ORGANIZATIONAL THEORY, DESIGN, AND CHANGE - Chapter 04

CHAPTER 4: BASIC CHALLENGES OF ORGANIZATIONAL DESIGN

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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

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.

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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.

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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) Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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.

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.

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

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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. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 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.

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.

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Q. When did the restaurant differentiate into divisions?

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ 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: Hierarchy of Authority specifies reporting relationships. Direct Contact requires managers from different functions to meet to coordinate activities. Liaison Role requires a manager to coordinates with other subunit managers. Task forces create a temporary cross-functional committee. Teams require different functional managers to coordinate activities. Integrating roles coordinate two or more functions or divisions. Integrating Departments coordinate functions or divisions.

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Refer to discussion question 3 here to show how integrating mechanisms facilitate communication and coordination. _________________________________________________________________________________ _________________________________________________________________________________

Organizational Insight 4.2: Integration at Amgen Amgen has been successful with its new drugs Epogen (an anemia drug) and Neupogen (an immune system stimulant). Growth has led Amgen to adopt two integration mechanisms: product development teams and task forces. However, employees feel more loyalty to their teams than to their regular jobs.

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1. 2. 3. 4. 5. 6. 7.

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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.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ 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.

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Centralization versus Decentralization of Authority When top managers make decisions, authority is centralized. When lower-level managers make decisions, authority is decentralized.

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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 competencies motivates managers. Yet, decentralization makes planning and coordination difficult, and the company may lose control of decision-making.

Notes_________________________________________________________________________ ______________________________________________________________________________ ______________________________________________________________________________ Organizational Insight 4.3: Centralize or Decentralize? Decentralization can be a disadvantage. United Way suffered from the perception that donations were used for overhead 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?

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.

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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.

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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.

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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.

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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 changes, behavior is unchanged because rules become internalized norms. Socialization means learning norms and unwritten rules.

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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.

___________________________________________________________________________ ___________________________________________________________________________ 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, with 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.

Managerial Implications: The Design Challenges Managers should create a map of the principal integrating mechanisms and determine which levels in the hierarchy have responsibility for specific decisions. Managers should list their principal tasks and responsibilities and be aware of the informal norms and values that influence group members.

4.5

Mechanistic and Organic Organizational Structures

Design choices produce mechanistic and organic structures. (Fig. 4.6) Mechanistic structures influence people to behave in a predictable manner. Decision-making is highly centralized and roles clearly defined. (Fig. 4.7a)

A. The primary integrating mechanism is the hierarchy. Standardization and formal rules facilitate control and coordination. Emphasis on the hierarchy makes the informal organization aware of status. Promotion is slow and one’s career path outlined. This rigid structure is appropriate in stable, unchanging environments. Organic structures encourage flexibility and decentralize decision-making. Roles are loosely defined. Employees perform many tasks and work with people from various functions. (Fig. 4.7b) Q. What integrating mechanisms are used? A. This structure requires complex integrating mechanisms such as task forces and teams. Status is based on leadership ability not a formal position in the hierarchy. Organic structures respond quickly to change.

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Q. What is the major integrating mechanism?

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Notes_________________________________________________________________________

______________________________________________________________________________ ______________________________________________________________________________ Organizational Insight 4.4: Sony’s Magic Touch Sony uses its organic structure to motivate and coordinate employees. Q. What characterizes Sony’s structure? A. Sony’s organic structure encourages innovation. Engineers can join any project if they can make a contribution. Sony has 23 groups with hundreds of development teams that encourage communication and innovation. Engineers who take successful risks are promoted and gain control of resources. Top management interferes only if groups duplicate efforts. Authority is decentralized, roles loosely defined, and mutual adjustment preferred to standardization. This structure has allowed Sony to introduce innovative products. An organic structure is not always appropriate; the military needs a mechanistic structure. The Contingency Approach to Organizational Design Contingencies shape organizational design. The contingency approach customizes structure to the sources of uncertainty. Mechanistic and organic structures are ideals, useful for understanding the effect of structure on behavior, but in reality, organizations mix both structures. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

Lawrence and Lorsch analyzed three industries with three levels of uncertainty—plastics, food processing, and container manufacturing. They selected companies and measured: (1) differentiation in production, R&D, and sales departments; (2) differences in subunit or functional orientations, and (3) differences in integrating mechanisms. (Table 4.2) Research findings: 1. In complex, unstable environments, attitudes vary significantly. Each department creates its own response to environment issues. 2. In unstable, uncertain environments, informal and decentralized organizations using mutual adjustment are more effective. 3. In stable, certain environments, centralization, formalization, and standardization are more effective. 4. Effective companies match levels of integration with levels of differentiation. Highly differentiated companies have complex integrating mechanisms.

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Lawrence and Lorsch on Differentiation, Integration, and the Environment The number and size of an organization’s functions reflect the need to manage exchanges with environmental forces. (Fig. 4.9)

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To be effective, an organization must adapt its structure to match its environment; Burns and Stalker strengthen this conclusion.

Burns and Stalker on Organic versus Mechanistic Structures and the Environment Burns and Stalker found that companies with organic structures were more effective in unstable and changing environments. Companies with mechanistic structures were more effective in a stable environment. Q. Why is an organic structure more effective in a dynamic environment? A. A flat, decentralized structure increases communication, information sharing, and customer responsiveness. A stable environment makes complex decision-making unnecessary; transactions are managed easily, and centralized authority is more effective. Burns and Stalker proposed that structure be designed to match the dynamism of the environment. Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________ Organizational Insight 4.5: McDonald’s Changing Environment McDonald’s environment is becoming more uncertain. Specific forces of uncertainty include changed consumer tastes and increased competition. General forces include environmental issues such as safe packaging. Q. How has McDonald’s responded to its changing environment and what is the role of structure? A. McDonald’s environment is more uncertain, so it views its domain differently, offering new products to new customers. McDonalds’ mechanistic structure based on formalization ensured standardization, but an uncertain environment has led to an organic structure. Franchisees can tailor menus and decor to local customers. McDonald’s challenge is to make its structure organic to promote flexibility yet maintain centralization to ensure standards of quality and cleanliness.

Organizational Insight 4.6: Wal-Mart’s Race to the Top Wal-Mart has achieved a balance between a mechanistic and organic structure. The vertical operating structure has a defined hierarchy, but store managers and employees make some decisions. Q. How is Wal-Mart mechanistic? How is it organic? A. In a clearly defined hierarchy, regional vice presidents are in charge of district managers, who are in charge of store managers. Decision-making is centralized at the store manager level, and operations are standardized. Wal-Mart’s structure is organic because store managers make decisions. This facilitates mutual adjustment. Wal-Mart employees, called associates, make suggestions that are implemented. Wal-

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Notes________________________________________________________________________________ ____________________________________________________________________________________ ____________________________________________________________________________________

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Mart has informal norms and values that foster responsive behavior. To coordinate, Wal-Mart uses task forces and teams. Notes_________________________________________________________________________

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DISCUSSION QUESTIONS AND ANSWERS 1. Why does differentiation occur in an organization? Distinguish between vertical and horizontal differentiation. Differentiation occurs because as organizations grow and become more complex, they establish a division of labor. Complex organizations must control and coordinate activities to achieve goals. Vertical differentiation is a hierarchy of authority with reporting relationships established to connect organizational roles and subunits. Horizontal differentiation groups roles according to task responsibilities, establishes division of labor, and forms subunits. 2. Draw an organizational chart of your business school or college. Outline the major roles and functions. How differentiated is it? Do you think the distribution of authority and division of labor are appropriate? Answers will vary. The hierarchy from top to bottom is president; vice presidents; dean of the business school; department heads from each of the functional departments—finance, management, marketing, accounting, and information systems. Under department heads are faculty members, then student assistants and workers. Horizontally there are five functions and specializations within each function. Vertically the hierarchy has several layers. 3.

When does an organization need to use complex integrating mechanisms? Why?

4.

What factors determine the balance between centralization and decentralization and between standardization and mutual adjustment?

The balance depends on organizational goals and the environment. To discourage risk-taking, the structure is centralized with control through standardization. To encourage risk-taking, the structure is decentralized with control through mutual adjustment. Centralization and standardization promote predictability; decentralization and mutual adjustment promote innovation. Centralization and standardization fit a stable, unchanging environment, whereas decentralization and mutual adjustment fit a changing, uncertain environment.

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Under what conditions is an organization likely to prefer (a) a mechanistic structure, (b) an organic structure, or (c) elements of both?

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As organizations become differentiated, subunit orientations emerge, leading to poor communication and coordination. Complex and highly differentiated organizations, such as those with several divisions, use complex integrating mechanisms to facilitate communication and coordination. In large organizations, division managers never meet, so integrating roles promote communication and coordination.

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a. An organization prefers a mechanistic structure to encourage predictable behavior in a stable environment. If technology doesn’t change and the tasks are simple, a mechanistic structure is preferable. A mechanistic structure is preferred when formalized rules must be followed. b. An organization prefers an organic structure to foster innovation in a changing, uncertain environment, or if a project requires cross-functional coordination. If technology changes and a company has skilled workers, it needs an organic structure. c. Most organizations adopt both a mechanistic and organic structure and simply lean more toward one. The military has a mechanistic structure, but remains flexible, faced with uncertainties on the battlefield. An organization can have rules and centralized decision making, but still decentralize some decisions. A balance between mechanistic and organic structures results in a competitive advantage.

ORGANIZATIONAL THEORY IN ACTION Practicing Organizational Theory: Growing Pains In small groups, students have founded the Zylon Corp., a rapidly growing Internet software company. An informal structure has worked, but now employees do not feel rewarded for performance, and managers do not listen to their ideas. Students review the organizational structure and propose design choices to solve these problems.

Making the Connection Students will find examples either in business publications or online of a company facing one of the design challenges discussed in the chapter and explain how the company has handled the challenge.

The Ethical Dimension Using the design challenges, students examine the ethical implications of various structures. The key point based upon Contingency Theory is that structures must fit the environment. When they don’t, the situation is more likely to produce wrong decisions, which, in turn, could be viewed as unethical. For example, a nuclear power plant that should be very mechanistic may operate very poorly, and make bad decisions if they are structured in an organic format. Safety concerns would most likely be a high ethical concern. Likewise, a creative software company that has a mechanistic structure would also be ineffective, and employees might get frustrated and behave unethically.

Students will describe differentiation, core competences, and design challenges in their company. They will determine whether their company is decentralized or centralized and whether it uses standardization or mutual adjustment. They will describe the role of the informal organization and identify integrating mechanisms.

CASE FOR ANALYSIS Where Should Decisions Be Made?

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ANALYZING THE ORGANIZATION

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Until 1995, decision-making at Procter & Gamble was decentralized; managers in each country made their own decisions. This structure impeded managers of similar divisions from cooperating. Thus, top management divided global operations into North America, Europe, the Middle East, and Asia; each area was assigned a global executive vice president. Vice presidents were responsible for cooperation among divisions; authority was centralized. The balance between centralization and decentralization can be changed to make better use of resources. 1.

Why did Procter & Gamble move to centralize control?

Top managers believed that highly decentralized global decision-making prevented cooperation in similar divisions in different counties (soap and detergent divisions) and in different divisions in the same country or world regions. This new structure reduced costs and allowed for rapid innovation. This change was made in 1995, and in 1996 P&G earned record operating profits on record global sales. 2.

When would managers realize that they had gone too far and “centralized” control too much?

When P&G does not respond to customers as quickly as competitors, it will need more innovation and move towards decentralization. Decentralization promotes flexibility and responsiveness by allowing lower-level managers to make on-the-spot decisions. Managers can demonstrate their personal skills and will be more motivated.

1. Use the four design challenge questions as a guide for this chapter. These questions really put a practical spin on the basic principles of design. 2. Have students bring real organizational charts from their organizations. An organizational chart can illustrate the difference between vertical and horizontal differentiation. In a vertical authority relationship, employees report to a supervisor, who reports to a manager, who reports to a vice president. The chart shows that task responsibilities are horizontal; functions such as manufacturing, sales, and R&D are on the same level. 3. Ask students which of the six design challenges their organization faces regularly. A good follow up discussion concerns restructuring, and why it does not always occur when faced with these design challenges. 4. Have students debate the advantages and disadvantages of centralization and decentralization. 5. Have students distinguish between rules, formal written statements, and norms, or informal standards of behavior. 6. Have students discuss when formalization has “failed” them. Examples might include a retail store’s return policy, or a video-rental store’s late-fee policy. The key point is that high levels of formalization are efficient, because employees require less training and don’t have to make as many decisions, but tend to break down when customers have unusual requests or requirements. This is a good way for students to understand how the efficiencies of formalization must be balanced with customer needs.

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TEACHING SUGGESTIONS