Chapter 3: Fundamentals of Organizational Design

Organizations are ubiquitous; they are present everywhere at once. We are born into organizations. Besides our families, we socialize through as a particular kind of organization in the beginning, the kindergarten.

Organizational Design and Process of the Organization

Organizational design is the whole specification of strategy, processes, and structure the organization. In the first chapter, we have discussed strategy and structure. Processes include coordination, control, and incentives. They aim to help achieve a configuration of mental and physical effort that leads to good organizational performance.

Coordination is the process of lining up the activities of people or their units to achieve a state of integration. Coordination requirements are more pressing than ever as organizations respond to globalization and intense competition. Besides, more intensive coordination is required for aligning all functional areas off the organization including marketing, R&D, and quality assurance to respond the tactics of rival organizations effectively.

There are diverse coordination mechanisms for organizations:

1. Face-to-face interpersonal interaction
2. Rules and procedures for coordinating routine, recurring activities
3. Standardized plans, skills, and values
4. Direct supervision
5. Staff assistants as specialized administrative personnel created to facilitate interaction between personnel of the same unit
6. Liaisons as specialized positions or units designed to facilitate interchange between interdependent units
7. Teams having members from different units
8. Coordination-supporting software packages
9. Independent integrators, who are independent of the departments they coordinate and report to the manager who oversees those departments.

Control is a process through which management can initiate and regulate activities such that their results fit in with the goals and expectations held by management.

There are six particularly important strategies of control in organizations. Their characteristics are summarized as follows

1. Personal centralized control including direct supervision of people’s activities and centralized decision-making.
2. Bureaucratic control, whose most characteristic feature is formalization in the sense of written and standardized definitions of responsibilities and procedures.
3. Output control, which depends on having the ability to identify tasks that are complete in themselves, in the sense of having a measurable output or criterion of overall achievement.
4. Control through electronic surveillance, in which the speed and quality of work is recorded and appraised remotely through the use of information and communication technology, including video.
5. HRM control including recruitment and selection, performance appraisal, training and development, and rewards.
6. Cultural control, which aims to ensure that the members of an organization willingly comply with managerial requirements on the basis both of accepting the legitimacy of management’s authority and of identifying with its goals.

Reward is allocating incentives for managers and employees to improve performance and meet unit goals. There are four basic types of incentive systems:

1. Personal pay, which is based on the individual compliance with rules or directives.
2. Skill-based pay, which is based on merit, and is usually measured regarding formal education and seniority.
3. Bonus-based incentives, which are based on individual performance, are rooted in a management-by-objectives philosophy.
4. Profit sharing is based on giving both a fixed bonus and a share in the profits to the group.

Forms of Departmentalization

A fundamental characteristic of organization structure is departmentalization, which is the basis for grouping positions into departments and departments into the entire organization. There are five significant forms of departmentalization: These are; simple, functional (unitary), multidivisional, and matrix. Small organizations usually involve simple forms characterized by entirely flexible relationships with limited differentiation and almost no hierarchy.

A function is a group of people, working together, who have similar skills or use the same kind of knowledge, tools, or techniques to perform their jobs. A functional form (U-from) consists of all the departments that an organization requires to produce its goods or services.

The form that organizations most commonly adopt to solve the control problems that result from producing many different kinds of products in many different locations for many different types of customers is the multidivisional form. A multidivisional form (M-form) groups functions according to the specific demands of products, markets, or customers. The M-form has several advantages.

The first of these is size. Multidivisional organizations consistently grow more extensive than their functional counterparts. Larger organizations have more significant influence on their environment and usually, occupy more central positions in their inter-organizational relationships than do small organizations. Secondly, the M-form also provides better training for future executives than does the functional form. Thirdly, the M-form offers enhanced responsiveness to the needs of customers because of the specialization allows greater focus on the businesses each division operates.

Finally, the M-form provides for accountability based on divisional profits. The primary disadvantage of the Mform is duplication. Usually, each department has the same functional units such as production, marketing, and accounting. Overlap like this often results in higher costs. A second disadvantage is the challenge of coordinating across the different departments.

Sometimes, an organization’s structure needs to be multi focused in both the function and the product, geography or customer at the same time. A matrix form enables implementing both divisional and functional forms, simultaneously. A matrix form often is the answer when organizations find that the functional, divisional, and geographic structures combined with coordination mechanisms will not work. The matrix is a secure form of coordination. The product managers and functional or geographic managers have equal authority within the organization, and employees report to both of them.

The matrix form has significant advantages. One is tremendous flexibility to tackle new projects. Within both U-form and M-form designs, starting a new project generally requires either adding responsibility to every function or creating a new division, whereas starting a new project is a common event within matrix organizations that only requires naming a project manager and recruiting a team.

Interorganizational Forms

The business group refers to a collaboratively coordinated set of legally independent companies. When companies enter different industries, which have either few or no similarities with each other,

The M-form becomes inadequate. That is why; these companies create a business group, which is a collaboratively coordinated set of legally independent companies. The base for the reason for collaboration between the companies can be joint ownership, products, and financial or family bonds. Usually, there is a core entity (central actor), which controls or coordinates the member companies financially or managerially.

The network form combines legally separate companies along with a value chain into a loosely integrated whole. There are three types of a network form: The dynamic network includes independent companies along the value chain form temporary alliances from among a large pool of potential partners. The stable network consists of a large core company creates market- based linkages to a limited set of partners. The internal network is composed of commonly owned companies allocate resources along the value chain using prices established in the open market.

A highly developed version of the network form is the virtual form, which exists within a space that is not bound by the legal and physical structures that define a conventional organization. Certain phrases are commonly used to identify the virtual organization – lack of physical structure, reliance on ICT, fluidity and mobility, the transcending of conventional boundaries, networks, and flexibility. It is important to recognize that there can be different degrees and different forms of virtuality in the organization.

Theories On Organizational Design

The contingency theory argues that to contribute to successful overall performance, how a company is organized must adjust to features of the environment, size, technology, and strategy. The mechanistic organization has a high degree of formalization, centralization, and specialization; tall hierarchy; bureaucratic control; and personal and/ or skill-based pay as the incentive system.

The organic organization includes a low degree of formalization and specialization, decentralization; flat hierarchy; HRM and/or cultural control; and bonus-based incentives and/or profit sharing as the incentive system. The effectiveness of each type of organizational design is dependent on the environment of the organization. The environments characterized by uncertainty and rapid rates of change in market conditions or technologies require organic organizational designs. On the contrary, the environments characterized by relative stability necessitate mechanistic organizational designs.

Larger organizations tend to develop mechanistic designs of the organization but with some degree of decentralization. They tend to adopt more formalized systems of control whereas smaller ones tend to rely on personal relationships to maintain control. The studies have found that there is a connection between size, formalized structure and performance and this connection is the most robust for companies operating in relatively stable environments.

Another contingency factor is technology. Contingency theorists have developed two technology typologies. The first typology is based on technical complexity, which refers to the degree of mechanization in the manufacturing process, and it includes three types of technology: unit (small batch), mass production (large batch), and continuous processing technologies. Unit technologies produce one item or unit at a time or a few items all at once.

Mass production technologies deliver high numbers of identical products using highly routinized and often mechanized procedures. The continuous processing is a series of non-discrete transformations occurring in a sequence. Mediating technologies serve parties by bringing them together in an exchange or other transaction. Long-linked technologies involve linear transformation processes in which inputs enter at one end of a long series of sequential steps from which products emerge at the other end. Intensive technologies necessitate coordinating the specialized abilities of two or more experts in the transformation of a usually unique input into a customized output.

Business-level strategies deal with the answer to the question how to compete. For a company that produces single or similar types of products, there are three answers of this question: cost leadership, differentiation, and integration. A cost-leadership strategy includes offering the same or similar value for customers by delivering products or services at a lower cost than competitors, enabling the company to charge average or lower prices to the customers. The primary drivers of a cost leadership strategy include having lower cost access to input factors such as capital, land, and raw materials; achieving economies of scale; exploiting experience effects; and making process innovation.

A differentiation strategy includes offering higher value through delivering products with unique characteristics while keeping costs at the same or similar levels with the competitors and charging higher prices for customers. Making product innovation, offering complementary products, and focusing on customer service are the main drivers of a differentiation strategy.

An integration strategy is offering customers more value for the money by satisfying their desires and reducing costs compared to competitors with similar caliber product offerings. The drivers of both a cost leadership strategy and a differentiation strategy are relevant for an integration strategy. Moreover, economies of scope, flexible production, and mass customization are essential drivers of an integration strategy, as well.

According to the contingency theory, the related diversification necessitates the M-form while the unrelated diversification requires the form of business group when we make decisions and take actions at the corporate level.

A company adopts a related diversification strategy when it gains less than 70 percent of its revenues from single business activity and obtains revenues from other lines of business linked to the primary business activity. These multi-business companies can pool and share resources as well as leverage competencies across different business lines. A company adopts an unrelated diversification strategy when less than 70 percent of its revenues from a single business, and there are few, if any, linkages among its businesses.

The fundamental rationale for the M-form is that the activities associated with different products or geographical markets or customers generate their specific knowledge and require their particular skills. Thus, it makes sense to group the people concerned into their organizational units to concentrate and simplify communications and joint working among them. This action helps to promote the benefits of diversity and innovation adapted to local circumstances. On the other hand, when the company prefers unrelated diversification, the inability of headquarters to cope with different businesses has often made the whole less valuable than the sum of its parts.

The configuration theory conceptualizes of organizations as holistic entities; both composed of a set of subsystems, and yet still distinguished from components alone. Subcomponents are related to each other in ways that yield a coherent whole. These wholes are often referred to as ideal types, archetypes, or modes.

A configuration implies a multidimensional combination of work contingencies, design and performance elements that commonly occur together. However, rather than trying to explain how an organization is designed from its constituent elements, one-element-at-a time, a configuration perspective tends to focus on how a work system is designed from the interaction of its constituent elements taken together as a whole.

The organization with a simple structure is typically a new, small start-up company. It consists mainly of a top manager and workers. The organization is managed and coordinated by direct supervision from the top rather than by middle managers or support departments. The primary goal of the organization is to survive and become established in its industry. There is little formalization or specialization. This form is suited to a dynamic environment because the simplicity and flexibility enable it to maneuver quickly and compete successfully with more substantial, less adaptable organizations.

The machine bureaucracy is huge, typically mature, and is often oriented to mass production. The middle management area reflects the tall hierarchy for control. This form demonstrates extensive formalization and specialization, with a primary goal of efficiency. This form is suited to a simple, stable environment. Examples of machine bureaucracy are steel companies and large government organizations.

The distinguishing feature of the professional bureaucracy is employing highly skilled professionals, such as in hospitals, universities, and consulting companies. A sizeable administrative support staff is needed to support the professionals and handle the organization’s routine administrative activities. Although the primary goals of the professional bureaucracy are quality and effectiveness, and it has a certain degree of both specialization and formalization, professionals of the organization have autonomy. Professional organizations typically provide services rather than tangible goods, and they exist in complex environments.

Organizations with a divisionalized form are mature companies that are extremely large and are subdivided into product or market or customer groups, as mentioned previously in the section of the M-form. The divisionalized form helps to solve the problem of inflexibility experienced by a too-large machine bureaucracy by dividing it into smaller parts.

The adhocracy develops in a complex, rapidly changing environment. The primary goal is constant innovation and meeting continually evolving needs. The main structure consists of many intersecting teams. Adhocracies are usually young or middle-aged and can grow quite large. Employees are engaged in the administration and support of their teams. Examples of adhocracies include aerospace and electronics industries, and research and development companies.