadvantages of a mul divisional structure Good management can control most of the problems, but can’t eliminate them. The problems are: - - Managing the corporate-divisional relaonship: how much authority to centralize at the corporate level and how much authority to decentralize to the operang divisions; Coordinaon problems between divisions: some divisions may begin to compete for resources, and this rivalry may prevent them from cooperang. Transfer pricing: problems between divisions o2en revolve around the transfer price, which is the price at which one division sells product or informaon about innovaons to another division. Bureaucrac costs: the high costs of operang a muldivisional structure must connually be evaluated against the benets the company obtains. Communicaon problems: it may take long for headquarters to make decisions and transmit them to divisions that responses to competors are too slow. The more centralized an organizaon, the more of a problem communicaon will be. Product team structure A product team structure is a cross between the product division structure, in which the support funcons are centralized, and the muldivisional structure, in which each division has its own support funcons. In a product team structure, specialists from the support funcons are combined into product development teams that specialize in the needs of a parcular kind of product. Each team is a self-contained division 28 headed by a product team manager, who supervises the operaonal acvies associated with developing and manufacturing the product. The product teams focus on the needs of one product or a few related products, and they owe their allegiance not to their funcons but to the product team they join. A product team structure is more decentralized than a funconal structure or a product division structure, and specialists are permi9ed to make on-the-spot decisions. Moreover, the high level of integraon produced by teams makes it possible to make decisions quickly and respond to fastchanging customer requirements. Managers must connually evaluate how well their product structure is working because it has a direct impact on the e*ecveness of their organizaon. 6.4 Divisional structure II: Geographic structure A geographic divisional structure is a divisional structure in which divisions are organized according to the requirements of the di*erent locaons in which an organizaon operates. A geographic structure allows some funcons to be centralized at one headquarters locaon and other to be decentralized to a regional level. Imposing geographic grouping over basic funconal grouping increases horizontal di*erenaon. The creaon of a new level of hierarchy, regional managers, and the decentralizaon of control to regional hierarchies increases the vercal di*erenaon. 6.5 Divisional structure III: Market structure A market structure aligns funconal skills and competences with the product needs of di*erent customer groups. Markeng, not manufacturing, determines how managers decide how to group organizaonal acvies into divisions. Each customer division has a di*erent markeng focus, and the job of each division is to develop products to suit the needs of its specic customers. 6.6 Matrix structure A matrix structure is a structure in which people and resources are grouped in two ways simultaneously: by funcon and by project or product. In the context of organizaonal design, a matrix is a rectangular grid that shows a vercal :ow of funconal responsibility and a horizontal :ow of product responsibility. The organizaon itself is :at, having minimal hierarchical levels within each funcon and decentralized authority. The members of the teams are called two-boss employees because they report to two superiors: the product team manager and the funconal manager. The dening feature of a matrix structure is the fact that team members have two superiors. 29 The assumpon of a matrix structure is that when team members are given more responsibility than they have formal authority, they are forced to cooperate to get the job done. Both matrix structure and product team structure make use of teams to coordinate acvies, but they di*er in two major respects. (1) Team members in a product team structure have only one boss, and (2) in the matrix structure, team membership is not xed. Team members move from team to team, to where their skills are most needed. Advantages of a matrix structure A matrix structure has four advantages over more tradional structure. 1. The use of cross-funconal teams is designed to reduce funconal barriers and overcome the problem of subunit orientaon. Besides, with di*erenaon between funcons kept to a minimum, integraon becomes easier to achieve. It also facilitates adapon and learning, and makes the organizaon :exible and able to respond quickly to changing product and customer needs; 2. The matrix structure opens up communicaon between funconal specialists and provides an opportunity for team members from di*erent funcons to learn from one another and develop their skills. Thus, it facilitates technological process; 3. The matrix enables an organizaon to e*ecvely use the skills of its specialized employees who move from product to product as needed; 4. The dual funconal and product focus promotes concern for both cost and quality. The primary goal of funconal specialists is likely to be technical, the primary goal of product managers is likely to concern cost and speed of development. Disadvantages of a matrix structure To idenfy the problems of a matrix structure, consider what is missing in the matrix. A matrix lacks the advantages of bureaucrac structure. It lacks a control structure that allows employees to develop stable expectaons of each other. The team members don’t like the (1) role conEict that exists because of the two di*erent managers. Besides, the lack of a clearly dened hierarchy of authority can also lead to con:ict between funcons and product teams over the use of resources. This leads to (2) power struggles between product and funconal managers and policking takes place to gain the support of the top management. People who work in a matrix structure o2en complain about high levels of stress and uncertainty. Over me, people is a matrix structure are likely to experience a vacuum of authority and responsibility and move to create their own informal organizaon to provide them with some sense of structure and stability. The mul divisional matrix structure A mul divisional matrix structure is a structure that provides for more integraon between corporate and divisional managers and between divisional managers. This structure allows an organizaon to coordinate acvies e*ecvely but is di;cult to manage. Communicaon and coordinaon problems arise because of the high degree of di*erenaon within a muldivisional structure. 30 Divisional managers meet with corporate managers to exchange knowledge and informaon and to coordinate divisional acvies. The muldivisional matrix structure makes it much easier for top managers from the divisions and corporate headquarters to cooperate and coordinate organizaonal acvies jointly. Hybrid structure A hybrid structure is the structure of a large organizaon that has many divisions and simultaneously uses many di*erent types of organizaonal structure. Thus, one product division may choose to operate with a funconal structure, a second may choose a geographical structure, and a third may choose a product team structure because of the nature of the division’s products or the desire to be more responsive to customers’ needs. Companies that operate only in one industry but choose to compete in di*erent market segments of the industry also may use a hybrid structure. Organizaonal structure may be likened to the layers of an onion. The outer layer provides the overarching organizaonal framework (most common some form of product or market division) and each inner layer is the structure that each division selects for itself in response to the conngencies it faces (such as a geographic or product team structure). 6.7 Network structure and the boundaryless organiza on A network structure is a cluster of di*erent organizaons whose acons are coordinated by contracts and agreements, rather than by a formal hierarchy of authority. Network structures o2en become very complex as a company forms agreements with a whole range of suppliers, manufacturers, and distributors to outsource many of the value-creaon acvies necessary to produce and market goods and services. Advantages of network structures An organizaon can realize several advantages by using a network structure: 1. To the degree that an organizaon can nd network partners that can perform a specic funconal acvity reliably, and at a lower cost, producon costs are reduced. For example, the hierarchy can be kept as :at as possible and fewer managers are needed; 2. Because Nike outsources many funconal acvies, it is able to stay small and :exible. Control of the design process is decentralized to teams that are assigned to develop each of the new kinds of sports and leisure shoes; 3. A network structure allows an organizaon to act in an organic way; an organizaon can quickly alter its network in response. Disadvantages of network structures But the network structure also has drawbacks in certain situaons. (1) A considerable level of mutual adjustment is needed to permit the groups to interact so that they can learn from one another and constantly improve the nal product. Also, (2) managers must be there to integrate the acvies of the groups to make sure their acvies mesh well. Moreover, (3) there has to be considerable trust between the di*erent groups so they are willing to share their ideas, which is necessary for successful new product development. It is unlikely that a network structure would provide an organizaon with the ability to control such a complex value-creaon process because managers lack the means to coordinate and move the 31 various network partners e*ecvely. (1) It would be di;cult to obtain the ongoing learning that builds core competences over me inside a company, because separate companies have less incenve to make such an investment. (2) If one of Nike’s suppliers failed to perform well, Nike could easily replace it by forming a contract with another. The boundaryless organiza on is composed of people who are linked by computers, faxes, CAD systems, and video teleconferencing, and they may rarely or ever see one another face to face. E-commerce is trade that takes place between companies, and between companies and customers, using IT and the Internet. . ntrols the way members make decisions, the way they interpret vironment, what they do with informaon, and how they behave. ards, se to urs, rable ds of end k to a est, d by n h tell and mbers to use in their decision making.