STRUCTURAL IMPLEMENTATION INTRODUCTION To implement its strategy successfully a firm must have an appropriate organizational structure. An organizational structure is a set of formal tasks and reporting relationships which provide a framework for control and coordination within the organization. The visual representation of an organizational structure is called organizational chart. The purpose of an organizational structure is to coordinate and integrate the efforts of all employees at all levels – corporate, business and functional levels – so that they work together to achieve the specific set of strategies. STRUCTURE It is the arrangement of tasks and subtasks required to implement a strategy. An organization specifies three components in this: 1. Formal reporting relationships. 2. Grouping of individual’s into departments. 3. Design of system to ensure effective communication. IMPORTANCE OF ORGANISATIONAL STRUCTURE Organizational structure is a tool that managers use to harness resources for getting things done. It is defined as (i) the set of formal tasks assigned to individuals and departments. (ii) formal reporting relationships, including lines of authority, responsibility, number of hierarchical levels and span of manager’s control, and (iii) the design of systems to ensure effective coordination of employees across departments. The set of formal tasks and formal relationships provides a framework for vertical control of the organization. There are two different aspects of the organizational structure: Superstructure and Infrastructure. 1. Superstructure: This is the highly visible part of the organizational structure. This depicts how people are grouped into different divisions, departments and sections and how they are related to each other. The superstructure also indicates the principal ways in which the organizational operations are integrated and coordinated. By showing their levels, it indicates which groups have relatively more strategic importance. 2. Infrastructure: This is comparatively less visible part of the organizational structure. It is connected with issues like delegation of authority, specialization, communication, information system and procedures. The infrastructure enables the organization to engage in a number of disparate activities and still keep them coordinated. The design of organizational structure is a critical task of the top management of an organization. It is the skeleton of the whole organization. It provides relatively more durable organizational arrangements and relationships. Thus an organizational structure fulfils two fundamental and opposing requirements: 1. Division of labour into various tasks 2. Coordination of these tasks to accomplish effective control of an organization. However, as an organization grows and becomes more complex, it needs appropriate changes in its design. STRATEGY AND STRUCTURE Strategic management posits that the strategy and the organization structure of the firm must match. In a classic study of large U.S corporations such as DuPont, General Motors, Sears, and Standard Oil, Alfred Chandler concluded that structure follows strategy. This means that changes in the corporate strategy lead to changes in organizational structure. He also concluded that organizations follow a pattern of development from one kind of structural arrangement to another as they expand. According to Chandler, these structural changes occur because the old structure was not suitable. Chandler therefore proposed the following as the sequence of what occurs: 1. New strategy is created. 2. New administrative problems emerge. 3. Economic performance declines. 4. New appropriate structure is invented. 5. Profit returns to its previous level. Chandler found that in their early years, corporations such as DuPont and General Motors had a centralized functional structure, which was suitable for a limited range of products. As they added new product lines and created their own distribution networks, the old structure became too complex. Therefore, they shifted to a decentralized structure with several autonomous divisions. STRATEGY DETERMINES STRUCTURE AFFECTS Research conducted by Chandler proposes structure follows strategy for economic efficiency. There is close interdependence between strategy and structure. There are two types of interdependence on forward and backward relationship. ‒ ‒ Strategy determines how the organization structure has to be formed. And structure influences presents strategy implemented and in future. 1. Forward Relationship: A suitable organizational structure is required for effective implementation of strategy. A growth strategy requires a different structure then stability structure. Organizational structure is a means for strategy implementation. When there is a significant change in strategy the structure has to be redesigned. New organizational structure creates changes in corporate strategy. 2. Backward Relationship: Strategy is also influenced by Structure. Structural consideration affects the implementation of present strategy and the formulation of future strategies. There is a reciprocal relationship between strategy and structure. Structural implementation is in fact an ongoing process of matching the structure of an organization with its strategy. Whenever there is a mismatch between the two, changes in structure have to be made. Otherwise strategy implementation becomes difficult and performance suffers. An effective structural framework helps to deal with confusion, chaos and duplication of efforts arises at different levels. BASIC PRINCIPLES OF ORGANISATIONAL STRUCTURE There are several important principles of organization, which need to be understood before building an organization’s structure. They are: 1. Hierarchy: Hierarchy defines who reports to whom and the span of control. Span of control is the number of people reporting to a supervisor. It determines how closely a supervisor can monitor subordinates. Tall structures have many levels in the hierarchy and a narrow span. Communication up and down the hierarchy becomes difficult. Flat structures are horizontally dispersed having fewer levels in the hierarchy. The trend in recent years has been towards flat structures allowing for wider spans of control as a way to facilitate better communication and co-ordination. 2. Chain of Command: The chain of command is an unbroken line of authority that links all persons in an organization and shows who reports to whom. It has two underlying principles. Unity of command means that each employee is held accountable to only one supervisor. The scalar principle means a clearly defined line of authority in the organization. Authority and responsibility for different tasks should be distinct. All persons in the organization should know to whom they report as well as the successive management levels all the way to the top. 3. Specialization: Specialization, sometimes called division of labour, is the degree to which organizational tasks are subdivided into separate jobs. Work can be performed more efficiently if employees are allowed to specialize. This is because an employee in each department performs only the tasks relevant to his specialized function. Despite the apparent advantages of specialization, many organizations are moving away from this principle. With too much specialization, employees are isolated performing only a single, boring job. Many companies are, therefore, enlarging jobs to provide greater challenges or assigning tasks to teams so that employees can rotate among several jobs performed by the team. 4. Authority, Responsibility and Delegation: Authority is the formal and legitimate right of a manager to make decisions, issue orders, allocate resources and command obedience. Responsibility is the duty to perform the task or activity an employee has been assigned. Accountability means that the people with authority and responsibility are subject to reporting and justifying task outcomes to those above them in the chain of command. Most organizations today encourage managers to delegate authority to the lowest possible level to provide maximum flexibility to meet customer needs and adapt to the environment. Managers are encouraged to delegate authority, although they often find it difficult. 5. Centralization and Decentralization: Centralization and decentralization refer to the level at which decisions are made. Centralization means that decision-making is done at the top levels of the organization. Decentralization means that decision making is pushed down to the lower levels in the organization. Centralization helps in better coordination, but too much centralization results in slow response and demotivates people at lower levels. Decentralization relieves the burden on top managers, makes greater use of worker’s skills, ensures decision making by well-informed people and permits rapid response to external changes. But it does not mean that every organization should decentralize. Managers should diagnose the organizational situation and select the decision-making level. 6. Formalization: Formalization is the extent to which written documentation is used to direct and control employees. Written documentation includes rules, regulations, policies, procedures, job descriptions etc. They are inexpensive ways to coordinate activities. These documents complement the organizational structure by providing descriptions of tasks, responsibilities and authority. The use of rules and regulations is a part of bureaucratic model of organization. 7. Departmentalization: Another fundamental characteristic of organizational structure is departmentalization, which means grouping positions into departments and departments into the total organization. TYPES OF ORGANISATIONAL STRUCTURE There are seven basic types of organizational structures, namely: - Simple Structure, Functional Structure, Divisional Structure, SBU Structure, Matrix Structure, Network Structure and Virtual structure. 1. SIMPLE STRUCTURE: In this structure, the owner manager controls all the activities and makes all the decisions. This structure may be appropriate for small and young organizations. Coordination of task is done through direct supervision. There is little specialization of tasks, few rules and regulations and communication is informal. ADVANTAGES: a. b. c. d. Quick decision-making. Flexible. Efficient. Ability to respond quickly. DISADVANTAGES: a. Not suitable for big organization. OWNER MANAGER EMPLOYEES 2. FUNCTIONAL STRUCTURE: Functional structures are grouped based on major functions performed. Each function is led by a functional specialist. They are formed in organizations in which there are a single or closely related products or services. ADVANTAGES: a. b. c. d. Allows for functional specialization. Allows for career paths and professional development. Centralized decision-making. More efficient use of managerial and technical talent. DISADVANTAGES: a. b. c. d. Tends to create functional silos that hinder communication and coordination. Overburdens the top management, as functional conflicts is pushed up. Line-staff conflicts. Difficult to establish uniform standards across the organization. CEO MANAFACT URINF MARKETING FINANCE HUMAN RESOURCE R&D 3. DIVISIONAL STRUCTURE: Divisional structures are used by diversified organizations. In a divisional structure, divisions are created as self-contained units with separate functional departments for each division. A division may be organized around geographic area, products, customers etc. the head office determines corporate strategy, allocates resources among divisions and appoints and rewards the heads of these divisions. Each division is responsible for product, market and financial objectives for the division as well as their division’s contribution to overall corporate performance. ADVANTAGES: a. b. c. d. e. Separation of strategic and operational control. Quick response to changes in external environment. Conflicts across functional areas are maximized. Development of general management talent is enhanced. Increasing accountability and focus. DISADVANTAGES a. b. c. d. e. Increased cost due to duplication of functions and personnel. Dysfunctional competition among divisions for resources. Differences in image and quality may occur across divisions. Divisions may focus on short term performance. Divisional perspective may dominate the organization-wide perspective. CEO DIVISION 1 MANUFACTURING MARKETING FINANCE HR DIVISION 2 DIVISION 3 SAME AS DIVISION 1 SAME AS DIVISION 1 4. SBU STRUCTURE: Corporations that are highly diversified may consist of numerous divisions. It will be difficult for corporate office to coordinate their activities. Hence, the diverse businesses are grouped into SBUs. Generally, divisions with similar products, markets or technologies are grouped into as SBU, as a distinct profit centre. ADVANTAGES a. Greater decentralization of authority. b. Planning and control by the corporate office becomes more manageable. c. Individuals SBUs can react to changes more quickly. DISADVANTAGES a. Difficult to achieve synergies across SBUs. b. Adds one more level in the hierarchy, increasing costs and overheads. c. Corporate office is far removed from the individual divisions and may be unaware of key developments in divisions. CEO DIVISION-1 SBU-1 SBU-2 DIVISION-2 DIVISION-3 SBU-3 5. MATRIX STRUCTURE: The matrix structure is, in effect, a combination of functional and divisional structures. In this structure, there are functional managers and product or projects managers. Employees report to one functional manager and to one or more project managers. The dual line of authority makes the matrix structure unique. The matrix structure has been used successfully by companies such as IBM, Unilever, Ford Motor Company etc. ADVANTAGES a. b. c. d. e. It facilitates the use of specialized personnel without duplication. Firms can use resources more efficiently. Experienced managers can divide their time among multiple products/projects. It is flexible and permits innovation. It provides professionals with boarder range of responsibilities. DISADVANTAGES a. b. c. d. e. Dual reporting may lead to politics, power play and conflicts. Working relationships may become complicated. Excessive reliance on group processes and teamwork. Diffusion of accountability. May erode timely decision making. TOP MANAGEMENT MANUFACTURING SALES FINANCE PERSONNEL MANAGER PROJECT A MANUFACTURING UNIT SALES UNIT FINANCE UNIT PERSONNEL UNIT MANAGER PROJECT B MANUFACTURING UNIT SALES UNIT FINANCE UNIT PERSONNEL UNIT MANAGER PROJECT C MANUFACTURING UNIT SALES UNIT FINANCE UNIT PERSONNEL UNIT MANAGER PROJECT D MANUFACTURING UNIT SALES UNIT FINANCE UNIT PERSONNEL UNIT 6. NETWORK STRUCTURE: A network organization outsources or subcontracts many of its major functions to separate companies and coordinates their activities from a small headquarters. Rather than being housed under one roof, activities like design, manufacturing, marketing, distribution etc. are outsourced to separate organizations that are concerned electronically to the central office. ADVANTAGES a. It is global. It can draw one resource worldwide to achieve the best quality and price. b. It has workforce flexibility and challenges. c. Reduced administrative overhead. DISADVANTAGES a. No hands-on control. Managers have to rely on contracts, coordination, negotiation, and electronic linkage to hold things together. b. If a subcontractor fails to deliver or goes out of business, the headquarters organization will be temporarily out of business. c. Employee loyalty can weaken, because they may feel they can be replaced by contract services. ACCOUNTS RECEIVABLES COMPANY (USA) DESIGN COMPANY (CANADA) TRANSPORTATION COMPANY (KOREA) COMPANY CORE (HUB) DISTRIBUTION COMPANY (EUROPE) MANUFACTURING COMPANY (ASIA) 7. VIRTUAL ORGANISATION: This is an extension of the network structure. In this approach, independent organizations form temporary alliances to exploit specific opportunities, and then disband when their objectives are met. The term virtual means in effect but not actually so. The virtual organization consists of a network of independent companies— suppliers, customers or even competitors—linked together to share skills, costs, markets and rewards. The members of a virtual organization pool and share the knowledge and expertise of each other. The virtual organization will have few full-time employees or may temporarily hire outside specialists to complete a specific project, such as a new software application. These people do not become a part of the organization, but join together as a separate entity for a specific purpose. Sometimes companies use a virtual approach to harness the talents and energies of the best people for a particular job, rather than trying to develop those capabilities in house. When an organization uses a virtual approach, the virtual group typically has full authority to make decisions within certain predetermined boundaries and goals. Most virtual organizations use electronic media for sharing of information and data. Some organizations have redesigned offices to provide temporary space for virtual workers to meet or work on-site. ADVANTAGES a. It can draw on expertise worldwide. b. It is highly flexible and responsive. c. It reduces overhead costs. DISADVANTAGE a. Lack of control because the boundaries of a virtual organization are weak and ambiguous. b. Virtual teams place new demands on managers, who have to work with new people, new ideas and new problems. c. Virtual organization poses communication difficulties, and managers may lose motivation.
