1 Session Three Fundamentals of Organization Structure

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Session Three

Fundamentals of

Organization Structure

Top Management Responsibilities

Determine the organization’s purpose Determine the organization’s goals in order to

enact and fulfill the purpose Develop strategy to achieve the goals Design the organization to enact the strategy

given the demands of: Changing and uncertain stakeholders Changing and uncertain environment

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Environment/Goals/Strategy/Structure Analysis Process

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ExternalEnvironmentalAssessment

InternalEnvironmentalAssessment

2. Goals 3. Strategy 4. Structure

6. Outcome Assessment – have you been successful?

Learning orEfficiency

Learning orEfficiency

1. Tells you what you should do

5. Outcome

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Selecting Strategy and Design to Achieve Organizational Goals1. Goals Where you want to go

2. Strategy How you are going to get there. A plan for interacting with the competitive environment to achieve organizational goals.

3. Structure How you can do what you need to do to implement strategy and achieve goals

Environment Goals Strategy Structure

Selecting Structure to Implement Organizational Strategy Different structures better allow the

implementation of certain types of strategies We need to understand the theoretical types

of organizational structure to see which ones fit which types better allow the implementation of types of strategies, which in turn best achieve the desired goals

Looking to understand the types and how to create them

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A Sample Organization Chart

C h ie fA cco u nta n t

B u dg etA n a lyst

V ice P re sid e n tF in an ce

P la n tS u pe rin ten de nt

M a in te na n ceS u pe rin ten de nt

V ice P re sid e n tM a nu fa c tu ring

T ra in ingS p e c ia list

B e ne fitsA d m in is tra to r

D ire c to rH u m an R e so u rces

C E O

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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

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Vertical and Horizontal Linkages in Organizations Vertical – emphasis on efficiency and control

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

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Vertical and Horizontal Linkages in Organizations Horizontal – emphasis on learning

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

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Vertical Information Linkages

Used to delineate activities between different levels of an organization

Designed mainly to facilitate control and create efficiency

Formalized systems

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Vertical Information Linkages

Hierarchical referral Chain of command to pass information up and

down the organization Rules and plans

Procedures for responding to routine or repetitive tasks without communicating up the hierarchy

Vertical information systems Reports that pass information up and down the

hierarchy without face-to-face communication

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Horizontal Information Linkages

Primarily designed to overcome barriers between departments and coordinate employees in unity of effort

Bring people together for learning, creativity and teamwork

Used to aid rather than control activities

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Information systems – knowledge sharing Direct contact - creation of a liaison person

located in one department but responsible for communicating and coordinating with another

Task forces – temporary committees composed of representatives from many departments

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Full-time integrator – product/project/ program/brand manager located outside of

the various departments but is responsible for coordinating several departments Need excellent people skills, be able to span

boundaries of departments with different priorities and perspectives

Must be able to build trust and coalitions and resolve problems

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Project Manager Location in 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

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Teams Permanent task forces that are used with full-time

integrators when activities require strong coordination over a long time across several functions

Virtual teams – one made up of organizationally or geographically dispersed members who are linked through technology

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Ladder of Mechanisms for Horizontal Linkage and Coordination

HIGHLOW

LOW Information Systems

Direct Contact

Task Forces

Full-time Integrators

Teams

Am

ount

of

Hor

izon

tal

Coo

rdin

atio

n R

equi

red

Cost of Coordination in Time and Human Resources

H IGH

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Structural Design Options for Grouping Employees into Departments Places employees who perform similar functions,

bring similar knowledge and skills, together

Engineering Marketing Manufacturing

CEO

FunctionalGrouping

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

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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 a few products

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

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Strengths and Weaknesses of Functional Organization Structure 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

goals

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

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Structural Design Options for Grouping Employees into Departments Organizing people together according to what the

firm produces

DivisionalGrouping


ProductDivision 1

ProductDivision 2

ProductDivision 3

CEO

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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

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

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Strengths and Weaknesses of Divisional Organization Structure 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.

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Structural Design Options for Grouping Employees (Continued) The organization embraces two structural groupings

simultaneously – matrix or hybrid

MultifocusedGrouping CEO

ManufacturingMarketing

ProductDivision 2

ProductDivision 1

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

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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

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Matrix Structure

Appropriate when the organization’s structure needs to be multifocused (i.e. product and function) at the same time

Strong form of horizontal linkage Product and functional managers have equal

authority – similar to integrator roles

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Matrix Structure – Conditions

Pressure exists to share scarce resources across product lines Medium sized business that needs to be flexible in its

use of resources Environmental pressure exists for two or more

outputs Balance of power between functions and products

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Matrix Structure – Conditions

Environment is uncertain and complex Frequent changes and high interdependence between

departments needs lots of coordination and information sharing (vertical and horizontal)

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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

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.

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STRENGTHS: Provides opportunity for both functional and

product skill development

Best in medium-sized organizations with multiple products



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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



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WEAKNESSES: Will not work unless participants understand it

and adopt collegial rather than vertical-type relationships

Requires great effort to maintain power balance



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Structural Design Options for Grouping Employees (Continued) Employees are organized around core work

processes. All people who work on a core process are brought together in a group rather than separated into functional departments

HorizontalGrouping

CEO

FinanceHuman Resources

CoreProcess 2

CoreProcess 1


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A Horizontal Structure

Sources: 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.

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 Process

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Horizontal Structure

Organizes employees around core processes

Supporting activities cross processes (i.e. HR)

Generally made after a shift in focus – business process reengineering

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Structure based on core processes rather than tasks Processes Business Development, Technical

Support Tasks Market Research, Call Centres

Self-directed teams rather than individuals Process owners are responsible for all tasks

within the core process

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Team members provided skills, tools, motivation, and authority to manage processes and cross-trained to perform each other’s jobs

Freedom to think creatively and flexibly

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Customer driven rather than task driven Effectiveness measured by end-of-process

performance objectives

Culture of openness, trust and collaboration focused on continuous improvement

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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

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.

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Strengths and Weaknesses of Horizontal Structure

STRENGTHS: 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


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Strengths and Weaknesses of Horizontal Structure WEAKNESSES:

Determining core processes to organize around is difficult and time-consuming

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


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Strengths and Weaknesses of Horizontal Structure WEAKNESSES:

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


Virtual Network Structure

Many organizations OUTSOURCE secondary nor non-core operations to other organizations (geography is not a limiting factor) as a way of improving efficiency – can allocate more resources to competitive advantage generating competencies

Non-core activities: accounting, legal, marketing, manufacturing

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STRENGTHS More flexible and faster responses More efficient allocation of resources could lead to

better effectiveness Better access to better, innovative expertise –

R&D Reduced labour costs More focused organization

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WEAKNESSES Hard to determine core processes Requires change in culture, job design,

management philosophy, IS and rewards Much coordination needed Control is reduced Agency concerns

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FunctionalStructure

Hybrid StructurePart 1. Sun Petrochemical Products

President

TechnologyVice

President

FinancialServices

Vice Pres.

HumanResources

Director

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.

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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 Group

Parts Supply / Logistics Group

FunctionalStructure

Hor

izon

tal S

truc

ture

Teams

Teams

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The Relationship of Structure to Organization’s Need for Efficiency vs. Learning

HorizontalStructure

DominantStructuralApproach

Horizontal:• Coordination• Learning• Innovation• FlexibilityVertical:

• Control• Efficiency• Stability• Reliability

MatrixStructure

DivisionalStructure

Functional withcross-functional

teams, integratorsFunctionalStructure

Modular Structure

Structural Alignment Need to find and then implement the right

balance of vertical and horizontal control Vertical

Efficiency and stability Best in predictable, simple, stable environments,

with efficiency goals and low-cost strategies Horizontal

Effectiveness, learning and flexibility Best in uncertain, complex, dynamic

environments with effectiveness goals and differentiation strategies

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Symptoms of Structural Deficiency Organizational structure needs to be

evaluated periodically to make sure there are no deficiencies: Decision making is delayed or lacking in quality The organization does not respond innovatively to

a changing environment Employee performance declines and goals are

not being met Too much conflict is evident

Documents

1 Session Three Fundamentals of Organization Structure