ORGANISATION STRUCTURE AND DESIGN

We routinely enjoy the goods and services that organisations provide, we rarely bother to wonder about how these goods and services are produced.

What is an Organization?
Organization: a tool used by people to coordinate their actions to obtain something they desire or value Organizations provide goods and services Organizations employ people Organizations bring together people and resources to produce products and services Basically, organizations exist to create value

How Does an Organization Create Value?

Value creation takes place at three stages: input, conversion, and output Inputs: include human resources, information and knowledge, raw materials, money and capital Conversion: the way the organization uses human resources and technology to transform inputs into outputs Output: finished products and services that the organization releases to its environment Each stage is affected by the environment in which the organization operates Environment the set of forces and conditions that operate beyond an organizations boundaries but affect its ability to acquire and use resources to create value

How an Organization Creates Value

How McDonald's creates value

McDonald's Input obtain from its environment: Raw materials( ground beef, sandwich buns, potatoes, milk-shake mix etc.) Money and capita( shareholders investment) Human resources( cooks, clean-up crew, order takers, managers) Information and knowledge (training, knowledge of fast-food industry) Customers McDonald's environment Sales of outputs to Customers: Satisfied customers Suppliers of meat, potatoes, milk-shake mix Population from which to choose employees Government health regulations Competitors ( Taco Bell, Burger King)

McDonald's conversion process Transforms inputs and adds value to them: Machinery( grills, toasters, milk-shake machines) Computers ( computerized cash registers, ordering systems, inventory tracking) Human skills and abilities (personnel trained in sandwich preparation, ordering, potato frying, overseeing the whole operation) McDonald's outputs Released to its environment: Fast and cheap food Satisfied customers Satisfied shareholders

Why Do Organizations Exist?

People working together to produce goods and services create more value than people working alone 5 major reasons why organizations exist: To increase specialization and the division of labor
Division of labor allows specialization Specialization allows individuals to become experts at their job

To use large-scale technology Taking the advantage of the economies of scale and scope results from the use of modern automated and computerized technology. Economies of scale: cost savings that result when goods and services are produced in large volume Economies of scope: cost savings that result when an organization is able to use underutilized resources more effectively because they can be shared across several different products or tasks

 To manage the external environment

pressures from the environment in which organizations operate also make organizations the favored mode for organizing productive resources External environment consists of the political, social, economic, and technological factors that affect organizations Organizations regularly exchange products and services for needed resources Organizations need to manage their external environment

To exert power and control

Organizations structure their members to efficiently produce products and services

To economize on transaction costs

Transaction costs: the costs associated with negotiating, monitoring, and governing exchanges between people who must cooperate

Organizational Theory, Design, and Change: Some Definitions

Organizational theory: the study of how organizations function and how they affect and are affected by the environment in which they operate Organizational structure: the formal system of task and authority relationships that control how people to coordinate their actions and use resources to achieve organizational goals Organizational culture: is the set of key values, beliefs, and attitudes shared by organizational members and helps shape the behavior within the organization

 Organizational design: the process by which managers select and manage aspects of structure and culture so that an organization can control the activities necessary to achieve its goals Organizational change: the process by which organizations move from their present state to some desired future state to increase their effectiveness

Basic challenges of organisational design

Design Challenge 1: people in this organisation take on new tasks as the need arises and its very clear who is responsible for what, and who is supposed to report to whom. This makes it difficult to know on whom to call when the need arises and difficult to coordinate people's activities so they work together as a team As the organization grows, managers must decide how to control and coordinate the activities that are required for the organization to create value. The principle design challenge is how to manage differentiation to achieve organizational goals.

Differentiation : the process by which an organization allocates people and resources to organizational task and establishes the task and authority relationship that allow the organization to achieve its goals. or in short it is the process of establishing and controlling the division of labour, or degree of specialization, in the organization.

In a simple organization, differentiation is low because the division of labour is low, typically one person or few people perform all organizational tasks so, there are few problems with coordinating who does what, for whom, and when, however in a complex organization both the division of labour an differentiation are high.

Building blocks of differentiation

The basic building blocks of differentiation are organizational roles

Organizational roles: the set of task-related behaviors required of a person by his or position in and organization. Organizational structure is based on a system of interlocking roles, and the relationship of one role to another. The differentiation of an organization into individual organizational roles results in clear authority. Authority: the power to hold people accountable for their actions and to make decisions concerning the use of organizational resources. Control: the ability to coordinate and motivate people to work in the organization's interests

Function: a subunit composed of a group of people, working together, who possess similar skills or use the same kind of knowledge, tools, or techniques to perform their jobs Division: a subunit that consists of a collection of functions or departments that share responsibility for producing a particular good or service Organizational complexity: the number of different functions and divisions possessed by an organization
Degree of differentiation

5 Different Kinds of Functions

Support functions: facilitate an organizations control of its relations with its environment and its stakeholders
Purchasing, sales and marketing, public relations, and legal affairs

Production functions: manage and improve the efficiency of an organizations conversion processes so that more value is created
Production operations, production control, and quality control Production operations controls manufacturing process, Production control decides on most efficient way to produce at low cost, Quality control monitors product quality.

Maintenance functions: enable an organization to keep its departments in operation includes

Personnel: recruit and train and improve skills Engineering :repair broken machinery and Janitorial services: to keep work environment safe and healthy

Adaptive functions: allow an organization to adjust to changes in the environment

Research and development, market research, and long-range planning

Managerial functions: facilitate the control and coordination of activities within and among departments
Acquisition of, investment in, and control of resources

Vertical and Horizontal Differentiation

Hierarchy: a classification of people according to
their relative authority and rank Vertical differentiation: the way an organization designs its hierarchy of authority and creates reporting relationships to link organizational roles and subunits
Establishes the distribution authority between levels

Horizontal differentiation: the way an

organization groups organizational tasks into roles and roles into subunits (functions and divisions)
Roles differentiated according to their main task responsibilities

Organizational Chart of the B.A.R. and Grille

Design Challenge 2: We can't get people to communicate and coordinate in this organization. Specifying tasks and roles is supposed to help coordinate the work process, but here it builds barriers between people and function. companies have often found that specialization limits communication between subunits and prevents them from learning from one another. As a result of horizontal differentiation, the members of different functions develop a subunit orientation. To avoid the communication problems that can arise from horizontal differentiation, organisations try to find new or better ways to integrate functions. That is to promote cooperation, coordination and communication among separate subunits.

Balancing Differentiation and Integration

Horizontal differentiation is supposed to enable people to specialize and become more productive
Specialization often limits communication between subunits People develop subunit orientation
Subunit orientation: a tendency to view ones role in the organization strictly from the perspective of the time frame, goals, and interpersonal orientations of ones subunit

When subunit orientation occurs, communication fails and coordination becomes difficult

Integration: the process of coordinating various tasks, functions, and divisions so that they work together and not at cross-purposes

Types and examples of Integrating Mechanisms

Integration mechanism( in order of increasing complexity) Hierarchy of authority

Description

Example (e.g., in Johnson and Johnson

A ranking of employees integrates by specifying who reports to whom.

Sales person reports to Diaper Division sales manager

Direct contact

Managers meet face-to-face to coordinate activities

A specific manager is given responsibility for coordinating with managers from other subunits on behalf of his or her subunit

Diaper division sales and manufacturing managers meet to discuss scheduling

A person from each of J&Js production, marketing and research and development departments is given responsibility for coordinating with other departments

Liaison role

Taskforce

Managers meet in temporary A committee is formed to find committees to coordinate cross- new ways to recycle diapers functional activities.

Team

Managers meet regularly in permanent committees to coordinate activities

A permanent J&J committee is established to promote new product development in the Diaper Division
One manager takes responsibility for coordinating diaper and baby soap divisions to enhance their marketing activities A team of managers is created to take responsibility for coordinating J&Js centralization program to allow divisions to share skills and resources.

Integrating role A new role is established to coordinate the activities of two or more functions or divisions

Integrating department

A new department is created to coordinate the activities of functions or divisions

Managers must fit level of integration and level of differentiation Differentiation and integration must be balanced
Complex organizations need more integration Simple organizations need less integration

Design Challenge 3: People in this organization dont take responsibility or risks. They are always looking to the boss for direction and supervision. As a result, decision making is slow and cumbersome and we miss out on a lot of opportunities to create value. Hierarchy of authority is supposed to improve the way an organization functions because people can be held accountable for their actions and because the hierarchy defines the area of each person's authority within the organization. However many companies complain that when a hierarchy of authority exists, people are constantly looking to their superior for directions. When something new or unusual occurs they prefer to let it pass, or they pass it on to their superior than assume responsibility and take the risk of dealing with it.

Balancing Centralization and Decentralization

Centralized organization: the authority to make important decisions is retained by top level managers
Top managers able to coordinate activities to keep the organization focused on its goals

Decentralized organization: the authority to make important decisions is delegated to managers at all levels in the hierarchy
Promotes flexibility and responsiveness

Ideal balance entails:

Enabling middle and lower managers who are at the scene of the action to make important decisions Allowing top managers to focus on long-term strategy making

Factors influencing the amount of centralization and Decentralization

More Centralization Environment is more stable. Lower-level managers are not as capable or experienced at making decisions. Lower-level managers do not want to have a say in decisions. Decision are more significant. Organization is facing a crisis or the risk of company failure. More Decentralization Environment is complex, uncertain. Lower-level managers are capable and experienced at making decisions. Lower-level managers want a voice in decisions. Decision are relatively minor. Corporate culture is more open to allowing managers to have a say in what happens.

Company is large

Company is geographically dispersed

Effective implementation of company Effective implementation of company strategies depends on managers strategies depends on managers having retaining more say over what happens. more involvement and flexibility to make decisions.

Design Challenge 4: people in this organization pay too much attention to the rules. Whenever I need somebody to satisfy an unusual customer request or need real quick service from another function. I cant get it because no one is willing to bend or break the rules. Standardization: conformity to specific models or examples defined by sets of rules and norms that are considered proper in a given situation. Standardized decision-making and coordination procedures make peoples actions routine and predictable. Mutual adjustment: the compromise that emerges when decision making and coordination are evolutionary processes and people use their judgment rather that standardized rules to address problems. Guide decision making and promote coordination.

Balancing Standardization and Mutual Adjustment

Standardization: conformity to specific models or examples defined by sets of rules and norms that are considered proper in a given situation. Standardized decision-making and coordination procedures make peoples actions routine and predictable.

Mutual adjustment: the process through which people use their judgment rather than standardized rules to address problems, guide decision making, and promote coordination

Formalization: the use of written rules and procedures to standardize operations. Rules : formal, written statements that specify the appropriate means for reaching desired goals. Norms: standards or styles of behavior that are considered acceptable or typical for a group of people Socialization: the process by which organizational members learn the norms of an organization and internalize these unwritten rules of conduct.

 Challenge facing managers is:

To find a way of using rules and norms to standardize behavior, and to allow for mutual adjustment to give managers opportunity to discover new and better ways to achieve goals

Each design challenge has implications for how an organization as a whole and the people in the organization behave and perform. Useful concepts for addressing the way in which managements response to the challenges collectively influence how an organizational structure works are the concepts of mechanistic structure and organic structure.

 Mechanistic structure: designed to induce people to behave in predictable, accountable ways. Organic structure: which promote flexibility, so people initiate change and can adapt quickly to changing conditions.

How the design challenges result in Mechanistic or Organic Structure

Mechanistic structures result when an organisation makes these choices. Individual Specialization Employees work separately and specialize in one clear defined task Simple integrating mechanisms Hierarchy of authority is clearly defined and is the major integrating mechanism.
Centralization Authority to control tasks is kept at the top of the organization. Most communication is vertical Standardization Extensive use is made of rules and SOPs to coordinate tasks, and work process is predictable.

Organic structures result when an organisation makes these choices. Joint Specialization Employees work together and coordinate their actions to find the best way of performing a task Complex integrating mechanisms Task forces and teams are the major integrating mechanisms
Decentralization Authority to control tasks is delegated to people at all levels in the organization. Most communication is lateral Mutual adjustment Extensive use is made of face-to face to coordinate tasks, and work process is relatively unpredictable.

Organisational design and strategy in a changing global environment

 An organization's strategy is a specific pattern of decisions and actions that managers take to use core competences to achieve a competitive advantage and outperform competitors. Customers are likely to respond to a strategy that is based on the goal of offering high quality products and services at appropriate price. Through its strategy an organisation seeks to use and develop core competences to gain a competitive advantage so that it can increase its share of scarce resources in its environment.

 Core competences: the skills and abilities in value creation activities that allow a company to achieve superior efficiency quality innovation, or customer responses Sources of core competences: Specialized resources: two kinds of resources give an organization a competitive advantage Functional resources Organisational resources Coordination abilities

The value creation cycle

Global expansion and core competences

Expanding globally into overseas markets can be an important facilitator of the development of an organizations core competences

The creation of value through global expansion

Functional-level strategy
A plan of action to strengthen an organizations functional and organizational resources, as well as its coordination abilities, in order to create core competences. The strategic goal of each function is to create a core competence that give the organization a competitive advantage. An organization creates value by applying its functional skills and knowledge to inputs and transforming them into outputs of finished goods and services. To gain a competitive advantage, an organization must be able to do at least one of the following 1. Perform functional activities at a lower than that of its rivals 2. Perform functional activities in a way that clearly differentiates its goods and services from those of its rivals by giving its products unique qualities that customers greatly desire.

Low-cost and differentiation advantages resulting from functional-level strategy

Value-creating function Manufacturing

Source of low-cost advantage Development of skills in flexible manufacturing technology Reduction of turnover and absenteeism Use of just-in-time inventory system\computerized warehousing Development of long-term relationship with suppliers and customers Increased demand and lower production costs Improved efficiency of manufacturing technology

Sources of differentiation advantage Increase in product quality and reliability Hiring of highly skilled personnel

Human recourses management Materials management

Use of company reputation and long term relationships with suppliers and customers to provide high quality inputs and efficient distribution and disposal of outputs Targeting of customer groups Tailoring products to customers Promoting brand names Create new products Improvement of existing products.

Sales and marketing Research and development

Functional level strategy and structure

Structural characteristics associated with the development of core competences in production, sales and research and development.

Managerial implications of functional-level strategy

1. As a manager or member of function, identify the functional resources or coordination abilities that give your function a core competence. Having identified the source of your functions core competence, establish a plan to improve or strengthen them, and create a set of goals to measure you progress Study your competitors and the methods and practices they use to control their functional activities. Pick your most effective competitors, study its methods, and use them as a benchmark for what you wish to achieve in your function Analyze the way your functional structure and culture affect functional resources and abilities. Experiment to see whether changing a component of structure or culture can enhance your functions core competence.

2.

3.

Business-level strategy
A plan to combine functional core competences in order to position the organization so that it has a competitive advantage in its domain. Low-cost business level strategy: a plan whereby an organization produces low-priced goods and services for all customer groups Differentiation business level strategy: a plan whereby an organization produces high priced, quality products aimed at particular market segments.

Characteristics of organizational structure associated with Businesslevel Differentiation and Low cost strategies