CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
OVERVIEW OF THE CHAPTER
To create high performing organizations, managers must design an organizational architecture
that maximizes the efficient use of resources. This chapter opens by examining the four
critical factors that help managers to determine the most appropriate organizational structure
their organization. Next, it discusses three components of organizational design: job design,
grouping jobs into functions and divisions, and the coordination of functions and divisions.
The chapter closes with a discussion of integrating mechanisms and the growing popularity of
global strategic alliances and business-to-business network structures.
LEARNING OBJECTIVES
1. Identify the factors that influence managers’ choice of an organizational structure.
(LO1)
2. Explain how managers group tasks into jobs that are motivating and satisfying for
employees. (LO2)
3. Describe the types of organizational structures managers can design, and explain why
they choose one structure over another. (LO3)
4. Explain why managers must coordinate and integrate between jobs, functions, and
divisions as an organization grows.(LO4)
LECTURE OUTLINE
MANAGEMENT SNAPSHOT: MICROSOFT CENTRALIZES TO MEET GOOGLE’S
CHALLENGE
Microsoft has been working hard to compete with Yahoo and especially Google, which are
developing innovative Web-based software products to attract broadband users. Because
Microsoft’s managers realize their decision making is slowed by its decentralized structure,
they have decided to reorganize. Seven business units are being consolidated into three
principal divisions, each of which will be headed by a manager with proven product
innovation skills. The objective is to reduce infighting and miscommunication that was
slowing product development between the seven units. In the new structure, the three
divisional heads will yield enormous power. Also, an additional layer is being added to the
company’s hierarchy, thus presenting the danger of increased bureaucracy.
Jones and George, Essentials of Contemporary Management, Third Edition
7-1
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
I. DESIGNING ORGANIZATIONAL STRUCTURE (LO1)
Organizing is the process by which managers establish the structure of working relationships
among employees to allow them to achieve organizational goals efficiently and effectively.
Organizational structure is the formal system of task and reporting relationships that
determines how employees use resources to achieve goals. Organizational design is the
process by which managers make specific organizing choices that result in the construction of
a particular organizational structure.

According to contingency theory, managers design organizational structures to fit the
factors or circumstances that are affecting the company and causing them the greatest
uncertainty. Thus, there is no one best way to design an organization.

Four factors are important determinants of organizational structure. They are: 1) the
nature of the organizational environment, 2) the type of strategy the organization
pursues, 3) the technology the organization uses, and 4) the characteristics of the
organization’s human resources.
The Organizational Environment

The more quickly the external environment is changing and the greater the uncertainty
within it, the greater the need to speed decision-making and communication so that
scarce resources can be obtained. In such situations, the manager’s goal is to make
organizing decisions that result in greater flexibility. Therefore, they are likely to
decentralize authority and empower lower-level employees.

In contrast, if the external environment is relatively stable, uncertainty is low, and
resources are readily available, managers make organizing decisions that bring more
stability or formality to the organization’s structure.

In today’s marketplace, change is rapid and competition is intense. Therefore, most
managers are seeking ways to structure organizations that allow people and
departments to behave flexibly.
Strategy


Different strategies often call for the use of different organizational structures. A
differentiation strategy aimed at increasing quality usually succeeds best in a flexible
structure.
A low-cost strategy aimed at driving down costs works best in a more formal
structure, which gives managers greater control.
Jones and George, Essentials of Contemporary Management, Third Edition
7-2
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE

At the corporate level, when managers pursue a strategy of vertical integration or
diversification, a flexible structure is needed to provide sufficient coordination
between different business divisions.

Managers are also challenged to create organizational structures that allow flexibility
on a global level.
Technology
Technology is the combination of skills, knowledge, tools, machines, computers, and
equipment that are used in the design, production, and distribution of goods and services.

The more complicated the technology, the greater the need for a more flexible
structure that allows managers to respond quickly to unexpected situations. If
technology is routine, a formal structure is more appropriate because tasks are simple
and procedures for performing tasks can be outlined in advance.

Two factors determine how complicated or nonroutine technology is, according to
researcher Charles Perrow. They are task variety and task analyzability. Nonroutine
technologies are characterized by high task variety and low task analyzability. Routine
technologies are characterized by low task variety and high task analyzability.

The more that a technology is based upon the skills, knowledge, and abilities of people
working together on an ongoing basis, as opposed to automated machines that can be
programmed in advance, the more complex the technology is.
Human Resources

The more highly skilled a workforce and the more people are required to work
together in groups or teams to perform tasks, the more likely an organization is to use
a flexible, decentralized structure.

Flexible structures, characterized by decentralized authority and empowered
employees, are well suited to the needs of highly skilled people.

The way an organization’s structure works depends upon the organizing choices that
managers make about four issues: 1) how to group tasks into individual jobs, 2) How
to group jobs into functions and divisions, 3) how to allocate authority in the
organization among jobs, functions, and divisions, and 4) how to coordinate or
integrate jobs, functions, and divisions.
Jones and George, Essentials of Contemporary Management, Third Edition
7-3
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
II. GROUPING TASKS INTO JOBS: JOB DESIGN (LO2)
The first step in organizational design is job design. Job design is the process by which
managers decide how to divide into specific jobs the tasks that have to be performed.

The result of the job design process is a division of labor among employees.
Establishing an appropriate division of labor among employees is vital to increasing
efficiency and effectiveness.

When deciding how to assign tasks to individual jobs, managers must be careful not to
oversimplify jobs. Job simplification is the process of reducing the number of tasks
that each worker performs. Too much job simplification may reduce efficiency rather
than increase it, if workers become bored and unhappy.
Job Enlargement and Job Enrichment

Job enlargement is increasing the number of different tasks in a given job by
changing the division of labor. By increasing the range of tasks performed by a
worker, managers hope to reduce boredom and increase motivation to perform at a
high level.

Job enrichment is increasing the degree of responsibility a worker has over his or her
job by 1) empowering workers to experiment to find new or better ways of doing the
job, 2) encouraging workers to develop new skills, 3) allowing workers to decide how
to do the work and giving them the responsibility for deciding how to respond to
unexpected situations, and 4) allowing workers to monitor and measure their own
performance.

By enriching an employee’s job, managers are expecting that employee’s level of
involvement in their work to increase, thereby increasing productivity.

Managers who make design choices such as these are likely to increase the degree to
which workers behave flexibly rather than mechanically. Narrow, specialized jobs
lead people to behave in predictable ways. In contrast, workers who perform a variety
of tasks are encouraged to discover new ways to perform their jobs and are more likely
to act flexibly and creatively.
Jones and George, Essentials of Contemporary Management, Third Edition
7-4
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
The Job Characteristics Model
J. R. Hackman and G. R. Oldham’s Job Characteristics Model explains how managers can
make jobs more interesting and motivating. According to Hackman and Oldham, every job
has five characteristics that determine how motivating the job is. They are:

Skill variety, which examines the extent to which a job requires an employee to use a
wide range of different skills, abilities, or knowledge.

Task identity, which examines the extent to which a job requires a worker to perform
all the tasks from the beginning to the end of the production process.

Task significance, which examines the degree to which a worker feels his or her job is
meaningful because of its effect on people outside of the organization.

Autonomy, which examines the degree to which a job gives an employee the freedom
and discretion needed to schedule different tasks and decide how to carry them out.

Feedback, which is the extent to which a worker receives clear and direct information
regarding how well he or she has performed the job.
The five job characteristics affect an employee’s motivation by impacting three critical
psychological states. They are: 1) feeling that one’s work is meaningful, 2) feeling
responsible for work outcomes, and 3) feeling responsible for knowing how those outcomes
affect others.
III. GROUPING JOBS INTO FUNCTIONS AND DIVISIONS (LO3)
The next organizing decision is how to group jobs together to best match the needs of the
organization’s environment, strategy, technology, and human resources. Most topmanagement teams group jobs into departments and develop a functional structure. As the
organization grows, managers design a divisional structure or a more complex matrix or
product team structure.
Jones and George, Essentials of Contemporary Management, Third Edition
7-5
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Functional Structure
A function is a group of people working together who possess similar skills or use the same
knowledge, tools, or techniques to perform their jobs. A functional structure is a structure
composed of all the departments that an organization requires to produce its goods or services.
The advantages of grouping jobs according to function are:
 When people who perform similar jobs are grouped together, they can learn from
observing one another.

When people who perform similar jobs are grouped together, it is easier for managers
to monitor and evaluate their performance.

The functional structure allows managers to create the set of functions they need to
scan and monitor the task and general environments.
As an organization grows, the functional structure may become less efficient and effective for
the following reasons:
 Managers in different functions may find it more difficult to communicate and
coordinate with one another.

Functional managers may become so preoccupied with supervising their own specific
departments that they lose sight of organizational goals.
Divisional Structures: Product, Market, and Geographic
As the problems associated with growth and diversification increase over time, most
managers of large organizations choose a divisional structure and create a series of business
units, each of which produces a specific kind of product for a specific kind of customer.
There are three different forms of divisional structure: product structure, geographic
structure, and market structure.
Product Structure
When using a product structure managers place each distinct product line in its own selfcontained division and give divisional managers the responsibility for division business-level
structure. Each division is self-contained because it has a complete set of all the functions that
it needs to produce goods or services. Advantages of using a product structure are:
Jones and George, Essentials of Contemporary Management, Third Edition
7-6
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE





It allows functional managers to specialize in only one product area, so they build
expertise.
Each division’s managers can become experts in their industry.
It frees corporate managers from the need to supervise directly each division’s day-today activities.
The extra layer of management (the divisional management layer) can improve the
use of organizational resources.
It puts divisional managers close to their customers and lets them respond quickly and
appropriately.
Management Insight: GlaxoSmithKline’s New Product Structure
Recently, many of the large pharmaceutical companies have merged in an effort to increase
their research productivity. GlaxoSmithKline is an example of such a merger. After the
merger, one of the company’s largest challenges was to determine the best way to combine
the talents of scientists and researchers from both organizations so that they could quickly
innovate new products. Understanding the problems associated with its large size, Glaxo
managers decided to group researchers into eight small product divisions that each focuses
upon a specific cluster of diseases, such as heart disease or viral infections.
To date, GlaxoSmithKline’s new product structure has worked well. The number of new
drugs moving into clinical trials has doubled and many other new drugs have been developed.
In addition, increased collaboration resulting from the new structure has boosted company
morale and decreased turnover.
Geographic Structure
When organizations expand rapidly both at home and abroad, functional structures can create
problems. In such cases, a geographic structure, in which divisions are broken down by
geographical location, is often chosen. Managers are most likely to do this when customer
needs vary widely by country or world region.

Managers are most likely to use a global geographic structure when pursuing a
multidomestic strategy, since customer needs vary widely by country or world region.

In contrast, managers are most likely to use a global product structure when pursuing
a global strategy, since customers abroad are willing to buy the same kind of product,
or slight variations thereof.
Jones and George, Essentials of Contemporary Management, Third Edition
7-7
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Market Structure
Sometimes managers group functions according to the type of customer buying the product,
in order to tailor an organization’s products to each customer’s unique demands. A market
structure (also called customer structure) is an organizational structure in which each kind
of customer is served by a self-contained division. It allows managers to be responsive to the
needs of customers and allows them to make decisions in response to customers’ changing
needs.
Managing Globally: Nokia, Dow and the LEGO Company Revamp Their Global
Structures to Raise Performance
This case describes three different strategies used by three different CEOs to reorganize their
company. Lego’s leadership made the decision to combine its central, northern, and southern
European divisions into a single unit in order to encourage cooperation and sharing of
information and to eliminate costly duplication of activities. In contrast, Dow Chemical
Company decided to split its Global Chemical Division into three separate and self-contained
units – the plastics, chemicals and intermediates, and performance chemical groups. Dow’s
objective was to provide managers with the focus required to effectively meet a variety of
customer needs. Finally, Nokia decided to create two new global divisions for the purpose of
quickly developing innovative wireless communications products. Nokia’s CEO realized that
its lack of such products represented a weakness in the company’s product line. Nokia’s goal
was to obtain a significant share of the lucrative wireless technology market to help boost its
corporate performance.
Jones and George, Essentials of Contemporary Management, Third Edition
7-8
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Matrix and Product Team Designs
When the environment is dynamic, changing rapidly, and uncertainty is high, even a
divisional structure may not provide enough flexibility. Matrix and product team designs are
the most flexible type of organization structures.
Matrix Structure: In a matrix structure, managers group people in two ways simultaneously:
by function and by product. The result is a complex network of reporting relationships that
makes the matrix structure very flexible.

Each person in a product team reports to two bosses: 1) a functional boss, who assigns
individuals to a team and evaluates their performance, and 2) the boss of the product
team, who evaluates their performance on the team. Product teams are empowered and
team members are responsible for making important decisions, to keep the matrix
structure flexible.

Matrix structures have been successfully used for years at high-tech companies where
new product development takes place frequently and the need to innovate quickly is
vital to the organization’s survival.
Product Team Structure: The dual reporting relationships of a matrix structure have always
been difficult for managers and employees to deal with. To avoid these problems, managers
have devised another way of organizing people and resources: a product team structure.
Jones and George, Essentials of Contemporary Management, Third Edition
7-9
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE

The product team structure differs from a matrix in that: 1) it does away with dual
reporting relationships and two-boss managers, and 2) functional employees are
permanently assigned to a cross-functional team.

A cross-functional team is a group of managers brought together from different
departments to perform organizational tasks. They report only to the product team
manager. Increasingly, organizations are making empowered cross-functional teams
an essential part of their organizational architecture to help them gain a competitive
advantage in fast-changing organizational environments.
Hybrid Structure
A large organization that has many divisions and simultaneously uses many different
structures has a hybrid structure. For example, most large organizations use product division
structures to create self-contained divisions. Then, each division manager selects the structure
that best meets the needs of their particular environment, strategy, etc.
III. COORDINATING FUNCTIONS AND DIVISIONS (LO4)
When organizing, the manager’s next task is to ensure that there is sufficient coordination
among functions and divisions.
Allocating Authority
To coordinate the activities of people, functions, and divisions and to allow them to work
together managers must develop a clear hierarchy of authority. Authority is the power vested
in a manager to make decisions and use resources to achieve organizational goals by virtue of
his or her position in an organization. The hierarchy of authority is an organization’s chain of
command. Every manager, at every level of the hierarchy, supervises one or more
subordinates. The term span of control refers to the number of subordinates who report
directly to a manager.

A line manager is someone who is in the direct line or chain of command and has
formal authority over people and resources below him. A staff manager is a manager
responsible for managing a specialist function.

Managers at each level of the hierarchy confer upon managers below them in the chain
of command the authority to make decisions. By accepting this authority, those lowerlevel managers then become responsible for their decisions and are accountable for
how well they make them.
Jones and George, Essentials of Contemporary Management, Third Edition
7-10
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Tall and Flat Organizations

As an organization grows in size, its hierarchy of authority normally lengthens,
making the organizational structure taller. A tall organization has many levels of
authority relative to company size. A flat organization has fewer levels relative to
company size.

As a hierarchy becomes taller, effective communication becomes difficult and
expenses rise.
The Minimum Chain of Command

The principle of the minimum chain of command states that top managers should
always construct a hierarchy with the fewest levels of authority necessary to
efficiently and effectively use organizational resources.

To ward off the problems associated with tall organizations, top managers must be
sure that they are employing the right number of middle and first-line managers.
Effective managers constantly scrutinize their hierarchies to see if the number of
levels can be reduced.
Centralization and Decentralization of Authority

Another way that managers keep the organizational hierarchy flat is to decentralize
authority to lower-level managers and non-managerial employees. Advantages of
decentralization include fewer communication problems, a need for fewer managers,
and an improved ability of employees to recognize and respond to customer needs.

Another advantage is that the organization continues to behave in a flexible as it grows
and becomes taller.

However, too much decentralization has disadvantages, including managers who may
begin to pursue their own goals at the expense of organizational goals and a lack of
communication among functions or divisions that may prevent possible synergies.
Top managers must seek a balance between centralization and decentralization of authority
that best responds to the four contingencies that they face. If in a stable environment, then
there is no need to decentralize authority. In uncertain, changing environments, however, top
managers must empower employees and allow teams to make important strategic decisions.
Jones and George, Essentials of Contemporary Management, Third Edition
7-11
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Managing Globally: Plexus Uses Self-Managed Teams to Decentralize Authority
Plexus, an electronics maker located in Neenah, Wisconsin, wanted to find a way to compete
with low-cost manufacturers abroad. The solution they identified and implemented lies in the
company’s development of a new manufacturing technology called ‘low-high,’ which allows
the production of low volumes of many different kinds of products in a highly efficient
manner. To make this new technology effective, however, work activities had to be
reorganized by decentralizing control and empowering work teams.
An organizational structure was designed that is based upon the creation of four ‘focused
factories’, in which control over production decisions is given to the workers who perform all
the operations involved in making a product. Workers are cross-trained so that they can
perform any particular operation in their ‘factory’. The ability of work teams to make rapid
decisions is vital, since every minute that a production line is not moving increases production
costs tremendously. Decentralization has helped to reduce the amount of time that the
production line is idle.
Types of Integrating Mechanisms

Managers can use various integrating mechanisms to increase communication and
coordination among functions and divisions. The greater the complexity of an
organization’s structure, the greater is the need to increase communication and
coordination among functions and divisions.

Six integrating mechanisms are available to managers to increase coordination and
communication. Listed in increasing complexity, they are: direct contact, liaison
roles, task forces, cross-functional teams, integrating roles and departments, and
matrix structures.
-
Direct Contact: Direct contact creates a context within which managers from
different functions or divisions can work together to solve mutual problems.
However, if managers of equal authority have differing views, a problem is
created, since no mechanism exists to resolve the conflict apart from the
authority of top management. The need to solve everyday conflicts, however,
wastes top management’s time and slows decision-making.
-
Liaison Roles: When the volume of contacts between two functions increases,
one way to improve coordination is to give one manager in each function or
division the responsibility for coordinating with the other. The responsibility
for coordination is a part of the liaison’s full time job. Usually an informal
relationship forms between the people involved, greatly easing strains between
functions.
Jones and George, Essentials of Contemporary Management, Third Edition
7-12
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
-
Task Forces: If two or more functions share common problems and direct
contact and liaison roles do not provide sufficient coordination, a task force
may be appropriate. One manager from each relevant function or division is
assigned to a task force that meets to solve the specific, mutual problem.
Members are responsible for reporting back to their own departments on issues
addressed and solutions recommended. Task forces are often called ad hoc
committees because they are temporary. Once the problem is resolved, the task
force is disbanded.
-
Cross-Functional Teams: To address recurring problems effectively,
managers are increasingly using permanent integrating mechanisms such as
cross-functional teams. An example of a cross functional team is a new
product development committee that is responsible for the choice, design,
manufacturing, and marketing of a new product. The more complex an
organization, the more important cross-functional teams become.
-
Integrating Roles: An integrating role is a role whose only function is to
increase coordination and integration among functions or divisions to achieve
performance gains from synergies. Usually, senior managers who can envision
how to use the resources of the functions or divisions to obtain new synergies
are chosen to perform such roles. Once again, the more complex an
organization, the more important integrating roles become.
-
Matrix Structure: Managers often use a matrix structure when they must be
able to respond quickly to the task and general environments. Because the
matrix structure contains many of integrating mechanisms already discussed, it
offers maximum flexibility, communication, and coordination among functions
and divisions.
IV. STRATEGIC ALLIANCES, B2B NETWORK STRUCTURES, and IT
Recently, increasing globalization and the use of new IT has brought about innovations in
organizational architecture: strategic alliances and business-to-business network structures.

A strategic alliance is a formal agreement that commits two or more companies to
exchange or share their resources in order to produce and market a product. Strategic
alliances are usually formed because the companies involved have similar interests
and believe that they can benefit by cooperating with each other.
Jones and George, Essentials of Contemporary Management, Third Edition
7-13
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE

A network structure is a series of global strategic alliances that one or several
organizations create with suppliers, manufacturers, and/or distributors to produce and
market a product. Network structures allow an organization to manage its global value
chain in order to find new ways to reduce costs and increase the quality of products,
without incurring the high costs of hiring managers to complete these tasks.
Ethics in Action: Of Shoes and Sweatshops
As the production of all kinds of goods and services are increasingly outsourced to poor
regions of the world, the behavior of companies that outsource production to subcontractors in
these countries has come under scrutiny. Nike, the largest and most profitable shoe company
in the world, was one of the first to experience public backlash when critics revealed how
workers in poor countries were being treated. As a result, CEO Phil Knight reevaluated
Nike’s labor practices and announced that all factories producing its products would be
independently monitored and inspected. After its competitor, Reebok, announced its intention
to raise wages by 20%, Nike raised its wages 25 percent so that workers earned $23 a month
rather than $18. Adidas, a European shoemaker, faced similar accusations. Similar crises in
the clothing, electronics, and toy industries have forced manufacturers within each to
reevaluate their foreign labor practices, also.

The ability of managers to produce and distribute products using a network structure
instead of creating a complex organization structure has led to the popularity of the
idea of a boundaryless organization. Such an organization is composed of people
linked by IT –computers, faxes, computer-aided design systems, and videoteleconferencing, who may rarely, if ever, see each other face-to-face.

Large consulting companies utilize their employees in this way. Consultants are
connected by laptop to the organization’s knowledge management system, its
company-specific information system that systematizes the knowledge of its
employees and provides them with access to other employees who have the expertise
to solve the problems they encounter as they perform their jobs.

The push to lower costs has led to the development of electronic business-to business
networks in which most or all of the companies in an industry use the same software
platform to link to each other and establish industry specifications and standards and
solicit bids from thousands of potential suppliers worldwide. Suppliers also use the
same software platform so electronic bidding, auctions, and transactions are possible
between buyers and sellers around the world.
Jones and George, Essentials of Contemporary Management, Third Edition
7-14
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE

To maximize efficiency and effectiveness, managers must carefully assess the relative
benefits of performing a functional activity in-house versus outsourcing. It still is not
clear how B2B networks and other forms of electronic alliances between companies
will develop in the future.
V. SUMMARY AND REVIEW
LECTURE ENHANCERS
Lecture Enhancer 7.1
STRATEGIC ALLIANCES, NETWORK ORGANIZATIONS, AND ETHICAL
RESPONSIBILITY
Strategic alliances span a range of configurations, from preferred vendors to the modern
boundaryless organization. Organizations have evolved through (a) preferred vendors, (b)
licensing agreements, (c) original equipment manufacturers, (d) contractual alliances, (e)
partnerships and joint ventures, and finally (f) boundaryless organizations. This continuum
reflects a gradual but progressive movement towards the removal of boundaries, resulting in
increased interaction between individuals and organizations. In the process, organizations
have evolved toward greater flexibility. The trend is to remove barriers among people,
organizational units, and organizations. In the process, organizations have become leaner,
flatter, and more focused on their specific contribution to the value chain. In essence,
organizations have become like nodes in a network of complex relationships.
In addition to creating economic opportunities, strategic alliances also hold disadvantages.
The most evident ones are the splitting of profits and the sharing of knowledge. Because firms
involved in a strategic alliance of any configuration tend to specialize in the specific area of
competence that maximizes their contribution to the value chain, expertise and information
becomes fragmented. This poses another challenge and potential threat, since a firm could
possibly lose a critical competence in an activity that has been outsourced or it could become
dependent on its strategic partners.
Hence, strategic alliances often connect organizations to each other in a very intense way.
The relationship between strategic partners involves not only traditional business contracts,
but also social contracts that must be honored if the alliances are to succeed. All firms must
trust each other and accept the norms of the relationship.
Jones and George, Essentials of Contemporary Management, Third Edition
7-15
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Herein lies the challenge of maintaining ethical standards. Social contacts among companies
are difficult to monitor when a company is operating in a continually evolving network.
Traditional bureaucratic approaches will not work, and for this reason, clan control is relied
upon. As is the case of contracts between employee and employer, companies must rely upon
finding partners that share their values. The challenge is to create a cross-organizational
culture in which the values and interests of the partners coincide. In the real world, we find
few mechanisms to control the behavior of strategic partners, so we must rely on mutual trust
based on the partners’ good character and reputation.
Many cases exemplify the ethical gaps that can occur because of the decentralized control in
network organizations. One well-documented case involves the financial services industry. It
appears that Fleet Bank was benefiting from redlining practices by extending lines of credit to
second-mortgage companies, encouraging those companies to make high interest mortgages
in poor areas heavily populated by minorities, and then purchasing the mortgages from these
companies. In this way, Fleet was able to benefit from these questionable loans while shifting
ethical responsibility to the independent mortgage companies.
A well-publicized case is that of Nike, whose partners produced shoes using child labor. A
less publicized case is that of Southeast Asia’s “beer girls”. Beer and liquor distributors hired
small armies of attractive women to greet male customers at bars and restaurants and promote
the distributors’ brands. There was a darker side of this marketing because the girls were
pressured by customers to go home with them, and if they refused, were sometimes raped. A
number of the beer girls are now HIV positive. The distributors either deny there was a
problem or refuse to take responsibility for it. The brewers, who typically are foreign
exporters, claimed “marketing efforts conducted overseas are really not something the brewer
participates in or has any knowledge of”.
Many other cases such as these can be cited in which fragmentation of the stages of the
production or marketing function resulted in fragmentation of ethical responsibility. While
the network structure resulted in greater cost effectiveness, it also spread responsibility for
and oversight of ethical conduct to several organizations, which led to ethical lapses.
Jones and George, Essentials of Contemporary Management, Third Edition
7-16
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Is there anything that can be done to maintain an ethical climate within a network or are these
sad cases of corporate irresponsibility inevitable? This question raises the issues of power,
influence, and choice of networks for decision-makers. Many feel that decision- makers have
strategic choice, and they retain the freedom of choice when they enter into networks. It is
therefore, the responsibility of managers to ensure that ethical responsibility is not lost in a
decentralized network. Managers can maintain a climate of ethical responsibility by choosing
partners who share their ethical values, by using their power and influence to block unethical
conduct, and by creating an environment that includes an ethical dimension and a monitoring
system that scans the ethical dimension as closely as the comic dimension.
Adapted from “Strategic Alliances, Network Organizations, and Ethical Responsibility”, by Anthony J. Daboub,
Advanced Management Journal 67, Autumn 2002, p. 40-48.
Lecture Enhancer 7.2
ORGANIZING FOR CUSTOMER SERVICE
Traditional formal organization structure can stifle an organization’s ability to deliver
exemplary customer service. To meet the needs of customers, a more fluid approach is
needed. An example of this is the customer-supplier relationship developed by Digital
Equipment Corporation, which attempts to build lasting partnerships with its customers by
anticipating not only the day-to-day requirements of customers, but also by helping them plan
for the unexpected.
Jones and George, Essentials of Contemporary Management, Third Edition
7-17
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
An example of this occurred at 3:30 a.m. January 4, 1988 when an electrical fire in Chase
Bank’s main production site in Manhattan wiped out the fifty-story building’s power,
including all computer systems. This was the first day of the banking new year and Chase
expected to process well over its daily average money transfer volume.
When Chase purchased its equipment, Digital assisted in planning for the everyday and backup operations crucial to the bank’s relationship with its customers. They also supported a
secondary site which was fully operational and configured to meet the backup processing
requirements of the main production facility.
The situation for Chase was potentially threatening. If on-line systems failed to process even
one day’s worth of transactions, the bank could be subject to serious penalties. Two Digital
field service crews were on the scene before dawn—one downtown and another at one of the
bank’s contingency sites. Simultaneously, a Digital team from manufacturing, sales, and field
service banded together, coordinating overnight delivery of additional parts and peripherals.
That same day, the operational site was fully operational, enabling Chase to successfully
complete 95 percent of its business volume. Digital continuously worked with bank personnel
until the main production site was back in business. For Chase customers, it was business as
usual.
Lecture Enhancer 7.3
FLEXIBLE DESIGN EXTENDS TO THE WORKPLACE
Businesses, having become convinced of the value of teamwork, are starting to redesign
offices to accommodate the teams. Braun Inc., a small appliance manufacturer and a Gillette
Co. subsidiary, recently celebrated its move from a traditional office building in Lynnfield,
Mass. to a two-story, 38,000-square-foot site where employees meet at oases furnished with
cafe-style tables and chairs, computer terminals for Internet browsing, and aquariums stocked
with exotic fish.
“We wanted to change the rules and create a more open environment that would encourage
communication and collaboration”, said president Bruce Cleverly. “We had already
restructured our business by creating cross-functional teams that allow our finance, logistics,
sales, and marketing people to work together based on specific products. We needed an
environment that reflected our new approach”. Braun is hardly alone. Over the last decade,
International Business Machines Corp., Chrysler Corp., AT&T Co., and Ford Motor Corp.
have all redesigned their office spaces with an eye toward flexibility and open
communication.
Jones and George, Essentials of Contemporary Management, Third Edition
7-18
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Not surprising, the office-furniture industry has capitalized on the trend, aggressively
marketing flexible furnishings for the flexible workspace. One example: Personal Harbor, a
Steelcase Inc. product that helps companies build their own collaborative office spaces with
cabinets on wheels, screens with dual functions, and other portable furnishings.
To be sure, the much-maligned cubicle of Dilbert fame still exists. But at Braun, the standard
cubicle now includes stylish glass openings that allow employees to see beyond their own
gray walls and reflect light from the banks of windows that line the office.
Braun’s Cleverly described the impetus for creating the new, open office: With company sales
expected to reach the $500 million mark next year, the firm needed more space, giving it a
ready-made opportunity to move to a more open floor plan. So Braun hired architects Jung &
Brennan Inc. to draw up plans for renovation of some additional leased space. Under the
architects’ direction, contractors tore down walls, connected two floors by way of a spiral
staircase and created a meeting place in the lobby with the look and feel of a living room.
Additionally, the new floor plan encouraged socializing by developing islands where the
company’s 170 employees could meet in small groups.
The company still uses offices, but windows lessen the isolation that previously characterized
the executives’ old offices. And strategically placed meeting places make it possible for
people to gather for impromptu or planned discussions throughout the day.
Jim Barter, a Braun product manager, says the new office has encouraged brainstorming and
reduced the amount of time it takes to gather information. “It’s easier to connect with the
people you need and share ideas. You just walk out the office door”, he said.
MANAGEMENT IN ACTION
Notes for Topics for Discussion and Action
Discussion:
1. Would a flexible or a more formal structure be most appropriate for each of these
organizations: (a) a large department store (b) a Big Five accountancy firm (c) a
biotechnology company? Explain your reasoning. (LO1)
Jones and George, Essentials of Contemporary Management, Third Edition
7-19
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
A large department store should utilize a formal structure. The retail business is a relatively
stable environment. Resources are readily available, and uncertainty is low. Less coordination
and communication among people and functions is needed to obtain resources. In a
department store, most important decisions can and should be made by top managers within a
clearly defined hierarchy of authority. Employees do not need to decide which products to
sell, or how the store will market itself. Employee activities should be governed by extensive
rules and standard operating procedures.
A Big Five accountancy firm should utilize a more flexible structure. Most of these firms are
expanding globally, and global expansion is facilitated by a flexible structure that allows for
more autonomy at lower levels in the organization. Also, primarily professionals staff an
accounting firm. Flexible structures are best suited to the needs of highly skilled people. Most
accountants have learned professional honesty and integrity in their training, and would likely
resent close supervision, a distinct feature of a formal structure.
A biotechnology firm should also implement a flexible structure, due to the ever-changing
and developing environment in which it operates. A flexible structure makes it easier to speed
decision making and communication, and makes it easier to obtain resources. In addition to
the environment, technology is also a factor. The more complicated the technology, the
greater the need for a more flexible structure. Biotechnology firms have incredibly
complicated skills, knowledge, tools, machines, and computers that they use to conduct
research and develop products. Many of their human resources are skilled, as scientists or
doctors, and do not require close management supervision.
2. Using the job characteristics model, discuss how a manager can enlarge or enriched a
subordinate’s job. (LO2)
A university has many different departments and positions, so a typical job may not be easy to
identify. Since a secretary would be found in most departments, that will be used as an
example.
A secretary of a department may have duties like typing, answering the telephone, taking
messages, accepting packages, and mailing out information. The skill variety may be
sufficient if the secretary feels that a wide range of skills, abilities, and knowledge are being
used. Task identity may not be very high for a secretary, since most tasks, such as typing a
letter or sending out department information, probably don’t require much process. Increased
task identity can be gained by having the secretary give input concerning the type of
information the department sends out, or having the secretary contribute to the content of this
information. Secretaries can often feel that they have task significance when faculty or staff
thank them for completing a task and therefore show them that their work is important.
Jones and George, Essentials of Contemporary Management, Third Edition
7-20
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
3. How might a salesperson’s job or a secretary’s job be enlarged or enriched to make it
more motivating? (LO2)
Allowing them to schedule their various activities and be responsible for reporting to
management on their progress could enrich a salesperson’s job. A salesperson could also be
charged with the task of finding new ways to approach customers or close a sale that make
repeat business more likely. Management might encourage their sales force to develop new
skills, such as marketing techniques and knowledge that can be applied to their current jobs. A
workshop for salespeople could be arranged to help figure out ways to respond to unexpected
situations, with various workshop members offering suggestions and solutions.
Giving him or her the opportunity to handle new responsibilities could enrich a secretary’s
job. A manager could encourage a secretary to develop new skills or extend the opportunity to
decide how to do the work, for example, developing a new way of organizing files or
documents. Allowing a secretary to monitor and measure their own performance might also
give him or her a feeling of job involvement, and encourage flexibility rather than rigidity in
the work setting.
4. When and under what conditions might managers change from a functional to (a) product
(b) geographic, or (c) market structure? (LO3)
A functional structure is a structure that is composed of all the necessary departments that an
organization requires to produce its goods or services. A functional structure might be
changed to a product structure if growth and diversification in an organization become a
problem over time. Managers might create divisions according to the type of product or
service they provide if they decide to diversify into new industries or to expand their range of
products. By placing each distinct line or business in its own self-contained division and
giving the divisional managers the responsibility for devising the right business-level strategy,
the division will be in a better position to compete effectively in that industry or market.
A geographic structure may be adopted when organizations are expanding rapidly both at
home and abroad, and managers find it increasingly difficult to manage, from one central
location, the problems and issues that may arise in each region of the country or area of the
world. When shifting to this structure, management breaks down divisions by geographic
location, giving managers the flexibility they need to best meet the needs of regional
customers.
Jones and George, Essentials of Contemporary Management, Third Edition
7-21
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
A market structure is appropriate when an organization needs to group functions according to
the type of customer buying the product. This structure allows managers to be more
responsive to the needs of their customers and allows them to act flexibly to make decisions
that are needed to quickly respond to changing customer needs. This structure is beneficial in
organizations where the time factor is critical.
5. How do matrix structure and product team structure differ? Why is product team structure
more widely used? (LO3)
In a matrix structure, managers group people and resources in two ways simultaneously: by
function and by product team. In developing this structure, managers build a network of
reporting relationships among product teams and functions. Each person in a product team
reports to both a functional and a product team boss (known as two boss managers.) Matrix
structure makes the most use of human resources because people are only part of the team
when their skills are needed, and leave the team after they have completed their assignment.
A product team structure is different from a matrix structure in that (1) it does away with dual
reporting relationships and two boss managers; and (2) in a product team structure, employees
are permanently assigned to cross-functional team, and the team is empowered to bring a new
or redesigned product to market. Members of a cross-functional team report only to the
product team manager or one of his/her direct subordinates.
Jones and George, Essentials of Contemporary Management, Third Edition
7-22
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
The product team structure is more widely used today because dual reporting relationships
that characterize the matrix structure are difficult for managers and employees to handle.
Often, the two bosses make conflicting demands, leaving employees confused and frustrated.
Functional and product team bosses may come into conflict over who is in charge of which
team members for how long, since members are not permanently assigned to a crossfunctional team in a matrix structure, like they are in a product team structure. A product team
structure is used because it allows flexibility with a structure that is easier to operate.
Action
6. Compare the pros and cons of using a network structure to perform organizational
activities, as opposed to performing all activities “in house” or within one organizational
hierarchy. (LO4)
A network structure is a series of global strategic alliances that one or several organizations
create with suppliers, manufacturers, and/or distributors to produce and market a product.
Network structures allow an organization to create and manage a global value chain in order
to find new ways to reduce costs and increase the quality of products without incurring the
high costs of operating a complex organizational structure.
The disadvantages of using a network structure include limited control over the processes
used by foreign suppliers, which may result disturbing consequences for the organization. The
ethical problems created for Nike by its foreign suppliers is an example.
7. What are the advantages and disadvantages of business-to-business networks? (LO4)
The advantage of a business-to-business network is that further cost reductions can be
achieved through the standardization of certain manufacturing specifications and operational
transactions at the industry-wide level. Potential disadvantages may include difficulty in
maintaining any competitive advantage or distinctive competency based upon operational
efficiencies, since large portions of the operations function has been standardized across all
competitors. Also, accusations of oligopoly could emerge, since competitors are working
together in an effort to lower costs.
8. Find a manager and identify the kind of organizational structure that his or her
organization uses to coordinate its people and resources. Why is the organization using that
structure? Would a different kind of structure be more appropriate? Which one? (LO3)
Jones and George, Essentials of Contemporary Management, Third Edition
7-23
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Dr. Miller is the director of a survey research institute affiliated with a large university. The
institute uses a functional structure, or one that encompasses all the necessary departments
that it needs to produce its goods and services. Departments include sampling, interviewing,
data collection, data processing, data programming, and accounting. Departments are
arranged so that everyone possesses similar skills and uses the same kind of knowledge, tools,
and techniques to perform their jobs. This structure is used so that people can learn from
observing one another and can become more specialized and perform at a higher level. It also
is easier for managers, or study directors, to monitor and evaluate the performance of their
subordinates. Also, it allows study directors to most efficiently scan and monitor the
environment.
Occasionally, a different structure is used when it is deemed appropriate. In some research
organizations, it is necessary to adopt a product structure. This occurs when a department
accepts a project that is different from what is normally done by the organization. When this
occurs, one team will be responsible for all aspects of one study, from data collection, to
sampling, to evaluation, to data processing. This allows the team to concentrate on one project
or subject area.
9. With the same or another manager, discuss the distribution of authority in the
organization. Does the manager think that decentralizing authority and empowering
employees is appropriate.(LO3)
Dr. Miller’s department is structured hierarchically. Dr. Miller is the director of the
department, and study directors report directly to her. Under the study directors, the divisions
are similar in terms of authority. Each division has a person in charge of that division, with
subordinates reporting to them. Study directors have line authority, that is, they are in the
direct chain of command and are directly responsible for making the decisions about the
research. Heads of the departments have staff authority, and are responsible for giving the
best possible advice to the study directors about how resources and skills should be utilized.
Dr. Miller explained that authority was decentralized, though final reports and
communications needed to be approved by the director. Employees are somewhat empowered
in that they are responsible for monitoring some of their own work, and they receive feedback
on their performance. Dr. Miller did not think that more responsibility needed to be given to
employees in addition to what they already have, since many grants and contracts are for
national clients, who prefer to deal directly with the director and the study directors.
AACSB standards: 1, 3, 9, 10, 12, 13
Jones and George, Essentials of Contemporary Management, Third Edition
7-24
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
NOTES FOR BUILDING MANAGEMENT SKILLS (LO 1, 2, 3, 4)
Understanding Organizing
Think of an organization with which you are familiar or perhaps one in which you have
worked, such as a store, restaurant, office, church, or school. Then answer the following
questions.
1. Which contingencies are most important in explaining how the organization is organized?
Do you think it is organized in the right way?
A large university will be used as an example of an organization. The environment is
important in explaining why a university is usually operated under a formal structure.
Historically, universities have served the purpose of providing higher education, with
adequate faculty and support staff. The environment was not subject to a high level of
uncertainty, and resources were readily available. Most universities adopted the same
strategy, perhaps differentiating some programs, but most were comparable in services and
courses offered.
Technology has emerged as a new standard, though computers are becoming increasingly
prevalent in all aspects of teaching and administration. Human resources is less of a factor
because the range is typically great, from professors, to custodial staff, to administrative staff.
This formal, functional structure may not be the most appropriate for universities that hope to
succeed in the coming years. Students are requiring more from schools, funding is scarce, and
many schools need to learn to do more with less. A more flexible structure, at least in some
departments, may help universities respond to the changing academic environment.
2. Using the job characteristics model, how motivating do you think the job of a typical
employee in this organization is?
Based upon the Job Characteristics Model, the job of a professor should be extremely
motivating since skill variety, task significance, task identity, autonomy and feedback are
high. However, this may not be the case for a member of the university’s administrative staff,
such a secretary of a department. Skill variety may be sufficient if the secretary feels that she
uses a wide range of skills, abilities, and knowledge. However, task identity may be low,
since there is little opportunity to complete a job from start to finish.
3. Can you think of any ways in which a typical job could be enlarged or enriched?
Jones and George, Essentials of Contemporary Management, Third Edition
7-25
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
A secretary of a department may have duties such as typing, answering the telephone, taking
messages, accepting packages, and sending out information. Having the secretary provide
input concerning what type of information the department sends out or asking her to
contribute to the content of this information can increase task identity. Secretaries can often
feel that they have task significance when faculty or other staff members thank them for
completing a task and therefore show them that their work is important.
4. What kind of organization structure does the organization use? If it is part of a chain, what
kind of structure does the entire organization use? What other structures might allow the
organization to operate more effectively? For example, would the move to a product team
structure lead to greater efficiency or effectiveness? Why or why not?
A university is usually composed of different schools, for example, arts and sciences,
engineering, business, and so on. Within each school, there are usually deans and faculty, both
senior and associate. Overall, the structure is functional in that departments are made up of
people who possess similar skills or use the same kind of knowledge, tools, or techniques to
perform their jobs. There are other structures in a university, also. The fact that universities
are divided into graduate and undergraduate programs is indicative of a market structure, in
that the schools are divided according to the type of student on which they focus.
Some universities are also divided into more than one campus, which makes a geographic
structure appropriate. This allows schools to focus on the area in which a school is, as is the
case when there is an urban and a suburban campus. Students at each of the two schools often
have unique needs and issues.
A product structure would not lead to more organizational effectiveness in this context
because all the divisions or schools in the university should be striving to deliver the same
product, which is a quality education. In terms of type of degree, a university could be labeled
a product structure in that each faculty member tends to specialize in one school, and they can
become experts in their respective fields.
5. How many levels are there in the organization’s hierarchy? Is authority centralized or
decentralized? Describe the span of control of the top manager and of middle or first-line
managers.
Jones and George, Essentials of Contemporary Management, Third Edition
7-26
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
There are many levels in a university’s hierarchy. The president of the university must report
to a board of trustees, and deans of schools must report to both university president and the
board. Senior faculty must report to the head of their department, and the heads of
departments must report to deans of schools. Associate faculty need to report to senior faculty
in their department, as well as the head of the department. Graduate students who work for the
university must report to their advisors and department faculty. Authority tends to be
centralized at the very top of each division, but becomes more decentralized as you move
down the hierarchy. The president of the university cannot make all the decisions about which
courses will be offered or which faculty will be hired, but some decisions about budget
allocations and strategy are too monumental to be delegated to specific departments.
The president has a large span of control, or many subordinates that he or she directly
manages. The heads of departments, which can be viewed as middle managers, have large
spans of control as well. A professor, which may be viewed as a first line manager, would
have a small span of control, perhaps only over a few graduate students.
6. Is the distribution of authority appropriate for the organization and its activities? Would it
be possible to flatten the hierarchy by decentralizing authority and empowering employees?
The functional structure of a large university is appropriate because divisions like athletics,
food service, maintenance and other operation divisions should be separate from the academic
departments such as psychology, mathematics, education, and so forth. Authority is
decentralized within each department so that the head of the department does not have to
make every day-to-day decisions, but is still informed of the activities that are being carried
out.
Within a very large university, sometimes the hierarchy is too formally structured in a way
that makes it difficult to get things done. In some cases, a student may need the signature of a
head of a department in order to add or drop a class. If the department head is very busy, it
may be difficult for a student to fulfill this requirement, possibly causing him or her time and
money. If authority was decentralized to faculty for this requirement, it would be easier for
the student to fulfill it.
Jones and George, Essentials of Contemporary Management, Third Edition
7-27
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Sometimes it is difficult to decentralize authority and empower employees in a situation
where those with authority are unwilling to relinquish it to others. This can happen in a
university as well as in any organization. Also, if departments or divisions are given too much
decision making authority, there is the danger that they will begin to pursue their own goals at
the expense of the university’s goals. An example might be a department who wants to
concentrate heavily on research at the expense of teaching. This may not be in line with the
strategy of the university as a primarily educational, rather than a research, institution.
7. What are the principal integrating mechanisms used in the organization? Do they provide
sufficient coordination among people and functions? How might they be improved?
Faculty and departmental meetings are held in which everyone meets to discuss relevant
issues and to update one another on the status of their teaching and/or research activities.
Different committees are also formed in which representatives of each division meet to
address problems or issues that concern everyone. These committees serve as task forces
within the academic system. These tools are used so that divisions can increase
communication and coordination within themselves, and their departments.
The existing integrating mechanisms may not be providing sufficient coordination between
people and functions. These mechanisms could be improved by having cross-departmental
meetings. In today’s universities, many students are requesting inter-departmental learning.
The boundaries between fields are becoming blurred, and students want to be able to take
classes from and specialize in many different fields in order to be successful in their careers.
Universities that continue to operate as if each department exists within a vacuum will find
that students will look elsewhere for education that takes more of an integrative approach. The
environment is changing in that students need to know more and have more diversified
experiences.
Jones and George, Essentials of Contemporary Management, Third Edition
7-28
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
More direct contact with faculty from different divisions, and more cross-functional or crossdepartmental teams or committees could promote communication and integration within the
academic departments. In addition, liaisons from the “real-world” could be established in
order to connect the academic setting with the realities of the working environment. Faculty
could meet with these liaisons to establish internships and job opportunities.
8. Now that you have analyzed the way this organization is organized, what advice would you
give to its managers to help them improve the way it operates?
The advice that would be most helpful would be to be flexible. Certain functions need to
remain separate, but departments and schools would do well to try to integrate more and
become less strict with requirements to take certain classes in certain schools. Students should
be allowed and encouraged to build their own curriculum so that they receive the relevant
training that they need to succeed in today’s world. The job opportunities that exist today
require people who have many different skills and wide knowledge bases. The environment is
very unstable in many industries, and employers are looking for students who possess
initiative and creativity. Allowing for more flexibility within our education systems can
promote this while providing quality education.
AACSB Standards: 1, 3, 9, 10, 12
Managing Ethically (LO 1, 2)
1. What ethical rules should managers use to decide which employees to terminate when
redesigning their hierarchy?
When redesigning the hierarchy requires downsizing, managers must be certain that the
Justice Model guides their decision making. This model states that an ethical decision is one
that is rendered in a fair, impartial, and equitable way and prohibits discrimination between
people based on observable appearances or behaviors. Clearly, the strongest performers
should be retained since they make the greatest contribution to the company’s bottom line.
Retaining employees based on factors unrelated to job performance, such as friendship or
subservient behavior, undermines the organization’s ability to compete effectively, thereby
negatively impacting all stakeholders.
Jones and George, Essentials of Contemporary Management, Third Edition
7-29
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
2. Some people argue that employees who have worked for an organization for many years
have a claim on the organization at least as strong as its shareholders. What do you think of
the ethics of this position? Can employees claim to own their jobs if they have contributed
significantly to its past success? How does a socially responsible organization behave in this
situation?
The highest performers should be retained because they make the greatest contribution to the
company’s bottom line, not because their performance has provided them with ‘ownership’ of
their jobs. When downsizing long time employees whose job performance has been mediocre
or marginal, the highly ethical and socially responsible organization might provide free job
outplacement counseling, generous severance pay, or other services that will help the
employee adjust to their new situation.
AACSB Standards: 1, 3, 7
NOTES FOR SMALL GROUP BREAKOUT EXERCISE (LO 1, 2, 3, 4)
Bob’s Appliances
You are a team of local consultants that Bob has called in to advise him as he makes this
crucial choice. Which structure do you recommend? Why?
Since Bob’s strategy is to widen his product range and compete directly with the chains, he
needs to implement a structure that is more flexible than the functional structure that is
currently in place. The current divisions of sales, purchasing and accounting, and repair will
not adequately accommodate the new product line of consumer electronics. The best strategy
would be to implement a product structure with separate functions for each of his two lines of
business. A product structure would be the most appropriate because the consumer electronics
business is much less predictable and stable than the appliances business. A product structure
will give divisional managers (appliances and consumer electronics) the responsibility for
devising the right business-level strategy to allow the two divisions to compete with the chain
stores. This structure will also allow functional managers to specialize in only one product
area, and each manager can become experts in their product industry. This structure also
liberates Bob from direct responsibility for all day-to-day operations.
In terms of customer service, a product structure will enable Bob’s Appliances to retain their
good reputation. Product divisional managers are closer to their customers and can respond
more appropriately to the changing environment.
AACSB Standards: 1, 3, 9
Jones and George, Essentials of Contemporary Management, Third Edition
7-30
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
NOTES FOR BE THE MANAGER (LO 3)
1. Discuss ways in which you can improve the way the current functional structure operates
to speed website development.
Given the project-oriented nature of the firm, the matrix structure would work well. A product
team structure with cross-functional roles would expedite the process of website development.
2. Discuss the pros and cons of moving to a (a) multidivisional, (b) matrix, and (c) productteam structure to reduce website development time.
A multidivisional structure would help the company organize workers into smaller, more
manageable units, which would presumably work faster. With a matrix structure, employees
from different functional areas would learn from each other and become more skilled and
productive. The product team structure would allow employees to work cross-functionally
but would do away with the dual reporting relationship of the matrix structure, which can be
problematic.
3. Which of these structures do you think is most appropriate and why?
The product team structure appears to be the best alternative. Because they report to two
bosses, employees often find the matrix structure frustrating and confusing. A divisional
structure does not lend itself to the company’s project orientation.
AACSB Standards: 1, 3, 9
BUSINESS WEEK CASES IN THE NEWS
Case Synopsis: Information Technology: Stopping the Sprawl at HP
Randy Mott, the new CIO at Hewlett-Packard, has embarked upon a $1billion, three-year
project to makeover that company’s internal IT systems. He wants to replace the company’s
85 loosely connected data centers around the world with six cutting edge facilities to be
located in Austin, Atlanta, and Houston. Mott is pushing for sweeping changes in the way his
company operates. He plans to slash thousands of smaller projects in H-P’s decentralized
organization and take a much more centralized approach to management by focusing on only
a handful of corporate initiatives. The goal is to integrate all of H-P’s data so that everyone in
the organization is working from the same set of information, thereby providing executives
with the tools needed to make better decisions. If Mott is successful, H-P’s annual spending
on technology will eventually be cut in half and thousands will be laid off.
Jones and George, Essentials of Contemporary Management, Third Edition
7-31
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Questions:
1. In what is Randy Mott trying to change H-P’s structure and the way it works?
H-P’s IT staff has long resisted centralized control. They have grown accustomed to having
the freedom to purchase their own equipment and make their own decisions concerning
projects to be pursued. Under Mott, they most likely will have to adjust to less freedom
regarding decision making and a more centralized chain of command from which they will be
expected to take directions.
2. What impact will his changes probably have on H-P’s culture?
Typically, decentralized organizations are usually quite flexible while centralized
organizations are more rigid with less room for autonomy, individual creativity, and personal
ownership of projects. These are some of the changes in culture that H-P probably should
expect.
3. How will the changes he has made affect H-P’s competitive advantage and
performance?
One of Mott’s objectives is to create a single customer management database, much like a
CRM system. Such a system will allow managers in the organization’s various departments
to approach and service customers as a unified team and share information regarding best
practices, thus enhancing overall responsiveness to customers.
AACSB Standards: 1, 3, 9, 10, 12
Chapter 7 Video Case Teaching Note
General Motors Global Research Network
Teaching Objective: To see how a large, traditional organization changed the structure of its
research and development function to focus on innovation and globalization
Video Summary: GM’s top managers realized that the organization was too self-contained
and that to increase its competitiveness, they needed to change the company’s business model.
They restructured GM to create a global team environment for research and development. By
building an extensive network of engineers that allows it to tap into R&D expertise around the
globe, GM aims to reach the level of innovation required to differentiate itself from its
competitors.
Jones and George, Essentials of Contemporary Management, Third Edition
7-32
CHAPTER SEVEN
DESIGNING ORGANIZATIONAL STRUCTURE
Questions:
1. How does technology influence organizational structure at GM? What other factors
should managers at GM consider when selecting a structure?
Global competition has forced GM to increase its focus on innovation, and thus advanced
technology. Accommodating this need required a more flexible structure that would allow
GM to leverage the technical capabilities of researchers worldwide. Management realized that
it needed the input of the best researchers, both inside and outside of GM, no matter where
they were located. The new structure is composed of global teams of employees who
comfortably interact with team members from a variety of cultures and settings. Technology,
human resources, strategy, and the level of turbulence in the external environment should be
considered by managers seeking to design the best organizational structure for their company.
2. What organizational structures do you equate with GM’s old model of research?
Which structures do you equate with the new model?
GM’s old research model was probably built around a traditional, functional structure in
which all employees with technology backgrounds and skills were clustered into a single unit
within the organization and worked together in a single location. The new business model is
probably hybrid, using a geographic structure that encompasses virtual product teams.
3. What must GM managers consider as they move from the old structure to the new
structure?
A major change in organizational structure generally requires a shift in organizational culture,
for which employees must be prepared. The new structure will force a change in how decision
making occurs within the organization and how employees relate and communicate with each
other.
Jones and George, Essentials of Contemporary Management, Third Edition
7-33