MCom I Semester Foundation organization structure Study Material Notes
Table of Contents
MCom I Semester Foundation organization structure Study Material Notes: What are organizational Structure work specialization chain of command DepartmentalizationFormalization centralization and decentralization span of control common organizational designs The simple structure The bureaucracy The matrix Structure new Design Options The virtual organization Why do Structures differ Organization Size :
BBA I Semester Managerial Economics Nature Functions Profit Study Material Notes
Foundation Organizational Structure
Gordon Gee is using a change in organization structure as a means to attempt to change the behavior of coaches, athletes, and other constituencies at Vanderbilt. And that’s the theme of this chapter: Organization structures can shape attitudes and behavior. In the following pages, we define the key components that make up an organization’s structure, present half a dozen or so structural design options from which managers can choose, identify the contingency factors that make certain structural designs preferable in varying situations, and conclude by considering the different effects that various organizational designs have on employee behavior.
Foundation organization structure
What Is Organizational Structure?
An organizational structure defines how job tasks are formally divided, grouped, and coordinated. There are six key elements that managers need to address when they design their organization’s structure. These are: work specialization, departmentalization, chain of command, span of control, centralization and decentralization, and formalization.” Exhibit 15-1 presents each of these elements as answers to an important structural question. The following sections describe these six elements of structure.
Foundation organization structure
Work Specialization
Early in the twentieth century, Henry Ford became rich and famous by building automobiles on an assembly line. Every Ford worker was assigned a specific, repetitive task. For instance, one person would just put on the right-front wheel and someone else would install the right-front door. By breaking jobs up into small standardized tasks, which could be performed over and over again, Ford was able to produce cars at the rate of one every 10 seconds, using employees who had relatively limited skills.
Ford demonstrated that work can be performed more efficiently if emplovees are allowed to specialize. Today we use the term work specialization, or division of labor, to describe the degree to which activities in the organization are subdivided into separate jobs.
The essence of work specialization is that, rather than an entire job being done by one individual, it is broken down into a number of steps, with each step being completed by a separate individual. In essence, individuals specialize in doing part of an activity rather than the entire activity.
By the late 1940s, most manufacturing jobs in industrialized countries were being done with high work specialization. Management saw this as a means to make the most efficient use of its employees skills. In most organizations, some tasks require highly developed skills and others can be performed by untrained workers. If all workers were engaged in each step of, say, an organization’s manufacturing process, all would have to have the skills necessary to perform both the most demanding and the least demanding jobs. The result would be that, except when performing the most skilled or highly complex tasks, employees would be working below their skill levels. And because skilled workers are paid more than unskilled workers and their wages tend to reflect their highest level of skill, it represents an inefficient use of organizational resources to pay highly skilled workers to do easy tasks.
Foundation organization structure
Managers also saw other efficiencies that could be achieved through work specialization. Employee skills at performing a task successfully increase through repetition. Less time is spent in changing tasks, in putting away one’s tools and equipment from a prior step in the work process, and in getting ready for another. Equally important, training for specialization is more efficient from the organization’s perspective. It’s easier and less costly to find and train workers to do specific and repetitive tasks. This is especially true of highly sophisticated and complex operations. For example, could Tata Motors produce even one hundred cars a year if one person had to build the entire car alone? Not likely! Finally, work specialization increases efficiency and productivity by encouraging the creation of special inventions and machinery.
For much of the first half of the twentieth century, managers viewed work specialization as an unending source of increased productivity. And they were probably right. Because specialization was not widely practiced, its introduction almost always generated higher productivity. But by the 1960s. there came increasing evidence that a good thing can be carried too far. The point had been reached in some jobs at which the human diseconomies from specialization-which surfaced as boredom, fatigue, stress, low productivity, poor quality, increased absenteeism, and high turnovermore than offset the economic advantages (see Exhibit 15-2). In such cases, productivity could be increased by enlarging, rather than narrowing, the scope of job activities. In addition, a number of companies found that by giving employees a variety of activities to do, allowing them to do a whole and complete job, and putting them into teams with interchangeable skills, they often achieved significantly higher output, with increased employee satisfaction.
Most managers today see work specialization as neither obsolete nor an unending source of increased productivity. Rather, managers recognize the economies it provides in certain types of jobs and the problems it creates when it’s carried too far. You’ll find, for example, high work specialization being used by McDonald’s to efficiently make and sell hamburgers and fries, and by medical specialists in most health maintenance organizations. On the other hand, the Tata group of companies have had success by broadening the scope of jobs and reducing specialization
Foundation organization structure
Departmentalization
Once you’ve divided jobs up through work specialization, you need to group these jobs together so that common tasks can be coordinated. The basis by which jobs are grouped together is called departmentalization.
One of the most popular ways to group activities is by functions performed. A manufacturing manager might organize his or her plant by separating engineering, accounting, manufacturing human resources, and supply specialists into common departments. Of course, departmentalization by function can be used in all types of organizations. Only the functions change to reflect the organization’s objectives and activities. A hospital might have departments devoted to research, patient care, accounting, and so forth. A professional football franchise might have departments entitled Player Personnel. Ticket Sales, and Travel and Accommodations. The major advantage to this type of grouping is obtaining efficiencies from putting like specialists together. Functional departmentalization seeks to achieve economies of scale by placing people with common skills and orientations into common units.
Jobs can also be departmentalized by the type of product the organization produces. Johnson & Johnson, for instance, is organized along these lines. Each major product-such as Acuvue, Neutrogena, Tylenol, and Band-Aidhis placed under the authority of an executive who has complete global responsibility for that product. The major advantage to this type of grouping is increased account ability for product performance, since all activities related to a specific product are under the direction of a single manager. If an organization’s activities are service- rather than product-related, each service would be autonomously grouped. For instance, Automatic Data Processing has departments for each of its employer-provided services-payroll, retirement, expense management, tax, and the like. Each offers a common array of services under the direction of a product or service manager.
Another way to departmentalize is on the basis of geography or territory. The sales function, for instance, may have Western, Southern, Midwestern, and Eastern regions. Each of these regions is, in effect, a department organized around geography. If an organization’s customers are scattered over a large geographic area and have similar needs based on their location, then this form of departmentalization can be valuable.
Ar lain Tubes aluminum tubing plant production is organized into five departments: casting press; tubing; finishing; and inspecting, packing, and shipping. This is an example of process departmentalization because each department specializes in one specific phase in the production of aluminum tubing. The metal is cast in huge furnaces; sent to the press department, where it is extruded into aluminum pipe; transferred to the tube mill, where it is stretched into various sizes and shapes of tubing: moved to finishing, where it is cut and cleaned; and finally, arrives in the inspecting, packing, and shipping department. Since each process requires different skills this method offers a basis for the homogeneous categorizing of activities
Foundation organization structure
Process departmentalization can be used for processing customers as well as products. If you’ve ever been to a state motor vehicles office to get a driver’s license. you probably went through several departments before receiving your license. In one state, applicants must go through three steps, each handled by a separate department (1) validation by motor vehicles division: (2) processing by the licens Now betin to see your car fadeing department; and (3) payment collection by the treasury department in a little as 8 weeks.
A final category of departmentalization is to use the particular type of customer the organization seeks to reach. Microsoft, for instance, is organized around four customer markets: consumers, large corporations, software developers, and small businesses. The assumption underlying customer departmentalization is that cus tomers in each department have a common set of problems and needs that can best be met by having specialists for each.
Large organizations may use all of the forms of departmentalization that we’ve described. A major Japanese electronics firm, for instance, organizes each of its divisions along functional lines and its manufacturing units around processes: it departmentalizes sales around seven geographic regions, and divides each sales region into four customer groupings. Across organizations of all sizes, one strong trend has developed over the past decade. Rigid, functional departmentalization is being increasingly complemented by teams that cross traditional departmental lines. As we described in Chapter 9, as tasks have become more complex and more diverse skills are needed to accomplish those tasks. management has turned to cross-functional teams.
Employees anywhere in an organization to communicate with anyone else without going through formal channels. Moreover, the concepts of authority and maintaining the chain of command are increasingly less relevant as operating employees are being empowered to make decisions that previously were reserved for management. Add to this the popularity of self-managed and cross-functional teams and the creation of new structural designs that include multiple bosses, and the unity-of-command concept takes on less relevance. There are, of course, still many organizations that find they can be most productive by enforcing the chain of command. There just seem to be fewer of them nowadays.
Foundation organization structure
Span of Control
How many employees can a manager efficiently and effectively direct? This question of span of control is important because, to a large degree, it determines the number of levels and managers an organization has. All things being equal, the wider or larger the span, the more efficient the organization. An example can illustrate the validity of this statement
Assume that we have two organizations, both of which have approximately 4.100 operative level employees. As Exhibit 15-3 illustrates, if one has a uniform span of four and the other a span of eight, the wider span would have two fewer levels and approximately 800 fewer managers. If the average manager made Rs 5 lacs a year, the wider span would save Rs 2 crore a year in man. agreement salaries! Obviously, wider spans are more efficient in terms of cost. However, at some point wider spans reduce effectiveness. That is, when the span becomes too large, employee performance suffers because supervisors no longer have the time to provide the necessary leadership and support
Foundation organization structure
Narrow or small spans have their advocates. By keeping the span of control to five or six employ ees, a manager can maintain close control. But narrow spans have three major drawbacks. First, as already described, they’re expensive because they add levels of management. Second, they make vetical communication in the organization more complex. The added levels of hierarchy slow down decision making and tend to isolate upper management. Third, narrow spans of control encourage overly tight supervision and discourage employee autonomy.
The trend in recent years has been toward wider spans of control. This is consistent with recen efforts by companies to reduce costs, cut overhead, speed up decision making, increased get closer to customers, and empower employees. However, to ensure that performance does ter because of these wider spans, organizations have been investing heavily in employee trans Managers recognize that they can handle a wider span when employees know their jobs inside and out or can turn to their coworkers when they have questions.
Foundation organization structure
Centralization and Decentralization
In some organizations, top managers make all the decisions. Lower level managers merely carry out top management’s directives. At the other extreme, there are organizations in which decision making is pushed down to the managers who are closest to the action. The former organizations are highly centralized; the latter are decentralized.
The term centralization refers to the degree to which decision making is concentrated at a single point in the organization. The concept includes only formal authority–that is, the rights inherent in one’s position. Typically, it’s said that if top management makes the organization’s key decisions with little or no input from lower level personnel, then the organization is centralized. In contrast, the more that lower-level personnel provide input or are actually given the discretion to make decisions, the more decentralization there is
An organization characterized by centralization is an inherently different structural animal from one that is decentralized. In a decentralized organization, action can be taken more quickly to solve problems, more people provide input into decisions, and employees are less likely to feel alienated from those who make the decisions that affect their work lives.
Consistent with recent management efforts to make organizations more flexible and responsive, there has been a marked trend toward decentralizing decision making. In large companies, lower level managers are closer to the action and typically have more detailed knowledge about prob. Items than do top managers. For instance, big retailers like Shopper’s Stop and Life Style have given their store managers considerably more discretion in choosing what to stock. This allows those stores to compete more effectively against local merchants.
Foundation organization structure
Formalization
Formalization refers to the degree to which jobs within the organization are standardized. If a job is highly formalized, then the job incumbent has a minimum amount of discretion over what is to be done, when it is to be done, and how he or she should do it. Employees can be expected always to handle the same input in exactly the same way, resulting in a consistent and uniform output. There are explicit job descriptions, lots of organizational rules, and clearly defined procedures covering work processes in organizations in which there is high formalization. Where formalization is low, job behaviors are relatively nonprogrammed and emplovees have a great deal of freedom to exercise discretion in their work. Because an individual’s discretion on the job is inversely related to the amount of behavior in that job that is preprogrammed by the organization, the greater the stan. dardization and the less input the employee has into how his or her work is to be done. Standard ization not only eliminates the possibility of employees engaging in alternative behaviors, but it even removes the need for employees to consider alternatives.
The degree of formalization can vary widely between organizations and within organizations. Certain jobs, for instance, are well known to have little formalization College book travelers–the representatives of publishers who call on professors to inform them of their company’s new publicationshave a great deal of freedom in their jobs. They have no standard sales spiel, and the extent of rules and procedures governing their behavior may be little more than the requirement that they submit a weekly sales report and some suggestions on what to emphasize for the various new titles. At the other extreme, there are clerical and editorial positions in the same publishing houses for which employees are required to be at their desks by 8:00 AM or be docked a half-hour’s pay and, once at that desk, to follow a set of precise procedures dictated by management.
Foundation organization structure
Common Organizational Designs
We now turn to describing three of the more common organizational designs found in use: the simple structure, the bureaucracy, and the matrix structure
Foundation organization structure
The Simple Structure
What do a small retail store, an electronics firm run by a hard driving entrepreneur, and an airline in the midst of a companywide pilot’s strike have in common? They probably all use the simple struture.
Structure is said to be characterized most by what it is not rather than by what pe structure is not elaborate. It has a low degree of departmentalization, wide spam trol, authority centralized in a single person, and little formalization. The simple struct organization; it usually has only two or three vertical levels, a loose body of employees vidual in whom the decision-making authority is centralized.
The simple structure is most widely practiced in small businesses in which the manager and the owner are one and the same. This, for example, is illustrated in Exhibit 15-b, an organization or retail mens store. Gopal Sharma owns and manages this store. Although he employs live me respeople, a cashier, and extra personnel for weekends and holidays, he runs them large companies, in times of crisis, can become simple structures for short periods. 15M, TOT instance, became a simple structure for more than a year back in the early 1990s. When Louis Gel sther was hired as CEO in 1993, he immediately put the company into what he called “survival mode. “We had to cut $9 billion a year in expenses. We had to bring the company back, literally from the brink of death.” So Gerstner implemented a highly centralized, personalized leadership and organizational style. Said Gerstner: “It was a benevolent dictatorship, with me as the dictator.
The strength of the simple structure lies in its simplicity. It’s fast, flexible, and inexpensive to maintain, and accountability is clear. One major weakness is that it’s difficult to maintain in anything other than small organizations. It becomes increasingly inadequate as an organization grows because its low formalization and high centralization tend to create information overload at the top. As size increases, decision making typically becomes slower and can eventually come to a standstillas the single executive tries to continue making all the decisions. This often proves to be the undoing of many small businesses. When an organization begins to employ 50 or 100 people, it’s very difficult for the owner manager to make all the choices. If the structure isn’t changed and made more elaborate, the firm often loses momentum and can eventually fail. The simple structure’s other weakness is that it’s risky-everything depends on one person. One heart attack can literally destroy the organization’s information and decision-making center.
Foundation organization structure
The Bureaucracy
Standardization! That’s the key concept that underlies all bureaucracies. Take a look at the bank where you keep your checking account, the department store where you buy your clothes, or the government offices that collect your taxes, enforce health regulations, or provide local fire protection. They all rely on standardized work processes for coordination and control
The bureaucracy is characterized by highly routine operating tasks achieved through specialization, very formalized rules and regulations, tasks that are grouped into functional departments, centralized authority, narrow spans of control, and decision making that follows the chain of command.
Indian Railways, the world’s largest bureaucratic organization has more than 15 lac employees, spread over 16 zones all over the country, running, maintaining, and controlling 108,486 km of track, handling 5,112 million passengers in a year and over 600 million tons of freight traffic.
The primary strength of the bureaucracy lies in its ability to perform standardized activities in a highly efficient manner. Putting like specialties together in functional departments results in economies of scale, minimum duplication of personnel and equipment, and employees who have the opportunity to talk the same language” among their peers. Furthermore, bureaucracies can get by nicely with less talented-and, hence, less costly-middle- and lower-level managers. The pervasiveness of rules and regulations substitutes for managerial discretion. Standardized operations, coupled with high formalization, allow decision making to be centralized. There is little need, there! fore, for innovative and experienced decision makers below the level of senior executives.
Foundation organization structure
One of the major weaknesses of a bureaucracy is illustrated in the following dialogue between four executives in one company: “Ya know, nothing happens in this place until we produce some thing.” said the production executive. “Wrong.” commented the research and development man ager, “nothing happens until we design something!” “What are you talking about?” asked the marketing executive. “Nothing happens here until we sell something!” Finally, the exasperated accounting manager responded, “It doesn’t matter what you produce, design, or sell. No one knows what happens until we tally up the results!” This conversation points up the fact that specialization creates sub unit conflicts. Functional unit goals can override the overall goals of the organization.
Foundation organization structure
The other major weakness of a bureaucracy is something we’ve all experienced at one time or another when having to deal with people who work in these organizations: obsessive concern with following the rules. When cases arise that don’t precisely fit the rules, there is no room for modification. The bureaucracy is efficient only as long as employees confront problems that they have previously encountered and for which programmed decision rules have already been established.
The Matrix Structure
Another popular organizational design option is the matrix structure. You’ll find it being used in adyertising agencies, aerospace firms, research and development laboratories, construction companies hospitals, government agencies, universities, management consulting firms, and entertainment companies. Essentially, the matrix combines two forms of departmentalization: functional and product
The strength of functional departmentalization lies in putting like specialists together which minimizes the number necessary while allowing the pooling and sharing of specialized resource across products. Its major disadvantage is the difficulty of coordinating the tasks of diverse functional specialists so that their activities are completed on time and within budget. Product departmentalization, on the other hand, has exactly the opposite benefits and disadvantages. It facilitates coord nation among specialties to achieve on-time completion and meet budget targets. Furthermore, it provides clear responsibility for all activities related to a product, but with duplication of activities and costs. The matrix attempts to gain the strengths of each, while avoiding their weaknesses.
The most obvious structural characteristic of the matrix is that it breaks the unity of command concept. Employees in the matrix have two bosses–their functional department managers and their product managers. Therefore, the matrix has a dual chain of command.
Exhibit 15-6 shows the matrix form as used in a college of business administration. The academic departments of accounting, finance, marketing, and so forth are functional units. In addition, specific programs (that is, products) are overlaid on the functions. In this way, members in a matrix structure have a dual assignment-to their functional department and to their product groups. For instance, a professor of accounting who is teaching an undergraduate course reports to the director dergraduate programs as well as to the head of the accounting department
The matrix was initially developed in the aerospace industry where the organization had to be responsive to products, markets, as well as technology. Citibank has used a matrix structure in its international activity to concentrate on geographic areas while Boeing has used the matrix to focus on resources.
The strength of the matrix lies in its ability to facilitate coordination when the organization has a multiplicity of complex and interdependent activities. As an organization gets larger, its information processing capacity can become overloaded. In a bureaucracy, complexity results in increased for malization. The direct and frequent contact between different specialties in the matrix can make for better communication and more flexibility. Information permeates the organization and more! quickly reaches the people who need to take account of it. Furthermore, the matrix reduces “bureaupathologies–the dual lines of authority reduce the tendencies of departmental members to become so busy protecting their little worlds that the organization’s overall goals become secondary
There is another advantage to the matrix. It facilitates the efficient allocation of specialist When individuals with highly specialized skills are lodged in one functional department or produce group, their talents are monopolized and underused. The matrix achieves the advantage economies of scale by providing the organization with both the best resources and an effective of ensuring their efficient deployment.
The major disadvantages of the matrix lie in the confusion it creates, its propensity to foster power struggles, and the stress it places on individuals. When you dispense with the unity-of-command concept, ambiguity is significantly increased, and ambiguity often leads to conflict. For example, it’s free quently unclear who reports to whom, and it is not unusual for product managers to fight over getting the best specialists assigned to their products. Confusion and ambiguity also create the seeds of power struggles. Bureaucracy reduces the potential for power grabs by defining the rules of the game. When those rules are up for grabs,” power struggles between functional and product managers result. For individuals who desire security and absence from ambiguity, this work climate can produce stress Reporting to more than one boss introduces role conflict, and unclear expectations introduce role ambiguity. The comfort of bureaucracy’s predictability is absent, replaced by insecurity and stress.
New Design Options
Over the past decade or two, senior managers in a number of organizations have been working to develop new structural options that can better help their firms to compete effectively. In this section. we’ll describe three such structural designs: the team structure, the virtual organization, and the boundary less organization.
More often, particularly among larger organizations, the team structure complements what is typically a bureaucracy. This allows the organization to achieve the efficiency of bureaucracy’s standardization, while gaining the flexibility that teams provide. To improve productivity at the operat ing level, for instance, companies like DaimlerChrysler, Saturn, Motorola, and Xerox have made extensive use of self-managed teams. On the other hand, when companies like Boeing or Hewlett Packard need to design new products or coordinate major projects, they’ll structure activities around cross-functional teams.
The Virtual Organization
Why own when you can rent? That question captures the essence of the virtual organization (also sometimes called the network or modular organization), typically a small, core organization that out sources major business functions. In structural terms, the virtual organization is highly centralized with little or no departmentalization.
The prototype of the virtual structure is today’s movie-making organization. In Hollywood’s golden era, movies were made by huge, vertically integrated corporations. Studios such as MGM, Warner Brothers, and 20th Century Fox owned large movie lots and employed thousands of fulltime specialists-set designers, camera people, film editors, directors, and even actors. Nowadays. most movies are made by a collection of individuals and small companies who come together and make films project by project. This structural form allows each project to be staffed with the talent most suited to its demands, rather than having to choose just from the people employed by the studio. It minimizes bureaucratic overhead because there is no lasting organization to maintain. And it lessens long-term risks and their costs because there is no long term-a team is assembled for a finite period and then disbanded.
Ancle Hsu and David Ji run a virtual organization. Their firm, California-based Apex Digital, is one of the world’s largest producers of DVD players, yet the company neither owns a factory nor employs an engineer. They contract everything out to firms in China. With minimal investment, Apex has grown from nothing to annual sales of over $500 million in just three years. Similarly, Paul Newman’s food products company, Newman’s Own, sells about $190 million in food every year yet employs only 18 people. This is because it outsources almost everything manufacturing, procurement, shipping, and quality control.
When large organizations use the virtual structure, they frequently use it to outsource manufacturing Companies like Nike, Reebok, LL. Bean, and Cisco Systems are just a few of the thousands of companies that have found that they can do hundreds of millions of dollars in business without owning manufacturing facilities. Cisco, for instance, is essentially a research and development company that uses outside suppliers and independent manufacturers to assemble the Internet routers that its engineers design. National Steel Corp. contracts out its mail-room operations: Procter & Gamble outsources its information-technology operation to Hewlett-Packard; and ExxonMobil has turned over maintenance of its oil refineries to another firm.
What’s going on here? A quest for maximum flexibility. These virtual organizations have created networks of relationships that allow them to contract out manufacturing, distribution, marketing, or any other business function for which management feels that others can do it better or more cheap
The virtual organization stands in sharp contrast to the typical bureaucracy that has many yeri cal levels of management and where control is sought through ownership. In such organizations research and development are done in-house, production occurs in company-owned plants, and sales and marketing are performed by the company’s own employees. To support all this, management has to employ extra staff, including accountants, human resource specialists, and lawyers. The virtual organization, however, outsources many of these functions and concentrates on what it does best. For most U.S. firms that means focusing on design or marketing.
Exhibit 15-7 shows a virtual organization in which management outsources all of the primary functions of the business. The core of the organization is a small group of executives whose job is to oversee directly any activities that are done in-house and to coordinate relationships with the other organizations that manufacture, distribute, and perform other crucial functions for the virtual or nization. The dotted lines in Exhibit 15-7 represent the relationships typically maintained under contracts. In essence, managers in virtual structures spend most of their time coordinating and controlling external relations, typically by way of computer network links.
The major advantage to the virtual organization is its flexibility. For instance, it allowed individuals with an innovative idea and little money, such as Ancle Hsu and David Ji, to successfully compete against the likes of Sony, Hitachi, and Sharp Electronics. The primary drawback to this structure is that it reduces management’s control over key parts of its business.
The Boundaryless Organization
General Electric’s former chairman, Jack Welch, coined the term boundaryless organization to describe his idea of what he wanted GE to become. Welch wanted to turn his company into a “family grocery store.” That is, in spite of its monstrous size (2004 revenues were in excess of $135 billion). he wanted to eliminate vertical and horizontal boundaries within GE and break down external barriers between the company and its customers and suppliers. The boundarvless organization seeks to clim inate the chain of command, have limitless spans of control, and replace departments with empowe ered teams. And because it relies so heavily on information technology, some have turned to calling this structure the form (or technology-based) organization. 17
Although GE has not yet achieved this boundaryless state and probably never will it has made significant progress toward that end. So have other companies, such as Hewlett-Packard. AT&T. Motorola, and Oticon A/S. Let’s take a look at what a boundaryless organization would look like and what some firms are doing to try to make it a reality
By removing vertical boundaries, management flattens the hierarchy, Status and rank are mm mized. Cross-hierarchical teams (which includes top executives, middle managers, supervisors, and operative employees), participative decision-making practices, and the use of 360-degree perfor mance appraisals (in which peers and others above and below the employee evaluate his or her per formance) are examples of what GE is doing to break down vertical boundaries. At Oticon 1/5. a $160 million a year Danish hearing aid manufacturer, all traces of hierarchy have disappeared. Everyone works at uniform mobile workstations. And project teams, not functions or departments, are used to coordinate work.
Functional departments create horizontal boundaries. And these boundaries stille interaction between functions, product lines, and units. The way to reduce these barriers is to replace functional departments with cross-functional teams and to organize activities around processes. For instance, Xerox now develops new products through multidisciplinary teams that work in a single process instead of around narrow functional tasks. Similarly, some AT&T units are now doing annual buda gets based not on functions or departments but on processes such as the maintenance of a world wide telecommunications network. Another way management can cut through horizontal barriers is to use lateral transfers, rotating people into and out of different functional areas. This approach turns specialists into generalists.
When fully operational, the boundaryless organization also breaks down barriers to external constituencies (suppliers, customers, regulators, etc.) and barriers created by geography. Globalization, strategic alliances, customer-organization links, and telecommuting are all examples of practices that reduce external boundaries, Coca-Cola, for instance, sees itself as a global corporation, not as a U.S. or Atlanta company. Firms such as NEC Corp., Boeing, and Apple Computer each have strategic alliances or joint partnerships with dozens of companies. These alliances blur the distinction between one organization and another, as employees work on joint projects. And some companies are allowing customers to perform functions that previously were done by management. For instance, some AT&T units are receiving bonuses based on customer evaluations of the teams that serve them. Finally, we suggest that telecommuting is blurring organizational boundaries. The security analyst with Merrill Lynch who does his job from his ranch in Montana or the software designer who works for a San Francisco company but does her job in Boulder, Colorado, are just two examples of the millions of workers who are now doing their jobs outside the physical boundaries of their employers’ premises.
Why Do Structures Differ?
In the previous sections, we described a variety of organizational designs ranging from the highly structured and standardized bureaucracy to the loose and amorphous boundaryless organization, The other designs we discussed tend to exist somewhere between these two extremes.
Reconceptualizes our previous discussions by presenting two extreme models of organizational design. One extreme we’ll call the mechanistic model. It’s generally synonymous with the bureaucracy in that it has extensive departmentalization, high formalization, a limited information network (mostly downward communication), and little participation by low-level members in decision making. At the other extreme is the organic model. This model looks a lot like the boundaryless organization. It’s flat, uses cross-hierarchical and cross-functional teams, has low formalization, possesses a comprehensive information network (using lateral and upward communication as well as downward), and involves high participation in decision making With these two models in mind, we’re now prepared to address the question: Why are some organizations structured along more mechanistic lines whereas others follow organic characteristics? What are the forces that influence the design that is chosen? In the following pages, we present the major forces that have been identified as causes or determinants of an organization’s structure.21
Strategy
An organization’s structure is a means to help management achieve its objectives. Because objectives are derived from the organization’s overall strategy, it’s only logical that strategy and structure should be closely linked. More specifically, structure should follow strategy. If management makes a Significant change in its organization’s strategy, the structure will need to be modified to accommodate and support this change.
Most current strategy frameworks focus on three strategy dimensions–innovation, cost mintmization, and imitation and the structural design that works best with each.
To what degree does an organization introduce major new products or services? An innovation strategy does not mean a strategy merely for simple or cosmetic changes from previous offerings but rather one for meaningful and unique innovations. Obviously, not all firms pursue innovation. This strategy may appropriately characterize SM Co. and Apple Computer, but it’s not a strategy pursued by conservative retailer Marks & Spencer
An organization that is pursuing a cost-minimization strategy tightly controls costs, refrains from incurring unnecessary innovation or marketing expenses, and cuts prices in selling a basic product This would describe the strategy pursued by Wal-Mart or the makers of generic grocery products
Organizations following an imitation strategy try to capitalize on the best of both of the previous strategies. They seek to minimize risk and maximize opportunity for profit. Their strategy is to move into new products or new markets only after viability has been proven by innovators. They take the successful ideas of innovators and copy them. Manufacturers of mass-marketed fashion goods that are rip-offs of designer styles follow the imitation strategy. This label probably also characterizes well known firms such as IBM and Caterpillar. They essentially follow their smaller and more innovative competitors with superior products, but only after their competitors have demonstrated that the market is there.
Exhibit 15-9 describes the structural option that best matches each strategy. Innovators need the flexibility of the organic structure, whereas cost minimizers seek the efficiency and stability of the mechanistic structure. Imitators combine the two structures. They use a mechanistic structure in order to maintain tight controls and low costs in their current activities, while at the same time they create organic subunits in which to pursue new undertakings.
Organization Size
There is considerable evidence to support that an organization’s size significantly affects its structure. For instance, large organizations those that typically employ 2,000 or more people-tend to have more specialization, more departmentalization, more vertical levels, and more rules and regulations than do small organizations. However, the relationship isn’t linear. Rather, size affects structure at a decreasing rate. The impact of size becomes less important as an organization expands. Why is this? Essentially, once an organization has around 2,000 employees, it’s already fairly mechamistic. An additional 500 employees will not have much impact. On the other hand, adding 500 employees to an organization that has only 300 members is likely to result in a significant shift toward a more mechanistic structure.
Foundation organization structure
Technology
The term technology refers to how an organization transfers its inputs into outputs. Every organization has at least one technology for converting financial, human, and physical resources into products or services. The Ford Motor Co., for instance, predominantly uses an assembly-line process to make its products. On the other hand, colleges may use a number of instruction technologies-the ever-popular formal lecture method, the case-analysis method, the experiential exercise method, the programmed learning method, and so forth. In this section we want to show that organizational structures adapt to their technology,
Numerous studies have been carried out on the technology-structure relationship. The details of those studies are quite complex, so we’ll go straight to the bottom line” and attempt to summarize what we know.
The common theme that differentiates technologies is their degree of routineness. By this we mean that technologies tend toward either routine or nonroutine activities. The former are characterized by automated and standardized operations. Nonroutine activities are customized. They include varied operations such as furniture restoring, custom shoemaking, and genetic research
What relationships have been found between technology and structure? Although the relationship is not overwhelmingly strong, we find that routine tasks are associated with taller and more departmentalized structures. The relationship between technology and formalization, however, is stronger. Studies consistently show routineness to be associated with the presence of rule manuals, job descriptions, and other formalized documentation. Finally, an interesting relationship has been found between technology and centralization. It seems logical that routine technologies would be associated with a centralized structure, while nonroutine technologies, which rely more heavily on the knowledge of specialists, would be characterized by delegated decision authority. This position has met with some support. However, a more generalizable conclusion is that the technology-cenuralization relationship is moderated by the degree of formalization Formal regulations and centralized decision-making are both control mechanisms and management can substitute one for the other Routine technologies should be associated with centralized control if there is a minimum of rules and regulations. However, if formalization is high, routine technology can be accompanied by decentralization. So, we would predict that routine technology would lead to centralization, but only if formalization is low.
Foundation organization structure
Environment
An organization’s environment is composed of institutions or forces outside the organization that potentially affect the organization’s performance. These typically include suppliers, customers, competitors, government regulatory agencies, public pressure groups, and the like.
Why should an organization’s structure be affected by its environment? Because of environmental uncertainty. Some organizations face relatively static environments-few forces in their environment are changing. There are, for example, no new competitors, no new technological breakthroughs by current competitors, or little activity by public pressure groups to influence the organization. Other organizations face very dynamic environments-rapidly changing government regulations affecting their business, new competitors, difficulties in acquiring raw materials, continually changing product preferences by customers, and so on. Static environments create significantly less uncertainty for man agers than do dynamic ones. And because uncertainty is a threat to an organization’s effectiveness, management will try to minimize it. One way to reduce environmental uncertainty is through adjustments in the organization’s structure 26
Recent research has helped clarify what is meant by environmental uncertainty. It’s been found that there are three key dimensions to any organization’s environment capacity, volatility, and complexity.
The capacity of an environment refers to the degree to which it can support growth. Rich and growing environments generate excess resources, which can buffer the organization in times of relative scarcity. Abundant capacity, for example, leaves room for an organization to make mistakes. while scarce capacity does not in 2004, firms operating in the multimedia software business had relatively abundant environments, whereas those in the full service brokerage business faced relative scarcity.
The degree of instability in an environment is captured in the volatility dimension. When there is a high degree of unpredictable change, the environment is dynamic. This makes it difficult for management to predict accurately the probabilities associated with various decision alternatives. At the other extreme is a stable environment in India, foreign disinvestment has given stability to real estate investment Finally, the environment needs to be assessed in terms of complexity–that is, the degree of het
id concentration among environmental elements. Simple environments are homoge neous and concentrated. This might describe the tobacco industry, since there are relatively few play ers. It’s easy for firms in this industry to keep a close eye on the competition. In contrast, environments characterized by heterogeneity and dispersion are called complex. This is essentially the current environment for firms competing in the Internet connection business. Every day there seems to be another “new kid on the block with whom current Internet access providers have to deal.
Exhibit 15-10 summarizes our definition of the environment along its three dimensions. The arrows in this figure are meant to indicate movement toward higher uncertainty. So organizations that operate in environments characterized as scarce, dynamic, and complex face the greatest degree of uncertainty. Why? Because they have little room for error, high unpredictability, and a diverse set of elements in the environment to monitor constantly.
Given this three-dimensional definition of environment, we can offer some general conclusions. There is evidence that relates the degrees of environmental uncertainty to different structural arrangements. Specifically, the more scarce, dynamic, and complex the environment, the more organic a structure should be. The more abundant, stable, and simple the environment, the more the mechanistic structure will be preferred.
Foundation organization structure
Organizational Designs and Employee Behavior
We opened this chapter by implying that an organization’s structure can have significant effects on its members. In this section, we want to assess directly just what those effects might be.
A review of the evidence linking organizational structures to employee performance and satis faction leads to a pretty clear conclusion-you can’t generalize. Not everyone prefers the freedom and flexibility of organic structures. Some people are most productive and satisfied when work tasks are standardized and ambiguity is minimized that is, in mechanistic structures. So any discussion of the effect of organizational design on employee behavior has to address individual differences. To illustrate this point, let’s consider employee preferences for work specialization, span of control, and centralization.29
The evidence generally indicates that work shecialization contributes to higher employee prouvity, but at the price of reduced job satisfaction. However this statement ignores individuale ences and the type of job activities people do.
we noted previously, work specialization is not an unending source of higher productivity Problems start to surface, and productivity begins to suffer when the human diseconomics of dois repetitive and narrow tasks overtake the economies of specialization. As the workforce has been more highly educated and desirous of iobs that are intrinsically rewarding the point at which ductivity begins to decline seems to be reached more quickly than in decades past
though more people today are undoubtedly turned off by overly specializ their parents or grandparents, it would be naive to anore the reality that there is th e the workforce that prefers the routine and renetitiveness of highly specialized jobs. Some individuals want work that makes minimal intellectual demands and provides the security of routine. To people, high work specialization is a source of iob satisfaction. The empirical question, of couc. whether this represents 2 percent of the workforce or 52 percent. Given that there is some sell-selec tion operating m the choice of careers, we might conclude that negative behavioral outcomes from high specialization are most likely to surface in professional jobs occupied by individuals with high needs for personal growth and diversity.
Foundation organization structure
A review of the research indicates that it is probably safe to say there is no evidence to support a relationship between span of control and employee performance. Although it is intuitively attractive to argue that large spans might lead to higher employee performance because they provide more distant supervision and more opportunity for personal initiative, the research fails to support this notion. At this point it’s impossible to state that any particular span of control is best for producing high performance or high satisfaction among employees. Again, the reason is probably individual differences. That is, some people like to be left alone, while others prefer the security of a boss who is quickly available at all times. Consistent with several of the contingency theories of leadership discussed in Chapter 11. we would expect factors such as employees’ experiences and abilities and the degree of structure in their tasks to explain when wide or narrow spans of control are likely to contribute to their performance and job satisfaction. However, there is some evidence indicating that a manager’s job satisfaction increases as the number of employees he or she supervises increases.
We find fairly strong evidence linking centralization and job satisfaction. In general, organizations that are less centralized have a greater amount of participative decision making. And the evidence suggests that participative decision making is positively related to job satisfaction. But, again, individual differences surface. The decentralization-satisfaction relationship is strongest with employees who have low self-esteem. Because individuals with low self-esteem have less confidence in their abilities, they place a higher value on shared decision making, which means that they’re not held solely responsible for decision outcomes.
Our conclusion: To maximize employee performance and satisfaction. Individual differences such as experience, personality, and the work activity, should be taken into account. In addition, national culture influences the preference for structure, so it too needs to be considered. For instance, organizations that operate with people from high power distance cultures, such as those found in Greece, France, and most of Latin America, will find employees much more accepting of mechanistic structures than where employees come from low power distance countries. So you need to consider cultural differences along with individual differences when making predictions on how structure will affect employee performance and satisfaction.
One obvious insight needs to be made before we leave this topic: People don’t select employers randomly. There is substantial evidence that individuals are attracted to selected by, and stay with organizations that suit their personal characteristics. Job candidates who prefer predictability for instance, are likely to seek out and take employment in mechanistic structures, while those who want autonomy are more likely to end up in an organic structure. So the effect of structure on employee behavior is undoubtedly reduced when the selection process facilitates proper matching of individual characteristics with organizational characteristics.
Foundation organization structure
Restructuring Indian Organizations: Challenges and Responses
In recent years, economic, social and political upheavals have gathered momentum in most parts of the globe. The response to the pressures emerging from economic reforms initiated by the government in this decade has led to massive organizational restructuring Companies that are restructuring are the ones that are struggling to survive in the competitive environment. The entry of multinational companies and reduction of tariff barriers has exposed domestic industry to competition. There are new entrants in every conceivable product segment from processed food to steel to personal computers. As a result of this, every company is restructuring to cope with the emerging reallties. There are various reasons for this
1 The pressure of competition as a result of liberalization is squeezing margins and profits. An efticient organizational structure is therefore becoming increasingly essential Product divisions are being consolidated for synergy and those that do not fit into a company’s main line of business mare being divested.
2. The globalization of business has compelled more and more companies to establish export departments. Those who are planning to globalize are dividing the world into geographical sectors and establishing regional management groups, for example, ITC and Ranbaxy.
3. New developments in information technology and the extensive use of computers in organizations have made it necessary for them to adopt new organizational arrangements to realize full benefits of information technology for improving corporate performance.
4. The shift in fiscal policy and the reduction of government expenditure has forced many companies, especially PSUs, to identify new customers and markets. Many companies are now creating marketing departments and those with such departments are acquiring more importance and clout.
5. The convertibility of the rupee is proving to be a particularly strong incentive for companies to focus on exports, Medium sized companies that were content to operate in the domestic market are now looking for opportunities to export.
6. Cost-cutting and increased productivity is demanding downsizing of the workforce at both worker and managerial levels. In the absence of a clearly defined exit policy, companies are using the voluntary retirement scheme to downsize the workforce and make structures flatter
Many Indian organizations are grappling with the problem of haphazard growth in the last decade. Metal Box’s diversification in the 1970s into the field of anti-friction bearings is one of the well known examples of a company that was almost wiped out of existence. Brooke Bonda company traditionally dependent on tea and coffee-wanted to balance its portfolio with non-traditional businesses. The company ventured into the export of corned buffalo meat and leather. It also entered the paper industry, setting up a plant in Madhya Pradesh, and the lucrative two wheeler market, by acquiring Karnataka Scooters. All these ventures were failures and the company had to get rid of all these businesses. There are many examples of other companies that diversified to unrelated business and had similar experiences
Regrouping Business Activities
An emerging issue of crucial importance to Indian organizations is the ability to cope and manage increasing diversity. Many diversified companies are grouping their business in a way that permits them to focus effort and promote coordination of activity. Some companies that have regrouped their activities are:
1 Larsen and Toubro, which reorganized its 14 business groups into five compact divisions, each functioning as an independent profit center.
2. Greaves Cotton’s 14 business divisions have been pruned to five business groups, each one being made a profit center. Most of the six subsidiaries and three associate companies are being merged into the parent company to take advantage of manufacturing synergies.
3. Voltas has reorganized its 13 divisions into three business groups. The plan seeks to club together divisions that have less disparity in terms of the market they cater to. Thus, the plan essentially reorganizes existing divisions into groups on the basis of markets. Each group is headed by a chief executive officer and each division by a general manager.
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Foundation organization structure
Strategic Business Units
Many Indian organizations are beginning to realize the benefits of being small and the advantages of being able to respond faster to competition. The concept of strategic business units (SBU), has become popular and large multi-product companies are splitting themselves into more manageable units. An SBU essentially functions as a self-sufficient unit and takes care of all of its own marketing production, sales, and HRD functions for a broad product or a product group. In a SBU, the head of each unit functions as a chief executive and decision making is pushed down the line, making the unit fast moving and quick to react to market demand.
ITC is a good example of a company that has implemented an organization structure based on SBUs. The company has not only demarcated its total business into specific product groups, but also ensured that the structure enables ita managers to function as if each product group is a distinct corporate enterprise with a clearly delineated strategy and performance targets. The company has also created a national board of directors for its various product groups as distinct from the corporate board constituted according to the provisions of the company law. There is a hotels’ board, a leaf tobacco board, and a cigarette board that function as if they are managing separate companies based on the understanding of the market place related to the product groups. Managers in each product group also have full autonomy. The heads of the product group operations serve on the ITC Board. Thus, differentiated product group operations are integrated meaningfully into overall corporate operations.
Foundation organization structure
Summary and Implications for Managers
The theme of this chapter has been that an organization’s internal structure contributes to explaining and predicting behavior. That is, in addition to individual and group factors, the structural relationships in which people work has a bearing on employee attitudes and behavior.
What’s the basis for the argument that structure has an impact on both attitudes and behavior To the degree that an organization’s structure reduces ambiguity for employees and clarifies con cerns such as “What am I supposed to do?” “How am I supposed to do it?” “To whom do I report and “To whom do I go if I have a problem?” it shapes their attitudes and facilitates and motivates them to higher levels of performance. Of course, structure also constrains employees to the extent that it limits and controls what they do For example, organizations structured around high levels of formalization and specialization strict adherence to the chain of command, limited delegation of authority, and narrow spans of control give employees little autonomy. Controls in such organizations are tight, and behavior will tend to vary within a narrow range. In contrast, organizations that are structured around limited special ization, low formalization, wide spans of control, and the like provide employees greater freedom and, thus, will be characterized by greater behavioral diversity
Foundation organization structure
Exhibit 15-11 visually summarizes what we’ve discussed in this chapter. Strategy, size, technology and environment determine the type of structure an organization will have. For simplicity’s sake, we can classify structural designs around one of two models: mechanistic or organic. The specific effect of structural designs on performance and satisfaction is moderated by employees’ individual preferences and cultural norms.
One last point: Managers need to be reminded that structural variables like work specialization, span of control, formalization, and centralization are objective characteristics that can be measured by organizational researchers. The findings and conclusions we’ve offered in this chapter, in fact, are directly a result of the work of these researchers. But employees don’t objectively measure these structural characteristics. They observe things around them in an unscientific fashion and then form their own implicit models of what the organization’s structure is like. How many people did they have to interview with before they were offered their jobs? How many people work in their departments and buildings? Is there an organization policy manual? If so, is it readily available and do people follow it closely? How is the organization and its top management described in newspapers and periodicals? Answers to questions such as these, when combined with an employee’s experiences and comments made by peers, lead members to form an overall subjective image of what their orga nization’s structure is like. This image, though, may in no way resemble the organization’s actual objective structural characteristics.
The importance of these implicit models of organizational structure should not be overlooked. As we noted in Chapter 5, people respond to their perceptions rather than to objective reality. The research, for instance, on the relationship between many structural variables and subsequent levels of performance or job satisfaction is far from consistent. We explained some of this as being attrib utable to individual differences. However, an additional cause contributing to these inconsistent findings might be diverse perceptions of the objective characteristics. Researchers typically focus on actual levels of the various structural components, but these may be irrelevant if people interpret similar components differently. The bottom line, therefore, is to understand how employees inter pret their organization’s structure. That should prove a more meaningful predictor of their behavior than the objective characteristics themselves.
