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ORGANISATION STRUCTURE
AND DESIGN
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We routinely enjoy the goods and services
that organisations provide, we rarely bother
to wonder about how these goods and
services are produced.
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How Does an Organization Create
Value? Value creation takes place at three stages: input,
conversion, and output Inputs: include human resources, information and
knowledge, raw materials, money and capital
Conversion: the way the organization uses human
resources and technology to transform inputs intooutputs
Output: finished products and services that theorganization releases to its environment
Each stage is affected by the environment in which the
organization operates
Environment the set of forces and conditions thatoperate beyond an organizations boundaries but affect itsability to acquire and use resources to create value
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How an Organization Creates Value
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How McDonald's creates value
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McDonald's Input
obtain from its environment:
Raw materials( ground beef, sandwichbuns, potatoes, milk-shake mix etc.)
Money and capita( shareholders
investment)
Human resources( cooks, clean-up crew,order takers, managers)
Information and knowledge (training,knowledge of fast-food industry)
Customers
McDonald's conversion process
Transforms inputs and adds value tothem:
Machinery( grills, toasters,
milk-shake machines)
Computers ( computerized cashregisters, ordering systems,inventory tracking)
Human skills and abilities(personnel trained in sandwich
preparation, ordering, potato frying,overseeing the whole operation)
McDonald's environment
Sales of outputs to Customers:
Satisfied customers
Suppliers of meat, potatoes, milk-shakemix
Population from which to chooseemployees
Government health regulations
Competitors ( Taco Bell, Burger King)
McDonald's outputs
Released to its environment:
Fast and cheap food
Satisfied customers
Satisfied shareholders
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Why Do Organizations Exist?People working together to produce goods and services
create more value than people working alone5 major reasons why organizations exist:
To increase specialization and the division of labor Division of labor allows specialization
Specialization allows individuals to become experts at their job
To use large-scale technologyTaking the advantage of the economies of scale and scope
results from the use of modern automated and computerized
technology.
Economies of scale: cost savings that result whengoods and services are produced in large volume
Economies of scope: cost savings that result when anorganization is able to use underutilized resources moreeffectively because they can be shared across several
different products or tasks
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To manage the external environmentpressures from the environment in which organizationsoperate also make organizations the favored mode for
organizing productive resources External environment consists of the political, social,economic, and technological factors that affectorganizations
Organizations regularly exchange products and
services for needed resources Organizations need to manage their externalenvironment
To exert power and control Organizations structure their members to efficiently
produce products and services
To economize on transaction costs Transaction costs: the costs associated with
negotiating, monitoring, and governing exchanges
between people who must cooperate
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Organizational Theory, Design, and
Change: Some Definitions
Organizational theory: the study of how organizationsfunction and how they affect and are affected by the
environment in which they operate
Organizational structure: the formal system of task andauthority relationships that control how people to
coordinate their actions and use resources to achieve
organizational goals
Organizational culture: is the set of key values, beliefs,
and attitudes shared by organizational members andhelps shape the behavior within the organization
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Organizational design: the process by which managersselect and manage aspects of structure and culture so
that an organization can control the activities necessary
to achieve its goals
Organizational change: the process by whichorganizations move from their present state to some
desired future state to increase their effectiveness
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Basic challenges of
organisational design
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Design Challenge 1:
people in this organisation take on new tasks as the
need arises and its very clear who is responsible forwhat, and who is supposed to report to whom. This
makes it difficult to know on whom to call when the
need arises and difficult to coordinate people's
activities so they work together as a teamAs the organization grows, managers must decide how
to control and coordinate the activities that are required
for the organization to create value. The principle
design challenge is how to manage differentiation to
achieve organizational goals.
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Differentiation : the process by which anorganization allocates people and resources toorganizational task and establishes the task and
authority relationship that allow the organizationto achieve its goals. or in short it is the process ofestablishing and controlling the division of labour,or degree of specialization, in the organization.
In a simple organization, differentiation is lowbecause the division of labour is low, typicallyone person or few people perform all
organizational tasks so, there are few problemswith coordinating who does what, for whom, andwhen, however in a complex organization boththe division of labour an differentiation are high.
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Building blocks of differentiation
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The basic building blocks of differentiation are
organizational roles
Organizational roles: the set of task-related behaviorsrequired of a person by his or position in and
organization.
Organizational structure is based on a system of
interlocking roles, and the relationship of one role to
another. The differentiation of an organization into
individual organizational roles results in clear authority.
Authority: the power to hold people accountable fortheir actions and to make decisions concerning the use of
organizational resources.
Control: the ability to coordinate and motivate people to
work in the organization's interests
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Function: a subunit composed of a groupof people, working together, who possesssimilar skills or use the same kind ofknowledge, tools, or techniques to performtheir jobs
Division: a subunit that consists of acollection of functions or departments thatshare responsibility for producing aparticular good or service
Organizational complexity: the number of
different functions and divisions possessedby an organization Degree of differentiation
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Support functions:facilitate an organizationscontrol of its relations with its environment and itsstakeholders
Purchasing, sales and marketing, public relations, andlegal affairs
Production functions: manage and improve the
efficiency of an organizations conversionprocesses so that more value is created Production operations, production control, and quality
control
Production operations controls manufacturing process,
Production control decides on most efficient way toproduce at low cost,
Quality control monitors product quality.
5 Different Kinds of Functions
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Maintenance functions: enable an organizationto keep its departments in operation includes
Personnel: recruit and train and improve skills
Engineering :repair broken machinery and Janitorial services: to keep work environment safe and
healthy
Adaptive functions: allow an organization toadjust to changes in the environment
Research and development, market research, andlong-range planning
Managerial functions: facilitate the control andcoordination of activities within and among
departments Acquisition of, investment in, and control of resources
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Hierarchy: a classification of people according to
their relative authority and rank Vertical differentiation:the way an organization
designs its hierarchy of authority and createsreporting relationships to link organizational roles
and subunits Establishes the distribution authority between levels
Horizontal differentiation:the way anorganization groups organizational tasks into rolesand roles into subunits (functions and divisions)
Roles differentiated according to their main taskresponsibilities
Vertical and Horizontal Differentiation
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Organizational Chart of the B.A.R. and Grille
Design Challenge 2:
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Design Challenge 2:We can't get people to communicate andcoordinate in this organization. Specifying tasksand roles is supposed to help coordinate the work
process, but here it builds barriers between peopleand function.
companies have often found that specializationlimits communication between subunits and
prevents them from learning from one another. As aresult of horizontal differentiation, the members ofdifferent functions develop a subunit orientation.
To avoid the communication problems that canarise from horizontal differentiation, organisationstry to find new or better ways to integrate functions.That is to promote cooperation, coordination andcommunication among separate subunits.
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Balancing Differentiation and Integration
Horizontal differentiation is supposed to enable
people to specialize and become moreproductive
Specialization often limits communication betweensubunits
People develop subunit orientation Subunit orientation:a tendency to view ones role in the
organization strictly from the perspective of the time frame,goals, and interpersonal orientations of ones subunit
When subunit orientation occurs, communication fails
and coordination becomes difficult Integration: the process of coordinating various
tasks, functions, and divisions so that they worktogether and not at cross-purposes
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Types and examples ofIntegrating Mechanisms
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Integration
mechanism( in
order of increasing
complexity)
Description Example (e.g., in Johnson
and Johnson
Hierarchy ofauthority
A ranking of employeesintegrates by specifying who
reports to whom.
Sales person reports to DiaperDivision sales manager
Direct contact Managers meet face-to-face to
coordinate activities
Diaper division sales and
manufacturing managers meet
to discuss scheduling
Liaison role A specific manager is given
responsibility for coordinating
with managers from other
subunits on behalf of his or her
subunit
A person from each of J&Js
production, marketing and
research and development
departments is given
responsibility for coordinatingwith other departments
Taskforce Managers meet in temporary
committees to coordinate cross-
functional activities.
A committee is formed to find
new ways to recycle diapers
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Team Managers meet regularly in
permanent committees to
coordinate activities
A permanent J&J committee
is established to promote
new product development in
the Diaper Division
Integrating role A new role is established to
coordinate the activities of
two or more functions or
divisions
One manager takes
responsibility for
coordinating diaper and baby
soap divisions to enhancetheir marketing activities
Integrating
department
A new department is created
to coordinate the activities of
functions or divisions
A team of managers is
created to take responsibility
for coordinating J&Jscentralization program to
allow divisions to share skills
and resources.
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Managers must fit level of integration and
level of differentiation
Differentiation and integration must bebalanced
Complex organizations need more
integration Simple organizations need less integration
i C 3 d
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Design Challenge 3: People in this organization donttake responsibility or risks. They are always looking tothe boss for direction and supervision. As a result,decision making is slow and cumbersome and we missout on a lot of opportunities to create value.
Hierarchy of authority is supposed to improve the wayan organization functions because people can be heldaccountable for their actions and because the hierarchy
defines the area of each person's authority within theorganization.
However many companies complain that when ahierarchy of authority exists, people are constantlylooking to their superior for directions. When somethingnew or unusual occurs they prefer to let it pass, or theypass it on to their superior than assume responsibilityand take the risk of dealing with it.
B l i C t li ti d D t li ti
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Centralizedorganization: the authority to make
important decisions is retained by top levelmanagers Top managers able to coordinate activities to keep
the organization focused on its goals
Decentralized organization: the authority tomake important decisions is delegated tomanagers at all levels in the hierarchy Promotes flexibility and responsiveness
Ideal balance entails: Enabling middle and lower managers who are at the
scene of the action to make important decisions
Allowing top managers to focus on long-term strategy
making
Balancing Centralization and Decentralization
F t i fl i th t f t li ti d D t li ti
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Factors influencing the amount of centralization and Decentralization
More Centralization More Decentralization
Environment is more stable. Environment is complex, uncertain.
Lower-level managers are not as
capable or experienced at making
decisions.
Lower-level managers are capable and
experienced at making decisions.
Lower-level managers do not want to
have a say in decisions.
Lower-level managers want a voice in
decisions.Decision are more significant. Decision are relatively minor.
Organization is facing a crisis or the
risk of company failure.
Corporate culture is more open to
allowing managers to have a say in
what happens.
Company is large Company is geographically dispersed
Effective implementation of company
strategies depends on managers
retaining more say over what happens.
Effective implementation of company
strategies depends on managers having
more involvement and flexibility to
make decisions.
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Design Challenge 4: people in this organization paytoo much attention to the rules. Whenever I needsomebody to satisfy an unusual customer request or
need real quick service from another function. I cantget it because no one is willing to bend or break therules.
Standardization: conformity to specific models or
examplesdefined by sets of rules and norms that areconsidered proper in a given situation. Standardizeddecision-making and coordination procedures makepeoples actions routine and predictable.
Mutual adjustment: the compromise that emergeswhen decision making and coordination areevolutionary processes and people use their judgmentrather that standardized rules to address problems.
Guide decision making and promote coordination.
Balancing Standardization and Mutual
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Balancing Standardization and Mutual
Adjustment
Standardization: conformity to specific models orexamplesdefined by sets of rules and norms thatare considered proper in a given situation.Standardized decision-making and coordination
procedures make peoples actions routine andpredictable.
Mutual adjustment: the process throughwhich people use their judgment rather thanstandardized rules to address problems,guide decision making, and promotecoordination
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Formalization: the use of written rules and procedures
to standardize operations.
Rules : formal, written statements that specify the
appropriate means for reaching desired goals.
Norms: standards or styles of behavior that are
considered acceptable or typical for a group of peopleSocialization: the process by which organizational
members learn the norms of an organization and
internalize these unwritten rules of conduct.
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Challenge facing managers is:
To find a way of using rules and norms to
standardize behavior, and
to allow for mutual adjustment to givemanagers opportunity to discover new and
better ways to achieve goals
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Each design challenge has implications for how anorganization as a whole and the people in the
organization behave and perform. Useful concepts for
addressing the way in which managements response
to the challenges collectively influence how anorganizational structure works are the concepts of
mechanistic structure and organic structure.
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Mechanistic structure: designed to induce
people to behave in predictable, accountable
ways.
Organic structure: which promote flexibility,
so people initiate change and can adapt quickly
to changing conditions.
How the design challenges result in Mechanistic or Organic Structure
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g g g
Mechanistic structures result when an
organisation makes these choices.
Organic structures result when an
organisation makes these choices.
Individual SpecializationEmployees work separately and
specialize in one clear defined task
Joint SpecializationEmployees work together and coordinate
their actions to find the best way of
performing a task
Simple integrating mechanisms
Hierarchy of authority is clearly defined
and is the major integrating mechanism.
Complex integrating mechanisms
Task forces and teams are the major
integrating mechanisms
Centralization
Authority to control tasks is kept at the
top of the organization. Mostcommunication is vertical
Decentralization
Authority to control tasks is delegated to
people at all levels in the organization.Most communication is lateral
Standardization
Extensive use is made of rules and SOPs
to coordinate tasks, and work process is
predictable.
Mutual adjustment
Extensive use is made of face-to face to
coordinate tasks, and work process is
relatively unpredictable.
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Organisational design and
strategy in a changing globalenvironment
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An organization's strategy is a specific pattern of
decisions and actions that managers take to use
core competences to achieve a competitiveadvantage and outperform competitors.
Customers are likely to respond to a strategy that
is based on the goal of offering high qualityproducts and services at appropriate price.
Through its strategy an organisation seeks to use
and develop core competences to gain acompetitive advantage so that it can increase its
share of scarce resources in its environment.
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Core competences: the skills and abilities in
value creation activities that allow a company to
achieve superior efficiency quality innovation, orcustomer responses
Sources of core competences:
Specialized resources: two kinds ofresources give an organization a competitive
advantage
Functional resourcesOrganisational resources
Coordination abilities
The value creation cycle
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The value creation cycle
Gl b l i d
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Global expansion and core
competences
Expanding globally into overseas markets
can be an important facilitator of the
development of an organizations core
competences
Th ti f l th h
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The creation of value through
global expansion
Functional-level strategy
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Functional-level strategy A plan of action to strengthen an organizations functional
and organizational resources, as well as its coordination
abilities, in order to create core competences. The strategic goal of each function is to create a corecompetence that give the organization a competitiveadvantage.
An organization creates value by applying its functional skills
and knowledge to inputs and transforming them into outputsof finished goods and services. To gain a competitiveadvantage, an organization must be able to do at least one ofthe following
1. Perform functional activities at a lower than that of its
rivals2. Perform functional activities in a way that clearly
differentiates its goods and services from those of itsrivals by giving its products unique qualities thatcustomers greatly desire.
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Low-cost and differentiation
advantages resulting fromfunctional-level strategy
Value-creating Source of low-cost advantage Sources of differentiation
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g
function
g
advantage
Manufacturing Development of skills in
flexible manufacturing
technology
Increase in product quality and
reliability
Human
recourses
management
Reduction of turnover and
absenteeism
Hiring of highly skilled personnel
Materials
management
Use of just-in-time inventory
system\computerizedwarehousing
Development of long-term
relationship with suppliers
and customers
Use of company reputation and
long term relationships withsuppliers and customers to
provide high quality inputs and
efficient distribution and disposal
of outputs
Sales andmarketing
Increased demand and lowerproduction costs
Targeting of customer groupsTailoring products to customers
Promoting brand names
Research and
development
Improved efficiency of
manufacturing technology
Create new products
Improvement of existing
products.
F ti l l l t t g d
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Functional level strategy andstructure
Structural characteristics associated with
the development of core competences in
production, sales and research and
development.
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Managerial implications of functional-level strategy
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1. As a manager or member of function, identify the
functional resources or coordination abilities that give your
function a core competence. Having identified the source ofyour functions core competence, establish a plan to
improve or strengthen them, and create a set of goals to
measure you progress
2. Study your competitors and the methods and practices theyuse to control their functional activities. Pick your most
effective competitors, study its methods, and use them as a
benchmark for what you wish to achieve in your function
3. Analyze the way your functional structure and culture affect
functional resources and abilities. Experiment to see
whether changing a component of structure or culture can
enhance your functions core competence.
Managerial implications of functional level strategy
Business-level strategy
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Business level strategy
A plan to combine functional core competences
in order to position the organization so that ithas a competitive advantage in its domain.
Low-cost business level strategy: a plan
whereby an organization produces low-pricedgoods and services for all customer groups
Differentiation business level strategy: a plan
whereby an organization produces high priced,quality products aimed at particular market
segments.
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Characteristics of organizational
structure associated with Business-
level Differentiation and Low coststrategies
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