Chapter Six

Organizing the Business

After reading this chapter, you should be able to:

1. Discuss the factors that influence a firm’s organizational structure.

2. Explain specialization and departmentalization as two of the building blocks of organizational structure.

3. Describe centralization and decentralization, delegation, and authority as the key ingredients in establishing the decision-making hierarchy.

L E A R N I N G O B J E C T I V E SL E A R N I N G O B J E C T I V E S

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After reading this chapter, you should be able to:

1. Explain the differences among functional, divisional, matrix, and international organizational structures and describe the most popular new forms of organizational design.

2. Describe the informal organization and discuss intrapreneuring.

L E A R N I N G O B J E C T I V E S (cont.)L E A R N I N G O B J E C T I V E S (cont.)

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What’s in It for Me?

• By understanding the material in this chapter, you’ll also be prepared to:• Understand your “place” in the organization that

employs you• Be better equipped to create the optimal

structure for your own organization as a boss or owner

• Understand the functioning of virtual and informal organizations, as well as intrapreneuring

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What Is Organizational Structure?

• Organizational Structure• Specification of the jobs to be done within

an organization and the ways in which those jobs relate to one another

• Organizational Charts• Clarify structure and show employees

where they fit• Show the chain of command, or reporting

relationships, within a company

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FIGURE 6.1 The FIGURE 6.1 The Organizational Chart Chart

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Determinants of Organizational Structure

External EnvironmentExternal Environment

Internal EnvironmentInternal Environment

SizeSize

StrategyStrategy

MissionMission

Organizational structure is usually quite fluid!

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The Building Blocks of Organizational Structure

• Specialization• Division of work: job specialization

• Departmentalization• Product, process, functional, customer, or geographic

• Establishment of a decision-making hierarchy• Distributing authority:

• Delegation: assigning tasks• Centralization: upper management retains authority• Decentralization: lower-level managers make decisions

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Planning Departments

• Departmentalization – grouping specialized jobs into logical units.• Areas of departmentalization:

• Product departmentalization• Process departmentalization• Functional departmentalization• Customer departmentalization• Geographic departmentalization• Multi forms (combinations) of departmentalization

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FIGURE 6.2 Multiple Forms of Departmentalization

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Establishing the Decision-Making Hierarchy

Centralized OrganizationCentralized Organization

Decentralized OrganizationDecentralized Organization

Lower-level managers hold Lower-level managers hold significant decision-making significant decision-making authorityauthority

Top managers hold most Top managers hold most decision-making authoritydecision-making authority

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Tall and Flat Organizations

• Flat Organizational Structure• Common in decentralized organizations• Fewer layers of management• Rapid communication• Wide spans of control

• Tall Organizational Structure• Common in centralized organizations • Multiple layers of management• Slower communication• Narrower spans of control

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Figure 6.3 Organizational Structure and Span of Control

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The Delegation Process

• Delegation• The process through which a manager allocates

work to subordinates

• Delegation Entails:• Assignment of responsibility—the duty to

perform an assigned task• Granting of authority—the power to make

decisions necessary to complete the task• Creation of accountability—the obligation of

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Why Managers Won’t Delegate

• The fear that subordinates don’t really know how to do the job

• Desire to keep as much control as possible

• The fear that a subordinate might “show the manager up” by doing a superb job

• Lack of ability as to how to effectively delegate

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Forms of Authority

• Line Authority• Operational authority that flows up and down

the chain of command

• Staff Authority• Authority based on special expertise; usually

involves advising line managers

• Committee and Team Authority• Granted to committees or work teams that play

central roles in daily operations

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Figure 6.4 Line and Staff Organization

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Forms of Organizational Structure• Functional Structure• Authority is determined by the relationships

between group functions and activities• Used by most small- to medium-sized firms;

structured around basic business functions (marketing, operations, finance)

• Advantages:• Specialization and smoother internal coordination

• Disadvantages:• Centralization, poor cross-functional coordination, and

lack of accountability

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Figure 6.5 Functional Structure

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Forms of Organizational Structure (cont.)

• Divisional Structure• Based on departmentalization by product, with

each division managed as a separate enterprise• Organization is structured around several divisions

—departments that resemble separate businesses that produce and market their own products

• Advantages:• Increased product-focus and internal

coordination• Disadvantages:• Duplication of efforts and competition between

divisions

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Figure 6.6 Divisional Structure

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Forms of Organizational Structure (cont.)

• Matrix Structure• Organized along two dimensions; for example,

functional and divisional structures• Advantages:• Highly flexible, focused on a single problem, access to

resources and expertise• Disadvantages:• Loss of command and control, lack of accountability,

impermanent existence

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FIGURE 6.7 Matrix Organization at Martha Stewart’s Omnimedia

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Forms of Organizational Structure (cont.)

• International Structures• Developed in response to the need to manufacture,

purchase, and sell in global markets• Department, division, or geographic

• Global Structure• Acquiring resources (including capital), producing goods

and services, engaging in research and development, and selling products in whatever local market is appropriate, without any consideration of national boundaries

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FIGURE 6.8 International Division Structure

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Organizational Design for the 21st Century

• Team Organization• Relies almost exclusively on project-type teams, with little

or no underlying functional hierarchy

• Virtual Organization• Has little or no formal structure, few permanent

employees, a very small staff, and a modest facility

• Learning Organization• Integrates continuous improvement and employee

learning and development; responds to changing demands and needs

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FIGURE 6.9 The Virtual Organization

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Informal Organization

• Informal Organization• Everyday social interactions among employees

that transcend formal jobs and job interrelationships

• Advantages:• May reinforce the formal organization

• Disadvantages:• Can reinforce office politics that put the interests of

individuals ahead of those of the firm• May communicate distorted or inaccurate information

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Informal Organization (cont.)• Informal Groups• Groups of people who decide to interact among

themselves, sometimes about business• Organizational Grapevine• The informal communication network that runs

throughout the organization• Intrapreneuring• Creating and maintaining the innovation and flexibility of

a small-business environment within the confines of a large, bureaucratic structure

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Key Terms

accountability authority centralized organization chain of command committee and team authority customer departmentalization decentralized organization delegation departmentalization

division divisional structure flat organizational structure functional

departmentalization functional structuregeographic

departmentalization grapevine informal organization

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Key Terms (cont.)

international organizational structures

intrapreneuring job specialization line authority line department matrix structure organization chart organizational structure

process departmentalization product departmentalization profit center responsibility span of control staff authority staff members tall organizational structure work team

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