Designing Organizational Structures

1. DesigningOrganizational Structures Chapter 8

2. Chapter 8 Learning Goals • Whatare the five structural building blocks that managers use to design organizations? • What are the five types of departmentalization? • How can the degree of centralization/- decentralization be altered to make an organization more successful? • How do mechanistic and organic organizations differ?

3. Chapter 8 Learning Goals (cont’d.) • Whatis the difference between line positions and staff positions? • What is the goal of reengineering? • How does the informal organization affect the performance of a company? • What trends are influencing the way businesses organize?

4. Organizing: the process of coordinating and allocating a firm’s resources so that the firm can carry out its plans and achieve its goals (one of the four activities of management)

5. Learning Goal 1 • Whatare the five structural building blocks that managers use to design organizations? • Division of labor • Process of dividing work into separate jobs • Assigning tasks to workers • Departmentalization • Managerial hierarchy • Levels of management within the organization • Managerial span of control • Number of employees the manager directly supervises • Amount of centralization or decentralization in the organization • Deciding at which level in the organization decisions should be made • Centralization is degree to which formal authority is concentrated in one area or level of the organization

6. 5 Structural Building Blocks 1. Division of Labor 2. Departmentalization 3. Managerial Hierarchy 4. Span of Control 5. Centralization of Decision-Making

7. 1. Division of Labor Division of Labor: the process of dividing work into separate jobs and assigning tasks to workers

8. Learning Goal 2 • Whatare the five types of departmentalization? • Functional – based on primary functions performed within an organizational unit • Product – based on the goods or services produced or sold by the organizational unit • Process – based on the production process used by the organizational unit • Customer – based on the primary type of customer served by the organizational unit • Geographic – based on geographic segmentation of organizational units

9. 2. Departmentalization Departmentalization: the process of grouping jobs together so that similar or associated tasks and activities can be coordinated

10. 2. Departmentalization Types of Departmentalization 1. Functional 2. Product 3. Process 4. Customer 5. Geographic

11. 3. Managerial Hierarchy Managerial Hierarchy: the levels of management within an organization; typically includes top, middle, and supervisory levels

12. Managerial Pyramid Top Management Power Number of Employees Middle Management Supervisory Management

13. 4. Span of Control Span of Control: the number of employees a manager directly supervises

14. 4. Span of Control Factors Determining Span of Control 1.Nature of the task 2. Location of the workers 3. Ability of manager to delegate 4. Amount of interaction and feedback between manager and workers 5. Level of skill and motivation of the workers

15. Learning Goal 3 • How can the degree of centralization/decentralization be altered to make an organization more successful? • Centralization allows top managers • To develop a broad view of operations • To exercise tight financial controls • Highly decentralized organizations give lower-level personnel • More responsibility • Power to make and implement decisions • Decentralization can result in • Faster decision-making • Increased innovation and responsiveness to customer preferences

16. Centralization: the degree to which formal authority is concentrated in one area or level of an organization Decentralization: pushing decision-making authority down the organizational hierarchy, giving lower-level workers more responsibility

17. Mechanistic organization Relatively high degree of work specialization Rigid departmentalization Many layers of management Narrow spans of control Centralized decision making Long chain of command Results in a tall organizational structure Organic organization Relatively low degree of work specialization Loose departmentalization Few levels of management Wide spans of control Decentralized decision making Short chain of command Results in a flat organizational structure Learning Goal 4 • How do mechanistic and organic organizations differ?

18. Mechanistic vs. Organic Structures

19. Organic Structure Example Chuck Knight, CEO of Emerson Electric, describes his organizational philosophy: • “We organize around issues and opportunities -- not around an organization chart.” • “We don’t care about structure or form -- we care about getting things done.” • “We plan and control profits at the lowest possible level.” Source: Neff & Citrin: Lessons from the Top, 1999, pp. 199-203.

20. Line Positions Directly involved in the processes used to create goods and services Typically found in areas such as Production Marketing Finance Staff Positions Provide the administrative and support services that line employees need to achieve the firm’s goals Found in areas such as Legal counseling Managerial consulting Public relations Human resource management Learning Goal 5 • What is the difference between line positions • and staff positions?

21. Common Organizational Structures 1. Line organization clear chain of command 2. Line-and-staff organization line positions & staff positions 3. Committee structure groups 4. Matrix structure combines functional and product departmentalization

22. Learning Goal 6 • What is the goal of reengineering? • Reengineering is the complete redesign of business structures and processes in order to improve operations • Goal of reengineering • Redesign business processes to achieve improvements in: • Cost control • Product quality • Customer service • Speed

23. Reengineering: the complete redesign of business structures and processes in order to improve operations

24. Reengineering Example Mike Vokema, CEO of Herman Miller, estimated that 80% of costs stemmed from organization of the company Herman Miller was reengineered by: • dissembling the organization of top management • starting from scratch with a new leadership team • revamping product development with cross-functional departmentalization Source: Neff & Citrin: Lessons from the Top, 1999, pp. 319-326.

25. Learning Goal 7 • How does the informal organization affect the performance of a company? • Informal organizations • Give employees more control over their work environment by delivering a continuous stream of company information, helping employees stay informed • Informal relationships can be: • Between people at the same hierarchical level • Between people at different levels and in different departments

26. The Informal Organization: the network of connections and channels of communication based on the informal relationships of individuals inside an organization

27. Functions of theInformal Organization 1. Friendships & social contact 2. Information & sense of control over work environment 3. Source of status & recognition

28. The Informal Organization Social network analysis: the mapping of social relationships among individuals in an organization • Consultants for Ernst & Young saved an automobile industry supplier an estimated $14 million by applying social network analysis to improve communication Source: Entrepreneur, Jan. 2000, p. 110.

29. Learning Goal 8 • What trends are influencing the way businesses organize? • Virtual corporations • Network of independent companies linked by information technology to share skills, costs, and access to one another’s markets • Allows companies to come together quickly to exploit rapidly changing opportunities • Key attributes are technology, opportunism, excellence, trust, and no borders • Large global mergers • Raise important issues in organizational structure

30. Trends AffectingOrganizational Structure • Increase in the Virtual Corporation • More prevalent need to structure for global mergers

31. Virtual Company Example General Life, a virtual life insurance company, reduces fixed costs (80% of traditional company costs) by subcontracting: • application processing, underwriting, commission accounting, policyholder service, agent appointments, technology development, illustration design & support, policy filing and licensing, and assert management Source: Best’s Review, May 1998: www.ambest.com