Riassunti Organizational Design

ORGANIZATIONAL DESIGN

PRINCIPLES AND BASIC FORMS - WEEK1 (argomento1)

Organization is a tool people use to coordinate their actions to obtain something they desire or

value.

Organization is a consciously coordinated social entity, with a relatively identifiable

boundary, that functions on a relatively continuous basis to achieve a common goal or set

of goals. (Robbins, 1990)

There are several types of organizations: Large, small, medium, manufacturing products

(ex.computer automobiles); providing services (ex. Legal and banking); profit businesses;

non-profit businesses.

-Why do Organizations exist? Five factors explain why more value can be created when people

è

work together in a coordinated and organized way the use of organization increases

specialization and the division of labor; use large scale technology; manage the external

environment; economize on transaction costs,; exert power and control.

-Organization as “Open systems”: consider the interaction with external environmentè

organizational environment: is the set of forces and conditions that operate beyond an

organization’s boundaries but affect the ability of the organization to create value.

-Interacting dimension:

The evolution of Organizational design

OT has gone through an historical evolution:

-Classical Organization Theory: developed during the industrial revolution, remains the basis

of management theory. It has been developed to find the best way to perform and manage tasks,

and develop efficient organizations. This perspective is associated with the development of

extended hierarchies and bureaucratic procedures of control. Three main theories are:

1)Scientific Management theory (F.W. Taylor): it was born because of the need to increase

productivity and efficiency. Closed-system thinking. The focus is on the technical core only;

no interest in employees feelings. Scientific study of the situations to find the best method to

deliver the greatest output. Managers standardize procedures, select workers with the most

appropriate abilities, train them, plan work and provide wage incentives to increase output.

Principlesè Taylor identified movements and tools to increase the outcome: -work, equipment

and processes should be standardized; time and task study to define standards for workers;

selection and training of the workers instead of giving them the choice of the tasks; fully

cooperation with the workers to ensure they use the proper method; work division so

management is responsible for planning work methods and workers are responsible for

executing the work; only monetary incentive matters (outputs are linked to payments).

2)Administrative Management Theory (Henry Fayol): it is focused on TOTAL

organization; emphasis is on the development of managerial principles rather than work

methods. Fayol proposed 14 principles of management: division of work, authority and

responsibility, discipline, unit of command, unit of direction, remuneration, subordination of

personal interest to general interest, centralization, scalar chain, order, equity, stability of

tenure, esprit de corps, initiative.

è Scientific management and administrative principles contributed to the

development of bureaucratic organizations. Bureaucracy was an effective approach

for the needs of the Industrial Age. It remained the primary approach to organization

design through the 1980s. Weber’s Theory is based on: a well-defined hierarchy, the

division of labor and job specialization, formal rules and regulations. The key factors

of the theory are; -Impersonality, managers should maintain impersonal relationship

with employees (no favoritism and prejudice in decisions); -Competence, staffs are

selected and appointed based on technical qualifications and ability; -Records,

bureaucracy needs to maintain files of all activities.

3)Behavioral Theories of Management (Elton Mayo): successful organization depends

especially on manager’s ability to understand and work with people. This theory addresses

human dimensions of work: motivation, leadership, trust, teamwork, and conflict management.

Mayo conducted the Hawthorne Experiment; main findings are: Organization is a social

system; Employees can be motivated by psychological and social wants; Economic incentives

are not the only method to motivate people: Management should develop co-operative

attitudes; Productivity is linked with employee satisfaction; Group psychology plays an

important role in the organization; High morale results in higher output.

Contingency Theory: Managerial practices depends on the circumstances; open-system

view; there is no one best way to manage organization; “if” and “then” approach to

management; considers different nature of organizations; provides a framework where every

solution depends upon the environmental conditions (same problem can have different

solutions at different points of time; different problems can have same solution at the same

point of time). Ex. Of application of Contingency Theory: a hospital operates in a highly

unpredictable environment (outbreaks, emergencies, disasters). Health managers during

emergency must build an organizational culture and structure that faces the event in a flexible

and responsive way. Dynamic organizational structure could be based on the nature of the

problem, and who needs to be involved and the actions taken.

Two organization design approaches:

-Mechannical System Design (Vertical structure; Rigid culture; competitive strategy; formal

systems; routine tasks). Stable environment and efficient performance. This systems shows a

simple structure, low differentiation, low integration, centralized decision making,

standardization.

èFrom the Mechanical to the Natural System Design: (Horizontal structure; adaptive

culture; collaborative strategy; shared information; empowered roles). Turbulent environment

and learning organization. This model shows a complex structure, high differentiation, high

integration, decentralized decision making, mutual adjustment.

Mechanistic vs Organic Models

-Mechanistic: High specialization, rigid departmentalization, clear chain of command, narrow

spans of control, centralization, high formation.

-Organic: cross-functional teams, cross-hierarchical teams, free flow of information, wide

spans of control, decentralization, low formalization.

New approaches (60s and 70s):

1)Institutional Theory

2)Population ecology

Focus on external environment and lack of rational adaptation.

1)New institutionalism: in some industries, structures and behaviors of organizations are led

by their need to achieve legitimacy, rather than pure efficiency. To achieve legitimacy is needed

conformity to rules. There is isomorphism: similarity of the processes or structure of one

organization to those of another. Three types of isomorphism: coercive (laws), mimetic

(imitation taken for grand, uncertainty), normative (professionalization).

2) Population Ecology: An organization may not easily adapt to meet changes in the

environment because of organizational inertia. This inertia results from forces inside the

organization. So, organizations are “selected” by the environment, influencing the forms that

grow and that disappear.

PRINCIPLES OF ORGANIZATION DESIGN

The Organizational Chart shows the end result of organizational differentiation. Each box of

the chart represents a role function in the organization. Each role has a vertical and horizontal

dimension:

-Roles are vertically differentiated based on the amount of authority that goes with each role;

-each lower role is under the control or supervision of a higher one;

-managers have to choose how much vertical differentiation to adopt (ex: how many levels)

-roles are also horizontally differentiated based on their responsibility;

-roles can be grouped into functions or divisions.

DIFFERENTIATION: increase in size and complexity of organizational activities increases

the division of labor or the need to differentiate horizontally (creating new roles and grouping

roles into functions and divisions); Horizontal differentiation increases the need of vertically

differentiation to maintain control over the various functions (by adding additional levels in

the organizational hierarchy).

Horizontal differentiation is supposed to enable people to specialize and become more

productive. Problems:: specialization may limit communication between subunits, also

preventing from learning; people develop subunit orientation. INTEGRATION: is the process

of coordinating various tasks, functions, and divisions so that they work together.

Vertical information linkages: coordinate activities between the top and the bottom of the

organization.

1) Hierarchical referral: vertical lines that identify chain of command;

2) Rules and Plan: rules enable peer employees to be coordinated; plans provide

boundaries to employees behavior;

3) Information systems: enable vertical information dissemination in an organization.

(ex: reports)

Horizontal Information Linkages coordinate activities across organizational departments.

We have:

-Direct contact, managers that meet to coordinate activities;

-Liaison role, a specific manager is given responsibility for coordinating with managers from

other subunits on behalf of their subunits;

- Task Force, a temporary committee composed of members of organizational unit affected by

a problem;

-Permanent position, established to improve communication between divisions;

-Teams, a permanent task force or committee used to deal with ongoing strategic or

administrative issues. Often used in conjunction with a full-time integrator, like a Project

manager that integrates and coordinates different departments and Products.

Organizational Structures

The design of organization structure indicates:

-Required Work Activities, units created to perform tasks considered important; -Reporting

relationships, chain of command, hierarchical reporting relationships; -Department grouping

options.

Three eras can be distinguished in organisational structure and design developments:

Grouping options can be:

i. functional groupings (place together employees who perform similar functions and

processes)

ii. divisional groupings (people are organised according to what the organisation produces)

iii. multi focused grouping (an organisation embraces two structural groupings

simultaneously (e.g. matrix or hybrid)

iv. horizontal (process-based) grouping (employees are organised around core work

processes. They are grouped together rather than being separated)

v. virtual network grouping (the organisation is a loosely connected cluster or separate

components )

vi. other more innovative forms

ERA 1: Traditional designs: FUNCTIONAL, DIVISIONAL, MULTIFOCUSED

FUNCTIONAL STRUCTURE

A design that groups people together on the basis of their common expertise and experience

or because they use the same resources (ex: R&D, Manifacturing, Accounting, Marketing). Ex:

all engineers are located in the engineering departments. Functional structure is the base of

horizontal differentiation.

FUNCTIONAL STRENGHT:

-Allows economies of scale within departments: with specialized people, productivity

increases;

-Enables in-depth knowledge and skill development: because people work together over long

time horizons;

-Enables organizations to accomplish functional goals. Each function controls its own

activities.

-It is best when organization produces only one or few products.

-The FUNCTIONAL STRUCTURE is appropriate if the organization:

-produces a small number of similar products;

-has one or few locations;

-sells the products to only one general type of client or customer.

FUNCTIONAL WEAKNESSES:

-Functional structure leads to poor horizontal coordination;

-Slow response time to environmental changes (changes need a cross-functional response);

-May cause hierarchy overload;

-Results in less innovation, limited cross-functional communication;

-Involves restricted view of goals (by function instead of than by organization).

FUNCTIONAL WITH HORIZONTAL LINKAGES:

-Few companies can respond in today’s environment without horizontal linkages, for ex.

using integrating mechanisms, such as task forces and teams, to improve coordination.

THE KEY TO ORGANIZATIONAL DESIGN:

The design of an organization needs to fit its situation. In fact, designs that fit produce higher

organizational performance than designs that do not. . The opposite of fit is misfit (non-

alignment). Misfits produces disorganization and consequent lower performance. As

organizations enlarge and evolve, they tend to lose fit and performance. Managers have to

readjust the situation.

Fit can be considered as a kind of alignment between some factors - the contingencies

(competitive strategy, organization size, and task uncertainty) - and the organisation.

According to the contingency theory or contingency approach, designing the organisation is

an exercise of searching the best possible fit.

e.g. Google: a large organisation (size), with several thousands of employees which is spread

all over the world (geographic dispersion of the organisation is also a proxy for size). It is

investing a lot in technology development = it is a technology leader in many cases (other firms

may be technology followers). Moreover, Google has a culture based on the predominance of

informal relationships.

e.g. a shop in Rome: a small sized organisation such as a single business, no

internationalisation. It may embrace a strict and formal culture.

Idea of handling multiple contingencies: each factor/contingency is exercising pressure

towards the organisation. And designing an organisation is the response to such pressure.

Fit is about aligning the contingencies with the organisation.

Elements that we can design are:

• hierarchy,

• centralisation,

• formalisation - the production of formal documents in a company, association or any

organisation. Organisations have rules which are synthesised in formal documents. The

extreme of formalisation is called bureaucratisation.

• specialisation,

• complexity: made by: Number of elements we are dealing with; Variety; Relations which are

connecting the elements. Higher levels of homogeneity makes things less complex.

In general terms, we can say that people working within an organisation can be assigned one

or multiple tasks (task = an activity to perform). By assigning one single repetitive task,

employees can become hyperspecialized in that activity. The organisation can exploit the

learning curve = the more you do it, the faster you do it. (better facing to uncertainty). The

organisation is investing on the specialisation by nurturing specialists. Or, employees may

receive multiple tasks: the organisation is leveraging on the level of generalise employees can

afford. The level of specialisation or generalisation is something the organisation can decide

(homogeneous tasks vis a vis a variety of tasks).

• complexity: it depends on 1. the number of elements the organisation is dealing with, 2.

variety of such elements, 3. relations - or links - that are connecting the various elements.

Something is complex if it is made by several elements, being diverse one from the other and

interdependent among them. The higher the three factors, the higher the complexity.

e.g. by taking a group of people made by 3 individuals, or one made by 8 individuals, we can

expect that the variety of the second group is higher. If both group are made of 8 people all

homogeneous, the degree of variety will be lower of a group made by 8 people all coming by

different countries. If we take a group of individuals and we isolate each individual, or we take

a group in which all people cooperate in order to reach a goal, in the second case the degree of

variety is higher. The higher the number, the variety or the degree of density, the higher the

complexity.

Fit is the condition of alignment in which organisation tends to align to certain contingencies.

Only ex post we can check if the organisational design was fitting the contingencies or not.

The concept of fit is central to modern organisational design. The core idea is that the design

of an organisation needs to fit its strategy and other contingency factors. Designs that fit deliver

better financial performance; misfit produces disorganisation and consequent lower

performance (Schlevogt, 2002).

Forms or models can be:

- simple form

- U-form (functional)

- M-Form (divisional)

- Matrix

We can call this family of forms as the 2 Dimension forms.

Each FORM has pros and cons. The more we know about the models, the more our design will

fit the contingencies. Form are abstract forms of organization: the more we know about forms,

the more we understand. We have a limited set of forms, but we have infinite number of

possible organization structures.

Simple model - it is the typic generic model for an organisation.

Startup: someone has a business idea which, if successful, makes the business to grow. The

more and the faster it grows, the more the entrepreneur needs other people. Except from some

few exceptions, all the organisation are born this way (from an idea).

Multi-tasking is fundamental for this model: everybody does a little bit of everything -

everybody is able to deliver the whole chain. Everybody is engaged with all or most of the

activities.

The main pro is the flexibility (each employee in the organisation is able to satisfy consumers’

request; everybody is able to deliver multiple activities. The organisation is therefore easily

adaptable to the requests coming from the external environment.)

Cons: After a certain level of complexity (number of people, tasks performed, variety of people

and tasks, complexity of the components), the flexibility produces dysfunctional effects. e.g.

restaurant or pizzeria, if everybody does everything, after a certain number of tables or

customers, the service becomes chaotic.

—> inefficiency caused by:

- entropy or chaos (confusion within the organisation) and

- lack of specialisation

No learning effects that cause efficiency.

In order to understand the differences between models, we need to take into consideration the

span of control. The span of control is the number of individuals that I can control - or

supervise - efficiently.