Designing Organizationa

l Structure

Structure for StartupStructure for Startup

• Consider an organization that Consider an organization that – Limits itself to producing a small Limits itself to producing a small

number of similar productsnumber of similar products– Produces those products in one or a Produces those products in one or a

few locationsfew locations– Sells them to only one general type Sells them to only one general type

of client or customerof client or customer

Functional StructureFunctional Structure

• A functional structure is a design that A functional structure is a design that groups people on the basis of their groups people on the basis of their common skills, expertise, or common skills, expertise, or resources they useresources they use

• Functional structure is the bedrock of Functional structure is the bedrock of horizontal differentiationhorizontal differentiation

• An organization groups tasks into An organization groups tasks into functions to increase the functions to increase the effectiveness with which it achieves effectiveness with which it achieves its goalsits goals

Functional StructureFunctional Structure

Functional Structure Functional Structure (cont.)(cont.)

Functional Structure: Functional Structure: AdvantagesAdvantages

• Provides people with the opportunity Provides people with the opportunity to learn from one another and become to learn from one another and become more specialized and productivemore specialized and productive

• People who are grouped together by People who are grouped together by common skills can supervise one common skills can supervise one another and control each other’s another and control each other’s behaviorbehavior

• People develop norms and values that People develop norms and values that allow them to become more effective allow them to become more effective at what they doat what they do

Control Problems in a Control Problems in a Functional StructureFunctional Structure

• Communication Problems: as more Communication Problems: as more organizational functions develop, organizational functions develop, each with their own hierarchy, they each with their own hierarchy, they become increasingly distant from one become increasingly distant from one anotheranother

• Measurement Problems: information Measurement Problems: information needed to measure the profitability of needed to measure the profitability of any functional group is difficult to any functional group is difficult to obtainobtain

• Location Problems: centralized Location Problems: centralized control hinders ability to satisfy the control hinders ability to satisfy the special needs in different geographic special needs in different geographic regionsregions

Control Problems in a Control Problems in a Functional Structure Functional Structure

(cont.)(cont.)• Customer Problems: servicing the Customer Problems: servicing the

needs of new kinds of customers and needs of new kinds of customers and tailoring products to suit them is tailoring products to suit them is relatively difficult relatively difficult

• Strategic Problems: top managers Strategic Problems: top managers spend too much time finding ways to spend too much time finding ways to improve coordinationimprove coordination

Solving the Control Solving the Control ProblemProblem

• Managers can solve control Managers can solve control problems by redesigning the problems by redesigning the functional structure to increase functional structure to increase integration between functionsintegration between functions

Improving Integration in a Functional Improving Integration in a Functional Structure by Combining Sales and Structure by Combining Sales and

MarketingMarketing

Differentiation and Differentiation and IntegrationIntegration

Differentiation and Differentiation and Integration (cont.)Integration (cont.)

From Functional From Functional Structure to Divisional Structure to Divisional

StructureStructure• Functional structure is Functional structure is

appropriate if the organization: appropriate if the organization: – Limits itself to producing a small Limits itself to producing a small

number of similar productsnumber of similar products– Produces those products in one or a Produces those products in one or a

few locationsfew locations– Sells them to only one general type Sells them to only one general type

of client or customerof client or customer

From Functional From Functional Structure to Divisional Structure to Divisional

Structure (cont.)Structure (cont.)• As organizations grow, they begin to As organizations grow, they begin to produce more products that may be produce more products that may be different from one anotherdifferent from one another

• Organizations also increase production Organizations also increase production at a number of locations to serve many at a number of locations to serve many different types of customersdifferent types of customers

• More complex structure is based on:More complex structure is based on:– Increasing vertical differentiationIncreasing vertical differentiation– Increasing horizontal differentiationIncreasing horizontal differentiation– Increasing integrationIncreasing integration

Moving to a Divisional Moving to a Divisional StructureStructure

• Organizations most commonly adopt Organizations most commonly adopt the divisional structure to solve the divisional structure to solve control problems that arise with too control problems that arise with too many products, regions, or many products, regions, or customerscustomers

• Divisional structure is dependent on Divisional structure is dependent on control problem to be solvedcontrol problem to be solved– Create smaller, more manageable Create smaller, more manageable

subunitssubunits• Product structureProduct structure• Geographic structureGeographic structure• Market structureMarket structure

Divisional I: Product Divisional I: Product StructureStructure

• Product structureProduct structure: a divisional : a divisional structure in which products structure in which products (goods or services) are grouped (goods or services) are grouped into separate divisions according into separate divisions according to their similarities or differencesto their similarities or differences

• Organizations need to decide how Organizations need to decide how to coordinate its product to coordinate its product activities with support functionsactivities with support functions– Leads to three kinds of product Leads to three kinds of product

structurestructure

Product Structure (cont.)Product Structure (cont.)

• Product division structureProduct division structure: a : a structure in which a centralized set structure in which a centralized set of support functions service the of support functions service the needs of a number of different needs of a number of different product linesproduct lines

• Support function is divided into Support function is divided into product-oriented teams of functional product-oriented teams of functional specialists who focus on the needs of specialists who focus on the needs of one particular product divisionone particular product division

Product Division Product Division StructureStructure

Assignment of Product-Oriented Assignment of Product-Oriented Functional Teams to Individual Functional Teams to Individual

DivisionsDivisions

Product Structure (cont.)Product Structure (cont.)• Multidivisional structure: Multidivisional structure: A structure A structure

in which support functions are placed in in which support functions are placed in self-contained divisionsself-contained divisions

• Each division has its own set of support Each division has its own set of support functions and controls its own value functions and controls its own value

• Corporate headquarters staff:Corporate headquarters staff: responsible for overseeing the activities responsible for overseeing the activities of the managers heading each division of the managers heading each division

• Allows a company to operate in many Allows a company to operate in many different (diverse) businesses different (diverse) businesses

Multidivisional Multidivisional StructureStructure

Advantages of a Advantages of a Multidivisional StructureMultidivisional Structure

• Increased organizational Increased organizational effectiveness: clear division of labor effectiveness: clear division of labor between corporate and divisional between corporate and divisional managers generally increases managers generally increases organizational effectiveness organizational effectiveness

• Increased control: extra control Increased control: extra control provided by the corporate office provided by the corporate office can encourage the stronger pursuit can encourage the stronger pursuit of internal organizational efficiency of internal organizational efficiency by divisional managersby divisional managers

Advantages of a Advantages of a Multidivisional Multidivisional

Structure (cont.)Structure (cont.)• Profitable growth: when each Profitable growth: when each division is its own profit center, division is its own profit center, individual profitability can be individual profitability can be clearly evaluatedclearly evaluated

• Internal labor market: the most Internal labor market: the most able divisional managers are able divisional managers are promoted (from within)to become promoted (from within)to become corporate managerscorporate managers

Multidivisional Structure in Multidivisional Structure in Which Each Division Has a Which Each Division Has a

Different StructureDifferent Structure

Disadvantages of a Disadvantages of a Multidivisional StructureMultidivisional Structure

• Managing the corporate-divisional Managing the corporate-divisional relationship: finding the balance relationship: finding the balance between centralization and between centralization and decentralizationdecentralization

• Coordination problems between Coordination problems between divisions: divisions start divisions: divisions start competing for resources and competing for resources and coordination problems arise coordination problems arise between divisionsbetween divisions

Disadvantages of a Disadvantages of a Multidivisional Structure Multidivisional Structure

(cont.)(cont.)• Transfer pricing: problems between Transfer pricing: problems between

divisions often revolve around the divisions often revolve around the transfer pricetransfer price, i.e., the price at , i.e., the price at which one division sells a product or which one division sells a product or information about innovations to information about innovations to another divisionanother division

• Bureaucratic costs: multidivisional Bureaucratic costs: multidivisional structures are very expensive to structures are very expensive to operate operate

• Communication problems: tall Communication problems: tall hierarchies tend to have hierarchies tend to have communication problems, communication problems, particularly the distortion of particularly the distortion of informationinformation

Product Structure (cont.)Product Structure (cont.)• Product team structureProduct team structure: :

specialists from the support specialists from the support functions are created that specialize functions are created that specialize in the needs of particular kind of in the needs of particular kind of productproduct– Focus on the needs of one product (or client) Focus on the needs of one product (or client)

or a few related productsor a few related products

• A product team structure is more A product team structure is more decentralized than a functional decentralized than a functional structure or a product division structure or a product division structure, and specialists in the structure, and specialists in the various product teams are permitted various product teams are permitted to make on-the spot decisionsto make on-the spot decisions

Product Team StructureProduct Team Structure

Divisional Structure II: Divisional Structure II: Geographic StructureGeographic Structure

• When the control problems that When the control problems that companies experience are a companies experience are a function of geography, a geographic function of geography, a geographic divisional structure is appropriatedivisional structure is appropriate

• Allows the organization to adjust its Allows the organization to adjust its structure to align its core structure to align its core competences with the needs of competences with the needs of customers in different geographic customers in different geographic regionsregions

• Allows some functions to be Allows some functions to be centralized and others centralized and others decentralizeddecentralized

Geographic StructureGeographic Structure

Divisional Structure III Divisional Structure III : Market Structure: Market Structure

• A market structure aligns functional A market structure aligns functional skills and activities with the needs skills and activities with the needs of different customer groupsof different customer groups

• Each customer group has a different Each customer group has a different marketing focus, and the job of each marketing focus, and the job of each group is to develop products to suit group is to develop products to suit the needs of its specific customersthe needs of its specific customers

• Each customer group makes use of Each customer group makes use of centralized support functioncentralized support function

Market StructureMarket Structure

Matrix StructureMatrix Structure• Matrix structure:Matrix structure: an organizational an organizational

design that groups people and resources design that groups people and resources in two ways simultaneously, by function in two ways simultaneously, by function and productand product

• A matrix is a rectangular grid that shows A matrix is a rectangular grid that shows a vertical flow of functional responsibility a vertical flow of functional responsibility and a horizontal flow of product and a horizontal flow of product responsibilityresponsibility

• The members of the team are called The members of the team are called two-two-boss employeesboss employees because they report to because they report to two superiors: the product team two superiors: the product team manager and the functional managermanager and the functional manager

• The team is the building block and The team is the building block and principal coordination and integration principal coordination and integration mechanismmechanism

Matrix StructureMatrix Structure

Advantages of a Matrix Advantages of a Matrix StructureStructure

• The use of cross-functional teams The use of cross-functional teams reduces functional barriers and subunit reduces functional barriers and subunit orientation.orientation.

• Opens communication between Opens communication between functional specialists functional specialists

• The matrix enables an organization to The matrix enables an organization to maximize its use of skilled maximize its use of skilled professionals, who move from product professionals, who move from product to product as neededto product as needed

• The dual functional and product focus The dual functional and product focus promotes concern for both cost and promotes concern for both cost and qualityquality

Disadvantages of a Disadvantages of a Matrix StructureMatrix Structure

• Matrix lacks a control structure that Matrix lacks a control structure that leads employees to develop stable leads employees to develop stable expectations of one anotherexpectations of one another

• The lack of a clearly defined hierarchy The lack of a clearly defined hierarchy of authority can also lead to conflict of authority can also lead to conflict between functions and product teams between functions and product teams over the use of resourcesover the use of resources

• People are likely to experience a People are likely to experience a vacuum of authority and responsibility vacuum of authority and responsibility – People then create their own informal People then create their own informal

organization to provide themselves with organization to provide themselves with some sense of structure and stabilitysome sense of structure and stability

Network StructureNetwork Structure• Network structure:Network structure: a cluster of different a cluster of different

organizations whose actions are organizations whose actions are coordinated by contracts and agreements coordinated by contracts and agreements rather than through a formal hierarchy of rather than through a formal hierarchy of authorityauthority

• Very complex as companies form Very complex as companies form agreements with many suppliers, agreements with many suppliers, manufacturers, and distributorsmanufacturers, and distributors

• Such agreements are necessary as the Such agreements are necessary as the organization outsources many of the value organization outsources many of the value creation activities involved in production creation activities involved in production and marketing goods and servicesand marketing goods and services

Advantages of Network Advantages of Network StructuresStructures

• To the degree that a network To the degree that a network partner can perform a specific partner can perform a specific functional activity reliably, and at a functional activity reliably, and at a lower cost, production costs are lower cost, production costs are reducedreduced

• Avoids the high bureaucratic costs Avoids the high bureaucratic costs of operating a complex of operating a complex organizational structureorganizational structure

• Allows an organization to act in an Allows an organization to act in an organic wayorganic way

• Network partners can be replaced if Network partners can be replaced if they do not perform up to standardsthey do not perform up to standards

Disadvantages of Disadvantages of Network StructuresNetwork Structures

• A considerable level of mutual A considerable level of mutual adjustment is needed to allow the adjustment is needed to allow the groups to interact so that they can groups to interact so that they can learn from one another and learn from one another and constantly improve the product constantly improve the product

• Ability to control a complex value- Ability to control a complex value- creation process is difficult creation process is difficult because managers lack the means because managers lack the means to effectively coordinate and to effectively coordinate and motivate the various network motivate the various network partnerspartners