Organizational theory and design

Organizational theory and design

Università Cattolica del Sacro Cuore Giulia Basile 2^nd term 2023 Organizational theory and design 2^nd term 2023.

Summary of the principles of management lesson about organization

Organization of a company:

• Organizational design
  • Organizational structure
  • Organizational system
  • Organizational culture

Purpose and objectives of Organization people’s behaviors. They define, orient and coordinate. In a big company it is necessary to main aim is to reach effectiveness and efficiency to satisfy better the needs of customers.

Organizational design

• Dividing labor among units and positions allocating tasks, authority and accountability.
• Coordinating units exchange and circulation of information.
• Ensuring cooperation aligning goals and controlling their pursuit.

It is important to understand the differences between the corporate governance and the organizational design in companies:

• Corporate governance rules to define plans and supervise the activities, board of directors and auditors.
• They are planning.
• Organizational design they are executing.

To apply organizational design, that is decide how to divide labour and coordinate the different units, companies have the so called organizational variables:

• Organizational structure: identifies bodies and relationship between bodies, hierarchy.
• Organizational system: rules and procedures.
• Organizational culture: values that guide behavior, they are not written procedures but employees act on the basis of the value of the company, ex. customer must be satisfied.

The organizational structure

• The way by which tasks are divided and coordinated.

Tasks can be distributed and grouped based on task similarity, products, geography, process, etc. and the way tasks, authority and accountability are distributed and related hierarchically defines the basic organizational forms:

• Functional structure
• Multidivisional structure
• Matrix structure Pag.1

Organizational theory and design 2^nd term 2023.

Pure functional structure

• Advantage: functional specialization, avoid duplication, very interesting in the efficient way, and very used in small and medium companies.
• The activities are based on similar tasks, finance, marketing, ecc.
• It is a simple and efficient way to organize labour.
• They are generally preferred when centralization leads to significant cost saving and specialization.

Pure multidivisional structure

• Advantage: coordination on business and greater cohesion.
• Exists especially in companies that work in different countries and have some specific rule for each country.
• The activities can be based on the basis of products, geographical areas or customers.

Matrix structure

• Fusion between functional and multidivisional structure.
• Advantages: lots of support to employees, faster information, orientation to innovation, more people confront to each other.
• Disadvantages: unclear organization, complexity in functioning, difficulty in identifying priorities, internal conflicts and demotivation. Pag.2

Organizational theory and design 2^nd term 2023.

Organizational system

It is a system that allows a company to coordinate and control operations. It is divided into:

• Information Systems
• Strategic Planning System
• Financial Planning and Control System, how much money we need and what are the expensive we will make:
  • Capital Expenditure Budget
  • Operating Budget
• Human Resource Management Systems, control behaviors and activities.

Organizational culture

Set of values that guide an employee in the company. It depends mostly on:

• The country in which a company is located;
• The type of company.

Example: 1. Virgin let its employees take as much holidays as they want.

2. Amazon is guided by four principles: customer’s observation rather than competitor’s focus, passion for invention, commitment to operational excellence and long-term thinking. Pag.3

Organizational theory and design 2^nd term 2023.

Lecture 1 introduction to organizational theory and design

Organize work is necessary for the survival of a company. A very good example in designing and renewing organization is given by Starbucks. The company announced the new store format called “Starbucks pickup”, which allows customers to order ahead and pay through the Starbucks mobile app for picking-up or to have their order delivered where they want.

The change has been introduced after an analysis of the behavior of the customers and hopefully it will allow the brand to become more efficient and improve customer experience.

• The implementation of a new format implies not only changing strategy but also the way the company is organizing work activities, e.g. the way the store manager communicates with the store employees, changes the set of tasks the employees perform…. All the changes that a company implement will affect, in a positive or in a negative way, the company’s performance.

However, sometimes the implementation of “wrong” organizational arrangement could lead to losses or extreme costs. For instance, McDonald’s failed to balance innovation with process efficiency. The mistake started with a failure to understand the fundamentals of flexible leadership: leaders must be able to juggle conflicting priorities, keep them in balance and assess the consequences of each decision and how it might impact other areas of the organization.

• In this case, McDonald’s’ leadership put so much emphasis on innovation that it failed to recognize how making significant changes to its food preparation would hinder its ability to maintain speed and keep costs down.
• If McDonald’s leadership had taken the time to collect feedbacks and tested the concept more thoroughly before rolling it out, it would have recognized that they misjudged customers’ needs and desires, and that personalization was not the right strategy.

We have to keep in mind that the world can change very rapidly and companies should be ready to take opportunities from those changes. An example of leadership ineffectiveness is the one of Blockbuster.

A few years before the bankrupt of Blockbuster, Netflix CEO proposed the two companies to work together, with Netflix running Blockbuster’s brand online and Blockbuster promoting Netflix in its stores. Blockbuster refused and preferred to remain focused on maintaining the status quo, doubling down on physical stores and inventory. In this case Blockbuster’s leadership failed to recognize how quickly the video rental market was changing.

• Without innovative leaders, even the most successful companies can flounder.

In general, we have to keep in mind that it is not always easy to decide how to organize work and for this reason structures could be very sophisticated. Pag.4

Organizational theory and design 2^nd term 2023.

What is an organization and what is an organization structure?

Organization

A tool people use to coordinate their actions to obtain something they desire or value, to reach them goals. The goals of a company are multifaceted: high technical and economic performance, for instance, are very important; but nowadays companies are trying to implement also sustainability or equality goals.

Organizational structure

The formal system of tasks and authority relationships that control how people coordinate their action and use resources to achieve organizational goals.

• Hierarchical structure
• Flat structure

Having a long or a short chain of command organizes authority in a different way.

Distributing tasks, according to people’s competencies, functional structure, or business’ needs, divisional structure, allows a company to define a strategy and a people management approach, in order to achieve its goals. The way by which tasks are allocated, ex. The existence of certain units such as environmental control, is the result of the recognition of an opportunity or a solution to a problem, more sustainable supply chain.

• Example: Patagonia, its website is helpful to see examples of task allocation.

Obviously, the structure of a company changes in time, as the company grows and need a more clear organization.

• Example: Endelea. It started by two young girls, but as the company has enlarged a bit, they had to reorganize the structure and distribute tasks in different offices, such as the administrative or the marketing one. specialization.

Why does organization exist?

It exists to increase specialization and division of labor.

• Division of labor allow specialization;
• Specialization allows people to become experts in their job. It can be done in terms of competencies or in terms of differentiating products.

Specialization is used to reach efficiency, obtained by:

• Economies of scale: cost saving that result when goods and services are produced in large volume on automated product lines. A company can reduce the unitary costs of a product, by saturating the equipment. more functional structure.
• Economies of scope: cost saving that result when an organization is able to use underutilized resources more effectively because they can be shared across different product or tasks. more business structure.

The decision of whether to use economies of scale or scope, can shape the organization of a company and influences its structure.

Organization exists also to manage the organizational environment

An organization’s environment is the source of valuable input resources and is the marketplace into which it releases outputs. It is the source of economic, social, and political pressures that affect an organization’s ability to obtain these resources.

• Lego has a divisional structure, because tasks are allocated according to a strategic business reason and not to competence, organized geographically, in order to create a specificity for each area. Pag.5

Organizational theory and design 2^nd term 2023.

Organization exists also to economize on transaction costs

• Transactions cost are the costs associated with negotiating, monitoring, and governing exchanges between people. In the supply case if the supply material is rare transaction costs are higher.

Two organizational solution to save on this costs are:

• Establish a contract that ties the supplier to the company for a longer time a joined venture, if in the chart there’s a point it means that the activity is shared with another company that originally owned the resources that were costly to the company.
• Internalize the production, vertical integration, but you need capital.

Organization exist also to exert power and control

Organizations can exert great pressure on individuals to conform to task and production requirements in order to increase production efficiency. Companies have tools that persuade to work better, such as financial incentives or intangible benefits, health insurance.

Examples for vertical integration and transaction costs

• Walmart opens a milk processing facility.
• Costco decided to invest in poultry.
• Amazon acquires companies such as Whole Foods.

Organizational design, change, and culture

Organizational design

The process by which managers select and manage aspects of the structure so that an organization can control the activities necessary to achieve its goals.

Organizational change

The process by which organizations redesign their structures and cultures to move from their present state to some desired future state to increase their effectiveness.

• Enel: the company had to redesign its structure to exploit opportunities in other countries, adding of regions, and organize better the matrix structure, reduced functions and divisions.

Organizational culture

The set of shared values and norms that controls organizational members’ interactions with each other and with suppliers, customers, and other people outside the organization.

• Merge between Essilor and Luxottica: they used to have different values, therefore after the acquisition they have not been merged as well, but are working together. Pag.6

Organizational theory and design 2^nd term 2023.

The importance of organizational design, change and culture

Dealing with contingencies

The design of an organization determines how effectively an organization is able to respond to various pressures in its environment.

Managing diversity

Organizational design and culture that can define diversity as a priority.

• Example: L’Oréal has a committee for diversity management. Why are they using diversity?
  • Reputation of the company. Competitive advantage, reach more customers and attracting employees, “healthy workplace.”
  • Promoting diversity is a way by which a company can restore some features of the society.

Gaining competitive advantage

The ability of a company to outperform its competitors because through the organizational tools is able to create more value from the resources at its disposal. Pag.7

Organizational theory and design 2^nd term 2023.

Lecture 2 and the fundamental features to describe a model – The Haier’s case

Introduction, brands and products

Founded in 1984 in Qingdao, China, Haier Group is now one of the largest home appliance and multinational consumer electronics companies. It has grown from a small collective factory, which was caused to bankruptcy, to one of the China’s most recognized global brand, under the direction of Zhang Ruimin.

Haier Group’s product line is quite diversified, ranging from refrigerator, freezer, washing machine, air conditioner, and water heater to small appliances, television, personal computer, mobile phone and medical devices.

In the 1980s, it was the beginning of China’s reform and opening up. There were few product in the market, while people’s demand was far beyond the level of supply. Due to the scarcity of supply, the three most desirable objects’ prices, television, refrigerator and washing machine, were skyrocketed. By the time, Haier was just a small refrigerator factory in Qingdao, but its commitment toward quality and manufacturing excellence determinate its success in the first phase. As the company continued to grow and the times changed, in terms of technology innovation and market’s demand, the structure and the strategy had to change as well.

Stage 1 Haier’s organization

The structure of the first stage of can be described as:

• Hierarchical: in terms of number of organizational levels, compared to what happens after 2012 with the new model”: originally the upstream and the downstream units are linked through a long chain of command, 9 levels.
• Specialized: businesses and tasks highly separated, narrowed down, so to develop their own processes.
• Formalized: there are standardized and codified processes to illustrate the characteristics of a job, how it will be evaluated and the rewards and punishments associated with this evaluation.
• Centralized: downstream employees are not assumed to have relevant information, which flows preferably from the top of the organization to the bottom. This is meant also as an organizational arrangement to ‘convey a forceful and visionary leadership style”.

From the structural features of the organization, we can already see the implications in terms of leadership and supervision style:

• The supervision is technical, and not relational.
• It is based on looking for mistakes, as deviances with the respect to the job descriptions and the performance evaluation forms: punishment-reward leadership.
• Supervisors have a forceful leadership style, they are seen as commanders.
• Downstream employees do not exert any discretion or engage in horizontal coordination: slow information flow.

The model has been working out till 2012, because the environment stayed quite stable. The priorities developing productivity and efficiency and keeping an high quality at every step of the manufacturing process. Over time, those priorities changed, due to the opening toward new countries and markets and the technological advancements. The aim became getting closer to the customer, reason why the initial structure could not work and a new one was needed. Pag.8

Organizational theory and design 2^nd term 2023.

Fundamental features to describe an organization and its relationship with environmental uncertainty

The fundamental characteristics to describe the structure of a company are the following:

Vertical differentiation

We describe hierarchy as the extent to which the organization is vertically developed. It refers to the amount of power associated to a position in the organizational structure - span of 1 control.

• High vertical differentiation: many vertical levels, lower span of control for each manager.
• Low vertical differentiation: more flat structure, higher span of control for each manager.

The higher vertical differentiation is, the higher is the control and supervision.

To determine the level of vertical differentiation we have to count the number of layers in the organizational chart. We have to keep in mind that the CEO represent the level zero. It is also important to specify which unit has the most vertical differentiation.

Horizontal differentiation

We describe specialization as the extent to which tasks in the organization are subdivided into separate units and jobs.

• High horizontal differentiation: deep subdivision with many differentiated and specialized units, high labor division.
• Low horizontal differentiation: few subdivision with few and large units, low labor division.

The higher the horizontal differentiation is, the higher is the division of labour.

To determine the level of horizontal differentiation we have to count the number of units in the first level of the organizati