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M A N A G E M E N T1st E D I T I O N

Gulati | Mayo | Nohria

Chapter 7

Organizational

Design

ORGANIZATIONAL

PERSPECTIVE

©South-Western, a part of Cengage Learning PowerPoint Presentation by Charlie Cook

Learning Objectives

• Understand the role that organizations play in helping a firm achieve its strategic objectives

• Define the various organizational design decisions that are central to creating an organization that is aligned with a firm’s strategic objectives

• Explain the different forms of organizational structure including functional, divisional, matrix, network, and hybrid and outline the advantages and disadvantages of each form

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Learning Objectives

• Determine what organizational choices and leadership approaches correspond to specific life-cycle stages of a business

• Describe how firms are redefining their organizations to better meet the demands of customers and improve their operational efficiency

© South-Western, a part of Cengage Learning 7-3

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© South-Western, a part of Cengage Learning 1–4

Figure 1.1 - The Pillars of Management

We are here

Organizational DesignOrganizational Design

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The formal systems, levers, and decisions an organization adopts or employs in pursuit of its strategy

Why organizing is relevant:

Rule of 150

Why organizing is relevant:

Rule of 150

Robin Dunbar suggested a cognitive limit to the number of people with whom one can maintain

stable social relationships.

• Over 150 employees:– Managers no longer know what all the employees

do

– Employees no longer know what all the other employees do.

– A need for organization comes up

– Multiple ways to organize a company

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Division of LaborDivision of Labor

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Horizontal specialization - The

breadth of activities that are performed in a certain job

Horizontal specialization - The

breadth of activities that are performed in a certain job

The manner in which work in a firm is divided among employeesThe manner in which work in a firm is divided among employees

Vertical specialization - How much

an employee creates, executes, and administers activities in a certain

area of the firm

Vertical specialization - How much

an employee creates, executes, and administers activities in a certain

area of the firm

Division of LaborDivision of Labor

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• Advantages

– Creation of highly specialized jobs can help develop expertise or competency in a certain skill or function

– Repetitive and specialized nature of jobs helps in quick and efficient training of new resources

• Disadvantages

– Extreme specialization resulting in tedious repetitive work can lead to low job satisfaction

– Due to high levels of job specialization, firms are unable to prevent turnover

The level of division of labor is related to the expectation

on how long employees will remain with the firm

Recap Chapter 1:

Theories of Management

Recap Chapter 1:

Theories of Management

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A focus on how jobs, work, and incentive schemes could be designed to improve productivity using industrial

engineering methods

A focus on how jobs, work, and incentive schemes could be designed to improve productivity using industrial

engineering methods

Scientific management

Scientific management

The belief that organizations must be understood as systems of interdependent human beings who share a

common interest in the survival and effective functioning of the firm

The belief that organizations must be understood as systems of interdependent human beings who share a

common interest in the survival and effective functioning of the firm

Human relations movement

Human relations movement

A view of the firm where effective organizational structure is based on fit or alignment between the organization and

various aspects in its environment

A view of the firm where effective organizational structure is based on fit or alignment between the organization and

various aspects in its environment

Contingent view

Contingent view

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Coordinating MechanismsCoordinating Mechanisms

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Those who believe that more control is warranted in organizational design to ensure that jobs are performed

satisfactorily and efficiently

Those who believe that more control is warranted in organizational design to ensure that jobs are performed

satisfactorily and efficiently

Organizers (Scientific

Mgmt)

Organizers (Scientific

Mgmt)

An extreme form of organizational control in which systems are highly formalized and are characterized by

extensive rules, procedures, policies, and instructions.

An extreme form of organizational control in which systems are highly formalized and are characterized by

extensive rules, procedures, policies, and instructions.

Bureaucratic

approach

Bureaucratic

approach

Greater job standardization

Specific definitions of roles and responsibilities

More hierarchical leadership

Close personal surveillance of superiors over subordinates

Not useful in creative environments

Coordinating MechanismsCoordinating Mechanisms

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Those who support a more open organizational structure where roles and responsibilities are loosely definedThose who support a more open organizational structure where roles and responsibilities are loosely defined

Behaviorists (Human

Relations Mgmt)

Behaviorists (Human

Relations Mgmt)

A type of organizational control that includes self-supervising teams that are responsible for a set of tasksA type of organizational control that includes self-supervising teams that are responsible for a set of tasks

Clan approach

Clan approach

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Figure 7.1 - Bureaucratic and Clan Approaches to Control

Source: Adapted from B. R. Baliga and Alfred M. Jaeger, “Multinational Corporations: Control Systems and Delegation Issues,” Journal of International Business

Studies, Vol. 15, Fall 1984, pp. 25–40

Most fast food restaurants,

many industrial companies

Some start-up, consulting ,

advertising and high tech

companies

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Organizational StructureOrganizational Structure

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Organizes a firm in terms of the main activities that need to be performed, such as production, marketing, sales, and accountingOrganizes a firm in terms of the main activities that need to be performed, such as production, marketing, sales, and accounting

Functional structure

Functional structure

Groups diverse functions into separate divisionsGroups diverse functions into separate divisionsDivisional structureDivisional structure

Both divisional and functional managers have equal authority in the organizationBoth divisional and functional managers have equal authority in the organization

Matrix structureMatrix structure

Knowledge workers are organized to work as individual contributors or to be a part of a work cluster that provides a

certain expertise for the organization

Knowledge workers are organized to work as individual contributors or to be a part of a work cluster that provides a

certain expertise for the organization

Network structure Network structure

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Figure 7.2 - Three Functions of an Organization

Case study in Organizational Design

A simplified and subjective view of the company

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Hewlett Packard

• Founded in 1939 in a garage in Palo Alto, CA (now Silicon Valley)

HP Functional Organizational structure

• Started out with 1 product

– Oscillator - sold to Walt Disney

• Company grew and organized as a functional

organization with

– sales,

– manufacturing,

– finance and

– human resource departments

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Figure 7.3 - Functional Organizational Structure

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Functional FormFunctional Form

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• Each functional department conducts its own budgeting and planning processes

• Works well for small businesses and businesses with a limited number of products or services

• Supports:

– Easy flow of communication

– Straightforward approach to supervision

– Reduced level of redundancy

• Best suited for competitive situations that requireefficiency of production or functional expertise

Hewlett Packard Decision MakingHewlett Packard Decision Making

• Additional products:

– HP 12C calculator

– Printers & other products

• One of the employees created a new type of computer

• Hewlett Packard was offered the right of first refusal

• Took too long to make a decision

Hewlett Packard and WozniackHewlett Packard and Wozniack

• Steven Wozniack decided to work with Steven Jobs and create Apple Computer instead

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HP Product Growth - Sales GrowthHP Product Growth - Sales Growth

HP - Re-organization to product groupsHP - Re-organization to product groups

– HP established a division structure, with each product group becoming a self-sustaining organization responsible for developing, manufacturing and marketing its products. For example:

• Printers

• Plotters

• Computers

• Servers

• Services

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Figure 7.4 - Divisional Organizational Structure

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Silos: A functional or divisional unit that operates by its own rules and guidelines and does not openly share information

with other units

Recent Trends in Organizational DesignRecent Trends in Organizational Design

HP: Impact of Divisional StructureHP: Impact of Divisional Structure

• Same company would get 4 Hewlett Packard salespeople calling on the same purchasing

manager

– receive visits from:

• HP printer salesperson

• HP plotter salesperson

• HP computer salesperson

• HP server salesperson

Hewlett Packard re-organizationHewlett Packard re-organization

• HP response to customer irritation:

– Sell total services and solutions, rather than individual products

• Reorganize into

– Large customers

– Small customers

– Public Sector

– etc

Re-organization by customer type

1 sales executive to call on each corporation

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Divisional FormDivisional Form

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• Can be organized around products, geographies, or clients

• Each division is accountable for its own profit and loss

• Employees feel more loyal towards their division rather than function

• Allows greater accountability

• Promotion is based on management capabilities

across divisions rather than functional expertise

All types of divisional forms have their own

advantages and disadvantages

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Figure 7.5 - Matrix Organizational Structure

Matrix FormMatrix Form

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• Combines the positive elements from different organizational configurations to:

– Cope with strong environmental pressures

– Assist complex internal interrelationships

– Facilitate sharing and optimization of resources

• To facilitate optimized performance, uses:

– Technological expertise within functions

– Horizontal coordination across the functions

• Assigns equal authority to both divisional and

functional managers

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Proctor and Gamble Matrix structureProctor and Gamble Matrix structure

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© South-Western, a part of Cengage Learning 7-32

Figure 7.6 - Network Organizational Structure

Network FormNetwork Form

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• Uses cross-functional teams and technology to coordinate the work of geographically-dispersed

work groups

• Emphasizes on the informal structure of the firm

– Informal relationships between clusters of workers and cross-functional teams dominate the action of the firm

• Allows firms to quickly to adapt to changes in the marketplace or respond to a competitor’s action

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<click screenshot for video>

Modern Shed

1. Describe how Modern Shed functions as a modular organization.

2. What are the advantages and disadvantages of Modern Shed’s organizational structure?

© 2015 Cengage Learning

© South-Western, a part of Cengage Learning 7-35

Table 7.1 - Advantages and Disadvantages of Different Organizational Structures

The contingent view describes which type of

organization has the best internal and external fit

Organizational Design LeversOrganizational Design Levers

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Are concerned with how decisions are madeAre concerned with how decisions are made

How information should flow through

the organization

How information should flow through

the organization

Who should make decisions regarding

that information

Who should make decisions regarding

that information

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Decision Rights Decision Rights

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Rights that include initiating, approving, implementing, and controlling various types of strategic or tactical decisions

Differ based on vertical and horizontal

dimensions

Differ based on vertical and horizontal

dimensions

Delegation: The process by which managers

transfer decision rights to individual employees

Delegation: The process by which managers

transfer decision rights to individual employees

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An organizational structure characterized by formal structures that control employee behavior

by concentrating decisions in a top-down, hierarchical fashion

An organizational structure characterized by formal structures that control employee behavior

by concentrating decisions in a top-down, hierarchical fashion

Centralized

organization

Centralized

organization

An organizational structure where key decisions are made at all levels of the firm, not mandated

from the top

An organizational structure where key decisions are made at all levels of the firm, not mandated

from the top

Decentralized

organization

Decentralized

organization

Decision RightsDecision Rights

Informal Structures Informal Structures

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• Contribute in defining an organization

• Develop over a period of time

• Not listed in the firm’s bylaws or management practices

• Are affected by organizational changes

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Mutual AdaptationMutual Adaptation

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The process by which firms impact the nature of their

overarching industrial environment and adapt their

organization in response to evolving contextual factors

The process by which firms impact the nature of their

overarching industrial environment and adapt their

organization in response to evolving contextual factors

Critically important in industries where change

is a constant, such as technology and fashion

Critically important in industries where change

is a constant, such as technology and fashion

Hewlett Packard had been adapting and re-organizing for the last 20-40 years

Still in process – no end stage

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Figure 7.7 - Role of Leadership across Life-Cycle Stages

Source: Adapted from Anthony J. Mayo, Nitin Nohria, and Mark Rennella, Entrepreneurs, Managers, and Leaders: What the Airline Industry Can Teach Us About

Leadership (New York: Palgrave MacMillan, 2009), pp. 1–20.

Organizational FlexibilityOrganizational Flexibility

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• Ambidextrous organizations

– Maintain efficiency in current strategic operations while preparing for imminent changes

– Create a separate team to work on future opportunities while the rest of the firm focuses on the primary business

• Advantage - Creates a forum for innovation and creativity

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Recent Trends in Organizational DesignRecent Trends in Organizational Design

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CooperationCooperation

Capability

development

Capability

development

Customer-

centric model

Customer-

centric model

CoordinationCoordination

ConnectionConnection

Key Terms

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Behaviorists

Bureaucratic approach

Centralized organization

Clan approach

Decentralized organization

Decision rights

Behaviorists

Bureaucratic approach

Centralized organization

Clan approach

Decentralized organization

Decision rights

Functional structure

Matrix structure

Mutual adaptation

Network structure

Organizational design

Organizational structure

Organizers

Silos