TEN CHAPTER MANAGING ORGANIZATIONAL STRUCTURE
OVERVIEW OF THE CHAPTER To create high performing organizations, managers must design an organizational architecture that maximizes the efficient use of resources in order to efficiently produce the goods and services customers want. This chapter opens by examining the four critical factors that help managers to determine the most appropriate organizational structure their organization. Next, it discusses three components of organizational design: job design, grouping jobs into functions and divisions, and the coordination of functions and divisions. The chapter then closes with a discussion of integrating mechanisms and the growing popularity of global strategic alliances and business-to-business network structures. LEARNING OBJECTIVES
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Identify the factors that influence managers choice of an organizational structure. Explain how managers group tasks into jobs that are motivating and satisfying for employees. Describe the types of organizational structures managers can design, and explain why they choose one structure over another. Explain why there is a need to both centralize and decentralize authority. Explain why managers must coordinate and integrate between jobs, functions, and divisions as an organization grows. Explain why managers who seek new ways to increase efficiency and effectiveness are using strategic alliances and network alliances.
LECTURE OUTLINE A MANAGERS CHALLENGE: NOKIA, DOW, AND LEGO REVAMP THEIR GLOBAL STRUCTURES TO RAISE PERFORMANCE This introductory case describes three different strategies used by three different CEOs to reorganize their company. Legos leadership made the decision to combine its central, northern, and southern European divisions into a single unit in order to encourage cooperation and sharing of information and to eliminate costly duplication of activities. In contrast, Dow Chemical Company decided to split its Global Chemical Division into three separate and selfcontained units the plastics, chemicals and intermediates, and performance chemical groups. Dows objective was to provide managers with the focus required to effectively meet a diversity of customer needs. Finally, Nokia decided to create two new global divisions for the purpose of quickly developing innovative wireless communications products. Nokias CEO realized that its lack of such products represented a weakness in the companys product line. Nokias goal is to obtain a significant share of the lucrative wireless technology market to help boost its corporate performance. I. DESIGNING ORGANIZATIONAL STRUCTURE
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Organizing is the process by which managers establish the structure of working relationships among employees to allow them to achieve organizational goals efficiently and effectively. Organizational structure is the formal system of task and reporting relationships that determines how employees use resources to achieve goals. Organizational design is the process by which managers make specific organizing choices that result in the construction of a particular organizational structure.
According to contingency theory, managers design organizational structures to fit the factors or circumstances that are affecting the company and causing them the greatest uncertainty. Thus, there is no one best way to design an organization. Four factors are important determinants of organizational structure. They are: 1) the nature of the organizational environment, 2) the type of strategy the organization pursues, 3) the technology the organization uses, and 4) the characteristics of the organizations human resources.
The Organizational Environment
The more quickly the external environment is changing and the greater the uncertainty within it, the greater the need to speed decision-making and communication so that scarce resources can be obtained. In such situations, the managers goal is to make organizing decisions that result in greater flexibility. Therefore, they are likely to decentralize authority and empower lower-level employees. In contrast, if the external environment is relatively stable, uncertainty is low, and resources are readily available, managers make organizing decisions that bring more stability or formality to the organizations structure. In todays marketplace, change is rapid and competition is intense. Therefore, most managers are seeking ways to structure organizations that allow people and departments to behave flexibly.
Strategy
Different strategies often call for the use of different organizational structures. A differentiation strategy aimed at increasing quality usually succeeds best in a flexible structure. A low-cost strategy aimed at driving down costs works best in a more formal structure, which gives managers greater control. At the corporate level, when managers pursue a strategy of vertical integration or diversification, a flexible structure is needed to provide sufficient coordination between different business divisions.
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Managers are also challenged to create organizational structures that allow flexibility on a global level.
Manager as a Person: Wayne Inouye Has to Restructure Gateway When Wayne Inouye was hired by eMachines, a low price computer maker on the verge of bankruptcy, he was assigned the responsibility of either finding a way to return the company to profitability or to shut it down. Inouye decided to restructure eMachines by outsourcing the companys manufacturing, sales, and customers service operations and focusing the companys efforts on marketing. Using an IT system that linked eMachines to its retailers, Inouye and his managers gathered real time information concerning customer demand and product preferences and used it to guide the redesign of its products, so that products leaving the assembly line reflected current customer needs. By 2003, eMachines had replaced Gateway as the number three computer maker. Gateway was so impressed by Inouyes new strategy and structure that they made an offer to buy eMachines, contingent upon Inouyes willingness to assume the position of CEO and take charge of successfully merging the two companies. Inouye accepted Gateways offer. His new task was to design a structure that would allow Gateway to compete effectively against Dell. Technology Technology is the combination of skills, knowledge, tools, machines, computers, and equipment that are used in the design, production, and distribution of goods and services.
The more complicated the technology, the greater the need for a more flexible structure that allows managers to respond quickly to unexpected situations. If technology is routine, a formal structure is more appropriate because tasks are simple and procedures for performing tasks can be outlined in advance. Two factors determine how complicated or nonroutine technology is, according to researcher Charles Perrow. They are task variety and task analyzability. Nonroutine technologies are characterized by high task variety and low task analyzability. Routine technologies are characterized by low task variety and high task analyzability. The more that a technology is based upon the skills, knowledge, and abilities of people working together on an ongoing basis, as opposed to automated machines that can be programmed in advance, the more complex the technology is. Joan Woodward, a professor who investigated the relationship between technology and organizational structure, differentiated among three kinds of technology on the basis of the relative contribution made by people or machines.
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Small-batch technology is used to produce small quantities of customized, one-of-a-kind products and is based on the skills of people who work together in small groups.Because small-batch goods are customized, a structure that decentralizes authority and allows employees to respond flexibly to the unique requirements of each product is most appropriate. Mass-production technology is based primarily on the use of automated machines that are programmed to perform the same operations time and time again. There is less need for flexibility, and a formal organizational structure is preferred because it gives managers more control over the production process. Continuous-process technology is almost completely mechanized. Products are produced by automated machines working in sequence and controlled through computers from a central monitoring station. A flexible organizational structure is the preferred choice with this kind of technology, since employees must be able to respond quickly and appropriately to prevent disaster, in the event of an unexpected situation.
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Information Technology is changing methods of organizing, since an IT-enabled organizational structure allows for new kinds of relationships among electronically connected people. An example is knowledge management, the sharing and integrating of expertise within and between functions and divisions through real-time, interconnected IT. Human Resources
The more highly skilled a workforce and the more people are required to work together in groups or teams to perform tasks, the more likely an organization is to use a flexible, decentralized structure. Flexible structures, characterized by decentralized authority and empowered employees, are well suited to the needs of highly skilled people. The way an organizations structure works depends upon the organizing choices that managers make about four issues: 1) how to group tasks into individual jobs, 2) How to group jobs into functions and divisions, 3) how to allocate authority in the organization among jobs, functions, and divisions, and 4) how to coordinate or integrate jobs, functions, and divisions.
II. GROUPING TASKS INTO JOBS: JOB DESIGN The first step in organizational design is job design. Job design is the process by which managers decide how to divide into specific jobs the tasks that have to be performed.
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The result of the job design process is a division of labor among employees. Establishing an appropriate division of labor among employees is vital to increasing efficiency and effectiveness. When deciding how to assign tasks to individual jobs, managers must be careful not to oversimplify jobs. Job simplification is the process of reducing the number of tasks that each worker performs. Too much job simplification may reduce efficiency rather than increase it, if workers become bored and unhappy.
Job Enlargement and Job Enrichment
Job enlargement is increasing the number of different tasks in a given job by changing the division of labor. By increasing the range of tasks performed by a worker, managers hope to reduce boredom and increase motivation to perform at a high level. Job enrichment is increasing the degree of responsibility a worker has over his or her job by 1) empowering workers to experiment to find new or better ways of doing the job, 2) encouraging workers to develop new skills, 3) allowing workers to decide how to do the work and giving them the responsibility for deciding how to respond to unexpected situations, and 4) allowing workers to monitor and measure their own performance. By enriching an employees job, managers are expecting that employees level of involvement in their work to increase, thereby increasing productivity. Managers who make design choices such as these are likely to increase the degree to which workers behave flexibly rather than mechanically. Narrow, specialized jobs lead people to behave in predictable ways. In contrast, workers who perform a variety of tasks are encouraged to discover new ways to perform their jobs and are more likely to act flexibly and creatively.
The Job Characteristics Model J. R. Hackman and G. R. Oldhams Job Characteristics Model explains how managers can make jobs more interesting and motivating. According to Hackman and Oldham, every job has five characteristics that determine how motivating the job is. They are:
Skill variety, which examines the extent to which a job requires an employee to use a wide range of different skills, abilities, or knowledge. Task identity, which examines the extent to which a job requires a worker to perform all the tasks from the beginning to the end of the production process.
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Task significance, which examines the degree to which a worker feels his or her job is meaningful because of its effect on people outside of the organization. Autonomy, which examines the degree to which a job gives an employee the freedom and discretion needed to schedule different tasks and decide how to carry them out. Feedback, which is the extent to which a worker receives clear and direct information regarding how well he or she has performed the job.
The five job characteristics affect an employees motivation by impacting three critical psychological states. They are: 1) feeling that ones work is meaningful, 2) feeling responsible for work outcomes, and 3) feeling responsible for knowing how those outcomes affect others. III. GROUPING JOBS INTO FUNCTIONS AND DIVISIONS The next organizing decision is how to group jobs together to best match the needs of the organizations environment, strategy, technology, and human resources. Most topmanagement teams group jobs into departments and develop a functional structure. As the organization grows, managers design a divisional structure or a more complex matrix or product team structure. Functional Structure A function is a group of people working together who possess similar skills or use the same knowledge, tools, or techniques to perform their jobs. A functional structure is a structure composed of all the departments that an organization requires to produce its goods or services. The advantages of grouping jobs according to function are: When people who perform similar jobs are grouped together, they can learn from observing one another.
When people who perform similar jobs are grouped together, it is easier for managers to monitor and evaluate their performance. The functional structure allows managers to create the set of functions they need to scan and monitor the task and general environments.
As an organization grows, the functional structure may become less efficient and effective for the following reasons: Managers in different functions may find it more difficult to communicate and coordinate with one another.
Functional managers may become so preoccupied with supervising their own specific departments that they lose sight of organizational goals.
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Divisional Structures: Product, Market, and Geographic As the problems associated with growth and diversification increase over time, most managers of large organizations choose a divisional structure and create a series of business units, each of which produces a specific kind of product for a specific kind of customer. There are three different forms of divisional structure: product structure, geographic structure, and market structure. Product Structure When using a product structure managers place each distinct product line in its own selfcontained division and give divisional managers the responsibility for division business-level structure. Each division is self-contained because it has a complete set of all the functions that it needs to produce goods or services. Advantages of using a product structure are:
It allows functional managers to specialize in only one product area, so they build expertise. Each divisions managers can become experts in their industry. It frees corporate managers from the need to supervise directly each divisions day-today activities. The extra layer of management (the divisional management layer) can improve the use of organizational resources. It puts divisional managers close to their customers and lets them respond quickly and appropriately.
Management Insight: GlaxoSmithKlines New Product Structure Recently, many of the large pharmaceutical companies have merged in an effort to increase their research productivity. GlaxoSmithKline is an example of such a merger. After the merger, one of the companys largest challenges was to determine the best way to combine the talents of scientists and researchers from both organizations that so they could quickly innovate new products. Understanding the problems associated with its large size, Glaxo managers decided to group researchers into eight small product divisions that each focuses upon a specific clusters of diseases, such as heart disease or viral infections. To date, GlaxoSmithKlines new product structure has worked well. The number of new drugs moving into clinical trials has doubled and many other new drugs have been developed. In addition, increased collaboration resulting from the new structure has boosted company morale and decreased turnover. Geographic Structure When organizations expand rapidly both at home and abroad, functional structures can create problems. In such cases, a geographic structure, in which divisions are broken down by
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geographical location, is often chosen. Managers are most likely to do this when customer needs vary widely by country or world region.
Managers are most likely to use a global geographic structure when pursuing a multidomestic strategy, since customer needs vary widely by country or world region. In contrast, managers are most likely to use a global product structure when pursuing a global strategy, since customers abroad are willing to buy the same kind of product, or slight variations thereof.
Market Structure Sometimes managers group functions according to the type of customer buying the product, in order to tailor an organizations products to each customers unique demands. A market structure (also called customer structure) is an organizational structure in which each kind of customer is served by a self-contained division. It allows managers to be responsive to the needs of customers and allows them to make decisions in response to customers changing needs. Matrix and Product Team Designs When the environment is dynamic, changing rapidly, and uncertainty is high, even a divisional structure may not provide enough flexibility. Matrix and product team designs are the most flexible type of organization structures. Matrix Structure: In a matrix structure, managers group people in two ways simultaneously: by function and by product. The result is a complex network of reporting relationships that makes the matrix structure very flexible.
Each person in a product team reports to two bosses: 1) a functional boss, who assigns individuals to a team and evaluates their performance, and 2) the boss of the product team, who evaluates their performance on the team. Product teams are empowered and team members are responsible for making important decisions, to keep the matrix structure flexible. Matrix structures have been successfully used for years at high-tech companies where new product development takes place frequently and the need to innovate quickly is vital to the organizations survival.
Product Team Structure: The dual reporting relationships of a matrix structure have always been difficult for managers and employees to deal with. To avoid these problems, managers have devised another way of organizing people and resources: a product team structure.
The product team structure differs from a matrix in that: 1) it does away with dual reporting relationships and two-boss managers, and 2) functional employees are permanently assigned to a cross-functional team.
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A cross-functional team is a group of managers brought together from different departments to perform organizational tasks. They report only to the product team manager. Increasingly, organizations are making empowered cross-functional teams an essential part of their organizational architecture to help them gain a competitive advantage in fast-changing organizational environments.
Management Insight: How Three CEOs Worked to Reorganize Lucent In 2000, Lucent Technologies experienced a rapid descent from success to disaster. The companys incredibly complex organizational structure was identified as a root cause of the poor management decision making that led to the companys decline. At that time, the company had eleven different divisions, which created internal communications and coordination problems of enormous proportion. The architect of that elaborate structure, CEO Richard McGinn, was replaced by Henry Schacht, who reduced the number of corporate divisions from eleven to five. A year later, as losses continued to mount, Schacht combined the five units into two business divisions and laid off 20,000 employees. However, financial performance continued to deteriorate, indicating that the reorganization had failed. Schacht was replaced by Patricia Russo as CEO, who decided to create a product team structure that utilized cross-functional teams. It appears that Russo had finally identified the right structure for Lucent, which regained profitability in 2003. Hybrid Structure A large organization that has many divisions and simultaneously uses many different structures has a hybrid structure. For example, most large organizations use product division structures to create self-contained divisions. Then, each division manager selects the structure that best meets the needs of their particular environment, strategy, etc. III. COORDINATING FUNCTIONS AND DIVISIONS When organizing, the managers next task is to ensure that there is sufficient coordination among functions and divisions. Allocating Authority To coordinate the activities of people, functions, and divisions and to allow them to work together managers must develop a clear hierarchy of authority. Authority is the power vested in a manager to make decisions and use resources to achieve organizational goals by virtue of his or her position in an organization. The hierarchy of authority is an organizations chain of command. Every manager, at every level of the hierarchy, supervises one or more subordinates. The term span of control refers to the number of subordinates who report directly to a manager.
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A line manager is someone who is in the direct line or chain of command and has formal authority over people and resources below him. A staff manager is a manager responsible for managing a specialist function. Managers at each level of the hierarchy confer upon managers below them in the chain of command the authority to make decisions. By accepting this authority, those lowerlevel managers then become responsible for their decisions and are accountable for how well they make them.
Tall and Flat Organizations
As an organization grows in size, its hierarchy of authority normally lengthens, making the organizational structure taller. A tall organization has many levels of authority relative to company size. A flat organization has fewer levels relative to company size. As a hierarchy becomes taller, effective communication becomes difficult and expenses rise.
The Minimum Chain of Command
The principle of the minimum chain of command states that top managers should always construct a hierarchy with the fewest levels of authority necessary to efficiently and effectively use organizational resources. To ward off the problems associated with tall organizations, top managers must be sure that they are employing the right number of middle and first-line managers. Effective managers constantly scrutinize their hierarchies to see if the number of levels can be reduced.
Centralization and Decentralization of Authority
Another way that managers keep the organizational hierarchy flat is to decentralize authority to lower-level managers and non-managerial employees. Advantages of decentralization include fewer communication problems, a need for fewer managers, and an improved ability of employees to recognize and respond to customer needs. Another advantage is that the organization continues to behave in a flexible as it grows and becomes taller. However, too much decentralization has disadvantages, including managers who may begin to pursue their own goals at the expense of organizational goals and a lack of communication among functions or divisions that may prevent possible synergies.
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Top managers must seek a balance between centralization and decentralization of authority that best responds to the four contingencies that they face. If in a stable environment, then there is no need to decentralize authority. In uncertain, changing environments, however, top managers must empower employees and allow teams to make important strategic decisions. Managing Globally: Plexus Uses Self-Managed Teams to Decentralize Authority Plexus, an electronics maker located in Neenah, Wisconsin, wanted to find a way to compete with low-cost manufacturers abroad. The solution they identified and implemented lies in the companys development of a new manufacturing technology called low-high, which allows the production of low volumes of many different kinds of products in a highly efficient manner. To make this new technology effective, however, work activities had to be reorganized by decentralizing control and empowering work teams. An organizational structure was designed based upon the creation of four focused factories, in which control over production decisions is given to the workers who perform all the operations involved in making a product. Workers are cross-trained so that they can perform any particular operation in their factory. The ability of work teams to make rapid decisions is vital, since every minute that a production line is not moving increases production costs tremendously. Decentralization has helped to reduce the amount of time that the production line is idle. Types of Integrating Mechanisms
Managers can use various integrating mechanisms to increase communication and coordination among functions and divisions. The greater the complexity of an organizations structure, the greater is the need to increase communication and coordination among functions and divisions. Six integrating mechanisms are available to managers to increase coordination and communication. Listed in increasing complexity, they are: direct contact, liaison roles, task forces, cross-functional teams, integrating roles and departments, and matrix structures.
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Direct Contact: Direct contact creates a context within which managers from different functions or divisions can work together to solve mutual problems. However, if managers of equal authority have differing views, a problem is created, since no mechanism exists to resolve the conflict apart from the authority of top management. The need to solve everyday conflicts, however, wastes top managements time and slows decision-making. Liaison Roles: When the volume of contacts between two functions increases, one way to improve coordination is to give one manager in each function or division the responsibility for coordinating with the other. The responsibility
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for coordination is a part of the liaisons full time job. Usually an informal relationship forms between the people involved, greatly easing strains between functions.
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Task Forces: If two or more functions share common problems and direct contact and liaison roles do not provide sufficient coordination, a task force may be appropriate. One manager from each relevant function or division is assigned to a task force that meets to solve the specific, mutual problem. Members are responsible for reporting back to their own departments on issues addressed and solutions recommended. Task forces are often called ad hoc committees because they are temporary. Once the problem is resolved, the task force is disbanded. Cross-Functional Teams: To address recurring problems effectively, managers are increasingly using permanent integrating mechanisms such as cross-functional teams. An example of a cross functional team is a new product development committee that is responsible for the choice, design, manufacturing, and marketing of a new product. The more complex an organization, the more important cross-functional teams become. Integrating Roles: An integrating role is a role whose only function is to increase coordination and integration among functions or divisions to achieve performance gains from synergies. Usually, senior managers who can envision how to use the resources of the functions or divisions to obtain new synergies are chosen to perform such roles. Once again, the more complex an organization, the more important integrating roles become. Matrix Structure: Managers often use a matrix structure when they must be able to respond quickly to the task and general environments. Because the matrix structure contains many of integrating mechanisms already discussed, it offers maximum flexibility, communication, and coordination among functions and divisions.
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IV. STRATEGIC ALLIANCES, B2B NETWORK STRUCTURES, and IT Recently, increasing globalization and the use of new IT has brought about innovations in organizational architecture: strategic alliances and business-to-business network structures.
A strategic alliance is a formal agreement that commits two or more companies to exchange or share their resources in order to produce and market a product. Strategic alliances are usually formed because the companies involved have similar interests and believe that they can benefit by cooperating with each other.
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A network structure is a series of global strategic alliances that one or several organizations create with suppliers, manufacturers, and/or distributors to produce and market a product. Network structures allow an organization to manage its global value chain in order to find new ways to reduce costs and increase the quality of products, without incurring the high costs of hiring managers to complete these tasks.
Ethics in Action: Of Shoes and Sweatshops As the production of all kinds of goods and services are increasingly outsourced to poor regions of the world, the behavior of companies that outsource production to subcontractors in these countries has come under scrutiny. Nike, the largest and most profitable shoe company in the world, was one of the first to experience public backlash when critics revealed how workers in poor countries were being treated. As a result, CEO Phil Knight reevaluated Nikes labor practices and announced that all factories producing its products would be independently monitored and inspected. After its competitor, Reebok, announced its intention to raise wages by 20%, Nike raised its wages 25 percent so that workers earned $23 a month rather than $18. Adidas, a European shoemaker, faced similar accusations. Similar crises in the clothing, electronics, and toy industries have forced manufacturers within each to reevaluate their foreign labor practices, also.
The ability of managers to produce and distribute products using a network structure instead of creating a complex organization structure has led to the popularity of the idea of a boundaryless organization. Such an organization is composed of people linked by IT computers, faxes, computer-aided design systems, and videoteleconferencing, who may rarely, if ever, see each other face-to-face. Large consulting companies utilize their employees in this way. Consultants are connected by laptop to the organizations knowledge management system, its company-specific information system that systematizes the knowledge of its employees and provides them with access to other employees who have the expertise to solve the problems they encounter as they perform their jobs. The push to lower costs has led to the development of electronic business-to business networks in which most or all of the companies in an industry use the same software platform to link to each other and establish industry specifications and standards and solicit bids from thousands of potential suppliers worldwide. Suppliers also use the same software platform so electronic bidding, auctions, and transactions are possible between buyers and sellers around the world. To maximize efficiency and effectiveness, managers must carefully assess the relative benefits of performing a functional activity in-house versus outsourcing. It still is not clear how B2B networks and other forms of electronic alliances between companies will develop in the future.
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