Chapter 6 Organizational Structure PDF

CHAPTER 6 ORGANIZATIONAL STRUCTURE  Learning Objectives Understand the meaning of organizing and organizational structure; To know the elements of organizational structure; To understand the difference b/w mechanistic and organic structures; To know the different form of c...

CHAPTER 6 ORGANIZATIONAL STRUCTURE  Learning Objectives Understand the meaning of organizing and organizational structure; To know the elements of organizational structure; To understand the difference b/w mechanistic and organic structures; To know the different form of contemporary organizational structures Designing Organizational Structure The function of organization in management involves structuring resources and activities in a way that facilitates the achievement of the organization’s goals. It includes the following key components: When managers create or change the structure, they’re engaged in organizational design, a process that involves decisions about six key elements: 1) work specialization, 2)departmentalization, 3)chain of command, 4)span of control, 5)centralization and decentralization, and 6)formalization This structure can be shown visually shown as organizational chart.  Work Specialization Work Specialization: Dividing tasks into smaller jobs to allow individuals or groups to focus on specific areas, improving efficiency and expertise. It is also known as division of labor, a concept introduced in the management history. Example: For example, McDonald’s uses high work specialization to get its products made and delivered to customers efficiently and quickly—that’s why it’s called “fast” food. One person takes orders at the drive-through window, others cook and assemble the hamburgers, another works the fryer, another bags orders, and so forth. Such single-minded focus on maximizing efficiency has contributed to increasing productivity.  Departmentalization Departmentalization: Grouping jobs or activities into departments based on function, product, geography, or customer needs. For example, marketing, sales, or production departments. Five common forms of departmentalization are used, although an organization may develop its own unique classification. Example: A hotel might have departments such as front desk operations, sales and catering, housekeeping and laundry, and maintenance.  Five Common Forms of Departmentalization The common forms of departmentalization are: Functional, Divisional (geographical, product, and customer) and Matrix (Functional and divisional) Continued… Continued… Continued… Continued… Continued… Continued…  Self-reading-Contemporary view Most large organizations continue to use combinations of most or all of these types of departmentalization. For example, General Electric (GE) organizes its corporate staff along functional lines, including public relations, legal, global research, human resources, and finance. Black & Decker organizes its divisions along functional lines, its manufacturing units around processes, and its sales regions around customer groupings. One popular departmentalization trend is the increasing use of customer departmentalization. Because getting and keeping customers is essential for success, this approach works well because it emphasizes monitoring and responding to changes in customers’ needs. Another popular trend is the use of teams, especially as work tasks have become more complex and diverse skills are needed to accomplish those tasks. One specific type of team that more organizations are using is a cross-functional team, a work team composed of individuals from various functional specialties. For instance, Harley-Davidson relies on cross- functional teams at all levels of the company to conceptualize and design new products.  Chain of command Chain of Command: Establishing a clear hierarchy that defines authority and reporting relationships, ensuring accountability and clarity in decision-making. The chain of command is the line of authority extending from upper organizational levels to lower levels, which clarifies who reports to whom. Managers need to consider it when organizing work because it helps employees with questions such as “Who do I report to?” or “Who do I go to if I have a problem?”  Continued… Span of Control: Determining how many employees a manager can effectively supervise, balancing between too wide a span (which can dilute supervision) and too narrow a span (which can lead to micro-management). The traditional view was that managers could not—and should not—directly supervise more than five or six subordinates. Determining the span of control is important because, to a large degree, it determines the number of levels and managers in an organization. Thus, the wider or larger the span, the more efficient the organization.  Example Assume two organizations both have approximately 4,100 employees. If one organization has a span of four and the other a span of eight, the organization with the wider span will have two fewer levels and approximately 800 fewer managers. At an average manager’s salary of $62,000 a year, the organization with the wider span would save over $49 million a year. Obviously, wider spans are more efficient in terms of cost. However, at some point, wider spans may reduce effectiveness if employee performance worsens because managers no longer have the time to lead effectively. Continued…  Self-reading-The contemporary view The contemporary view of span of control recognizes there is no magic number. Many factors influence the number of employees a manager can efficiently and effectively manage. These factors include the skills and abilities of the manager and the employees and the characteristics of the work being done. For instance, managers with well-trained and experienced employees can function well with a wider span. Apple CEO Tim Cook has 17 direct reports. At first glance, that seems like a lot. But Cook indicates otherwise: “If you have smart people, a strong organizational culture, and a well-defined and articulated strategy that everyone understands, you can [have] numerous direct reports because your job isn’t to tell people what to do.” Other contingency variables that determine the appropriate span include similarity and complexity of employee tasks; the physical proximity of subordinates; the degree to which standardized procedures are in place; the sophistication of the organization’s information system; the strength of the organization’s culture.  Continued… The trend in recent years has been toward larger spans of control, which is consistent with managers’ efforts to speed up decision making, increase flexibility, get closer to customers, empower employees, and reduce costs. Managers are beginning to recognize that they can handle a wider span when employees know their jobs well and when those employees understand organizational processes. For instance, at PepsiCo’s Gamesa cookie plant in Mexico, 56 employees now report to each manager. However, to ensure that performance doesn’t suffer because of these wider spans, employees were thoroughly briefed on company goals and processes.  Continued… Although early management theorists (Fayol, Weber, Taylor, Barnard, and others) believed that chain of command, authority (line and staff), responsibility, and unity of command were essential, times have changed. Those elements are far less important today. Information technology has made such concepts less relevant today. Employees can access information that used to be available only to managers in a matter of a few seconds. It also means that employees can communicate with anyone else in the organization without going through the chain of command. Also, many employees, especially in organizations where work revolves around projects, and themselves reporting to more than one boss, thus violating the unity of command principle.  Centralization and Decentralization Centralization: Centralization is a structure where decision-making authority is concentrated at the top levels of management. In centralized organizations, key decisions are made by a small group of senior executives or managers, and lower levels of management have limited decision-making authority. Example: In a centralized company, like a multinational corporation, headquarters may decide on all important business strategies, product launches, and budgets. Branch managers may only implement these decisions without altering them based on local needs. Decentralization: Decentralization is a structure where decision-making authority is distributed throughout various levels of the organization. In decentralized organizations, lower- level managers and employees are empowered to make decisions related to their specific areas of responsibility. Example: In a decentralized company, such as a retail chain, store managers may have the authority to adjust product offerings, set prices, and make promotional decisions based on local customer preferences, without waiting for approval from corporate headquarters. Also known as Delegation of Authority, which means assigning decision-making authority to lower-level managers or employees, empowering them to take action within certain boundaries.  Difference b/w Centralization and Decentralization Aspect Centralization Decentralization Spread across various levels of Decision-Making Concentrated at the top levels management Tight control by top Control is distributed, more Control management autonomy for lower levels Less flexible, slower response to More flexible, quicker response Flexibility/Adaptability local needs to local or specific issues Accountability Top managers are accountable Local managers or department for major decisions heads are accountable for their decisions Examples Military organizations, Franchise models, multinational government bodies companies with regional offices  When to Use Centralization vs. Decentralization Centralization is often better when the organization requires consistency, uniform policies, or operates in a stable environment. It’s also common when decisions need to align with a long-term vision set by senior leadership. Decentralization is more effective in dynamic environments where quick decision-making is essential, or when the organization operates in diverse markets that require localized strategies. It also fosters innovation and initiative at lower levels. In summary, centralization emphasizes control and uniformity, while decentralization promotes flexibility and local decision-making.  Contemporary view Today, managers often choose the amount of centralization or decentralization that will allow them to best implement their decisions and achieve organizational goals. What works in one organization, however, won’t necessarily work in another, so managers must determine the appropriate amount of decentralization for each organization and work units within it. As organizations have become more flexible and responsive to environmental trends, there’s been a distinct shift toward decentralized decision making. This trend, also known as employee empowerment, gives employees more authority (power) to make decisions. In large companies especially, lower-level managers are “closer to the action” and typically have more detailed knowledge about problems and how best to solve them than top managers. For instance, decentralized management is the cornerstone of Johnson & Johnson’s business model.  Formalization Formalization refers to how standardized an organization’s jobs are and the extent to which employee behavior is guided by rules and procedures. In highly formalized organizations, there are explicit job descriptions, numerous organizational rules, and clearly defined procedures covering work processes. Employees have little discretion over what’s done, when it’s done, and how it’s done. However, where there is less formalization, employees have more discretion in how they do their work.  Contemporary view Although some formalization is necessary for consistency and control, many organizations today rely less on strict rules and standardization to guide and regulate employee behavior. For instance, consider the following situation: A customer came into a coffee shop to buy a cinnamon roll, but the tray was empty, prompting her to ask whether there were cinnamon rolls in the kitchen. The employee informed her that several were just removed from the tray because the sell-by date had elapsed. She strongly expressed her disappointment and became quite angry. The customer insisted that he should sell her a cinnamon roll. Even though policy dictates that he should not, he did so anyway because the company has a policy of ensuring high customer satisfaction. And he reasoned that the pastry should still be good to eat because the rolls were removed just two hours before. Has this employee done something wrong? He did “break” the rule. But by “breaking” the rule, he actually brought in revenue and provided good customer service. Considering there are numerous situations where rules may be too restrictive, many organizations have allowed employees some latitude, giving them sufficient autonomy to make those decisions that they feel are best under the circumstances. It doesn’t mean throwing out all organizational rules because there will be rules that are important for employees to follow—and these rules should be explained so employees understand why it’s important to adhere to them. But for other rules, employees may be given some leeway.  Mechanistic and organic structures Basic organizational design revolves around these two organizational forms. The mechanistic organization (or bureaucracy) was the natural result of combining the six elements of structure. Adhering to the chain-of-command principle ensured the existence of a formal hierarchy of authority, with each person controlled and supervised by one superior. Keeping the span of control small at increasingly higher levels in the organization created tall, impersonal structures. As the distance between the top and the bottom of the organization expanded, top management would increasingly impose rules and regulations. Because top managers couldn’t control lower-level activities through direct observation and ensure the use of standard practices, they substituted rules and regulations. The early management writers’ belief in a high degree of work specialization created jobs that were simple, routine, and standardized. Further specialization through the use of departmentalization increased impersonality and the need for multiple layers of management to coordinate the specialized departments.  Continued… The organic organization is a highly adaptive form that is as loose and flexible as the mechanistic organization is rigid and stable. Rather than having standardized jobs and regulations, the organic organization’s loose structure allows it to change rapidly, as required. It has division of labor, but the jobs people do are not standardized. Employees tend to be professionals who are technically proficient and trained to handle diverse problems. They need few formal rules and little direct supervision because their training has instilled in them standards of professional conduct. For instance, a petroleum engineer doesn’t need to follow specific procedures on how to locate oil sources miles offshore. The engineer can solve most problems alone or after conferring with colleagues. Professional standards guide his or her behavior. The organic organization is low in centralization so that the professional can respond quickly to problems and because top-level managers cannot be expected to possess the expertise to make necessary decisions.  Formal and informal organization An organization may be formal or informal. In most organizations, formal groups will function as it is essential to execute specific tasks of the concerned formal organization. A formal organization is mainly guided by its rules, systems and procedures. In a formal organization, authority, and responsibility and relationships must be clear, fixed and definite. In a formal organization delegation of authority is done in a legal way.  Continued.. An informal organization does not have the features of a formal organization. It comes into existence because of social connections of employees within the workplace. Informal organization has several benefits to the management such as: It makes the work and workplace a better place to work. Informal work groups provide satisfaction and stability to the organization. They provide a very effective channel of communication within the organization. (grapevine) It keeps a check of the managers and mangers will be more careful while performing their job due to pressure from informal organization.  Traditional vs. contemporary organizational designs Traditional organizational designs refer to structures that have been prevalent in many businesses for a significant period. Some common types of traditional organizational designs include: Functional Structure: This design groups employees based on their specific functions or roles, such as marketing, finance, operations, etc. Each department operates independently and is headed by a functional manager. It's a hierarchical structure with clear reporting lines. Divisional Structure: Organizations using a divisional structure are divided based on products, geographical regions, or customer groups. Each division operates as a separate entity with its own resources, functions, and sometimes even its own leadership. Hierarchical Structure: Hierarchical structures are characterized by clear, vertical lines of authority and control. Decision-making flows from the top-down, with each level having authority over the levels below. This structure often includes multiple layers of management. Centralized Authority: In traditional designs, decision-making authority tends to be centralized at the top levels of the organization. Most major decisions are made by top management, and lower-level employees have limited autonomy. Bureaucratic Approach: Traditional designs often incorporate bureaucratic principles, including standardized procedures, formalized rules and regulations, and adherence to established protocols. This can sometimes lead to rigidity and slow responses to change. These traditional designs have been prevalent in many organizations for their clarity in roles, clear reporting structures, and stability. However, they may also have limitations in adapting to rapidly changing environments, fostering innovation, and promoting employee empowerment due to their rigid and hierarchical nature.  Contemporary structures Many organizations are finding that traditional organizational designs often aren’t appropriate for today’s increasingly dynamic and complex environment. Instead, organizations need to be lean, flexible, and innovative; that is, they need to be more organic. So managers are finding creative ways to structure and organize work. In recent times, many organizations have been transitioning from these traditional designs to more contemporary and flexible structures that encourage agility, collaboration, and responsiveness to change in order to stay competitive in dynamic markets.  Continued… Some of the prominent contemporary organizational designs include: Flat Organizations: These structures have fewer hierarchical levels between management and staff. They promote quicker decision-making, more direct communication, and often encourage employee empowerment and involvement in decision-making processes. Matrix Organizations: In this design, employees report to both functional managers and project managers. It allows for specialization within functions while also facilitating collaboration across different projects or initiatives. Network Organizations: These structures are built around networks of independent entities or individuals collaborating to achieve common goals. They are flexible and adaptive, relying on partnerships, alliances, and outsourcing to access specialized skills and resources. Strategic alliance: Strategic alliances are partnerships between companies to achieve mutual goals while maintaining their independence. Virtual organizations: A virtual organization is a flexible, networked organizational structure where geographically dispersed individuals, teams, or companies collaborate and work together through the use of digital technologies, without a physical centralized office. Members of a virtual organization are connected via the internet, telecommunications, and collaboration tools, allowing them to work remotely or from different locations while still functioning as part of a unified entity. Boundaryless Organizations: These organizations eliminate traditional boundaries, both internally (between departments) and externally (with external partners, customers, etc.). They focus on cross-functional teams, collaboration, and knowledge sharing to enhance innovation and flexibility. Holacracy: This approach distributes decision-making authority to self-organizing teams or circles. It replaces traditional hierarchical structures with a system of distributed power, encouraging autonomy and innovation at various levels. Agile Organizations: Agile methodologies, often used in software development, have extended to organizational design. These organizations are highly adaptive, emphasizing iterative processes, quick responses to change, and customer-centricity. Hybrid Structures: Many contemporary organizations use a mix of different designs, combining elements of various structures to suit their specific needs. For example, a company might have a flat hierarchy but use aspects of a matrix structure for specific projects.  Matrix and Project Structures Other popular contemporary designs are the matrix and project structures. The matrix structure assigns specialists from different functional departments to work on projects led by a project manager. One unique aspect of this design is that it creates a dual chain of command because employees in a matrix organization have two managers, their functional area manager and their product or project manager, who share authority. The project manager has authority over the functional members who are part of his or her project team in areas related to the project’s goals. However, any decisions about promotions, salary recommendations, and annual reviews typically remain the functional manager’s responsibility. The matrix design “violates” the unity-of-command principle, which says that each person should report to only one boss; however, it can—and does—work effectively if both managers communicate regularly, coordinate work demands on employees, and resolve conflicts together.  Continued… Many organizations use a project structure, in which employees continuously work on projects. Unlike the matrix structure, a project structure has no formal departments where employees return at the completion of a project. Instead, employees take their specific skills, abilities, and experiences to other projects. Also, all work in project structures is performed by teams of employees. For instance, at design firm IDEO, project teams form, disband, and form again as the work requires. Project structures tend to be more flexible organizational designs, without the departmentalization or rigid organizational hierarchy that can slow down making decisions or taking action. In this structure, managers serve as facilitators, mentors, and coaches. They eliminate or minimize organizational obstacles and ensure that teams have the resources they need to effectively and efficiently complete their work.  Network organizations Network organizations are a type of organizational structure in which a central hub coordinates activities with a network of external partners, such as suppliers, manufacturers, or specialized service providers, rather than relying solely on in-house resources. These organizations are often highly flexible and decentralized, using technology and communication systems to manage relationships and processes across different entities. Nike: Nike operates as a network organization by outsourcing most of its manufacturing to independent suppliers around the world, while the core company focuses on design, marketing, and sales. Nike coordinates with these external manufacturers, forming a flexible network. Uber: Uber exemplifies a network organization by connecting drivers (who are independent contractors) with customers via its platform. Uber manages the network without owning cars or directly employing drivers.  Strategic alliance A strategic alliance is a partnership between two or more organizations that collaborate to achieve shared goals while remaining independent entities. Apple and IBM: Apple partnered with IBM to bring IBM’s enterprise software solutions to Apple devices. The alliance focuses on developing mobile apps and services for businesses, helping Apple expand into the corporate sector while leveraging IBM’s strong presence in enterprise IT. Tesla and Panasonic: Tesla partnered with Panasonic to manufacture batteries for Tesla's electric vehicles and energy storage products. This alliance enables Tesla to benefit from Panasonic's expertise in battery technology while Panasonic gains from Tesla's growing demand for batteries.  Boundryless organization A boundaryless organization is a type of organizational structure that seeks to eliminate traditional barriers and boundaries within the organization, such as those between departments, hierarchical levels, or between the organization and its external environment. The goal is to create a highly flexible, adaptive, and open structure where information flows freely, collaboration is encouraged, and the organization can quickly respond to changes in the environment. Google: Google encourages a boundaryless culture by promoting open communication across all levels and departments. Employees are encouraged to collaborate on projects, even across different business units, and they have easy access to information. Google also uses cross-functional teams to foster innovation. Haier: The Chinese appliance company Haier has implemented a boundaryless management model by breaking its large organization into small self-managed teams called micro-enterprises. These teams operate with high autonomy and collaborate with external partners, customers, and suppliers, enhancing flexibility and innovation.  Virtual organization A virtual organization is a flexible, networked organizational structure where geographically dispersed individuals, teams, or companies collaborate and work together through the use of digital technologies, without a physical centralized office. Members of a virtual organization are connected via the internet, telecommunications, and collaboration tools, allowing them to work remotely or from different locations while still functioning as part of a unified entity. Continued… Continued…