3-1

Chapter Three

Fundamentals ofOrganization Structure

3-2

Three key components in the definition of Organization Structure

Organization structure designates formal reporting relationships, including the number of levels in the hierarchy and the span of control of managers and supervisors.

Organization structure identifies the grouping together of individuals into departments and of departments into the total organization.

Organization structure includes the design of systems to ensure effective communication, coordination, and integration of effort across departments.

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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

3-4

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

ex. Dow Chem. ,

P & G

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

3-5

Vertical Information Linkages Vertical linkages are used to

coordinate activities between the top and bottom of an organization and are designed primarily for control of the organization.

Structural devices to achieve vertical linkage:

-- Hierarchical Referral -- Rules and Plans -- Vertical Information Systems

3-6

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

3-7

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

3-8

Teams Used for Horizontal Coordination at Wizard Software Company

VideogamesChief Engineer

Programming Vice Pres

Customer ServiceManager

Videogames Basic Research Supervisor

Research Vice Pres

Applications and Testing Supervisor

ProcurementSupervisor

Videogames Sales Manager

Marketing Vice Pres.

Memory Products International Manager

Advertising Manager

Memory Products Chief Programmer

Memory ProductsResearch Supervisor

Memory Products Sales Manager

President

Videogames Product Team

Memory Products Team

3-9

Organization Design Alternatives

Required Work Activities Reporting Relationships Departmental Groupings

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Organization Design Alternatives Required Work Activities--Departments are created to perform tasks

considered strategically important to the company. e.g. Dept. of HR

--As organizations grow larger and more complex, more and more functions need to be performed.

--Organizations typically define new departments or divisions as a way to accomplish tasks deemed valuable by the organization.

--Today, many companies are finding it important to establish departments. such as IT or e-business to take advantage of new technology and new business opportunities.

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Organization Design Alternatives

Reporting Relationships--Reporting relationships, often called the

chain of command, are represented by vertical lines on an organization chart.

--The definition of departments and the drawing of reporting relationships defines how employees are to be grouped into departments.

3-12

Organization Design Alternatives

Departmental Grouping Options--Options for department grouping,

including functional grouping, divisional grouping, multifocused grouping (Matrix or Hybrid), horizontal grouping, and modular grouping. (Fig. 3.6)

--Departmental grouping affects employees because they share a common supervisor and common resources, are jointly responsible for performance, and tend to identify and collaborate with one another.

3-13

Structural Design Options for Grouping Employees into Departments

P ro du ctD iv is io n 1

P ro du ctD iv is io n 2

P ro du ctD iv is io n 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.

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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

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.

3-15

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.

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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 ub lis h ing

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

O ffi c e

A uto m a tio n

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

V irtua l

R e a lity

I n fo -T e c h

P re s ide n t

DivisionalStructure

3-17

Structural Design Options for Grouping Employees (Continued)

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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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.

3-19

Geographical Structurefor Apple Computer

CEOSteve Jobs

AppleEurope

ApplePacific

France

AppleProducts

Asia

Japan

Australia

AppleAmericas

Canada

Latin America/Caribbean

SalesService andMarketingto Regions

Source: www.apple.com

3-20

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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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.

3-22

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 Pro

du

ct L

ines

3-23

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.

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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

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 processes 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.

3-25

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.

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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

Hori

zon

tal S

truct

ure

Teams

Teams

3-27

Organization Contextual Variables that Influence Structure

Structure(learning vs. efficiency)

EnvironmentChapters 4, 6

CultureChapter 10

SizeChapter 9

Strategy,Goals

Chapter 2

TechnologyChapters 7,8

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.

3-28

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

Horizontal

Structure

DominantStructuralApproach

Horizontal:• Coordination• Learning• Innovation• Flexibility

Vertical:• Control• Efficiency• Stability• Reliability

MatrixStructu

re

DivisionalStructure

Functional withcross-functional

teams, integratorsFunctionalStructure

Modular

Structure

3-29

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 is evident