1

Chapter Three

Fundamentals of

Organization Structure

–Definition

–Designing Vertical and Horizontal Linkages

–Design Options & Grouping Activities

2

Defining Structure Three components:

– Org. structure designates formal reporting relationships

– Grouping together of individuals into teams, departments, and organization

– Design of system to maximize communication, coordination, and integration of efforts across departments

3

A Sample Organization Chart

C h ie fA ccou n tan t

B u d g e tA n a lys t

V ice P res id en tF ian an ce

P lan tS u p erin ten d en t

M a in ten an ceS u p erin ten d en t

V ice P res id en tM an u fac tu rin g

Tra in in gS p ec ia lis t

B en e fitsA d m in is tra to r

D irec to rH u m an R esou rces

C E O

4

The Relationship of Organization Design to Efficiency vs. Learning

Outcomes

Horizontal OrganizationDesigned for Learning

Vertical OrganizationDesigned for Efficiency

DominantStructuralApproach

Horizontal structure is dominant• Shared tasks, empowerment• Relaxed hierarchy, few rules• Horizontal, face-to-face communication• Many teams and task forces• Decentralized decision making

Vertical structure is dominant• Specialized tasks• Strict hierarchy, many rules• Vertical communication and reporting systems• Few teams, task forces or integrators• Centralized decision making

5

Ladder of Mechanisms for Horizontal Linkage and

Coordination

HIGH

LOW

LOW

Information Systems

Direct Contact

Task Forces

Full-time Integrators

Teams

Am

ount

of

Hori

zonta

lC

oord

inati

on R

equir

ed

Cost of Coordination in Time and Human Resources

H IGH

6

Project Manager Locationin the Structure

President

FinanceDepartment

FinancialAccountant

BudgetAnalyst

ManagementAccountant

EngineeringDepartment

ProductDesigner

Draftsperson

ElectricalDesigner

MarketingDepartment

MarketResearcher

AdvertisingSpecialist

MarketPlanner

PurchasingDepartment

Buyer

Buyer

Buyer

Project ManagerNew

Product B

Project ManagerNew

Product A

Project ManagerNew

Product C

7

Teams Used for Horizontal Coordination at Rodney Hunt

Company

Water Control Equip.Chief Engineer

Engineering Vice Pres

Customer Service, Purchasing,

Production Manager

Foundry General Supervisor

Manufacturing Vice Pres

Machine Shop General Supervisor

Shipping and YardSupervisor

Water Control Equip. Sales Manager

Marketing Vice Pres.

Textile MachineryExport Manager

Advertising Manager

Textile MachineryChief Engineer

Stainless Steel General Supervisor

Textile MachineryDomestic Sales Manager

President

Water Control Product Team

Textile Product Team

8

Structural Design Options for Grouping Employees into

Departments

P rod u c tD ivis ion 1

P rod u c tD ivis ion 2

P rod u c tD ivis ion 3

C E O

Engineering Marketing Manufacturing

CEO

FunctionalGrouping

DivisionalGrouping

Source: Adapted from David Nadler and Michael Tushman,Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

9

Strengths and Weaknesses of Functional Organization

Structure STRENGTHS:

– Allows economies of scale within functional departments

– Enables in-depth knowledge and skill development

– Enables organization to accomplish functional goals

– Is best with only one or few products

WEAKNESSES:– Slow response time to

environmental changes– May cause decisions to

pile on top, hierarchy overload

– Leads to poor horizontal coordination among departments

– Results in less innovation– Involves restricted view of

organizational goalsSource: Adapted from Robert Duncan, “What Is the Right Organization Structure? Decision Tree Analysis Provides the Answer,” Organizational Dynamics (Winter 1979): 429.

10

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

Source: Adapted from Robert Duncan, “What Is theRight Organization Structure? Decision Tree AnalysisProvides the Answer,” Organizational Dynamics(Winter 1979): 431.

11

Reorganization from Functional Structure to Divisional Structure

at Info-Tech

R&D Manufacturing Accounting Marketing

Info-TechPresident

FunctionalStructure

R & D M fg A c c tg M k tg

E le c tro n ic

P u b lis h in g

R & D M fg A c c tg M k tg

O ffi c e

A u to m a tio n

R & D M fg A c c tg M k tg

V irtu a l

R e a lity

I n fo -T e c h

P re s id e n t

DivisionalStructure

12

Structural Design Options for Grouping Employees

(Continued)

Multi-focusedGrouping

CEO

ManufacturingMarketing

ProductDivision 2

ProductDivision 1

Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

13

Structural Design Options for Grouping Employees

(Continued)

HorizontalGrouping

CEO

FinanceHuman Resources

CoreProcess 2

CoreProcess 1

Source: Adapted from David Nadler and Michael Tushman,Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

14

Geographical Structurefor Apple Computer

CEOSteve Jobs

AppleEurope

ApplePacific

France

AppleProducts

Far East

Japan

Australia

AppleAmericas

Canada

Latin America/Caribbean

SalesService andMarketingto Regions

Source: www.apple.com

15

Product

Manager A

Product

Manager B

Product

Manager C

Product

Manager D

Directorof ProductOperations

DesignVice

President

MfgVice

President

MarketingVice

PresidentController

Procure-ment

Manager

President

Dual-Authority Structure in a Matrix Organization

16

STRENGTHS:– Achieves coordination

necessary to meet dual demands from customers

– Flexible sharing of human resources across products

– Suited to complex decisions and frequent changes in unstable environment

– Provides opportunity for both functional and product skill development

– Best in medium-sized organizations with multiple products

WEAKNESSES:– Causes participants to experience

dual authority, which can be frustrating and confusing

– Means participants need good interpersonal skills and extensive training

– Is time consuming; involves frequent meetings and conflict resolution sessions

– Will not work unless participants understand it and adopt collegial rather than vertical-type relationships

– Requires great effort to maintain power balance

Strengths and Weaknesses of Matrix Organization

Structure

Source: Adapted from Robert Duncan, “What Is the RightOrganization Structure? Decision Tree Analysis Provides theAnswer,”Organizational Dynamics (Winter 1979): 429.

17

Matrix Structure forWorldwide Steel Company

President

IndustrialRelations

Vice President

Mfg.Services

Vice President

FinanceVice

President

MarketingVice

President

Mfg.Vice

President

MetallurgyVice

President

Field SalesVice

President

Open DieBusiness Mgr.

Ring ProductsBusiness Mgr.

Wheels & AxlesBusiness Mgr.

SteelmakingBusiness Mgr.

Vertical Functions

Hori

zon

tal Fu

nct

ion

s

18

A Horizontal Structure

Team3

Team2

Team1

TopManagement

Team

Team3

Team2

Team1

Customer

Customer

ProcessOwner

ProcessOwner

Testing Product Planning

Research Market

Analysis

New Product Development Process

Distrib. Material

Flow Purchasing Analysis

Procurement and Logistics ProcessSources: Based on Frank Ostroff,The Horizontal Organization, (New York:Oxford University Press, 1999); John A. Byrne,“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.

19

Strengths and Weaknesses of Horizontal

Structure STRENGTHS:

– Flexibility and rapid response to changes in customer needs

– Directs the attention of everyone toward the production and delivery of value to the customer

– Each employee has a broader view of organizational goals

– Promotes a focus on teamwork and collaboration—common commitment to meeting objectives

– Improves quality of life for employees by offering them the opportunity to share responsibility, make decisions, and be accountable for outcomes

WEAKNESSES:– Determining core processed to

organize around is difficult and time-consuming

– Requires changes in culture, job design, management philosophy, and information and reward systems

– Traditional managers may balk when they have to give up power and authority

– Requires significant training of employees to work effectively in a horizontal team environment

– Can limit in-depth skill development

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.

20

FunctionalStructure

Hybrid StructurePart 1. Sun Petrochemical

Products

President

TechnologyVice

President

FinancialServices

Vice Pres.

HumanResourcesDirector

ChiefCounsel

ChemicalsVice

President

LubricantsVice

President

FuelsVice

President

ProductStructure

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.

21

Hybrid StructurePart 2. Ford Customer Service

Division

Director andProcess Owner

Director andProcess Owner

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.

HumanResources

Strategy andCommunicationFinance

Vice President andGeneral Manager

Teams

Teams

Director andProcess Owner Teams

Technical Support Group

Vehicle Service and Programs Group

Parts Supply / Logistics Group

FunctionalStructure

Hori

zon

tal S

truct

ure

Teams

Teams

22

Organization Contextual Variables that Influence

Structure

Structure(learning vs. efficiency)

EnvironmentChapters 4, 5

CultureChapter 9

SizeChapter 8

Strategy,Goals

Chapter 2

TechnologyChapters 6,7

Sources: Adapted from Jay R. Galbraith,Competing with Flexible Lateral Organizations, 2nd ed. (Reading, Mass.: Addison-Wesley, 1994), Ch.1; Jay R. Galbraith, Organization Design (Reading, Mass.: Addison-Wesley, 1977), Ch. 1.

23

The Relationship of Structure to Organization’s Need for Efficiency

vs. Learning

HorizontalStructure

DominantStructuralApproach

Horizontal:• Coordination• Change• Learning• Innovation• Flexibility

Vertical:• Control• Efficiency• Stability• Reliability

MatrixStructure

DivisionalStructure

Functional withcross-functional

teams, integratorsFunctionalStructure

24

Symptoms of Structural Deficiency

Decision making is delayed or lacking in quality

The organization does not respond innovatively to a changing environment

Too much conflict from departments being at cross purposes is evident