CHAPTER SEVEN ORGANIZING: DESIGNING ORGANIZATIONAL
STRUCTURE
OVERVIEW OF THE CHAPTER
To create high performing organizations, managers must design an organizational architecture
that maximizes the efficient use of resources in order to efficiently produce the goods and
services customers want. This chapter opens by examining the four critical factors that help
managers to determine the most appropriate organizational structure their organization. It then
discusses three components of organizational design: job design, grouping jobs into functions
and divisions, and the coordination of functions and divisions. The chapter then closes with a
discussion of integrating mechanisms and the growing popularity of global strategic alliances
and business-to-business network structures.
LEARNING OBJECTIVES
1. Identify the factors that influence managers’ choice of an organizational structure.
2. Explain how managers group tasks into jobs that are motivating and satisfying for
employees.
3. Describe the types of organizational structures managers can design, and explain why
they choose one structure over another.
4. Explain why there is a need to both centralize and decentralize authority.
5. Explain why managers must coordinate and integrate between jobs, functions, and
divisions as an organization grows.
6. Explain why managers who seek new ways to increase efficiency and effectiveness are
using strategic alliances and network alliances.
MANAGEMENT SNAPSHOT: EXIDE’S NEW GLOBAL STRUCTURE
Although Exide is the world’s biggest producer of automotive and industrial batteries, it
continued to lose money during the 1990s. Former Chrysler COO Robert A. Lutz was hired to
turn around Exide’s performance. He found that the problems seem to lie in the global
organizational structure of the company. Exide was organized into geographical areas that
operated separately and often competed with each other. Lutz decided to change the company
to a global product structure. By 2001, losses were stemmed and Exide was making a modest
profit. Exide’s managers now realize that organizing is an ongoing process.
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Questions:
1. What factors or circumstances served as a signal to Mr. Lutz that Exide needed a new
organizational structure?
Contingency theory states that organizational structures should be designed (or
redesigned) to fit the factors and circumstances that are impacting the organization the
most. Change had occurred in Exide’s organizational environment to which it needed to
respond. Specifically, many of Exide’s customers, such as GM and Ford, had become
global organizations. Therefore Exide needed to shift its global strategic approach from
regional to global, understanding that the various regions of the world were no longer
isolated and individualistic but interconnected and interactive in nature.
2. What were the benefits of changing from a geographic structure to a global product
structure?
A global product structure puts divisional managers close to their customers and lets them
respond quickly and appropriately. It also allows managers to specialize in only one
product area so that they can build the expertise required to refine the organization’s
competitive strategy. Abolition of the geographic structure eliminated competition
between Exide’s divisions, thus maximizing organization performance
LECTURE OUTLINE
I. DESIGNING ORGANIZATIONAL STRUCTURE
Organizing is the process by which managers establish the structure of working relationships
among employees to allow them to achieve organizational goals efficiently and effectively.
Organizational structure is the formal system of task and reporting relationships that
determines how employees use resources to achieve goals. Organizational design is the
process by which managers make specific organizing choices that result in the construction of
a particular organizational structure.

According to contingency theory, managers design organizational structures to fit the
factors or circumstances that are affecting the company and causing them the greatest
uncertainty. Thus, there is no one best way to design an organization.

Four factors are important determinants of organizational structure. They are: 1) the nature
of the organizational environment, 2) the type of strategy the organization pursues, 3) the
technology the organization uses, and 4) the characteristics of the organization’s human
resources.
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The Organizational Environment

The more quickly the external environment is changing and the greater the uncertainty
within it, the greater the need to speed decision-making and communication so that scarce
resources can be obtained. In such situations, the manager’s goal is to make organizing
decisions that result in greater flexibility. Therefore, they are likely to decentralize
authority and empower lower-level employees.

In contrast, if the external environment is relatively stable, uncertainty is low, and
resources are readily available, managers can be organizing decisions that bring more
stability or formality to the organization’s structure.

In today’s marketplace, change is rapid and competition is intense. Therefore, most
managers are seeking ways to structure organizations that allow people and departments to
behave flexibly.
Strategy

Different strategies often call for the use of different organizational structures. A
differentiation strategy aimed at increasing quality usually succeeds best in a flexible
structure.

A low-cost strategy aimed at driving down costs fares best in a more formal structure,
which gives managers greater control.

At the corporate level, when managers pursue a strategy of vertical integration or
diversification, a flexible structure is needed to provide sufficient coordination between
different business divisions.

Managers are also challenged to create organizational structures that allow flexibility on a
global level.
Technology
Technology is the combination of skills, knowledge, tools, machines, computers, and
equipment that are used in the design, production, and distribution of goods and services.

The more complicated the technology, the greater the need for a more flexible structure
that allows managers to respond quickly to unexpected situations.

If technology is routine, a formal structure is more appropriate because tasks are simple
and procedures for performing tasks can be outlined in advance.
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
Examples of nonroutine technology include scientists in research and development
laboratories developing a new product or top management engaged in planning sessions to
develop a their company’s strategy direction. Examples of routine technology include
typical mass production or assembly operations where workers perform the same task
repeatedly.

Small-batch technology is used to produce small quantities of customized, one-of-a-kind
products and is based on the skills of people who work together in small groups. Because
small-batch goods are customized, a structure that decentralizes authority and allows
employees to respond flexibly to the unique requirements of each product is most
appropriate.

Mass-production technology is based primarily on the use of automated machines that are
programmed to perform the same operations time and time again. There is less need for
flexibility, and a formal organizational structure is preferred because it gives managers
more control over the production process.
Human Resources

The more highly skilled a workforce and the more people are required to work together in
groups or teams to perform tasks, the more likely an organization is to use a flexible,
decentralized structure.

Flexible structures, characterized by decentralized authority and empowered employees,
are well suited to the needs of highly skilled people.

The extent to which an organization’s structure is flexible or formal depends upon the
organizing choices that managers make about four issues: 1) how to group tasks into
individual jobs, 2) How to group jobs into functions and divisions, 3) how to allocate
authority in the organization among jobs, functions, and divisions, and 4) how to
coordinate or integrate jobs, functions, and divisions.
II. GROUPING TASKS INTO JOBS: JOB DESIGN
The first step in organizational design is job design. Job design is the process by which
managers decide how to divide into specific jobs the tasks that have to be performed.

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The result of the job design process is a division of labor among employees. Establishing
an appropriate division of labor among employees is vital to increasing efficiency and
effectiveness.
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
When deciding how to assign tasks to individual jobs, managers must be careful not to
oversimplify jobs. Job simplification is the process of reducing the number of tasks that
each worker performs. Too much job simplification may reduce efficiency rather than
increase it, if workers become bored and unhappy.
Job Enlargement and Job Enrichment

Job enlargement is increasing the number of different tasks in a given job by changing the
division of labor. By increasing the range of tasks performed by a worker, managers hope
to reduce boredom and increase motivation to perform at a high level.

Job enrichment is increasing the degree of responsibility a worker has over his or her job
by:
1. Empowering workers to experiment to find new or better ways of doing the job,
2. Encouraging workers to develop new skills,
3. Allowing workers to decide how to do the work and giving them the responsibility for
deciding how to respond to unexpected situations, and
4. Allowing workers to monitor and measure their own performance.

By enriching an employee’s job, managers are expecting that employee’s level of
involvement in their work to increase, thereby increasing productivity.

Managers who make design choices such as these are likely to increase the degree to
which workers behave flexibly rather than mechanically. Narrow, specialized jobs lead
people to behave in predictable ways. In contrast, workers who perform a variety of tasks
are encouraged to discover new ways to perform their jobs are likely to act flexibly and
creatively.
The Job Characteristics Model
J. R. Hackman and G. R. Oldham’s Job Characteristics Model explains how managers can
make jobs more interesting and motivating. According to Hackman and Oldham, every job
has five characteristics that determine how motivating the job is. They are:

Skill variety, which examines the extent to which a job requires an employee to use a wide
range of different skills, abilities, or knowledge.

Task identity, which examines the extent to which a job requires a worker to perform all
the tasks from the beginning to the end of the production process.

Task significance, which examines the degree to which a worker feels his or her job is
meaningful because of its effect on people outside of the organization.
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
Autonomy, which examines the degree to which a job gives an employee the freedom and
discretion needed to schedule different tasks and decide how to carry them out.

Feedback, which is the extent to which a worker receives clear and direct information
regarding how well he or she has performed the job.
The five job characteristics affect an employee’s motivation by impacting three critical
psychological states. They are:
 Feeling that one’s work is meaningful.
 Feeling responsible for work outcomes.
 Feeling responsible for knowing how those outcomes affect others.
III. GROUPING JOBS INTO FUNCTIONS AND DIVISIONS
The next organizing decision is how to group jobs together to best match the needs of the
organization’s environment, strategy, technology, and human resources. Most topmanagement teams group jobs into departments and develop a functional structure. As the
organization grows, managers design a divisional structure or a more complex matrix or
product team structure.
Functional Structure
A function is a group of people, working together, who possesses similar skills or uses the
same knowledge, tools, or techniques to perform their jobs. A functional structure is a
structure composed of all the departments that an organization requires to produce its goods or
services.
The advantages to grouping jobs according to function are:
 When people who perform similar jobs are grouped together, they can learn from
observing one another.
 When people who perform similar jobs are grouped together, it is easier for managers to
monitor and evaluate their performance.
 The functional structure allows managers to create the set of functions they need to scan
and monitor the task and general environments.
As an organization grows, the functional structure may become less efficient and effective for
the following reasons:
 Managers in different functions may find it more difficult to communicate and coordinate
with one another.
 Functional managers may become preoccupied with supervising their own specific
departments that they lose sight of organizational goals.
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Divisional Structures: Product, Market, and Geographic
As the problems associated with growth and diversification increase over time, managers of
large organizations may choose a divisional structure and create a series of business units,
each of which produces a specific kind of product for a specific kind of customer.
When managers organize divisions according to the type of good or service they provide, they
adopt a product structure. When managers organize divisions according to the area of the
world they operate in, they adopt a geographic structure. When managers organize divisions
according to the types of customers they focus on, they adopt a market structure.

Product Structure
Using a product structure managers place each distinct product line in its own selfcontained division and give divisional managers the responsibility for division businesslevel structure.
Each division is self-contained because it has a complete set of all the functions that it
needs to produce goods or services.
Advantages of using a product structure are:
 It allows functional managers to specialize in only one product area, so they build
expertise.
 Each division’s managers can become experts in their industry.
 It frees corporate managers from the need to supervise directly each division’s day-today activities.
 The extra layer of management can improve the use of organizational resources.
 It puts divisional managers close to their customers and lets them respond quickly and
appropriately.
Management Insight: Viacom’s 2001 Product Structure
Viacom is continually making acquisitions that add to the range of products that this huge
media entertainment company offers its customers. To manage Viacom’s many different
businesses effectively, chairman of the board Sumner Redstone decided to design a product
structure. He placed each of Viacom’s many different businesses is a separate division and
gave managers in each division the responsibility for making their business the number-one
performer in its industry. However, Redstone also recognized that its various businesses could
create synergies for Viacom by sharing their skills and resources. To achieve these synergies,
he created a corporate team of managers who are responsible for working with the different
divisional managers to identify new opportunities that create value for consumers.
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
Geographic Structure
When organizations expand rapidly both at home and abroad, functional structures can
create problems. In such cases, a geographic structure, in which divisions are broken
down by geographical location, is often chosen. Managers are most likely to do this when
customer needs vary widely by country or world region.

Market Structure
Sometimes managers group functions according to the type of customer buying the
product, in order to tailor an organization’s products to each customer’s unique demands.
A market structure (also called customer structure) is an organizational structure in
which each kind of customer is served by a self-contained division. It allows managers to
be responsive to the needs of customers and allows them to make decisions in response to
customers’ changing needs.
Matrix and Product Team Designs
When the environment is dynamic, changing rapidly, and uncertainty is high, even a divisional
structure may not provide enough flexibility. Matrix and product team designs are the most
flexible type of organization structures.
Matrix Structure
In a matrix structure, managers group people in two ways simultaneously: by function and by
product. The result is a complex network of reporting relationships that makes the matrix
structure very flexible.

Each person in a product team reports to two bosses: 1) a functional boss, who assigns
individuals to a team and evaluates their performance, and 2) the boss of the product team,
who evaluates their performance on the team.

To keep make the most of human resources, the functional employees assigned to product
teams change over time as the specific skills needed by the team changes.
Product Team Structure

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The dual reporting relationships of a matrix structure have always been difficult for
managers and employees to deal with. To avoid these problems, managers have devised
another way of organizing people and resources: a product team structure.
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
The product team structure differs from a matrix in that: 1) it does away with dual
reporting relation ships and two-boss managers, and 2) functional employees are
permanently assigned to a cross-functional team.

A cross-functional team is a group of managers brought together from different
departments to perform organizational tasks. Increasingly, organizations are making
empowered cross-functional teams an essential part of their organizational architecture to
help them gain a competitive advantage in fast-changing organizational environments.
III. COORDINATING FUNCTIONS AND DIVISIONS
In organizing, a manager’s next task is to ensure that there is sufficient coordination among
functions and divisions.
Allocating Authority
To coordinate the activities of people, functions, and divisions and to allow them to work
together managers must develop a clear hierarchy of authority. Authority is the power vested
in a manager to make decisions and use resources to achieve organizational goals by virtue of
his or her position in an organization. The hierarchy of authority is an organization’s chain of
command. Every manager, at every level of the hierarchy, supervises one or more
subordinates. The term span of control refers to the number of subordinates who report
directly to a manager.

Managers at each level of the hierarchy deliberate with managers at the next level down in
authority to make decisions. By accepting this authority, those lower-level managers then
become responsible for their decisions and are accountable for how well they make them.

A line manager is someone in the direct line or chain of command and has formal
authority over people and resources lower down. A staff manager is a manager
responsible for managing one of the specialist functions, like marketing or finance.
Tall and Flat Organizations

As an organization grows in size, its hierarchy of authority normally lengthens, making the
organizational structure taller. A tall organization has many levels of authority relative to
a company size. A flat organization has fewer levels relative to company size.

As a hierarchy becomes taller, problems that make an organization less flexible and slow
to respond to respond to environmental changes may result. Effective communication
becomes difficult and expenses rise.
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The Minimum Chain of Command

The principle of the minimum chain of command states that top managers should always
construct a hierarchy with the fewest levels of authority necessary to efficiently and
effectively use organizational resources.

To ward off the problems associated with tall organizations, top managers must be sure
that they are employing the right number of middle and first-line managers. Effective
managers constantly scrutinize their hierarchies to see whether the number of levels can be
reduced.
Centralization and Decentralization of Authority
Another way that managers keep the organizational hierarchy flat is to decentralize authority
to lower-level managers and nonmanagerial employees.
Advantages of decentralization include:
 Communication problems are minimized.
 Employees are better able to recognize and respond to customer needs when decisionmaking is at lower levels within the organization.
 The organization behaves in a flexible way even as the organization grows and becomes
taller.
However, too much decentralization has disadvantages, including:
 Managers may begin to pursue their own goals at the expense of organizational goals.
 Lack of communication among functions or divisions may prevent possible synergies.
Top managers must seek a balance between centralization and decentralization of authority. If
managers are in a stable environment, then there is no need to decentralize authority. In
uncertain, changing environments, top managers must empower employees and allow teams to
make important strategic decisions.
Managing Globally: DaimlerChrysler, Volkswagen, and Decentralization
In 2001, managers at two different German car companies made two very different decisions
concerning how to structure their companies. At DaimlerChrysler, CEO Jurgen Schrempp was
furious about the billions of dollars of losses its U.S. Chrysler division experienced. He felt
that this happened because his company was too decentralized. After the merger, Schrempp
had left many decisions to the Americans and he believed that they had not made the tough
choices required to reduce costs and improve quality. So he installed a German management
team who would report directly to him so he could make the key decisions.
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At Volkswagen, they were having a different problem. Managers believed too much
centralization at the top of the organization had led to the lumping of all the cars together, to
the point that the public could not perceive the difference between Audis and ordinary
Volkswagens. So at Volkswagen they created two divisions, one for luxury cars and one for
mass-produced cars. Decision making authority was decentralized in both.
Types of Integrating Mechanisms

Managers can use various integrating mechanisms to increase communication and
coordination among functions and divisions. The greater the complexity of an
organization’s structure, the greater is the need to increase communication and
coordination among functions and divisions.

Five integrating mechanisms are available to managers to increase coordination and
communication. Listed in increasing complexity, they are: direct contact, liaison roles,
task forces, cross-functional teams, and matrix structures.
IV. STRATEGIC ALLIANCES, NETWORK STRUCTURES, and IT
Recently, increasing globalization and the use of new IT has brought about two innovations in
organizational architecture: strategic alliances and business-to-business network structures.

A strategic alliance is a formal agreement that commits two or more companies to
exchange or share their resources in order to produce and market a product. Strategic
alliances are usually formed because the companies involved have similar interests and
believe that they can benefit by cooperating with each other.

A network structure is a series of global strategic alliances that an organization creates
with suppliers, manufacturers, and/or distributors to produce and market a product.
Network structures allow an organization to manage its global value chain in order to find
new ways to reduce costs and increase the quality of products, without incurring the high
costs of hiring managers to complete these tasks.
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Ethics in Action: Of Shoes and Sweatshops
As the production of all kinds of goods and services are increasingly outsourced to poor
regions of the world, the behavior of companies that outsource production to subcontractors in
these countries has come under scrutiny. Nike, the largest and most profitable shoe company
in the world, was one of the first to experience public backlash when critics revealed how
workers in poor countries were being treated. As a result, CEO Phil Knight reevaluated Nike’s
labor practices and announced that all factories producing its products would be independently
monitored and inspected. After its competitor, Reebok, announced its intention to raise wages
by 20%, Nike raised its wages 25 percent so that workers earned $23 a month rather than $18.
Adidas, a European shoemaker, faced similar accusations. Similar crises in the clothing,
electronics, and toy industries have forced them to reevaluate their foreign labor practices,
also.
V. SUMMARY AND REVIEW
LECTURE ENHANCERS
Lecture Enhancer 7.1
ORGANIZING FOR CUSTOMER SERVICE
Traditional formal organization structure can stifle an organization’s ability to deliver
exemplary customer service. To meet the needs of customers, a more fluid approach is
needed. An example of this is the customer-supplier relationship developed by Digital
Equipment Corporation, which attempts to build lasting partnerships with its customers by
anticipating not only the day-to-day requirements of customers, but also by helping them plan
for the unexpected.
An example of this occurred at 3:30 a.m. January 4, 1988 when an electrical fire in Chase
Bank’s main production site in Manhattan wiped out the fifty-story building’s power,
including all computer systems. This was the first day of the banking new year and Chase
expected to process well over its daily average money transfer volume.
When Chase purchased its equipment, Digital assisted in planning for the everyday and backup operations crucial to the bank’s relationship with its customers. They also supported a
secondary site which was fully operational and configured to meet the backup processing
requirements of the main production facility.
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The situation for Chase was potentially threatening. If on-line systems failed to process even
one day’s worth of transactions, the bank could be subject to serious penalties. Two Digital
field service crews were on the scene before dawn—one downtown and another at one of the
bank’s contingency sites. Simultaneously, a Digital team from manufacturing, sales, and field
service banded together, coordinating overnight delivery of additional parts and peripherals.
That same day, the operational site was fully operational, enabling Chase to successfully
complete 95 percent of its business volume. Digital continuously worked with bank personnel
until the main production site was back in business. For Chase customers, it was business as
usual.
Lecture Enhancer 7.2
FLEXIBLE DESIGN EXTENDS TO THE WORKPLACE
Businesses, having become convinced of the value of teamwork, are starting to redesign
offices to accommodate the teams. Braun Inc., a small appliance manufacturer and a Gillette
Co. subsidiary, recently celebrated its move from a traditional office building in Lynnfield,
Mass. to a two-story, 38,000-square-foot site where employees meet at oases furnished with
cafe-style tables and chairs, computer terminals for Internet browsing, and aquariums stocked
with exotic fish.
“We wanted to change the rules and create a more open environment that would encourage
communication and collaboration,” said president Bruce Cleverly. “We had already
restructured our business by creating cross-functional teams that allow our finance, logistics,
sales, and marketing people to work together based on specific products. We needed an
environment that reflected our new approach.” Braun is hardly alone. Over the last decade,
International Business Machines Corp., Chrysler Corp., AT&T Co., and Ford Motor Corp.
have all redesigned their office spaces with an eye toward flexibility and open
communication.
Not surprising, the office-furniture industry has capitalized on the trend, aggressively
marketing flexible furnishings for the flexible workspace. One example: Personal Harbor, a
Steelcase Inc. product that helps companies build their own collaborative office spaces with
cabinets on wheels, screens with dual functions, and other portable furnishings.
To be sure, the much-maligned cubicle of Dilbert fame still exists. But at Braun, the standard
cubicle now includes stylish glass openings that allow employees to see beyond their own
gray walls and reflect light from the banks of windows that line the office.
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Braun’s Cleverly described the impetus for creating the new, open office: With company sales
expected to reach the $500 million mark next year, the firm needed more space, giving it a
ready-made opportunity to move to a more open floor plan. So Braun hired architects Jung &
Brennan Inc. to draw up plans for renovation of some additional leased space. Under the
architects’ direction, contractors tore down walls, connected two floors by way of a spiral
staircase and created a meeting place in the lobby with the look and feel of a living room.
Additionally, the new floor plan encouraged socializing by developing islands where the
company’s 170 employees could meet in small groups.
The company still uses offices, but windows lessen the isolation that previously characterized
the executives’ old offices. And strategically placed meeting places make it possible for
people to gather for impromptu or planned discussions throughout the day.
Jim Barter, a Braun product manager, says the new office has encouraged brainstorming and
reduced the amount of time it takes to gather information. “It’s easier to connect with the
people you need and share ideas. You just walk out the office door,” he said.
MANAGEMENT IN ACTION
Notes for Topics for Discussion and Action
1. Would a flexible or formal structure be most appropriate for each of these organizations:
(a) a large department store (b) a Big Five accountancy firm (c) a biotechnology
company? Explain your reasoning.
A large department store should utilize a formal structure. The retail business is a
relatively stable environment. Resources are readily available, and uncertainty is low. Less
coordination and communication among people and functions is needed to obtain
resources. In a department store, most important decisions can and should be made by top
managers within a clearly defined hierarchy of authority. Employees do not need to decide
which products to sell, or how the store will market itself. Employee activities should be
governed by extensive rules and standard operating procedures.
A Big Five accountancy firm should utilize a more flexible structure. Most of these firms
are expanding globally, and global expansion is facilitated by a flexible structure that
allows for more autonomy at lower levels in the organization. Also, primarily
professionals staff an accounting firm. Flexible structures are best suited to the needs of
highly skilled people. Most accountants have learned professional honesty and integrity in
their training, and would likely resent close supervision, a distinct feature of a formal
structure.
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A biotechnology firm should also implement a flexible structure, due to the ever-changing
and developing environment in which it operates. A flexible structure makes it easier to
speed decision making and communication, and makes it easier to obtain resources. In
addition to the environment, technology is also a factor. The more complicated the
technology, the greater the need for a more flexible structure. Biotechnology firms have
incredibly complicated skills, knowledge, tools, machines, and computers that they use to
conduct research and develop products. Many of their human resources are skilled, as
scientists or doctors, and do not require close management supervision.
2. How could a salesperson’s job or a secretary’s job be enlarged or enriched to make it
more motivating?
Allowing them to schedule their various activities and be responsible for reporting to
management on their progress could enrich a salesperson’s job. A salesperson could also
be charged with the task of finding new ways to approach customers or close a sale that
make repeat business more likely. Management might encourage their sales force to
develop new skills, such as marketing techniques and knowledge that can be applied to
their current jobs. A workshop for salespeople could be arranged to help figure out ways
to respond to unexpected situations, with various workshop members offering suggestions
and solutions.
Giving him or her the opportunity to handle new responsibilities could enrich a secretary’s
job. A manager could encourage a secretary to develop new skills or extend the
opportunity to decide how to do the work, for example, developing a new way of
organizing files or documents. Allowing a secretary to monitor and measure their own
performance might also give him or her a feeling of job involvement, and encourage
flexibility rather than rigidity in the work setting.
3. When and under what conditions might managers change from a functional to (a) product
(b) geographic, or (c) market structure?
A functional structure is a structure that is composed of all the necessary departments that
an organization requires to produce its goods or services. A functional structure might be
changed to a product structure if growth and diversification in an organization become a
problem over time. Managers might create divisions according to the type of product or
service they provide if they decide to diversify into new industries or to expand their range
of products. By placing each distinct line or business in its own self-contained division
and giving the divisional managers the responsibility for devising the right business-level
strategy, the division will be in a better position to compete effectively in that industry or
market.
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A geographic structure may be adopted when organizations are expanding rapidly both at
home and abroad, and managers find it increasingly difficult to manage, from one central
location, the problems and issues that may arise in each region of the country or area of the
world. When shifting to this structure, management breaks down divisions by geographic
location, giving managers the flexibility they need to best meet the needs of regional
customers.
A market structure is appropriate when an organization needs to group functions according
to the type of customer buying the product. This structure allows managers to be more
responsive to the needs of their customers and allows them to act flexibly to make
decisions that are needed to quickly respond to changing customer needs. This structure is
beneficial in organizations where the time factor is critical.
4. How do matrix structure and product team structure differ? Why is product team structure
more widely used?
In a matrix structure, managers group people and resources in two ways simultaneously:
by function and by product team. In developing this structure, managers build a network of
reporting relationships among product teams and functions. Each person in a product team
reports to both a functional and a product team boss (known as two boss managers.)
Matrix structure makes the most use of human resources because people are only part of
the team when their skills are needed, and leave the team after they have completed their
assignment.
A product team structure is different from a matrix structure in that (1) it does away with
dual reporting relationships and two boss managers; and (2) in a product team structure,
employees are permanently assigned to cross-functional team, and the team is empowered
to bring a new or redesigned product to market. Members of a cross-functional team report
only to the product team manager or one of his/her direct subordinates.
The product team structure is more widely used today because dual reporting relationships
that characterize the matrix structure are difficult for managers and employees to handle.
Often, the two bosses make conflicting demands, leaving employees confused and
frustrated. Functional and product team bosses may come into conflict over who is in
charge of which team members for how long, since members are not permanently assigned
to a cross-functional team in a matrix structure, like they are in a product team structure. A
product team structure is used because it allows flexibility with a structure that is easier to
operate.
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5. Find a manager and identify the kind of organizational structure that his or her
organization uses to coordinate its people and resources. Why is the organization using
that structure? Would a different kind of structure be more appropriate? Which one?
Dr. Miller is the director of a survey research institute affiliated with a large university.
The institute uses a functional structure, or one that encompasses all the necessary
departments that it needs to produce its goods and services. Departments include
sampling, interviewing, data collection, data processing, data programming, and
accounting. Departments are arranged so that everyone possesses similar skills and uses
the same kind of knowledge, tools, and techniques to perform their jobs. This structure is
used so that people can learn from observing one another and can become more
specialized and perform at a higher level. It also is easier for managers, or study directors,
to monitor and evaluate the performance of their subordinates. Also, it allows study
directors to most efficiently scan and monitor the environment.
Occasionally, a different structure is used when it is deemed appropriate. In some research
organizations, it is necessary to adopt a product structure. This occurs when a department
accepts a project that is different from what is normally done by the organization. When
this occurs, one team will be responsible for all aspects of one study, from data collection,
to sampling, to evaluation, to data processing. This allows the team to concentrate on one
project or subject area.
6. Compare the pros and cons of using a network structure to perform organizational
activities, as opposed to performing all activities “in house” or within one organizational
hierarchy.
The advantages of using a network structure to perform organizational activities are: 1) it
allows the organization to bring resources together on a long-term basis for the purpose of
finding new ways to reduce costs and increase the quality of their products, without
incurring the high costs of operating a complex organizational structure, 2) it allows
companies to gain access to low cost foreign sources of inputs, and 3) it allows companies
to keep their organizational structure flat and flexible.
The disadvantages of using a network structure include limited control over the processes
used by foreign suppliers, which may result disturbing consequences for the organization.
The ethical problems created for Nike by its foreign suppliers is an example.
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Notes for Building Management Skills
Understanding Organizing
Think of an organization with which you are familiar or perhaps one in which you have
worked, such as a store, restaurant, office, church, or school. Then answer the following
questions.
1. Which contingencies are most important in explaining how the organization is organized?
Do you think it is organized in the right way?
A large university will be used as an example of an organization. The environment is
important in explaining why a university is usually operated under a formal structure.
Historically, universities have served the purpose of higher education, with adequate
faculty and support staff. The environment was not subject to a high level of uncertainty,
and resources were readily available. Most universities adopted the same strategy, perhaps
differentiating some programs, but most were comparable in services and courses offered.
Technology has emerged as a new standard, though computers are becoming increasingly
prevalent in all aspects of teaching and administration. Human resources is less of a factor
because the range is typically great, from professors, to custodial staff, to administrative
staff.
This formal, functional structure may not be the most appropriate for universities that
hope to succeed in the coming years. Students are requiring more from schools, funding is
scarce, and many schools need to learn to do more with less. A more flexible structure, at
least in some departments, may help universities respond to the changing academic
environment.
2. Using the job characteristics model, how motivating do you think the job of a typical
employee in this organization is? Can you think of any ways in which a typical job could
be enlarged or enriched?
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A university has many different departments and positions, so a typical job may not be
easy to identify. Since a secretary would be found in most departments, that will be used
as an example.
A secretary of a department may have duties such as typing, answering the telephone,
taking messages, accepting packages, and sending out information. The skill variety may
be sufficient if the secretary feels that they use a wide range of skills, abilities, and
knowledge. Task identity may not be very high for a secretary, since any task might not
require much process, like typing a letter or sending out department information. More
task identity may be gained by having the secretary give input about which information
the department sends out, or having the secretary contribute to the content of this
information. Secretaries can often feel that they have task significance when faculty or
staff thank them for completing a task and therefore show them that their work is
important.
3. What kind of organization structure does the organization use? If it is part of a chain,
what kind of structure does the entire organization use? What other structures might
allow the organization to operate more effectively? For example, would the move to a
product team structure lead to greater efficiency or effectiveness? Why or why not?
A university is usually composed of different schools, for example, arts and sciences,
engineering, business, and so on. Within each school, there are usually deans and faculty,
both senior and associate. Overall, the structure is functional in that departments are made
up of people who possess similar skills or use the same kind of knowledge, tools, or
techniques to perform their jobs. There are other structures in a university, also. The fact
that universities are divided into graduate and undergraduate programs is indicative of a
market structure, in that the schools are divided according to the type of student on which
they focus.
Some universities are also divided into more than one campus, which makes a geographic
structure appropriate. This allows schools to focus on the area in which a school is, as is
the case when there is an urban and a suburban campus. Students at each of the two
schools often have unique needs and issues.
A product structure would not lead to more organizational effectiveness in this context
because all the divisions or schools in the university should be striving to deliver the same
product, which is a quality education. In terms of type of degree, a university could be
labeled a product structure in that each faculty member tends to specialize in one school,
and they can become experts in their respective fields.
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4. How many levels are there in the organization’s hierarchy? Is authority centralized or
decentralized? Describe the span of control of the top manager and of middle or first-line
managers.
There are many levels in a university’s hierarchy. The president of the university must
report to a board of trustees, and deans of schools must report to both university president
and the board. Senior faculty must report to the head of their department, and the heads of
departments must report to deans of schools. Associate faculty need to report to senior
faculty in their department, as well as the head of the department. Graduate students who
work for the university must report to their advisors and department faculty. Authority
tends to be centralized at the very top of each division, but becomes more decentralized as
you move down the hierarchy. The president of the university cannot make all the decisions
about which courses will be offered or which faculty will be hired, but some decisions
about budget allocations and strategy are too monumental to be delegated to specific
departments.
The president has a large span of control, or many subordinates that he or she directly
manages. The heads of departments, which can be viewed as middle managers, have large
spans of control as well. A professor, which may be viewed as a first line manager, would
have a small span of control, perhaps only over a few graduate students.
5. Is the distribution of authority appropriate for the organization and its activities? Would
it be possible to flatten the hierarchy by decentralizing authority and empowering
employees?
The functional structure of a large university is appropriate because divisions like
athletics, food service, maintenance and other operation divisions should be separate from
the academic departments such as psychology, mathematics, education, and so forth.
Authority is decentralized within each department so that the head of the department does
not have to make every day-to-day decisions, but is still informed of the activities that are
being carried out.
Within a very large university, sometimes the hierarchy is too formally structured in a way
that makes it difficult to get things done. In some cases, a student may need the signature
of a head of a department in order to add or drop a class. If the department head is very
busy, it may be difficult for a student to fulfill this requirement, possibly causing him or
her time and money. If authority were decentralized to faculty for this requirement, it
would be easier for the student to fulfill it.
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Sometimes it is difficult to decentralize authority and empower employees in a situation
where those with authority are unwilling to relinquish it to others. This can happen in a
university as well as in any organization. Also, if departments or divisions are given too
much decision making authority, there is the danger that they will begin to pursue their
own goals at the expense of the university’s goals. An example might be a department
who wants to concentrate heavily on research at the expense of teaching. This may not be
in line with the strategy of the university as a primarily educational, rather than a research,
institution.
6. What are the principal integrating mechanisms used in the organization? Do they provide
sufficient coordination among people and functions? How might they be improved?
Faculty and departmental meetings are held in which everyone meets to discuss relevant
issues and to update one another on the status of their teaching and/or research activities.
Different committees are also formed in which representatives of each division meet to
address problems or issues that concern everyone. These committees serve as task forces
within the academic system. These tools are used so that divisions can increase
communication and coordination within themselves, and their departments.
The existing integrating mechanisms may not be providing sufficient coordination
between people and functions. These mechanisms could be improved by having crossdepartmental meetings. In today’s universities, many students are requesting interdepartmental learning. The boundaries between fields are becoming blurred, and students
want to be able to take classes from and specialize in many different fields in order to be
successful in their careers. Universities that continue to operate as if each department
exists within a vacuum will find that students will look elsewhere for education that takes
more of an integrative approach. The environment is changing in that students need to
know more and have more diversified experiences.
More direct contact with faculty from different divisions, and more cross-functional or
cross-departmental teams or committees could promote communication and integration
within the academic departments. In addition, liaisons from the “real-world” could be
established in order to connect the academic setting with the realities of the working
environment. Faculty could meet with these liaisons to establish internships and job
opportunities.
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7. Now that you have analyzed the way this organization is organized, what advice would
you give to its managers to help them improve the way it operates?
The advice that would be most helpful would be to be flexible. Certain functions need to
remain separate, but departments and schools would do well to try to integrate more and
become less strict with requirements to take certain classes in certain schools. Students
should be allowed and encouraged to build their own curriculum so that they receive the
relevant training that they need to succeed in today’s world. The job opportunities that
exist today require people who have many different skills and wide knowledge bases. The
environment is very unstable in many industries, and employers are looking for students
who possess initiative and creativity. Allowing for more flexibility within our education
systems can promote this while providing quality education.
Notes for Small Group Breakout Exercise
Bob’s Appliances
You are a team of local consultants that Bob has called in to advise him as he makes this
crucial choice. Which structure do you recommend? Why?
Since Bob’s strategy is to widen his product range and compete directly with the chains, he
needs to implement a structure that is more flexible than the functional structure that is
currently in place. The current divisions of sales, purchasing and accounting, and repair will
not adequately accommodate the new product line of consumer electronics. The best strategy
would be to implement a product structure with separate functions for each of his two lines of
business. A product structure would be the most appropriate because the consumer electronics
business is much less predictable and stable than the appliances business. A product structure
will give divisional managers (appliances and consumer electronics) the responsibility for
devising the right business-level strategy to allow the two divisions to compete with the chain
stores. This structure will also allow functional managers to specialize in only one product
area, and each manager can become experts in their product industry. This structure also
liberates Bob from direct responsibility for all day-to-day operations.
In terms of customer service, a product structure will enable Bob’s Appliances to retain their
good reputation. Product divisional managers are closer to their customers and can respond
more appropriately to the changing environment.
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Notes for You’re the Management Consultant
Speeding Up Website Design
Questions:
1. Discuss ways in which you can improve the way the current functional structure operates
to speed website development.
Given the project-oriented nature of the firm, the matrix structure would work well. A
product team structure with cross-functional roles would expedite the process of website
development.
2. Discuss the pros and cons of moving to a (a) multidivisional, (b) matrix, and (c) productteam structure to reduce website development time.
A multidivisional structure would help the company organize workers into smaller, more
manageable units, which would presumably work faster. With a matrix structure,
employees from different functional areas would learn from each other and become more
skilled and productive. The product team structure would allow employees to work crossfunctionally but would do away with the dual reporting relationship of the matrix
structure, which can be problematic.
3. Which of these structures do you think is most appropriate and why?
The product team structure appears to be the best alternative. Because they report to two
bosses, employees often find the matrix structure frustrating and confusing. A divisional
structure does not lend itself to the company’s project orientation.
MANAGING ETHICALLY
1. Either by yourself or in a group, discuss whether or not it is ethical for managers to allow
workers to perform such repetitive tasks for long periods of time. What kind of standards
would you need to use to decide this issue?
Problems occur when workers must repeat a motion with far too great a frequency and not
enough rest in between. Repetitive tasks that potentially cause such problems include
typing, lifting, twisting or reaching. If the constant cycle of repetitive motion isn’t
interrupted by breaks and/or exercise, serious conditions such as carpal tunnel syndrome,
back pain, or tendonitis can develop, which may require surgery to correct. It is unethical
for an employer to knowingly allow workers to consistently perform a task that has been
proven to result in physical injury.
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2. To what extent should job redesign be used to change such a situation and enrich jobs, if
it raises costs and makes a company less competitive?
OSHA estimates that 1.8 million workers are injured each year by repetitive tasks that lead
to musculoskeletal disorders. These problems cost employers between $45 and $54 billion
annually in compensation, lost wages, and decreased productivity, according to the
National Academy of Sciences. Clearly, this increases costs and decreases efficiency,
rendering the organization less competitive.
Experts say that in many cases, however, these problems can be prevented by simple
adjustments, such as sitting straighter at a desk, providing wrist rests for typists, providing
a more comfortable chair for office workers, ensuring enough light to prevent eye strain,
and moving a piece of equipment or rearranging a work station. In such cases, job redesign
and its accompanying expense are in unnecessary.
However, if the cause of productivity loss is boredom, not injury, job enlargement or job
enrichment is probably the best solution. Achieving the right mix of worker-task
specialization is should result in increases in worker output. This, in turn, should result
increased revenue that outweighs the costs incurred from job redesign.
3. How could organizational structure be redesigned to make this problem less prevalent?
If boredom is the culprit, Hackman and Oldham’s job characteristics model can be used as
a guide to make jobs more interesting and motivating. This model explains why enlarged
and enriched jobs will result in improved personal and organizational outcomes. Managers
should also analyze jobs or work tasks and seek worker input, in an effort to identify
potential ergonomic problems before injuries occur. If workplace conditions are identified
that can give rise to musculoskeleltal disorders, increasing the number or variety of tasks
in a given job (job enlargement) is an appropriate solution.
CASE FOR DISCUSION
Case Synopsis: LUCENT REORGANIZIES FOR SURVIVAL
“How should managers improve performance?” In the early 2000s, Lucent managers faced
many problems from globalization to trying to gain a competitive advantage to attempting to
increase efficiency and effectiveness. In the 1990s, Lucent Technologies was a high-flying
company but suddenly its stock plunged, and competitors like Nortel and Cisco were doing
much better. Some of the company’s problems were due to the very complex way the
company had been organized by former CEO, McGinn. His successor, Henry Schacht,
decided to increase efficiency and effectiveness by restructuring the five divisions into two to
coordinate decisions better. The company spent hundreds of millions of dollars to restructure
the company and laid off over half its employees.
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Questions:
1. What problems in the environment caused problems for Lucent and led to the need for
change?
Lucent was faced with increased competition from Nortel Networks. It was forced to
restructure as means of attempting to gain and sustain a competitive advantage, since it
has misread the needs of its consumers.
2. What was the design of Lucent’s old organizational structure?
The old structure consisted of 11 different business divisions, each of which focused on a
particular product and market. This is an example of a divisional market structure, also
sometimes called a customer structure.
3. What was the design of Lucent’s new organizational structure?
Lucent’s new organizational structure consists of two divisions. The Network Solutions
Division handles all of the company’s ‘land-line’ products and the Mobility Solutions
Division handles all of its wireless products. This is an example of a divisional product
structure.
4. Check the Internet for any recent stories about how Lucent’s structure is working.
The most current articles concerning this topic can be obtained by using any Internet
search engine, such as Google or Yahoo.
BUSINESS WEEK CASES IN THE NEWS
Case Synopsis: Meet the “Completely Different EDS”
This case outlines the recent difficulties experienced by Electronic Data Systems (EDS).
When the company landed the government’s biggest ever technology deal, corporate
executives celebrated. Investors, however, thought that celebration was premature. Despite
nearly two years of painful cost cutting and reorganizing, EDS still had not proven that it
could again ignite its sluggish topline growth. Although CEO Richard H. Brown and his team
have done a great job of pruning costs, the IT industry remained sluggish.
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EDS had grown fat and complacent, with some 48 strategic business units operating as
separate fiefdoms that bloated costs and confused customers. When Brown took over, he hit
EDS like a neutron bomb. Only 10 of the 38 top officers who were there when he arrived
remain. The 48 fiefdoms have been streamlined into four business divisions. With rapidly
changing markets, EDS has no choice but to be faster and nimbler in the years to come.
Questions:
1. What kind of organizational structure did the old EDS have? How did this affect its
performance?
EDS's former product structure consisted of 48 strategic business units operating as
separate fiefdoms, which bloated costs and confused customers.
2. What changes did Brown make to EDS’s structure and how do they affect is performance?
Brown fired many top managers, streamlined the company into four business divisions,
and began evaluating the performance of his top 40 managers into a competitive, highly
visible manner. The company has had some initial success – costs are down and
communications with customers have improved dramatically. However, EDS executives
agree that they still must deliver upon their growth promises to fully reap rewards on Wall
Street.
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