Designing organizational structures - summary of chapter 13 of Organizational Behavior by Mcshane, S. (8th edition)

Organizational Behavior 
Chapter 13
Designing organizational structures

Organizational structure: the division of labor as well as the patterns of coordination, communication, workflow, ad formal power that direct organizational activities.

Two fundamental processes in organizational structure:

• Division of labor
• Coordination

Four main elements of organizational structure:

• Span of control
• Centralization
• Formalization
• Departmentalization

Contingencies of organizational design:

• External environment
• Organizational size
• Technology
• Strategy

Division of labor and coordination

Division of labor

Division of labor: the subdivision of work into separate jobs assigned to different people.
Subdivided work leads to job specialization.
Job specialization increases work efficiency.

Coordination of work activities

When people divide work among themselves, they require coordinating mechanisms to ensure that everyone works in concert.
Coordination is so closely connected to division of labor that the optimal level of specialization is limited by the feasibility of coordinating the work. An organization’s ability to divide work among people depends on how well those people can coordinate each other.
Coordination tends to become more expensive and difficult as the division of labor increases.

Coordinating mechanisms:

• Informal communication
  All organizations rely on informal communication as a coordinating mechanism.
  Includes sharing information on mutual tasks as well as forming common mental models so that employees synchronize work activities using the same mental road map.

Vital in nonroutine and ambiguous situations.
Liaison roles, expected to communicate and share information with coworkers in other work units. Integrator roles, people are responsible for coordinating a work process by encouraging employees in each work unit to share information and informally coordinate work activities.

• Formal hierarchy
• Standardization

Elements of organizational structure

Span of control

Span of control: the number of people directly reporting to the next level above in the hierarchy.
Also called span of management.

Influences on the span of control:

• Managers can often accommodate a wider span of control because staff members are self-managing and coordinate mainly through standardized skills.
• Whether employees perform routine tasks. A wider span of control is possible when employees perform routine jobs.
• The degree of interdependence among employees within the department or team. A narrow span of control is necessary for highly interdependent jobs.

Tall versus flat structures

Span of control is interconnected with organizational size and the number of layers in the organizational hierarchy.

The interconnection of span of control, organizational size and number of management layers has important implications for companies.

• As organizations grow, they typically employ more people, which means they must widen the span of control, build a taller hierarchy, or both.
  Building taller hierarchy creates problems.
  • Executives in tall structures tend to receive lower-quality and less timely information
  • Taller structures have higher overhead costs. More people administering the company.
  • Employees feel less empowered in their work

Centralization and decentralization

Centralization: the degree to which formal decision authority is held by a small group of people, typically those at the top of the organizational hierarchy.

Decentralize: organizations disperse decision authority and power throughout the organization.

Different degrees of decentralization can occur simultaneously in different parts of an organization.

Formalization

Formalization: the degree to which organizations standardize behavior through rules, procedures, formal training, and related mechanisms.

Older companies tend to become more formalized because work activities become routinized, making them easier to document into standardized practices.

Formalization may increase efficiency and compliance, but it can also create problems.

• Rules and procedures reduce organizational flexibility
• High levels of formalization tend to undermine organizational learning and creativity
• Some work rules become so convoluted that organizational efficiency would decline if they were actually followed as prescribed.
• Formalization is a source of job dissatisfaction and work stress.
• Rules and procedures have been known to take on a life of their own in some organizations. They become the focus of attention.

Mechanistic versus organic structures

Mechanistic structure: an organizational structure with:

• A narrow span of control
• A high degree of formalization
• A high degree of centralization

Organic structures: an organizational structure with:

• A wide span of control
• Little formalization
• Decentralized decision making

Mechanistic structures operate better in stable environments because they rely on efficiency and routine behaviors.
Organic structures work better in rapidly changing (dynamic) environments because they are more flexible and responsive to changes.
Organic structures are also more compatible with organizational learning and high-performance workplaces.
The effectiveness of organic structures depends on how well employees have developed their roles and expertise.

Forms of departmentalization

The organization chart represents the fourth element in the structuring of organizations called departmentalization.
Departmentalization specifies how employees and their activities are grouped together.
Influences organizational behavior in the following ways:

• Departmentalization establishes the chain of command. Is establishes interdependencies among employees and subunits.
• Departmentalization focuses people around common mental models or ways of thinking.
• Encourages specific people and work units to coordinate through informal communication.

Six most common pure types of departmentalization:

• Simple
• Functional
• Divisional
• Team-based
• Matrix
• Network

Simple structure

Minimal hierarchy.
Employees perform broadly defined roles because there are insufficient economies of scale to assign them to specialized jobs.
Highly flexible and minimizes the walls that form between employees in other structures.

Functional structure

As organizations grow, they typically shift from a simple structure to a functional structure.
A functional structure: an organizational structure in which employees are organized around specific knowledge or other structures.

Evaluating the functional structure

The functional structure creates specialized pools of talent that typically serve everyone in the organization.

• Pooling talent into one group improves economies of scale compared to dispersing functional specialists over different parts of the organization
• Also increases employee identity with the specialization or profession

Direct supervision is easier in a functional structure because managers oversee people with common issues and expertise.

The functional structure has limitations

• Employees around their skills tend to focus attention on those skills and related professional needs rather than on the companies products, services or client needs. They might not develop a broader understanding of the business.
• The functional structures produces more dysfunctional conflict and poorer coordination.

Divisional structure

The divisional structure: an organizational structure in which employees are organized around geographic areas, outputs, or clients.
Three variations

• Geographic divisional structure: organizes people around distinct regions of the country or wold
• Product/service divisional structure: organizes employees around distinct outputs.
• Client divisional structure: organizes employees around specific customer groups.

The form of divisional structure a large organization should adopt depends mainly on the primary source of environmental diversity or uncertainty.

Evaluating the divisional structure

The divisional structure is a building-block structure. It accommodates growth relatively easily.
Also outcome-focused.

Limitations:

• Tends to duplicate resources
• Unless the division is quite large, resources are not used as efficiently as they are in functional structures.
• Creates silos of knowledge
• The preferred divisional structure depends on the company’s primary source of environmental diversity or uncertainty. Leaders struggle to find the best structure, often resulting in the departure of some executives and frustration among those who remain.

Team-based structure

Team-based structure: an organizational structure built around self-directed teams that complete an entire piece of work.
Usually organic.
Wide span of control because teams operate with minimal supervision.
Highly decentralized because almost all day-to-day decisions are made by team members rather than someone further up the organizational hierarchy.
Usually found within the manufacturing or service operations of larger divisional structures.

Evaluating the team-based structure

Flexible and responsive in turbulent environments.
Less reliance on formal hierarchy.
Improves communication and cooperation.

But

• Need for ongoing interpersonal skill training.
• More time to coordinate
• more stress due increased ambiguity or increased conflict, loss of functional power and unclear career progression ladders.

Matrix structure

Matrix structure: an organizational structure that overlays two structures in order to leverage the benefits from both.

The product-geographic matrix structure is the most common matrix design among global companies.
A ‘pure’ matrix design is relatively uncommon. Most have a complex.
Some companies deviate form the pure matrix design by applying it only to some regions.

Evaluating the matrix structure

The project-functional matrix structure usually makes very good use of resources and expertise, making it ideal for project-based organizations with fluctuating workloads.
When properly managed, it improves communication efficiency, project flexibility, and innovation.
It focuses employees on serving clients or creating products, yet keeps people organized around their specialization.
Knowledge sharing improves and human resources are used more efficiently.

Logical choice when two different dimensions are equally important.

Problems:

• It increases conflict among managers who equally share power.
• Ambiguous accountability

Network structure

Network structure: an alliance of several organizations for the purpose of creating a product or serving a client.
Typically consists of several satellite organizations bee-hived around a hub or core firm. The core firm orchestrates the network process and provides one or who other core competencies.
The core firm might be the main contact with customers, but most of service delivery and support activities are farmed out to satellite organizations located anywhere in the world.

One of the main forces pushing toward a network structure is the recognition that an organization has only a few core competencies.
Core competency: a knowledge base that resides throughout the organization and provides strategic advantage.

Companies are also more likely to form network structures when technology is changing quickly and production processes are complex or varied.

Evaluating the network structure

Good

• Flexibility to realign their structure with changing environmental requirements
• The core firm becomes globally competitive as it shops worldwide for subcontractors with the best people and the best technology at the best price.

Disadvantage

• They expose the core firm to marked forces
• Information technology makes worldwide communication much easier, but it will never replace the degree of control organizations have when manufacturing, marketing, and other functions are in-house.

Contingencies of organizational design

Ideas that work well in one situation might not work as well in another situation.

External environment

The best structure for an organization depends on its external environment.
Four characteristics of external environment influence the type of organizational structure best suited to a particular situation:

• Dynamic versus stable environments
  Organic is better in dynamic environments.
• Complex versus simple environments
  The more complex the environment, the more decentralized the organization should become
• Diverse versus integrated environments
  The more diverse the environment, the more the firm needs to use a divisional structure aligned with that diversity.
• Hostile versus munificent environments
  Organic structures tend to be best in hostile environments. (except extremely hostile. Than centralization)

Organizational size

As the number of employees increases, job specialization increases due to a greater division of labor.
The greater division of labor requires more elaborate coordinating mechanisms.
Larger firms make more use of standardization.
Larger organizations also tend to be more decentralized.

Technology

Technology: the mechanisms or processes an organization relies on to make its products or services.
Two main technological contingencies:

• Variability
  How predictable the job duties are from one day to the next
• Analyzability
  How much the job can be performed using known procedures and rules.

An organic structure should be introduced where employees perform tasks with high variability and low analyzability.
A mechanistic structure is preferred where the technology has low variability and high analyzability.

Organizational strategy

Organizational strategy: the way the organization positions itself in its environment in relation to its stakeholders, given the organization’s resources, capabilities, and mission.

If a company’s strategy is to compete through innovation, a more organic structure would be preferred.
A mechanistic structure is preferred is a company chooses low-costs.