Maximizing Profitability Through Organizational Structure

1. Chapter 11: Designing Organizational Structure Text by Charles W. L. Hill Gareth R. Jones Multimedia Slides by Milton M. Pressley Univ. of New Orleans

2. Preview • The Role of Organizational Structure • Vertical Differentiation • Horizontal Differentiation • Integration and Integrating Mechanisms

3. The Role of Organizational Structure • Organizational Structure Defined • Building Blocks • Differentiation • Vertical • Horizontal • Integration • Bureaucratic Costs

4. Good Organizational Design Economizes on the Bureaucratic Costs of Organizational Structure Enhances a Company’s Value-Creation Skills Leading to a Low-cost Advantage Leading to Differentiation Advantages and Ability to Charge a Premium Price Which Increases Profit Figure 11.1: How Organizational Design Increases Profitability

5. Vertical Differentiation • Span of Control

6. 1 2 Vertical Differentiation 3 Figure 11.2: Tall and Flat Structures • Span of Control 1 2 3 4 5 6 7 8 Tall Structure (8 levels) Flat Structure (3 levels)

7. Vertical Differentiation (Continued) Problems with Tall Hierarchies

8. Figure 11.3: Relationship Between Company Size and Number of Hierarchical Levels 10 9 8 7 6 5 4 Number of Hierarchical Levels 1000 2000 3000 10,000 Employees

9. Vertical Differentiation (Continued) Problems with Tall Hierarchies • Minimum Chain of Command Principle

10. Figure 11.4: Sources of Bureaucratic Costs Number of Middle Managers Coordination Problem Information Distortion Motivational Problems Bureaucratic Costs

11. Vertical Differentiation (Continued) Problems With Tall Hierarchies • Coordination Problems • Information Distortion • Motivational Problems • Number of Middle Managers • Minimum Chain of Command Principle

12. Vertical Differentiation (Continued) Centralization or Decentralization? • Centralization Defined • Decentralization Defined • Advantages of Decentralization • Information Overload Reduction • Increase of Motivation and Accountability (Increases Flexibility and Reduces Bureaucratic Costs) • Fewer Managers Needed (Reduced Bureaucratic Costs)

13. Vertical Differentiation (Continued) Centralization or Decentralization? • Advantages of Centralization • Easier Coordination of Activities Needed to Pursue Firm’s Strategy • Decisions Fit Broad Organizational Objectives • Strong, Focused Leadership Allows for Speedy Decision

14. Horizontal Differentiation • Simple Structure • Functional Structure

15. CEO Researchand Devel- opment Sales and Marketing Manufact- uring Materials Manage- ment Engineer- ing Figure 11.5: Functional Structure

16. Horizontal Differentiation (Continued) • Simple Structure • Functional Structure • Advantages of Functional Structures • People Learn from Each Other and Become More Specialized and Productive • Gives Managers Greater Control of Organizational Activities

17. Horizontal Differentiation (Continued) • Problems With Functional Structures • Communications Problems • Measurement Problems • Location Problems • Strategic Problems

18. Multidivisional Structure • Two Main Innovations • Each SBU in Its Own Self-Contained Division • Office of Corporate Headquarters Staff Monitors and Exercises Financial Control Over Divisional Activities

19. CEO Corporate Headquarters Staff Figure 11.6: Multidivisional Structure Typical Chemical Company Oil Division (Functional Structure) Pharmaceuticals Division (Product Team Structure) Plastics Division (Matrix Structure)

20. Multidivisional Structure (Continued) • Two Main Innovations • - Each SBU in Its Own Self-Contained • Division • - Office of Corporate Headquarters Staff • Monitors and Exercises Financial Control Over Divisional Activities • Operating Responsibility • Strategic Responsibility

21. Multidivisional Structure (Continued) • Enhanced Corporate Financial Control • Enhanced Strategic Control • Growth • Stronger Pursuit of Internal Efficiency • Advantages of Multidivisional Structure

22. Multidivisional Structure (Continued) • Disadvantages of Multidivisional Structure • Difficulty of Establishing the Divisional-Corporate Authority Relationship • Distortion of Information • Competition for Resources • Transfer Pricing • Short-Term Research and Development Focus • Bureaucratic Costs

23. Matrix Structure • Matrix Structure Defined

24. Figure 11.7: Two Boss Employees President FunctionalManagers Sales & Marketing Finance R&D R&D Purchasing Proj A Proj B Proj/Product Mgrs Proj C Proj D

25. Matrix Structure (Continued) • Advantages • Speedy Product Development • Autonomy and Flexibility Suitable for Professional Employees • Makes Maximum Use of Employee Skills As Existing Projects are Completed and New Projects Develop • Leaves Top Management Free to Concentrate on Strategic Issues

26. Matrix Structure (Continued) • Disadvantages • High Bureaucratic Costs • High New Project Startup Costs • Conflict Between Functions and Projects Over Resources • Difficult to Operate Because Task and Role Relationships Become Complex

27. Product Team Structure • Product Team Structure Defined

28. CEO Materials Management Sales and Marketing Engineering R&D Product Teams Manufacturing Units Figure 11.8: Product Team Structure

29. Product Team Structure (Continued) • Product Team Structure Defined • Advantages Similar to Matrix Structure (But, Easier and Less Costly to Operate)

30. Geographic Structure • Geographic Structure Defined

31. Regional Operations Central Operations Regional Operations Regional Operations CEO Regional Operations Figure 11.9: Geographic Structure

32. Geographic Structure (Continued) • Advantages • More Responsive to Regional Customers’ Needs • Reduces Transportation Costs • Provides More Control Than Functional Structure • Economies of Scale Achieved • Reduction of Coordination and Communications Problems

33. Integration and Integrating Mechanisms • Integration • Relationship Between Differentiation and Integration • Forms of Integrating Mechanisms • Direct Contact • Interdepartmental Liaison Roles • Temporary Task Forces • Permanent Teams • Integrating Roles • Integrating Departments • Matrix Structure

34. Direct Sales and production managers Contact Liaison Roles Task Forces Teams Integrating Roles Integrating Departments Matrix Table 11.1: Types and Examples of Integrating Mechanisms

35. Direct Sales and production managers Contact Liaison Assistant sales and plant managers Roles Task Forces Teams Integrating Roles Integrating Departments Matrix Table 11.1: Types and Examples of Integrating Mechanisms

36. Sales Production Figure 11.10: Forms of Integrating Mechanisms (a) Liaison Role

37. Direct Sales and production managers Contact Liaison Assistant sales and plant managers Roles Task Forces Representatives from sales, production, and research and development Teams Integrating Roles Integrating Departments Matrix Table 11.1: Types and Examples of Integrating Mechanisms

38. Direct Sales and production managers Contact Liaison Assistant sales and plant managers Roles Task Forces Representatives from sales, production, and research and development Teams Organizational executive committee Integrating Roles Integrating Departments Matrix Table 11.1: Types and Examples of Integrating Mechanisms

39. Production Sales Research & Develop- ment Engineering Figure 11.10: Forms of Integrating Mechanisms (Continued) (b) Task Force or Team

40. Direct Sales and production managers Contact Liaison Assistant sales and plant managers Roles Task Forces Representatives from sales, production, and research and development Teams Organizational executive committee Integrating Assistant vice-president for strategic Roles planning or vice president without portfolio Integrating Departments Matrix Table 11.1: Types and Examples of Integrating Mechanisms

41. Figure 11.10: Forms of Integrating Mechanisms (Continued)(c) Integrating Role Integrating Role OilDivision Plastics Division

42. Direct Sales and production managers Contact Liaison Assistant sales and plant managers Roles Task Forces Representatives from sales, production, and research and development Teams Organizational executive committee Integrating Assistant vice-president for strategic Roles planning or vice president without portfolio Integrating Corporate headquarters staff Departments Matrix Table 11.1: Types and Examples of Integrating Mechanisms

43. Direct Sales and production managers Contact Liaison Assistant sales and plant managers Roles Task Forces Representatives from sales, production, and research and development Teams Organizational executive committee Integrating Assistant vice-president for strategic Roles planning or vice president without portfolio Integrating Corporate headquarters staff Departments Matrix All roles are integrating roles Table 11.1: Types and Examples of Integrating Mechanisms

44. Integration and Integrating Mechanisms (Continued) • Integration • Relationship Between Differentiation and Integration • Forms of Integrating Mechanisms • Direct Contact • Interdepartmental Liaison Roles • Temporary Task Forces • Permanent Teams • Integrating Roles • Integrating Departments • Matrix Structure • Integration and Control

45. THE ROLE OF ORGANIZATIONAL STRUCTURE VERTICAL DIFFERENTIATION HORIZONTAL DIFFERENTIATION INTEGRATION AND INTEGRATING MECHANISMS Chapter Summary