Organizational Design Slides Courtesy of Professor Joe Labianca

Organizational Design

Slides Courtesy of Professor Joe Labianca

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Organization Charts

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Example Org Chart: Cox Communications (Metro Newspaper Structure)

Publisher

GM

Finance HR Advertising Controller IT Production

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What do organization charts tell us?

Basic Information• Who reports to whom• Who has the ultimate official authority to make decisions• Which people are being asked to specialize in what areas

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Types of GroupingsGroupings for specialization happen around two basic types of groups:1. Functional groupings (e.g., Accounting, Human Resources,

Marketing, Nursing)2. Divisional groupings

– Products or Services (e.g., Computer Hardware, Software, IT Consulting Services, Sports Medicine, Plastic Surgery)

– Geographic Areas (e.g., Northern KY, Southern KY, Eastern KY)

– Clientele (e.g., Educational institutions, Government, Corporate; Women’s Clinics, Sports Clinics; High Net Worth Banking)

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Functional vs. Divisional Grouping Structures

Human Resources Sales Accounting

CEOFunctionalStructure

HR Sales Acct

Hardware Software Consulting

CEODivisionalStructure

HR Sales Acct HR Sales Acct

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The Apple-Orange Company Structure (Part One)

• How will you structure your company?– Functional?– Divisional?

• Why do you prefer this structure?– What are the advantages?– What are the disadvantages?

• List the criteria you are considering when making this decision– Are there other pieces of information you wished you

had as you were making the decision? What were they?

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What is the best organizational structure?

• It depends• No way of grouping people is perfect• Every structure has its advantages and

disadvantages

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Functional Structure Strengths

• Enables in-depth knowledge and skill development within the functional area – (e.g., all researchers can learn from each other,

regardless of what product they are currently researching)

• Allows economies of scale within functional departments– (e.g., might not need as many workers or managers

because of less duplication)• Very efficient; helps to minimize costs

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Divisional Structure Strengths

• Allows divisions to adapt to differences in products, geographic regions, and clients

• Decentralizes decision-making• Suited to fast change in unstable

environments• Best in large organizations with several

products• Highly adaptable

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The Apple-Orange Company Structure (Part Two)

Imagine that you chose the functional grouping in Part OneAs the company continues to grow, the decision is made to diversify into the following products:

• Pears• Eggplant• Grapes• Broccoli

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Possible Functional Structure for Apple-Orange

John

Carl

Sales

Salespeople (Apples, Oranges, Pears,

Broccoli, Grapes, Eggplant)

Production Grow & Harvest

Field Workers (Apples, Oranges, Pears,


Research

Researchers (Apples, Oranges, Pears,


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The Apple-Orange Company Structure (Part Two, continued)

Now place yourself in the role of the Vice-President of Research. What problems do you foresee happening as the number of products proliferates? What will happen to the VP of Sales? The VP of Production?

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Functional Structure Weaknesses

• Leads to poor horizontal coordination among departments

• Involves restricted view of organizational goals (functional silo mentality)

• May cause decisions to pile on top, creating overload at top of hierarchy

• Slow response time to environmental changes• Results in less innovation• Works best when there are few products• Low in adaptability

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The Apple-Orange Company Structure (Part Three)

Now imagine that you chose the divisional grouping in Part One.As the company continues to grow, the decision is made to diversify into the following products:

• Pears• Eggplant• Grapes• Broccoli

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Possible Divisional Structure for Apple-Orange

John

Carl

Apple Division

Salespeople (Apples)

Orange Division

Field Workers (Apples)

Researchers (Apples)

Salespeople (Oranges)

Field Workers (Oranges)

Researchers (Oranges)

Pear DivisionBroccoli Division

Grapes Division

Eggplant Division

Salespeople (Pears)

Field Workers(Pears)

Researchers (Pears)

Salespeople (Broccoli)

Field Workers (Broccoli)

Researchers (Broccoli)

Salespeople (Grapes)

Field Workers (Grapes)

Researchers (Grapes)

Salespeople (Eggplant)

Field Workers (Eggplant)

Researchers (Eggplant)

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The Apple-Orange Company Structure (Part Three, continued)

What problems do you foresee happening as the number of products proliferates?

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Divisional Structure Weaknesses

• Leads to poor coordination across product lines• Eliminates economies of scale in functional

departments• Restricts in-depth competence and technical

specialization in a functional area • Very inefficient; great deal of duplication

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Example Divisional Structure: IBM (pre-June 2002)

CEO

Hardware Software Services Global Finance

HR Finance Sales IT

HR Finance Sales ITHR Finance Sales IT

HR Finance Sales IT

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The Organizational Environment’s Role in Determining Structure

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What determines the choice of structure?

Environmental Uncertainty

Uncertainty is driven by two main factors:1. Environmental complexity

• the number and similarity of elements (e.g., suppliers, customers, regulators) in the organization’s environment

2. Environmental dynamism

• the rate of change in the elements in the organization’s environment

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An Organization’s Environment(j)

InternationalSector

(d)Financial

ResourcesSector(e)

MarketSector

(f)Technology

Sector

(g)EconomicConditions

Sector

(a)IndustrySector

(h)Government

Sector

(c)Human Resources

Sector

(b)Raw Materials

Sector

(i)Socio-cultural

Sector

ORGANIZATION

DOMAIN

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Environmental SectorsIndustry Competitors, industry size & competitiveness, related

industries

Market Customers, clients, potential users of products and services

Raw materials Suppliers, manufacturers, real estate, services

Human resources

Labor market, employment agencies, universities, training schools, employees in other companies, unionization, illegal immigration

Financial Stock markets, banks, savings and loans, private investors

Technology Production techniques, science, information technology

General economic condition

Recession, unemployment rate, inflation rate, rate of investment, economics, growth

Government City, state, federal laws and regulations, taxes, services, court system, political processes

Sociocultural Demographics, values, beliefs, education, religion, work ethic, consumer and green movements

International Competition from and acquisition by foreign firms, entry into overseas markets, foreign customs, regulations, exchange rates

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Relationship Between Structure and Environment

• Flexibility• Change• Innovation

• Efficiency• Reliability• Reducing Costs

DivisionalStructure

FunctionalStructure

Simple, Stable Environments Complex, Unstable Environments

DominantStructuralApproach

EnvironmentalUncertainty

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What happens between the extremes?

• Simple, stable environments = functional structures• Complex, unstable environments = divisional structures

Q. What happens when you have a:• simple, but unstable environment (e.g., fashion industry)?• complex, but stable environment (e.g., universities, hospitals)?

A. Organizations use:• hybrid structures• matrix structures

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Possible Hybrid Structure for Apple-Orange

John

Carl

Apple DivisionOrange Division



Field Workers (Oranges)



Grapes Division

Eggplant Division


Researchers (Pears)







Salespeople (Apples, Oranges, Pears, Broccoli,

Grapes, Eggplant)

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Hybrid Structure Strengths

• Allows organization to balance achieving some adaptability and coordination in product divisions and some efficiency in centralized functional departments

• Achieves some degree of coordination both within and between product lines

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Hybrid Structure Weaknesses

• Leads to conflict between divisions and corporate departments

• Has potential to favor the creation of excessive administrative overhead in the corporate departments

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Example of a Hybrid Structure: Sun Petrochemical

FunctionalStructure

President

TechnologyVice

President

FinancialServices

Vice Pres.

HumanResourcesDirector

ChiefCounsel

ChemicalsVice

President

LubricantsVice

President

FuelsVice

President

ProductStructure

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Possible Matrix Structure for Apple-Orange

John

Carl

Apple Division

Salespeople (Apples)

Orange Division



Salespeople (Oranges)

FieldWorkers (Oranges)



Grapes Division

Eggplant Division

Salespeople (Pears)


Researchers (Pears)

Salespeople (Broccoli)



Salespeople (Grapes)



Salespeople (Eggplant)



VP of Sales

VP of Production

VP of Research

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Matrix Structure Strengths

• Provides opportunity for both functional and product skill development

• Flexible sharing of human resources across products, while still promoting efficiency goals

• Team-based approach can be useful for satisfying customers’ dual concerns for innovation and cost-savings

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Matrix Structure Weaknesses

• Causes employees to experience dual authority (e.g., product manager and functional manager), which can be frustrating and confusing•Meetings, meetings, and more meetings– Is time consuming; involves frequent meetings

and conflict resolution sessions• Conflict between division heads and functional

dept heads is pushed down onto employees•Will not work unless participants, particularly

managers, understand it and adopt collegial rather than vertical-type relationships; often requires adoption of 360 degree reviews•Means employees need good interpersonal

skills and extensive training, particularly in conflict resolution• Best in medium-sized organizations with

multiple products

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Matrix Example: Harland Checks’ Functional MatrixVP Customer Care

IT

Milton

Process & Quality

Reporting & Forecasting

HR & Training

Sales & Mktg

Salt Lake CityAtlanta

Documents

Organizational Design Slides Courtesy of Professor Joe Labianca