Unit 2 Individual Project Foundation of Organizational Design MGMT673

Foundation of Organization Design

(MGMT673)

Reading Material

Organizational Structures

Types of Structures

There are many types of organizational structures. Each structure functions in different ways, demands different skills from employees, and is influenced by corporate size, strategy, culture, and the resources the organization has for managing the structure.

Organizations have been known to change their structure to meet market demands, only to discover that they overlooked something major, which is now derailing their work. For example, the computer system an organization had in place could not support the demands of the new structure, or other stakeholders (such as suppliers, government regulators, or employees) refused to work with the new structure. In many cases, an organization has been forced to return to its old structure at an enormous cost of both time and money. Though structural change should not be feared, all critical stakeholders must be in on the early stages of planning. This allows the consultants and management to understand both the intended, as well as the potential unintended, consequences of the new design.

The following are some basic organizational structures' strengths, weaknesses, and limitations.

Functional Organization

The functional organization is a widely used design and has existed since Roman times. Such an organization is generally broken into departments or divisions, such as manufacturing, sales, accounting, and human resources. The importance of the different structural units has emerged over time and can be determined by looking at the organization’s history. As functional organizations grew, they often added on new units or subunits. Like all organizational designs, the functional organization has strengths and weaknesses. The strength of the functional organization is that when the environments these organizations grow up in are stable, and the workforce is homogenous, these organizations work very well.

There is a challenge in functional organization design. Through the years, as organizational environments became more turbulent, as the work force became increasingly diversified, and as technology became more demanding and complicated, it also became more costly to keep the functional organizations performing well.

Divisional Organization

The divisional organization is built around products, services, geography, or customers, rather than functions. It came into being about the same time as the growth of the large American corporations and the early development of the mass markets.

Some of the strengths of divisional organizations are that they make accountability of managers easier, promote delegation, focus interest on the customer, and build departmental cohesion. Weaknesses of this structure are inefficiency and multiple demands on people, which increase stress and cause goal conflict. The latter is due to focusing on department objectives at the expense of the overall organization’s needs and objectives.

Matrix Organization

The matrix organization was developed as an attempt to take the best from the functional and divisional structures, while minimizing their weaknesses. It was first developed in the aerospace industry where changing technological and customer needs necessitated managing lateral demands. Its combination of both lateral and vertical structures increases flexibility, and it is more adaptable to change than either the functional or divisional structure.

However, its dual chains of command, in which each employee has at least two bosses, makes working relationships more complex and increases interpersonal conflict within the organization and also with clients. Matrix organizations are now widely used in nearly all sectors but have not proven to be the solution that everyone had hoped they would be. Working in teams may increase complexity and other demands of decision-making.

Process Organization

The process organization depends on multidisciplinary teams organized around core processes. It emphasizes lateral over vertical relationships with the need for fewer managers. However, the team members often must develop traditional management skills. Though the process organizations eliminate many of the procedural and hierarchal boundaries by reducing management costs, they do require a new mindset. They are often resisted by middle management because it puts their jobs into question. This type of organizational structure, however, is growing rapidly in both manufacturing and service industries.

Customer-Centric Organization

The customer-centric organization focuses on satisfying customer needs and demands. It is similar to the process organization. The increasing power of the customer to demand solutions to problems and the rise of globalization and e-commerce is often given as the rationale for the development of this type of organization. Advantages include providing “one face” to the customer and having tailor-made solutions. A disadvantage is that managing relationships between the front and back offices and clarifying marketing’s role may become nearly impossible.

Network Organization

The network organization gained its name from computer networks. The basic idea is to link different organizations together to provide a market or product. This type of structure links very independent organizations together to produce and deliver a product to customers. Design, manufacturing, marketing, distribution, sales, and so forth, are all handled by different organizations. The company’s task is to manage its brand, while conveniently delivering a product that customers want and where they can easily purchase it. Though it is an ideal way to focus resources on customers and market needs, managing relationships across multiple and divergent organizations can be a major challenge.

Preparing for Change

Simply designing the perfect organization is not enough, though it can make for a good beginning. Management, along with help from any outside consultants utilized, needs to develop a plan for communicating the redesign. It must address why the new design is necessary, what it is expected to accomplish, and how it will affect employees and other stakeholders. Everything must be communicated effectively if it is to result in high performance that can be maintained.

Consider How Different Stakeholders Will React

It is highly likely that not all stakeholders will respond in the same way, or that their responses will all be positive. Design changes will not just impact management and employees, but may force other stakeholders, such as suppliers and customers, to change how they interact with the organization. It may even force design changes upon them. Being aware of the new design's impact on all stakeholders is vital for profitable performance.

Have a Strategy for Communicating the Changes

Good organizational communication is critical for all constituents. Bankers, suppliers, customers, clients, and the governing board don’t always have to know every detail, but they must receive clear and timely communications about the stages of the process that will impact them. No one likes surprises; when they can be avoided, they should be.

Consider Employee's and Other Stakeholders’ Needs

If the needs of the various stakeholders have been considered during the design process, then this should not be a major problem when rolling out the new design and communicating it to the organization's various stakeholders. However, it is still necessary to keep all vested parties informed that the organization has considered their needs and is continually monitoring the new design's impact on all stakeholders.

Consequences of Change

Structural change always has consequences and outcomes—generally, both good and bad. The good results are welcomed, and are often tied to the reasons for making the changes. Oftentimes though, the changes that will challenge the organization are not thoroughly thought out. Too often, both management and consultants establish unrealistic expectations for themselves and others.

Changes the Organization’s Culture

Structural change often impacts the current organizational culture in unplanned and unexpected ways. Though some assume culture is easy to change, that is simply not the case. New cultures often demand a new language and new skills, and these cannot be learned or transferred as quickly as one may think.

Because of structural changes, a culture’s informal reward system may suddenly no longer function. The customs that formally allowed the business to function with a minimum number of policies and procedures can be lost, because no one thought to consider how critical functions would be communicated after the change.

Leads to Confusion

Organizational restructuring often changes the ground rules that people have become dependent on to do their jobs and to function within the organization, with customers, and with other important stakeholders. Who does what and who reports to whom? Often such questions are not adequately addressed or, if addressed, not communicated effectively throughout the organization. Confusion can quickly lead to chaos and the abortion of a completely appropriate design. The elimination of confusion is essential if positive and productive results are to be achieved.

Reduces Financial Performance

The added costs incurred because of new technologies, additional training, managing complexity, and a host of other hidden costs, can sometimes turn a profitable organization into an unprofitable one. Obviously, this is not a desired consequence. Consultants and management must attempt to determine the cost of any particular organizational design. Careful examination of such matters in the beginning can lead to an effective and profitable redesign effort.

Planned Change

Not all change is planned. Changes are often forced on an organization because of market adjustments, technological innovations, and social and political movements, as well as many other events occurring outside of the organization.

Nearly all organizational redesigns are initiated by management and are examples of planned change. Management may hire an outside firm to help with redesigning the organization, but that is an example of management delegating its responsibilities to a consultant who specializes in organizational design.

Many of the consequences of poor organizational design are caused by a mismatch between the new design and what the organization can actually accomplish. When using outside consultants, the working relationship between management and the consultants is essential—management must engage. Successful redesign depends on mutual understanding of the issues confronting the organization. Assessing the situation and then deciding on a design that will help the organization accomplish its objectives is a collaborative undertaking. Taking on the redesign of an organization is so critical to an organization’s success that it must be deliberate and well thought through.

When managers and consultants are attentive and meticulous and give constant attention to the redesign process, positive and productive changes are achieved.

Deliberate Approach to Change

Organizational development, as a discipline and a practice, concerns itself with planning change and helping manage it. Organizational design is one of many strategies used by organizational development consultants to manage planned change.

Consider Organizational Contingencies

There is not one best way to design an organization. Those accustomed to thinking that there is can easily get frustrated with the design process. Many contingencies or forces, both inside and outside of the organization, can lead to surprising results. Because contingencies are critical to the design process, organizational diagnosis is an essential and crucial step in selecting and implementing an effective organizational design. Often, it is because of a hurried or incomplete diagnosis that the consultants and the management team select a dysfunctional or inadequate design.

Assess the Organization and Its Environment

Organizational diagnosis is a procedure, or process, for determining how an organization is currently performing. It helps both the consultant and client determine where to focus their efforts. Generally, organizational diagnosis is a continuous process with deeper and deeper levels of data collection and analysis. An organization may realize that it is not achieving its objectives and goals or may discover things are not working as it expected. Leadership looks for a reason and then takes action. If the actions do not correct the issues, leadership may bring in an external consultant or firm to help determine what is wrong and to provide suggestions on how to manage the organization or the problem area. Good consultants and business organizations also build in an evaluation process to see how the intervention is working. This often becomes the starting point for another diagnosis. The process is circular, as it must be to make a difference. Too often, things improve and management goes back to its old way of doing things or just ignores what is happening, and another crisis emerges.

A good organizational design may last for years. However, because of growth, environmental change, or new technology, the once-excellent design becomes dysfunctional, and the organization must redesign. In the turbulent world in which we currently live, redesign is increasing. In some organizations, it is nearly continuous.

Open Systems Approach

Modern organizational development consultants use an open-systems approach. That is, they see an organization as an open, rather than a closed, self-contained system. In the real world, there is no such thing as a closed system. An open-system view takes into account the external environment as well as the internal workings of the organization. It also uses internal and external feedback to monitor the organization's processes, markets, and response to feedback. Increasingly, the environment influences organizations in numerous ways.

Why Restructure Organizations?

Why Restructure Organizations?

There is no one reason for restructuring an organization. Changes in the organization's environment, technology, process, and business strategy can all be factors. The simple fact that an organization's competition, suppliers, or customers have made structural changes in their own organizations has at one time or another forced organizations to change their own designs. These changes are often not planned, except by the most forward-looking organizations that have proactive leadership.

Change in the Environment

Increasingly, leaders and managers are recognizing the importance of seeing their organizations as open systems. A major advantage to the utilization of open systems when considering organizational restructuring, is the awareness of the importance of the environment on both the current organization and any future designs the management and consultants may decide upon. Nearly everyone is aware of the impact of globalization and e-commerce on organizations, but energy sources, international debt, cultural and age diversity, and natural and man-made disasters can all have an impact on organizations as well, and need to be considered in the redesign process.

Change in Technology or Process

Today’s world seems to be at the top when it comes to process and technological change. The amount of technological change today is unprecedented in human history, and the new technologies and media continually modify both processes and human relationships. Continuous adaptation is becoming the norm and must increasingly be taken into consideration when contemplating redesign. Given how long the functional organization served organizational purposes and how many new organizational structures have emerged in the last 100 years, it is probably safe to say that new organizational structures will keep emerging in the future. Anyone could create a yet unthought-of organizational design, responding to ever-changing technology.

Change of Strategy

Changing strategy to meet market demands, cut costs, or simply to reposition an organization, often leads to considering organizational redesign. Organizations have been known to change their organizational strategy to differentiate their product mix, change their market focus, change their client base, or reduce cost, and then realize the new strategy would necessitate a different type of organizational structure than their current one. Sometimes an organization will be aware of the organizational design issues before it changes its strategy, but in many cases the redesign is the result of a strategic change made without forethought of how the new strategy will impact the organization

Changes Made by Customers, Suppliers, or Competition

Because modern organizations are open systems, changes in customers’ wants, suppliers’ redesigned organizations, and competition’s changing strategies often force structural changes upon a client organization. These are not necessarily wanted changes and often lead to resistance from top management as well as employees. Encroaching unwanted outside demands have forced organizations to redesign far more often than is recognized. Because managers want to believe they are in control, there is often a reluctance to recognize the obvious. Awareness is crucial to successful redesign.