Economics for Engineering Prof. Andrea Sianesi academical year 2011/2012

1. Economics for Engineering Prof. Andrea Sianesiacademical year 2011/2012 Basics of Organization Theory and Design

2. Agenda • Introduction to organisation theory • Organisation design at micro and macro level • Organisational structures • The role of contingent factors in organisation design • Trends in organisation design - new organisational models EE-Organization

3. The organisation • Organisation as social institution • Social entities guided by common goals, designed as systems of structured and coordinated activities that interact with the external environment • Goals, roles and tasks, hierarchy and coordination • Organisation as act of organising • the ways in which labour is divided into distinct tasks and then coordination is achieved among these tasks EE-Organization

4. Perspectives on organisation • In organisational theories’ development there are two main perspectives, centred respectively on the system or its actors: • The system’s perspective: organisation as a mechanistic or organic system: • system actors • The actors’ perspective: organisation as an entity resulting from the interaction among the actors • actors system • How these two perspectives are linked? Can they be recomposed? EE-Organization

5. The managerial perspective on organisation • Refers to the perspective of the manager who run the organisation and is responsible of the achievement of the institutional aims • Organisation as a system composed by interacting parts (organisational units) • Focus on formal and objective aspects • Main goal: organisational design • Contingent and normative approach • Design the most effective organisational model in relation to goals, technologies, industry, environment, etc. EE-Organization

6. Growth and organisations’ life cycle • In most cases enterprises are compelled to grow in order to answer to competitive challenges • Economies of scale and scope • Access to financial markets • Attraction of qualified resources • Personal ambition of entrepreneurs • Dimensional growth means more organisational complexity: • Specialisation and coordination become critical as dimensions grow • Life cycle concept can be useful: • Organisational problems are different in each step EE-Organization

7. The Bodin Case History • Open questions: • Which different steps characterise Bodin’s company development? • Which organizational variables best describe each step? • Which contingent drivers have triggered innovation in the organisation? EE-Organization

8. Lessons from Bodin case history • Years ’50: Bodin and 2 workers • Every worker accomplishes more tasks • Bodin himself contributes to manual operations • Informal coordination, mutual adjustment • First ’60: Increase in the number of workers • Miss Cravero supervises new workers • No clear division of tasks between workers • Graduates’ hiring with specific tasks: standardisation of competences allows a fast integration EE-Organization

9. Lessons from case Bodin • 1968: Re-organization • Introductionofdifferent production units: warping, weaving, cut and fold, packaging • Workers are divided and each one assigned to a specific unit • Developmentof training programsforoperationalworkers • Divisionof work betweendesigners and cardboard’s makers • Only expert workers are polyvalent • Definitionofoperatingproceduresforeachactivity and unit • Codification of procedures • Years ’80: Growth • Hiringof a commercial manager in orderto coordinate salesmen and agents • Hiringofan industrial expert specialized in production planning • Unitmanagersorganizetheir work autonomously in ordertorespectweeklyscheduling • Separationofproductlines: standard and multicolorlabels • Decisionalcentralization: Bodinisstillinvolved in alldecisions EE-Organization

10. Lessons from Bodin case history EE-Organization

11. Lessons from Bodin case history • Role of contingent drivers in the organisational change: • Turbulent environment • Markets’ globalization • Change in technologies • Reluctance to introduce new technologies and information tools • Pressure on prices • Dimensional growth EE-Organization

12. Job specialisation • Specialisation emerges from the need to divide activities required to obtain a specific output between different people and organisational units • Horizontal job specialisation: • Assignment of elementary tasks required to obtain a specific output to different positions (fragmentation) • Vertical job specialisation: • Separation between design & control activities and their execution EE-Organization

13. Horizontal job specialisation • Factors driving towards horizontal job specialisation: • Increase of productivity: • Improve of dexterity and learning curves (learning economies) • Saving in time lost in switching tasks • Specialised methods and technologies • Less need of training and qualified resources • Better use of individual skills • Problems due to excessive horizontal job specialisation: • More need for coordination • Problem of balancing resources’ saturation • Repetitiveness, alienation EE-Organization

14. Vertical job specialisation • Factors driving towards vertical job specialisation: • Consequence of horizontal specialisation: workers’ narrowed perspective makes difficult for them to relate their work to that of others • Possibility to hire less qualified workers • Better use of highly qualified workers and control and planning skills • Problems due to excessive vertical job specialisation: • Coordination problems • Demotivation, alienation • Insufficient contribution to improvement and innovation EE-Organization

15. Coordination • Need of coordination emerges in order to guarantee coherence and results of the activities when job specialisation increases • There are different coordinating mechanisms: • Mutual adjustment • Direct supervision • Standardization of work processes • Standardization of work outputs • Standardization of workers skills • Different coordinating mechanisms fit different contexts, contingent situations and technologies • Coordinating mechanisms represent organizational costs EE-Organization

16. Mutual Adjustment Coordinating mechanisms Manager Manager Manager Staff Staff Staff Operator Operator Operator Operator Operator Operator • Direct supervision • Standardization • Process • Output • Skills EE-Organization

17. Coordinating mechanisms’ cycle Horizontal and vertical specialization Mutual adjustment Direct supervision Complexity and growth Standard tasks Standard competences Uncertainty and diversification Turbolence Standard outputs EE-Organization

18. Costs of coordination and specialisation Time/Costs Coordination Execution Specialisation EE-Organization

19. Agenda • Introduction to organisation theory • Organisation design at micro and macro level • Organisational structures • The role of contingent factors in organisation design • Trends in organisation design - new organisational models EE-Organization

20. Organisation design • MICRO level: • Design of jobs and roles • Division of work among individuals within a group/unit • Typical problems: specialization, coordination, qualification, motivation, empowerment • MACRO level: • Design of organisational units • Division of work among groups/units within an organisation • Typical problems: hierarchical levels, “span of control”, grouping criteria, cross-functional integration mechanisms EE-Organization

21. Organisational design – the MICRO level • Organisational design at Micro level consists of: • Designing the content of labour and the roles of individuals within the organisation • Formalizing to a higher or lower extent the behaviour of individuals • Developing competencies and skills of the individuals • Individuals decide to adhere and contribute to the organisation • It is very important to take into account the perspective of the individual about organisational design EE-Organization

22. Human resources and the organisation • Human resources: • Interact with the organisation, are not passive actors • Have personal goals and aspirations which can be different to the ones of the organisation • Set constraints to organisational design as a consequence of their skills and competencies • The goal of organisational design is to align (make compatible) personal and organisational goals EE-Organization

23. Micro level: definitions and key concepts • Basic definitions: • Task: set of necessarily linked activities/operations given the employed capacity and technique • Job: set of tasks that can be assigned to a position (that can be covered by an individual) • Role: set of behavioural expectations that the organisation has in relation to an individual assigned to a position EE-Organization

24. Jobs’ breadth and interdependencies • Job design should take into account the “optimal” level of specialization and the volume of activities • Job design is dependent on the level of interdependencies between tasks: • Sequential interdependencies • Reciprocal interdependencies • Interdependencies related to resources • Time and space interdependencies EE-Organization

25. Different types of jobs and roles Vertical Specialisation Job Enlargement Restricted operative jobs Repetition Norms and procedures Enlarged operative jobs Versatility Polyvalence Norms and procedures Job Enrichement Low level managerial jobs Coordination Norms and procedures Limited autonomy Professional jobs Limited but sophisticated activities Technical knowledge Local decisional autonomy High level managerial jobs Delegation and autonomy Weak formalization Variety and unforeseeable jobs Involvement in strategic decisional processes Horizontal Specialisation EE-Organization

26. Behaviour Formalization • The organisation’s way of reducing the discretion of its members, by standardizing rules, procedures, roles and responsibilities • Motivations: • Control: • Reduce undesirable behaviors • Instrument that can be used for sanctioning • Coordination: • Support to process and output standardization • Guarantee: • Ensure fairness in the treatment of individuals by the managers • Instruments: • Job descriptions • Norms and procedures EE-Organization

27. Mechanistic and organic forms Vertical Structure Horizontal structure Routine job Rigid culture Job enrichment Adaptive culture Formal system Competitive strategy Shared information Collaborative strategy Stable environment Efficient performances Turbulent environment Learning Organization Organic form paradigm Mechanistics form paradigm Organizational change to improve performances Font: adapted from David K. Hurst, Crisis and Renewal: Meeting the Challenge of Organizational Change (Boston, Mass.: Harvard Business School) EE-Organization

28. Organisational design – the MACRO level • Organisational design at Macro level consists of: • Designing the composition and boundaries of organisational units within the organisation • Defining the coordination mechanisms between organisational units • Key decisions: • Number of positions under a single head (span of control) • Number of hierarchical levels • The organisation chart formalises and represents the organisational structure of the company EE-Organization

29. Macro level: definitions and key concepts • Organizational unit: set of positions under a unique responsibility whose jobs and roles are: • Assigned in a relatively stable way • Mutually interdependent • Sufficiently autonomous and measurable • Horizontal dimension of organisational units: • Span of control: total number of people directly dependent from a chief or supervisor • Managerial breadth: number of jobs directly dependent from a supervisor • Vertical dimension: • Hierarchical chain: number of hierarchical level in the organization EE-Organization

30. Organisational Units design • Organisational design can follow a top-down or bottom-up approach, by grouping jobs and roles with high level of interdependence • Effects of grouping: • common supervision • share common resources • common performance measures • encourages mutual adjustment EE-Organization

31. Activity grouping criteria • Input-oriented grouping • Competences: knowledge and skills (e.g. hospitals) • Type of function or process (e.g. purchasing, production, marketing, R&D) or technologies (e.g. moulding, welding) • Output-oriented grouping • Product (e.g. damage or life insurance) • Client (final customers, companies, public administration) • Geographical area (e,g. multinational companies) EE-Organization

32. Selection of grouping criteria • Economies of scale……………………FUNCTIONAL CRITERIA • Reduction of operating costs per unit coming from centralisation of production capacity and consequent increase in volumes (e.g. maintenance unit) • Economies of specialization…………..FUNCTIONAL CRITERIA • Advantages coming from specialisation and integration of competences, know how development, interaction among experts (e.g. R&D) • Output effectiveness………………DIVISIONAL CRITERIA • Need to coordinate activities for a product, client, market, geographical area • Advantages coming from the integration and coordination of sequential or reciprocally interdependent activities EE-Organization

33. Economies of scale Total costs Economies Optimum size Diseconomies Production capacity EE-Organization

34. Coordinating mechanisms between organizational units • Coordinating mechanisms within organizational units can be also used to coordinate different organizational units • In addition, there are some lateral devices: • Organizational mechanisms • Liaison roles • Integrating managers • Cross-functional teams • Managerial mechanisms • Planning and control systems • Technological mechanisms • Enterprise information systems Top management Production R&D Efficiency Creativity EE-Organization

35. Organizational mechanisms • Liaison roles • No formal authority (e.g. connection between Purchasing and R&D) • Integrating Managers • Product Manager: responsible for a product or a product line (e.g. consumer-goods) • Project Manager: responsible for a temporary project (e.g. introduction of an e-procurement system) • Cross-functional Teams • Temporary or permanent interdisciplinary groups (e.g. new product development team; executive committee) EE-Organization

36. Agenda • Introduction to organisation theory • Organisation design at micro and macro level • Organisational structures • The role of contingent factors in organisation design • Trends in organisation design - new organisational models EE-Organization

37. Basic organizational models: functional organization CEO STAFF R&D Manufacturing Marketing Sales Accounting • Grouping criteria: process or technique used, competence • Main coordinating mechanisms: direct supervision, process standardization • Strengths: allows economies of scale within functional departments, enables in-depth knowledge and skill development • Weaknesses: slow response time to environmental changes, hierarchy overload, poor horizontal coordination among departments, lack of innovation, limited view of organizational goals • Typical context: companies with one or few products competing in rather stable industry EE-Organization

38. Basic organizational models: divisional organization CEO STAFF PRODUCT A PRODUCT B PRODUCT C STAFF R&D Manufacturing Marketing Accounting Sales • Grouping criteria: product, customer, geographical area • Main coordinating mechanisms: output standardization • Strengths: market responsiveness, adaptation to differences in products, regions, clients, faster and decentralized decision-making • Weaknesses: reduced economies of scale, poor coordination across product lines, lack of in-depth competence and technical specialization • Typical context: large organizations with several products in dynamic and unstable industries EE-Organization

39. Advanced organizational models: hybrid organization CEO STAFF R&D Manufacturing Accounting Market A Market B Marketing Sales Marketing Sales • Grouping criteria: mix of functional and divisional criteria • Strengths: uses most suitable criterion for each function; tries to combine the advantages of the functional and divisional structures • Weaknesses: loss of clarity of grouping criteria and problems in cross-functional integration among activities EE-Organization

40. Task Force C.E.O. STAFF PROJECT MANAGER PROJECT MNGNT TEAM PROJECT ENGINEERING SUPPLY FIELD FIELD OPERATIONS PLANNING & CONTROL ENGINEERING MARKETING PROCUREMENT ACCOUNTING COMMISSIONING TESTING SHIPPING AND DELIVERY SCHEDULER PROJECT PROCUREMENT COMMISSIONING & START UP AT CUSTOMER PLANT MANUFACTURING AND ASSEMBLY PRJ ACCOUNTER FIELD MANAGER PROJECT ENGINEER (ELECTRICAL) PROJECT ENGINEER (MECHANICAL) PROJECT ENGINEER (FLUID) QUALITY MANAGER

41. Advanced organizational models: matrix organization CEO Director Design Mfg Marketing Procure- ment of Product Vice President Vice President Vice President Controller Operations Manager Product Manager A Product Manager B Product Manager C Product Manager D EE-Organization

42. Global matrix structure International Executive Committee Country Managers West Europe China Argentina/ Brazil North America Business Areas Power Transformers Transportation Industry Local Companies EE-Organization

43. Matrix structure: strenghs and weaknesses • STRENGTHS: • Achieves coordination necessary to meet multiple goals • Flexible sharing of human resources across units • Suited to complex industries and unstable environments • Provides opportunity for both functional and market skill development • Best in large-sized organizations with multiple products • WEAKNESSES: • Causes participants to experience dual authority, which can be frustrating and confusing • Means participants need good interpersonal skills and extensive training • Is time consuming; involves frequent meetings and conflict resolution sessions • Will not work unless participants adopt collegial rather than vertical-type relationships • Requires great effort to maintain power balance EE-Organization

44. Agenda • Introduction to organisation theory • Organisation design at micro and macro level • Organisational structures • The role of contingent factors in organisation design • Trends in organisation design - new organisational models EE-Organization

45. Contingent factors and organisational choices CONTINGENT FACTORS Socio-economic environment Market environment (stability, complexity, competition, …) Goals and strategy Technological regulation and sophistication Organisational age and size ….. ORGANIZATIONAL VARIABLES Job specialisation Competencies and training Behaviour formalisation Grouping criteria Unit size Coordination mechanisms Vertical and horizontal decentralisation FIT Organisational effectiveness EE-Organization

46. Contingent factors:environment • Complexity (number and variety of elements) • Products, markets, technologies • Regulations • Globalization • Uncertainty (degree of change) • Products, markets, technologies • Regulations • Globalization EE-Organization

47. How Complexity affects organizations • As the complexity in the external environmental increases, so does internal organizational complexity • E.g. Engineering company • Complex technologies research center on core technologies • Complex contracts legal units • Geopolitical variability study center • Cost control complexity accounting center for each contract • Wide range of competences recruiting offices • Complex regulations lobbying • Complex financings project financing units EE-Organization

48. How Uncertainty affects organizations • Decoupling systems (quantitative uncertainty) • Stocks • Seasonal work • Flexibility increase (qualitative uncertainty) • Organic vs mechanistic structures EE-Organization

49. External environment and organization Uncertainty • Organic - Simple • Few organizational units • Interface roles • Fast imitation • Planning and reactivity • Organic - Complex • Many organizational units • Extended interface roles • Horizontal training • Strategic planning and forecasting Simplicity Complexity • Mechanistic - Simple • Few organizational units • Operations management • Efficiency and standardization • Direct supervision • Mechanistic - Complex • Many organizational units • All standardization forms • Planning and budget Stability EE-Organization

50. Contingent factors:objectives and strategies • Focus • External: profitability (survival in the environment) • Internal: employee satisfaction • Cost Leadership • Search for efficiency and economies of scale • Functional structures • Processes Standardization and direct supervision • High formalization • Mechanistic forms • Differentiation • Search for effectiveness • Divisional structures (SBU) • Standardization of competencies and skills, mutual adjustment • Low formalization • Organic forms EE-Organization