SESSION 3: STRUCTURE

AND GOVERNANCE
York University - ADMS 1000
Jason Yarmolinsky
Learning Goals

 The aim of this session is to examine some of the approaches that

organizations have adopted with regard to structure and design. We will
consider more generally the question, “What determines how an organization
is designed?”. In addition, we consider the fundamentally different forms of
business as well as the notion of governance.
Questions to Keep in Mind…

 1. What are 4 different forms of business ownership and their purpose?

 2. Can you explain the “agency problem” and define the purpose of corporate
governance?
 3. What are the main challenges to “good” governance?
 4. Who are the 4 major groups involved in corporate goverance?
 5. How do you define “good” governance?
 6. Why is it important to understand organizational design?
 7. What is an organization?
 8 What 5 central elements constitute organizational design or structure?
 9. What are the most important contingencies that influence the type of
organizational design that is suitable?
 10. What is meant by the term “virtual organization”?
Forms of Business Ownership
Forms of Business Ownership – Sole
Proprietorship
 The sole proprietorship is the most popular organizational form in Canada and
is the simplest and least expensive way to establish a business.
 The owner has complete control over the direction of the business and has
freedom to operate without interference from partners or shareholders and is
entitled to all the profits (or losses) the business generates.
 sole proprietorships are very simple to design and maintain from a tax and
accounting perspective.
 No legal separation between the person and the business– unlimited personal
liability
 Could be difficult to obtain financing, deal with legal liabilities or weather
economic downturns/personal issues impacting the business
 most appealing for small businesses where investment in the business is small
and the associated risks are minimal
Forms of Business Ownership –
Partnership
 General Partnership – Same as sole proprietorship but “two (or more) heads
are better than one”.
 Benefit from additional skillset, knowledge, skills
 Still face unlimited personal liability (for both partners)
 Limited (or Limited Liability) Partnerships
 Includes general partners and individuals who are partners, limited in liability to
their investment (not personally liable).
 Limited partners not involved in day to day operations
 Creates opportunity to attract greater investment then general partnerships
 General partners still maintain unlimited personal liability
Forms of Business Ownership –
Corporation
 A separate legal entity, unique of it’s owners
 As independent legal entity, the corporation can sue and be sued, enter into contracts, buy,
sell and hold property, and not involve the owner at all.
 Owners face limited liability– cannot lose more than they have invested and they are not
personally liable
 Can be private or public (meaning that the shares in the company are publicly traded)
 Benefits include:
 Limited Liability
 Permanency
 Transfer of Ownership
 Access to Capital (Equity and Debt)
 Does have higher costs and obligation to meet more stringent government regulation (i.e
filing annual financial statements) and governance requirements
Forms of Business Ownership – Co-
operative
 Associations formed and managed by people who come together to attain
common economic, social or cultural needs. Cooperatives are owned,
controlled and operated for the benefit of their members.
 Often community organizations (i.e Food Co-ops, credit unions)
 Based on the principle of participatory governance
 they are governed by those who use their services—the members of the co-op. That
ideology is actually reflected in its ownership structure. A cooperative is
characterized by a democratic structure— it is not owned by “outside” investors
but by its own members, each having equal say in the company’s operations.
 The goal of such entities is to generate mutual benefits to its members.
Consequently, even if the intent of the co-op is to generate profit, that profit will
be shared among the members.
Corporate Governance

 Corporate governance is the system of rules, practices and processes by which

a company is directed and controlled. It involves balancing the interests of
the many different stakeholders pertinent to the business.
 Stakeholder: an individual or a group that has one or more of the different kinds
of stakes in a business. Stakeholders are affected by the action and decisions of
the business, and they can also potentially affect the actions of the business.
 the aim of corporate governance is to create a balance of power among
shareholders (owners), directors, and management in order to protect and
enhance shareholder value and the interests of other pertinent stakeholders.
The Challenge of Good Corporate
Governance
 Separation of Ownership from Management
 Principle-Agent Problem
 the management group was intended to serve as the agent for the
owner/shareholder (the principal).
 However, incentives are not completely aligned (management wants high
compensation although it impacts organization/owner’s profitability)
 agency problems can arise when the management group of a public company makes
decisions that place its own economic self-interests above the interests of the
owners/shareholders.
 Major Groups in Corporate Governance
Shareholders Board of Directors
Elect

Hire

Corporate Officers

Hire

Employees

Note: Not the only stakeholders within the organization

What is Good Governance?

 Accountability: Good governance means that management takes responsibility for

what they do and can be held accountable for their actions.
 Fairness: Good governance means that consideration is given to all pertinent
stakeholders and each will be treated equitably.
 Transparency: Good governance means that management does not “hide” any
information but allows its processes and transactions to be observable by other
stakeholders. This requires disclosures of important information and keeps all
stakeholders informed about management activities.
 Reliable Leadership: Good governance cannot exist without reliable leadership.
Such leaders are competent and trustworthy to carry out the vision and mission of
the business in the best interests of all pertinent stakeholders.
 Stakeholder engagement: Good governance requires that pertinent stakeholders
are identified and engaged to ensure that management is fully knowledgeable
regarding the expectations and requirements of other stakeholders.
What is an Organization?

Defining features

 Social
 Interact with their environment
 Goal-oriented
 Structure-based
The Organism Metaphor: Organizations as
Open-Systems

 A system can be defined as interdependent elements working together to

achieve a goal or goals.
 Organizations are dependent on the environment for their survival and
success.
 Without obtaining the necessary environmental inputs, whether they are suitable
employees or the raw materials for production, organizations cannot function
effectively.
 Similarly, if organizations fail to generate the types of products or services sought
by the environment, then, too, these organizations will cease to exist.
Organizational Structure

 Organizational structure has been defined as a deliberately planned network

or pattern of relationships that exists among individuals in various roles or
positions.

Elements of Organizational Structure

 Work Specialization
 Decision-Making Source
 Levels of Administration
 Departmentation
 Formalization
Organizational Structure – Work
Specialization
 Functional specialization refers to the division of jobs into simple, repetitive
tasks (refer to Taylor’s Scientific Management)
 Social specialization refers to the specialization of individuals, rather than
the specialization of jobs. Social specialization is accomplished through the
employment of professionals whose skills cannot be easily routinized.
Organizational Structure – Decision
Making Source
 If top management makes all the important decisions, with little or no input
from lower levels of the organization, this would be considered a highly
centralized decision-making structure.
 If decision-making authority is not concentrated at the top level but rather is
spread to the lower levels, this is referred to as decentralized decision-
making.

 Consider: Google vs. Dr. Oetker

Organizational Structure – Levels of
Administration
 How many levels of those in charge do we have?
 The more we have, the taller the organization
 Traditionally, when an organization became successful and grew in numbers,
the response was to add levels of administration to maintain control.
 The consequence is that communication takes longer than it would to
communicate if there were fewer levels.
 the close supervision they encourage also tends to discourage employee autonomy
and self-management.
 The trend as of late has been to “flatten” the hierarchy
 Typically, flattening the hierarchy includes spreading decision-making authority
down to the lower levels of the organization.
Organizational Structure – Formalization

 To what degree will rules or procedures be employed to guide organizational

members?
 Formalization reflects the degree to which jobs within the organization are
standardized. A high level of formalization means highly standardized work—i.e.,
clear rules regarding how the work should be performed

 Highly standardized work, or work that is very much rule-directed, suggests that
there is little individual discretion in how it can be performed.
 , high formalization is what scientific management advocated in its assertion of
standardizing work to ensure consistency/ reliability
 Current trend is shift towards less formality
 Given the need to adapt to the rapidly changing external environment, organizations
have found that they must be willing to scrap the old way of doing things in favour of
methods that better accommodate the changing demands of their environment
Organizational Structure –
Departmentalization
 On what basis will jobs be grouped together?
 the dividing or grouping of major functions or work activities into separate units
 Functional Departmentalization: grouping workers together who carry out
the same type of functions on behalf of the organization
 Divisional Departmentalization: grouping of employees based on the
products or services produced by the organization. This is referred to as
product or divisional departmentation
 Geographic Departmentalization
 Customer Departmentalization
Mechanistic versus Organic Structure

Mechanistic Organic

Work specialization Functional Social

Decision-making source Centralized Decentralized

Levels of Administration Tall Flat

Departmentation Functional Divisional

Formalization High Low

The Contingencies of Structure

 Contingency theories seek to explain what factors in the organization’s

environment influence these organizational design choices.
 A central philosophy underlying contingency theory is that there is no one ideal
way to organize
 The optimal organizational structure is dependent on, or is contingent on, the
nature of its operating environment
 Managers should seek to achieve a fit or alignment among the major elements
of their organization’s environment and its internal organizational design
 Managers must accurately define those environmental factors that have
significant impact on their organizations in order to generate a suitable
organizational structure—one capable of responding to environmental
demands and the characteristics for which it was designe
The Contingencies of Structure

 Strategy
 Organizational Size (and balancing formalization)
 Technology (Routine and Non-Routine)
 Environment (Dynamic vs. Static)
The Virtual Organization

 Outsourcing: hiring external organizations to conduct work in certain

functions of the company. For example, payroll, accounting, legal work can
be assigned to outsourced staff.
 Important to identify value-added work and non-value added work (accounting,
payroll, HR, IT , Customer Service etc.)
 Networking: Organizations limiting themselves to fewer activities in which
they have expertise and assigning specialists to handle all other functions.
 Results in organizations engaging in co-operative relationships with suppliers,
distributors or competitors.
 Japanese concept: keiretsu
 Shed non-core functions
 Allows company to be nimble and flexible, while focusing on the areas that the
organization adds the highest value
Benefits of Virtual Organizations

 Cost savings are significant. (Low Admin.)

 Great alternative for entrepreneurs.
 Fast way to develop and market new products.
 Fast and flexible.
Risks of Virtual Organizations

 Losing control (Reliant on others)

 Lack of employee loyalty
 Potential sacrifice of competitive learning
opportunities
Case - Google

 Question:
Explain which organizational structure would likely work best for Alphabet.
Consider the characteristics of the following as part of your analysis:
 1. Traditional bureaucracy versus modern organizations
 2. Work specialization: functional versus social
 3. Mechanistic versus organic
Case - Google

 Consider “ Contingency Theory”

 Strategy
 Organizational Size (and balancing
formalization)
 Technology (Routine and Non-
Routine)
 Environment (Dynamic vs. Static)
Case - Google

 Apply case facts to criteria:

Mechanistic Organic

Work specialization Functional Social

Decision-making source Centralized Decentralized

Levels of Administration Tall Flat

Departmentation Functional Divisional

Formalization High Low

Case – Google – Q1.

 1. Traditional bureaucracy versus modern organizations

 “Today Google employs over 57,000 people in over 40 countries and is worth over
$50 billion. However, Google has tried to keep the same structure with a team-
based approach. In 2013, for example, the company had just 5,000 managers,
1,000 directors, and 100 vice-presidents.”
 While Google still has formal organization charts, Google promotes less managerial
oversight and more employee freedom since there just “simply isn’t time to
micromanage.”
 Google gives their employees plenty of freedom and uses communication as a tool
to keep everyone moving forward in the same direction
 Answer: Modern
Case – Google – Q2.

 2. Work specialization: functional versus social

 Google needed to attract the very best engineers. These weren’t engineers in the
traditional sense of this role. These were brilliant coders and system designers who
possessed deep technical expertise. Many of them also were quite business savvy and
were gifted with keen creative abilities. As a result, Google refers to many of its workers
as ‘smart creatives.’
 A product manager’s job is to work together with the people [in small teams] who
design, engineer, and develop things to make great products. Some of this entails the
traditional administrative work around owning the product life cycle, defining the
product roadmap, representing the voice of the consumer, and communicating all that to
the team and management. Mostly, though, smart creative product managers need to
find the technical insights that make products better
 Google believes “smart creatives” can be found in every school, city, demographic,
business, non-profit and government agency. They are ambitious, know how to use
technology and do a lot more. They work hard, challenge the status quo and think about
things differently
 Answer: Social
Case- Google Q.3

 3. Mechanistic versus organic

Mechanistic Organic

Work specialization Functional Social

Decision-making source Centralized Decentralized

Levels of Administration Tall Flat

Departmentation Functional Divisional

Formalization High Low

Given all case facts point towards Organic, this is the correct response