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OD - complete notes of the course
Organization design (Università Ca' Foscari Venezia)
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Organisation Design –
Laura Cortellazzo
1.0: Organisation and organisational effectiveness
An organisation is a tool people use to coordinate their actions to obtain something they desire or value,
and so to achieve their goals.


Organising: grouping people and resources to achieve their goal
Organised: grouping people and resources in an effective and efficient way
Definition: organisations are social entities that are goal directed, which are designed as deliberately
structured and coordinated activity systems and are linked to the external environment.
Who creates the organisations? Who is the entrepreneur?
 Entrepreneurship is the process by which people recognise opportunities to satisfy needs and then
gather and use resources to meet them.
The value creation of an organisation takes pales at three stages: Input, Conversion, Output. Each stage is
affected by the Environment.
 The organisational environment is the set of forces and conditions that operate beyond an
organisation’s boundaries but affect its ability to acquire and use resources to create value.
1. Organisation’s Input is obtained from its environment:
a)
b)
c)
d)
e)
Raw materials
Monet and capital
Human Resources
Information and knowledge
Customers of service organisation
The way the organisation obtains these inputs to produce goods and services,
determines how much value the organisation creates at the input stage.
2. Organisation’s Conversion Process by using:
a) Machinery
b) Computers
c) Human Resources (skills and abilities)
Aim: to transform inputs into outputs. This
value is created at this stage.
determines how much
3. Organisation’s Outputs are realised back to the environment, where they are purchased and used by
customers to satisfy their needs.
a)
b)
c)
d)
e)
Finished goods
Services
Dividends
Salaries
Value for shareholders
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4. Organisation’s Environment: the firm uses the money earned from the sale of its output to obtain new
supplies of inputs, and the cycle begins again:
a)
b)
c)
d)
e)
f)
Customers
Shareholders
Suppliers
Distributors
Government
Competitors
The amount of value the organisation creates is a function of the quality of its skills, including its ability to
learn from and respond to the environment.

An organisation that continues to satisfy people’s needs will be able to obtain increasing amounts of
resources over time and will be able to create more and more value.
Value captured by value created by the firms:
Given C (cost of providing benefits), P (price paid by the customer), B (benefits perceived by the customer),
B-P (customer surplus)


VCT = B – C and it’s the value created by the firm
VCP = P – C and it’s the value captured (= producer surplus, = firm’s profit)
WHY DO ORGANISATION EXIST?
1. To exploit specialisation and labour division . People working together to produce goods and services
usually can create more value than people working separately.
2. To use large scale technology. Organisations are able to take advantage of economies of scale and scope
that result from the use of modern automated and computerised technology.
 Economy of scale is reduction in average cost when goods and services are produced in large
volume on automated production lines
 Economy of scope reduction in AC by producing more types of products (co-produced products by
the same process, complementary processes, shared inputs across the products)
example: Elvio Bonollo with his product line Of was able to create a range of grappa that combine tradition
with modern taste requirements. The company uses the liquid residues of distillation to obtain biogas
which is transformed into electricity, ensuring coverage of 80% of the company's energy needs.
(BonolloEnergia). The company produces high quality natural tartaric acid, which is used for the
preparation of pharmaceutical products.
3. To manage the organisational environment = the source of valuable inputs and the marketplace into
which the firm releases outputs.
 It comprehends economic, social, and political pressures that affect the obtainment of resources
 An organisation has the resources to develop specialists to anticipate or influence these pressures;
this allows to create more value
see grappa example
4. To economise on transaction costs
 Problems arise when people cooperate in the production => learn how to work with others
 People have to decide who will do which tasks (labour division), who will get paid what amounts,
and how to decide if each co-worker is doing his share of the work
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
Transaction costs = associated with negotiating, monitoring and governing exchanges between
people => controlling the exchanges reduces the transaction costs and increases productivity
5. To exert power and control
 Organisations can exert great pressure on individuals to conform to task and production
requirements in order to increase production efficiency
 To get a job done efficiently, people must come to work in a predictable fashion, behave in the
interests of the organisation, and accept the authority of the organisation and its managers =>
individuals must conform to organisational requirements
 Power and control are put on people’s behaviours & performance, by the means of coordination
mechanisms: hierarchy, standardisation, relations
Over time, the stability created by an organisation provides a setting in which the organisation and its
members can increase their skills and capabilities.
ORGANISATIONAL THEORY and its relations with Structure, Design and Change, Culture
Organisational Theory = study of how organisations function and how they affect / are affected by the
environment
Organisational structure = formal system of task and authority relationships that control how people
coordinate their actions and use resources to achieve organisational goals




The principal purpose is the one of controlling both coordination and motivation for achieving goals
The appropriate structure is the one that facilitates effective responses to coordination and motivation
issues, which arise from environmental, technological, or human reasons.
As organisations grow and differentiate, the structure likewise evolves.
Organisational structure can be managed through the process of organisational design and change.
Organisational culture = set of shared values and norms that controls organisational members’ interactions
with each other and with suppliers, customers, and other people outside the organisation.



It’s shaped by the people inside the organisation, by organisational ethics, by the property rights
given to employees, and by the structure of the organisation
Shapes and controls behaviour within the organisation.
Evolves and can be managed through organisational design and change
Organisational design and change = process by which managers select and manage various dimensions of
organisational structure and culture in order to control activities and achieve goals


Balances the management of internal and external pressures to survive in the long run
Allows continuous redesign and transformation of the structure and culture in responding to change
HOW DO MANAGERS MEASURE ORGANISATIONAL EFFECTIVENESS?
Managers are responsible for utilising organisational resources in a way that maximises an organisation’s
ability to create value => how do they evaluate organisational performance? 3 factors for effectiveness are:
1. Control over the external environment which means also having the ability to attract resources and
customers; securing scarce and valuable skills and resources from outside: external resource approach:
Definition: the organization’s ability to secure, manage, and control scarce and valued skills and
resources how effectively an organization manages and controls its external environment
Examples: Nonino, Huffington post, Nike
KPI: lower costs of inputs, obtain high-quality inputs of raw materials and employees, increase market
share, increase stock price, gain support of stakeholders such as government or environmentalists
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2. Innovation: coordinating resources with employee skills creatively to innovate products and adapt to
changing customer needs: internal system approach:
Definition: how effectively an organization functions and operates
Examples: Starbucks, Came
KPI: cut decision-making time, increase rate of product innovation, increase coordination and
motivation of employees, reduce conflict, reduce time to market
3. Efficiency: convert skills and resources efficiently into finished goods/services: technical approach:
Definition: organization’s ability to convert skills and resources into goods and services efficiently
Examples: Ford, Toyota, McDonald
KPI: increase product quality, reduce number of defects, reduce production costs, improve customer
service, reduce delivery time to customer
1.1: Stakeholders, Managers and Ethics
Organisations exist because of their ability to create value and outcomes for groups of stakeholders, who
can be internal or external
 Stakeholders = people who have an interest, claim or stake in an organization, in what it does, and in
how well it will perform
 They are motivated to participate in the organisation if inducements exceed contribution = if their
rewards (money, power, status) exceed the skills, knowledge, expertise the organisation requires
Internal stakeholders: are closest to the firm and have the strongest most direct claim on resources
a) Shareholders are the owners.
 Contribution: money and capital
 Induction: dividends and stock appreciation

Impact of digitalization: enlarge the set of potential shareholders

Stock investment is risky because does not guarantee a return

If they do not find the inducement right for their contribution, sell shares and withdraw
b) Managers are the employees who coordinate resources in order to meet goals (they are the agents or
employees of shareholders, since they have the responsibility to invest shareholders’ money).
 Contribution: skills and expertise, team building
 Induction: salaries, bonuses, status, and power

Impact of digitalization: management by algorithm, AI decision-making

If they do not find the inducement right for their contribution, withdraw by leaving the firm
example of Algorithm Management: it’s used in HR processes in order to make them less biased
Risks: lack of transparency and accountability, data protection and privacy, loss of human oversight, the
purpose and people behind algorithmic decision-making
c) Workforce consists of all-nonmanagerial employees. They have task responsibilities and duties and are
accountable for performing at the required level
 Contribution: skills and expertise
 Induction: wages, bonuses, stable employment, promotion (influence worker’s motivation)

Impact of digitalization: crowdsourcing, gig working, protean careers

If they do not find the inducement right for their contribution, withdraw by reducing performance
or leaving
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Protean careers caused a change in the psychological contract between employee and employer: it has
shifted from the more traditional relational contract (emphasis on mutual loyalty) to the new transactional
contract (employers do not guarantee employment but provide opportunities, and employees do not
promise loyalty but do commit to high performance)
 Can be self-directed or value-driven
External stakeholders: do not own the organisation or are the employed by it, but they do have some claim
on or interest in it => they’re vital to organizations
a) Customers are usually the largest group; they make choices among products based on the product
value and how much they pay for it
 Contribution: revenues from purchase of goods / services
 Inducement: quality and price of goods / services

Are satisfied if the price of the product reflects the value that they believe they’re obtaining from it
(price equal to or less than that value)

Impact of digitalization: communities
b) Suppliers provide reliable raw materials and components that allow to reduce uncertainty in production
processes => allow production costs reduction

Direct effect on the efficiency of the firm and indirect effect on the ability to attract customers
(attracted by high-quality products which need high-quality inputs)
 Contribution: high-quality inputs
 Inducement: revenue from purchase of inputs

Impact of digitalization: platforms and crow-sourcing
c) Partners
 Contribution: co-produce, inputs
 Induction: revenue from purchase of inputs, visibility
d) Government
 Contribution: rules governing good business practices
 Induction: fair and free competition

Impact of digitalization: privacy
e) Unions
 Contribution: free and fair collective bargaining
 Induction: equitable share of inducements

Impact of digitalization: gig economy
f) Local communities
 Contribution: social and economic infrastructure
 Induction: revenues, taxes and employment

Impact of digitalization: virtual community
g) General public
 Contribution: customer loyalty and reputation
 Induction: national pride
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
Impact of digitalization: social media
ALLOCATING REWARDS
A major problem: how to allocate the profits earned for being effective among the various stakeholders?

The firm needs to minimally satisfy the expectation of each group

Rewards are fundamental for organisational effectiveness: the inducements offered to stakeholders
now determine their motivation => the form and level of their contributions in the future

Stakeholders’ future investment decisions depend on the return they expect from their investments

Top managers and the board of directors have the power to determine the reward for each group
TOP MANAGERS and ORGANISATIONAL AUTHORITY
Top management = stakeholder group that has the ultimate responsibility for setting company goals and
objectives and for allocating organisational resources to achieve these objectives
Authority = power to hold people accountable for their actions and to make decisions concerning the use of
organisational resources
Hierarchy = vertical ordering of organisational roles according to their relative authority

Legally, shareholders own the company and exercise control
over it through their representatives, the board of directors
=> delegate to managers the legal authority and
responsibility to use the resources

Corporate managers are accountable for the way they use
resources and for how much value the
organisation creates

The board of directors (elected by shareholders) monitors
corporate managers’ activities and rewards them; they have
the legal authority to hire, fire, and discipline managers

The chair of the board of directors is the principal
representative of the shareholders and has the most
authority. Through the executive committee (most important
directors and top managers), the chair monitors and
evaluates corporate managers

The position of the chair and the other directors is one of
trusteeship: they act as trustees to protect the interests of
shareholders and other stakeholders

The salary committee sets the salaries and terms of
employment for corporate managers

Top-management team: group of managers who report to the CEO and COO. Provides direction,
planning, strategy, goals, and policies for the entire organization

General managers and Middle managers : group of managers reporting to the top management team;
divisional or functional managers responsible for implementation and coordination
We can have 2 types of managers:
a) Line managers have direct responsibility for the production processes. Primary activities are:
operations (manufacturing, assembling, …) and marketing & sales (promotions, channel relations)
b) Staff managers are in charge of a specific function – support and service. Supporting activities are:
information technology, administration, HR, organisational design and control, accounting and finance
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The CEO’s (Chief Executive Officer) roles are:

Set the organization’s goals and design its structure => control coordination and motivation in order to
make employees achieve goals

Select key executives to occupy the topmost levels of the managerial hierarchy and determine
organisational culture, which shapes the way members approach problems and make decisions

Determine top management’s rewards and incentives (motivation to be effective)

Control the allocation of scarce resources such as money and decision-making power among the
organization’s functional areas or business divisions
 His actions and reputation have a major impact on inside and outside stakeholders’ views of the
organization and affect the organization’s ability to attract resources from its environment

His personality and charisma can influence an organisation’s ability to obtain money from banks
and shareholders and influence customers’ desire to buy a company’s products
 He reports to the chair of the board but still is the most powerful person since he controls resources;
often, the same person is both CEO and COB (considerable power)
COMPETING GOALS: shareholders vs managers
 Job of managers: maximise shareholder wealth by maximising the organisation’s return on the resources
and capital invested in the business
 Divorce of ownership and control: managers have control over resources, and so over the company
even if shareholders own it => managers may follow goals that promote their own interests
 Managers prefer to pursue low-risk strategies (have no incentive to be entrepreneurial), since their
salaries are closely correlated with organisational size => may not maximise return on invested capital
 Managers tend also to have a short-term approach
AGENCY
Agency theory: understanding the complex authority relationship between top management and the
board of directors
An agency relation arises whenever the principal delegates decision-making authority or control over
resources to the agent
 Shareholders are the principals; members of top management are their agents
Agency problem: a problem in discourage managerial accountability that arises when delegating authority
to managers (if you employ an expert manager, by definition that person must know more than you)

Principals are at an information disadvantage compared with agents => information asymmetry makes
it very difficult for shareholders to judge the effectiveness of top-management actions

The goals and interests of managers and shareholders may diverge => conflict of interests
o
Managers may prefer to look at the short-term dimension, while shareholders might prefer actions
that lead to long-term profitability
Moral hazard problem exists when two conditions hold:
1. The principal finds it very difficult to evaluate how well the agent has performed because the agent has
an information advantage
2. The agent has an incentive to pursue goals and objectives that are different from the principal’s
Self-dealing: conduct of corporate managers who take advantage of their position in an organisation to act
in their own interests, such as taking advantage of opportunities to misappropriate corporate resources
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Solving the agency problem by using governance mechanisms, or forms of control that align interests:
1. The principal role of the board of directors is to monitor top managers’ activities, question their
decision making and strategies, and intervene when necessary
2. Reinforce and develop the organisation’s code of ethics
3. Find the right set of incentives to align the interests of managers and shareholders
The most effective way of aligning interests between management and shareholders is to make managers’
rewards dependent on the outcomes of their decisions, that is, contingent on organisational performance
TOP MANAGERS AND ORGANIZATIONAL ETHICS

Managers should follow ethical guidelines in their decision making when confronted with an ethical
dilemma. Ethics are moral principles that govern individuals’ or groups’ behaviours
Ethical dilemma: experiences when people must decide whether or not they should act in a way
that benefits someone else, even if it harms others and isn’t in their own interest
Moral scruples: thoughts, feelings that tell a person what is right or wrong; are a part of a person’s ethics
 Problem: no absolute or indisputable rules or principles can be developed to decide if an action is
ethical or unethical => depends more on specific attitudes, beliefs, and values
Ethics and the law: how are companies and managers decide what is ethical and so act appropriately
toward other people and groups?

Society as a whole, can make laws that specify what people and organisations can and cannot do

Laws also specify sanctions or punishments

Neither laws nor ethics are fixed principles, which do not change over time: ethics change as time
passes and laws change to reflect the changing ethical beliefs of a society

There are other sources: there can be behaviours that are unethical but legal

Both ethical and legal rules are relative: no absolute or unvarying standards exist to determine how we
should behave, and people are caught up in moral dilemmas all the time
Ethics:

Help people to determine moral responses to situations in which the best course of action is unclear

Guide managers in their decisions about what to do in various situations

Help managers decide how best to respond to the interests of various organisational stakeholders
Managers might be in trouble when they have to balance their interests and the interests of the
organisation against the interests of other stakeholders’ group
WHAT DETERMINES WHETHER A DECISION IS ETHICAL?
1. Utilitarian Model: an ethical decision is one that produces the greatest good for the greatest number of
people

Managerial implication: managers should compare different actions based on the benefits and costs
of these for different stakeholder groups and choose the greater benefit

How do managers decide on the relative importance of each stakeholder group?
2. Moral Rights Model: an ethical decision is one that best maintains and protects the fundamental rights
and privileges of the people affected by it

Managerial implication: managers should compare different actions based on the effect of these on
stakeholders’ rights and choose the ones that best protect stakeholders’ rights
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
How do managers decide on the relative importance of these fundamental rights?
3. Justice Model: an ethical decision is one that distributes benefits and harms among stakeholders in a
fair, equitable, or impartial way

Managerial implication: managers should compare different actions based on the degree to which
these will promote a fair distribution of outcomes

How can managers be impartial and do not discriminate against people’s appearance or behaviour?
A simple approach to ethical dilemma is that if a manager can answer “yes” to each of these questions,
then the decision is acceptable:
1. Does my decision fall within the accepted values or standards that typically apply in the organisational
environment?
2. Am I willing to see the decision communicated to all stakeholders affected by it—for example, by having
it reported in newspapers or on television?
3. Would the people with whom I have a significant personal relationship, such as family members,
friends, or even managers in other organisations, approve of the decision?
An ethical decision is a decision that typical stakeholders would find acceptable because it aids
stakeholders, the organisation, or society. An unethical decision is a decision a manager would prefer to
hide from other people.
ETHICS SOURCES
1. Social Ethics

Codified in a society’s legal system, in its customs and practices, and in the unwritten norms and
values that people use for social interaction

Many are followed automatically by people because they have internalised society’s values

In general, the poorer a country, the more likely are employees to be treated with little regard

Example: whether it is ethical to use child labour or not
2. Professional Ethics

The moral rules and values that a group of people uses to control the way they perform a task or
use resources

In an organisation there are many groups of employees whose behaviour is governed by
professional ethics: lawyers, researchers, and accountants

On the other hand, customers often expect certain kinds of “professionals”
3. Individual Ethics

The personal and moral standards used by individuals to structure their social interactions

Many behaviours that one person may find unethical another person may find ethical
These three sources of ethics collectively influence the rules / standards used by an organisation and its
members in their dealings with other stakeholders’ groups
Each organisation has a set of ethics; some of these are unique to an organisation and are an important
aspect of its culture; companies, collectively, are expected to follow ethical and legal rules
WHY DO ETHICAL RULES DEVELOP?
1. “Tragedy of the commons” problem: it regards the self-interest issue (slow down the pursuit of it)
 When common land exists, it is rational for every person to maximise their use of it because it is a
free resource. So, everybody feed their cows on the land to promote their individual interests
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
In general: left to their own devices, people pursue their own goals at the expense of collective goals

Ethical laws and rules emerge to control self-interested behaviour by individuals and organisations
that threatens society’s collective interests

Ethical issues are complex: the problem is to distribute the helps and harms between different
stakeholders => try to follow the moral principles that seem to produce the most good

Ethical rules protect people: without them, free and fair competition degenerates into conflict and
warfare, and everybody loses
2. Transaction costs

Ethical rules reduce the costs people have bear to decide what is right or appropriate => reduce
transaction costs between people (monitoring, negotiating, and enforcing agreements)

Transaction costs can be enormous when strangers meet to engage in business
3. Reputation effects: behaviour that follows accepted ethical rules confers a reputation effect on an
individual or an organisation that also reduces transaction costs

If an organisation always follows the rules and is known for its ethical business practices it will gain
reputation, which is valuable because people will want to deal with it

Unethical organisations over time are penalised as people refuse to deal with them

One intangible reward that comes from behaving ethically is feeling good about one’s behaviour
and enjoying the good conscience that comes with it

Personal reputation is the outcome of behaving ethically, and the esteem or respect of one’s peers
has always been a reward that people desire
More value is created in societies where people follow ethical rules, and where criminal and unethical
behaviour are prevented by law and by custom and practice from emerging
WHY DOES UNETHICAL BEHAVIOUR OCCUR?
a) Personal Ethics: what you identify as right/wrong depends on the context in which you grow (as people
mature as individuals in a society)

Ethics are obtained from such sources as family and friends, places of worship, education,
professional training, organisations of all kinds
b) Self Interest: weighting our personal interests against the effects of our actions on others

People who realise they have most at stake in a career sense or a monetary sense are the ones
most likely to act unethically

Organisations that are doing badly in an economic sense and are struggling to survive are the ones
most likely to commit unethical and illegal acts such as collusion, price fixing, or bribery
c) External pressures increase the likelihood to behave unethically

Temptation for firms to engage collectively in unethical and illegal anti-competitive behaviour =>
acting together to raise prices in order to increase profits
Social costs of unethical behaviour over the long run: mismanaged, top-heavy, bureaucratised organisations
become less innovative, spend less on R&D and more on advertising or managerial salaries
CREATING AN ETHICAL ORGANISATION
Designing an ethical structure and culture

An organisation can encourage people to act ethically by putting in place incentives for ethical
behaviour and disincentives to punish those who behave unethically
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
Ethical culture of the organisation is established by the board and top managers (creation of authority
relationships that promote ethical behaviour); leaders should be role models

An organisation often uses its mission statement to guide employees in making ethical decisions

Build company goals/missions including ethics and set standards of conduct

Make whistle-blowing an acceptable and rewarded activity: it occurs when an employee informs an
outside person or agency about an organisation’s illegal or immoral behaviour
 Procedures that allow subordinates access to upper-level managers to voice concerns

Use training as a tool (Ethics Officer and Committees training)
 The position of ethics officer can be established to investigate claims of unethical behaviour, and
ethics committees can make formal ethical judgments

Create an ethical corporate culture with the commitment at all levels of the organisation
3.0: Basic challenges of organisational design
DIFFERENTIATION = process by which an organisation allocates people and resources to organisational tasks
and establishes the task and authority relationships that allow the organisation to achieve its goals

Process of establishing and controlling the division of labour (or degree of specialisation) and the
distribution of authority in the organisation

As the volume of business grows, differentiation changes:
a) In simple organisations, differentiation is low because the division labour is low. One person or few
people perform all organisational tasks, so there are few problems with coordination
b) In complex organisations, both division of labour and differentiation are high
 As the volume grows, the owners need to increase the division of labour (differentiate)
Horizontal differentiation

The organisational chat horizontally differentiates roles according to their main task responsibilities

Refers to the way an organisation groups organisational tasks into roles and roles into subunits
(functions and divisions)

Establishes the division of labour that enables people to become more specialised and productive

Organisational role is the set of task-related behaviours required of a person by his or her position in an
organisation

Function is a subunit composed of a group of people, working together, who possess similar skills or use
the same kind of knowledge, tools or techniques to perform their jobs. (Specialisation on INPUT)

Division is a subunit that consists of a collection of functions or departments that share responsibility for
producing a particular good or service. (Specialisation on OUTPUT)
The number of different functions and divisions is a measure of the organisation’s complexity — its degree
of differentiation. Differentiation increases an organisation’s control over its activities and allows the
organisation to accomplish its tasks more effectively.
Vertical differentiation



The organisation chart vertically differentiates organisational roles based on how much authority
The classification of people according to their relative authority and rank is called hierarchy
Authority = power to hold people accountable for their actions and to make decisions about how to
invest and use organisational resources.
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
When an individual understands his responsibilities and what a superior can require for his role, the
result is organisational control (ability to coordinate and motivate)

Managers designing an organisation have to make decisions about how much vertically differentiate =
how many levels should there be from top to bottom

Vertical differentiation refers to the way an organisation designs its hierarchy of authority and creates
reporting relationships to link organisational roles and subunits

Establishes the distribution of authority between levels to give the organisation more control over its
activities and increase its ability to create value
COORDINATION

Subunit orientation = tendency to view one’s role in the organisation strictly from the perspective of
the time frame, goals, and interpersonal orientations of one’s subunit


Interdependence = form of relationship among units to accomplish a task
Thompson interdependence = work cannot be successfully completed by
allowing each person or department to operate independently
a)
Pooled interdependence (bank agencies): low need of horizontal
communication and low need to locate units closely; coordination
required involves standardization, rules, procedures
b)
Sequential interdependence (assembly line): medium need of
horizontal communication and medium need to locate units closely;
coordination required involves plans and programs
c)
Reciprocal interdependence (ER): high need of horizontal
communication and high need to locate units closely; coordination required involves mutual
adjustment and teamwork
Coordination mechanisms: authority, standardization, relation-based mechanisms
1. Authority: power to hold people accountable for their actions and to make decisions about the use of
resources => balancing centralization & decentralization

The hierarchy defines the area of each person’s authority within the organisation

Many complain that with a hierarchy, employees are constantly looking to their superiors for
decisions

As responsibility and risk-taking decline so does performance, because its members do not take
advantage of new opportunities for using its core competences

When nobody is willing to take responsibility, decision making becomes slow and the organisation
becomes inflexible (unable to change and adapt)
a) Centralized = the authority to make important decisions is retained by managers at the top of the
hierarchy

Adv: hierarchy defines the area of each person’s authority and keeps the organisation focused
on its goals (lets top managers coordinate activities)

Dis: when top managers become overloaded and immersed in operational decision-making
about day-to-day resource issues (slow decision-making)
b) Decentralized = the authority to make important decision about organisational resources and to
initiate new projects is delegated to managers at all levels in the hierarchy
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
Adv: promotes flexibility and responsiveness by allowing lower-level managers to make on-the
spot decisions. Managers can demonstrate their personal skills (higher motivation)

Dis: planning and coordination are more difficult => may lead to losing control of the decisionmaking process
 If authority is too decentralised, managers have so much freedom that they can pursue their own
functional goals and objectives at the expense of organisational goals
 If authority is too centralised, managers lower down in the hierarchy become afraid to make new
moves and lack the freedom to respond to problems as they arise in their own departments
 Should find a balance between the two, so that lower managers are allowed to make important
decisions, and top managers focus on long-term strategic decision making
 The result is a good balance between long-term strategy making and short-term flexibility and
innovation
2. Standardization (rules / objectives / culture): the conformity to specific models, defined by established
a) Rules: formal written statements that specify the appropriate means for reaching designed goals
b) Norms: standards or styles of behaviour that are typical or representative of a group of people and
which regulate and govern them

They are important forms of behaviour control in organisations => specify how employees are to
perform their roles, and set forth the tasks and responsibilities associated with each role

Its advantages are efficiency and predictability (people’s actions routine)

Many complain that employees tend to follow written and unwritten guidelines too rigidly instead
of adapting them to the needs of a particular situation => decision making is inflexible

Should find the right balance between standardisation and mutual adjustment
Mutual adjustment: the evolving process through which people use their current bet judgement of
events rather than standardised rules to address problems, guide decision making and promote
coordination
 The right balance makes many actions predictable so that ongoing organisational tasks and goals
are achieved, yet it gives employees the freedom to behave flexibly so they can respond to new and
changing situations creatively

A high level of formalisation typically implies centralisation of authority

A low level of formalisation implies that coordination is the product of mutual adjustment among
people and that decision making is a dynamic process; it typically implies decentralisation
Norms and Socialization

Socialization = process by which organisational members learn the norms of the organisation and
internalize these unwritten rules of conduct

Members of the group follow a norm because it is a generally agreed upon standard for behaviour

Disadvantages of norms: many norms promote organisational effectiveness and many do not

Inertia - norms and change: when rules are internalised, they become part of a person’s
psychological makeup so that external rules become internalised norms => it is very difficult for
people to break a familiar rule and follow a new one
3. Relation-based mechanisms for integration:

Integration = process of coordinating tasks, functions and divisions, so that they work together and
not cross purposes
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
Managers must carefully divide and allocate authority within a function and between one function
and others to promote coordination
a) Direct contact between people in different subunits is an integration mechanism; there are often
more problems associated with using it effectively than with the hierarchy of authority

Establishing personal relationships and professional contacts between people at all levels is
important to overcome the problems that arise because subunit orientations differ

Managers from different functions who have the ability to make direct contact with one another
can work together to solve common problem

If disputes still occur, however, it is important for both parties to be able to appeal to a common
superior
b) Liaison role: a specific manager is given responsibility for coordinating with managers from other
subunits on behalf of his or her subunits

The people who hold these connecting, or liaison, roles are able to develop in-depth relations
with people in other subunits => helps overcome barriers between subunits

Over time, they can become increasingly flexible in accommodating other subunits’ requests
c) Task force: managers meet temporary committees to coordinate cross-functional activities

As an organisation increases in size and complexity, more than two subunits may need to work
together to solve common problems =>the task force is set up to handle a specific problem

One or a few members of each function join a task force that meets regularly until a solution to
the problem is found

Task force members are then responsible for taking the solution back to their functions to gain
their input and approval

To increase the effectiveness of task forces, a senior manager who is not a member of any of
the functions involved usually chairs the meetings
d) Teams: managers meet regularly in permeant committees to coordinate activities

When the issue a task force is dealing with becomes an ongoing strategic or administrative
issue, the task force becomes permanent => a team is a permanent task force or committee
e) Integrating role: a new role is established to coordinate the activities of two or more functions or
divisions

As organisations become large and complex, communication barriers between functions and
divisions are likely to increase.

An integrating role is a full-time managerial position established specifically to improve
communication between divisions.

Its purpose is to promote the sharing of information and knowledge to better pursue
organisational goals such as product innovation, increased flexibility, improved customer service

People in integrating roles are often senior managers who have decided to give up authority in
a specific function and focus on company-wide integration
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THE CONTINGENCY APPROACH
Contingency Theory: in order to manage its environment effectively, an organisation should design its
structure to fit with the environment in which the organisation operates. In other words, the firm
must design its internal structure to control the external environment.

The contingencies or sources of uncertainty facing an organisation shape the organisation’s design

A functional structure emerges, in part, to deal with the complexity of environmental demands and
respond to various contingencies

The contingency approach to organisational design tailors of organisational structure to the sources of
uncertainty facing an organisation
 A poor fit between structure and environment leads to failure
 A close fit leads to success
MECHANISTIC vs ORGANIC STRUCTURES
Mechanistic structures are designed to induce people to behave in predictable, accountable ways. Decisionmaking authority is centralised, subordinates are closely supervised, and information flows mainly in a
vertical direction down a clearly defined hierarchy

Individual specialisation: employees work separately and specialise in one clearly defined task

Simple integrating mechanisms: hierarchy of authority is clearly defined and is the major integrating
mechanism

Centralisation: authority to control tasks is kept at the top of the organisation. Most communication is
vertical

Standardisation: extensive use is made of rules and SOPs to coordinate tasks, and work process is
predictable
Organic structures promote flexibility, so people initiate change and can adapt quickly to it.

Joint specialisation: employees work together and coordinate their actions to find the best way of
performing a task

Complex integrating mechanisms: task forces and teams are the major integrating mechanism

Decentralisation: authority to control tasks is delegated to people at all levels in the organisation. Most
communication is lateral

Mutual adjustment: extended use is made of face-to-face to coordinate tasks and work process is
relatively unpredictable.
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4.0: Basic challenges of organisational design – Authority and Control
Hierarchy begins to emerge when managers find it more and more difficult to coordinate and motivate
employees effectively.

Directives and control from one hierarchical level to another one

Directly affects the behaviour of organisational actors

Control: question, probe, consult with subordinates about the situation to ensure performance level and
rules are followed

Motivation: on the job learning and skills development; promote behaviours that increase
effectiveness; create person-organisation bond

Key decisions to control and motivate a firm are:
a) Increase the number of managers to minor, evaluate and reward employees
b) Increase the number of managerial levels so that the hierarchy becomes taller over time
 The result is that vertical differentiation increases and this gives the organisation direct face-to-face
control over its members—managers personally control their subordinates (direct supervision)
As the organisation grows:

Employees increase in number and begin to specialise, performing
widely different kinds of tasks

Level of differentiation increases and this makes coordinating
employees’ activities more difficult

Division of labour and specialisation produce motivational problems

The increase in the size of the managerial component in an
organisation is less than proportional to the increase in size of the
organisation as it grows
Span of control

Organisations that become too tall inevitably experience serious communications and coordination
problems (problems of controlling newly hired employees)
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
One way is to increase its managers’ span of control, which is the number of subordinates a manager
directly manages
Section A shows an organisation with a CEO, 5 managers, and
10 employees; each manager supervises 2 people.
Section B shows an organisation with a CEO, 2 managers, and
10 employees, but Manager A supervises 2 people, and
Manager B supervises 8 ppl.
The main determinants of the span of control are task complexity and task interdependence

The single most important factor limiting the managerial span of
control is the inability to exercise adequate supervision over the
activities of subordinates as they grow in number

An arithmetic increase in the number of subordinates is followed
by an exponential increase in the number of subordinate
relationships that a manger has to supervise
Disadvantages of hierarchical levels
1. Communication: slowdown, distortion, manipulation
2. Motivation
3. Opportunism
4. Bureaucratic costs
The only reason why an organization should choose a tall structure over a flat structure is when it needs a
high level of direct control and personal supervision over subordinates
a) Tall organisation: the hierarchy has many levels to the size of the organisation
b) Flat organisation: has few levels in its hierarchy relative to its size
Most organisation have a pyramid-like structure (deceasing numbers of managers at each level), rather than
a bloated structure (increasing number of managers at each level)
1. Communication problems
a. With too many hierarchical levels, top-bottom communication takes longer. The slowdown hurts
the performance of organisations that need to respond quickly to customers’ needs or competitors
b. Distortion. Information becomes distorted as it flows up and down the hierarchy through many
levels of management; people interpret messages according to their own needs and interests
c. Managers may deliberately manipulate information to promote their own interests; they can lead
others to make certain kinds of decisions by selecting information
2. Motivation problems

As the numbers of levels increases, there is a decrease in the managers’ authority and
responsibility at low levels

Managers of a flat organisation possess relatively more authority and responsibility than those of a
tall organisation => they are more motivated to perform their organisational roles
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
With many levels it’s easier for managers to pass the buck and evade responsibility by shifting it to
the manager above; this worsens the problem of slow decision making and poor communication
3. Bureaucratic costs

The greater the number of managers and hierarchical levels, the greater the bureaucratic costs
(associated with running and operating an organisation)

The terms restructuring and downsizing are used to describe the process by which managers
streamline hierarchies and lay off managers and workers to reduce bureaucratic costs

The ideal number of hierarchical levels: the minimum chain of command

Managers should base the decision to employ an extra manager on the difference between the
value added by the last manager employed and the cost of the last manager employed.

Well-managed organisations use rules which prompts upper-level managers to evaluate whether
another lower-level manager or another hierarchical level is really necessary

According to the principle of minimum chain of command, each function chooses the minimum
number of hierarchical levels it needs to operate effectively and achieve its goals

Fewer bureaucratic costs for flat organisations
ORGANISATIONAL DESIGN DECISIONS
INNFORM survey instrument: indicators of contemporary change

Changing structure: removal of layers and a more flexible,
project-based forms of organisation (more horizontal character)

Changing processes: deliberate cultivation or cross-unit teams
and cross-unit communications

Changing boundaries: rewarding the boundaries around what
constitutes or supports the true competitive advantage
Delayering (removing layers) has pros and cons:

Cons: demotivation, risk of low coordination, conflicts

Pros: improving communication, speeding up the decision -making processes, increasing operators’
participation, reduction of bureaucratic costs
The Lean Production (Toyota production system) combines the best features of craft production (highquality, individualized, custom-made products) and mass production (manufacturing at great quantities to
satisfy broad consumer needs at lower prices)
Factors affecting the Hierarchy (the level of Vertical Differentiation) are:
a) Level of decentralisation: decentralisation reduces the amount of direct supervision required (less
communication and coordination problems) => allows to be flexible in responding to change
b) Level of standardisation: the more standardisation, the less the need to rely on direct supervision
(makes actions predictable) => managers’ span of control can be increased (norms control behaviour)
c) Level of horizontal differentiation: it leads to functions/divisions and increases vertical differentiation
(many subunits’ hierarchies), but still the organisation remains flat, avoiding tall hierarchies’ problems
d) Strength of the informal ties and relationships that exist between organized members
BUREAUCRACY (Max Weber)

A bureaucracy is a form of organisational structure in which people can be held accountable for their
actions because they are required to act in accordance with rules and standard operating procedures
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1. It is founded on the concept of rational-legal authority = the authority a person possesses because of
his or her position in an organisation
2. Organizational roles are held on the basis of technical competence

Power is owed to a person because of the level of authority and responsibility associated with the
organisational position the person occupies
3. A role’s task responsibility and decision-making authority and its relationship to other roles should be
clearly specified
4. The organization of roles is such that each lower office in the hierarchy is under the control and
supervision of a higher office
5. Rules, standard operating procedures, and norms should be used to control the behaviour and the
relationship between roles
6. Administrative acts, decisions, and rules should be formulated and put in writing

In theory, a bureaucracy is impersonal; people’s attitudes and beliefs play no part in determining the
way a bureaucracy operates (otherwise, effectiveness would suffer)

Weber’s first two principles establish the organisational role as the basic component of bureaucracy

The next four principles specify how the process of differentiation should be controlled
1. Weber’s first principle indicates that choices affecting the design of an organisation’s hierarchy should
be based on the needs of the task, not on the needs of the person performing the task

For bureaucracy to be effective, the distinction between positions and the people who hold them
must be clear: people are appointed to position, they do not own them
2. The second principle points out that, in a well-designed hierarchy, people occupy roles because they
can do the job, not because of who they are or who they know

People must always remember that holding a role in a legal sense means their job is to use the
organisation’s resources wisely for the benefit of all stakeholders, not just for personal gain
3. According to the third principle, a clear and consistent pattern of vertical differentiation (decisionmaking authority) and horizontal differentiation (task responsibility) is the foundation for effectiveness

This specification creates a stable system in which each person has a clear expectation and
understanding of the rights and responsibilities attached to other organisational roles

People also know how to deal with their peers — people who are at the same level in the
organisation as they are and over whom they have no authority, and vice versa
4. The fourth principle focuses on the hierarchical pattern of vertical differentiation, which makes clear
that a person at a low level in the hierarchy can go to someone at a higher level to solve conflicts
5. The fifth principle points out the importance of rules, SOPs, and norms as they provide behavioural
guidelines that can increase efficiency because they specify the best way to accomplish a task

Over time, these guidelines should change as improved ways of doing things are discovered; the
goal is constant progress to meeting organisational goals.

Rules, SOPs, and norms clarify people’s expectations about one another and prevent
misunderstandings over responsibility or the use of power.

Rules and norms enhance the integration and coordination of roles at different levels
6. The sixth principle states the importance of “written down” rules and decisions, since they become
official guides to the way the organisation works
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
When an employee leaves an organisation, an indication of what that person did is part of the
organisation’s written records => a bureaucratic structure provides an organisation with memory

Written records also ensure that organisational history cannot be altered
Advantages of bureaucracy

Efficient control and coordination between different levels & lower transaction costs, since individuals
can be held accountable for what they do and their behaviours are regulated by rules, SOPs and norms

Clear specification of vertical authority and horizontal task relationships => no question about each
person’s role

Separates the position from the person

Stability for a long run view of the organization

Reputation
Disadvantages of bureaucracy

Growth of bureaucracy: managers may fail to control the development of the hierarchy, causing the
organisation to become very tall, centralised, and inflexible (low decision-making, more costs)

Overreliance on rules – unresponsiveness to customers’ needs (cause – effect) because workers may
focus just on protecting their personal position (by following rules)

Lower motivation and commitment

Rigidity and inertia
MANAGEMENT BY OBJECTIVES
It’s the system of evaluating subordinates on their ability to achieve specific organisational goals or
performance standards and to meet operating budgets

It is an effort to be fair and reasonable, to predict performance and to provide individuals with an
opportunity to be self-motivating by setting their own objectives

Objectives tend to grow from year to year and create stress

With pre-established goals, little weight can be given to the areas of discretion open to the individual.

No objectives will have significant incentive power if they are forced choices unrelated to a person’s
underlying dreams, wishes and personal aspirations (powerful driving forces)

Managers and their subordinates together determine the subordinates’ goals

An important characteristic of MBO is its participatory nature (this strengthens commitment)
Most organisations use MBO because it is pointless to establish goals and then fail to evaluate them
a) MBO starts when top managers establish overall organisational objectives, such as specific financial
performance targets
b) Objective setting cascades down throughout the organisation as managers at the divisional
and functional levels set their objectives to achieve the corporate ones
c) Finally, first-level managers and workers jointly set objectives that will contribute to achieving functional
goals

Managers and their subordinates periodically review the subordinates’ progress toward meeting goals

Once specific objectives have been agreed, managers are accountable for meeting those objectives
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
Normally, salary raises and promotions are linked to the goal-setting process, and managers who
achieve their goals receive greater rewards than those who fall short
In the companies that have decentralised responsibility for the production of goods and services to teams,
particularly cross-functional teams, MBO works differently

Managers ask each team to develop a set of goals and performance targets which are consistent with
organisational objectives

Managers then negotiate with each team to establish its final goals and the budget the team will need
to achieve them

The reward system is linked to team performance, not to the performance of any one team member
DECENTRALIZATION TREND
An important trend, which is accelerating as the result of advances in IT, is the increasing use of empowered
workers, self-managed teams, cross-functional teams, and virtual teams

IT provides people with more of the information and knowledge they need to perform their roles

IT has led to a decentralisation of authority in organisations and the increasing use of teams

Decentralising authority to lower-level employees and placing them in teams reduces the need for
direct, personal supervision by managers, and organisations become flatter
Empowerment = the process of giving employees throughout an organisation the authority to make
important decisions and to be responsible for their outcomes
Self-managed teams = work groups consisting of people who are jointly responsible for ensuring that the
team accomplishes its goals and who are empowered to lead themselves
Cross functional teams = formal work groups of employees from across different functions that are
empowered to direct and coordinate the value-creation activities necessary to complete different projects
 The introduction of digital tools has enabled the organisational structure to become not only flatter and
decentralised, but also dispersed
Virtual teams = interdependent groups of individuals that work across time, space and organisational
boundaries with communication links that are heavily dependent upon advanced information technologies

Advantages:
 Reduce costs
 Recruiting talent despite location
 Creativity and innovation due to heterogeneity

Challenges:
 Geographical and organisational distance
 Communication
 Heterogeneity
 Monitoring
Remote work is another challenge for direct supervision and smart working could lead to drawbacks in
productivity and creativity (especially for the youngest)
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AGILE ORGANIZATIONS
The term agile comes from software development, created in 2001 in Utah. The four main laws are:
a) Individuals and interactions over processes and tools - people as the main characters of development
process
b) Working software over comprehensive documentation - streamlining documentation to not slow down
the developer
c) Customer collaboration over contract negotiation - the customer is engaged and collaborates
throughout the development process making easier to meet his needs
d) Responding to change over following a plan - continued development by adapting to consumers’ needs
and providing additional value
Agile teams work differently from chain-of-command bureaucracies
 Are largely self-governing: senior leaders tell team members where to innovate but not how
 The teams work closely with customers, both external and internal. Ideally, this puts responsibility for
innovation in the hands of those who are closest to customers
 It reduces layers of control and approval, speeding up work and increasing the team’s motivation
 It frees up senior leaders to do what only can do:
a) Create and communicate long-term visions
b) Set and sequence strategic priorities
c) Build the organisational capabilities to achieve those goals
When to use agile, based on the conditions (market environment, customer involvement, innovation type):
5.0: Organisational Design Structure
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DESIGNING ORGANISATIONAL STRUCTURE: SPECIALISATION and COORDINATION
Types of ideal structures are N, but organisational structures are infinite. Each type has strengths &
weaknesses
SIMPLE STRUCTURES are of two types:
1. Entrepreneurial structure: the entrepreneur has maximum authority, directly controls employees
and external stakeholders and directs strategically the business

No intermediate hierarchal levels

Limited specialisation

Limited autonomy, mainly based on direct supervisions
Advantages:

Faster decision making and reactiveness to change because power is centralised and the
organisation is flat

Flexibility: low specialisation, tasks are interchangeable
Disadvantages:

Strategic vs Operational decisions and overload

Highly dependent from competencies, ability and health of one single person
2. Artisan structure: one person at the top; activities require widespread competencies and greater
operational discretion

Operational group has specific technical skills and it is often directly in contact

The head of the organisation cannot directly control operations

Coordination is based on standardisation of knowledge
FUNCTIONAL STRUCTURE
Definition: it is a design that groups people together on the basis of their common expertise and
experience or because they use the same resources. It is a foundation of a horizontal differentiation.

As size grows, they develop not only more functions but also more specialization within each function

An organisation groups different task into serape functions to increase the effectiveness with which it
achieves its principal goal: providing customers with high quality products at competitive prices

As functions specialise, employees’ skills and abilities improve and the core competences that give an
organisation a competitive advantage emerge

Provides people with the opportunities to learn from one another and become more specialised and
productive.

All organisations become divided into independent functions because this promotes specialisation and
the division of labour, a major sources of increased effectiveness
Advantages:
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1. Economies of specialisation: people with skills in common can learn the most efficient techniques for
performing a task or the best way to solve problems, from one another
2. Peers’ supervision: in addition to functional managers, peers in the same function can monitor and
supervise one another and keep work activities on track
3. Specialised communication and culture: develop norms and values that allow them to become more
effective at what they do
Problems:

How to keep control of increasingly complex actives as it grows and differentiates => control problems
as it produces more, becomes geographically diverse, or faces increasing competition (causes are
change unit boundaries and more complex coordination)
a) Communication problems => each function has its own hierarchy and, as functions develop, they
become increasingly distant from one another and develop different subunit orientations that cause
communication problems
b) Measurement problems => as organisations grow and complexity increases, the information needed to
measure the contribution of functions to overall profitability is often difficult to obtain
c) Location problems => as a company grows, it may need to set up shop and establish manufacturing or
sales facilities in different geographic regions to serve customers better
 Geographic spread => the firm must develop a control & information system that balances
centralization of decision-making authority with decentralization of authority to regional operations
d) Customer problems => as quantity and quality increase, more and more customers are attracted, with
different kinds of needs; functions have little opportunity to specialise in particular needs
e) Strategic problems => top managers may be forced to spend so much time finding solutions to everyday
coordination problems that they have no time to address the longer-term strategic problems
Solution to control problems is redesigning the structure to increase integration between functions
DIVISIONAL STRUCTURE
If an organisation:
a) Limits itself to produce a small number of similar products
b) Produces those products in one or few location
c) Sells them to only one major type of customer
Managers are able to solve many of the control problems associate with functional structure. However, as
organisations grow, they begin to produce more products that are often very different from one another. =>
need a structure that simultaneously:
1. Increase managers’ control of its different individual subunits so that subunits can better meet
product and customer needs
2. Allow managers to control and integrate the operation of the whole company to ensure all its
subunits are setting organisational goals
Divisional structure: functions are grouped together according to the specific demands of products,
markets or customers

Focus on the outside products and services that are produces, or on the customer

The main goal behind the divisional structure is to create smaller, more manageable subunits

Based on specialization on output – product, geographic area, market
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
Division managers are responsible of P&L (profit and loss)

An executive level oversees subunits which are relatively independent and have limits on their contact
with headquarters

Each SBU (product business, customer business, country business) is organized as a simple or functional
configuration within the subunit

Corporate functions and divisions: centralization vs decentralization, efficiency vs responsiveness,
coordination vs local adaption
Advantages:
1. Aims to be effective with its external focus on the product, customer or region
2. It is more market-responsive than the functional configuration. Because the divisions are relative
autonomous, they can:
 Make decisions on their own
 Meet the needs of the marketplace in creative ways
 Thus, foster opportunity for growth
Disadvantage:

Each division is relatively independent of the other in its operations and markets => this configuration
does not handle interdivisional dependencies well
DIVISIONAL STRUCTURE ONE: three kinds of Product Structure

The control problem is due to the number and complexity of products => the organisation divides
its activities by products

A product structure is a divisional structure in which products are grouped into separate divisions,
according to their similarities or differences

In general, an organisation has two choices:
a) Centralise the support function at the top of the organisation so one set of support function
services all the different product divisions
b) Create multiple sets of support function, one for each product divisions
1. Product division structure
 An organisation whose products are broadly similar and
aimed at the same market will choose to centralise support
services and use the product division structure
 A centralised set of support functions services the needs of
a number of different product lines
 Each product division manager (PDM) has responsibility for
coordinating with each support function
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I can have specialised teams within the marketing function, but they are still centralised and working in
same unit => easier to share knowledge & information
2. Multidivisional structure
 An organisation whose products are very different and that
operates in several different markets or industries will
choose multidivisional structure
 Support functions are placed in self-contained divisions;
each division is independent and has its own set of support
functions
 Headquarters oversee the activities of the divisional
managers; there are 3 levels of management:
1. Corporate
2. Divisional
3. Functional
The first innovation is the independence of each division
o
In a multidivisional structure, each division is indecent and self-contained (= has its own set of
support functions and controls its own value-creation activities) => horizontal differentiation
o
In a product division structure, divisions share the services of a set of centralised functions
The second innovation is the corporate headquarters staff, composed by corporate managers who are
responsible for overseeing the activities of the divisional mangers heading up the different divisions
o
Because corporate managers now form an additional level in the hierarchy, vertical differentiation
has increased, providing more coordination and control
o
Compared to a functional or a product division structure, a multidivisional structure provides
additional differentiation and integration, which facilitate control of more complex activities
Advantages of multidivisional structure:
 Increased organisational effectiveness: there is a clear division of labour between corporate and
divisional managers => increases the organisational effectiveness

Divisional managers are responsible for the day-to-day operation of their respective decisions and
for costumes divisional activities to the need of customers

Corporate managers are responsible for the long-term planning for the corporation as a whole
 Increased control: corporate managers monitor the performance of divisional managers and this
encourages the stronger pursuit of internal organisational efficiency
 Profitable growth: when each division is its own profit centre (= when its individual profitability can be
clearly evaluated), headquarters can identify the divisions in which an investment of capital will yield
the highest returns
 Internal labour market: the most able divisional managers are promoted to become corporate
managers => divisional managers have an incentive to perform well (increased motivation)
Disadvantages of multidivisional structure:
 Managing the corporate-divisional relationship => the central management problem is how much
authority to centralise at the corporate level and how much to decentralise to the divisions

On one hand, each division is closest to its particular operating environment and is in the best
position to develop plans to increase its own effectiveness, so decentralisation is logical
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On the other hand, headquarters’ role is to adopt the long-term view and to tailor divisional
activities to the needs of the whole organisation, so centralisation has advantages too

Too much centralisation can straitjacket divisional managers; they lose control of decision making
and the result can be poor performance

Too much decentralisation can result in giving divisional managers so much freedom that they slack
off and fail to control their division’s costs
 Coordination problems between divisions

Measures of effectiveness such as ROI can be used to compare performance, and headquarters can
allocate different capital to the divisions

Divisions may begin to compete for resources, and rivalry between them may prevent them from
cooperating, at the expenses of organisational performance
 Transfer pricing = price at which one division sells a product or information about innovations to
another division

To maximise its own ROI, one division will want a high transfer price, but that will penalise the other
division, which is, after all, part of the same organisation

Thus, as each division pursues its own goals, coordination problems can emerge and must be
managed by the corporate center

Mechanisms like integrating roles and departments are important in promoting cooperation
 Bureaucratic costs

Multidivisional structures are very expensive to operate; each division has a full complement of
support functions, including R&D => extensive duplication of activities plus costs of corporate
headquarters managers

If the benefits relative to the costs fall, the company should move to reduce the size of corporate
headquarters, the number of divisions, or the costs of its support functions
 Communication problems arise in tall hierarchies, particularly the distortion of information

Multidivisional structures because they tend to be the tallest of all structures

The head of a division may deliberately disguise falling divisional performance to receive larger
capital allocations

It may take so long for headquarters to make decisions and transmit them to divisions that
responses to competitors are too slow

The more centralised an organisation, the more of a problem communication will be
3. Product team structure

An organisation whose products are very complex
technologically or whose characteristics change rapidly to
suit changing customer needs will choose a product team
structure

It is a divisional structure in which specialist from the
support functions are combined into product
development items that specialise in the needs of particular
kinds of product

Each team is a self-contained division headed by a product
team manager, who supervises the operational activities
associated with developing and manufacturing the product
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The product teams focus on the needs of one product (or client) or a few related products, and they owe
their allegiance not to their functions but to the product team they join

The vice presidents of the functions, at the top of the organisation, retain overall functional control, but
decision-making authority for each product is decentralised to the team

It is more decentralised than a functional structure or a product division structure

Specialists are permitted to make on-the-spot decisions important for service organisations

Integration is high because each team becomes responsible for all aspects of its operations;
collaboration is close and involvement is high. This allows quick decision-making and respond to change

+ economies of specialization, - costs, + fast decision-making
Product structures increases horizontal differentiation and vertical differentiation (which separates
managers into corporate level, division-level, and function-level managers).
MULTI-BUSINESS companies (like Sony) are made up of different core sectors. In the example of Sony:
DIVISIONAL STRUCTURE TWO: Geographic Structure

The organisation decides its activities by region - uses geographic structure => when control problems
arise as a function of geography

It is a divisional structure in which divisions are organised according to the requirements of the different
locations in which an organisation operates

As an organisation grows, it often develops a national customer base; as it spreads into different regions
of a country, it needs to align its core competences with the needs of different customers

Allows some functions to be centralised at one headquarters location and others to be decentralised to
a regional level
DIVISIONAL STRUCTURE THREE: Market Structure

The grouping of activities by product or geography
makes the product or region the center of attention

In contrast, a market structure aligns functional skills
and competences with the product needs of different
customer groups

Marketing, not manufacturing, determines how
managers decide how to group activities into divisions
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Each customer division has a different marketing focus, and its job is to develop products to suit the
needs of its specific customers

Each division makes use of centralised support functions

Engineering tailors products to suit the various needs of each division, and manufacturing follows each
division’s specifications

It focuses the activities of the whole organisation on the needs of the customer => the organisation can
quickly sense changes in its market
MATRIX STRUCTURE
In a matrix structure, people and resource are grouped in two
ways simultaneously:
1. By function
2. By project or product
It is both similar to and different from a product team structure

There’s high interdependence among functions

There’s a strategic relevance of different dimensions (tech /
product / geographic areas) and the focus is on these
multiple dimensions
Basically, a matrix is a rectangular grid that shows:
a) Vertical flow of functional responsibility: lines pointing down are the grouping of tasks by function
b) Horizontal flow of product responsibility: lines pointing left to right are the grouping of tasks by product
An organisation with matrix structure differentiates into whatever functions it needs to achieve its goals

The organisation itself is very flat, having minimal hierarchical level within each function and
decentralised authority

Functional employees report to the heads of their respective function, the functional vice president,
but do not work under their direct supervisions

The work functional personnel are determined by membership in one of several cross functional
products teams under the leadership of a product manager

The members of the team are two-boss employees, which are employees who report to two superiors:
1. Product team manager
2. Functional manager

The team is both the basic building block of the matrix and the principal mechanism for coordination
and integration

The matrix structure relies on minimal vertical control from the formal hierarchy and maximal
horizontal control from the use of integrating mechanisms (teams) which promote mutual adjustment
Advantages:
 Manage complex businesses

The use of cross functional teams reduces functional barriers and overcomes the problem of
subunit orientation

With differentiation between functions kept to a minimum, integration is easier to achieve

In turn, the team structure facilitates adaptation and learning for the whole organisation.
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 More flexible and responsive to changing product and customer needs
 Better resource allocation (when needed)

Enables an organisation to effectively use the skills of its specialised employees who move from
product to product as needed

People move around the matrix to wherever they are most needed; team membership is constantly
changing to suit the needs of the product
 Better coordination among function

It opens up communication between functional specialists and provides an opportunity for teams’
members from different functions to learn from one another and develop their skills

Facilitates technological progress because the interactions of different specialists produce
the innovations that give a company its core competences
 Development of General management competencies (focus both on cost & quality)

The dual functional and product focus promotes concern for both cost and quality

The primary goal of functional specialists is likely to be technical: producing the highest-quality,
most innovative product possible (regardless of cost)

In contrast, the primary goals of product managers are likely to concern cost and speed of
development— doing whatever can be done given the amount of time and money available

This approach keeps technical possibilities in line with commercial realities
Disadvantages:
 High costs

The lack of a clearly defined hierarchy of authority can lead to conflict between functions and
product teams over the use of resources

Cost and resource allocation becomes fuzzy as products exceed their budgets and specialists cannot
overcome technical obstacles
 People don’t like role ambiguity

A matrix lacks the advantages of a bureaucratic structure

With a flat hierarchy and few rules and SOPs, the matrix lacks a control structure that allows
employees to develop stable expectations of each other

In theory, team members negotiate with one another about role responsibilities, and the resulting
give-and-take makes the organisation flexible

In practice, many people do not like the role ambiguity and role conflict that matrices can produce
 Value authority relationships
 High conflicts
 Matrix on paper (informal organisation)

Matrix structures have to be carefully managed to retain their flexibility

People who work in a matrix often complain about high levels of stress and uncertainty

Over time, people are likely to experience a vacuum of authority and responsibility and move to
create their own informal organisation to provide them with some sense of structure and stability

Informal leaders emerge within teams; these become increasingly recognised as experts or as great
team leaders
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A status hierarchy emerges within teams; members often resist transfer to other teams in order to
remain with their colleagues

When top managers do not get the results they expect, they sometimes try to increase their control
their power over decision making => turns into a centralised, less flexible structure
Matrix structures are mainly appropriate when a high level of coordination between functional experts is
needed because an organisation must respond quickly to a changing environment
Multidivisional matrix structure

Allows an organisation to coordinate activities effectively
but it’s difficult to manage

Communication and coordination problems arise because
of the high degree of differentiation within a multidivisional
structure => a company with several divisions needs to be
sure it has sufficient integration mechanisms to handle its
control needs

Sometimes the corporate center becomes very remote
from divisional activities and is unable to play this
important integrating role => introduction of the matrix
structure at the top of the organisation and creation of a
multidivisional matrix structure

It is a structure of a large organisation that has many divisions and simultaneously uses many different
types of organisational structure. It allows senior vice presidents at the corporate center to:
a) Send corporate-level specialists to each division
b) Perform an in-depth evaluation of their performance
c) Devise a functional action plan for each division
The multidivisional matrix structure makes it much easier for top managers from the divisions and
corporate headquarters to cooperate and coordinate organisational activities jointly
META-ORGANISATIONS

A meta-organisation is an organisation whose agents are themselves legally autonomous and not linked
through employment relationship
a) First distinction is between closed boundaries and open boundaries
b) Second distinction is between high stratification and low stratification
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Challenges
a) No formal authority = bargaining and collective action based on consensus
b) Self-interest and conflict

Some meta-organization evolve around a singular architect, which has distinctive informal authority
because of its size or control over resources

In other cases, parts of the meta-organization may have different individual interests

To mediate the different interests coexisting into a meta-organisation, voting mechanisms,
persuasion or standards are implemented
NETWORK STRUCTURES

Network = a cluster or different organisations whose actions are coordinated by contracts and
agreements rather than through a formal hierarchy of authority

Very complex as companies form agreements with many suppliers, manufacturers, distributors to
outsource many of the value-creation activities necessary to produce and market goods / services

Very often one organisation takes the lead in creating the network as it searches for a way to increase
effectiveness

The network structure is:
a) More flat and decentralised
b) Managers coordinate and control relationships that are both internal and external to the firm
c) Open communication and reliable partners are key elements
d) The main coordination tool is the contract, but it needs to be integrated with the coordination tools

They represent a legal – economic instrument of cooperation between companies that, through
“Contratto di rete”, mutually engage in forms of collaboration concerning their activities

Configuration of the network and methods are defined by the group of enterprises

The purpose of the network is increasing, individually and collectively, the innovative capacity and
competitiveness on the market of the enterprises that are part of the network

When the companies can exploit synergies

To coordinate integration of the value chain

Allows contract flexibility
Advantages of network structures
1. Bureaucratic costs are reduced. When an organisation contracts with others to perform specific valuecreation activities, it avoids the high bureaucratic costs of operating a complex organisational structure
2. Production costs are reduced. When an organisation can find a network partner that can perform a
specific functional activity reliably and at lower cost, production costs are reduced.
3. Network partners can be easily replaced if they fail to perform at standard. A network structure allows
an organisation to act in an organic way: if the environment changes, for example, and new
opportunities become apparent, an organisation can quickly alter its network in response

Also, organisations gain access to low-cost overseas sources of inputs and functional expertise
Disadvantages of network structures

A considerable level of mutual adjustment is needed to allow the groups to interact and learn from one
another
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
Managers may lack the means to effectively coordinate and motivate the various network partners

Trust is needed among network partners - especially in complex value-creation processes
6.0: Organisational Culture
The organisation culture is the set of shared values and norms that control organisational members’
interactions with each other and with people outside the organisation
a) Structure = designed to achieve competitive advantage and promote stakeholder interest
b) Culture = can be used to increase organisational effectiveness

Culture controls the way members make decisions, the way they interpret and manage the
organisational environment, what they do with information, and how they behave

Culture thus affects an organisation’s performance and competitive position

Culture consists of the end states that the organisation seeks to achieve (its terminal values) and the
modes of behaviour the organisation encourages (its instrumental values). This means that the
instrumental values help the organisation achieve its terminal goals

The organisation develops norms, rules, and SOPs that embody its instrumental values
Values are general criteria, standards or guiding principles that people use to determine which types of
behaviours, events, situations and outcomes are desirable or undesirable. The two kinds of values are:
1. Terminal value: a desired end state or outcome that people seek to achieve. Organisations can adopt:
excellence, responsibility, reliability, profitability, innovativeness, economy, morality, quality
2. Instrumental value: a desired mode of behaviour. They include: working hard, respecting traditions and
authority, being conservative and cautious, being frugal, being creative and courageous, being honest,
taking risks, maintaining high standards

Different organisations have different cultures because they have different sets of these values

The combination of terminal and instrumental values leads to an entrepreneurial culture

Terminal values can often be found by studying an organisation’s mission statement and official goals,
which are told to the organisation members and other stakeholders
Norms are standard or styles of behaviour that are considered acceptable or typical for a group of people.
Differences in global values and norms:

The values and norms of different countries also affect organisational culture. Differences between the
cultures arise because of differences in national values and norms

At the beginning of the ‘70s, Hofstede’s cultural dimensions theory defined national cultures according
to 6 dimensions generally accepted as the most comprehensive framework of national cultures
1.
Power distance: extent to which the less powerful members of institutions and organisations within
a country expect and accept that power is distributed unequally
2.
Individualism: the degree of interdependence a society maintains among its members
3.
Masculinity: what motivates people, wanting to be the best (Masculine) or liking what they do
(Feminine)
4.
Uncertainty avoidance: extent to which the members of a culture feel threatened by ambiguous or
unknown situations and have created beliefs and institutions that try to avoid these
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
5.
Long term orientation: how every society has to maintain some links with its own past while
dealing with the challenges of the present and future
6.
Indulgence: the extent to which people try to control their desires and impulses
Laurent’s studied on management values:
o
National culture also influences basic managerial assumptions in organisations
o
It is important for a manager to have precise answers to most of the questions of the subordinates
o
The main reason for having a hierarchical structure is to know who has authority over whom
o
In order to have efficient work relationships, it is often necessary to bypass the hierarchical line
CORPORATE CULTURE TRANSMISSION
The ability of an organisation’s culture to motivate employees and increase organisational effectiveness is
directly related to the way in which members learn the organisation’s values

Members can learn central values from an organisation’s formal socialisation practices (12), from the
stories, ceremonies, language that develop informally and from materiality
Van Maneen and Schein socialisation tactics

Newcomers must learn the values and norms that guide existing members’ behaviour

Since they are outsiders, only when have learned and internalised an organisation’s values and act in
accordance with its rules and norms will they be accepted as insiders

They can learn value indirectly, by observing how exiting members behave, by understanding which
behaviour are appropriate and inappropriate (risky)

The most effective way to learn appropriate values is through socialisation, which is the process by
which members learn and internalise the values and norms of an organisation’s culture

Van Maneen and Schein: model of socialisation that suggests how organisations can structure the
socialisation experience in order to learn values; these values influence the role orientation

Role orientation: characteristic way in which newcomers respond to a situation

There are 12 socialisation tactics that influence a newcomer’s role orientation

The use of different sets of these tactics leads to two different role orientations:
1. Institutionalised role orientation: individuals are taught to respond to a new context in the same
way that existing organisational members do; this encourages obedience and conformity to rules
2. Individualised role orientation: individuals are allowed and encouraged to be creative and to
experiment with changing norms and values so an organisation can better achieve its values
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The following lists contrasts the tactics used to socialise newcomers to an institutionalised orientation
with those tactics used to develop an individualised orientation:
1. Collective vs Individual
o
Collective tactics: common learning experiences designed to produce standardised responses
o
Individual tactics: each learning experiences are unique, and newcomers can learn new,
appropriate responses for each situation
2. Formal vs informal
o
Formal tactics: segregate newcomers from existing members during the learning process
o
Informal tactics: newcomers learn on the job as member as a team
3. Sequential vs random
o
Sequential tactics: explicit information about the sequence in which to perform new activities
or occupy new roles as advancing in an organisation
o
Random tactics: training is based on the interests and need of individual newcomers because
there is no set sequence to the newcomers’ progress in the organisation
4. Fixed vs variable
o
Fixed tactics: give newcomers precise knowledge of the timetable associated with completing
each stage in the learning process
o
Variable tactics: no information about when newcomers will reach a certain stage
5. Serial vs disjunctive
o
Serial tactics: existing organisational members act as role models and mentors for newcomers
o
Disjunctive tactics: require newcomers to figure out their own way of behaving
6. Divestiture vs investiture
o
Divestiture: newcomers receive negative social support and existing members withhold support
until newcomers learn the ropes and conform to established norms
o
Investiture: newcomers immediately receive positive social support from other organisational
members and are encouraged to be themselves
Stories, ceremonies and organisational language
Organisations use several types of ceremonial rites to communicate culture norms and values:
a) Rites of passage: mark an individual’s entry to, promotion in and departure from the organisation
 Learn and internalise norms and values
b) Rites of integration: shared announcements of organisational success, office parties, and company
cookouts => build and reinforce common bonds between organisational members
 Build common norms and values
c) Rites of enhancement: award dinners, newspaper realises, employee promotions, publicity recognise,
and reward employees’ contributions
 Motivate commitment to norms and values
Stories (whether fact or fiction) about organisational superstars provide important clues about cultural
values and norms
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Because language is the principal medium of communication in organisations, the characteristic phrases
that frame and describe events provide important clues about norms and values.

The concept of organisational language encompasses not only spoken language but how people dress,
the offices they occupy, the company cars they drive, and how they formally address one another
Finally, organisational symbols often convey an organisation’s cultural values to its members and to others
outside the organisation.
WHERE DOES CULTURE COME FROM?
The organisational culture develops from the interaction of four factors:
1. Personal and professional characteristics of people within the organisation
2. Organisational ethics
3. The property rights system that the organisation gives to employees
4. The organisational structure
Characteristics of people within the organisation

The ultimate source of organisational culture is the people who make up the organisation: if you want
to know why cultures differ, look at their members

Organisations A, B, C develop different cultures because they attract, select, retain people who have
different values, personalities and ethics

People may be attracted to organisation whose values match theirs and the organisation selects people
who shares its values

The founder of the organisation has a big influence on the organisation’s initial culture because of his
personal values and beliefs; he sets the scene for the later development of the culture

Implication of the people make the place view: the culture of an organisation can be straightened and
changed over time by the people who control and lead it
Organisational ethics

Organisational ethics are the moral values, beliefs and reels that establish the appropriate way for
organisational members to behave

In developing cultural values, top managers must make choices about the appropriate thing to do; they
rely on ethical instrumental values embodied in the organisation’s culture
 These outline the right and wrong ways to behave in a situation in which an action may help one person
or stakeholder group, but hurt another

One of the top management responsibilities is to ensure that organisation members obey the law

One of the main ways in which top managers can ensure the legality of organisational behaviour is to
create an organisation culture that fixes ethical instrumental values
Property rights

The values in an organisation culture also stem for how the organisation distributes property rights, the
rights that are given to members to receive and use resources

Property rights define the rights and responsibilities of each inside stakeholder group and cause the
development of different norms, values, and attitude toward their organisation

Shareholders have the strongest property rights because they own the resources and shares
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
Top managers often have strong rights because they are given a huge number of resources – such as
high salaries, rights to larger stock options, or golden parachutes (guarantee large sums of money if
they are fired when their company is taken over)

Top managers’ rights to use organisational resources are reflected in their authority to make decisions
and control resources

Managers are usually given strong rights because if they do not share in the value that the organisation
creates, they are unlikely to be motivated to work hard on behalf of the organisation

The workforce may be given strong property rights, such as a guarantee of lifetime employment and
involvement in an employee stock ownership plan or in a profit-sharing plan. However, often their
property rights are simply the wages they earn and the health and pension benefit they receive

Workers’ rights to use organisational resources are reflected in their responsibilities in the level of
control they have over their tasks

The distribution of property rights has a direct effect on the instrumental values that the shape
employee behaviour and motivate organisational members
Organisational structure

The fourth source of cultural value is organisational structure, which is the formal system of the skin
authority relationships that an organisation establishes to control its activities

Because different structures give rise to different cultures, managers and leaders need to design a
certain kind of organisational structure to create a certain kind of organisational culture
a) Mechanistic structure: tall, highly centralised and standardised. People have relatively little personal
autonomy and desirable behaviour include being caution, obeying superior authority and respecting
traditions
 So, mechanistic structure is likely to give rise to a culture which seeks for predictability and stability
b) Organic structure: is flat, decentralised and relies on mutual adjustment. People have more freedom to
choose and control their own activities, and desired behaviours include being creative or courageous
and taking risks.
 So, organic structure is likely to give rise to a culture which seeks for innovation and flexibility

Whether a company is centralised or decentralised also leads to the development of different kinds of
cultural values
a) Centralisation can be used to create cultural value that reinforce obedience and accountability.
b) Decentralisation creates values that encourage and reward creativity or innovation
One source of a company’s competitive advantage is its ability to design its structure and manage its culture
so there is a good fit between the two. This gives rise to a core competence that is hard for other
organisations to imitate.
THE ROLE OF ORGANISATIONAL CULTURE

Culture has pervasive effects on a firm because not only it defines who its relevant employees,
customers, suppliers, and competitors are, but it also defines how a firm will interact with them

When properly aligned with personal values, drives, and needs, culture can unleash tremendous
amounts of energy toward a shared purpose

Culture is a powerful differentiator when strongly aligned with strategy and leadership

Unfortunately, many leaders either let culture go unmanaged or relegate it to the HR function, where it
becomes a secondary concern for the business
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
They may lay out detailed, thoughtful plans for strategy and execution, but because they don’t
understand culture’s power and dynamics, their plans go off the rails
CSR – CORPORATE SOCIAL RESPONSIBILITY

Very important consequences of the values and norms of its culture is an organisation’s stance with
regard to social responsibility

Social responsibility = a manager’s duty or obligation to make decisions that nurture, protect, enhance,
and promote the welfare and well-being of stakeholders and society as a whole

Many kinds of decisions signal an organisation’s interest in being socially responsible:
 Supply chain: supply chain monitoring program, requirements for suppliers, centralized testing of the
use of chemicals
 Products: all collections are for free
 Environment: purchase of FSC (Forest Stewardship Council) certified paper and cardboard, abolition of
laminate / materials that are difficult to recycle, use of water-based inks
 Community: restoration of Italian cultural / artistic works, project for the production of short films,
purchase of medical equipment for scientific research, aqua for life – for access to drinking water
Approaches to social responsibility: commitment to CSR ranges from low to high
1. Obstructionist approach is the low end of the organisation’s commitment to social responsibility

Obstructionist managers choose not to behave in a socially responsible way

Instead, they behave unethically and illegally and do all they can to prevent knowledge of their
behaviour from reaching other organisational stakeholders and society at large

Result: loss of reputation and devastation for their organisations and for all stakeholders involved
2. Defensive approach is an approach indicating a commitment to ethical behaviour

Defensive managers stay within the law and abide strictly within legal requirements, but they make
no attempt to exercise social responsibility beyond what law indicates

Managers adopting this approach do all they can to ensure that their employees behave legally and
do not harm others

But when making ethical choices, these managers put the claims and interests of their shareholders
first, at the expense of other stakeholders

The very nature of a capitalist society — in which managers’ primary responsibility is to the owners
of the corporation — probably encourages the defensive response
3. Accommodative approach is the acknowledgement of the need to support social responsibility.

Accommodative managers agree that organisational members ought to behave legally and ethically,
and they try to balance the interests of different stakeholders

Managers want to make choices that are reasonable in the eyes of society
4. Proactive approach: managers actively embrace the need to behave in socially responsible ways

They learn about the needs of different stakeholder groups, and are willing to use organisational
resources to promote the interests not only of stockholders but of the other stakeholders
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Why to be socially responsible?
a) First, workers and society benefit directly because organisations bear some of the costs of helping
workers
b) Second, it has been said that if all organisations in a society were socially responsible, the quality of life
as a whole would be higher
 Indeed, several management experts have argued that the way organisations behave toward
their employees determines many of a society’s values and norms and the ethics of its citizens
c) Other reasons for being socially responsible are that it is the right thing to do and companies that act
responsibly toward their stakeholders benefit from increasing business and see their profits rise
 It appears that socially responsible companies have less risky investments, tend to be more profitable,
have a more loyal and committed workforce, and have better reputations, which encourage
stakeholders to establish long-term business relationships with them
CSR investments: what is driving sustainable decisions?Employees, customers and shareholders expect
more from brands and increasingly consider environmental, social and governance factors (ESG)
 "ESG-oriented investments are now the fastest growing area in financial markets” (Toby Usnik)
 The global COVID-19 crisis changed the playing field. CSR shifted focus from sustainability and climate
action to how companies treated employees during the crisis and extended a helping hand to the
community
7.0: Organisational Change
Opening case: Digital Transformation Initiative

Areas of technological investment are: IoT/Connected devices, Mobile/Social media, Cognitive
technologies and Robotics

Organisation decide to invest in digital technology for 3 reasons: new efficiencies, customer experience
and outcomes, new business models
HOW TO MAXIMISE VALUE FROM NEW TECHNOLOGY INVESTMENTS?
1. Agile and digital-savvy leadership: strategic vision, purpose, skills intent and alignment across
management levels ensure a nimble decision-making process on innovation

The importance of leaders’ ability to provide a clear vision and cultivate a digital culture to use
transparent communication. Use small teams for experimenting and then scale up.
2. Forward-looking skills agenda: infusing a digital mindset in the workforce by making innovation the
focus of training and hiring programs

Need for investments in re-skilling the workforce and attracting talents also by utilizing flexible
workforce
3. Ecosystem thinking: collaborating within the value chain (suppliers, distributors, customers) and
outside (start-ups, academia)

Create open collaboration beyond organisational boundaries; share and exploit data within the
ecosystem
4. Data access and management: strong data infrastructure and warehouse capability combine with the
right analysts and communication tools to drive competitiveness

Reinforce the data management lifecycle (data origination, storage, structuring and analysis,
communication and action)
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5. Technology infrastructure readiness: building required technology infrastructure to ensure strong
capabilities on cloud, cybersecurity and interoperability
For their transformation to succeed, organisations need employee buy-in at all levels, consistent
communication, and better people strategies.
WHAT IS ORGANISATIONAL CHANGE?
Organisational change: the process by which organisation move from their present state to some desired
future state to increase their effectiveness.

The goal of a planned organisational change is to find new or improved ways of using resources and
capabilities to increase an organisation’s ability to create value and improve returns to its stakeholders
Targets of change: planned organisational change is targeted at improving effectiveness at one or more of
four interdependent levels; this means that it is often impossible to change one without changing another
1. Human resources: an organisation’s most important asset

Distinctive competences lie in the skills and abilities of employees => give an organisation a
competitive advantage

Organisations must continually monitor their structures to find the most effective way of motivating
and organising human resources to acquire and use their skills

Typical kinds of change efforts directed at human resources include:
a) A new investment in training and development activities
b) Socialising employees into the organisational culture so they learn the new routines
c) Changing organisational norms and values to motivate a multicultural and diverse workforce
d) An ongoing examination of the way in which promotion and reward systems operate
2. Functional resources

Each organisational function needs to develop procedures that allow it to manage the particular
environment it faces

As the environment changes, organisations often transfer resources to the functions where the
most value can be created.

An organisation can improve the value that its functions create by changing its structure, culture,
and technology.

The change from traditional mass production to a manufacturing operation based on self-managed
work teams often allows companies to increase product quality and productivity if employees can
share in the gains from the new work system
3. Technological capabilities give an organisation an enormous capacity to change itself to exploit market
opportunities.

An organisation has to provide the context that allows it to translate its technological competences
into value for its stakeholders. This task often involves the redesign of organisational activities.
4. Organisational capabilities

Through the design of organisational structure and culture, an organisation can control its human
and functional resources to take advantage of technological opportunities

Organisational change often involves changing the relationships between people and functions to
increase their ability to create value

Changes in structure and culture take place at all levels of the organisation and include:
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a) Changing the routines and individual uses to greet customers
b) Changing work group relationships
c) Improving integration between divisions
d) Changing corporate culture by changing the top-management team
LEVELS OF CHANGE
1.
Micro - between my job
2.
Macro - between functions
3.
Intra organisational - between the organisation
4.
Inter organisational - between partners ecosystem
CHANGE TYPE DUE TO IMPACT

Size: number of people and units involved

Impact: how the desired state is far from the actual one

Timing: time necessary to move to the new state

Investment: in financial and human resources

Goals: corporate level vs single unit

Change agent: top or middle management
Evolutionary change vs Revolutionary change
a) The first one is gradual, incremental, and specifically focused.

Socio-technical systems theory, total quality management, and the creation of empowered, flexible
work groups are instruments of evolutionary change used to make incremental improvements
b) The second one is sudden, drastic, and organisation-wide

It has repercussions at all levels in the organisation - corporate, divisional, functional, group, and
individual. Reengineering, restructuring, and innovation are three important instruments
FORCES FOR CHANGE

One of the manager’s most important task is to recognise the nature of the many forces that impact an
organisation => respond to competitive, economic, political, global and other forces
Competitive forces – technological change

Competition is a force for change because unless an organisation matches or surpasses its competitors
in efficiency, quality or its capability to innovate new or improved goods or services, it will not survive

To lead on the dimensions of efficiency or quality, an organisation must adopt the latest technology;
this brings a change to task and relationships as workers learn new skills or techniques

To lead on the dimension of innovation and obtain a technological advantage over competitors, a
company must possess skills in managing the process of innovation and other sources of change
Economic, political and global forces continually affect organisations and compel them to change how and
where they produce goods and services

Economic and political unions among countries are becoming an increasingly important force
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
Other global challenges: need to change structure to allow expansion into foreign market, need to
adapt to various national cultures and need to help expatriate managers adapt to the new economic,
political and cultural values (law changes too)
Demographic and social forces

Changes in the composition of the workforce and the increasing diversity of employees have presented
organisations with many challenges and opportunities

Changes in the demographic characteristics have led managers to change their styles of managing and
to learn how to understand, supervise, and motivate diverse members effectively

Managers have had to abandon the stereotypes they unwittingly may have used in making promotion
decisions, and they have had to accept the importance of equity in the recruitment and promotion

Many companies have helped their workers keep up with changing technology by providing support for
advanced education and training

Increasingly, organisations are coming to realise that the ultimate source of competitive advantage and
organisational effectiveness lies in fully utilising the skills of their members
Ethical forces

It is critical for an organisation to take steps to promote ethical behaviour in the face of increasing
government, political, and social demand for more responsible and honest corporate behaviour

Many companies have created the position of ethics officer, a person to whom employees can report
ethical lapses by an organisation’s managers or workers

Organisations are also trying to promote ethical behaviour by giving employees more direct access to
important decision makers and by protecting whistle-blowers

Changes aimed to allow managers and workers to report unethical behaviour
These were all external forces; internal forces of change are instead: strategic change, business model
change, M&A, Performance gap, New CEO or management team
RESISTANCE TO CHANGE

The main explanation for the loss of effectiveness is the inability to respond to change in the
environment because of organisational inertia, which is the tendency to resist change

Resistance to change lowers effectiveness and reduces chances of survival

Resistances or impediments to change that cause inertia are found at the organisation, group and
individual levels
Organisation-level resistance to change
a) Power and conflict: change usually benefits some people, functions, or divisions at the expense of
others and causes power struggles and organisational conflict => an organisation is likely to resist it
b) Differences in functional orientation: functions and divisions often see a problem differently (from their
own viewpoint) => the organisation must spend time and effort to secure agreement about the source
of a problem before responding to it
c) Mechanistic structure is more resistant to change (workers are expected to act in certain ways and do
not develop the capacity to adjust their behaviour to changing conditions)

The extensive use of mutual adjustment and decentralised authority in an organic structure fosters
the development of skills that allow workers to be creative and responsive
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d) Organisational culture: values and norms cause people to behave in predictable ways => if change
disrupts taken-for-granted values and norms, culture will cause resistance

Sometimes, values and norms are so strong that even when the environment is changing,
managers cannot change because they are committed to the way they presently do business
Group-level resent to change
a) Group norms and roles: many groups develop strong informal norms that specify appropriate and
inappropriate behaviours and govern the interactions between members

Often, change alters task and role relationships in a group; when it happens, it breaks group norms
and the informal expectations that group members have one another => they may resist change
b) (Too much) Cohesiveness = the attractiveness of a group to its members

Too much cohesiveness may reduce performance because it suffocates opportunities to change and
adapt; the group may resist attempts by management to change what it does

Group members may unite to preserve the status quo and to protect their interests
c) Groupthink is a pattern of faulty decision making that occurs in cohesive groups when members
discount negative information in order to arrive at a unanimous agreement

The rapid increase of commitment worsens this situation because even when group members
realise their decision is wrong, they continue to pursue it because they are committed to it
Individual level resistance to change
a) Avoidance of uncertainty and insecurity: workers’ resistance to the uncertainty and insecurity
surrounding change can cause organisational inertia

The result is that absenteeism and turnover may increase as change takes place, and workers may
become uncooperative and attempt to delay or slow the change process

This because workers tend to focus only on how change will affect them or their function or division
personally
b) Habit is the people’s preference for familiar actions and events; it’s difficult to break
c) Loose of human capital
d) Lack of skills of change management
LEWIN’S FORCE-FIELD THEORY OF CHANGE
According to Kurt Lewin force field theory, two sets of opposing forces within an organisation determine
how change will take place

When the forces are balanced, the organisation is a state of inertia
and does not change

To get an organisation to change, managers must find a way to:
1. Increase the forces for change
2. Reduce resistance to change
3. Or do both simultaneously
APPROACHES TO CHANGE
1. Developments in evolutionary change: Socio-Technical Systems theory
It is a theory that proposes the importance of changing role and task or technical relationships to increase
organisational effectiveness
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
Focuses on the need for managers to fit or “jointly optimise” the workings of an organisation’s
technical and social systems (its technology and culture), in order not to disrupt group norms / values

Applies a new technology, trying not to harm existing cohesiveness and social relationships
2. Total Quality Management
It is a technique developed by Deming to continuously improve the effectiveness of flexible work teams

TQM is an ongoing and constant effort by all of an organisation’s functions to find new ways to improve
the quality of goods and services

Use of quality circles: groups of workers who meet regularly to discuss the way work is performed in
order to find new ways to increase performance

And so, it needs high commitment at all levels

Quality is based on the needs of the customer

The “total” indicates that the effort is one that touches every inch of every employee

Quality is defined by what the customers’ requirements are
 Systemic analysis and using that data to improve work processes increase quality
 The improvement of quality is a continuous effort and is conducted throughout the entire firm

Benefits:
 Error prevention and elimination
 Reduced service costs and increased profits
 Continuous efforts to meet the quality standards
 Involvement and empowerment of employees at every production level
 Customers becoming the main focus
 Meeting consumer expectations
 Improved organisational culture
 Innovative strategies and creative ideas

Problems:
 Underestimating the degree of commitment from people at all levels in the organisation necessary
to implement a TQM program
 Long time frame necessary for TQM editors to succeed and show realists
3. Business Process Reengineering
The process by which managers redesign how tasks are bundled into roles and functions to improve
organisational effectiveness

Change resulting from reengineering requires managers to go back to the basics and pull apart each
step in the work process to identify a better way to coordinate and integrate the activities

Managers make business processes the focus of attention; a business process is an activity that cuts
across functional boundaries and is vital to quick delivery, high quality or low costs


Process: structured measured set of activities designed to produce a specific output
Reengineering focuses on business processes and not functions
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

Organize work in order for one to follow the entire process
Decentralize decision-making
4. Flexible Teams

The attention to goals behinds socio-technical systems theory and TQM has led many organisations to
embrace the concept of flexible workers and work teams as a way of changing employee’s attitude

Each worker acquires the skills necessary to substitute for any other worker => workers can be
transferred to the task most needed by the organisation (higher responsiveness)


Employees understand how tasks are related; thus, it is easier to redesign the relationships


To further speed the development of functional capabilities, flexible workers are grouped into flexible
work teams, who perform all the operations for a specified stage in the manufacturing process
A flexible work team is self-managed
Each team’s activities are driven by customer demands for the final product
LEWIN’S THREE-STEP CHANGE PROCESS
In Lewin’s view, implementing change is a three-step process:
1. Unfreeze the organisation from its present state: making people become aware of the need for change
2. Change
3. Refreeze the organisation in the new, desired state so its members do not revert to their previous work
attitudes => make new behaviours relatively permanent and resistant to further change
Lewin warns that resistance to change will cause an organisation and its members to revert to their old
ways of doing things unless the organisation actively takes steps to refreeze.
ACTION RESEARCH
Action research is a strategy for generating and acquiring knowledge that managers can use to define an
organisation’s desired future state and to plan a change program that allows to reach that state
 The techniques and practices of action research help managers unfreeze an organisation, move it to its
new desired position and refreeze it so the benefits of the change are retained
1. Diagnosing the organisation

The first step requires managers to recognise the existence of a problem that needs to be solved and
acknowledge that some type of change is needed to solve it (recognise need for change)

Somebody in the organisation perceives a gap between desired performance and actual performance
 Perhaps customer complaints about the quality of goods or services have increased
 Perhaps profits have recently fallen or operating costs have been escalating
 Perhaps turnover among managers or workers has been excessive

Managers have to distinguish between symptoms and causes; carefully collect information to diagnose
the problem correctly and get employees committed to the change process

Information is collected from people at all levels in the organisation and from outsiders such as
customers and suppliers
 Questionnaire surveys and interviews with workers and managers to diagnose the present state
2. Determining the desired future state

The next step is to identify where the organisation needs to be — its desired future state
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
This step also involves a difficult planning process as managers work out various alternative courses of
action that could move the organisation to where they would like it to be (benchmarking)

Identifying the desired future state involves deciding the organisation’s strategy and structure
3. Implementing action

It is a three-step process:
a) Managers need to identify possible impediments to change at the organisation, group and
individual levels. The more revolutionary the change, the greater the problem of implementing it
 Find ways to minimise, control, and co-opt resistance to change
 Devise strategies to bring organisational members on board and foster their commitment
 Look to the future and seek ways to refreeze the changes so people cannot slide back
b) Deciding who will be responsible for actually making the changes and controlling the process
 External change agents: outside consultants who are experts in managing change
 Internal change agents: managers from within the organisation who are knowledgeable about
the situation to be changed
o
The principal problem with using internal change agents is that other members of the
organisation may perceive them as being politically involved in the changes and biased
o
External change agents are likely to be perceived as less influenced by internal politics.
Moreover, outsiders have a detached view of the organisation’s problems
c) Deciding which specific change strategy will most effectively unfreeze, change, and refreeze the
organisation. The types of change that these techniques give rise to fall into two categories:
 Top-down change: implemented by managers at a high level in the organisation.
The result of radical organisational restructuring and reengineering is top-down change. They
choose to manage problems as they arise at the divisional, functional, or individual levels.
 Bottom-up change: implemented by employees at low levels; it gradually rises until it is felt
throughout the organisation. Diagnosing becomes central for change’s success; managers
involve employees at all levels in the process.
o
By reducing the uncertainty that employees experience, bottom-up change facilitates
unfreezing and increases the likelihood that employees will retain the new behaviours
o
Top-down change proceeds rapidly and forces employees to keep up with the pace of change,
troubleshooting to solve problems as they arise
o
Bottom-up change is easier to implement because it provokes less resistance
o
Organisations that have the time to engage in bottom-up change are generally well-run
organisations that pay attention to change, are used to change, and change often
o
Poorly run organisations, those that rarely change or postpone change until it is too late, are
forced to engage in top-down restructuring simply to survive
4. Evaluating the action

Assessing the degree to which the changes have accomplished the desired objectives (measurement)

Management decides whether more change is needed or whether more effort is needed to refreeze

The best way to evaluate is to develop measures or criteria

When criteria developed at the beginning are used consistently over time to evaluate the effects of the
change process, managers have ample information to assess the impact of changes
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 They can compare costs before and after the change to see whether efficiency has increased
 They can survey workers to see whether they are more satisfied with their jobs
 They can survey customers to see whether they are more satisfied with the quality

Assessing the impact of change is difficult because effects may emerge slowly

The action research process may take several years to complete

Often, poorly performing organisations fail to develop and apply criteria that allow them to evaluate
their performance
5. Institutionalising action research

Organisations must make it a required habit or a norm adopted by every member of an organisation

The institutionalisation of action research is as necessary at both:
 Top of the organisation: where the top-management team plans the organization’s future strategy
 The shop floor: where workers meet in quality circles to increase efficiency and quality

Because change is so difficult and requires so much thought and effort, members at all levels of the
organisation must be rewarded for being part of successful change efforts. The rewards can be:
 Top managers: stock options and bonus plans linked to organisational performance
 Lower-level members: employee stock ownership plan (ESOP), by performance bonuses and pay
linked to individual or group performance

Indeed, tangible, performance-related rewards help refreeze an organisation
8.0: Knowledge and Decision-making
Organisational decision making = process of responding to a problem by searching and selecting a solution
or course of action that will create value for stakeholders
 To make the best choices, manages make two kinds of decisions:
1. Programmed decisions are repetitive and routine. These result in the most efficient way of
operating and are formalised in advance in written rules and SOPs and are present in the culture
2. Non programmed decisions are novel and unstructured. No rules, norms or SOPs can be developed
since non routine problems are unique or unexpected.

Non programmed decision-making requires more search for information, because it is impossible to
know in advance if the decision is right. Forces managers to rely on judgement, intuition and creativity
Decision-making models
Rational model

According to the rational model, decision making is a straightforward three-stage process:
1. Managers identify and define the problems that need to be solved
2. Managers seek to design and develop a series of alternative courses of action to solve the problems.
They also study ways to take advantages of the organisation’s specific competences
3. Managers compare the likely consequences of each alternative and decide which course of action
offers the best solution and then implement it

The optimal decision maximises the expected utility, which is the probability (weighted average) of
utility over all possible outcomes of a decision

The rational model ignores the ambiguity and uncertainty that affect decision making. This model has
been criticised as unrealistic because:
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1. Decision makers have all the information they need
2. Decision makers have the ability to make the best decisions
3. Decision makers agree about what needs to be done
Bounded rationality
Herbert A. Simon proposed bounded rationality as an alternative
basis for the mathematical modelling of decision making

Bounded rationality is the idea that rationality is limited when
individuals make decisions: by the tractability of the problem,
the cognitive limitation of the mind and the time available

Decision-makers act as satisfiers, searching a satisfactory
solution rather than an optimal one
Carnegie model (Cryert, March, & Simon): introduces a new set of more realistic assumptions:
1. Satisficing: limited information searches to identify problems and alternative solutions (satisfy + suffice)
2. Bounded rationality: limited capacity to process information
3. Organisational coalitions: solution chosen is a result of compromise, bargaining, and accommodation
between coalitions

A final choice is based on a coalition among managers. Coalitions make decisions that satisfice, which
means accepting a satisfactory, not a maximum level of performance
Satisficing
Managers choose a set of problem-specific criteria or measures to evaluate a range of possible solutions.
Then work together to develop several best alternatives and select the one that best satisfies the criteria.
Organisational coalitions
The Carnegie model views an organisation as a coalition of different intestines, in which decision making
takes place by compromise, bargaining and negotiation between managers from different areas.

Any solution must be approved by the dominant coalition, the collection of managers or stakeholders
who have the part to decide which solution is chosen and can commit reissues to implement it
Incrementalist model

Managers select alternative courses of action that are only slightly, or incrementally, different from
those used in the past:
 Structured sequence of activities from problem to solution
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 Series of small choices that combine into a major decision
 A small number of alternatives are considered at each step
 Perceived to lessen the chances of making a mistake
 Correct or avoid mistakes through a succession of incremental changes
 Minimise costs but difficult to achieve radical change
Unstructured model (Mintzberg)

It describes how decision-making takes place in environments of high uncertainty
 Unstructured model recognises uncertainty in the environment
 Tries to explain how organisations make non-programmed decisions
 Decision-making is not a linear, sequential process
 Mangers rethink their alternatives when they hit a roadblock (something in the environment alters
managers’ interpretation, creates doubt)
Garbage-Can Model

A view of decision making that takes the unstructured process to the extreme:
 Decision makers are likely to start from the solution side as the problem side; they may propose
solutions to problems that do not exist; they create a problem they can solve with solutions that
are already available
 Create decision-making opportunities that they can solve with ready-made solutions based on their
competencies and skills
 Different coalitions may champion different alternatives

So, decision making becomes like a “garbage can” where problems, solutions, preferences of different
managers and coalitions all mix and contend with one another for organisational attention and action
ORGANISATIONAL LEARNING

Process that helps managers to make better non-programmed decisions

Organisational learning is used to improve members’ capacity to understand and manage the
organisation and its environment, so they can make decisions that continuously increase effectiveness

James March has proposed two principal types of organisational learning strategies:
a) Exploration: members search for and experiment with new kinds or forms of activities, skills and
procedures (shift away from current knowledge and skills)
b) Exploitation: members learn ways to refine, improve and leverage existing organisational activities,
skills, capabilities and procedures


Long-term innovation vs short-term productivity

Risk of becoming obsolete vs immediate reliability

Flexibility vs stability

Less risky vs more risky returns
Balancing exploration and exploitation is complicated because the outcomes of these two types of
activities are distinctive and differ. Both are relevant and should be pursued at the same time.
A learning organisation is an organisation that purposefully designs and constructs its structure, culture and
strategy so as to enhance and maximise the potential for organisational learning to take place.
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Levels of organisational learning: managers need to encourage learning at four levels:
1. Individual: managers need to facilitate the learning of new skills, rules, norms, and values so individuals
can increase their own personal abilities and so, help build an organisation’s core competences
2. Group: managers need to encourage learning by promoting the use of various kind of groups so that
employees can share or pool their skills and abilities to solve problems
 Groups provide a setting for synergy to develop, which can increase performance
3. Organisational: managers promote learning through the way they create its structure and culture. An
organisation’s structure is designed to facilitate communication and cooperation between subunits.
 A mechanistic structure facilitates exploitative learning, while the organic one facilitates explorative
learning; need to balance the two in order to take advantage of both types of learning
4. Interorganisational: important because organisations can improve their effectiveness by imitating
each other’s distinctive competencies
Factors affecting learning: several factors can reduce organisational learning over time:

Managers can develop rules and standards operating procedures to facilitate programmed decision
taking. This drives out non-programmed decision making

Cognitive structures: systems of connected beliefs, preferences, expectations, and values that
predetermine responses to and interpretations of situations, and shape the way managers make
decisions and perceive environmental opportunities and threats => cognitive bias
 When managers confront a problem, their cognitive structures shape their interpretation of the
information at hand, so the way managers view a situation is shaped by their prior experience
 This view is distorted or wrong, because of the operation of cognitive biases (= factors that
systematically bias cognitive structures and affect organisational learning and decision-making)
a) The cognitive dissonance is the state of discomfort or anxiety a person feels when there is an
inconsistency between his or her beliefs and actions

It explains why managers tend to misinterpret the real threats

The desire to reduce cognitive dissonance pushes managers to adopt flawed solutions
b) The illusion of control causes managers to overestimate the extent to which the outcomes of an
action are under their personal control
c) Frequency is a cognitive bias that deceives people into assuming that extreme instances of a
phenomenon are more prevalent than they really are
d) Representativeness is a cognitive bias that leads managers to form judgements based on small and
unrepresentative samples
 Frequency and representativeness can work in the opposite direction; a company that has great
success with a new product may devote all its resources to developing a new product line for
which there actually is little demand
e) A projection is a cognitive bias that allows managers to justify and reinforce their own preferences
and values by attributing them to others
f)
The ego-defensiveness is a cognitive bias that leads managers to interpret events in such a way that
their actions appear in the most favourable light
g) The escalation of commitment is a cognitive bias that leads managers to remain committed to a
losing course of action and refuse to admit they have made a mistake.
IMPROVING DECISION-MAKING AND LEARNING
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To overcome the effect of cognitive biases and promote learning and change organisations: strategies for
organisational learning

Managers should continuously unlearn old ideas and confront errors in their beliefs and perceptions by:
a) Listening to dissenters: choosing to be surrounded by people who hold different and often opposing
points of views => collect new information to evaluate new alternatives and so find the best solution
b) Converting events into learning opportunities: an organisation needs to redesign its structure and
culture to motivate managers to find better ways to respond to a situation
c) Experimenting: the process of generating new alternatives and testing the validity of old ones. Can be
used to improve both incremental and garbage-can decision-making processes
d) Using game theory (multiple players that make choices): interactions between organisations are viewed
as a competitive game. If companies understand the nature of the competitive game
they are playing, they can make better decisions
e) Nurture the top-management team (structure and people): the way the top-management team is
constructed affects the level of organisational learning
1. Wheel configuration decreases organisation learning because managers report separately to the
CEO. It works best when problems are simple and require minimal coordination
o
When problems are complex and nonprogrammed decision making is required, this
configuration slows organisational learning (all coordination takes place through the CEO)
2. Circle configuration: top managers from different functions
interact with one another and with the CEO (they function as a
team). It works better for complex problems requiring coordination
among group members to arrive at a solution
o
f)
Communication around the circle takes less time
Devil’s advocate and Dialectical inquiry

A devil’s advocate is a person who is responsible for critiquing ongoing organisational learning and
for questioning the assumptions the top-management team uses in the decision-making process.
 An organisation that uses devil’s advocacy institutionalises dissent by assigning a manager or
management team the role of devil’s advocate

An organisation that uses dialectical inquiry creates teams of decision makers who generate and
evaluate alternative scenarios and courses of action and then recommend the best one
 After hearing each team’s alternatives, all of the teams and the organisation’s top managers sit
down together to cull the best parts of each plan and synthesise a final plan
 Both are ways of overcoming cognitive biases and promoting organisational learning, and so of
improving decision making
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