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Fundamentals ofOrganization Structure
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Organization Structure
Three key components
designation of formal reportingrelationships
grouping of individuals into departmentsand of departments into the totalorganization;
of systems to ensure effectivecommunication, coordination, and
integration across departments.
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Organization chart
The visual representation ofunderlying activities and processes
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A Sample Organization Chart
ChiefAccountant
BudgetAnalyst
Vice PresidentFinance
PlantSuperintendent
MaintenanceSuperintendent
Vice PresidentManufacturing
TrainingSpecialist
BenefitsAdministrator
DirectorHuman Resources
CEO
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Information-ProcessingPerspective on Structure
The structure must fit informationrequirements of the organization
Vertical linkages are designedprimarily for control,
Horizontal linkages that are designedfor coordination and collaboration; allorganizations need a mix.
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Emphasis on VL(ie., efficiency & control)specialized tasks, hierarchy of authority, rules ®ulations, formal reporting systems, centralized
decision making, few teams/task forces;
Emphasis on HL- relaxed hierarchy, few rules,
face-to-face commn, many teams/task forces,informal decentralized DM, etc.;
But these two extremes have their own
disadvantages too, thus need for searching bestcombination of vertical controls and horizontalcollaboration, centralization and decentralization;
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The Relationship of OrganizationDesign to Efficiency vs. Learning
OutcomesHorizontal Organization
Designed for Learning
Vertical Organization
Designed for Efficiency
Dominant
Structural
Approach
Horizontal structure is dominant
Shared tasks, empowerment
Relaxed hierarchy, few rules
Horizontal, face-to-face communication
Many teams and task forces
Decentralized decision makingVertical structure is dominant
Specialized tasks
Strict hierarchy, many rules
Vertical communication and reporting systems
Few teams, task forces or integrators
Centralized decision making
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Structural Design Options for GroupingEmployees into Departments
Engineering Marketing Manufacturing
CEO
Functional
Grouping
Source: Adapted from David Nadler and Michael Tushman,
Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.
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Strengths and Weaknesses ofFunctional Organization Structure
STRENGTHS:Allows economies of
scale within functional
departmentsEnables in-depth
knowledge and skilldevelopment
Enables organizationto accomplish
functional goalsIs best with only one
or a few products
WEAKNESSES:Slow response time to
environmental changes
May cause decisions to pile ontop, hierarchy overload
Leads to poor horizontalcoordination amongdepartments
Results in less innovation
Source: Adapted from Robert Duncan, What Is the Right
Organization Structure? Decision Tree Analysis Provides the Answer,
Organizational Dynamics (Winter 1979): 429.
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From Functional Structure toDivisional Structure
Functional structure is appropriate ifthe organization:
Limits itself to producing a small numberof similar products
Produces those products in one or a few
locations
Sells them to only one general type ofclient or customer
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Functional to Divisional
However, as organizations grow, they arelikely to produce more products, which maybe different from each other.
Organizations also increase production at anumber of location to serve many differenttypes of customers.
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Firm Growth as EvolutionaryProcess
Single Business
Geographic
Diversification(Foreign Sales as %Total Sales)
Product
Diversification(Product Diversity)
Product and Geographic
Diversification
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Grouping is done based on
organizational output
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14
Moving to a DivisionalStructure Organizations most commonly adopt the
divisional structure to solve controlproblems with too many products,regions, or customers.
Divisional structure is dependent oncontrol problem to be solved.
Three types Product structure Geographic structure Market structure
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15
Product Structure
Product structure: a divisional structurein which products (goods or services) aregrouped into separate divisionsaccording to their similarities or
differences
Organizations need to decide how tocoordinate its product activities with
support functions.
Product Division structure, Multidivisionalstructure
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16
Product Division Structure
Product division structure: astructure in which a centralized set ofsupport functions service the needs of
a number of different product lines
Divided into product-oriented teams of
functional specialists who focus on theneeds of one particular productdivision
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17
Product Division Structure
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18
Multidivisional Structure
Organizations that produce a wide range ofproducts typically use the multidivisionalstructure.
A structure in which support functions are
placed in self-contained division.
Each division has its own set of supportfunctions and controls its own value.
Most Fortune 500 companies use amultidivisional structure. Allows them to grow and expand their operations
while maintaining control over their activities
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19
Multidivisional Structure
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20
Multidivisional Structure
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21
Divisional Structure II: GeographicStructure
When the control problems that companiesexperience are a function of geography, ageographic divisional structure isappropriate.
Allows the organization to adjust itsstructure to align its core competences withthe needs of customers in different
geographic regions
Allows some functions to be centralized andothers decentralized
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Geographical Structurefor Apple Computer
CEO
Steve Jobs
Apple
Europe
Apple
Pacific
France
Apple
Products
Asia
Japan
Australia
Apple
Americas
Canada
Latin
America/Caribbean
Sales
Service and
Marketing
to Regions
Source: www.apple.com
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GeographicalDepartmentalization
Indian oil
Refineries division Pipeline division
MathuraGuwahati North West East
GujaratBarauni
PanipatHaldia
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24
Divisional Structure III : MarketStructure
A market structure aligns functional skillsand activities with the needs of differentcustomer groups.
Each customer group has a differentmarketing focus, and the job of eachgroup is to develop products to suit the
needs of its specific customers.
Each customer group makes use of
centralized support function.
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25
Figure 6-11: Market Structure
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Strengths and Weaknesses ofDivisional Organization Structure
STRENGTHS:Suited to fast change in
unstable environment
Leads to client satisfaction
because product responsibilityand contact points are clear
Involves high coordinationacross functions
Allows units to adapt todifferences in products, regions,
clientsBest in large organizations with
several products
Decentralizes decision-making
WEAKNESSES:Eliminates economies of
scale in functionaldepartments
Leads to poorcoordination acrossproduct lines
Eliminates in-depthcompetence and technicalspecialization
Makes integration andstandardization acrossproduct lines difficult
Source: Adapted from Robert Duncan, What Is the
Right Organization Structure? Decision Tree Analysis
Provides the Answer, Organizational Dynamics
(Winter 1979): 431.
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Matrix Structure
The search for better and faster waysto develop products and to respond tocustomer needs has led companies toadopt a matrix structure.
Can be used when both technicalexpertise and product innovation andchange are important to meet
organizational goals
Strong form of horizontal linkage
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Matrix structure
A matrix is a rectangular grid vertical flow of functional responsibility
horizontal flow of product responsibility.
The members of the team are calledtwo-boss employees
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Production
group
Two-boss
manager
Engineering
group
Two-boss
manager
Personnel
group
Two-boss
manager
Accounting
group
Two-boss
manager
Matrix OrganizationalStructure
Production
group
Two-boss
manager
Engineering
group
Two-boss
manager
Personnel
group
Two-boss
manager
Accounting
group
Two-boss
manager
Accounting
Project
Manager
A
Project
Manager
B
Project
managementProduction
ChairmanCEO
Engineering PersonnelFunctional
managers
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Matrix is correct structure when followingconditions are met
Pressure exist to share the scare resources
across product lines, medium sizeorganization, and moderate number ofproduct line
Environmental pressure exists for in-depthskill and frequent new products
Environment is uncertain
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Strengths and Weaknesses ofMatrix Organization Structure
STRENGTHS:Achieves coordination
necessary to meet dualdemands from customers
Flexible sharing of humanresources across products
Suited to complex decisionsand frequent changes inunstable environment
Provides opportunity for bothfunctional and product skill
developmentBest in medium-sized
organizations with multipleproducts
WEAKNESSES:Causes participants to experience
dual authority, which can befrustrating and confusing
Means participants need goodinterpersonal skills and extensivetraining
Is time consuming; involves frequentmeetings and conflict resolutionsessions
Will not work unless participantsunderstand it and adopt collegialrather than vertical-typerelationships
Requires great effort to maintainpower balance
Source: Adapted from Robert Duncan, What Is the Right
Organization Structure? Decision Tree Analysis Provides theAnswer,Organizational Dynamics (Winter 1979): 429.
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32
The Multidivisional MatrixStructure Multidivisional matrix structure: a
structure that provides for moreintegration between corporate and
divisional managers
Makes it easier for top executives from
divisions and corporate center tocooperate
The Relative Advantage and
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The Relative Advantage andDisadvantages of Different
StructureFunctional Divisional Matrix
Resourceefficiency
Excellent Poor Moderate
Time efficiency Poor Good Moderate
Adaptability Poor Good Moderate
Environment forwhich best suited
Stable Heterogeneous Complexenvironmentmultiple demand
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Horizontal Structure
The organization chart is being formally structuredalong horizontal workflow and process
A process refer to an organized group of related
tasks and activities that work together to transforminputs into outputs that create value to customer
Examplenew product development, customerservice
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Davenport (1993, p.5) defines a businessprocess
as ...a structured, measured set of activities
designed to produce a specific output for aparticular customer of market.
Hammer and Champy (1993, p.35) defines
... a business process as a collection ofactivities that takes one or more kinds ofinput and creates an output that is of value tothe customer
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Core process groups are the formal organizationaldepartments of the horizontal organization
They are not functions differ from traditionalvertical silos
As a result of process redesign and vesting of moreemployees with decision making authority, the CPG isflatter than a functional department
CPG typically arranges people in multidisciplinary ways-dictated by what is required to deliver the value proposition
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Four types of processes. customer processes which are those processes that add
value for external customers.
Development processes such as product development,product/market innovation, technology innovation etcetera
allow the organization to work effectively on a longer timehorizon.
planning and control processes focus on particularmanagement tasks.
staff and service processes have to be recognized as well.They play a role as an enablerof all the other types ofprocesses. Frequently cited examples are ICT, humanresource management, finance and administration andmaintenance.
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Xerox
To provide a horizontal view, Xerox identified fourcore customer-oriented processes:
Time to Market, which focuses on manufacturing andengineering;
Integrated Supply Chain, which deals with themovement of parts and products;
Market to Collection, which includes marketing, sales,
and billing; and
Customer Service, which provides maintenance andtechnical support to customers.
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A Horizontal Structure
Team3
Team2
Team1
Top
Management
Team
Team
3
Team
2
Team
1
Customer
Customer
ProcessOwner
Process
Owner
TestingProduct
PlanningResearch
Market
Analysis
New Product Development Process
Distrib.Material
FlowPurchasingAnalysis
Procurement and Logistics Process
Sources: Based on Frank Ostroff,
The Horizontal Organization, (New York:
Oxford University Press, 1999); John A. Byrne,
The Horizontal Corporation,Business Week,
December 20, 1993, 76-81; and Thomas A. Stewart,
The Search for the Organization of Tomorrow,Fortune, May 19, 1992, 92-98.
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Strengths and Weaknesses ofHorizontal Structure
STRENGTHS:Flexibility and rapid response to
changes in customer needs
Directs the attention of everyonetoward the production and delivery ofvalue to the customer
Each employee has a broader view oforganizational goals
Promotes a focus on teamwork andcollaborationcommon commitmentto meeting objectives
Improves quality of life for employees
by offering them the opportunity toshare responsibility, make decisions,and be accountable for outcomes
WEAKNESSES:Determining core processes to
organize around is difficult andtime-consuming
Requires changes in culture,job design, managementphilosophy, and informationand reward systems
Traditional managers may balkwhen they have to give uppower and authority
Requires significant training ofemployees to work effectivelyin a horizontal teamenvironment
Can limit in-depth skilldevelopment
Sources: Based on Frank Ostroff, The Horizontal Organization: What the
Organization of the Future Looks Like and How It Delivers Value to
Customers, (New York: Oxford University Press, 1999);and Richard L. Daft, Organization Theory and Design, 6th ed.,
(Cincinnati, Ohio: South-Western College Publishing, 1998) 253.
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41
Network Structure
A cluster of different organizations whoseactions are coordinated by contracts andagreements rather than through a formalhierarchy of authority
Very complex as companies form agreementswith many suppliers, manufacturers, anddistributors
Such agreements are necessary as theorganization outsources many of the valuecreation activities involved in production andmarketing goods and services
Ad f N k
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42
Advantages of NetworkStructures
To the degree that a network partner canperform a specific functional activity reliably,and at a lower cost, production costs arereduced.
Avoids the high bureaucratic costs ofoperating a complex organizationalstructure
Allows an organization to act in an organicway
-
Di d f N k
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43
Disadvantages of NetworkStructures
A considerable level of mutualadjustment is needed to allow thegroups to interact so that they can
learn from one another.
Difficult to obtain the ongoing learning
that builds competences ascompanies have no incentive to do so
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FunctionalStructure
Hybrid StructureSun Petrochemical Products
President
TechnologyVice
President
FinancialServices
Vice Pres.
HumanResources
Director
ChiefCounsel
Chemicals
VicePresident
Lubricants
VicePresident
Fuels
VicePresident
Product
Structure
Sources: Based on Linda S. Ackerman, Transition Management:
An In-Depth Look at Managing Complex Change,
Organizational Dynamics (Summer 1982): 46-66;and Frank Ostroff, The Horizontal Organization,
(New York: Oxford University Press, 1999), Fig. 2.1, 34.
H b id St t
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Hybrid StructureFord Customer Service Division
Director and
Process Owner
Director and
Process Owner
Sources: Based on Linda S. Ackerman, Transition Management:
An In-Depth Look at Managing Complex Change, Organizational Dynamics(Summer 1982): 46-66; and Frank Ostroff, The Horizontal Organization,
(New York: Oxford University Press, 1999), Fig. 2.1, 34.
Human
Resources
Strategy and
CommunicationFinance
Vice President and
General Manager
Teams
Teams
Director and
Process Owner Teams
Technical Support Group
Vehicle Service Group
Parts Supply / Logistics Group
Functional
Structure
Horizonta
lStructure
Teams
Teams
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Organization Contextual Variablesthat Influence Structure
Structure
(learning vs.
efficiency)
Environment
Chapters 4, 6
Culture
Chapter 10
Size
Chapter 9
Strategy,
Goals
Chapter 2
Technology
Chapters 7,8
Sources: Adapted from Jay R. Galbraith,
Competing with Flexible Lateral Organizations, 2nd ed.
(Reading, Mass.: Addison-Wesley, 1994), Ch.1;
Jay R. Galbraith, Organization Design (Reading, Mass.:
Addison-Wesley, 1977), Ch. 1 .
The Relationship of Structure to
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The Relationship of Structure toOrganizations Need for Efficiency vs.
Learning
Horizontal
Structure
Dominant
Structural
Approach
Horizontal:
Coordination
Learning
Innovation
FlexibilityVertical:
Control
Efficiency
Stability
Reliability
Matrix
StructureDivisional
Structure
Functional with
cross-functional
teams, integrators
Functional
Structure
Modular
Structure
S f
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Symptoms ofStructural Deficiency
Decision making is delayed or lackingin quality
The organization does not respond
innovatively to a changingenvironment
Too much conflict is evident