Organization Structure

ORGANISATION DESIGN
•Target Market
•Product/Service
•Vision /Objective
•Division of Labour –who will do what. Divide complex
tasks into simple tasks.
 Structural Dimensions
• Differentiation • Hierarchy
• Integration • Span of control
• Centralization • Specialization
• Standardization • Division of labor
• Mutual Adjustment • Authority
• Formalization • Control
Differentiation – is the process by which an organization
allocates people and resources to organizational tasks
and estabilishes the task and authority relationships
that allow the org to achieve its goals.
It is the process of estabilishing and controlling the
division of labour . or the degree of specialization in an
organization.
Differentiation happens both at the horizontal and
vertical level.
•Horizontal –because of specialization , teams are
formed
•Vertical – because of reponsiblities levels.
In a simple org differentiation is low because the division of
labour is low.
In complex organisations , both division of labour and
differentiation are high. (as seen in the restaurant example)
Organisational Role – The basic building blocks of
Differentiation are Org Roles.
They are set of task related behaviours required of
a person by his /her position in an organistion.

As division of labour increases in an org, managers

specialize in some roles and hire people to
specialize in others.
 Division of Labor
Is the allotment of specific tasks to individuals

Simple organization 
Complex organization
Simple Tasks  Complex 
Break down into smaller tasks 
Division of labor
 Specialization
This is the extent of training required by tasks

Simple tasks  Complex tasks

No training  Specialized training

Unskilled  Professionals
 Differentiation
Is the extent of uniqueness or specialization of
skills required for tasks

• Low specialization  High commonality

Low differentiation

• High specialization  Low commonality

High differentiation
Building Blocks of Differentiation
Vertical and Horizontal Differentiation
• Vertical differentiation: the way an organization
designs its hierarchy of authority and creates
reporting relationships to link organizational roles
and subunits
– Establishes the distribution authority between levels
• Horizontal differentiation: the way an organization
groups organizational tasks into roles and roles into
subunits (functions and divisions)
– Roles differentiated according to their main task
responsibilities

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Organizational Chart of a Restaraunt

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 Integration
High specialization & differentiation 
Challenge of
Communication
Coordination
Control
High division of labor 
High specialization 
High differentiation 
High Integration
• INTEGRATION –The process of coordinating
various tasks, functions and divisions so that
they work together and not at cross purposes.
Some integration mechanism used by managers
are :
• Hierarchy of Authority- ranking of employees
integrates by specifying who reports to whom
• Direct Contact – Managers meet face to face to
coordinate activities
• Liaison Role – A manage is given responsibility
for coordinating with managers from other
units
• Task Force – Managers meet in temporary
committees to coordinate cross functional
activities
• Team – permanent committees to coordinate
activities
• Integrating Department – a new department is
created to coordinate the activities of functions
or divisions.
 Span of Control
This is the number of subordinates a managers
has reporting to him
– There is a limitation to this number

• Complex Task
• More Specialization
• High Interdependence
 lower the number of subordinates a
manager can effectively supervise
• Depends on the nature of the job
• How much physical monitoring is reqd
• Task Variability
• Task Interdependence
• How much IT is there in the job
• Sequential or parallel jobs
 Hierarchy
Hierarchy is the levels of distribution of
authority

Increase in specialization 
Challenges in Coordination/ Motivation 
Increase in Hierarchy (to maintain span of
control)

i.e Vertical Differentiation

 Centralization
Is the extent of concentration of authority at the
top levels

• Increasing Hierarchy 
Coordination & Communication challenges

Decentralize  Reduce hierarchy levels

 Standardization
When tasks are simple
It is possible to standardize tasks

Increase Complexity 
Breakdown tasks to smaller tasks 
Standardize the procedure
 Reduce supervision needs
 Formalization
Extent of laid down rules and regulations for
tasks

• Increase Complexity 
Formalize Tasks 
Less Coordination/Comm probs 
Increased rigidity (routinization)
 Organizational Roles
• Set of task-related behaviors required of a
person by his or her position in an
organization
– As the division of labor increases, managers
specialize in some roles and hire people to
specialize in others.
– Specialization allows people to develop their
individual abilities and knowledge within their
specific role.
– The identification of roles leads to authority and
control issues.
 Authority and Control
• Authority: the power to hold people
accountable for their 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
 Subunits: Functions and Divisions
• Function: a subunit composed of a group of
people, working together, who possess
similar skills or use the same kind of
knowledge, tools, or techniques to perform
their jobs
• Division: a subunit that consists of a
collection of functions or departments that
share responsibility for producing a
particular good or services
Organizational Design Challenges

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 Balancing Differentiation and
Integration
• Horizontal differentiation is supposed to
enable people to specialize and become more
productive
– Specialization often limits communication between
subunits
– People develop subunit orientation
• Subunit orientation: a tendency to view one’s role in
the organization strictly from the perspective of the
time frame, goals, and interpersonal orientations of
one’s subunit
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Defining Organizational Structure
 Defining Organizational Structure
 Formal reporting relationships
 Number of levels in the hierarchy
 Span of control of managers
 Departmentalization – grouping of individuals
 Grouping of departments into the total organization
 Design of systems to ensure effective communication,
coordination, control and integration of effort across
departments
A Typical Organization Chart
CEO

Production Finance Marketing

Functional Structure- A design that groups people together
on the basis of their common expertise and experience or
because they use the same resource
eg
Waiters and cleaning boys were grouped in the dining room
function and chefs & Kitchen staff were grouped into the
kitchen function.
Functional Structure is the bedrock of horizontal
differentiation
 Functional Structure
CEO

Production Finance Marketing

 M a n a gin g D ire c tor
R K P itamber

D eputy MD
A nand Mahindra

D irector (Operations) D irector (F inance) D irector (Marketing)

V P (O perations) V P (F inance) V P (Marketing)

G M (O perations) G M (F inance) G M ( Marketing)

4 locations 4 locations 4 locations
 Functional Structure
Strengths Weaknesses
 Best in stable  Slow response time to
environment environmental changes
 Allows economies of scale  Bottlenecks caused by
within functional sequential tasks
departments  May cause decisions to pile on
 Enables in-depth top, hierarchy overload
 Leads to poor horizontal
knowledge and skill
development coordination among
departments
 Specialist freed from
 Results in less innovation
admin/coordinating work
 If multi product priority
 Simple decision/
conflict
communication network  Involves restricted view of the
– best for single/few
product organization whole
Advantages of a Functional Structure
•Provides people an opportunity to learn from one another
another and become specialized and productive. They can
learn the most efficient techniques for performing a task, or
the best way to solve problems.
•People who are grouped together by common skills can
supervise one another
Disadvantages of a Functional Structure
•Control problems- as activities become complex , more products
are added, geographical diversity increases etc.- managers find it
difficult to manage.
•Communication Problems- as more organization functions
develop, each with its own hierarchy, they become distant from
each other. Each function develops its own orientation.eg sales
function wants to sell fast inorder to increase revenue. Production
function wants to churn out simpler products.
•Measurement problems- as functions become more complex,
difficult to measure performance
•Location Problems-geographical spread can posea control
problem within a functional structure.
• Customer Problems-other functions like production,
finance are far removed from a customer needs and they
may not understand

• Measurement problems- as functions become more

complex, difficult to measure performance
• Location Problems-geographical spread can pose a
control problem within a functional structure.
• Customer Problems-other functions like production,
finance are far removed from a customer needs and they
may not understand
DIVISIONAL STRUCTURE
As organisations grow over time, they produce more and
more products that are different from one another. These
goods may be produced at different locations and for
different types of customers. A divisional structure is one in
which functions are grouped together according to the
specific demands of products, markets, customers
 Divisional Structure
• Division – subunit consisting of collection of
functions or departments sharing
responsibility for producing particular product
or service
• Large complex company model
• Strengths and weaknesses?
 CEO

Prod Div 1 Prod Div 2 Prod Div 3

Divisional Structure (Product)

CEO

India Europe USA/Canada

Divisional Structure (Geographical)

 Divisional Structure
Strengths Weaknesses
 Suited to fast change in  Eliminates economies
unstable environment of scale to functional
 Leads to client satisfaction departments
because product  Leads to poor
responsibility and contact
points are clear coordination across
 Involves high coordination product lines
across functions  Eliminates in-depth
 Allows units to adapt to competence and
differences in products, technical specialization
regions, clients  Makes integration and
 Best in large organizations standardization across
with several products product line difficult
 Decentralize decision making
 M a n a g in g D ir e c t o r
R K P it a m b e r

D e p u ty M D
A n a n d M a h in d ra

C o r p o ra t e f u n c t io n s
( P u r c h a s e , M a r k e t in g , O p e r a t io n s )

F a r m E q u ip m e n t D iv is io n A u t o m o t iv e D iv is io n
T ra c to rs Je e ps

H e a d o f M a n u f a c t u r in g

GM GM
C e n t r a l S u p p lie s O p e a r t io n s

P U 1 M gr P U 2 M g r...P U 6

S u p p . M o d u le M g r M f g M o d u le M g r S e r v ic e s M g r

M a t l. H a n d lin g + Q A M a n u f a c t u r in g + M a in t e n a n c e +
+ P la n n in g + I n s p e c t io n + P & IR +
P ro c u re m e n t + E n g in e e r in g H R D + T r a in in g +
+ A c c t s + E x c is e A d m in is t r a t io n
 Matrix Structure
• Multi-focused approach
• Economies of scale important – sharing internal
resources
• Used when co-operation needed between functions
and products
• Relies on key roles
– Top leader
– Matrix bosses
– Two-boss employee
 Matrix Structure
CEO

Production Marketing Operations

Product 1

Product 2

Product 3

Matrix Structure
 Matrix Structure
Strengths
 Achieves coordination Weaknesses
necessary to meet dual  Causes participants to experience
demands from customers dual authority, which can be
 Flexible sharing of human frustrating and confusing
resources across products  Means participants need good
 Suited to complex interpersonal skills and extensive
decisions and frequent training
changes in unstable  Is time consuming; involves
environment frequent meetings and conflict
 Provides opportunity for resolution sessions
both functional and  Will not work unless participants
product skill development understand it and adopt collegial
 Best in medium-sized rather than vertical-type
organizations with relationships
multiple products  Requires great effort to maintain
power balance
 Horizontal / Flat Structure
• Flatter / ‘short’ structure
• Communication, teamwork vital for
coordination of processes
• Decisions made at team level
• Culture implications
• Increasing Importance
• Strengths and weaknesses?
 A Horizontal Structure
Top
Management
Team

Process Team Team Team

Owner 1 2 3

Market Product
Research Testing Customer
Analysis Planning
New Product Development Process

Process Team Team Team

Owner 1 2 3

Material
Analysis Purchasing
Flow
Distrib. Customer

Procurement and Logistics Process

 A Horizontal Project Structure
Top
Management
Team

Project Process Team Process Team Process Team

Owner 1 2 3

Market Product
Research Testing Customer
Analysis Planning

Project Process Team Process Team Process Team

Owner 1 2 3

Material
Analysis Purchasing
Flow
Distrib. Customer
 Soft Co

VBUs HCUs RBUs SSUs

Automotive Corporate
Consulting & North
Enterprise Sol
America
Banking Corp strategy
&Finance Quality Group
Consulting
APAC
Govt & PS Finance
Hi-Tech
Solutions
Japan
Healthcare HR
Managed Rest of APAC
IT Knowledge
Insurance Initiative
Western Europe
EABI
Retail Marketing
SAP Latin America
Solutions
Travel,
Quality
Transportation Microsoft
and Solutions
Logistics Shared Services
Energy & Group
Utilities Eng. Services

Manufacturin
Commercial & Internal Info.
g contracts System

Telecom
Corporate Platinum
Services Process Group
Infrastructure
Corporate legal
Media & Communication
Entertainment

Internal Audit N&S

Semiconduct
or
 Hybrid Project Matrix Structure
An Indian Software Organization

CEO

Pharma Banking Mfg

Java

C++

Mainfra
me

USA Europe Asia

Hybrid Matrix Structure

 Network Structure and the
Boundaryless Organization
• A cluster of different organizations whose actions are
coordinated by contracts and agreements rather
than through a formal hierarchy of authority
• Very complex as companies form agreements with
many suppliers, manufacturers, and distributors
• Such agreements are necessary as the organization
outsources many of the value creation activities
involved in production and marketing goods and
services
Advantages of Network Structures
• To the degree that a network partner can perform a
specific functional activity reliably, and at a lower
cost, production costs are reduced.
• Avoids the high bureaucratic costs of operating a
complex organizational structure
• Allows an organization to act in an organic way
• Access to low-cost foreign sources of inputs and
functional expertise
 Disadvantages of Network Structures
• A considerable level of mutual adjustment is
needed to allow the groups to interact so that
they can learn from one another.
• Difficult to obtain the ongoing learning that
builds competences as companies have no
incentive to do so
 The Boundaryless Organization
• Composed of people who are linked by
computers, faxes, CAD systems and video
conferencing
• The use of outsourcing and the development
of network organization are increasing rapidly
as organizations recognize the many
opportunities they offer to reduce costs and
increase flexibility.
 Contingency Approach
• A management approach in which the design
of an organization’s structure is tailored to the
sources of uncertainty facing an organization
• Organization should design its structure to fit
its environment

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Fit Between the Organization and Its
Environment

Copyright 2007 Prentice Hall 56

 Differentiation, Integration, and the
Environment
• Investigated how companies in different
industries differentiate and integrate their
structures to fit the environment
– Three industries that experienced different
levels of uncertainty:
• The plastics industry
• The food-processing industry
• The container or can-manufacturing industry

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 Findings:
• When environment is perceived as more
unstable and uncertain:
– Effective organizations are less formalized, more
decentralized and rely more on mutual
adjustment
• When environment is perceived as stable and
certain:
– Effective organizations have a more centralized,
standardized, and formalized structure

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Functional Differentiation and Environmental
Demands

Copyright 2007 Prentice Hall 59

The Effect of Uncertainty, Differentiation and
Integration

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Relationship Between Environmental
Uncertainty and Structure

Copyright 2007 Prentice Hall 61

Environmental Uncertainty, Structure
& Effectiveness

Uncertainty
Environmental
Differentiation Integration Reduction
Uncertainty
Mechanisms

Low Low Low Low

Moderate Moderate Moderate Moderate
High High High High