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Chapter 17 Organizational Design: Contingency and Configuration

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Chapter 17
Organizational Design
Learning Goals
• Describe how organizational design
coordinates activities in an organization and
gets information to decision makers
• Discuss the contingency factors of
organizational design
• Distinguish between the organizational
design effects of strategy, external
environment, technical process, and size
Learning Goals (Cont.)
• Describe the design features of functional,
divisional, hybrid, and matrix organization
• Explain the characteristics of several forms
of organizations that are likely to evolve in
the future
Chapter Overview
• Introduction
• The Contingency Factors of Organizational
• Forms of Organizational Design
• International Aspects of Organizational
• Ethical Issues in Organizational Design
• Organizational design refers to the way
managers structure their organization to
reach the organization’s goals
• Structural elements include
– Allocation of duties, tasks, and responsibilities
between departments and individuals
– Reporting relationships
– Number of levels
Introduction (Cont.)
• Organizational charts show the formal
design or structure. See text book Figure
• An incomplete picture because of informal
arrangements and underlying behavioral
• Two basic goals of organizational design
– Get information to decision makers
– Coordinate the interdependent parts of an
The Contingency Factors of
Organizational Design
• Overview
– External environment: Includes the
organization’s competitors, customers,
suppliers, government, . . .
– Strategy: The plan for reaching the goals of
the organization
– Open systems character of organizations
tightly couples these two factors
The Contingency Factors of
Organizational Design (Cont.)
• Overview (cont.)
– Technical process: The system an
organization uses to produce its products or
– Size: The number of organization members
The Contingency Factors of
Organizational Design (Cont.)
Major tools for
Technical process
Forms of
organizational design
Relationships Among the Contingency Factors
Roles of organizational culture and size.
• An organization’s strategy describes longterm goals and way of reaching the goals
• Describes resource allocation
• Plays a mediating role between the external
environment and the tools of organizational
– Note the two headed arrows in the drawings
– Example: Product innovation response
Strategy (Cont.)
• Strategy’s mediating role in organizational
– “Structure follows strategy”
– “Strategy follows structure”
– In both views, the design of the organization is
a major tool for carrying out the strategy
Strategy (Cont.)
Strategy’s mediating role in organizational design (cont.)
“Structure follows strategy”
Choice of an
organizational form
Reach strategic goals
Strategy (Cont.)
Strategy’s mediating role in organizational design (cont.)
“Strategy follows structure”
Organizational design is an
environment within which
managers form strategy.
Develop effective strategy
Prevents developing an
effective strategy
External Environment
• Managers assess the uncertainty in the
external environment when considering
design decisions
• Can design the organization to increase
information about the environment
• Or make the organization more flexible in
its response to the environment
• Information plays a key role because it can
reduce risk in a manager's predictions about
the future
External Environment (Cont.)
• Two elements of environmental
– Complexity of the external environment.
Ranges from simple to complex
• Simple environment has a few similar elements
• Complex environment has many different elements
External Environment (Cont.)
– Static to dynamic external environment
• Static external environment is unchanging or slowly
• Dynamic external environment is filled with quickly
moving events that could conflict with each other
• Degree of change creates uncertainty in predicting
future states of the environment
External Environment (Cont.)
• Four possible states of the external
– Simple-static: lowest uncertainty
– Complex-dynamic: highest uncertainty
– Simple-dynamic and complex-static
environments are about midway between the
other two
– Example: Internet commerce has created a
complex-dynamic environment for much of the
retail industry
Technical Process
• Conversion of inputs to outputs
• Manufacturing, service, or mental processes
• Affects peoples’ behavior in many ways
Work pace
Worker control
Degree of routine
Interdependence within the process
• Various types of technical processes exist
Organization Size
• As size increases, organizations have
– More formal written rules and procedures
– More management levels, unless managers
– More complex organizational forms
– Higher coordination requirements because of
– Size and technical process: more strongly
associated with organizational design in small
organizations than in large organizations
Forms of
Organizational Design
• Three major forms: functional, divisional,
and matrix
• Combine functional and divisional designs
to get a hybrid design
• Several variations of the divisional design
• Several evolving forms of organizational
Organizational Design
by Function
• Groups tasks of the organization according
to the activities they perform
• Typically configured into departments such
as manufacturing, engineering, accounting,
marketing, . . .
• Functional configurations can vary from
one organization to another depending on
tasks and goals
Organizational Design
by Function (Cont.)
• Strategy: Focused on a few products or
services in well defined markets with few
• External environment: stable, simple, little
• Technical process: Routine with little
interdependence with other parts of the
• Size: Small to medium
Organizational Design
by Function (Cont.)
• See Figure 17.1 in the text book for an
• Each major functional area helps align the
company with each sector
• Marketing, for example, focuses on
customers. It does not manufacture
products. That is the job of the
manufacturing function
Organizational Design
by Function (Cont.)
• Line and staff
– Line does the major operating tasks
– Staff gives support and serve in advisory roles.
Emphasizes technical skills within each
• Individuals work with others who share
common backgrounds and views
• Homogeneity can lead to narrow views of
the function’s contribution to the
Organizational Design
by Function (Cont.)
• Strengths
– Specialization
– Brings specialists together
– Collegial relationships develop among
– Encourages development of specialized skills
and information sharing
– Clear career paths for specialists
Organizational Design
by Function (Cont.)
• Weaknesses
– Does not help managers respond quickly to
external changes
– Emphasis on specialization promotes a tunnelvision view of the goal of the function
– Functional design can produce a set of widely
accepted behaviors and perceptions with the
Organizational Design
by Division
• Uses decentralization
• Divisions formed around products, services,
locations, customers, programs, or technical
• Often evolves from a functional design
• As the external environment changes,
managers may need to diversify its
activities to stay competitive
• A common management reaction to large
organization size
Organizational Design
by Division (Cont.)
• Strategy: Focused on different products,
services, customers, or operating locations
• External environment: Complex, fast
changing, with moderate to high uncertainty
• Technical process: Nonroutine and
interdependent with others parts of the
• Size: large
Organizational Design
by Division (Cont.)
• Emphasizes decision-making autonomy
throughout the organization
• Has high interpersonal skill demands
because of extensive contacts with people
throughout the organization
• Rewards behavior that goes toward the goal
of decentralization: product, customer,
service, or location
Organizational Design
by Division (Cont.)
• Strengths
– Easily adapts to differences in products,
services, clients, location, and the like
– For example, products and differ in how
manufactured and marketed
– Products, services, and customers are highly
– Often appear in division names
Organizational Design
by Division (Cont.)
• Weaknesses
– Loses economies of scale because many
functions such as accounting are duplicated
within the divisions
– Technical specialization is more diffuse
compared to a functional design
– Hard to get uniform application of policies and
procedures across divisions
Organizational Design
• Hybrid design uses both functions and
• Managers use a hybrid design to get the
benefits and reduce the weaknesses of the
two configurations
• The divisions decentralize some functions,
and the headquarters location centralizes
• Centralized functions often are the costly
Organizational Design (Cont.)
• People in different parts of the organization
fulfill different requirements
• Functional areas reward technical expertise
• Functional specialists often support the
• Divisions do the primary work of the
Organizational Design (Cont.)
• Strategy: Focused on many products or
• External environment: Fast changing,
moderate to high uncertainty, complex
• Technical process: Both routine and
nonroutine; high interdependence with
functions and divisions
• Size: Large
Organizational Design (Cont.)
• Strengths
– Focuses on products, services, and customers
– Adapts well to complex environments
– Economies of scale: expensive shared
resources are centralized and support all
Organizational Design (Cont.)
• Weaknesses
– Focus on division goals can lose total
organization view
– Non-uniform application of organizational
– Potential for high administrative overhead if
staff expands without control
– Potential conflict between division managers
and corporate headquarters. Managers want
autonomy; headquarters wants control
Organizational Design
• Used when two sectors of the external
environment demand management attention
• Typically responding to the customer and
technical parts of the environment
– Customers have special needs
– Technology changes fast
• Emerged during the 1950s within the U.S.
aerospace industry
Organizational Design (Cont.)
• Rejects the unity of command principal
described in Chapter 1 of the text book
• Uses multiple authority structures, so that
many people report to two managers
• People from different functional areas work
on various projects
Organizational Design (Cont.)
• Each person has at least two supervisors or
managers. One supervisor is in the
functional area and the other is in a project
• Mixture of people from the functional areas
varies according the project needs
• Multiple reporting relationships are a basic
feature of matrix organizations
See text book Figure 17.3 for a simplified
matrix organizational design.
Organizational Design (Cont.)
• Conditions under which an organization
may choose a matrix design
– Pressures from the external environment for a
dual focus
– High uncertainty within the multiple sectors
of the external environment
– Constraints on human and physical resources
Organizational Design (Cont.)
• High conflict potential because of multiple
authority relationships
• Managers need well-developed conflict
management skills
• Demand high levels of coordination,
cooperation, and communication
• Requires high levels of interpersonal skill
Organizational Design (Cont.)
• Different matrix uses and forms
– Within specific functional areas such as
marketing. Managers responsible for a brand
or group of brands bring all marketing skills
together to focus on the products
– Temporary forms for specific projects
– Permanent forms for the organization’s ongoing work
Organizational Design (Cont.)
• Strengths
– Responsive, flexible, efficient use of costly
– Potentially high levels of human motivation and
– Managers can respond fast to market changes
– Shares scarce and expensive resources
– People get information about a total project, not
only about their specialty
Organizational Design (Cont.)
• Weaknesses
– High levels of ambiguity because of multiple
authority relationships
– Ambiguity can encourage power struggles
among managers
– Multiple authority relationships can give
opposing demands to people
– High conflict potential can reach dysfunctional
levels and act as significant stressors for people
in matrix organizations
Evolving Forms of
Organizational Design
• Several new forms of organizational design
– Self-managing teams, a team-based approach
– A process view of organizational design focuses
on work processes
– The virtual organization. This unusual form
links widely scattered organizations into a
Self-Managing Teams
• Customer focus and fast changing
environments require decisions at lower
levels in an organization
• Decentralizes decision authority in the
• Decision authority in these teams can focus
on customers, processes, and product design
Self-Managing Teams (Cont.)
• Often cross-functional membership
• Helps flatten an organization by removing a
layer of management
• Results in a nimble organization that can
respond to fast changing customer needs
A Process View of
Organizational Design
• Discards the view of packaging duties and
tasks along functional or divisional lines
• The organization is a set of interconnected
processes that weave across multiple
• Focuses on the results of a process not on
people’s skills or functions
• People have responsibility for all or part of
a process with decision authority over those
The Virtual Organization
• A temporary network of companies or
people that focus on reaching a specific
• Information technology links members into
a network no matter where they are in the
• Enter agreements to get needed skills or
• Little direct control over functions done by
other members of the network
The Virtual Organization (Cont.)
• Features a need for high trust among
• Need conflict management and negotiation
• Interdependent in reaching a mutually
desired goal
International Aspects
of Organizational Design
• The international context of organizations
increases environmental complexity
• Varying cultural orientations and laws
introduce high uncertainty in the external
• Functional and divisional designs are more
congruent with cultures that want to avoid
uncertainty and accept hierarchical
relationships (Latin American countries and
International Aspects
of Organizational Design (Cont.)
• Matrix organizations do not work well in
countries that avoid ambiguity (Belgium,
France, and Italy)
• Self-managing teams work well in countries
with socially oriented values (Sweden and
• Virtual organizations use communications
and computer technology to span national
Ethical Issues and
Organizational Design
• Lobbying activities can change an
organization’s external environment. Both
legal and ethical in the United States
• Bribing government officials is illegal under
U.S. law
• Introducing new technologies can displace
workers and cause stress among those who
need to learn the technology
Ethical Issues and
Organizational Design (Cont.)
• Ethical issues about reducing the size of an
organization and increasing its efficiency. A
utilitarian analysis looks at the net benefits
of management’s actions
• High conflict and ambiguity of matrix
organizations can act as a significant
• Moving to the alternative forms is largescale organizational change and stress for
many people
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