Here is a summary of important topics from Chapters 1 through 5 of "Organizational Theory, Design, and

Change" by Gareth R. Jones, drawing on the provided sources:

Chapter 1: Organizations and Organizational Effectiveness

This chapter introduces the fundamental concepts of organizational theory, design, and change. It explains
what organizations are, why they exist, and how managers measure organizational effectiveness.

 What Is an Organization?

o An organization is defined as a tool people use to coordinate their actions to obtain

something they desire or value.

o Organizations exist to create value by obtaining inputs from the environment,

transforming them through a conversion process, and releasing outputs back into the
environment.

o The amount of value an organization creates depends on the quality of its skills, including
its ability to learn from and respond to the environment.

o Examples include FedEx Kinko's providing goods and services or Amazon.com using IT
to transform inputs into outputs.

 Why Do Organizations Exist?

o Organizations exist because people working together can usually create more value than
people working separately.

o Five reasons for the existence of organizations are summarised:

 To increase specialization and the division of labor: Organizations allow

individuals to focus on narrow areas of expertise, becoming more skilled and
productive.

 To use large-scale technology: Organizations can take advantage of economies

of scale (cost savings from large volume production) and economies of scope
(cost savings from sharing underutilized resources across different
products/tasks).

 To economise on transaction costs: Transaction costs are the costs associated

with negotiating, monitoring, and governing exchanges between people.
Organizations reduce these costs compared to individuals performing exchanges.

 To manage the external environment: Organizations coordinate actions to

manage relationships with the environment, such as suppliers and customers, to
obtain resources and satisfy needs.

 To exert power and control: Organizations can exert pressure on individuals to

conform to task and production requirements to increase efficiency, using
rewards and discipline.
  Organizational Theory, Design, and Change

o Organizational theory is the study of how organizations function and how they affect
and are affected by the environment in which they operate.

o The aim is to understand how organizations operate to control and change them
effectively, creating wealth and resources.

o Organizational design is the process by which managers select and manage aspects of
structure and culture so an organization can control the activities necessary to achieve its
goals. It has implications for competitive advantage, dealing with contingencies,
managing diversity, efficiency, innovation, environmental control, employee coordination
and motivation, and strategy implementation.

o Organizational structure is the formal system of task and authority relationships that
control how people coordinate their actions and use resources to achieve goals.

o Organizational culture is the set of shared values and norms that control organizational
members' interactions with each other and with external parties.

o Organizational change is the process by which organizations redesign their structures

and cultures to move from their present state to some desired future state to increase
effectiveness.

o The three are related: organizational theory provides the tools for organizational design
and change. Managers must balance the need for organizations to be both flexible and
capable of quick responses (like high-tech companies) with the need for stable task
relationships.

THE STAR MODEL

The Star Model™ framework is a foundation for organisation design that management can control to
influence employee behaviour. It consists of a series of design policies. These policies are the tools
managers need to effectively shape decisions and behaviours in their organisations.

The framework comprises five categories of design policies:

1. Strategy: Determines direction.

2. Structure: Determines the location of decision-making power.

3. Processes: Relate to the flow of information and are the means of responding to information
technologies.

4. Rewards: Influence employee motivation and alignment with organisational goals.

5. People: Influence and define employees' mind-sets and skills through human resource policies.

Let's look at each component in more detail:

 Strategy:
 o Strategy is the company's formula for winning.

o It specifies the goals and objectives, values, missions, and the basic direction of the
company.

o Specifically, it allocates the products or services offered, the markets served, and the
value provided to the customer.

o It also specifies sources of competitive advantage.

o Strategy is traditionally the first component addressed in the organisation design process.

o It's important because it establishes the criteria for choosing among alternative
organisational forms.

o Since each organisational form enables some activities well, often at the expense of
others, choosing forms involves trade-offs. Strategy dictates which activities are most
necessary, providing the basis for the best trade-offs.

o Matrix organisations result when two or more activities must be accomplished without
hindering the other, requiring an embrace of the "and" (e.g., global and local).

 Structure:

o Structure determines the placement of power and authority in the organisation.

o Structure policies fall into four areas:

 Specialization: Refers to the type and numbers of job specialties used.

 Shape: Refers to the number of people in departments (span of control) at each

level; large numbers create flat structures with few levels.

 Distribution of power: Vertically, this refers to centralization or decentralization;

laterally, it refers to the movement of power to the department dealing with
critical issues.

 Departmentalization: The basis for forming departments at each level, using

dimensions like functions, products, workflow processes, markets, customers,
and geography.

o Matrix structures are where two or more dimensions report to the same leader at the same
level.

 Processes:

o Information and decision processes cut across the organisation's structure; they are the
physiology or functioning, whereas structure is the anatomy.

o Management processes are both vertical and horizontal.

 o Vertical processes allocate scarce resources like funds and talent, typically through
business planning and budgeting. They require centrally collected needs and priority
decisions for resource allocation (capital, R&D, training, etc.). These are central to
effective matrix organisations and need dual or multidimensional information systems
support.

o Horizontal processes (also known as lateral processes) are designed around the workflow,
such as new product development or customer order fulfillment.

o Lateral processes are becoming the primary vehicle for managing in today's
organisations.

o Lateral processes can range from voluntary contacts to complex, formally supervised
teams.

 Rewards:

o The purpose of the reward system is to align employee goals with organisational goals.

o It provides motivation and incentive for completing the strategic direction.

o Policies include salaries, promotions, bonuses, profit sharing, stock options, and so forth.

o Much change is occurring in this area, especially supporting lateral processes, with
practices like pay-for-skill, team bonuses, gain-sharing, and non-monetary rewards
like recognition or challenging assignments.

o The Star Model™ suggests that the reward system must be congruent with the structure
and processes to influence strategic direction.

o Reward systems are only effective when they form a consistent package with other
design choices.

 People:

o This area governs human resource policies like recruiting, selection, rotation, training,
and development.

o In the appropriate combinations, these policies produce the talent (skills and mind-sets)
required by the strategy and structure to implement the chosen direction.

o Like other policies, these work best when consistent with the other connecting design
areas.

o Human resource policies also build the organisational capabilities to execute strategic
directions.

o Flexible organisations need flexible people. Cross-functional teams need generalists who
can cooperate. Matrix organisations need people who can manage conflict and influence
without authority.
 o HR policies simultaneously develop people and organisational capabilities.

Implications of the Star Model™:

 Structure is just one facet of organisation design and is often overemphasized in design efforts
compared to processes and rewards.

 In fast-changing environments and matrix organisations, structure is becoming less important,

while processes, rewards, and people are becoming more important.

 Different strategies lead to different organisations; there is no single best or trendy design for all
companies in all circumstances. The chosen design should best meet the criteria derived from the
strategy.

 The interweaving lines of the star shape illustrate that all policies must be aligned and interact
harmoniously for effectiveness.

 Alignment ensures a clear, consistent message is communicated to employees.

 Managers influence performance and culture only by acting through the design policies that affect
behaviour.

Overcoming Negatives Through Design:

 The Star Model™ can be used to overcome the negatives associated with any structural design
option.

 By identifying the negatives of a preferred structure, management can design the other policies
(processes, rewards, staffing) around the Star Model™ to counter those negatives while still
achieving the positives.

 For example, to minimise the negatives of a central unit (often created for efficiency and scale),
processes, rewards, and staffing policies can be designed to ensure the central unit meets planned
service levels agreed upon with the rest of the organisation. This includes accountability,
measurement, rewarding based on meeting service levels, and staffing with a mix of
permanent professionals and rotating managers to keep the unit connected to the work. This
increases the chances of achieving the positives while minimising typical negatives.

Importance of Organizational Design & Change (Notes)

 Respond to Environment/Contingencies: Design helps organisations attract resources

(employees, customers, contracts). Changing employee task relationships or external
relationships manages the environment. Global changes and IT advancements demand redesign.
IT fundamentally changes structure design and coordination (e.g., outsourcing, networks).

 Gain Competitive Advantage: Design, change, and redesign are sources of sustained
competitive advantage. Competitive advantage comes from core competences, including
managerial design/change skills. Good design/change is hard for competitors to imitate, creating
long-term advantage. Requires continuous evaluation and change of design.
  Manage Diversity: Designing structure/control systems makes optimal use of diverse workforce
talents. Helps develop culture for effective teamwork.

 Increase Efficiency & Innovation: Design involves finding better ways to coordinate and
motivate employees. Different structures/cultures influence behavior, impacting efficiency and
innovation.

 Avoid Poor Design Consequences: Many managers fail to see the effects of design on
performance. Poor design harms performance. Managers may be unaware of design's impact
until problems arise.

Organizational design is the process managers use to select and manage structure/culture to control
activities for goal achievement. It's about choosing how to achieve goals, balancing external and internal
pressures. Good design ensures long-term survival. Organizational change is the process of
redesign/transformation. This importance underpins why strategy in the Star Model™ guides the choice
of organisational forms (structures).

Drivers of Org Design

🔹 Variety & Diversity
This refers to the growing diversity in:
 Markets (global, regional, niche)
 Products/services offered
 Customer segments (e.g., generational, geographic, demographic differences)
Organizations must design flexible structures to handle this complexity—such as matrix structures, cross-
functional teams, or customer-centric models.
🔹 4 Stages (even the fifth one)
This likely refers to organizational life cycle stages, typically:
1. Start-up – informal, entrepreneurial
2. Growth – more formal roles emerge
3. Maturity – efficiency and stability
4. Renewal or Decline – innovation or stagnation
5. (“Even the fifth one”) implies transformation or reinvention in response to disruption.
Each stage demands a different design—for example, start-ups favor flat structures, while mature firms
need formal hierarchies.
🔹 U-Form, Multi Products, Multi-locational, Customer-Centric, Data-Centric
These are structural archetypes and design principles:
 U-Form (Unitary Form): Centralized, functional structure (e.g., marketing, sales, R&D).
 Multi-Product: Organizing around product lines (e.g., different business units for software vs
hardware).
  Multi-locational: Geographic or regional segmentation (e.g., EMEA, APAC regions).
 Customer-Centric: Organizing around customer segments, not internal functions.
 Data-Centric: Leveraging data analytics for decisions, structure, and performance tracking.
As complexity grows, organizations move from U-Form to more decentralized or hybrid structures.
🔹 Analytics 1.0, 2.0, 3.0
These are evolution stages of analytics and their impact on design:
 1.0 (Descriptive): Basic reporting; reactive decisions.
 2.0 (Predictive): Forecasting trends and behavior.
 3.0 (Prescriptive/Automated): Real-time insights driving automated or adaptive systems.
Organizations with advanced analytics need structures that enable rapid data flow, agility, and decision-
making authority closer to data sources.
🔹 Interdependence
This refers to how much different parts of the organization rely on each other. The higher the
interdependence:
 The more coordination is needed
 The more lateral or network-based structures are useful
 For example, product development needs close interaction between R&D, marketing, and
operations

🔹 Dynamics of Change
Change is constant—due to technology, markets, regulations, etc. Organizations must:
 Build adaptive, learning structures
 Empower innovation
 Use agile teams, dynamic roles, or reconfigurable structures
Designs must enable rather than resist change.
Summary
These drivers emphasize that one-size-fits-all structures no longer work. Modern organizational design
must be:
 Dynamic
 Data- and customer-driven
 Adaptable to complexity, diversity, and interdependence
Would you like a visual or case example based on your organization’s transformation efforts?
How Do Managers Measure Organizational Effectiveness?

o Organizations pursue goals that satisfy stakeholders' interests.

o Managers use goals to assess organizational performance.

o Four approaches are discussed:

 The External Resource Approach: Control: Evaluates the organization's ability

to secure, manage, and control scarce and valued skills and resources from its
external environment. Goals include lowering input costs, obtaining high-quality
inputs, increasing market share and stock price, and gaining stakeholder support.
Example: Southwest Airlines securing high-quality employees.

 The Internal Systems Approach: Innovation: Evaluates the organization's

ability to be innovative and function quickly and responsively. Goals include
reducing decision-making time, increasing the rate of product innovation, and
increasing coordination and motivation. Example: Southwest Airlines reducing
airplane turnaround time.

 The Technical Approach: Efficiency: Evaluates the organization's ability to

convert inputs into outputs efficiently. Efficiency can be measured by the ratio of
inputs to outputs. Goals include increasing quality and reducing costs. Example:
Southwest Airlines focusing on operational efficiency.

 Measuring Effectiveness: Organizational Goals: Managers create goals to

assess performance.

 Official goals are formally stated guiding principles, often the mission,
explaining why the organization exists and what it should be doing. They
are meant to legitimize the organization and obtain resources/support.
Operative goals are specific long-term and short-term goals that guide
managers and employees. They can be used to measure how well
managers are managing the environment, internal functioning, and
efficiency.

 Contingency Factors

o A contingency is an event that might occur and must be planned for, such as
environmental pressure or a new competitor.

o The way an organization designs its structure and culture is affected by contingency
factors, including the specific and general environment, technology, and strategic choices.

o Managers need to select and design organizational structure and culture to meet these
contingencies effectively.

o The organization's environment is becoming increasingly complex and difficult to

respond to, especially the global environment.
  Strategy

o Strategy is the specific pattern of decisions and actions managers take to use core
competences to achieve a competitive advantage and outperform competitors.

o Core competences are managers' skills and abilities in value-creating activities.

Functional skills and abilities are sources of core competences.

o A competitive advantage is the ability of one company to outperform another by

creating more value from resources.

o Organizations develop strategies to increase the value they create for stakeholders.

Chapter 2: Stakeholders, Managers, and Ethics

This chapter focuses on the different groups of people who have a stake in an organization and the ethical
issues managers face in balancing their interests.

 Organizational Stakeholders

o Stakeholders are people who have an interest, claim, or stake in an organization, in what
it does, and in how well it performs.

o Stakeholders are motivated to participate if they receive inducements (rewards like

money, power, status) that exceed their contributions (skills, knowledge, expertise).

o The two main groups are inside stakeholders and outside stakeholders.

o Inside Stakeholders: People closest to the organization with the strongest claim on
resources.

 Shareholders: Owners of the organization's wealth/capital. They provide

money/capital and expect maximised return on investment.

 Managers: Employees who direct and coordinate resources. They provide

skills/expertise and expect salary, bonuses, status, power.

 Workforce: Non-managerial employees. They provide skills/expertise and

expect wages, benefits, job security, good working conditions.

o Outside Stakeholders: People who do not own or are not employed by the organization
but have a claim or interest.

 Customers: Purchase products/services. They provide money (sales revenue)

and expect value (price ≤ perceived value).

 Suppliers: Provide inputs (raw materials, components). They provide inputs and
expect revenue from input sales.
  Government: Rules the environment. Provides rules (laws, regulations) and
expects companies to pay taxes and abide by laws. Example: OSHA fining BP
for safety lapses.

 Trade Unions: Represent employees' interests. Provide collective bargaining and

expects improved working conditions and terms.

 Local Communities: Groups, residents, and agencies affected by the

organization. Provide infrastructure, facilities, and expects organizations to pay
taxes, create jobs, and avoid harming the environment.

 The General Public: Society at large. Provides customer loyalty, reputation, and
expects organizations to compete effectively, be socially responsible, and not
threaten their safety/well-being.

 Organizational Effectiveness: Satisfying Stakeholders’ Goals and Interests

o Organizations exist to satisfy stakeholders' goals.

o Challenges include:

 Competing Goals: Different stakeholders have different, sometimes conflicting,

goals. In capitalist countries, shareholder wealth maximisation is often assumed
as the primary goal. Managers face the task of choosing which goals to satisfy
and balancing short-term vs. long-term goals. An organization that ignores its
stakeholders will likely fail.

 Allocating Rewards: Deciding how to distribute profits among stakeholders,

balancing minimal expectations with "extra" rewards. Managerial rewards are
often linked to organizational effectiveness, but defining effectiveness can be
debated (e.g., short-term profit vs. long-term wealth). The allocation of rewards
determines stakeholders' future motivation and contributions.

 Top Managers and Organizational Authority

o Corporate-level management is the inside stakeholder group responsible for setting

company goals/objectives, allocating resources, and designing structure.

o The hierarchy of authority is a vertical ordering of roles by authority. The chain of

command is the system of hierarchical reporting relationships.

o The Chief Executive Officer (CEO): Has the ultimate responsibility for managing the
organization. The CEO can influence effectiveness and decision making by:

1. Setting goals and designing structure (allocating authority and task

responsibilities).

2. Determining the top-management team's composition and roles.

3. Shaping organizational culture (values, norms, control).

 4. Allocating resources to functions and divisions.

5. Impacting stakeholders' views and the ability to attract resources.

o The Top-Management Team: Group of managers reporting to the CEO/COO, helping

set strategy, goals, and objectives. Includes the Chief Operating Officer (COO)/President,
who often manages internal operations and oversees divisions. The CEO's selection of the
top-management team is vital for present and future success.

o Other Managers: Include corporate managers (top-management team setting strategy for
the whole corporation), divisional managers (heads of self-contained divisions),
functional managers (heads of functions/departments like R&D, marketing), and first-line
managers (supervising non-managerial employees). Line roles have direct responsibility
for production; staff roles are in charge of specific functions.

 An Agency Theory Perspective

o Agency theory views managers as agents for shareholders (principals). The problem is
aligning the interests of agents and principals.

o The Moral Hazard Problem: Occurs when managers have more information about
operations than shareholders and may pursue their own self-interest (self-dealing) at the
expense of shareholders.

o Solving the Agency Problem: Governance mechanisms are forms of control that align
principal and agent interests. Examples include:

 The Board of Directors: Oversees management and can remove ineffective

managers.

 Stock-based compensation schemes: Monetary rewards (stocks/options) linked to

company performance, aligning manager and shareholder interests.

 Promotion tournaments and career paths: Linking rewards to performance over

the long term.

 Mechanisms like the takeover constraint, auditors, and compensation plans.

 Top Managers and Organizational Ethics

o Ethics are inner-guiding moral principles, values, and beliefs used to analyse situations
and decide on appropriate behaviour. They indicate right/wrong behaviour and how to
avoid harming others.

o An ethical dilemma is a quandary when deciding whether to act in a way that benefits
someone, even if it harms others or is against self-interest.

o Managers constantly make choices about how to deal with stakeholders, balancing
interests and apportioning "helps and harms".
 o Ethics and the Law: Ethical rules are unwritten codes; laws are written rules. Ethical
beliefs influence law creation, and laws codify ethical beliefs to prevent harm and align
interests. Ethical behaviour is consistent with the law; unethical behaviour is not.

o Ethics and Organizational Stakeholders: Managers decide how to balance the claims
of different stakeholders when their interests conflict. Ethical managers consider the
effects of decisions on all stakeholders.

o Models of Ethics: Three models to determine if a decision is ethical:

 Utilitarian model: Produces the greatest good for the greatest number of people.
Managerial implication: choose actions providing most benefits to stakeholders.
Problem: comparing benefits/costs for diverse groups is difficult.

 Moral rights model: Protects the fundamental rights and privileges of people.
Managerial implication: choose actions protecting stakeholders' rights (e.g.,
safety, privacy). Problem: choosing which rights to protect when they conflict.

 Justice model: Distributes benefits and harms among stakeholders in a fair,

equitable, and impartial way. Managerial implication: use fair procedures to
distribute outcomes. Problem: managers must avoid discrimination and
favouritism.

o Sources of Organizational Ethics:

 Societal ethics: Values and norms of a society.

 Professional ethics: Moral rules/values used by a group to control task

performance/resource use (e.g., medical ethics).

 Personal ethics: Moral principles learned from family, friends, education, etc..

o Why Do Ethical Rules Develop?

 To slow down or temper the pursuit of self-interest (e.g., tragedy of the

commons : individuals acting in their own self-interest can ultimately deplete
or ruin a shared, limited resource, even though it's in no one's long-term
interest for that to happen.)

 To control self-interested behavior that threatens society's collective interests.

 To increase the value produced by people interacting, protecting them.

 To reduce transaction costs (costs of monitoring, negotiating, enforcing

agreements) by establishing rules and trust.

Chapter 3: Organizing in a Changing Global Environment

This chapter examines the external environment as a major contingency and source of uncertainty for
organizations, and theories explaining how organizations try to manage and control it.

 The Specific Environment

 o Consists of forces from outside stakeholder groups that directly affect an organization's
ability to secure resources.

o Includes customers, distributors, unions, competitors, suppliers, and the government.

o Competition (domestic or international) makes resources scarce and valuable, increasing

difficulty in obtaining them.

o Organizations must manage relationships with suppliers and distributors.

o Global supply chain management is the coordination of the flow of raw materials,
components, and finished products around the world. Choices involve whether to buy or
make inputs and how to distribute products (e.g., directly, via wholesalers, alliances).

o Other stakeholders like government agencies, unions, and consumer groups pressure
organizations to follow rules and standards.

 The General Environment

o Consists of forces that shape the specific environment and affect the ability of all
organizations in a particular environment to obtain resources.

o Includes economic, technological, sociocultural, demographic, and political/legal forces.

o Economic forces: Interest rates, economy state, unemployment rate affect demand and
input prices. Global differences in exchange rates, wage levels, GDP affect international
operations. Organizations may move operations abroad or outsource to compete on cost
(e.g., Sony, GE, GM, Levi Strauss).

o Technological forces: Developments in IT, etc., affect how inputs are converted to
outputs. Can lower costs, allow differentiation, and create new products. IT revolution is
a major force changing organization operations and boundaries (e.g., outsourcing, global
network organizations).

o Sociocultural forces: Values, norms, customs of a society. Affect organizational values

and ethics. Example: changing attitudes towards animal testing influencing cosmetic
companies.

o Demographic forces: Characteristics of the population (age, education, lifestyle,

immigration). Affect demand for products and workforce composition.

o Political and legal forces: Laws and regulations (e.g., deregulation, environmental laws).
Affect organizations' ability to operate effectively.

 Sources of Uncertainty in the Environment

o The environment is a primary source of uncertainty.

o Uncertainty is a function of environmental complexity, dynamism, and richness.

 o Complexity: Number of forces needing management and their interconnectedness. More
forces and links = more complexity.

o Dynamism: Degree to which forces change rapidly. High dynamism = fast change = hard
to predict.

o Richness: Amount of resources available. Rich environment = resources are available;

Poor environment = resources are scarce.

o Uncertainty is lowest in a stable, simple, rich environment. Uncertainty is highest in a

dynamic, complex, poor environment.

 Resource Dependence Theory

o Argues the goal of an organization is to minimize its dependence on other

organizations for scarce resources and influence them to make resources available.

o Dependence strength on a resource depends on:

1. How vital the resource is to survival. (CRITICALITY)

2. Extent to which other organizations control the resource. Example: PC makers

depend on Intel for microchips. (SCARCITY)

o Organizations try to manage transactions with the environment to ensure predictable

access to resources.

o Interdependencies cause uncertainty.

 Symbiotic interdependencies: Outputs of one organization are inputs for

another (organization and suppliers/distributors).

 Competitive interdependencies: Organizations compete for scarce

inputs/outputs. Example: HP and Dell competing for customers and Intel's chips.

o Organizations use interorganizational strategies to manage these interdependencies.

Linkages can be formal (direct coordination, written agreement, common ownership) or
informal (indirect coordination, unspoken agreement).

o Strategies to manage symbiotic interdependencies: Reputation, Cooptation (absorbing

members of resource-providing groups), Strategic Alliances (formal agreements).
Examples: long-term contracts, networks, minority ownership, joint ventures.

o Strategies to manage competitive interdependencies: Collusion and cartels (illegal

agreements to coordinate activities), Third-party linkage mechanisms (regulatory bodies,
trade associations), Strategic Alliances (joint ventures, mergers, takeovers).

o An organization balances the need to reduce resource dependence against the resulting
loss of autonomy.

 Transaction Cost Theory

 o Argues the goal is to minimize the costs of exchanging resources in the environment
and managing internal exchanges.

o Transaction costs are costs of negotiating, monitoring, and governing exchanges.

Bureaucratic costs are costs of managing exchanges inside the organization.

o Sources of transaction costs:

 Bounded rationality: Limitations on cognitive abilities making complex

transactions hard to manage.

 Opportunism: Self-interest seeking with guile.

 Specific assets: Investments valuable only in a specific relationship. High

specific assets increase transaction costs.

o Organizations choose governance mechanisms (linkage mechanisms) that minimise

transaction costs. When transaction costs are high, more formal mechanisms are
preferred.

o Using Transaction Cost Theory to choose an interorganizational strategy:

1. Locate sources of transaction costs and estimate their level.

2. Estimate transaction cost savings from different linkage mechanisms.

3. Estimate the bureaucratic costs of operating the mechanism.

4. Choose the mechanism that gives the most transaction cost savings while
minimizing bureaucratic costs.

o Vertical integration (mergers/takeovers of suppliers/distributors) is a formal mechanism

with high bureaucratic costs but can greatly reduce transaction costs and uncertainty
when specific assets are high. Less formal alliances have lower bureaucratic costs.

o McDonald's example: Uses franchising (less formal) and ownership (more formal) based
on transaction and bureaucratic costs.

Chapter 4: Basic Challenges of Organizational Design

This chapter introduces the basic challenges managers face when designing an organizational structure to
maximise effectiveness and achieve stakeholder objectives.

 Differentiation

o The process by which an organization allocates people and resources to organizational

tasks and establishes the task and authority relationships that allow the organization to
achieve its goals. It's the process of grouping people and resources to achieve specific
tasks.

o Building blocks of differentiation:

  Organizational Roles: Collection of task responsibilities and behaviours
performed by an individual. As tasks increase, roles become more specialised.

 Subunits: Functions and Divisions: People with similar/related roles are

grouped into subunits.

 Function (Department): Subunit grouping people with similar

skills/knowledge/tools.

 Division: Subunit consisting of collection of functions/departments

responsible for a particular good/service.

 The number of functions and divisions is a measure of the organization's

complexity (degree of differentiation).

o Organizations differentiate into five kinds of functions as they grow:

 Support functions (purchasing, sales/marketing, PR).

 Production functions (manufacturing, operations).

 Maintenance functions (personnel, engineering, janitorial).

 Adaptive functions (R&D, marketing research).

 Managerial functions (top management, middle management, first-line

management).

o Horizontal differentiation: The way an organization groups tasks into roles and roles
into subunits (functions and divisions). Establishes division of labor.

o Vertical differentiation: The way an organization designs its hierarchy of authority and
creates reporting relationships. Establishes the distribution of authority. A hierarchy is a
classification by authority and rank.

 Organizational Design Challenges

o Managers face four basic challenges in designing structure:

1. Balancing Differentiation and Integration.

2. Balancing Centralization and Decentralization.

3. Balancing Standardization and Mutual Adjustment.

4. Connecting these choices to fit the environment (Contingency Theory).

o These challenges must be addressed simultaneously to create a high-performing structure.

 Balancing Differentiation and Integration

o Differentiation can lead to subunit orientation (different functions developing different

views and time horizons), making communication difficult.
 o Integration: Process of coordinating tasks, functions, and divisions so they work
together.

o Integrating Mechanisms (least to most complex):

1. Hierarchy of authority: Vertically linking roles and subunits by specifying who

reports to whom. Simple but can become overloaded.

2. Direct contact: Managers from different subunits meet face-to-face. Useful

when problems arise between subunits.

3. Liaison roles: Managers assigned to coordinate with other subunits. One person
in a subunit is responsible for communicating with another. (Communicating on
behalf of the group – no accountability)

4. Task forces: Temporary committees set up to solve specific problems. Managers

from relevant subunits meet as a task force. Useful for complex issues. (One
time activity)

5. Teams: Permanent task forces used to deal with recurring issues.

6. Integrating roles or departments: Full-time managerial positions/departments

coordinating subunits. An integrating role is a full-time position established
specifically to improve communication between divisions. (New Role for the
purpose of Integration - PM) Used when communication barriers are high in
large/complex organizations.

7. Matrix structure: (Discussed in Chapter 6)

o Managers must avoid differentiating or integrating too much, as both are expensive. The
goal is to guide differentiation to build core competences and integrate using appropriate
mechanisms to strengthen those competences.

 Balancing Centralization and Decentralization

o Authority: The power to hold people accountable and make decisions about resource
use.

o Vertical differentiation involves distributing authority. Decision-making authority can be

centralised or decentralized.

o Centralization: Authority to control tasks is kept at the top. Advantage: top managers
coordinate activities and keep focus on goals. Disadvantage: top managers can become
overloaded, neglecting long-term strategy.

o Decentralization: Authority is delegated to lower levels. Advantage: promotes flexibility

and responsiveness; allows lower-level managers to make on-the-spot decisions;
increases motivation and risk-taking. Disadvantage: coordination difficulties; potential
loss of control if too much authority is delegated.
 o Balancing authority is an ongoing task. High-tech companies often decentralise to
encourage innovation.

Conditions for Centralization:

1. Is it a mandatory requirement? Y – Centralize

2. People do not mind centralizing? Y – Centralize
3. Will centralization result in min 10% value creation? Y - Centralize

 Balancing Standardization and Mutual Adjustment

o Organizations need to find ways to control employees' actions to perform tasks

effectively.

o Standardization: Coordinating activities through written rules, standard operating

procedures (SOPs), and norms. Activities are predictable.

 Formalization: Use of written rules and SOPs. Rules specify how tasks should
be performed and actions to take.

 Socialization: Coordinating activities through shared understood norms and

values. Members internalise norms/values, guiding their behaviour.

o Mutual adjustment: Coordinating activities through informal communication and

personal contact. Decision making relies on judgment and skills rather than rules.

o Organizations need to balance these, depending on the situation.

 Mechanistic vs. Organic Structures

o These represent two ideal types of organizational structure that result from the choices
managers make regarding the four design challenges.

o Mechanistic structures: Designed to induce predictable, accountable behaviour.

Characterised by:

 Individual Specialization: Employees work separately on clearly defined tasks.

 Simple Integrating Mechanisms: Hierarchy is the major mechanism.

 Centralization: Authority is kept at the top; communication is vertical.

 Standardization: Extensive use of rules and SOPs; work process is predictable.

 Suitable for stable environments.

o Organic structures: Promote flexibility and quick responses to changing conditions.

Characterised by:

 Joint Specialization: Employees work together and coordinate activities.

 Complex Integrating Mechanisms: Greater use of teams and task forces.

  Decentralization: Authority is delegated; communication is lateral/horizontal.

 Mutual Adjustment: Coordination through informal communication; work

processes are unpredictable.

 Suitable for unstable, changing environments.

o Most organizations are a mixture of both types. Successful organizations often balance
the two.

 Contingency Theory

o Argues that to manage its environment effectively, an organization should design its
structure and control systems to fit with the environment in which it operates. The
structure should allow the organization to respond to contingencies.

o Implies that organizations in uncertain, rapidly changing environments require greater

differentiation and integration (organic structure) than those in stable environments
(mechanistic structure).

Contingency Factor Description

Environment Stable vs. dynamic markets, regulation, competition

Technology Routine (mass production) vs. non-routine (custom work)

Size of Organization Larger organizations often need more formalization

Strategy Cost leadership vs. differentiation

Culture/People Degree of autonomy, collaboration, or innovation focus

Chapter 5: Designing Organizational Structure: Authority and Control

This chapter delves deeper into vertical differentiation and the design of the hierarchy of authority,
explaining how it coordinates and motivates behaviour, and how other design choices affect its shape.

 Authority: How and Why Vertical Differentiation Occurs

o Organizations develop hierarchies of authority to coordinate and motivate employees.

o Goal conflicts and coordination/motivation problems in groups lead to the emergence of a

hierarchy and vertical differentiation. Managers at different levels become responsible for
different activities.

 The Emergence of the Hierarchy

o As organizations grow and differentiate horizontally (specialisation of tasks), the need for
vertical differentiation (hierarchy) increases to control activities.

o Managers in the hierarchy monitor, control, and supervise subordinates.

 o The structure assigns roles, task responsibilities, and decision-making authority.

 Size and Height Limitations

o The number of hierarchical levels is related to the size of the organization (number of
employees).

o Tall organization: Hierarchy has many levels relative to size.

o Flat organization: Hierarchy has fewer levels relative to size.

o Problems with tall hierarchies:

 Communication problems: Information distortion as it travels up/down the

hierarchy. Delays decision making. Worsens as levels increase.

 Motivation problems: Managerial authority/responsibility decrease at each

level. Less authority can reduce motivation. Easy to evade responsibility.

 Bureaucratic costs: Increased number of managers means higher salary/benefit

costs.

 The Parkinson’s Law Problem

o Growth in managers and hierarchical levels is controlled by two principles:

1. "An official wants to multiply subordinates, not rivals."

2. "Officials make work for one another."

o These lead to an unnecessary increase in the number of managers and complexity.

 The Ideal Number of Hierarchical Levels: The Minimum Chain of Command

o Principle: An organization should choose the minimum number of hierarchical levels

consistent with its goals and environment. Keep the organization as flat as possible.

o Only choose a tall structure if a high level of direct, personal control/supervision is

needed (e.g., nuclear power plants).

 Span of Control

o The span of control is the number of subordinates a manager directly manages.

o The ability to supervise subordinates limits the span of control. More subordinates =
exponentially increasing relationships to manage.

o Factors affecting span of control: Task complexity and task interrelatedness.

 Complex/interrelated tasks require narrower spans.

 Routine/unrelated tasks allow wider spans.

 Control: Factors Affecting the Shape of the Hierarchy

 o When direct supervision is limited, organizations use other methods to control activities,
influencing the hierarchy's shape.

o The level of vertical differentiation (height) is affected by:

 The Level of Horizontal Differentiation: Grouping tasks into

functions/divisions affects the number of positions and need for coordination.
Functions themselves can have different hierarchical heights (e.g., manufacturing
often taller than sales).

 The Level of Centralization: Centralization keeps decision-making power at the

top; decentralization delegates it. More decentralization can lead to a flatter
structure.

 The Level of Standardization: Use of rules, SOPs, and norms reduces the need
for direct supervision, allowing wider spans of control and potentially flatter
hierarchies.

 The Strength of the Informal Ties and Relationships: Informal organization

(personal relationships, norms) can coordinate and motivate, reducing the need
for formal hierarchy/supervision.

 The Principles of Bureaucracy

o Max Weber's principles for designing a hierarchy to effectively allocate authority and
control resources.

o A bureaucracy is a structure where people are accountable through rules and SOPs.

o Six principles:

1. Official jurisdictional areas are ordered by rules. A manager’s authority is

derived from the position held in the organization.

2. Each office has a sphere of competence based on tasks, authority, and coercion
means. Organizational roles are held on the basis of technical competence,
not because of social status, kinship, or heredity. Picking the best person
requires objectivity.

3. Offices are organised hierarchically. A role’s task responsibility and decision-

making authority and its relationship to other roles should be clearly
specified. Clear vertical/horizontal differentiation is foundational.

4. Rules, SOPs, and norms govern performance and interactions. To coordinate

subunits and motivate people, managers must use rules, standard operating
procedures (SOPs), and norms. Provide behavioral guidelines and increase
efficiency.
 5. Administrative acts, decisions, and rules are formulated and put in writing.
Administrative acts and decisions should be documented in writing. Ensures
consistency and accountability.

6. Membership in the organization is a career; tenure depends on technical

competence. Role incumbents are expected to use their position power and
authority in the interests of the organization, not in their own self-interest.
Using power for personal gain is unethical.

o Advantages of Bureaucracy: Lays out clear roles/responsibilities, reduces

ambiguity/conflict/transaction costs, provides a framework for using authority effectively,
creates standard practices, separation of roles from people ensures performance over
time. Can reduce costs and increase efficiency.

 Problems with Bureaucracy

o Managers can become overly bureaucratic, pursuing power/status over efficiency.

o Overreliance on rules/SOPs can make members unresponsive to stakeholders. Goals shift

from value creation to following rules to protect personal interests.

o Managers may resist change or innovation that threatens their positions.

 Management by Objectives (MBO)

o A system of evaluating subordinates on their ability to achieve specific organizational

goals or performance standards and meet budgets.

o Steps in MBO:

1. Specific goals and objectives are established at each level.

2. Managers and subordinates together decide the subordinates' present goals.

3. Managers and subordinates periodically review progress toward goals.

o Links salary/promotions to goal achievement.

 The Influence of the Informal Organization

o Decision making and coordination happen outside formal channels through informal
interactions.

o Rules and norms emerge from informal interactions, not just formal design.

o The informal organization is the network of personal relationships that develop over
time.

o Managers must harness the power of the informal organization to help achieve
organizational goals. Altering formal structure can disrupt informal norms.
These chapters lay the foundation for understanding how organizations are structured and managed, the
internal and external forces that shape them, and the fundamental challenges managers face in designing
effective organizations.

Based on the sources and our conversation, here is a summary of the concepts of Human Resource
Architecture and Designing High Performance Jobs:

Human Resource Architecture

The concept of Human Resource Architecture, as discussed in the source, proposes that organizations do
not manage all employees in the same way because not all employees possess knowledge and skills of
equal strategic importance. Instead, firms draw on theories like Transaction Cost Economics, Human
Capital Theory, and the Resource-Based View to develop a framework for allocating and developing
human capital.

The architecture is based on two primary dimensions that differentiate human capital:

 Value: This refers to the potential of the human capital to contribute to the firm's competitive
advantage or core competence. Value is measured as the ratio of strategic benefits to customers
(derived from skills) relative to the costs incurred.

 Uniqueness: This refers to the degree to which skills are firm-specific and not readily available in
the open labour market. Unique skills often involve tacit knowledge and expertise gained from
idiosyncratic learning processes or interdependent arrangements.

By combining these two dimensions, the source identifies four different employment modes, each
associated with a distinct type of human capital, employment relationship, and HR configuration:

1. Internal Development (High Value, High Uniqueness):

o Human Capital: Employees with valuable and unique skills, considered core employees.

o Employment Mode: Firms have incentives to develop these skills internally ("make").

o Employment Relationship: Organization focused or relational, encouraging long-term,

mutual investment.

o HR Configuration: Commitment-based system that nurtures involvement, uses

practices like extensive training, career development, skill-based pay, and developmental
performance appraisals.

2. Acquisition (High Value, Low Uniqueness):

o Human Capital: Employees with valuable but widely available skills (generic).
Examples include CPAs or delivery drivers.

o Employment Mode: Firms acquire these skills from the labour market rather than
heavily investing in internal development ("buy").

o Employment Relationship: Symbiotic, a relationship where employees are more career-

focused and can sell their talents elsewhere, but are expected to be loyal while employed.
 o HR Configuration: Market-based, emphasizing selective staffing to hire people with
existing skills for immediate contribution, externally equitable wages, and potentially
empowering employees within their domain.

3. Contracting (Low Value, Low Uniqueness):

o Human Capital: Employees with generic skills of limited strategic value ("public
knowledge").

o Employment Mode: Firms contract externally to minimize costs.

o Employment Relationship: Transactional, a short-term economic exchange with

explicit performance expectations and limited organizational involvement.

o HR Configuration: Compliance-based, focusing on enforcing rules and contractual

terms, with little investment in training or development.

4. Alliance (Low Value, High Uniqueness):

o Human Capital: Employees with unique skills that are not directly instrumental for
creating core customer value.

o Employment Mode: A hybrid approach using an alliance or partnership, blending

internal and external employment to utilize unique skills occasionally or for long-term
payoff.

o Employment Relationship: Partnership, requiring trust, information sharing,

reciprocity, and collaboration, often involving co-specialized assets where value is
realized through combined efforts.

o HR Configuration: Collaborative, investing in the relationship itself through process

facilitation, team building, communication mechanisms, and group-based rewards to
encourage sharing and joint decision making.

The framework highlights the complexity of managing these different modes simultaneously within an
organization and the dynamics by which the value and uniqueness of human capital can change over time
due to competitive pressures, requiring adjustments to the HR architecture.

Designing High Performance Jobs

Designing jobs effectively is presented as critical for executing a company's strategy and enabling
individuals and units to reach their performance potential. The article proposes a framework focusing on
four basic spans of a job that managers can adjust to influence employee behavior and performance:

1. Span of Control: The range of resources (people, assets, infrastructure, information) for which a
manager has decision rights and accountability. This span is adjusted based on how the business
creates value, e.g., narrow for standardization (like Wal-Mart store managers) or wide for
flexibility/local adaptation (like Nestle regional managers).

2. Span of Accountability: The range of trade-offs a manager can make concerning the measures
used to evaluate their performance. Narrow measures (like specific expenses) enforce
 compliance, while broad measures (like profit or market share) encourage creative thinking and
greater freedom.

3. Span of Influence: The extent to which a manager needs to interact with and influence
individuals or units outside their direct reporting lines to achieve their goals. This can be widened
by job design elements like cross-functional teams, matrix structures, stretch goals, or cost
allocation systems.

4. Span of Support: The amount of informal help and commitment a person can expect from
others, rooted in the organization's culture, values, and sense of shared responsibility. Policies like
a customer-based mission, broad stock ownership, group incentives, promoting internally, and
fostering trust can widen this span.

A key aspect of designing high-performance jobs is achieving equilibrium between the resources
supplied to a job and the resources demanded by the job's requirements.

 Supply of Resources = Span of Control + Span of Support.

 Demand for Resources = Span of Accountability + Span of Influence.

 For sustained high performance, Supply must equal Demand, visualized as the intersection of
these two sums.

Misalignment of these spans can lead to predictable problems:

 Crisis of Resources: Occurs when Supply < Demand. The employee lacks sufficient resources or
support to meet the demands of accountability and influence, leading to strategy failure.

 Crisis of Accountability: Occurs when Supply > Demand. The employee has more resources
than the job demands, leading to underutilization and inefficiency.

The article emphasizes that job designs, and thus the settings of these four spans, must be dynamically
adjusted over time as strategies and circumstances change. The example of IBM illustrates how
leadership changes and strategic shifts necessitated altering the spans for sales units to regain
effectiveness. Complex strategies often require wider spans across the board, but this balance is
precarious and requires continuous management.

Certainly, based on the sources provided and our conversation, here is a more detailed explanation of the
concept of the Span of accountability.

The Span of accountability is one of the four basic spans that managers can adjust when designing jobs
to influence employee behaviour and performance. It specifically refers to the "range of trade-offs
affecting the measures used to evaluate a manager's achievements".

Think of it like a slider, where you can set the span anywhere from narrow to wide:

 Narrow Span of Accountability: This means a manager is evaluated based on specific, detailed
measures, such as head count or particular line-item expenses in an operating budget. With a
narrow span, the manager can make "few trade-offs" in trying to improve the measured
performance dimensions. Setting the span to be narrow is used to "ensure compliance with
detailed directives".
  Wide Span of Accountability: This means a manager is evaluated based on broader metrics.
Examples include market share, business profit, return on capital employed, or customer
satisfaction. With a wide span, the manager has "greater freedom" and can make "many trade-
offs" in pursuit of these broader goals. Setting the span to be wide is intended to "encourage
creative thinking".

The Span of accountability is linked to the Span of control. While the Span of control defines the
resources a manager directly controls (people, assets, infrastructure), the Span of accountability defines
the goals they are expected to achieve and how their performance will be measured. Although the saying
"authority should match responsibility" might suggest these two spans should be equal, the source
highlights that in high-performing organisations, the Span of accountability is often set wider than the
Span of control.

This deliberate discrepancy creates an "entrepreneurial gap". By being held accountable for results that
require resources they don't directly control, managers are forced to "pursue opportunities without
regard to the resources they currently control". This situation stimulates their "energy and
creativity" to find ways to achieve success without direct command over all needed resources.

Typically, the Span of accountability varies by level within an organization; it is generally wider at the
top (e.g., a CEO accountable for stock price and overall profit) and narrower at the bottom (e.g., a store
manager accountable for specific operational metrics and compliance).

Misalignment of the four spans, including the Span of accountability, can lead to problems.

 If the demand for resources (represented by Span of accountability + Span of influence) is greater
than the supply (Span of control + Span of support), it can result in a "Crisis of Resources",
where the employee lacks the means to meet their accountabilities.

 Conversely, if the supply of resources exceeds the demand, it can lead to a "Crisis of Control"
(underutilization and inefficiency) or a "Crisis of Red Tape" (complexity and slowness), where
the demands of accountability and influence are too low for the resources available.

The appropriate setting for the Span of accountability, like the other spans, needs to be dynamically
adjusted over time as the organization's strategy, environment, and the role of the specific job or unit
change. The example of IBM demonstrates how the span of accountability for sales units was altered
under different CEOs and strategies to better align with desired outcomes, sometimes successfully and
sometimes leading to problems when not balanced with other spans.