Organization Theory & Design

Fundamentals of Organization
Structure
 Organization Structure
Advantages of organization structure:
1. Designates formal reporting
relationships, including the of levels in
the hierarchy and the span of control of
managers/supervisors.
2. Identifies the grouping together of
individuals into departments and
departments into total organization
3. Includes the design of systems to ensure
effective communication, coordination,
and integration of effort across
departments
 Contextual Variables that
Influence Structure

Culture Size

Structure
Strategy, (learning vs.
efficiency) Technology
Goals

Environment
 The Relationship of Organization
Design to Efficiency vs. Learning
Outcomes Horizontal Organization
Designed for Learning
Horizontal structure is dominant in
• Shared tasks, empowerment
• Relaxed hierarchy, few rules
• Horizontal, face-to-face communication
• Many teams and task forces
Dominant • Decentralized decision making
Structural Vertical structure is dominant in
• Specialized tasks
Approach
• Strict hierarchy, many rules
• Vertical communication and reporting
systems
• Few teams, task forces or integrators
• Centralized decision making
Vertical Organization
Designed for Efficiency
 The Relationship of Structure to
Organization’s Need for Efficiency vs.
Learning

Functional with
Functional cross-functional Divisional Matrix Horizontal Modular
Structure teams, integrators Structure Structure Structure Structure

Horizontal:
• Coordination
• Learning
Dominant • Innovation
Structural Vertical: • Flexibility
• Control
Approach
• Efficiency
• Stability
• Reliability
 A Functional Structure

CEO

V ic e P re sid e nt V ic e P re sid e nt D ire c to r

F in an ce M a nu fa c tu ring H u m an R e so u rc e s

C h ief B udget P la nt M a inte n a n ce T ra in ing B e n e fits

A c co u n ta nt A n a lyst S u p e rin ten d e n t S u p e rin ten de nt S p e c ia list A d m in is tra tor
 Strengths and Weaknesses of
Functional Organization Structure
WEAKNESSES:
STRENGTHS:
– Slow response time to
– Allows economies of
scale within functional environmental changes
departments – All decisions related to
– Enables in-depth inter-departmental
knowledge and skill coordination end up with
development the top-level management
– Enables organization – Leads to poor horizontal
to accomplish coordination among
functional goals departments
– Is best with only one – Does not encourage
or a few products
innovation
– Involves restricted view of
organizational goals
 Contingencies and Internal Systems in a Functional
Structure
Contingencies Internal Systems
Environment:
Operative Goals:
Low uncertainty, Stable
Functional goal emphasis
Technology:
Planning and budgeting:
Routine, Low interdependence
Cost based budgets, statistical
Size:
reports
Small to medium Formal Authority:
Functional Mangers
Goals:
Efficiency, functional expertise
A Cross-Functional Structure
with Integrators
President

Finance Engineering Marketing Purchasing

Department Department Department Department
Financial
Accountant Product Project Manager
Market Product A
Designer
Researcher
Buyer
Budget
Analyst Draftsperson Advertising Project Manager
Specialist Product B
Buyer
Management
Accountant Electrical
Designer Market Project Manager
Planner Buyer Product C
Cross Functional Structure with
Integrators
A cross functional structure with project teams or
cross functional integrators
Tries to minimize the disadvantages of a typical
functional structure by enhancing inter-
departmental coordination through teams
Suited to a relatively more dynamic environment
than what may be experienced by a functional
structure
PROBLEM:
Functional Heads still hold ultimate authority,
therefore, project leaders or team leaders find it
hard to exert leadership and control
 Divisional Structure
Info-Tech
President

Electronic Office Virtual

Publishing Automation Reality

R&D Mfg Acctg Mktg R&D Mfg Acctg Mktg R&D Mfg Acctg Mktg
 Strengths and Weaknesses of
Divisional Organization Structure
STRENGTHS:
– Suited to fast change in
unstable environment
– Leads to client satisfaction
because product
responsibility and contact
points are clear
– Involves high coordination
across functions
– Allows units to adapt to
differences in products,
regions, clients
– Best in large organizations
with several products
– Decentralizes decision-
making
WEAKNESSES:
– Eliminates economies of
scale in functional
departments
– Leads to poor coordination
across product lines
– Eliminates in-depth
competence and technical
specialization
– Makes integration and
standardization across
product lines difficult
 Contingencies and Internal Systems of Divisional
Structure
Contingencies Internal Systems
Environment: Operative Goals:
Moderate to high uncertainty Product emphasis
Technology:
Planning and budgeting:
Non-routine, high
interdependence among Based on Cost-Revenue-Profit
departments Economics
Size: Formal Authority:
Large Divisional Heads
Goals:
External effectiveness,
adaptation, client satisfaction
 Matrix Structure for
a Steel-Production Company
President
Vertical Functions
Human Industrial
Mfg. Marketing Finance Metallurgy Field Sales
Resources Relations
Vice Vice Vice Vice Vice
Vice Vice
President President President President President
Horizontal Product Lines

President President
Drilling &
Exploration
Mgr.

Aviation
Products
Mgr.
Wheels & Axles
Mgr.

Steelmaking
Mgr.
 Matrix Structure
When one sector of the environment
requires technological expertise, and
another sector requires rapid change
within each product line
Conditions:
1. Pressure exist to share scarce resources
across product lines
2. When pressure exists for two or more
critical outputs such as technical quality
(functional structure) and frequent new
products ( divisional structure)
3. Environmental Domain of the
organization is both complex and
uncertain
 Strengths and Weaknesses of
Matrix Organization Structure
STRENGTHS: WEAKNESSES:
– Achieves coordination – Causes participants to
necessary to meet dual experience dual authority,
demands from which can be frustrating and
customers confusing
– Flexible sharing of – Means participants need good
human resources across interpersonal skills and
products extensive training
– Suited to complex – Is time consuming; involves
decisions and frequent frequent meetings and conflict
changes in unstable resolution sessions
environment
– Provides opportunity for – Will not work unless
both functional and participants understand it and
product skill adopt collegial rather than
development vertical-type relationships
– Best in medium-sized – Requires great effort to
organizations with maintain power balance
multiple products
Contingencies and Internal systems of Matrix Structure
Contingencies Internal systems
Environment: Operative Goals:
Moderate to high uncertainty, Equal product and functional
changing customer demands emphasis
Technology: Planning and Budgeting:
Routine or non-routine, with Dual system – by function and
interdependencies between product
functions
Size: Formal Authority:
Medium Joint between functional and
Goals: product basis

External effectiveness and

adaptation plus efficiency with
some functions
A Process-based Structure
Top
Management
Team

Process Team Team Team

Owner 1 2 3

Market Product
Research Testing Customer
Analysis Planning
New Product Development Process

Process Team Team Team

Owner 1 2 3

Material
Analysis Purchasing
Flow
Distrib. Customer
Sources: Based on Frank Ostroff,
The Horizontal Organization, (New York:
Oxford University Press, 1999); John A. Byrne, Procurement and Logistics Process
“The Horizontal Corporation,” Business Week,
December 20, 1993, 76-81; and Thomas A. Stewart,
“The Search for the Organization of Tomorrow,”
Fortune, May 19, 1992, 92-98.
Process Based Organizations
Emphasize lateral rather than vertical
relationships
All functions necessary to produce a
product or services are placed in a common
unit usually managed by some one called
process owner
Few hierarchical levels, and senior
executive team is relatively small
Eliminate many hierarchical and
departmental boundaries that can impede
coordination, decision making and task
performance
There is no one right way to design process
based structures, the following features
characterize this form of organizing
 Characteristics of
Process-Based Structures
 Processes drive structure
 Organized around three to five processes
 Rather than products or functions processes
define structure
 Each process has clear performance goals
that drive execution
 Work adds value
 Simplify and enrich work processes
 Elimination of non-essential task and
reducing layers of management
 Enrichment takes place by combining tasks
so that a single team performs whole process
 Characteristics of
Process-Based Structures
 Teams are fundamental
 Teams are key organizing feature in the
process
 Manage everything from task execution
to planning
 Customers (internal/external) define
performance
 Primary goal is customer satisfaction
 Defining customer expectations and
designing team functions to meet those
expectations
 Process-Based Structures
 Teams are rewarded for performance
 Appraisal systems focus on measuring team
performance against customer satisfaction
and other goals
 Team based rewards are given more weight
 Teams are tightly linked to suppliers and
customers
> Teams have direct relationship with vendors
and customers to understand and respond to
emerging concerns
 Team members are well informed and trained
 Ability of team to work with broad range of
information (customers, markets, financial
data)
 Problem solving and decision making skills
and abilities
Strengths and Weaknesses of
Process-based Structure
STRENGTHS: WEAKNESSES:
– Flexibility and rapid response to – Determining core
changes in customer needs processes to organize
– Directs the attention of everyone around is difficult
toward the production and – Requires changes in
delivery of value to the customer culture, job design,
– Each employee has a broader management philosophy,
view of organizational goals and information and
reward systems
– Promotes a focus on teamwork
and collaboration—common – Traditional managers may
commitment to meeting balk when they have to
objectives give up power and
authority
– Improves quality of life for
employees by offering them the – Requires significant
opportunity to share training of employees to
responsibility, make decisions, work effectively in a
and be accountable for outcomes process-based structure

Sources: Based on Frank Ostroff, The Horizontal Organization: What the

Organization of the Future Looks Like and How It Delivers Value to
Customers, (New York: Oxford University Press, 1999);
and Richard L. Daft, Organization Theory and Design, 6th ed.,
(Cincinnati, Ohio: South-Western College Publishing, 1998) 253.
 Hybrid Structures
Hybrid structures combine characteristics of
various approaches tailored to specific needs
1. Most often used to combine characteristics of
functional structure and divisional structure
 Functions that are important for each product
or market are decentralized to self contained
units
 Some functions that are relatively stable and
require economies of scale and in-depth
specialization are centralized at headquarters
2. Second type of hybrid approach is to combine
characteristics of functional and process-based
structures
 Hybrid Structure
Part 1. Sun Petrochemical Products

President

Functional Chief
Human Technology Financial
Resources Vice Services
Structure Counsel
Director President Vice Pres.

Product Fuels Lubricants Chemicals

Vice Vice Vice
Structure President President President

Sources: Based on Linda S. Ackerman, “Transition Management:

An In-Depth Look at Managing Complex Change,”
Organizational Dynamics (Summer 1982): 46-66;
and Frank Ostroff, The Horizontal Organization,
(New York: Oxford University Press, 1999), Fig. 2.1, 34.
 Hybrid Structure
Part 2. Ford Customer Service Division

Vice President /
General Manager

Functional Strategy & Human

Structure Finance Communication Resources

Director and
Process Owner Teams
Horizontal Structure

Parts Supply / Logistics Group

Director and
Process Owner Teams

Vehicle Service Group

Director and
Process Owner Teams

Technical Support Group

 Accounting
Marketing

Modular
Grouping
The
Broker
Organization
Distribution
Distribution
 The Modular Structure
An inter market network
Alliances among a variety of organizations in
different markets (Nike, Adidas)
An opportunity network
A constellation of organizations brought together
to pursue a single purpose.
(e.g. Oil & Metallurgy Exploration Firms, Movie
Makers)
 The Network Organization
Designer Producer
Organizations Organizations

Broker
Organization

Supplier Distributor
Organizations Organizations
 Characteristics of Network Structures
 Disaggregation
Breaking up of organization functions into separate
organizations (sub-systems) performing specialized work
 Brokers
Managed by broker organizations that locate and assemble
member organizations
Broker may play a central role and subcontract for needed
products or services, or it may coordinate in linking partners
into network
 Coordinating Mechanisms:
Coordination falls into three categories:
1. Interpersonal relationship among individuals who have
developed partnerships. Conflicts are resolved through
reciprocity.
2. Formal contacts, ownership control, licensing arrangements.
3. Market mechanisms such as spot payments, performance
accountability, information systems, ensure all parties are aware
of each others’ activities
Advantages of Network Structures
Enables highly flexible and
adaptive response to dynamic
environments
Creates a “best of the best”
organization to focus resources on
customer and market needs
Each organization can leverage a
distinctive competency
Permits rapid global response
Can produce “synergistic” results
 Disadvantages of
Network Structures
Managing lateral relationships across
autonomous organizations is difficult
Motivating members to relinquish
autonomy to join network is tricky
Sustaining membership and benefits
can be problematic
May give partners access to proprietary
knowledge and technology
 Network Structure
Contingencies
Highly complex and uncertain
environments
Organizations of all sizes
Goals of organizational
specialization and innovation
Rapidly changing/emerging
technologies
Worldwide operations