Overview of the Chapter

Chapter seven

designing Organizational Structure

OVERVIEW OF THE CHAPTER

To create high performing organizations, managers must design an organizational architecture that maximizes the efficient use of resources. 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 closes with a discussion of integrating mechanisms and the growing popularity of global strategic alliances and business-to-business network structures.

LEARNING OBJECTIVES

1.  Identify the factors that influence managers’ choice of an organizational structure. (LO1)

2.  Explain how managers group tasks into jobs that are motivating and satisfying for employees. (LO2)

3.  Describe the types of organizational structures managers can design, and explain why they choose one structure over another. (LO3)

4.  Explain why managers must coordinate and integrate between jobs, functions, and divisions as an organization grows.(LO4)

LECTURE OUTLINE

MANAGEMENT SNAPSHOT: MICROSOFT CENTRALIZES TO MEET GOOGLE’S CHALLENGE

Microsoft has been working hard to compete with Yahoo and especially Google, which are developing innovative Web-based software products to attract broadband users. Because Microsoft’s managers realize their decision making is slowed by its decentralized structure, they have decided to reorganize. Seven business units are being consolidated into three principal divisions, each of which will be headed by a manager with proven product innovation skills. The objective is to reduce infighting and miscommunication that was slowing product development between the seven units. In the new structure, the three divisional heads will yield enormous power. Also, an additional layer is being added to the company’s hierarchy, thus presenting the danger of increased bureaucracy.

I. DESIGNING ORGANIZATIONAL STRUCTURE (LO1)

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 organization’s 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 manager’s 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 organization’s structure.

·  In today’s 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.

·  Managers are also challenged to create organizational structures that allow flexibility on a global level.

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.

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 organization’s 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 (LO2)

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.

·  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 employee’s job, managers are expecting that employee’s 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. Oldham’s 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.

·  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 employee’s motivation by impacting three critical psychological states. They are: 1) feeling that one’s 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 (LO3)

The next organizing decision is how to group jobs together to best match the needs of the organization’s environment, strategy, technology, and human resources. Most top-management 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.

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 self-contained 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 division’s managers can become experts in their industry.

·  It frees corporate managers from the need to supervise directly each division’s day-to-day 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: GlaxoSmithKline’s 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 company’s largest challenges was to determine the best way to combine the talents of scientists and researchers from both organizations so that 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 cluster of diseases, such as heart disease or viral infections.

To date, GlaxoSmithKline’s 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 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 organization’s products to each customer’s 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.

Managing Globally: Nokia, Dow and the LEGO Company Revamp Their Global Structures to Raise Performance

This case describes three different strategies used by three different CEOs to reorganize their company. Lego’s 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 self-contained units – the plastics, chemicals and intermediates, and performance chemical groups. Dow’s objective was to provide managers with the focus required to effectively meet a variety of customer needs. Finally, Nokia decided to create two new global divisions for the purpose of quickly developing innovative wireless communications products. Nokia’s CEO realized that its lack of such products represented a weakness in the company’s product line. Nokia’s goal was to obtain a significant share of the lucrative wireless technology market to help boost its corporate performance.