Chapter 6
Organizing the Business Enterprise
Chapter Overview
Organizational structure varies according to a firm’s mission, purpose, and
strategy. Size, technology, and changes in environmental circumstances also
influence structure. The building blocks of organizational structure are job
specialization and departmentalization. Common forms of departmentalization
are customer, product, process, geographic, and functional. Multiple forms are
often used within large organizations.
The decision-making hierarchy – which defines responsibility, authority,
delegation, and accountability – plays a critical role in organizational structure. In
a centralized organization, senior management holds most authority and decisionmaking power; in a decentralized organization, lower levels of management also
hold significant decision-making authority. Span of control refers to the number
of subordinates a manager supervises directly. The more people a manager
supervises, the wider the span of control.
The four basic forms of organizational structure reflected in most firms are:
functional, divisional, matrix, and international. However, the informal
organization can be as powerful – and sometimes more so – than the formal
organization. Some firms harness the power of the informal organization by
encouraging intrapreneuring: creating and maintaining the innovation and
flexibility of a small-business environment within a large company. The purpose
of intrapreneuring is to foster productive creativity.
Chapter Objectives
1. Discuss the elements that influence a firm’s organizational structure.
2. Explain specialization and departmentalization as the building blocks of
organizational structure.
3. Distinguish between responsibility, authority, delegation, and
accountability, and explain the differences between decision making in
centralized and decentralized organizations.
4. Explain the differences among functional, divisional, matrix, and
international organizational structures and describe the most popular new
forms of organizational design.
5. Describe the informal organization and discuss intrapreneuring.
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REFERENCE OUTLINE
Opening Case: Cooking Up a New Structure
I.
What Is Organizational Structure?
A. Determinants of Organization
B. Chain of Command
II.
The Building Blocks of Organizational Structure
A. Specialization
B. Departmentalization
1. Customer Departmentalization
2. Product Departmentalization
3. Process Departmentalization
4. Geographic Departmentalization
5. Functional Departmentalization
III.
Establishing the Decision-Making Hierarchy
A. Assigning Tasks: Responsibility and Authority
B. Performing Tasks: Delegation and Accountability
C. Distributing Authority: Centralization and Decentralization
1. Centralized Organizations
2. Decentralized Organizations
3. Tall and Flat Structures
4. Span of Control
D. Three Forms of Authority
1. Line Authority
2. Staff Authority
3. Committee and Team Authority
IV.
Basic Forms of Organizational Structure
A. Functional Organization
B. Divisional Organization
C. Matrix Organization
D. International Organization
E. Organizational Design in the Twenty-First Century
1. Boundary-less Organization
2. Team Organization
3. Virtual Organization
4. Learning Organization
V.
Informal Organization
A. Formal vs. Informal Organizational Systems
1. Informal Groups
2. Organizational Groups
B. Intrapreneuring
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LECTURE OUTLINE
I.
What Is Organizational Structure? (Use PowerPoint 6.4.)
Organizational structure defines an organization through
specification of the jobs to be performed and the ways in which these
jobs relate to one another. All organizations develop their own
appropriate structures.
A. Determinants of Organization (Use PowerPoint 6.5.)
Numerous factors influence the planning and creating of an
efficient organizational structure. Managers not only consider the
organization’s purpose, mission, and strategy, but also the
organization’s size, technology, and environmental changes.
B. Chain of Command (Use PowerPoint 6.6.)
Organizational charts are prepared to clarify structure and to
show employees where they fit into a firm’s operations. The chain
of command represents the hierarchy of who reports to whom in
the organization.
Notes:
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II.
The Building Blocks of Organizational Structure (Use PowerPoint
6.7.)
A. Specialization
1. Specialization and Growth. Job specialization, a
natural part of an organization’s growth, is the process of
identifying the specific jobs that need to be done and
designating the people who will perform them. Job
specialization may even involve breaking jobs into small
components prior to assigning them to individuals.
B. Departmentalization
Departmentalization is the grouping of similar or related jobs into
logical units. Several types of departmentalization exist.
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1. Customer Departmentalization. This grouping of jobs
simplifies shopping by providing identifiable store
segments.
2. Product Departmentalization. Organizations are
divided according to the products or services being
produced.
3. Process Departmentalization. Organizations are
divided according to production processes utilized.
4. Geographic Departmentalization. Organizations are
divided according to the areas of the country or world
that they serve.
5. Functional Departmentalization. Organizations are
divided according to a group’s functions or activities.
Examples include a firm’s production, marketing, human
resource, accounting, and finance departments.
Notes:
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III.
Establishing the Decision-Making Hierarchy (Use PowerPoint
6.8.)
The decision-making hierarchy is created by assigning tasks,
performing tasks, and distributing authority.
A. Assigning Tasks: Responsibility and Authority
Responsibility is the duty to perform an assigned task; authority
is the power to make decisions.
B. Performing Tasks: Delegation and Accountability
Delegation begins when responsibility is granted to a subordinate
from a supervisor; accountability falls to the subordinate, who
must carry out the assigned responsibilities.
C. Distributing Authority: Centralization and Decentralization
(Use PowerPoint 6.9, 6.10.)
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1. Centralized Organizations. In a centralized
organization, authority is held by upper-level
management.
2. Decentralized Organizations. In a decentralized
organization, authority is delegated to lower levels of
management.
3. Tall and Flat Organizations. Tall organizations are
multi-tiered, characterized by many layers of employees;
flat organizations have few layers of employees.
4. Span of Control. A manager’s span of control is the
number of people managed by one supervisor; many
factors can lead to a wide or narrow span of control.
D. Three Forms of Authority (Use PowerPoint 6.11.)
Forms of authority result when individuals are delegated authority
and responsibility in a firm. Various forms of authority may be
found in any given company.
1. Line Authority. This authority flows vertically up and
down the chain of command.
2. Staff Authority. This authority is found among
departments of advisors and counselors, including
specialists such as lawyers, engineers, accountants, and
human resource personnel. These individuals aid line
departments in making decisions, but do not have the
authority to make final decisions.
3. Committee and Team Authority. This is the authority
that is granted to committees and teams that play central
roles in the firm’s daily operations. Employees are
typically empowered to plan and organize their own work
and to perform that work with minimal supervision.
Notes:
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IV.
Basic Forms of Organizational Structure (Use PowerPoint 6.12.)
A. Functional Organization
Often used by most small- and medium-sized firms, functional
organizations divide job responsibilities by functional areas, such
as marketing or finance.
B. Divisional Organization
Corporate divisions usually operate under this structure as
relatively autonomous businesses under the larger corporate
umbrella. Divisions are departments that resemble separate
businesses in that they produce and market their own products.
C. Matrix Organization (Use PowerPoint 6.13.)
In this structure, teams are formed in which individuals report to
two or more managers, usually including a line manager and a staff
manager. The matrix structure is highly flexible and readily
adaptable to changing circumstances.
D. International Organization (Use PowerPoint 6.14.)
International organizational structures have been developed in
response to the need to manufacture, purchase, and sell in global
markets.
E. Organizational Design in the Twenty-First Century (Use
PowerPoint 6.15.)
1. Boundary-less Organization. In a boundary-less
organization, traditional boundaries and structure are
minimized or eliminated.
2. Team Organization. Team organization relies mostly
on project-type teams; people float from one project to
another as dictated by their skills and the demands of the
projects.
3. Virtual Organization. This organization has little or no
formal structure; this organization exists only in response
to its own needs.
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4. Learning Organization. The learning organization
works to integrate continuous improvement with
continuous employee learning and development.
Notes:
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V.
Informal Organization (Use PowerPoint 6.16.)
A. Formal vs. Informal Organizational Systems
A company’s informal organization is comprised of the everyday
social interactions between and among employees that transcend
formal jobs and job interrelationships.
1. Informal Groups. Informal organization can be just as
powerful as formal organization.
2. Organizational Grapevine. The organizational
grapevine, or the rumor mill, is an informal
communication structure in which people communicate
through ways that transcend the formal communication
processes.
B. Intrapreneuring
A relatively new concept, intrapreneuring is encouraged among
businesses as a way of enhancing creativity and flexibility in large,
bureaucratic structures.
Notes:
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Answers to Questions and Exercises
Questions for Review
1. What is an organization chart? What purpose does it serve?
An organization chart represents the firm’s structure and shows where
employees fit into the hierarchy. Organization charts depict the extent of
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line and staff authority, departmentalization, and span of control at various
levels.
2. Explain the significance of size as it relates to the organizational
structure. Describe the changes that are likely to occur as an
organization grows.
Larger firms develop more complex organizational structures. As a firm’s
size increases, job specialization becomes increasingly important,
followed by departmentalization, and a more definitive decision-making
hierarchy.
3. What is the difference between responsibility and authority?
Responsibility is the duty to perform an assigned task; authority is the
power to make the decisions necessary to complete that task.
Responsibility and authority should be closely linked for any given
assignment.
4. Why do some managers have difficulties in delegating authority?
Why does this problem tend to plague smaller businesses?
Some of the reasons managers have difficulty delegating authority
include: (a) fear that employees can’t do anything as well as they can; (b)
fear that something will go wrong if someone else does it; (c) fear that that
employee will “show up” the manager; (d) too bogged down in day-to-day
activities to delegate; (e) don’t know how to delegate; and (f) want to keep
control. Delegating is especially difficult for small business owners
because they typically began by doing everything themselves and having
complete control.
5. Why is a company’s informal organization important?
The everyday social connections among employees can transcend formal
job-related relationships, creating a very powerful dynamic that can either
support or disrupt a firm’s effectiveness.
Questions for Analysis
6. Draw up an organization chart for your college or university.
Charts will vary, but students should recognize and depict the mix of
customer and functional structures.
7. Describe a hypothetical organizational structure for a small printing
firm. Describe changes that might be necessary as the business grows.
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Answers will vary, but the firm will probably begin with a centralized
structure in which the owner will either perform or oversee every job.
Various types of departmentalization will probably emerge as the firm
grows and it may become more decentralized as management delegates
authority downward. With additional growth, the firm may advance from
a functional to a divisional or matrix organization.
8. Compare and contrast the matrix and divisional approaches to
organizational structure. How would you feel personally about
working in a matrix organization in which you were assigned
simultaneously to multiple units or groups?
A divisional structure consists of corporate divisions that operate as
relatively autonomous units under the larger corporate umbrella. In a
matrix structure, however, group members report to two or more
managers, usually one line and one staff manager. The matrix structure is
often used to address specific issues on a project-by-project basis.
Answers to the second question will vary, but students should address the
pros and cons of reporting to more than one manager.
Application Exercises
9. Interview the manager of a local service business – a fast food
restaurant. What types of tasks does this manager typically delegate?
Is the appropriate authority also delegated in each case?
Answers will vary, but managers in fast food restaurants typically delegate
tasks like cleaning, cooking, serving, etc. Depending on the size of the
business, ordering, scheduling, and payroll functions may be delegated as
well.
10. Using books, magazines, or personal interviews, identify a person who
has succeeded as an intrapreneur. In what ways did the structure of
the intrapreneur’s company help this individual succeed? In what
ways did the structure pose problems?
Students’ answers will vary, but they will probably find that intrapreneurs
are most likely to succeed in flexible environments with managers who are
open to innovation and willing to reward creativity.
Answers to Exercising Your Ethics
1. What are the ethical issues in this situation?
The ethical issues revolve around the employee’s responsibility to the
company. While he claims that he is not using company resources
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directly, he is using an extra hour of company time. In addition, he is
assuming no conflict of interest, but without directly discussing the issue
with his manager he cannot be sure.
2. What do you think most people would do in this situation?
Answers will vary.
3. What would you do in this situation?
Answers will vary.
Answers to Building Your Business Skills
1. With the average computer programmer earning nearly $75,000, and
with all competitive firms paying top dollar, why might organizational
issues be critical in determining employee loyalty?
Dissatisfied employees can obtain other jobs easily, so firms will try to
limit turnover by creating the most possible satisfactory work
environment.
2. If you were a programmer, what organizational factors would make a
difference to you? Why?
Answers will vary, but possibilities include variety of job tasks, degree of
decision-making authority, international involvement, and job related
benefits.
3. As the company founder, how willing would you be to make major
organizational changes in light of the shortage of qualified
programmers?
Answers will vary, but students should demonstrate awareness that
without making the changes needed to retain qualified programmers, the
business is unlikely to thrive long-term.
Classroom Activities
1. Diagram various examples of organization charts on the board or
overhead. Ask students to identify various characteristics about each
organization that could possibly be observed by looking at the
organization chart. For example, students should be able to observe a
long/tall vs. short/flat structure, span of control, departmentalization,
perhaps decentralized vs. centralized decision making, chain of command,
etc.
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2. Numerous exercises could be conducted to illustrate the grapevine.
Divide the class into groups of three. Ask Group #1 to explain either a
process or an idea to Group #2, secluded in a room away from all other
groups. Bring in Group #3, asking Group #2 to explain the same process
or idea. Then, bring in Group #4, asking Group #3 to explain the process
or idea. After all groups have presented the topic, ask the final group to
present what they have just heard. Ask the class to explain how the
process or idea changed from one group to the next as it was being
presented.
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