Chapter 4 Basic Challenges of Organizational Design

CHAPTER 4 BASIC CHALLENGES OF ORGANIZATIONAL DESIGN

TEACHING OBJECTIVES

1. To explain how differentiation occurs and why it is a design challenge. (4.1)

2. To review the five functions that accomplish organizational goals: support, production, maintenance, adaptive, and managerial. (4.1)

3. To examine interlocking roles that are differentiated vertically based on a hierarchy, and horizontally based on functional groups and divisions. (4.1)

4. To discuss the balance between differentiation and integration and examine the seven integrating mechanisms. (4.2)

5. To explain the differences between liaison and integrating roles and between task forces and teams. (4.3)

6. To illustrate the design challenge of balancing centralization and decentralization. (4.3)

7. To illustrate the design challenge of balancing standardization and mutual adjustment. (4.4)

8. To show that standardization or mutual adjustment results from organizational goals. (4.4)

9. To show the importance of the informal organization. (4.4)

10. To outline the difference between a mechanistic and organic structure. (4.5)

11. To show how the contingency approach tailors organizational structure to environmental uncertainties. (4.5)

CHAPTER SUMMARY

This chapter addresses four challenges of organizational design:

1. Determining the level of differentiation

2. Deciding how to coordinate activities

3. Determining who will make decisions

4. Deciding how tightly the organization will control employee activities

Differentiation is the process of dividing labor. The first design challenge is to determine the level of vertical and horizontal differentiation. In an organization, individuals are assigned specific responsibilities; those with similar skills are grouped into functions, with two or more functions grouped into a division. As organizations grow, they differentiate into five functional roles: support, production, maintenance, adaptive, and managerial. Each role has a horizontal and a vertical dimension. Horizontal differentiation groups people into subunits. Vertical differentiation designs a hierarchy of authority and establishes reporting relationships to connect subunits.

The second design challenge is balancing differentiation and integration. As an organization becomes differentiated, more complex integrating mechanisms coordinate activities. The following seven integrating mechanisms, listed from simplest to most complex, are reviewed:

1. Hierarchy of authority

2. Direct contact

3. Liaison role

4. Task force

5. Team

6. Integrating role

7. Integrating department

The integrating mechanism must facilitate communication and coordination for effectiveness, but unnecessary mechanisms are costly.

The third design challenge is the balance between centralization and decentralization, each with advantages and disadvantages. Distributing decision-making authority influences employee behavior. Centralization results in predictability whereas decentralization fosters innovation.

The fourth design challenge is balancing standardization and mutual adjustment. Standardization is facilitated through formalization, written rules, norms, and informal behavioral expectations. Socialization is the process of learning and internalizing norms. Standardization results in predictable behavior. Mutual adjustment relies on judgment rather than formalized rules for problem solving. If an organization desires predictability, it is highly centralized and relies on standardization. For innovation, an organization is decentralized and relies on mutual adjustment.

A mechanistic structure is appropriate in a predictable, stable environment. An organic structure is appropriate in an uncertain, changing environment requiring flexibility. In reality, most organizations are a combination of the two. The contingency approach tailors organizational structure to the sources of uncertainty.

CHAPTER OUTLINE

4.1 Differentiation

The first design challenge determines how to control and coordinate value creation. An organization must manage differentiation, the process of creating and controlling the division of labor. In a simple organization, division of labor is low with few coordination problems. Growth makes the organization complex with high division of labor and high differentiation. (Fig. 4.1)

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Organizational Insight 4.1: The B.A.R. and Grille Restaurant

Growth increases division of labor and differentiation. Two people started the restaurant and performed all the tasks; through growth, they hired 22 people. The owners opened two more restaurants, which increased differentiation.

Q: How did Bob and Amanda manage the increasingly complex activities?

A. Initially they performed all tasks, but as business increased, Amanda took control of the dining room and Bob managed the kitchen. They hired people to perform specific tasks such as bartending and a manager to oversee maintenance. Bob and Amanda opened two other restaurants and centralized support functions such as purchasing, marketing, and training.

Organizational Roles

Every position in an organization requires certain behaviors. Task-related behaviors, called organizational roles, determine relationships. As division of labor increases, managers specialize in some roles and hire employees to specialize in others to develop core competences. Because a restaurant manager holds waiters responsible for behavior, the manager has authority. Clearly defined roles and authority relationships give organizations the control to facilitate goal achievement. The relationships between managers and waiters ensure effective customer service.

Subunits: Functions and Divisions

Those with similar skills or shared resources are grouped into functions; chefs form the kitchen function. Two or more functions are grouped into a division; each restaurant division consists of the dining room and kitchen. Larger organizations have many divisions, and the number of functions and divisions indicates an organization’s complexity—the extent of differentiation. (Fig. 4.1)

As organizations grow, they differentiate into five functional roles:

1. Support functions handle a company’s relationship with its environment and its stakeholders. Support functions include purchasing, sales and marketing, and public relations and legal affairs.

2. Production functions improve organizational efficiency. They include production operations, production control, and quality control.

3. Maintenance functions keep an organization in operation. Maintenance functions include personnel, engineering, and janitorial services.

4. Adaptive functions allow for organizational responses to changes in the environment. Adaptive functions include research and development, market research, and long-range planning.

5. Managerial functions expedite departmental control and coordination. Managers at all levels have roles: top managers formulate strategy; middle managers use resources to meet goals; and lower-level managers direct workers.

Differentiation at the B.A.R. and Grille

Q: What roles did the B.A.R. and Grille develop?

A: The services manager handled advertising and bought supplies, a support role. Dividing labor between the kitchen and dining room facilitated production. The accountant, cashiers, and cleaning staff performed maintenance roles. Bob and Amanda ensured good customer service, an adaptive role, and created task and functional relationships, a managerial role.

Q. When did the restaurant differentiate into divisions?

A. The B.A.R. and Grille differentiated into divisions as additional restaurants were added. The three restaurant divisions had centralized support functions. Large companies have self-contained divisions, each with its own set of five basic functions to offer a competitive advantage.

Vertical and Horizontal Differentiation

Each role at the restaurant has a vertical and horizontal dimension. (Fig. 4.2)

Organizational roles are vertically differentiated according to the hierarchy of authority. Vertical differentiation creates reporting relationships to connect organizational roles and subunits. Lower levels report to higher levels; waiters report to managers. Vertical differentiation provides control over activities.

Roles are horizontally differentiated according to tasks, creating a division of labor and grouping into subunits. Busboys and waiters are grouped into functions.

Organizational Design Challenges

The first design challenge is selecting the levels of horizontal and vertical differentiation to reach organizational goals. Other design challenges include: balancing differentiation and integration; balancing centralization and decentralization; balancing standardization and mutual adjustment; and coordinating the formal and informal organizations.

Managerial Implications: Differentiation

Managers should draw an organizational chart to identify the distribution of authority and division of labor. Managers should analyze each person’s role and relationships between roles. Managers should analyze relationships between departments to make sure the division of labor creates value.

4.2 Balancing Differentiation and Integration

The second design challenge is to balance differentiation and integration. Horizontal differentiation creates subunits to facilitate specialization; however, subunit orientations, perceiving one’s role as a subunit member, emerge as an organization becomes complex.

Integration and Integrating Mechanisms

Subunit orientations make communication and coordination difficult. Integration or coordinating tasks, functions, and divisions, improves coordination and communication. (Table 4.1)

The seven integrating mechanisms, from simplest to complex, include:

1. Hierarchy of authority specifies reporting relationships.

2. Direct contact requires managers from different functions to meet to coordinate activities.

3. Liaison role requires a manager to coordinate with other subunit managers.

4. Task forces create a temporary cross-functional committee.

5. Teams require different functional managers to coordinate activities.

6. Integrating roles coordinate two or more functions or divisions.

7. Integrating departments coordinate functions or divisions.

· Refer to Discussion question 3 here to show how integrating mechanisms facilitate communication and coordination.

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Organizational Insight 4.2: Integration at a Movie Studio

Competition from companies that specialize in special effects have changed how movie studios operate. This insight shows how a movie studio was able to remain competitive by becoming more organic. Specifically, they built a state-of-the art office complex that better allowed coordination and cooperation between different departments.

Q. How can Amgen improve communication and coordination?

A. Amgen needs to integrate its teams into a hierarchy of authority to provide control so that teams coordinate with functions.

As companies become large and complex, communication barriers increase. An organization can create an integrating role, a full-time position to improve communication between divisions. This differs from a liaison role, which is only part-time. An organization with many integrating roles can establish an integrating department.

Differentiation versus Integration

Managers must fit integration to the level of differentiation.

Q. What was the level of differentiation and integration at the B.A.R. and Grille?

A. Initially, differentiation was low, so the owners ran the restaurant with little integration.

More integration is needed as the organization grows, but excessive differentiation or integration increases costs (more managers) and time spent coordinating activities. In balancing integration and differentiation, managers must develop core competences and select integrating mechanisms that foster subunit cooperation.

4.3 Balancing Centralization and Decentralization

The third design challenge determines how much decision-making authority to centralize and decentralize. One criticism of the hierarchy of authority is that employees are risk-averse and give tough problems to supervisors; this slows decision making and leads to missed opportunities.

Centralization versus Decentralization of Authority

When top managers make decisions, authority is centralized. When lower-level managers make decisions, authority is decentralized.

Q. What are the advantages and disadvantages of centralization?

A. Centralization keeps a company focused on goals, but managers become involved in day-to-day decisions and lose sight of strategic or long-term decision making.

Q. What are some advantages and disadvantages of decentralization?

A. Decentralization offers flexibility and responsiveness, making managers accountable risk-takers. The chance to demonstrate skills and competences motivates managers. Yet, decentralization makes planning and coordination difficult, and the company may lose control of decision making.

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Organizational Insight 4.3: Centralize or Decentralize?

Decentralization can be a disadvantage. United Way suffered from the perception that donations were used for overhead and not for the needy.

Q. Should United Way centralize or decentralize?

A. Consultants felt that the best way to save money and increase efficiency was to reduce the number of local organizations and centralize business functions. United Way had not found the right balance between centralization and decentralization.

Waste Management Inc. gave its subsidiary, Chemical Waste Management, a disposer of hazardous waste, complete authority to make operating decisions. Waste Management Inc. was interested only in the profits.

Q. What problems did Waste Management incur due to its balance of decentralization and centralization?

A. The failure to control decision making and the pressure to increase profits led employees to deliberately mishandle waste. Pollution-monitoring equipment was turned off to save disposal costs, and managers were accused of mislabeling containers to avoid disposal costs. The decentralized management style was blamed because there was little involvement from top managers.

Managers must select a balance between centralization and decentralization. The optimal balance occurs when middle managers make some decisions, and top managers make strategic decisions.

The distribution of authority controls how workers behave; the army discourages risk-taking and maximizes control, so the structure is highly centralized.

Q. What types of companies decentralize authority?

A. High-tech companies encourage innovation and risk-taking, so they decentralize authority.

Evaluating the balance of authority is ongoing.

4.4 Balancing Standardization and Mutual Adjustment

The fourth design difficulty balances standardization and mutual adjustment. Standardization is the process of following rules and standard operating procedures (SOPs). Mutual adjustment allows for judgment rather than rules to solve problems. Standardization makes actions predictable, and mutual adjustment provides flexibility for responding creatively.

Formalization: Written Rules

The use of written rules and procedures to standardize operations is known as formalization. If formalization and standardization are extensive, there is no room for mutual adjustment. Employees are held accountable for following rules.

Q. What companies use formalization extensively?

A. The military, UPS, and Federal Express use formalization.

Q. Are those companies highly centralized or decentralized?

A. Highly formalized companies are generally highly centralized. Companies with a high level of mutual adjustment are highly decentralized.

Socialization: Understood Norms

Rules are formal statements that specify methods for goal attainment, and norms are informal, internalized standards of behavior. Some norms promote effectiveness, and others reduce it. When production workers select a work rate and “ratebusters” violate the norm by working too fast, they face reprisals. If the norm is to make no changes, managers hesitate to suggest changes. Even if rules change, behavior is unchanged because rules become internalized norms. Socialization means learning norms and unwritten rules.

Standardization versus Mutual Adjustment

It is challenging to balance control through standardization with employee problem solving for mutual adjustment. Some functions, like accounting, require standardization, but others, like R&D, require risk taking. Integrating mechanisms, such as task forces and teams, increase mutual adjustment. Complex, uncertain tasks rely on mutual adjustment. An appropriate balance between standardization and mutual adjustment promotes creative and responsible behavior.

· Refer to Discussion question 4 here to emphasize the role of goals and the environment in balancing centralization vs. decentralization and standardization vs. mutual adjustment.

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Focus on New Information Technology: Amazon.com, Part 3

Design choices were driven by the need to ensure that Amazon’s software effectively linked customers to the Web site. Customer service was the most important element.

Q. How did Jeff Bezos structure Amazon.com?

A. The desire for good customer service led to a decentralized structure, which empowered employees to meet customers’ needs. For efficient book distribution and shipping, information systems were standardized, but mutual adjustment improved customer responsiveness.

Q. How does Amazon.com coordinate and motivate employees?

A. Socialization is the vehicle for coordinating and motivating employees. They learn organizational roles from members of their functions and the norm of providing excellent customer service. Employees receive company stock as a motivator.