Session Objectives: To understand the concept of organization structure

To identify the major structural alternatives in organizational design To analyze the advantages and disadvantages of functional structure To identify various forms of the divisional structure

To understand product geographical division, customer and hybrid divisions To understand the importance of matrix structure To identify other bases for departmentation To understand the concept of strategic business units

Designing Organization structure An overview There was an argument whether strategy takes precedence over structure, or vice-versa. A study conducted by Alfred D Chandler, concluded that, strategy comes first, and then comes structure. But, this view has been criticized. Others felt that structure takes precedence over strategy. This argument is supported with the example of Eastman Kodak. Kodak was incurring losses, the reason being, it operated on a functional structure. A functional structure does not allow the company to opt for multiple businesses. This made Kodak incompatible with its competitors (Fuji). To cope with competition, Kodak restructured its organization into 43 divisions, each division operating as a separate Business Unit. This particular change in its organizational structure, enabled Kodak to reap bigger profits. Irrespective of whether strategy takes precedence over structure, or viceversa, it is important for an organization, that both should have congruence with each other. Factors influencing organizational design Apart from the relationship between structure and strategy, there are certain contingency factors, such as the size of the organization or the technology used that affect the effectiveness of a particular structure. Contingency Factors : Technology Size

Environment

Major Structural Alternatives For making structural alternatives, one must first of all, identify the organization's activities, and then group them accordingly. Such grouping of an organization's activities is known as departmentation. Thus, departmentation is the process of grouping of activities to achieve organizational goals and objectives and delegating the authority to the manager to supervise the division and guide the staff. Departmentation is required because of the following reasons: It helps an organization to gain from specialization It defines the roles of each individual It facilitates control, coordination and communication.

It helps a manager to identify and locate sources of skill, information and competence. Departmentation can be done in four ways: Functional structure Divisional structure Hybrid structure Matrix structure

Functional structure Functional structure groups are formed into units on the basis of similarity of expertise, skills and work-groups positions. For instance, a production or an operation function combines all activities that are directly related to the manufacturing of a product. Similarly, the marketing function focuses on the promotion and sale of products and services. Domino's Pizza, which deals mainly in pizza and related items, operates with a functional structure; with operations, distribution, finance and administration as major functional departments. Advantages of functional structure Clarity in tasks

Provides economies of scale within functions. As employees are specialized, large volumes of work can be handled effectively. Specialize in a particular function or an area, enables employees to become experts in their functional areas. Ease of coordination within the departments, as activities are related to similar specialized areas. Helps to acquire in-depth skills, for performing the job better

 Small/medium firms can take advantage of this structure, while producing quality goods. Disadvantages of functional structure It results in narrow, boring and monotonous tasks.

All the decisions have to be made/passed by the topmanagement. Overburdening keeps mounting (unable to decide which one to prioritize), and this results in poor decision making. Overlapping of authority, divided responsibility, and ambiguity in accountability, not only create confusion, but also raise conflicts amongst the departments. Managers who specialize in their own areas/departments, lack knowledge of other functions, or they have a very narrow perspective about organizational activities. Divisional structure Divisional structure is a type of departmentation, where in different positions are grouped, based on the products, services and markets. Each division has functional resources for pursuing its own goals, with little or no relevance for other divisions. For example, Divisions in General Motors include, Chevrolet, Oldsmobile, Pontiac and Cadillac. Central headquarters at General Motors, maintains its focus on achieving results. It coordinates and controls the activities, while providing support services between divisions. Functional departments are facilitated in accomplishing division goals. Divisional structure is based on multiple businesses in related areas, operating within a large organizational framework. Advantages Quick decisions can be made, as divisions do not coordinate with other departments while taking decisions. An organization can focus on serving customers, as it has geographic/customer departmentation.

Results are tied to a particular product, service, territory etc. This enables the divisions to be more responsible, for their performance. Departmental or divisional managers become specialists, as they are exposed to divisional activities. Disadvantages

High costs are incurred, as duplication of activities, takes place. For instance, each geographical division has separate HR department, Accounts department etc., that increases administrative and other costs. Individual divisions tend to concentrate more on individual goals

rather than organizational goals. Divisional rivalry could occur , if the organization's goals are ambiguous. Divisional structure is further classified into product, geographic and customer divisional structure.

Product structure Product structure is created, with a purpose, to concentrate on a particular product or service or at least a relatively homogeneous set of products or services. Advantages It facilitates the use of specialized capital, promotes coordination and allows the optimum utilization of personal skills and specialized knowledge. Facilitates growth and diversity, in products and services.

Eliminates unprofitable product lines, by drawing a comparison among products. Encourages to expand the product line without disturbing the main product. Provides managers with training, to improve their managerial and inter-personal skills As the product manager is responsible for each product/product and profits, it becomes easy for the top-management to measure and analyze the contribution of each product line to total profit. Disadvantages Selection is based on managerial abilities only to sales,

Managerial costs are high, as activities relating accounting etc. are performed by separate departments. Geographic division

In the geographic division, departmentation is made on the basis of either location or territory. This structure is very common in organizations, having wide operations and a large network. Examples in this area include, banking industry, transport industry, etc. Advantages Managers apply special attention to the needs and problems of local markets. Foodworld has outlets in major cities in India. Depending on the consumers' tastes, it stocks the products. For instance, South

Indians prefer filter coffee (with more chicory content), while North Indians prefer instant coffee (Nescafe). This retail giant stocks more filter coffee in the south, while retaining instant coffee in the northern region. Transportation costs are low, as salespersons travel less, and spend more time in selling the products. Improves face-to-face communication, with managers having an opportunity to meet local clients. Disadvantages Shortage of manpower limits organizational growth between departments, poses

Geographical distance communication problems

Costs are high on account of duplication of activities. For instance, each territory has separate personnel, purchasing departments. Sometimes top managers at the headquarters, find it difficult to control and supervise departmental activities spread over a wide area. Customer divisions Customer divisions are set up, for serving a particular type of client or customer. They tend to serve the niche market or the untapped market. For instance, increasing demand for fast-food, provided an opportunity for fast-food chains like McDonalds, Dominos etc. to serve the customers in India. Advantages Addresses to the varied needs of customers, for clearly defined services. Particularly useful for those organizations, which serve different types of customers. For instance, the ATM facility provided by banks, serves all types of customers businessmen, officers, students, agents, salesperson etc. Disadvantages Difficult to coordinate between sales and other departments, as customer-base departmentation is applicable only to sales function. Training that is given, may prove to be inadequate, in understanding customers' needs. If so, it poses a bottleneck i.e., generates only very few brand loyal customers. Hybrid structure A blend of functional and divisional structures, takes the form of a hybrid structure. Organization adopts a hybrid structure, to avail the benefits of a

functional structure (economies of scale, in-depth expertise, resource utilization) and a divisional structure (focus on products, customers needs and markets). IBM is an example of a hybrid structure. It adopts the functional structure (departments), to handle issues in areas, such as external relations and technology; since in-depth expertise is required in handling these areas. Divisional structure is adopted to serve different customers' needs. Advantages It provides economies of scale in key functional areas

It facilitates adaptability and flexibility, in handling diverse products or service lines. It helps to align both divisional and organizational goals

Disadvantages The major disadvantage is that, rivalry among the divisions increase, as one department tries to control the other department. Matrix structure A matrix horizontal structure. functional structure is a type of departmentalization that superimposes a set of divisional reporting relationships, onto a hierarchal functional This structure attempts to take advantage of both divisional and structures.

This structure enables the employees to form themselves into different groups or teams. A project is then assigned to each member of the team. For instance, a company might have developed a new product. It picks up a representative from each functional area, to work in the new team. This representative, also retains the original membership of his functional area. At any point of time, this particular person can be a member of any one group, and also remain as a member of original functional area. Ford adopted the matrix structure, to build its popular automobile called 'Taurus'. It formed a group called 'Team Taurus", comprising of specialists from each functional area - designing, engineering, production, marketing etc. These groups facilitated in designing a new and successful product in the market. Advantages It facilitates decentralization of decisions at functional or divisional level. It monitors environmental conditions, with respect to both the projects and the functional areas. Cost effectiveness can be achieved, by allocating resources to departments. Disadvantages

 Higher administrative costs due to increase in the number of layers i.e. Project managers and their immediate staff. Reporting to two different heads, results in, unclear authority and responsibility Dual authority system, tends to promote conflicts.

Due to poor interpersonal skills or absence of control at the topmanagement level, changes within the organization, take place slowly. Other Bases for Departmentation Before choosing the pattern of departmentation, organizations should consider the pros and cons of each one of the factors, namely, departmentation, technology, customers, geographical location and environment. Thus the basic consideration in selecting departmentation should be To get maximum benefits from it by helping a manager to perform the organizational activities effectively and efficiently. It should facilitate the accomplishment of organizational goals and objectives. Mixing types of departmentation within a functional area helps in grouping activities that will best contribute to achieving the objectives of the organization. Other bases for departmentation are given below:. Departmentation by simple numbers Departmentation by time Departmentation by process or equipment

Departmentation by simple numbers This departmentation, groups all employees who perform similar duties, as being together in one department. Such groups report to one supervisor, irrespective of what work they perform and where they perform. Success of this departmentation depends upon the number of employees involved in the group. This type of departmentation has lost its importance, due to the following reasons. Technological advance is providing more specialized and diverse skills Groups comprise of such personnel, formed on the basis of numbers. Some are more efficient than the others within the group, or another group member may be more efficient. More suitable for lower levels of management and less useful in the process of decision-making. Departmentation of time Departmentation on the basis of time, is the oldest form of departmentation. It

is more commonly found in public organizations. Under this form, employees work throughout the 24 hour day, by working in shift-systems. The reasons for such continuous production activity could be the nature of the product, for example, electricity, or demand for the product or service, for example, hospitals. Advantages Effective utilization of manpower

Round-the-clock service can be offered, especially in service industry, like hospitals, passenger inquiry etc. Proper usage of resources is achieved, i.e. machinery and equipment, are used during the entire day as against the normal working hours (8 hours). Disadvantages Lack of effective supervision during night shifts

Results in 'fatigue'- difficulty or inconvenience caused due to changes or shifts in working hours. Employees tend to postpone or extend their work, to get extra payment for overtime. Departmentation by process or equipment Departmentation by process is a type of departmentation, where in, different activities are grouped on the basis of process or equipment. For instance, marketing research, marketing planning, advertising and promotion, and sales administration are grouped under marketing function. Similarly, different activities of production comprising of production planning, industrial engineering, production engineering, purchasing, tooling and general production, are grouped separately. Advantages Departmentation by process is beneficial, when the equipment requires special operating skills. It enhances economic benefits. The machinery or equipment is arranged in such a way, that it makes series of operations economical and feasible. Disadvantages It hinders coordination limitations of specialization. between various functions due to

Conflicts among departments, get aggravated, in matters relating to fund allocation, providing facilities etc. Strategic Business Units

Strategic Business Unit (SBU) is a distinct business unit. According to Koontz "SBUs are distinct little businesses set up as units in larger company to ensure that a certain product or product line is promoted and handled as though it is an independent business." This can be managed relatively independently of other businesses within the organization. An organization such as GE, has many such business units. Each unit is engaged in the manufacturing and selling of diverse products such as jet engines, lights and bulbs etc. Each SBU has its own marketing and production departments. The company also ensures that each SBU receives the same amount of attention, as others. Business can be identified as a SBU, if it satisfies the following criteria. SBU should have its mission statement, which is unique from other SBU's. It should have a well-defined competitors group

It should formulate its own integrated plans, that are different from other SBU's. Summary What comes first- strategy or structure? Designing the organization structure Major structural alternatives - Functional structure, Divisional structure, Hybrid structure, Matrix structure Factors influencing organizational design Functional structure Divisional structure Advantages and disadvantages of geographic divisions Customer divisions- advantages and disadvantages Hybrid divisions Matrix structure and its importance Strategic business units It should manage its resources in key areas, efficiently It should have a proper size (neither too big nor too small)