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Chapter 10
ORGANIZATIONAL
STRUCTURE
AND DESIGN
© Prentice Hall, 2002

10-1
Learning Objectives (cont.)
You should learn to:
– Define organizational structure and organizational
design
– Explain why structure and design are important to
an organization
– Describe the six key elements of organizational
structure
– Differentiate mechanistic and organic
organizational design
– Identify the four contingency factors that
influence organizational design
© Prentice Hall, 2002

10-2
Learning Objectives
You should learn to:
– Describe a simple structure, a functional structure,
and a divisional structure
– Explain team-based structures and why
organizations are using them
– Describe matrix structures, project structures,
autonomous internal units, and boundaryless
organizations
– Explain the concept of a learning organization
and how it influences organizational design
© Prentice Hall, 2002

10-3
Defining Organizational Structure
Nomenclature
– organizing - the process of creating an
organization’s structure
– organizational structure - the formal framework
by which job tasks are divided, grouped, and
coordinated
– organizational design - process of developing or
changing an organization’s structure
• process involves six key elements
© Prentice Hall, 2002

10-4
Defining Organizational Structure (cont.)
Work Specialization
– the degree to which tasks in an organization are
divided into separate jobs
• individuals specialize in doing part of an
activity rather than the entire activity
– too much specialization has created human
diseconomies
– an important organizing mechanism, though not a
source of ever-increasing productivity
© Prentice Hall, 2002

10-5
Defining Organizational Structure (cont.)
Departmentalization
– the basis by which jobs are grouped together
• functional - groups jobs by functions
performed
• product - groups jobs by product line
• geographical - groups jobs on the basis of
territory or geography
• process - groups jobs on the basis of product or
customer flow
• customer - groups jobs on the basis of common
customers
© Prentice Hall, 2002

10-6
Defining Organization Structure (cont.)
Departmentalization (cont.)
– large organizations combine most or all forms of
departmentalization
– trends
• customer departmentalization is increasingly being
used
– better able to monitor and respond to customer
needs
– cross-functional teams are becoming popular
» groups of individuals who are experts in various
specialties
» involved in all aspects of bringing a new
product to market
© Prentice Hall, 2002

10-7
Functional Departmentalization

Plant Manager

Manager,
Engineering

© Prentice Hall, 2002

Manager,
Accounting

Manager,

Manager,

Manager,

Manufacturing

Human Resources

Purchasing

10-8
Product Departmentalization
Bombardier, Ltd.
Manager,
Retail Accounts

Recreational and Utility
Vehicles Sector

Mass Transit
Division

Recreational Products
Division

Bombardier-Rotax
(Vienna)

Rail Products
Sector

Logistic Equipment
Division
Industrial Equipment
Division
Bombadier-Rotax
(Gunskirchen)

© Prentice Hall, 2002

10-9
Geographical Departmentalization

Vice President
for Sales
Sales Director,
Western Region

© Prentice Hall, 2002

Sales Director,
Southern Region

Sales Director,
Midwestern Region

Sales Director,
Eastern Region

10-10
Process Departmentalization
Plant Superintendent

Sawing
Department
Manager

Planing and
Milling
Department
Manager

Finishing
Department
Manager

Inspection and
Shipping
Department
Manager

© Prentice Hall, 2002

Assembling
Department
Manager

Lacquering and
Sanding
Department
Manager

10-11
Customer Departmentalization

Director
of Sales
Manager,
Retail Accounts

© Prentice Hall, 2002

Manager,
Wholesale Accounts

Manager,
Government Accounts

10-12
Defining Organization Structure (cont.)
Chain of Command (cont.)
– continuous line of authority that extends from upper
organizational levels to the lowest levels and clarifies
who reports to whom
• authority - the rights inherent in a managerial position
to tell people what to do and to expect them to do it
• responsibility - the obligation to perform any assigned
duties
• unity of command - a person should report to only
one manager
– these concepts are less relevant today due to information
technology and employee empowerment
© Prentice Hall, 2002

10-13
Defining Organization Structure (cont.)
Span of Control
– number of employees that a manager can efficiently and
effectively manage
– determines the number of levels and managers in an
organization
– the wider the span, the more efficient the organization
– appropriate span influenced by:
• the skills and abilities of employees
• the complexity of tasks performed
• availability of standardized procedures
• sophistication of organization’s information system
© Prentice Hall, 2002

10-14
Contrasting Spans Of Control
Members at Each Level

1

1

2

4

8

3

16

64

4

64

512

5

256

4,096

6

1,024

7

Organizational Level

1

4,096
Span of 4
Operatives
= 4,096
Managers (levels 1-6) = 1,365

© Prentice Hall, 2002

Span of 8
Operatives
= 4,096
Managers (levels 1-4) = 585
10-15
Defining Organization Structure (cont)
Centralization
– the degree to which decision making is
concentrated at a single point in the organization
• top-level managers make decisions with little
input from subordinates in a centralized
organization
Decentralization
– the degree to which decisions are made by lowerlevel employees
– distinct trend toward decentralized decision
making
© Prentice Hall, 2002

10-16
Factors That Influence the Amount of Centralization and Decentralization

© Prentice Hall, 2002

10-17
Defining Organization Structure (cont.)
Formalization
– the degree to which jobs within the organization are
standardized
• standardization - removes the need for employees to
consider alternatives
– extent to which employee behavior is guided by rules and
procedures
• employee allowed minimal discretion in highly
formalized jobs
– explicit job descriptions
– clearly defined procedures
© Prentice Hall, 2002

10-18
Organizational Design Decisions
Mechanistic Organization
– rigidly and tightly controlled structure
– tries to minimize the impact of differing human traits
– most large organizations have some mechanistic
characteristics

Organic Organization
– highly adaptive and flexible structure
– permits organization to change when the need arises
– employees are highly trained and empowered to handle
diverse job activities
– minimal formal rules and little direct supervision
© Prentice Hall, 2002

10-19
Mechanistic Versus Organic Organization

Mechanistic
• High Specialization
• Rigid Departmentalization
• Clear Chain of Command
• Narrow Spans of Control
• Centralization
• High Formalization

© Prentice Hall, 2002

Organic
• Cross-Hierarchical Teams
• Free Flow of Information
• Wide Spans of Control
• Decentralization
• Low Formalization

10-20
Organizational Design Decisions (cont.)
Contingency Factors
– Strategy and Structure - structure should facilitate the
achievement of goals
• strategy and structure should be closely linked
• strategy focuses on:
– innovation - need the flexibility and free flow of
information of the organic structure
– cost minimization - seek efficiency, stability, and
tight controls of mechanistic structure
– imitation - use structural characteristics of both
mechanistic and organic structures
© Prentice Hall, 2002

10-21
Organizational Design Decisions (cont.)
Contingency Factors (cont.)
– Size and Structure - size affects structure at a decreasing
rate
– Technology and Structure
• technology - converts inputs into outputs
– unit production - production of items in units or
small batches
– mass production - large-batch manufacturing
– process production - continuous-process
production
• mechanistic structure supports routine technology
• organic structure supports nonroutine technology
© Prentice Hall, 2002

10-22
Woodward’s Findings On Technology,
Structure, And Effectiveness

Structural
Characteristics

Unit
Production

Mass
Production

Low vertical
differentiation
Low horizontal
differentiation
Low formalization

Moderate vertical High vertical
differentiation
differentiation
High horizontal
Low horizontal
differentiation
differentiation
High formalization Low formalization

Most effective
structure

Organic

© Prentice Hall, 2002

Mechanistic

Process
Production

Organic

10-23
Organizational Design Decisions (cont.)
Contingency Factors (cont.)
– Environmental Uncertainty and Structure
• one way to reduce environmental uncertainty is to
adjust the organization’s structure
– with greater stability, mechanistic structures are
more effective
» mechanistic structures are not equipped to
respond to rapid environmental change
– the greater the uncertainty, the greater the need for
an organic structure
» organizations are being designed to be more
organic nowadays
© Prentice Hall, 2002

10-24
Common Organizational Designs
Traditional Organizational Designs
– Simple Structure - low departmentalization, wide
spans of control, authority centralized in a single
person, and little formalization
• commonly used by small businesses
• as organizations increase in size, the structure
tends to become more specialized and
formalized
– Functional Structure - groups similar or related
occupational specialties together
© Prentice Hall, 2002

10-25
Common Organizational Designs (cont.)
Traditional Organizational Designs (cont.)
– Divisional Structure - composed of separate
divisions
• each division has relatively limited autonomy
• parent corporation acts as an external overseer
to coordinate and control the divisions
– provides support services

© Prentice Hall, 2002

10-26
Strengths and Weakness of Common Traditional Organizational Designs

© Prentice Hall, 2002

10-27
Common Organizational Designs
Contemporary Organizational Designs
– Team-Based Structures - entire organization is
made up of work teams
• employee empowerment is crucial
• teams responsible for all work activity and
performance
• complements functional or divisional structures
in large organizations
– allows efficiency of a bureaucracy
– provides flexibility of teams
© Prentice Hall, 2002

10-28
Common Organizational Designs (cont.)
Contemporary Organizational Designs (cont.)
– Matrix Structure - assigns specialists from different
functional departments to work on projects led by project
managers
• adds vertical dimension to the traditional horizontal
functional departments
• creates a dual chain of command
– violates unity of command
– project managers have authority in areas relative to
the project’s goals
– functional managers retain authority over human
resource decisions (e.g., promotions)

© Prentice Hall, 2002

10-29
A Matrix Organization in an Aerospace Firm

© Prentice Hall, 2002

10-30
Common Organizational Designs (cont.)
Contemporary Organizational Designs (cont.)
– Project Structure - employees work continuously
on projects
• employees do not return to a functional
department at the conclusion of a project
• all work performed by teams comprised of
employees with appropriate skills and abilities
• tends to be very fluid and flexible
– no rigid departmentalization or organization
hierarchy
– managers serve as facilitators and mentors
© Prentice Hall, 2002

10-31
Common Organizational Designs (cont.)
Contemporary Organizational Designs (cont.)
– Autonomous Internal Units – independent,
decentralized business units
• each has its own products, clients, competitors,
and profit goals
• business units are autonomous
– there is no centralized control or resource
allocation

© Prentice Hall, 2002

10-32
Common Organizational Designs (cont.)
Contemporary Organizational Designs (cont.)
– Boundaryless Organization - design is not defined by, or
limited to, the horizontal, vertical, or external boundaries
imposed by a predefined structure
• strategic alliances break down barriers between the
company and its customers and suppliers
• seeks to eliminate the chain of command, to have
limitless spans of control, and to replace departments
with empowered teams
• flattens the hierarchy by removing vertical boundaries
• horizontal boundaries removed by organizing work
around processes instead of functional departments
© Prentice Hall, 2002

10-33
Common Organizational Designs (cont.)
Contemporary Organizational Designs (cont.)
– Learning Organization - an organizational mind-set
rather than a specific organizational design
• has developed the capacity to continuously adapt
• all members take an active role in identifying and
resolving work-related issues
• practice knowledge management by continually
acquiring and sharing new knowledge
• environment is conducive to open communication
• empowered teams are important
• leadership creates a shared vision for the future
• organizational culture provides sense of community
© Prentice Hall, 2002

10-34
Characteristics Of A Learning Organization
Organizational Design
• Boundaryless
• Teams
• Empowerment

Organizational Culture
• Strong Mutual
Relationships
• Sense of Community
• Caring
• Trust

The
Learning
Organization

Information Sharing
• Open
• Timely
• Accurate

Leadership
• Shared Vision
• Collaboration
© Prentice Hall, 2002

10-35

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Chap10

  • 2. Learning Objectives (cont.) You should learn to: – Define organizational structure and organizational design – Explain why structure and design are important to an organization – Describe the six key elements of organizational structure – Differentiate mechanistic and organic organizational design – Identify the four contingency factors that influence organizational design © Prentice Hall, 2002 10-2
  • 3. Learning Objectives You should learn to: – Describe a simple structure, a functional structure, and a divisional structure – Explain team-based structures and why organizations are using them – Describe matrix structures, project structures, autonomous internal units, and boundaryless organizations – Explain the concept of a learning organization and how it influences organizational design © Prentice Hall, 2002 10-3
  • 4. Defining Organizational Structure Nomenclature – organizing - the process of creating an organization’s structure – organizational structure - the formal framework by which job tasks are divided, grouped, and coordinated – organizational design - process of developing or changing an organization’s structure • process involves six key elements © Prentice Hall, 2002 10-4
  • 5. Defining Organizational Structure (cont.) Work Specialization – the degree to which tasks in an organization are divided into separate jobs • individuals specialize in doing part of an activity rather than the entire activity – too much specialization has created human diseconomies – an important organizing mechanism, though not a source of ever-increasing productivity © Prentice Hall, 2002 10-5
  • 6. Defining Organizational Structure (cont.) Departmentalization – the basis by which jobs are grouped together • functional - groups jobs by functions performed • product - groups jobs by product line • geographical - groups jobs on the basis of territory or geography • process - groups jobs on the basis of product or customer flow • customer - groups jobs on the basis of common customers © Prentice Hall, 2002 10-6
  • 7. Defining Organization Structure (cont.) Departmentalization (cont.) – large organizations combine most or all forms of departmentalization – trends • customer departmentalization is increasingly being used – better able to monitor and respond to customer needs – cross-functional teams are becoming popular » groups of individuals who are experts in various specialties » involved in all aspects of bringing a new product to market © Prentice Hall, 2002 10-7
  • 8. Functional Departmentalization Plant Manager Manager, Engineering © Prentice Hall, 2002 Manager, Accounting Manager, Manager, Manager, Manufacturing Human Resources Purchasing 10-8
  • 9. Product Departmentalization Bombardier, Ltd. Manager, Retail Accounts Recreational and Utility Vehicles Sector Mass Transit Division Recreational Products Division Bombardier-Rotax (Vienna) Rail Products Sector Logistic Equipment Division Industrial Equipment Division Bombadier-Rotax (Gunskirchen) © Prentice Hall, 2002 10-9
  • 10. Geographical Departmentalization Vice President for Sales Sales Director, Western Region © Prentice Hall, 2002 Sales Director, Southern Region Sales Director, Midwestern Region Sales Director, Eastern Region 10-10
  • 11. Process Departmentalization Plant Superintendent Sawing Department Manager Planing and Milling Department Manager Finishing Department Manager Inspection and Shipping Department Manager © Prentice Hall, 2002 Assembling Department Manager Lacquering and Sanding Department Manager 10-11
  • 12. Customer Departmentalization Director of Sales Manager, Retail Accounts © Prentice Hall, 2002 Manager, Wholesale Accounts Manager, Government Accounts 10-12
  • 13. Defining Organization Structure (cont.) Chain of Command (cont.) – continuous line of authority that extends from upper organizational levels to the lowest levels and clarifies who reports to whom • authority - the rights inherent in a managerial position to tell people what to do and to expect them to do it • responsibility - the obligation to perform any assigned duties • unity of command - a person should report to only one manager – these concepts are less relevant today due to information technology and employee empowerment © Prentice Hall, 2002 10-13
  • 14. Defining Organization Structure (cont.) Span of Control – number of employees that a manager can efficiently and effectively manage – determines the number of levels and managers in an organization – the wider the span, the more efficient the organization – appropriate span influenced by: • the skills and abilities of employees • the complexity of tasks performed • availability of standardized procedures • sophistication of organization’s information system © Prentice Hall, 2002 10-14
  • 15. Contrasting Spans Of Control Members at Each Level 1 1 2 4 8 3 16 64 4 64 512 5 256 4,096 6 1,024 7 Organizational Level 1 4,096 Span of 4 Operatives = 4,096 Managers (levels 1-6) = 1,365 © Prentice Hall, 2002 Span of 8 Operatives = 4,096 Managers (levels 1-4) = 585 10-15
  • 16. Defining Organization Structure (cont) Centralization – the degree to which decision making is concentrated at a single point in the organization • top-level managers make decisions with little input from subordinates in a centralized organization Decentralization – the degree to which decisions are made by lowerlevel employees – distinct trend toward decentralized decision making © Prentice Hall, 2002 10-16
  • 17. Factors That Influence the Amount of Centralization and Decentralization © Prentice Hall, 2002 10-17
  • 18. Defining Organization Structure (cont.) Formalization – the degree to which jobs within the organization are standardized • standardization - removes the need for employees to consider alternatives – extent to which employee behavior is guided by rules and procedures • employee allowed minimal discretion in highly formalized jobs – explicit job descriptions – clearly defined procedures © Prentice Hall, 2002 10-18
  • 19. Organizational Design Decisions Mechanistic Organization – rigidly and tightly controlled structure – tries to minimize the impact of differing human traits – most large organizations have some mechanistic characteristics Organic Organization – highly adaptive and flexible structure – permits organization to change when the need arises – employees are highly trained and empowered to handle diverse job activities – minimal formal rules and little direct supervision © Prentice Hall, 2002 10-19
  • 20. Mechanistic Versus Organic Organization Mechanistic • High Specialization • Rigid Departmentalization • Clear Chain of Command • Narrow Spans of Control • Centralization • High Formalization © Prentice Hall, 2002 Organic • Cross-Hierarchical Teams • Free Flow of Information • Wide Spans of Control • Decentralization • Low Formalization 10-20
  • 21. Organizational Design Decisions (cont.) Contingency Factors – Strategy and Structure - structure should facilitate the achievement of goals • strategy and structure should be closely linked • strategy focuses on: – innovation - need the flexibility and free flow of information of the organic structure – cost minimization - seek efficiency, stability, and tight controls of mechanistic structure – imitation - use structural characteristics of both mechanistic and organic structures © Prentice Hall, 2002 10-21
  • 22. Organizational Design Decisions (cont.) Contingency Factors (cont.) – Size and Structure - size affects structure at a decreasing rate – Technology and Structure • technology - converts inputs into outputs – unit production - production of items in units or small batches – mass production - large-batch manufacturing – process production - continuous-process production • mechanistic structure supports routine technology • organic structure supports nonroutine technology © Prentice Hall, 2002 10-22
  • 23. Woodward’s Findings On Technology, Structure, And Effectiveness Structural Characteristics Unit Production Mass Production Low vertical differentiation Low horizontal differentiation Low formalization Moderate vertical High vertical differentiation differentiation High horizontal Low horizontal differentiation differentiation High formalization Low formalization Most effective structure Organic © Prentice Hall, 2002 Mechanistic Process Production Organic 10-23
  • 24. Organizational Design Decisions (cont.) Contingency Factors (cont.) – Environmental Uncertainty and Structure • one way to reduce environmental uncertainty is to adjust the organization’s structure – with greater stability, mechanistic structures are more effective » mechanistic structures are not equipped to respond to rapid environmental change – the greater the uncertainty, the greater the need for an organic structure » organizations are being designed to be more organic nowadays © Prentice Hall, 2002 10-24
  • 25. Common Organizational Designs Traditional Organizational Designs – Simple Structure - low departmentalization, wide spans of control, authority centralized in a single person, and little formalization • commonly used by small businesses • as organizations increase in size, the structure tends to become more specialized and formalized – Functional Structure - groups similar or related occupational specialties together © Prentice Hall, 2002 10-25
  • 26. Common Organizational Designs (cont.) Traditional Organizational Designs (cont.) – Divisional Structure - composed of separate divisions • each division has relatively limited autonomy • parent corporation acts as an external overseer to coordinate and control the divisions – provides support services © Prentice Hall, 2002 10-26
  • 27. Strengths and Weakness of Common Traditional Organizational Designs © Prentice Hall, 2002 10-27
  • 28. Common Organizational Designs Contemporary Organizational Designs – Team-Based Structures - entire organization is made up of work teams • employee empowerment is crucial • teams responsible for all work activity and performance • complements functional or divisional structures in large organizations – allows efficiency of a bureaucracy – provides flexibility of teams © Prentice Hall, 2002 10-28
  • 29. Common Organizational Designs (cont.) Contemporary Organizational Designs (cont.) – Matrix Structure - assigns specialists from different functional departments to work on projects led by project managers • adds vertical dimension to the traditional horizontal functional departments • creates a dual chain of command – violates unity of command – project managers have authority in areas relative to the project’s goals – functional managers retain authority over human resource decisions (e.g., promotions) © Prentice Hall, 2002 10-29
  • 30. A Matrix Organization in an Aerospace Firm © Prentice Hall, 2002 10-30
  • 31. Common Organizational Designs (cont.) Contemporary Organizational Designs (cont.) – Project Structure - employees work continuously on projects • employees do not return to a functional department at the conclusion of a project • all work performed by teams comprised of employees with appropriate skills and abilities • tends to be very fluid and flexible – no rigid departmentalization or organization hierarchy – managers serve as facilitators and mentors © Prentice Hall, 2002 10-31
  • 32. Common Organizational Designs (cont.) Contemporary Organizational Designs (cont.) – Autonomous Internal Units – independent, decentralized business units • each has its own products, clients, competitors, and profit goals • business units are autonomous – there is no centralized control or resource allocation © Prentice Hall, 2002 10-32
  • 33. Common Organizational Designs (cont.) Contemporary Organizational Designs (cont.) – Boundaryless Organization - design is not defined by, or limited to, the horizontal, vertical, or external boundaries imposed by a predefined structure • strategic alliances break down barriers between the company and its customers and suppliers • seeks to eliminate the chain of command, to have limitless spans of control, and to replace departments with empowered teams • flattens the hierarchy by removing vertical boundaries • horizontal boundaries removed by organizing work around processes instead of functional departments © Prentice Hall, 2002 10-33
  • 34. Common Organizational Designs (cont.) Contemporary Organizational Designs (cont.) – Learning Organization - an organizational mind-set rather than a specific organizational design • has developed the capacity to continuously adapt • all members take an active role in identifying and resolving work-related issues • practice knowledge management by continually acquiring and sharing new knowledge • environment is conducive to open communication • empowered teams are important • leadership creates a shared vision for the future • organizational culture provides sense of community © Prentice Hall, 2002 10-34
  • 35. Characteristics Of A Learning Organization Organizational Design • Boundaryless • Teams • Empowerment Organizational Culture • Strong Mutual Relationships • Sense of Community • Caring • Trust The Learning Organization Information Sharing • Open • Timely • Accurate Leadership • Shared Vision • Collaboration © Prentice Hall, 2002 10-35