Organization Structure and Management Systems

1. Organization Structure and Management Systems OUTLINE • Evolution of the corporation • Principles of organizational design • Alternative structural forms • Management systems

2. Objectives • Define structure and describe its role in the implementation of strategy. • Identify and describe the different components of organizational structure. • Identify some of the problems associated with organizing. • Describe how the various components of organizational structure can be used to overcome these problems that are common to all firms and businesses.

3. Objectives (cont.) • Discuss some of the emerging issues that are likely to have an impact on organizing and organizational structures in the future.

4. The Basic Tasks of Organization Achieving high levels of productivity requires SPECIALIZATION Specialization by individuals necessitates COORDINATION ORGANIZATIONAL CHALLENGE: design structure & systems that: • Permit specialization • Facilitate coordination by grouping individuals & linking groups with systems of communication, decision making, & control • Deploy incentives to align individual & firm goals For coordination to be effective requires COOPERATION But goals of employees = goals of owners THE AGENCY PROBLEM

5. The Merits of Hierarchy in Organization Design (a) Self Organizing Team: 6 interactions (b) Hierarchy: 3 interactions • Economizing on coordination • Permitting flexibility and innovation loosely-coupled • modular forms.

6. Characteristics of BusinessOrganizations • Division of labor • Employee specialists • Hierarchy • “Tall” or “flat” • Span of control: number of subordinates reporting to a manager. • Decisions based on rules, policies, and standard operating procedures. • Become inflexible, resist change.

7. Definition of Organizational Structure • Includes any mechanisms which facilitate the formulation and implementation of strategy and the overall coordination of the business. • Hierarchical reporting relationships. • Policies, standard operating procedures, and control systems. • Information systems and flows of information moving through organizations. • Culture.

8. Definition of Organizational Structure (cont.) • Challenge confronting general managers is to combine these mechanisms into organizational structures that: • Effectively implement chosen strategies • Make their firms responsive to leadership, as well as to changes in the larger competitive environments.

9. Components of Organizational Structure • Hierarchy • Functional structure • Organizes activities around functional departments. • Advantage is that it allows employees to specialize • Problems: • Communication and motivation can be problematic • Cost centers without revenue-generating responsibility. • Tends to overload top managers.

11. Components of Organizational Structure(cont.) • Multidivisional (product, geographical) structure • many firms consist of several distinct operating segments. • divides those segments into autonomous units or divisions. • Advantages • Decentralizes decision-making • Improves accountability • Can improve allocation of resources (ROA, ROS)

12. Components of Organizational Structure(cont.) • Multidivisional (product, geographical) structure (cont.) • Disadvantages • Duplication of functional activities. • Top managers become very far removed from divisional activities. • Transfer pricing dilemma. • Can result in short-term focus and an undesirable level of competition for resources among divisions.

13. Multidivisional Structure (Product) CEO Corporate Staff Household Products Military Products Industrial Products Mfg R&D Mkt Mfg R&D Mkt Mfg R&D Mkt

15. Components of Organizational Structure(cont.) • Matrix structure • Functional structure is overlaid or placed on top of a multidivisional structure. • Major advantage: Information distributed more efficiently throughout organization. • Disadvantages • “Two boss problem” • Tendency for cross-functional team members to believe that every decision needs to be made as a group. • Specialist working on a product team become so involved in working on that product that they lose touch with their specialty area.

17. Components of Organizational Structure(cont.) • Policies, standard operating procedures, and control systems. • High performance is almost always associated with an effective set of policies, procedures, or systems. • At the same time, can limit organizational flexibility and can increase resistance to change. • Policies and procedures can also reward the wrong types of behaviors.

18. Components of Organizational Structure(cont.) • Information systems and information flows. • Implementation of strategy is becoming increasingly dependent on acquisition, storage, distribution, and application of information. • Can be source of competitive advantage.

19. Components of Organizational Structure(cont.) • Organizational culture • More informal than policies and procedures. • Transmitted to new employees through stories and myths from veteran employees, company signs, and training programs. • Can be source of competitive advantage. • Negative aspects of culture • Can retard organizational adaptation to change.

20. Central Issues/Problems in Organizing • Centralization vs. decentralization • Centralized decision making facilitates rapid implementation of strategies, improves coordination, and provides effective management of related diversification strategies. • Decentralization allows lower-level managers/employees more opportunities to participate in decision making, generally leads to better decisions and can improve organizational flexibility and responsiveness to environmental change.

21. Central Issues/Problems in Organizing(cont.) • Communication and language problems. • Organizations rarely have more than eight hierarchical levels due to limits imposed by problems of communication. • IT has not enabled firms to overcome these problems. • Many firms have adopted matrix structures to improve communication, coordination, and information flows.

22. Central Issues/Problems in Organizing(cont.) • Conflict • Inevitable part of all organizations. • Functional rivalries • Evidence suggests that “superordinate goals” will alleviate this problem. • Compensation plans designed to motivate employees to work to achieve overall organizational objectives. • Conflict is not entirely negative. • Fosters different opinions.

23. Central Issues/Problems in Organizing(cont.) • Subordination of owners’ and managers’ interests and problems of motivation. • “Agency problem:” tendency for interests of principals (owners) and their agents (managers) to diverge.

24. Emerging Issues • Changing nature of work • Human resource management issues. • How jobs are designed • How to organize work • How to retain employees

25. New Types of Organizational Structure • New structures are needed to meet the information requirements of the new work. • More cross-functional team and matrix structures. • Outsource many activities now performed by today’s workers.

26. Conclusions • Optimal organizational structure involves balancing conflict, employee motivation, degree of centralization, and communication and language problems. • Managers pressure their firms’ structures to acquire and disseminate information and to facilitate individual and organizational learning. • Managers continue to rethink their value chains and respond to changes in their competitive environments.

27. Key Points • Organizational structure includes the mechanisms which facilitate the formulation and implementation of strategy and the overall coordination of the business enterprise. • The objectives of structure are: • To implement strategies; and • To make organizations responsive to their owners (shareholders), managers, and the competitive environment.

28. Key Points (cont.) • Structure includes hierarchical reporting relationships, formal organizational control systems, flows of information, and organizational culture. • Three traditional types of hierarchical structures are the functional, multidivisional, and matrix forms, each having some advantages as well as disadvantages and limitations.

29. Key Points (cont.) • Though less visible than hierarchical structures, organizational control systems, flows of information, and organizational culture are important components of organizational structure. • Any structure has problems, including communication and motivational problems, control loss, and danger that owners’ interests will be subordinated to managers’ interests. • Effective organizational structures can mitigate, but not completely eliminate, these problems.

30. Key Points (cont.) • The competitive environment and the changing nature of work will lead companies to adopt new human resource management practices and to develop new structures, including modular or virtual forms of organization.