CHALLENGES OF

ORGANIZATIONAL DESIGN
BASIC CONCEPTS II
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Session 3
 LEARNING OBJECTIVES
 Understand the four basic organizational design challenges.
 Discuss the way in which these challenges must be addressed
 Design choices - mechanistic or an organic structure
 Use of Contingency theory to design a structure that fits an organization’s
environment
 Informal ways of organizing
 ORGANIZATIONAL ROLES
 Role: set of task-related behaviors required of a person by his or her position in an
organization
 As the division of labor increases, managers specialize in some roles and hire
people to specialize in others
 Specialization allows people to develop their individual abilities and knowledge
within their specific role
 Organizational structure is based on a system of interlocking roles

Authority: the power to hold people accountable for their actions and to
make decisions concerning the use of organizational resources.
Control: the ability to coordinate and motivate people to work in the
organization’s interests
 DESIGN CHALLENGE 1:
DIFFERENTIATION
 The process by which an organization allocates people and resources to
organizational tasks.
 Establishes the task and authority relationships that allow the
organization to achieve its goals
 Division of labor: the degree of specialization in the organization

In a simple organization, differentiation is low ( low division of labor )

In a complex organization, differentiation is high (division of labor is high )
 SUBUNITS: FUNCTIONS AND
DIVISIONS
 Function: a subunit composed of a group of people, working together, who
possess similar skills or use the same kind of knowledge, tools, or
techniques to perform their jobs
 Division: a subunit that consists of a collection of functions or departments
that share responsibility for producing a particular good or service.

Organizational Complexity: the number of different functions and divisions

possessed by an organization (degree of differentiation)

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 FUNCTION TYPES
Production functions: manage and improve the efficiency of an organization’s conversion
processes so that more value is created (Production operations, production control, and
quality control)

Support functions: facilitate an organization’s control of its relations with its environment and
its stakeholders ( Purchase, sales and marketing, public relations, and legal affairs )

Maintenance functions: enable an organization to keep its departments in operation

(Administration, engineering)

Adaptive functions: allow an organization to adjust to changes in the environment ( Research

and development, market research, corporate planning)

Managerial functions: facilitate the control and coordination of activities within and among
departments ( top mgt, middle mgt and lower lever mgt)
VERTICAL AND HORIZONTAL
DIFFERENTIATION
Hierarchy: a classification of people according to their relative authority and rank
Vertical differentiation: the way an organization designs its hierarchy of authority
and creates reporting relationships to link organizational roles and subunits.
Establishes the distribution of authority between levels
Horizontal differentiation: the way an organization groups organizational tasks
into roles and roles into subunits (functions and divisions)
Roles are differentiated according to their main task responsibilities.
DESIGN CHALLENGE 2: BALANCING
DIFFERENTIATION & INTEGRATION
Differentiation -to develop the core competences that offers a competitive advantage.
Horizontal differentiation is supposed to enable people to specialize and become
more productive.
Specialization often limits communication between subunits, creates
subunit orientation that reduces communication making coordination difficult.
Subunit orientation: a tendency to view one’s role in the organization strictly
from the perspective of the time frame, goals, and interpersonal
orientations of one’s subunit.

“Theybusters”
campaign
 TYPES OF INTEGRATION
MECHANISMS
 Hierarchy of authority: dictates “who reports to whom”
 Direct contact: managers meet face to face to coordinate activities. Problematic
as manager in one function has no authority over a manager in another.
 Liaison roles: a specific manager is given responsibility for coordinating with
managers from other subunits on behalf of their subunits
 Task force: managers meet in temporary committees to coordinate cross-
functional activities.
 Teams: a permanent task force used to deal with ongoing strategic or
administrative issues.
 Integrating department: a new department intended to coordinate the
activities of functions or divisions.
 Cisco has more than 190 acquisitions under its belt throughout the history of the
company.
 Cisco segments acquisitions into three categories: market acceleration, market
expansion, and new market entry.
 The time frame in which Cisco can execute an acquisition from start to finish can
take more than a year or just a few days.
 Formalized and centralized integration management through a designated team in
the Cisco Business Development group.

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DESIGN CHALLENGE 3: BALANCING
CENTRALIZATION &
DECENTRALIZATION
Centralization: the authority to make important decisions is retained by top
level managers. Top managers coordinate activities to keep the organization
focused on its goals.

Decentralization: the authority to make important decisions is delegated to

managers at all levels in the hierarchy. Promotes flexibility and responsiveness.

Ideal balance: Enabling middle and lower managers who are at the scene of the
action to make important operational decisions. Allowing top managers to focus
on long-term strategy making.
AUTHORITY: HOW AND WHY
VERTICAL DIFFERENTIATION
OCCURS
The hierarchy begins to emerge when the organization experiences problems in coordinating
and motivating employees.
Division of labor and specialization make it hard to motivate employees and determine how
well an individual performs.
Therefore organizations:
 increase the number of managers it uses to monitor, evaluate, and reward employees;
 increase the number of levels in its managerial hierarchy.

Tall organization: an organization in which the hierarchy has many levels relative to the
size of the organization
Flat organization: an organization that has few levels in its hierarchy relative to its size.
IDEAL NUMBER OF HIERARCHICAL
LEVELS
Principle of Minimum Chain of Command: an organization should choose the minimum
number of hierarchical levels consistent with its goals and the environment in which it
operates.
Span of control: Dependent on the complexity and interrelatedness of the
subordinates’ tasks
 Complex and dissimilar tasks – small span of control
 Routine and similar tasks (e.g., mass production) – large span of control
 Interrelated tasks are harder to coordinate
Merger with Warner Lambert and Pharmacia (2000)
Org structure grew taller- bureaucratic
Mgt layers cut from 14 to 7
Abolished product development committees
Stopped monthly and quarterly reports of progress
Flat, decentralize, organic regulated by norms & values.
 FOUR
Span To narrow the span To widen the span

Span of Control Reduce resource allocated to different Allocate more resources assets and
units infrastructure

Span of Accountability Standardize work by using measures Use non financial measures or broad
that allow few trade-offs financial measures

Span of Influence Require people to pay attention to only Inject creative tension through
their jobs; use single line reporting structures

Span of Support Use individualized rewards, single out Build shared responsibilities through
winners purpose and mission

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DESIGN CHALLENGE 4: BALANCING
STANDARDIZATION & MUTUAL
ADJUSTMENT
Standardization: conformity to specific models or examples that are considered proper in
a given situation. Defined by rules and norms

Mutual adjustment: the process through which people use their judgment rather than
standardized rules to address problems, guide decision making, and promote coordination.

Formalization: the use of rules and procedures to standardize operations

Socialization: the process by which organizational members learn the norms of an organization
and internalize these unwritten rules of conduct.
Challenge facing managers is: to find a way of using rules and norms to standardize behavior,
and to allow for mutual adjustment to give managers opportunity to discover new and better
ways to achieve goals.
MECHANISTIC AND ORGANIC
ORGANIZATIONAL STRUCTURES
Mechanistic Organic
 Induces people to behave in predictable,  Structures that promote flexibility, so people
accountable ways initiate change and can adapt quickly to changing
conditions
 Decision-making authority is centralized
 Decision making distributed throughout the
 Subordinates are closely supervised hierarchy
 Information flows mainly in a vertical direction  Coordination is achieved through mutual
along a clearly defined path adjustments
 Hierarchy- principal integrating mechanism  Status conferred by ability to provide creative
 Tasks and roles coordinated primarily through leadership
standardization and formal written rules  Encourages innovative behavior.
 Best suited to organizations that face stable,  Suited to dynamic environments
unchanging environments
CONTINGENCY APPROACH:
STRUCTURE TO FIT ENVIRONMENT
LAWRENCE & LORSCH*: DIFFERENTIATION, INTEGRATION, AND THE ENVIRONMENT
Investigated how companies in different industries differentiate and integrate their structures to fit the
environment
Three industries that experienced different levels of uncertainty:
The plastics industry
The food-processing industry
The container or can-manufacturing industry
Environment is perceived as more unstable and uncertain: effective organizations are less formalized, more
decentralized, and rely more on mutual adjustment.

Environment is perceived as stable and certain: effective organizations have a more centralized, standardized,
and formalized structure

*Lawrence, P.R., Lorsch, J.W., (1967): Organization and environment: Managing Differentiation and Integration. Boston, MA: Harvard
University
BURNS AND STALKER**
Also found that organizations need different kinds of structure to control their
activities based on the environment
Organic structures are more effective when the environment is unstable
and changing
Mechanistic structures are more effective in stable environments

** Burns, Tom E. and Stalker, G.M., The Management of Innovation (1961).

THE INFLUENCE OF THE
INFORMAL ORGANIZATION
Decision making and coordination frequently take place outside the formally
designed channels as people interact.
Rules and norms sometimes emerge from the interaction of people and not from the
formal rules blueprint
Managers need to consider the informal structure when they make changes as it
may disrupt informal norms that work.

Informal organization can actually

enhance organizational
performance.