Organizational structure and design - Essay Example

Organizational structure and design Organizational structure refers to the division of labor and the methods of coordination, communication, workflow, and power-sharing that exist in an organization. It is the formal arrangement of jobs within an organization. An organizational structure reflects the organization's culture and power relationships. Organizational design is the process of creating and modifying organizational structures. Organizational structures are frequently used as tools for change. Structures establish new communication patterns and align employee behavior with the corporate vision. The two fundamental processes or ingredients in organizational structure: Division of labor: Division of labor refers to the subdivision of work into separate jobs assigned to different people, which in turn leads to job specialization and increased job efficiency. Coordination: When groups divide work among themselves, it is required to co-ordinate their efforts towards the same objectives. Coordination is achieved through various mechanisms like informal communication, formal hierarchy and standardization. Elements of Organizational Structure The four main elements of organizational structure as follows: 1) Span of Control Span of control refers to the number of employees who can be effectively and efficiently managed by a supervisor. The span of control has an inverse relationship to the number of layers of hierarchy. The presence of informal communication and standardization can widen the span of control by reducing the need for direct supervision. A wider span of control is ideal when employees perform similar tasks or when the work teams are self-directed and possess specialized knowledge. It helps in reducing overhead costs and puts the top management in direct contact with the needs of the customers. Larger organizations that depend on hierarchy for coordination develop taller structures. 2) Centralization Centralization is the concentration of decision-making activities around a particular location, generally the top management. In a small organization, the founder takes most of the decisions himself but as the organization grows, organizations tend to become decentralized and decision-making authority is spread throughout the organization. 3) Formalization Formalization is the degree to which jobs within an organization are standardized and the extent to which employee behaviour is guided by rules and procedures. A low degree of formalization means that there are fewer restrictions on how employees do their work. Formalization exists in old companies and large organizations, and is encouraged by external influences like government safety regulations and strict accounting practices. Formalization increases efficiency but may reduce organizational flexibility in case of a non-routine situation which requires customized action. Mechanistic and organic structures McDonald's has a mechanistic structure, which means that it has a rigid and tightly controlled structure, and is characterized by a narrow span of control and high degree of formalization and centralization, and hence all tasks are well defined and can only be altered with the permission of the top management. A company with an organic structure is highly flexible and adaptive, which is characterized by a wide span of control, decentralized decision making, little formalization and an open communication network. An organic organization has a fluid team-based structure, in which the tasks vary according to the needs of the situation. Thus, a mechanist structure is only suitable in stable environments with routine tasks. 4) Departmentalization Departmentalization, also called the organizational chart, specifies how employees and their activities are grouped together. Hence, it is the process of grouping activities into departments. Division of labour creates specialists who need coordination. This coordination is facilitated by departmentalization. There are five types of departmentalization. They are simple, functional, divisional, matrix, and team-based. a) Simple structure A Simple structure exists in companies which have only a few products and employees and there is minimal hierarchy. Since in this structure, the owner coordinates directly all the functions, employees may find it inflexible under complex working conditions. b) Functional structure A functional structure groups jobs by the functions performed by the employees. Employees with related skills and responsibilities are assigned to the same department. Centralization and standardization of work processes are used as coordination mechanisms. Functional structures results in in-depth specialization and enhances communication and efficiency. The disadvantage of this structure is that departmental goals gain priority over organizational goals. It also leads to a high degree of differentiation and conflict between departments. c) Divisional structure A divisional structure groups employees around geographic areas, clients, or outputs (products/services). Divisional structures are also known as Strategic Business Units or SBUs, as they may operate as subsidiaries of the organization. Geographic structures group jobs on the basis of geography or territory. Product/service structures organize work around distinct products or services. Client-based structure organizes jobs by the type of customer or his needs. Divisional structures cater to regional taste and shorten the communication channels and result in self-contained units. The recent advancements in information technology, free trade policies and the convergence of consumer preference has reduced the need for local presence as business can be conducted worldwide via modern electronic resources. Divisional structures may also result in duplication of efforts and insufficient use of resources and tend to reduce cooperation across groups. d) Matrix structure A matrix structure uses the functional and divisional organizational forms simultaneously in order to exploit the benefits of both. Hence employees remain members of a functional department while also reporting to a product or project manager. Certain multinationals adopt a matrix structure that combines both geographical and product divisions. The product-based structure allows the company to exploit global economies of scale, whereas the geographic structure keeps knowledge close to the needs of individual countries. A matrix structure results in an employee reporting to two bosses i.e., the project manager as well as the functional leader. Matrix structures usually optimize the use of resources and skills, making them ideal for project-based organizations with fluctuating workloads. This structure has greater flexibility and communication and provides the firm with managers able to converse with both technical and marketing personnel. Matrix structure leads to role conflict and stress and also dilutes accountability as employees have to report to two managers who may have diverse expectations. e) Team-based or lateral structure This is a type of departmentalization with a flat hierarchy and relatively little formalization, consisting of self-directed work teams responsible for various work processes. It is called a lateral structure since it relies on extensive lateral communication and has a flat hierarchy. The work teams are organized around making a specific product or serving a specific client. A team-based structure generally has two or three management levels and all decision-making is done by team members, not the upper management. It results in better communication, faster and well-informed decision-making, and reduces reliance on a managerial hierarchy. But maintenance cost for team-based structures maybe high due to high training costs and difficulties in co-ordination. f) Network structure A network or modular structure is an alliance of several organizations for the purpose of creating a product or serving a client. This structure consists of several partner organizations clustered around a "hub" or "core" firm. The core firm contracts out certain functions to their partner firms so that they can concentrate on the things that they do best. This organizational structure takes advantage of the rapid changes in information technology to share information with within the network. Examples of network structure are companies that outsource their information systems departments to firms that specialize in information systems services and production processes. Virtual corporations Virtual or cellular corporations represent a temporary network of independent companies which provide customized product for a particular customer. Such temporary alliances reshape themselves to fit changing situations. Thus, in a unique situation, certain partners in the alliance form a virtual corporation that will work on the assignment until completion, after which they realign themselves to service another situation. Such corporations have great flexibility and the various partners are usually linked by information technology to share their costs and skills which gives them access to a wide range of specialized resources. But the core company may not have good control over the subcontractor's activities and subcontracting maybe expensive to a firm in the long run. Contingencies of Organizational Design The choice of a structure best suited for an organization depends on the size of the firm, the technology, environment and strategy. Size of the organization The structure of a large organization varies from that of a small one. An increase in the number of employees results in greater division of labor which in turn increases job specialization. Hence standardization of output is used to coordinate activities. Smaller firms have an organic structure with centralized decision-making, very little formalization and wide span of control. As a firm grows larger in size, there is the need for a mechanistic structure with decentralization, greater formalization which results in more levels of hierarchy. Technology In an organization which performs routine jobs like automobile assembling, there is a high degree of standardization of work processes as the job is very predictable. Therefore they have high degrees of formalization and centralization too. In such a firm, a mechanistic structure would be ideal. But in a firm which has jobs with a lot of variety and are non-repetitious, like research teams, there is a lot of informal communication among team members and the decision-making is decentralized and organic structures are best. External Environment An organization's external environment includes its clients, suppliers, government, raw materials, human resources and its competitors. The four features of the external environment which affects its choice of organizational structure are dynamism, complexity, diversity and hostility. In a dynamic environment with a high rate of change, an organic structure, like the network or team-based structures, is preferred as it can adapt quickly to the changes. In a complex environment with a lot of elements, a decentralized structure is better able to make informed decisions. If the environment is diversified with a variety of products or clients, the firm uses a divisionalized structure. Hostile environments are those in which the demand and supply of raw materials and finished products are unpredictable. In such places, an organic structure is preferred. Organizational Strategy The strategic thinkers of an organization design a structure that will facilitate the achievement of organizational goals. The organization has to interact with the changes in the environment in such a way that its strategic goals are realized. The process of positioning the organization in the competitive environment and implementing initiatives to compete successfully is called organizational strategy. The structure of an organization is influenced by not only the external factors, but also by the strategic positioning of the organization in relation to its environment. So the decisions of the top management change the organizational structure. Firms with a strategy to maximise production so as to offer products at a lower cost, can opt for a mechanistic structure. On the other hand, a firm which wishes to introduce a unique product in the market requires a matrix or team-based structure, as it needs a customized relation with its clients. In conclusion, although an organization's structure is influence by size, technology and environment, these contingencies do not necessarily determine its structure. The organizational leaders formulate strategies which manipulate these environments to suit the organizational objectives. 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