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3-1 Chapter Three Fundamentals of Organization Structure

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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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3-3 A Sample Organization Chart

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3-4 The Relationship of Organization Design to Efficiency vs. Learning Outcomes Horizontal Organization Designed for Learning Vertical Organization Designed for Efficiency Dominant Structural Approach 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

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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

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3-6 Ladder of Mechanisms for Horizontal Linkage and Coordination HIGHLOW Information Systems Direct Contact Task Forces Full-time Integrators Teams Amount of Horizontal Coordination Required Cost of Coordination in Time and Human Resources H IGH

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3-7 Project Manager Location in the Structure President Finance Department Financial Accountant Budget Analyst Management Accountant Engineering Department Product Designer Draftsperson Electrical Designer Marketing Department Market Researcher Advertising Specialist Market Planner Purchasing Department Buyer Project Manager New Product B Project Manager New Product A Project Manager New Product C

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3-8 Teams Used for Horizontal Coordination at Wizard Software Company Videogames Chief Engineer Programming Vice Pres Customer Service Manager Videogames Basic Research Supervisor Research Vice Pres Applications and Testing Supervisor Procurement Supervisor Videogames Sales Manager Marketing Vice Pres. Memory Products International Manager Advertising Manager Memory Products Chief Programmer Memory Products Research Supervisor Memory Products Sales Manager President Videogames Product Team Memory Products Team

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3-9 Organization Design Alternatives Required Work Activities Reporting Relationships Departmental Groupings

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3-10 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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3-11 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.

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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.

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3-13 Structural Design Options for Grouping Employees into Departments EngineeringMarketingManufacturing CEO Functional Grouping Divisional Grouping Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

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3-14 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 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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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 the Right Organization Structure? Decision Tree Analysis Provides the Answer, Organizational Dynamics (Winter 1979): 431.

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3-16 Reorganization from Functional Structure to Divisional Structure at Info-Tech R&DManufacturingAccountingMarketing Info-Tech President Functional Structure Divisional Structure

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3-17 Structural Design Options for Grouping Employees (Continued) Multifocused Grouping CEO ManufacturingMarketing Product Division 2 Product Division 1 Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

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3-18 Structural Design Options for Grouping Employees (Continued) Horizontal Grouping CEO FinanceHuman Resources Core Process 2 Core Process 1 Source: Adapted from David Nadler and Michael Tushman, Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

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3-19 Geographical Structure for Apple Computer CEO Steve Jobs Apple Europe Apple Pacific France Apple Products Asia Japan Australia Apple Americas Canada Latin America/ Caribbean Sales Service and Marketing to Regions Source: www.apple.com

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3-20 Product Manager A Product Manager B Product Manager C Product Manager D Director of Product Operations Design Vice President Mfg Vice President Marketing Vice President Controller Procure- ment Manager President Dual-Authority Structure in a Matrix Organization

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3-21 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 Right Organization Structure? Decision Tree Analysis Provides the Answer,Organizational Dynamics (Winter 1979): 429.

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3-22 Matrix Structure for Worldwide Steel Company President Industrial Relations Vice President Mfg. Services Vice President Finance Vice President Marketing Vice President Mfg. Vice President Metallurgy Vice President Field Sales Vice President Open Die Business Mgr. Ring Products Business Mgr. Wheels & Axles Business Mgr. Steelmaking Business Mgr. Vertical Functions Horizontal Product Lines

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3-23 A Horizontal Structure Team 3 Team 2 Team 1 Top Management Team 3 Team 2 Team 1 Customer Process Owner Process Owner Testing Product Planning Research Market Analysis New Product Development Process Distrib. Material Flow Purchasing Analysis Procurement and Logistics Process 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.

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3-24 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 collaborationcommon 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, 6 th ed., (Cincinnati, Ohio: South-Western College Publishing, 1998) 253.

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3-25 Functional Structure Hybrid Structure Part 1. Sun Petrochemical Products President Technology Vice President Financial Services Vice Pres. Human Resources Director Chief Counsel Chemicals Vice President Lubricants Vice President Fuels Vice President Product Structure 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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3-26 Hybrid Structure Part 2. Ford Customer Service Division Director and Process Owner Director and Process 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. Human Resources Strategy and CommunicationFinance Vice President and General Manager Teams Director and Process Owner Teams Technical Support Group Vehicle Service Group Parts Supply / Logistics Group Functional Structure Horizontal Structure Teams

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3-27 Organization Contextual Variables that Influence Structure Structure (learning vs. efficiency) Environment Chapters 4, 6 Culture Chapter 10 Size Chapter 9 Strategy, Goals Chapter 2 Technology Chapters 7,8 Sources: Adapted from Jay R. Galbraith, Competing with Flexible Lateral Organizations, 2 nd ed. (Reading, Mass.: Addison-Wesley, 1994), Ch.1; Jay R. Galbraith, Organization Design (Reading, Mass.: Addison-Wesley, 1977), Ch. 1.

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3-28 The Relationship of Structure to Organizations Need for Efficiency vs. Learning Horizontal Structure Dominant Structural Approach Horizontal: Coordination Learning Innovation Flexibility Vertical: Control Efficiency Stability Reliability Matrix Structure Divisional Structure Functional with cross-functional teams, integrators Functional Structure Modular Structure

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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