Video Transcript: Organizational Design and Structure

Designing and redesigning the organization in response to internal and external  changes is a key managerial function. Let's take a look at organizational design  and structure. Organizational design is the process of selecting and managing  aspects of organizational structure and culture to enable the organization to  achieve its goals. One of the most important outcomes of organizational design  is organizational structure, or the formal systems of task, power and reporting  relationships. Organizational structure is the core of what coordinates, controls  and motivates employees to cooperate towards the attainment of organizational  goals. When the organizational structure is aligned with organizational needs, it  results in greater organizational efficiencies and less conflict. Organizational  structures influence employee behavior by enabling or restricting  communication, teamwork and cooperation as well as intergroup relationships.  Imagine the difference between working in an organization comprised of  independent work teams given the authority to make their own decisions,  compared to a highly centralized bureaucratic organization in which decisions  are made solely by the CEO. Your autonomy, influence and work variety would  differ greatly in each organization. Each type of structure can be effective  depending on the nature of the organization and its environment, but each  creates very different patterns of communication and levels of individual  responsibility. An organizational chart is a diagram of the chain of command and  reporting relationships in an organization. An organizational chart like the one  shown here illustrates the chain of command and reporting relationships in your  company. Higher levels in the organization chart supervise and are responsible  for the activities and performance of the levels beneath them. It is a common  mistake to believe that a person's location in the organizational chart reflects  their importance to the company and its performance. What usually matters  most is what each person contributes, and people at all levels of the  organization can make meaningful contributions. An organization chart is a  diagram of the chain of command and reporting relationships in a company. As  organizations grow, they often create multiple organizational charts for each  major division or functional area. In addition to illustrating the chain of command, organizational charts show the division of labor, which reflects the degree to  which employees specialize or perform a variety of tasks as generalists. Dividing work into specialized jobs increases work efficiency. Specialized employees can  learn their jobs faster and with less training. And because their jobs are focused, they waste little time changing tasks. Division of labor also makes it easier to  assess job candidates for specific talents needed to do the job, because  specialists are experts, they often have greater autonomy and decision making  authority, which increases the firm's ability to respond quickly to environmental  changes. On the downside, employees tend to be more isolated when division  of labor is high. This can make it difficult for different divisions in the company to  understand each other's priorities and needs, it can increase the potential for 

conflict. The increased specialization of employees in each division also  decreases organizational flexibility. The number of people reporting directly to an individual is the person's span of control. Some experts call this span of  management. Clearly, narrow spans of control are more costly, but they also  provide closer supervision and more coaching. Narrower spans of control are  necessary for novel and complex tasks. Wider spans of control give  subordinates greater autonomy and responsibility for self management are best  for routine production type work. There is no consensus on the ideal span of  control, although having more than nine direct reports is often considered too  many to effectively manage. Wider spans of control are possible when  technology such as assembly line or computerized call center management  technology substitutes for close supervision when subordinates need less  direction and control and when jobs are being supervised are similar. When an  organization creates a hierarchy, it outlines supervision relationships by giving  some employees authority over others. Hierarchy establishes the tallness or  flatness of the organizational chart, although hierarchy can facilitate the  coordination of different departments, organizations clearly should not have  more hierarchical levels than are necessary. Not having enough levels can also  create problems when work activities require control and coordination. Middle  management layers can facilitate work processes. Hierarchy can give too much  power to too few people at the top of an organization, which can increase the  risk of unethical behavior because hierarchy creates clear chains of command, it also can relate information and communication among employees to better  compete in fast changing global marketplaces, organizations are increasingly  restructuring to reduce their hierarchy and improve speed and efficiency.  Formalization reflects the extent to which organizational rules, procedures and  communications are written down in a highly formalized firm. Little flexibility  exists in making decisions and both procedures and rewards follow explicit  rules. Formalization is not necessary for high performance because  formalization increases job and role clarity, it can increase employee  commitment without role clarity, dissatisfaction, anxiety and lower performance  can result if employees perceive that organizational rewards are consistently  allocated based on formal rules and procedures. Their confidence that they are  being compensated appropriately is increased. Centralization. Organizations  concentrate power and decision making authority at higher levels of the  organization. The two sub components of centralization are participation in  decision making and hierarchy of authority. Centralization creates clear lines of  communication and responsibility, and the implementation of decisions tends to  be straightforward. Centralization is best in non complex, stable environments.  In decentralized organizations, the authority for decision making affecting an  organization is distributed decentralization organizations tend to have flatter  structures than centralized organizations because employees' greater autonomy

decreases the need for middle management. Flatter structures promote  innovation and increase the speed of decision making, and can save money as  a result of fewer management layers. Decentralization is best when  organizations perform non routine tasks in complex environments, because it  empowers managers closest to the environment to make decisions and quickly  implement them. Organizational structure has significant impact on the culture,  effectiveness and performance of an organization. Mechanistic. Organizations  are rigid, traditional bureaucracies with centralized power and hierarchical  communications. Job descriptions are uniform and formal rules and regulations  guide decision making. More mechanistic organizations may minimize costs, but fit best with a relatively stable or slow changing environment when new  opportunities present themselves, mechanistic organizations usually move too  slowly to capitalize on them. In contrast, organic organizations are flexible.  Decentralized organizations with unclear lines of authority, they have  decentralized power, open communication channels and focus on adaptability in helping employees accomplish their goals. Organic organizations benefit from  faster awareness of response to market and competitive changes, better  customer service and faster decision making. Organic forms, like teams and  other flatter structures, have typically been associated with increased job  satisfaction, attractive commitment and learning. Note that mechanistic and  organic structures represent ends of a continuum, not a dichotomy. No  organization is perfectly organic or completely mechanistic. Firms usually  display some characteristics of both forms along a mechanistic, organic  continuum, an organizational structure defines how activities such as task  allocation, coordination and supervision are directed toward the achievement of  organizational aims. The most appropriate structure for an organization depends on many things. Let's discuss each influence in more detail, one of the most  important factors influencing the appropriateness of different organizational  structures is the business strategy. Simple designs are appropriate for simple  strategies and more complex designs are necessary when strategies require  more complex processes and interactions matching organizational structure to  the business strategy leads to higher firm performance. Another important factor is the company's external environment. Rapidly changing environments require  more flexible structures to deal effectively with the constant changes. This  usually means that authority needs to be decentralized in some way to process  relevant information and adjust to the changing environment. A third factor  influencing organizational structure is the nature of the organization's talent. An  organization's size also influences its structure. Smaller organizations tend to be less bureaucratic than larger firms, larger organizations tend to have greater  specialization and departmentalization, greater hierarchy and more rules than  do small firms. Larger firms also benefit from lower costs due to economies of  scale, the larger an organization and its subunits, the taller the hierarchy, the 

greater the centralization and the more bureaucracy it operates, and the greater  the chances of conflict between managers and employees. A fourth important  factor influencing organizational structure is the organization's expectations of  how employees should behave and what attitudes it wants to encourage or  suppress. The decision is based in part on company values. If employees are to  be encouraged to make decisions and work collaboratively, a decentralized and  flat structure is appropriate, a fifth factor influencing organizational structure is  the organization's technology or primary production system. As organizations  change their strategies and adapt to the changing environment, they often  modify and change their structures to support the changes. An organizational  structure defines how activities such as task allocation, coordination and  supervision are directed toward the achievement of organizational aims. As they grow, organizations must decide how to carve employees into sub units. This  usually means grouping people in a way that somehow relates to the tasks they  perform. Here are six common basis for grouping employees, employee  knowledge and skills. Employees are grouped by what they know. For example,  pharmaceutical organizations have departments like oncology and genetics by  business function. Employees are grouped by business function. For example,  many organizations have departments of human resources, marketing and  research and development. Employees are grouped based on the activities they do. For example, a realtor may have a different retail store and online  departments reflecting two different sales processes output. Employees are  grouped based on the products or services they work on. Client. Employees are  grouped based on the types of clients they serve location. Employees are  grouped based on the geographical areas they serve. Now let's discuss some of the structures that arise from these different groupings. A functional structure  groups people with the same skills or who use similar tools or work processes  together into departments. For example, a marketing department is staffed  solely with marketing professionals. A division is a collection of functions  organized around a particular geographic area, a geographic structure, product  or service, a product structure or market, a market structure. Divisional  structures are common among organizations with many products or services  geographical areas and customers. When employees report to both a project or  a product team and to a functional manager, they're working in a matrix  structure. Employees represent their function in their work team, which allows  the team to house all of the skills and expertise it needs to perform effectively  and make good decisions. Project managers coordinate the different functional  contributions to the project and are held accountable for the team's  performance. Organizations with a team based structure create horizontal or  vertical teams that can define part or all of the organization. Unlike matrix teams  in a team based structure performance, team members form different functions  and are permanently assigned to the project or product team and do not report 

to a second functional manager. In organizations with a lattice structure cross  functional and cross level, sub teams are formed and dissolved as necessary to  complete specific projects or tasks. This structure is common in consulting  organizations. A network organization is a collection of autonomous units or  firms that act as a single larger entity using social mechanisms for coordination  and control, because network organizations contract out any function that can  be done better or more cheaply by outside firms like marketing or payroll  managers spend a lot of time coordinating and controlling the network of  contractors and strategic alliances. Organizational Structure provides the  context in which employees teams and the organization perform. Communities  of practice are groups of people whose shared expertise and interest in a joint  enterprise informally binds them together. Examples include consultants who  specialize in designing training systems, or environmental engineers willing to  share their knowledge and insights with other environmental engineers a  community of practice. May or may not meet regularly or even in person, and  can be located in a single company or span companies altogether. The people  involved in the community of practice share their knowledge and experiences in  open creative ways, and can create new solutions and approaches to problems.  Managers cannot create effective communities of practice only the conditions  necessary for them to exist. A command and control management style is  unlikely to foster successful communities of practice. Successful managers  cultivate communities of practice by identifying and bringing the right people  together, building trust and providing an appropriate infrastructure the heart of  community of practice is the web of relationships among community members.  As a manager, how can you create the conditions that enable communities of  practice to flourish? Here are some expert tips. Start with a clear area of  business need build communities of practice that help the company work more  effectively. Start small test ideas and try several formats to see what employees  like and what works best. Recruit management involvement. If lower level  employees see their bosses actively participating in the community, they're more likely to participate as well. Use technology that supports the community's  needs, and the community members are able to use and are comfortable using  some training, using Wikis, portals and other technologies may be necessary  respect and build informal employee initiatives already underway, employees  may have already created a type of community of practice to help them do their  jobs better determine what's already in place and working and build on it.  Employees will already be somewhat familiar with the community's processes  and practices and more willing to use it, celebrate conditions and build on small  successes. Building a community of practice takes time and requires employees to behave in new ways. Highlight on the company's internet or on the company's newsletter, ways the community have solved business problems and recognize  employees who have meaningfully contributed. A reason many companies 

invest in communities of practice is the ability of those communities to transfer  knowledge among people