Chapter-2-Organisational Design and Designing Structue

Organizational Theory,
Design, and Change
CHAPTER 2
ORGANIZATIONAL DESIGN AND

DESIGNING ORGANIZATIONAL
STRUCTURE
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 4- 1

Introduction
 If an organization is to remain effective as it

changes and grows with its environment, managers
must continuously evaluate the way their
organizations are designed: for example, the way
work is divided among people and departments,
and the way it controls its human, financial, and
physical resources.
 Organizational design is the administration and
execution of an organization’s strategic plan.
 Organizational design involves difficult choices
about how to control—that is, coordinate
organizational tasks and motivate the people who
perform them—to maximize an organization’s
ability to create value.
Learning Objectives
1. Organizational designed defined.
2. Importance of organizational design.
3. Dimensions of Organization Design.
4. Describe the four basic organizational design
challenges confronting managers and consultants.
5. Discuss the way in which these challenges must
be addressed simultaneously if a high-performing
organizational structure is to be created.
6. Distinguish among the design choices that
underlie the creation of either a mechanistic or an
organic structure.
7. Recognize how to use contingency theory to
design a structure that fits an organization’s
environment.
8. Designing Organizational Structure and Types of
Organizational Structures.
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Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 4-
Cont’d
 Organizational design is determined by the strategic

direction of the company, the vision, mission, and
goals of the company. These lead to strategies that
the company competes on, which are enabled
through the organizational design.
 For example, Company A operates in an
established market and is looking to maintain its
position. This company will have a low-cost
leadership strategy focused on efficiency. In terms
of organizational design, this company will have a
strong, centralized authority, tight control, and
many standard operating procedures.

Cont’d
 Company B is an innovative and fast-growing
organization that emphasizes learning. This
company will have a more fluid and flexible design,
a much more decentralized structure, and loose
control. Employees work directly with customers
and are rewarded for creativity and risk-taking.
 In company A, risk-taking and failing are punished,
while in company B, it is much more likely to be
rewarded, evaluated, and learning's from the failed
project will be used as a stepping stone for a new
project.

Organizational designed defined
 Organizational design: the process by which
managers select and manage aspects of structure
and culture so that an organization can control the
activities necessary to achieve its goals.
 Organizational design is the process of aligning the
structure of an organization with its objectives, with
the ultimate aim of improving efficiency and
effectiveness.
 Organizational design is a step-by-step methodology
which identifies dysfunctional aspects of work flow,
procedures, structures and systems, realigns them
to fit current business realties/goals and then
develops plans to implement the new changes.
Why do we need organisational
Design
 Organisational design is the process of
aligning the structure of an organisation
with its objectives, with the ultimate aim
of improving efficiency and effectiveness.
 Good organizational structure and
design helps improve communication,
increase productivity, and inspire
innovation. It creates an environment
where people can work effectively.

The methodology of Organizational
Design
 The methodology of an organizational design
includes the following steps-
1. Charter(Agreement) the design process –
Establish a charter for the design process and
include desired outcomes, resource allocation,
participation, deadlines and communication
strategies for designing initiative.
2. Assess the current state – Assess the state of
your business to understand its strengths,
functions, principles, weaknesses, and whether
they are aligning with your core objectives,
ideology, and strategy. It will bring clarity about the
overall business and assist in making
improvements. 4- 9
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall
Cont’d
3. Design the new organization – This step

includes;
1.Define organizing principles like processes, technologies and
functions
2.Streamline the core processes in business that will lead to
deliverables to consumers
3.Standardizing procedures
4. Organizing human resources around core processes
5. Defining the performance metrics for each team and making
them accountable for their actions
6. Determining the equipment needs and requirements and
layout of various departments and teams in the organization
7. Identifying the support resources and staffing and where they
will be located appropriately
8. Defining the structure that provides operational support
Cont’d
4. Implement the design – Organize workgroups

and train them in the new design to build skills and
know-how. Rearrange facilities and equipment and
change and adjust information-sharing,
performance systems, and reward systems so that
the company becomes more responsive to the
customer needs.

Importance of organisational design
 If the organization design is planned and implemented

properly, it brings forth the alignment of goals and
objectives and a poor design often results in
ineffective decision-making, lack of trust and rigid
work environment.
1. Ability to deal with contingencies
2. Ability to achieve competitive advantage
3. Managing diversity effectively
4. Increasing efficiency
5. Increased global competitiveness
6. Increasing use of advanced information and
technology
7. Ability to innovate new goods and services
Dimensions of Organization Design
 Organizations shape our lives, and well-informed
managers can shape organization. The first step to
understand organizations is by examining the features
that describe specific organizational design
traits/features.
 Organizations can be described along contextual and
structural dimensions.
 Structural dimensions provide labels to describe the
internal characteristics of an organization. They create
a basis for measuring and comparing organizations.
Viewed as “ consequences” or “effects” or dependent
Variables.
 Contextual dimensions are characteristics of the
organizational setting that influence and shape the
structural dimensions. Viewed as “causes” of the
structural dimensions, as Independent variables.
Cont’d
1) Structural dimensions: provide labels to describe the
internal characteristics of an organization. They create
a basis for measuring and comparing organizations.
A.Specialization: the degree in which organizational
tasks are subdivided.
B.Departmentalization: The degree to which will jobs
be grouped
C.Hierarchy of authority: who reports to whom and the
span of control for managers.
D.Centralization: refers to the hierarchical level that
has authority to make a decision
E.Formalization: amount of written
documentation/rules etc.

Dimensions of Organization Design(cont’d)
2) Contextual dimensions: characterize the whole
organization. They represent both the organization and
the environment.
A.Size: Organizations are social systems, thus size is
measured by the number of people in the organization.
B.Organizational technology: Tools, techniques and
actions used to transform inputs to outputs.
C.Environment: all elements outside the boundary of the
organization.
D.Goals and strategy: define the purpose and
competitive techniques.
E.Culture: the underlying set of values, beliefs,
understandings and norms shared by employees.

Designing an Organization Structure
1. Managers must decide how to divide the
overall tasks of the organization into
successively smaller jobs.
2. Managers must decide the basis by which
to group the individual jobs.
3. Managers must decide the appropriate
size of the group reporting to each
supervisor
4. Managers must distribute authority among
the jobs.
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15–16
Why Organizational Structure Matters?
 Structure affects:
1. What employees pay attention to.
2. Ease of coordinating activities.
3. Speed of producing goods/services.
4. Cost of running the business.
5. Nature and extent of supervision
required.
6. Whom employees interact and build
relationships with.
Symptoms of Structural Weakness
1. Delay in decision making ----Overloaded
hierarchy; information funneling limited to too
few channels.
2. Poor quality decision making----Right
information not reaching right people in right
format.
3. Lack of innovative response to changing
environment ---- No coordinating effort.
4. High level of conflict---- Departments work
against each other, not for organizational goals.

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15–18
What Determines Organizational
Structure?
1. To what degree are tasks subdivided into
separate jobs?
2. On what basis will jobs be grouped
together?
3. To whom do individuals and groups report?
4. How many individuals can a manager
efficiently and effectively direct?
5. Where does decision-making authority lie?
6. To what degree will there be rules and
regulations to direct employees and
managers?
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4-
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 15–19
Key Design Questions and Answers for Designing
the Proper Organization Structure
The Key Question The Answer Is Provided By
1. To what degree are tasks Work specialization

subdivided into separate jobs?
2. On what basis will jobs be grouped Departmentalization
together?
3. To whom do individuals and groups Chain of command
report?
4. How many individuals can a manager Span of control
efficiently and effectively direct?
5. Where does decision-making Centralization
authority lie? and decentralization
6. To what degree will there be rules Formalization
and regulations to direct employees
and managers?
E X H I B I T 15–1
E X H I B I T 15–1
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15–20
(cont’d)
Work Specialization
The degree to which tasks in the organization
are subdivided into separate jobs.
Division
Divisionof
oflabor:
labor:
• • Makes
Makesefficient
efficientuse
useof
ofemployee
employeeskills
skills
• • Increases
Increasesemployee
employeeskills
skillsthrough
throughrepetition
repetition
• • Less
Lessbetween-job
between-jobdowntime
downtimeincreases
increases
productivity
productivity
• • Specialized
Specializedtraining
trainingisismore
moreefficient.
efficient.
• • Allows
Allowsuse
useof
ofspecialized
specializedequipment.
equipment.
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15–21
Cont’d
 The advantages of the work specialization are
1. Boost in product quality
2. Boost in job satisfaction
3. Boost in productivity
 The disadvantages of the specialization are
1. Increase in employee turnover
2. Increase in costs

(cont’d)
Departmentalization
The basis by which jobs are grouped together.
Grouping
GroupingActivities
ActivitiesBy:
By:
•• Function
Function
•• Product
Product
•• Geography
Geography
•• Process
Process
•• Customer
Customer
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15–23
(cont’d)
 Advantages of the departmentalization are
1. Better coordination
2. Better control
3. Flexibility
4. Motivated workforce
5. Boost efficiency
 The disadvantages of the departmentalization are
1. Slow decision-making
2. Misuse of authority
3. Overspecialization

(cont’d)
Authority
The rights inherent in a managerial position to give
orders and to expect the orders to be obeyed.
Chain of Command
The unbroken line of authority that extends from the top of the
organization to the lowest level and clarifies who reports to
whom. The authority is delegated from top to bottom in an
organization where the top management gives instructions to the
bottom levels and so on and the accountability flows from
downward to upward at each level.
Unity of Command
A subordinate should have only one superior to whom he or she is
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Prentice Hall Inc. All .
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15–25
(cont’d)
 Advantages of the line/chain of command are
1. Clear instructions
2. Conflict resolution and Direct supervision
3. Clear communication
4. Close monitoring of employee performance
5. Increase in productivity , efficiency & profitability
 The disadvantages of the line/chain of command are
1. Increase in office politics because of power
centralization
2. Too much dependency on higher authorities
3. Less sense of belonging
4. Delay in taking decisions
(cont’d)
Span of Control
The number of subordinates a manager can
efficiently and effectively direct. Trend in recent
years has been toward wider spans of control.
Concept:
Concept:
Wider
Widerspans
spansofofmanagement
managementincrease
increaseorganizational
organizational
efficiency.
efficiency.
Narrow
NarrowSpan
SpanDrawbacks:
Drawbacks:
• •Expense
Expenseof
ofadditional
additionallayers
layersof
ofmanagement.
management.
• •Increased
Increasedcomplexity
complexityof
ofvertical
vertical
communication.
communication.
• •Encouragement
Encouragementofofoverly
overlytight
tightsupervision
supervisionand
and
discouragement of employee autonomy.
discouragement of employee autonomy.
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(cont’d)
 The advantages of the span of control are
1. Clear communication
2. Few managers
3. Employee empowerment
4. Delegation of authority to subordinates by their
supervisor
 The disadvantages of the span of control are
1. Barriers in decision making
2. Too much work for managers
3. In need of trained managers to handle
responsibilities effectively
(cont’d)
Centralization
The degree to which decision making is concentrated
at a single point in the organization. Highly
centralized is when top managers make all the
decisions
Decentralization
The degree to which decision making is spread
throughout the organization. More decentralized is
when front line employees and managers make
decisions

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15–29
(cont’d)
 The advantages of the centralization are
1. Right decision-making for any unplanned decisions
2. Managing specialization
3. Managing and handling crisis & Less duplication of tasks
 The disadvantages of the centralization are
1. A dynamic and complex environment
2. Delay in decision making & Little sense of belonging
 The advantages of the decentralization are
1. Quick decisions & Competitive culture
2. Increase in initiatives by employees
3. Improve in employee performance
4. Independent decision-making by managers
 The disadvantages of the decentralization are
 1. Duplication of work
 2. High cost & Ambiguity in processes

(cont’d)
 Formalization
The degree to which jobs within the organization are
standardized. These written documents describe
behavior and activities.
 The advantages of the formalization are
1. Smooth flow of authority
2. Boost efficiency
3. Less ambiguity
 The disadvantages of the formalization are
1. Formal and rigid relations
2. Reduction in employee morale
3. Lengthy process in decision-making
Contextual dimensions
 Contingency factors—appropriate structure
depends on four contingency variables.
1. Strategy Dimensions:
 Innovation Strategy
 Cost-Minimization Strategy
 Imitation Strategy
2. Organization Size
3. Technology
4. Environmental Uncertainty

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15–32
Strategy and structure (cont’d)
Innovation Strategy
A strategy that emphasizes the introduction of major new
products and services. —needs the flexibility and free flow of
information of the organic organization .(Uses a more Flexible
management style/Decentralized approach)
Cost-minimization Strategy
A strategy that emphasizes tight cost controls, avoidance of
unnecessary innovation or marketing expenses, and price
cutting. —needs the efficiency, stability, and tight controls of
the mechanistic organization (Use Top-down Approach
Management style/ Centralized approach)
Imitation Strategy
A strategy that seeks to move into new products or new
markets only after their viability has already been proven. —
which uses characteristics of both mechanistic and organic.
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15–33
The Strategy-Structure Relationship
Strategy Structural Option
Innovation Organic: A loose structure; low

specialization, low formalization,
decentralized
Cost minimization Mechanistic: Tight control; extensive

work specialization, high formalization,
high centralization
Imitation Mechanistic and organic: Mix of

loose with tight properties; tight
controls over current activities and
looser controls for new undertakings
E X H I B I T 15–9
E X H I B I T 15–9
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15–34
Size and structure (cont’d)
Size
How the size of an organization affects its structure. As
an organization grows larger, it becomes more
mechanistic. Larger organizations tend to have more
specialization, departmentalization, centralization and
formalization although the size-structure relationship is
not linear/line.
Characteristics
Characteristicsof
oflarge
largeorganizations:
organizations:
• •More
Morespecialization
specialization
• •More
Morevertical
verticallevels
levels
• •More
Morerules
rulesand
andregulations
regulations
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15–35
Technology and structure (cont’d)
Technology
How an organization transfers its inputs into outputs.
Characteristics
Characteristicsof
ofroutineness
routineness(standardized
(standardizedor
or
customized)
customized)ininactivities:
activities:
• •Routine
Routinetechnologies
technologiesare
areassociated
associatedwith
withtall,
tall,
departmentalized
departmentalizedstructures
structuresand
andformalization
formalizationinin
organizations.
organizations.
• •Routine
Routinetechnologies
technologieslead
leadto
tocentralization
centralizationwhen
when
formalization
formalizationisislow.
low.
• •Nonroutine
Nonroutinetechnologies
technologiesare
areassociated
associatedwith
with
delegated
delegateddecision
decisionauthority.
authority.

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15–36
Environment uncertainty and structure
(cont’d)
Environment
Institutions or forces outside the organization that
potentially affect the organization’s performance.
The more uncertain the environment, the more
flexible and responsive the organization may need to
be.
Key
KeyDimensions-
Dimensions-
• • Capacity:
Capacity:the
thedegree
degreeto
towhich
whichan
anenvironment
environmentcan
can
support
supportgrowth.
growth.
• • Volatility:
Volatility:the
thedegree
degreeof
ofinstability
instabilityininthe
theenvironment.
environment.
• • Complexity:
Complexity:the
thedegree
degreeof
ofheterogeneity
heterogeneityand
and
concentration
concentrationamong
amongenvironmental
environmentalelements.
elements.
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15–37
The Three Dimensional Model of the
Environment
Volatility
Capacity
Complexity
E X H I B I T 15–10
E X H I B I T 15–10
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15–38
Basic challenges of organizational
design
1. Determining the level of

differentiation.
2. Deciding how to coordinate activities.
3. Determining who will make decisions.
4. Deciding how tightly the organization
will control employee activities.

1. Differentiation
 Differentiation is the process of dividing
labor
 The first design challenge is to determine the
level of vertical and horizontal differentiation.
 The process by which an organization allocates
people and resources to organizational tasks
and establishes the task and authority relationships
that allow the organization to achieve its goals.
 Division of labor The process of establishing and
controlling the degree of specialization in the
organization.

Differentiation (cont.)
 In a simple organization,
differentiation is low because the
division of labor is low
 Individuals typically perform all
organizational tasks
 In a complex organization,
differentiation is high because the
division of labor is high

Design Challenge

Design Challenge (cont.)




Building Blocks of Differentiation

Cont’d
 Organizational Role: Set of task-related
behaviors required of a person by his or her
position in an organization.
 Function: a subunit composed of a group of
people, working together, who possess
similar skills or use the same kind of
knowledge, tools, or techniques to perform
their jobs.
 Division: a subunit that consists of a
collection of functions or departments that
share responsibility for producing a particular
good or service.
 Organizational complexity: the number
of different functions and divisions possessed
by an organization 4- 48
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Vertical and Horizontal
Differentiation
 Hierarchy: a classification of people
according to their relative authority and rank
 Vertical differentiation: the way an
organization designs its hierarchy of authority
and creates reporting relationships to link
organizational roles and subunits
 Establishes the distribution authority between levels
 Horizontal differentiation: the way an
organization groups organizational tasks into
roles and roles into subunits (functions and
divisions)
 Roles differentiated according to their main task
responsibilities
Authority: How and Why Vertical
Differentiation Occurs
 The hierarchy begins to emerge when the
organization experiences problems in coordinating
and motivating employees
 To deal with coordination and motivation problems,
the organization can:
 Increase the number of managers it uses to
monitor, evaluate, and reward employees.
 Increase the number of levels in its managerial
hierarchy, thereby making the hierarchy of
authority taller.
 Size and height limitations
 Tall organization: an organization in which the hierarchy has
many levels relative to the size of the organization
 Flat organization: an organization that has few levels in its
hierarchy relative to its size
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Copyright 2007 Prentice 50
Figure -Flat and Tall Organizations

Differentiation Occurs (cont.)
 By the time an organization has 1,000
members, it has 4 levels in its
hierarchy
 At 3,000 members, it likely has 7 levels
 After 10,000 to 100,000, organizations
have 9 or 10 levels
 Increase in size of the managerial
component is less than proportional to
increase in size of the organization
Figure : Relationship Between Organizational
Size and Number of Hierarchical Levels

Types of Managerial Hierarchies

Figure :Relationship Between Organizational Size
and The Size of the Managerial Component

 Problems with tall hierarchies:
 Communication problems: communication
takes longer and is likely to be distorted
 Motivation problems: as hierarchy
increases, the relative difference in the
authority possessed managers at each
level decreases, as does their area of
responsibility
 Less responsibility and authority could reduce
motivation
 Bureaucratic costs: managers cost money

 Ideal number of hierarchical levels
determined by:
 Principle of minimum chain of
command: an organization should
choose the minimum number of
hierarchical levels consistent with is goals
and the environment in which it operates
 Span of control: the number of
subordinates a manager directly manages

Figure : Spans of Control

 Factors that determine the appropriate span
of control
 Most important factor limiting span of control is
the manager’s inability to supervise increasing
number of subordinates adequately
 There seems to be a limit to how wide a manager’s
span of control should be
 Dependent on the complexity and interrelatedness
of the subordinates’ tasks
 Complex and dissimilar tasks – small span of
control
 Routine and similar tasks (e.g., mass
production) – large span of control

Figure : Increasing Complexity of Manager’s
Job as the Span of Control Increases

Cont’d
 Horizontal differentiation: an
organization that is divided into subunits has
many different hierarchies, not just one
 Each function or division has its own
hierarchy
 Horizontal differentiation is the principal way
an organization retains control over
employees without increasing the number of
hierarchical levels

Figure : Horizontal Differentiation
into Functional Hierarchies

Figure : Horizontal Differentiation
Within the R&D Functions

Organizational Chart of the
B.A.R. and Grille

Organizational Design
Challenges(cont.)
 Now we look at three more design challenges that
confront managers who attempt to create a
structure that will maximize their organization’s
effectiveness
 The first of the three is how to link and coordinate
organizational activities. The second is to determine
who will make decisions. The third is to decide
which types of mechanisms are best suited to
controlling specific employee tasks and roles.
 The choices managers make as they grapple with
all four challenges determine how effectively their
organization works.

Challenges

 The second design challenge is
balancing differentiation and
integration.
 As an organization becomes differentiated, more
complex integrating mechanisms coordinate
activities.
 The integrating mechanisms must facilitate
communication and coordination for
effectiveness.

2. Balancing Differentiation
and Integration
 Horizontal differentiation is supposed
to enable people to specialize and
become more productive
 Specialization often limits communication
between subunits
 People develop subunit orientation
 Subunit orientation: a tendency to view
one’s role in the organization strictly from
the perspective of the time frame, goals, and
interpersonal orientations of one’s subunit

Balancing Differentiation and
Integration (cont.)
 When subunit orientation occurs,
communication fails and coordination
becomes difficult
 Integration: the process of
coordinating various tasks, functions,
and divisions so that they work
together and not at cross-purposes

Types of Integration
Mechanisms
 Hierarchy of authority: dictates
“who reports to whom”
 Direct contact: managers meet face
to face to coordinate activities
 Problematic that a manager in one
function has no authority over a manager
in another
 Liaison roles: a specific manager is
given responsibility for coordinating
with managers from other subunits on
behalf of their subunits
Mechanisms (cont.)
 Task force: managers meet in
temporary committees to coordinate
cross-functional activities
 Task force members responsible for
taking coordinating solutions back to
their respective functions for further
input and approval
 Teams: a permanent task force used
to deal with ongoing strategic or
administrative issues
Mechanisms (cont.)
 Integrating role: a new, full-time
role established to improve
communications between divisions
 Focused on company-wide integration
 Integrating department: a new
department intended to coordinate
the activities of functions or divisions
 Created when many employees enact
integrating roles

Types and Examples of
Integrating Mechanisms

Integrating Mechanisms

Integrating Mechanisms (cont.)

Integrating Mechanisms (cont.)

Balancing Differentiation and
Integration
 Managers facing the challenge of
deciding how and how much to
differentiate and integrate must:
 Carefully guide the process of
differentiation so that it develops the core
competences that give the organization a
competitive advantage
 Carefully integrate the organization by
choosing appropriate integrating
mechanisms that allow subunits to
cooperate and that build up the
organization’s core competences
 The third design challenge is the balance
between centralization and
decentralization, each with advantages
and disadvantages.
 Distributing decision-making authority
influences employee behavior.Centralization
results in predictability whereas
decentralization fosters
innovation/improvement.

Balancing Centralization and
Decentralization
 Centralized organization: the
authority to make important decisions
is retained by top level managers
 Top managers able to coordinate activities
to keep the organization focused on its
goals
 Decentralized organization: the
authority to make important decisions
is delegated to managers at all levels
in the hierarchy
 Promotes flexibility and responsiveness
Balancing Centralization and
Decentralization (cont.)
 Ideal balance entails:
 Enabling middle and lower managers
who are at the scene of the action to
make important decisions
 Allowing top managers to focus on long-
term strategy making

 The fourth design challenge is balancing
standardization and mutual adjustment.
 Standardization is facilitated through formalization, written rules and

norms.
 Mutual adjustment relies on judgment rather than formalized rules for
problem solving.
 If an organization desires predictability, it is highly centralized and relies
on standardization. For innovation, an organization is decentralized and
relies on mutual adjustment.
 A mechanistic structure is appropriate in a predictable, stable
environment. An organic structure is appropriate in an uncertain, changing
environment requiring flexibility. In reality, most organizations are a
combinations of the two.

Balancing Standardization and
Mutual Adjustment
 Standardization: conformity to specific
models or examples that are considered
proper in a given situation
 Defined by rules and norms
 Mutual adjustment: the process
through which people use their judgment
rather than standardized rules to address
problems, guide decision making, and
promote coordination
 Formalization: the use of rules and
procedures to standardize operations
Balancing Standardization and
Mutual Adjustment (cont.)
 Socialization: Understood Norms
 Rules: formal, written statement that specify
the appropriate means for reaching desired
goals
 Norms: standards or styles of behavior that
are considered typical for a group of people
 May arise informally
 External rules may become internalized norms
 Socialization: the process by which
organizational members learn the norms of an
organization and internalize these unwritten
rules of conduct
Standardization versus
Mutual Adjustment
 Challenge facing managers is:
 To find a way of using rules and norms to
standardize behavior, and
 to allow for mutual adjustment to give
managers opportunity to discover new
and better ways to achieve goals

ORGANIZATIONAL DESIGN DECISIONS
 Organizations aren’t structured the same way. Top
managers put a lot of thought into how best to
design the organization’s structure.
 Each design challenge has implications for how an
organization as a whole and the people in the
organization behave and perform.
 Two useful concepts for understanding how
managers manipulate all these challenges
collectively to influence the way an organizational
structure works are the concepts of mechanistic
structure and organic structure.
 When is each design favored? It “depends” on the
contingency variables.

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Mechanistic Versus Organic Models

87
Organizational Design Decisions (cont’d)
Mechanistic Model
A mechanistic organization is an organizational
structure also called bureaucratic/Tall structures, that is
characterized by high specialization, rigid
departmentalization, narrow spans of control, high
formalization, a limited information network, and little
participation in decision making by low-level
employees.
This organizational structure is much more formal than
organic structure, and does hold staff more
accountable for their work, it can become a hindrance
to the creativity and agility/alertness the organization
needs to keep up with random changes in its market.
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Organizational Design Decisions
(cont’d)
Organic Model
Organic structures (also known as "flat"

structures) are known for their wide spans of
control, decentralization, low formalization,
low specialization, loose departmentalization
and uses cross-functional teams, and relies on
participative decision making.
The flexibility that an organic structure allows
for can be extremely helpful to a business
that's navigating a fast-moving industry and it
also empowers employees to try new things.
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Mechanistic Versus Organic Models
E X H I B I T 15–8
E X H I B I T 15–8
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15–90
Mechanistic and Organic
Organizational Structures
 Mechanistic structures: designed to
induce people to behave in predictable,
accountable ways
 Decision-making authority is centralized
 Subordinates are closely supervised
 Information flows mainly in a vertical direction along a
clearly defined path
 Hierarchy principal integrating mechanism
 Tasks and roles coordinated primarily through
standardization and formal written rules
 Best suited to organizations that face stable,
unchanging environments

Mechanistic and Organic
Organizational Structures (cont.)
 Organic structures: structures that
promote flexibility, so people initiate
change and can adapt quickly to
changing conditions
 Decision making distributed throughout the
hierarchy
 Coordination is achieved through mutual
adjustments
 Status conferred by ability to provide creative
leadership
 Encourages innovative behavior
 Suited to dynamic environments
How the Design Challenges Result in
Mechanistic and Organic Structures

Contingency Approach
 A management approach in which the
design of an organization’s structure is
tailored to the sources of uncertainty
facing an organization
 Organization should design its
structure to fit its environment

Fit Between the Organization and Its
Environment

Relationship Between Environmental
Uncertainty and Structure

Advantages of Organisational Design
1. Increased efficiency & Inspires innovation
2. Perfect alignment of the business strategy with the market
environment
3. Improves communication & The clarity in reporting
relationships
4. Excellent and healthy customer relations
5. Efficient work processes & Smooth flow of information
6. Employees know to whom they are going to communicate
because of a transparent chain of command
7. Improved quality of services and goods
8. Quick decision-making & Increase in operational efficiency
9. Better growth opportunities for the firm
10. Motivated workforce & Healthy and happy work environment
11. Decreased operational expenses
12. Improved employee engagement & Advancement
opportunities for employees
Disadvantages of ineffective
1. Low employee morale
2. Lack of coordination and confusion within roles
3. Failure to share information and ideas
4. High employee turnover
5. Damage of brand image
6. Ill-defined systems
7. Inconsistency in quality of work
8. Waste of time
9. Mistrust between management and workers
10. Ineffective problem-solving
11. Below target results
12. Inefficient workflow with lots of breakdowns

Types of Organizational design
Structures
 The organizational design structure is divided into
two categories
 Traditional designs
1. Simple structure
2. Functional Structure
3. Divisional Structure & Multidivisional Structure
 Contemporary designs
 Team structure
 Matrix Structure
 Network Structure and
 the Boundaryless Organization

100
Simple structure
 In a simple structure, traditional design, the
emphasis is on centralized authority and low
departmentalization. It is generally adopted by
start-up and small business entities because the
owner tends to be in control of all the major roles
and functions.
 The advantages of the simple structure are
1. Wide spans of control
2. Greater employee involvement
 The drawback of simple structure is
1. No standardized procedures or policies
Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 4-101

Functional Structure
 In a functional structure traditional design,
the similar occupational specialists are
grouped in departments that have their
workforce to perform roles and duties.
 A functional structure is a design that
groups people on the basis of their common
skills, expertise, or resources they use
 Functional structure is the bedrock of
horizontal differentiation
 An organization groups tasks into functions
to increase the effectiveness with which it
achieves its goals.
Copyright 2007 Prentice Hall
Cont….
 Organizations using functional structures group
jobs based on similarity in functions. Such
structures may have departments such as
marketing, manufacturing, finance, accounting,
human resources, and information technology. In
these structures, each person serves a specialized
role and handles large volumes of transactions.
 For example, in a functional structure, an employee
in the marketing department may serve as an event
planner, planning promotional events for all the
products of the company

Figure : Functional Structure

Figure : Functional Structure
(cont.)

Functional Structure:
Advantages
1. People with common skills share information
for problem solving or accomplishing a task.
Learning from peers increases skills and
abilities.
2. People can supervise each other and meet
work schedules. Peer supervision is key if work
is complex because supervision from above is
difficult.
3. Working closely, peers develop norms and
values that increase their effectiveness and
loyalty.
Control Problems in a
Functional Structure
 A functional structure controls people and resources and
develops core competences. As a company grows and becomes
more complex, each function tries to maintain the company’s
position. Increased demand may strain manufacturing to produce
products fast enough or in sufficient quantity. Control
problems arise.
 Communication Problems: as more
organizational functions develop, each with
their own hierarchy, they become increasingly
distant from one another.
 Measurement Problems: information needed to
measure the profitability of any functional
group is difficult to obtain.

Control Problems in a
Functional Structure (cont.)
 Location Problems: centralized control

hinders ability to satisfy the special needs in
different geographic regions.
 Customer Problems: servicing the needs of
new kinds of customers and tailoring
products to suit them is relatively difficult.
 Strategic Problems: top managers spend too
much time finding ways to improve
coordination rather than focusing on long
term plans.

Solving the Control Problem
 Managers can solve control problems
by redesigning the functional structure
to increase integration between
functions.
 Marketing and sales have functional
hierarchies. Some companies
consolidate departments to resolve
coordination problems

Improving Integration in a Functional Structure
by Combining Sales and Marketing

From Functional Structure to
Divisional Structure
 Functional structure is appropriate if
the organization:
 Limits itself to producing a small number
of similar products.
 Produces those products in one or a few
locations.
 Sells them to only one general type of
client or customer.

From Functional Structure to
Divisional Structure (cont.)
 As organizations grow, they begin to produce
more products that may be different from one
another
 Organizations also increase production at a
number of locations to serve many different
types of customers, a company requires a
complex structure.
 More complex structure is based on:
 Increasing vertical differentiation
 Increasing horizontal differentiation
 Increasing integration

Cont….
 This move entails three design choices:
 Increasing vertical differentiation, increasing
the levels in the hierarchy, centralizing decision
making, and increasing control with rules.
 Increasing horizontal differentiation, product
teams, or divisions to overlay a functional grouping.
 Increasing integration, using integrating
mechanisms, such as task forces and teams, to
improve coordination between subunits and
motivation.

Divisional Structure
 In a divisional structure traditional design, there are semi-
autonomous or separate units with their own goals in an
organization. It is seen in large organizations where functions
are grouped based on projects, products or geographical
areas.
 In organizations using divisional structures, departments
represent the unique products, services, customers, or
geographic locations the company is serving. Thus each unique
product or service the company is producing will have its own
department. Within each department, functions such as
marketing, manufacturing, and other roles are replicated. In
these structures, employees act like generalists as opposed to
specialists. Instead of performing specialized tasks, employees
will be in charge of performing many different tasks in the
service of the product. For example, a marketing employee in a
company with a divisional structure may be in charge of
planning promotions, coordinating relations with advertising
agencies, and planning and conducting marketing research, all
for the particular product line handled by his or her division.
Figure : Differentiation and
Integration

Figure : Differentiation and
Integration (cont.)

Moving to a Divisional
Structure
 Organizations most commonly adopt
the divisional structure to solve control
problems that arise with too many
products, regions, or customers
 Divisional structure is dependent on
control problem to be solved
 Create smaller, more manageable subunits
 Product structure
 Geographic structure
 Market structure
Cont.…
 A divisional structure groups people from
different functions to provide customers with
goods or services. This structure makes
subunits easier to manage as a company
grows. The type of divisional structure
depends on the source of control problems.
 If many, complex products cause problems, a
product structure fits best.
 If multiple locations cause problems, a
geographic structure fits best.
 If different customer types cause problems, a
market structure fits best.

Product Structure
 Product structure: a divisional
structure in which products (goods or
services) are grouped into separate
divisions according to their similarities
or differences
 Organizations need to decide how to
coordinate its product activities with
support functions.

Product Structure (cont.)
 Product division structure: a
structure in which a centralized set of
support functions service the needs of
a number of different product lines
 Support function is divided into
product-oriented teams of functional
specialists who focus on the needs of
one particular product division

Figure : Product Division
Structure

Figure ; Assignment of Product-Oriented Functional
Teams to Individual Divisions

Product Structure (cont.)
 Multidivisional structure: A structure
in which support functions are placed in
self-contained divisions
 Each division has its own set of support
functions and controls its own value
 Corporate headquarters staff:
responsible for overseeing the activities
of the managers heading each division
 Allows a company to operate in many
different businesses
Figure : Multidivisional
Structure

Figure : Multidivisional Structure in
Which Each Division Has a Different
Structure

Advantages of a
Multidivisional Structure
1.Increased organizational effectiveness:
clear division of labor between corporate
and divisional managers generally
increases organizational effectiveness
2.Increased control: extra control
provided by the corporate office can
encourage the stronger pursuit of internal
organizational efficiency by divisional
managers

Advantages of a Multidivisional
Structure (cont.)
3. Profitable growth: when each division
is its own profit center, individual
profitability can be clearly evaluated
4. Internal labor market: the most able
divisional managers are promoted to
become corporate managers

Disadvantages of a
Multidivisional Structure
1. Managing the corporate-divisional
relationship: finding the balance between
centralization and decentralization
2. Coordination problems between
divisions: divisions start competing for
resources and coordination problems
arise between divisions

Disadvantages of a Multidivisional
Structure (cont.)
3.Transfer pricing: problems between
divisions often revolve around the
transfer price, i.e., the price at which
one division sells a product or information
about innovations to another division
4.Bureaucratic costs: multidivisional
structures are very expensive to operate
5. Communication problems: tall
hierarchies tend to have communication
problems, particularly the distortion of
information

Divisional Structure II:
Geographic Structure
 When the control problems that
companies experience are a function
of geography, a geographic divisional
structure is appropriate
 Allows the organization to adjust its
structure to align its core competences
with the needs of customers in
different geographic regions
 Allows some functions to be
centralized and others decentralized
Figure : Geographic Structure

Divisional Structure III :
Market Structure
 A market structure aligns functional
skills and activities with the needs of
different customer groups
 Each customer group has a different
marketing focus, and the job of each
group is to develop products to suit
the needs of its specific customers
 Each customer group makes use of
centralized support function
Figure : Market Structure

Team structure
As the name suggests, the team structure organizational
design is made of various teams where each one of them
moves forward towards a common goal and objective.
There is no chain of command, and all the teams are
held accountable for their work and performance.

Matrix Structure
 Matrix structure: an organizational design
that groups people and resources in two ways
simultaneously, by function and product
 The matrix structure includes both functional
and product responsibility. It is used for a high
level of group coordination to respond to
changing conditions.
 A matrix is a rectangular grid that shows a
vertical flow of functional responsibility and a
horizontal flow of product responsibility
 The members of the team are called two-
boss employees because they report to two
superiors: the product team manager and the
functional manager
 The team is the building block and principal
coordination and integration mechanism
Figure : Matrix Structure

Advantages of a Matrix
Structure
1. Functional barriers and subunit
orientation are reduced.
2. Cross-functional communication
allows members to learn and
develop skills.
3. Employee skills are utilized.
4. Employees are concerned about
both cost and quality.

Disadvantages of a Matrix
Structure
1. Lack of bureaucratic structure
leads to role ambiguity and role
conflict.
2. Teams may fight over resources.
3. Members often refuse transfers to
stay with peers.
4. Informal hierarchies emerge in
response to uncertainty.

Network Structure
 Network structure: a cluster of different
organizations whose actions are coordinated
by contracts and agreements rather than
through a formal hierarchy of authority. .
 Companies are using outsourcing,
transferring activities to outside organizations
such as suppliers, manufacturers, and
distributors. Network structures are becoming
complex.
 Nike keeps R&D in-house but outsources
other functions to companies around the
world. 4-139
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Advantages of Network
Structures
 To the degree that a network partner
can perform a specific functional activity
reliably, and at a lower cost, production
costs are reduced
 Avoids the high bureaucratic costs of
operating a complex organizational
structure
 Network partners can be replaced if
they do not perform up to standards
Access to low-cost foreign sources
of inputs and expertise
Disadvantages of Network
Structures
Coordination problems emerge,
followed by lack of cost reduction
and improved quality
Difficulty in replacing partners and
keeping proprietary information
from competitors

The Boundaryless Organization
 In the boundaryless organization, the design is not
limited by external, vertical or horizontal designs. The
organization uses a team approach instead of
departmental units and thus do not have to deal with
hierarchy, departmentalization, and chain of
commands.
 It is an unstructured design with more flexibility.
 composed of people who are linked by computers,
faxes, CAD systems and video conferencing
 The use of outsourcing and the development of
network organization are increasing rapidly as
organizations recognize the many opportunities they
offer to reduce costs and increase flexibility
 E-commerce is trade that takes place between
individuals and companies using information
technology.Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall 4-142
Organization Structure: Its
Determinants and Outcomes
E X H I B I T 15–11
E X H I B I T 15–11
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Organizational Theory,

Design, and Change

ORGANIZATIONAL DESIGN AND

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 If an organization is to remain effective as it

 Organizational design is determined by the strategic

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3. Design the new organization – This step

4. Implement the design – Organize workgroups

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 If the organization design is planned and implemented

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The Key Question The Answer Is Provided By

1. To what degree are tasks Work specialization

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Innovation Organic: A loose structure; low

Cost minimization Mechanistic: Tight control; extensive

Imitation Mechanistic and organic: Mix of

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1. Determining the level of

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production) – large span of control

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 Standardization is facilitated through formalization, written rules and

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