Chap08

© 2007 Thomson/South-Western. All rights reserved.© 2007 Thomson/South-Western. All rights reserved.

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Organizational Organizational DesignDesign

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Part 3 Organizing Challenges in the 21st CenturyPart 3 Organizing Challenges in the 21st Century

© 2007 Thomson/South-Western. All rights reserved. 8–2

1.1. Explain why organizational design is important for organizational Explain why organizational design is important for organizational success.success.

2.2. Identify the three major components of organizational design.Identify the three major components of organizational design.

3.3. Discuss the four types of organizational structure and the Discuss the four types of organizational structure and the strategic conditions under which each might be appropriate.strategic conditions under which each might be appropriate.

4.4. Describe the factors that affect an organization’s need for Describe the factors that affect an organization’s need for coordination and explain how integrating mechanisms can be coordination and explain how integrating mechanisms can be used to coordinate organizational activities.used to coordinate organizational activities.

5.5. Explain the concept of locus of decision making and when Explain the concept of locus of decision making and when centralized or decentralized decision making might be centralized or decentralized decision making might be appropriate.appropriate.

LEARNING OBJECTIVESLEARNING OBJECTIVESWhen you have finished studying this chapter, When you have finished studying this chapter, you should be able to:you should be able to:


Organizational DesignOrganizational Design

• Organizational Design DefinedOrganizational Design Defined A plan for arranging and coordinating the activities of A plan for arranging and coordinating the activities of

an organization for the purpose of fulfilling its mission an organization for the purpose of fulfilling its mission and achieving its goals.and achieving its goals.

• Components of Organizational DesignComponents of Organizational Design Overall organizational design is defined by three Overall organizational design is defined by three

primary components:primary components:

Organizational structureOrganizational structure

Integrating mechanismsIntegrating mechanisms

Locus of decision makingLocus of decision making


Figure 8.1Figure 8.1 Dimensions of Organizational DesignDimensions of Organizational Design


Organizational StructureOrganizational Structure

• Defines the primary reporting relationships that Defines the primary reporting relationships that exist within an organization.exist within an organization. The chain of command and hierarchy of The chain of command and hierarchy of

responsibility, authority, and accountability are responsibility, authority, and accountability are established through organizational structure.established through organizational structure.

• Common Forms of Organizational StructureCommon Forms of Organizational Structure

Functional structureFunctional structure

Divisional structureDivisional structure

Matrix structureMatrix structure

Network structureNetwork structure


Functional Structure: Specialization Functional Structure: Specialization and Efficiencyand Efficiency

• Members of the organization are grouped Members of the organization are grouped according to the particular function that they according to the particular function that they perform within the organization.perform within the organization. Appropriate when an organization’s greatest source Appropriate when an organization’s greatest source

of complexity comes from the diverse tasks that must of complexity comes from the diverse tasks that must be performed rather than from its products, be performed rather than from its products, geographic markets, or consumer groups.geographic markets, or consumer groups.


Figure 8.Figure 8.2 2 Functional StructureFunctional Structure


Functional StructureFunctional Structure

• AdvantagesAdvantages Facilitates Facilitates

specializationspecialization Cohesive work groupsCohesive work groups Improved operational Improved operational

efficiencyefficiency

• DisadvantagesDisadvantages Focus on departmental Focus on departmental

versus organizational versus organizational issuesissues

Difficult to develop Difficult to develop generalists needed for generalists needed for top-level managementtop-level management

Only top-level Only top-level management held management held accountable for accountable for profitabilityprofitability


Divisional Structures: Providing FocusDivisional Structures: Providing Focus

• Members of the organization are grouped on the Members of the organization are grouped on the basis of:basis of:

Common productsCommon products

Geographic marketsGeographic markets

Customers servedCustomers served


Types of Divisional StructureTypes of Divisional Structure

• Product DivisionsProduct Divisions For organizations with relatively diverse product lines For organizations with relatively diverse product lines

that require specialized efforts to achieve high that require specialized efforts to achieve high product quality.product quality.

• Geographic DivisionsGeographic Divisions For organizations with limited product lines that either For organizations with limited product lines that either

have wide geographic coverage or desire to grow have wide geographic coverage or desire to grow through geographic expansion.through geographic expansion.

• Customer DivisionsCustomer Divisions For organizations that have separate customer For organizations that have separate customer

groups with very specific and distinct needs.groups with very specific and distinct needs.


Product Divisional StructureProduct Divisional Structure

• AdvantagesAdvantages

Enhanced coordination.Enhanced coordination.

Better assessment of manager performance and Better assessment of manager performance and responsibility.responsibility.

Development of generalist managers.Development of generalist managers.

• DisadvantagesDisadvantages

Managers may lack expertise to operate in wide Managers may lack expertise to operate in wide geographic areas.geographic areas.

Duplication of resources.Duplication of resources.


Figure 8.Figure 8.3 3 Product Divisional Structure: ClariantProduct Divisional Structure: Clariant

Source: From the website http://www.clariant.com. Copyright by Clariant 2005. All rights reserved.

*ServicesProduction Services, Supply Chain Management, Sourcing, ESHA, IT, International Coordination**TechnologyIntellectual Property, Innovation & Knowledge Management, New Business Development


Geographic DivisionalGeographic Divisional


Allows for focus on specific new markets.Allows for focus on specific new markets.

Good structure for growth along geographic lines.Good structure for growth along geographic lines.

Adaptable to local needs.Adaptable to local needs.


Duplication of product or product/technology efforts.Duplication of product or product/technology efforts.

Coordination and integration are difficult.Coordination and integration are difficult.

May be difficult to manage diverse product lines.May be difficult to manage diverse product lines.


Figure 8.Figure 8.4 4 Geographic Divisional Structure: Canadian National Railway Geographic Divisional Structure: Canadian National Railway CompanyCompany

Source: “Illinois Central Spurs Reorganization by Canadian National,” Wall Street Journal, 15 April 1999, A4.


Matrix Structure: A Dual FocusMatrix Structure: A Dual Focus

• A structure in which the tasks of the organization A structure in which the tasks of the organization are grouped along two organizational are grouped along two organizational dimensions simultaneously.dimensions simultaneously.

• Examples include:Examples include:

Product/functionProduct/function

Product/geographic regionProduct/geographic region


Figure 8.Figure 8.5 5 Matrix StructureMatrix Structure


Matrix Structure Matrix Structure (cont’d)(cont’d)


Complex, leading to difficulties in implementationComplex, leading to difficulties in implementation

Behavioral difficulties from “two bosses”Behavioral difficulties from “two bosses”

Time consuming from a planning/coordination Time consuming from a planning/coordination perspectiveperspective


Can achieve simultaneous objectivesCan achieve simultaneous objectives

Managers focus on two organizational dimensions, Managers focus on two organizational dimensions, resulting in more specific job skillsresulting in more specific job skills


Network Structures: FlexibilityNetwork Structures: Flexibility

• An organizational structure An organizational structure that is founded on a set of that is founded on a set of alliances with other alliances with other organizations that serve a organizations that serve a wide variety of functions.wide variety of functions.

• An organization that has a An organization that has a core coordinating with other core coordinating with other organizations or organizations or organizational units.organizational units.


Figure 8.Figure 8.6 6 Network Structure (Building Contractor)Network Structure (Building Contractor)


Types of Network StructureTypes of Network Structure

• Internal NetworkInternal Network A network structure that relies on internally developed A network structure that relies on internally developed

units to provide services to a core organizational unit.units to provide services to a core organizational unit.

• Stable NetworkStable Network A network structure that utilizes external alliances A network structure that utilizes external alliances

selectively as a mechanism for gaining strategic selectively as a mechanism for gaining strategic flexibility.flexibility.

• Dynamic NetworkDynamic Network A network structure that makes extensive use of A network structure that makes extensive use of

outsourcing through alliances with outside outsourcing through alliances with outside organizations.organizations.


Network Structure Network Structure (cont’d)(cont’d)


Maximizes the effectiveness of the core unitMaximizes the effectiveness of the core unit

Do more with less resourcesDo more with less resources

FlexibilityFlexibility


Fragmentation makes it difficult to develop control Fragmentation makes it difficult to develop control systemssystems

Success is dependent on ability to locate sourcesSuccess is dependent on ability to locate sources

Difficult to develop employee loyaltyDifficult to develop employee loyalty


Managing Complexity Through Managing Complexity Through IntegrationIntegration• InterdependenceInterdependence

The degree to which work groups are interrelated.The degree to which work groups are interrelated.

• Primary levels of work group integration:Primary levels of work group integration:

Pooled interdependencePooled interdependence

Sequential interdependenceSequential interdependence

Reciprocal interdependenceReciprocal interdependence


Figure 8.Figure 8.7 7 Levels of Work Group InterdependenceLevels of Work Group Interdependence


BB

CC

DD

AA

FF

EE

Pooled InterdependencePooled Interdependence

• Occurs when organizational units Occurs when organizational units have a common resource but no have a common resource but no interrelationship with one another.interrelationship with one another.

Head-Head-quartersquarters


Sequential Interdependence Sequential Interdependence

• Occurs when organizational units must Occurs when organizational units must coordinate the flow of information, resources, coordinate the flow of information, resources, and tasks from one unit to another.and tasks from one unit to another.

AA BB CC


Reciprocal InterdependenceReciprocal Interdependence

• Occurs when information, Occurs when information, resources, and tasks must be resources, and tasks must be passed back and forth passed back and forth between work groups.between work groups. A

C

E F

D

B


Integrating MechanismsIntegrating Mechanisms

• Methods for managing the flow of information, Methods for managing the flow of information, resources, and tasks within the organization.resources, and tasks within the organization.

• Major categories of integrating mechanisms are:Major categories of integrating mechanisms are:

General management systems.General management systems.

Methods of increasing coordination potential.Methods of increasing coordination potential.

Methods of reducing the need for coordination.Methods of reducing the need for coordination.


Figure 8.Figure 8.8 8 Integrating MechanismsIntegrating Mechanisms

Source: Adapted by permission, J. R. Galbraith, “Organizational Design: An Information Processing View,” Interfaces 4 (May 1974): 3. Copyright 1974, The Institute of Management Sciences and the Operations Research Society of America (currently INFORMS), 2 Charles Street, Suite 300, Providence, RI 02904 USA.


General Management SystemsGeneral Management Systems

• Some coordination of work units may be Some coordination of work units may be achieved through the development of general achieved through the development of general management systems such as:management systems such as:

The managerial hierarchyThe managerial hierarchy

Rules and proceduresRules and procedures

Plans and goalsPlans and goals

• Such mechanisms form the foundation of an Such mechanisms form the foundation of an organization’s integration system.organization’s integration system.


Increasing Coordination PotentialIncreasing Coordination Potential

• Two mechanisms for increasing the coordination Two mechanisms for increasing the coordination potential both vertically and horizontally in the potential both vertically and horizontally in the organization are organization are information systemsinformation systems and and lateral lateral relationshipsrelationships..

Information systemsInformation systems facilitate the flow of information facilitate the flow of information up and down the traditional chain of command and up and down the traditional chain of command and across organizational units.across organizational units.

Lateral relationshipsLateral relationships exist across work units and exist across work units and serve as mechanisms for exchanging decision-serve as mechanisms for exchanging decision-making information.making information.


Boundary Spanning CoordinationBoundary Spanning Coordination

• Lateral relationships that help to integrate and Lateral relationships that help to integrate and coordinate the activities of the organization.coordinate the activities of the organization.

• Examples include:Examples include:

LiaisonsLiaisons

CommitteesCommittees

Task forcesTask forces

Integrating positionsIntegrating positions

Interfunctional work teamsInterfunctional work teams


Reducing the Need for CoordinationReducing the Need for Coordination

• The organization creates “slack resources” that The organization creates “slack resources” that reduce the interdependence of the work groups.reduce the interdependence of the work groups.

• Actions that reduce the need for coordination:Actions that reduce the need for coordination: Longer lead timesLonger lead times Larger inventoriesLarger inventories Work units that have only pooled interdependenceWork units that have only pooled interdependence

• As a result, the need for integrating mechanisms As a result, the need for integrating mechanisms is reduced.is reduced.


Locus of Decision MakingLocus of Decision Making

• The degree to which decision making is The degree to which decision making is centralized versus decentralized.centralized versus decentralized. Centralized Decision MakingCentralized Decision Making

Advantage: gives top-level management maximum control.Advantage: gives top-level management maximum control.

Disadvantage: limits the organization’s ability to respond Disadvantage: limits the organization’s ability to respond quickly and effectively to changes in the environment.quickly and effectively to changes in the environment.

Decentralized Decision MakingDecentralized Decision Making Advantage: rapid and effective response to environmental Advantage: rapid and effective response to environmental

change because the decision makers are the people closest change because the decision makers are the people closest to the situation.to the situation.

Disadvantage: top-level managers lose some control.Disadvantage: top-level managers lose some control.


Mechanistic Versus Organic SystemsMechanistic Versus Organic Systems

• Mechanistic SystemsMechanistic Systems Highly centralized organizations in which decision-Highly centralized organizations in which decision-

making authority rests with top-level management.making authority rests with top-level management.

• Organic SystemsOrganic Systems Decentralized organizations that push decision Decentralized organizations that push decision

making to the lowest levels of the organization in an making to the lowest levels of the organization in an effort to respond more effectively to environmental effort to respond more effectively to environmental change.change.


The Impact of Environmental StabilityThe Impact of Environmental Stability

• Stable EnvironmentsStable Environments Environments that experience little change.Environments that experience little change.

• Turbulent EnvironmentsTurbulent Environments Environments that are characterized by rapid and Environments that are characterized by rapid and

significant change.significant change.

• Organizational Design for a Changing Organizational Design for a Changing EnvironmentEnvironment An An adaptive organizationadaptive organization eliminates bureaucracy eliminates bureaucracy

limiting employee creativity and brings the decision limiting employee creativity and brings the decision makers closer to the customer.makers closer to the customer.


Implications for LeadersImplications for Leaders

• Remember that organizational design provides an important Remember that organizational design provides an important mechanism for achieving the strategic and operational goals of the mechanism for achieving the strategic and operational goals of the organization.organization.

• Understand the makeup of the forms of organizational structure and Understand the makeup of the forms of organizational structure and under what conditions it would be appropriate to use each.under what conditions it would be appropriate to use each.

• Understand the potential advantages and disadvantages of the Understand the potential advantages and disadvantages of the functional, division, matrix, and network structures.functional, division, matrix, and network structures.

• Look for ways to increase the integration potential of the Look for ways to increase the integration potential of the organization or to reduce the need for integration.organization or to reduce the need for integration.

• Understand the circumstances in which centralized or decentralized Understand the circumstances in which centralized or decentralized decision making would work well and how to use each approach.decision making would work well and how to use each approach.


Implications for Leaders (cont’d)Implications for Leaders (cont’d)

• Look for ways to increase the integration potential of the Look for ways to increase the integration potential of the organization or to reduce the need for integration.organization or to reduce the need for integration.

• Evaluate the advantages and disadvantages associated Evaluate the advantages and disadvantages associated with centralized versus decentralized decision making, with centralized versus decentralized decision making, given the specific circumstances of the organization.given the specific circumstances of the organization.

• Strive to develop an adaptive and flexible organization Strive to develop an adaptive and flexible organization that is effective in a dynamic business environment.that is effective in a dynamic business environment.


Table 8.Table 8.1 1 Potential Advantages and Disadvantages of Organizational Potential Advantages and Disadvantages of Organizational StructuresStructures

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