Management Course: Discussion Topic 10

Organizational Structure

McGraw-Hill/Irwin

McShane/Von Glinow OB 5e

Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.

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Choosing an Organizational Structure at BioWare

Ray Muzyka (left) and Greg Zeschuk (right) designed an organizational structure for their electronic games company, Bioware, that balances the need for teamwork and information sharing.

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Organizational Structure Defined

Division of labor and patterns of coordination, communication, workflow, and formal power that direct organizational activities.

Relates to many OB topics

• e.g. job design, teams, power, org culture, org change

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Division of Labor

• Subdividing work into separate jobs assigned to different people
• Division of labor is limited by ability to coordinate work
• Potentially increases work efficiency
• Necessary as company grows and work becomes more complex

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Coordinating Work Activities

Informal communication

• Sharing information, forming common mental models
• Allows flexibility
• Vital in nonroutine and ambiguous situations
• Easiest in small firms
• Applied in team-based structures
• Includes integrator roles

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Coordinating Work Activities

Formal hierarchy

• Direct supervision
• Assigns formal (legitimate) power to manage others
• Coordination strategy for departmentalization

Standardization

Standardized processes (e.g., job descriptions)

Standardized outputs (e.g., sales targets)

Standardized skills (e.g., training)

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Elements of
Organizational

Structure

Span of Control

Centralization

Department-alization

Formalization

Elements of Organizational Structure

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Span of Control

Number of people directly reporting to the next level

• Assumes coordination through direct supervision

Wider span of control possible when:

• Other coordinating mechanisms present
• Routine tasks
• Low employee interdependence

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Tall vs Flat Structures

As companies grow, they:

• Build taller hierarchy
• Widen span, or both

Problems with tall hierarchies

• Overhead costs
• Worse upward information
• Focus power around managers, so staff less empowered

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Issues with Tall vs Flatter Structures

• Firms moving toward flatter structures (delayering) because taller hierarchies have:
• Higher mgt overhead costs
• Less information flow
• Less staff empowerment
• But also problems with flatter hierarchies
• Undermines management functions
• Increases workload and stress
• Restricts management career development

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Centralization and Decentralization

Formal decision making authority is held by a few people, usually at the top

Centralization

Decision making authority is
dispersed throughout the organization

Decentralization

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Formalization

• The degree to which organizations standardize behavior through rules, procedures, formal training, and related mechanisms.
• Formalization increases as firms get older, larger, and more regulated
• Problems with formalization
• Reduces organizational flexibility
• Discourages organizational learning/creativity
• Reduces work efficiency
• Increases job dissatisfaction and work stress

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Growing an Organic Taxi

Award-winning TAXI relies on an organic structure to maintain its creative advantage. TAXI cofounder Paul Lavoie (bottom right in this New York City office photo) says that most firms are “so layered that a great idea was easily crushed…We needed a flexible infrastructure, able to move with the pace of change. TAXI started lean and nimble, and remains so today.”

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Mechanistic vs. Organic Structures

• Organic Structure
• Wide span of control
• Little formalization
• Decentralized decisions
• Mechanistic Structure
• Narrow span of control
• High formalization
• High centralization

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Departmentalization

Specifies how employees and their activities are grouped together

Three functions of departmentalization

Establishes chain of command

Creates common mental models, measures of performance, etc

Encourages coordination through informal communication

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Organizes employees around specific knowledge or other resources (e.g., marketing, production)

CEO

Finance

Production

Marketing

Functional Organizational Structure

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Evaluating Functional Structures

• Benefits
• Economy of scale
• Supports professional identity and career paths
• Easier supervision
• Limitations
• More emphasis on subunit than organizational goals
• Higher dysfunctional conflict
• Poorer coordination -- requires more controls

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Organizes employees around outputs,
clients, or geographic areas

Divisional Structure

CEO

Healthcare

Lighting

Products

Consumer
Lifestyle

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Divisional Structure

• Different forms of divisional structure
• Geographic structure
• Product structure
• Client structure
• Best form depends on environmental diversity or uncertainty
• Movement away from geographic form
• Less need for local representation
• Reduced geographic variation
• More global clients

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Evaluating Divisional Structures

• Benefits
• Building block structure -- accommodates growth
• Focuses on markets/products/clients
• Limitations
• Duplication, inefficient use of resources
• Specializations are dispersed--silos of knowledge
• Politics/conflict when two forms of equal value

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Team-Based Structure

• Self-directed work teams
• Teams organized around work processes
• Typically organic structure
• Wide span of control – many employees work without close supervision
• Decentralized with moderate/little formalization
• Usually found within divisionalized structure

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Evaluating Team-Based Structures

• Benefits
• Responsive, flexible
• Lower admin costs
• Quicker, more informed decisions
• Limitations
• Interpersonal training costs
• Slower during team development
• Role ambiguity increases stress
• Problems with supervisor role changes
• Duplication of resources

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Bioware’s Matrix Structure

Ray Muzyka (left) and Greg Zeschuk (right) adopted a matrix organizational structure for their electronic games company, Bioware, because it balances the need for teamwork and information sharing.

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Audio Dept

Leader

Software
Dept Leader

Art Dept
Leader

Matrix Structure (Project-based)

CEO

Game1

Project Leader

Game2

Project Leader

Game3

Project Leader

Employees ( ) are temporarily assigned to a specific
project team and have a permanent functional unit

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Evaluating Matrix Structures

• Benefits
• Uses resources and expertise effectively
• Improves communication, flexibility, innovation
• Focuses specialists on clients and products
• Supports knowledge sharing within specialty
• Solution when two divisions have equal importance
• Limitations
• Increases goal conflict and ambiguity
• Two bosses dilutes accountability
• More conflict, organizational politics, and stress

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Core
Firm

Product
development partner
(U.S.A.)

Callcenter
partner
(Philippines)

Accounting partner

(U.S.A.)

Package design partner
(UK)

Assembly partner
(Mexico)

Network Organizational Structure

Alliance of firms creating a product or service

Supporting firms beehived around a “hub” or “core” firm

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Evaluating Network Structures

• Benefits
• Highly flexible
• Potentially better use of skills and technology
• Not saddled with same resources for all products
• Limitations
• Exposed to market forces
• Less control over subcontractors than in-house

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External Environment & Structure

Dynamic

• High rate of change

• Use team-based, network, or other organic structure

Stable

• Steady conditions, predictable change

• Use mechanistic structure

Complex

• Many elements (such as stakeholders)

• Decentralize

Simple

• Few environmental elements

• Less need to decentralize

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External Environment & Structure (con’t)

Diverse

• Several products, clients, regions

• Use divisional form aligned with the diversity

Hostile

• Competition and resource scarcity

• Use organic structure for responsiveness

Integrated

• Single product, client, place

• Use functional structure, or geographic division if global

Munificent

• Plenty of resources and product demand

• Less need for organic structure

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Effects of Organizational Size

As organizations grow, they have:

• More division of labor (job specialization)
• Greater use of standardization
• More hierarchy and formalization
• More decentralization

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Technology and Structure

• Technology refers to mechanisms or processes by which an organization turns out its product or service
• Two contingencies:
• Variability -- the number of exceptions to standard procedure that tend to occur.
• Analyzability -- the predictability or difficulty of the required work

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Organizational Strategy

• Structure follows strategy
• Strategy points to the environments in which the organization will operate
• Leaders decide which structure to apply
• Differentiation strategy
• Providing unique products or attracting clients who want customization
• Cost leadership strategy
• Maximize productivity in order to offer competitive pricing