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Organizational Design & Strategic

Control
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Objectives
 What are organizations & what is the importance of
their structure?

 Factors in designing the structure of the organization

 Structure & configuration of classic organizations

 Structure & configuration of modern organizations

 What are the different relationships between strategy

& organizational structure?
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What is an organization?
 Specific configuration of
structure, people, task, and
techniques
 Structure describes the form
of departments, and
hierarchy. It influences the
organization’s efficiency &
effectiveness
 People incorporate the
skills, attitudes, and social
interaction of the members of
the organization
 Task depicts the goals of the
individual & the
organization
 Techniques explain the
methods and approach used
to perform tasks
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What is organizational structure?
 Mechanism of mobilizing human, physical, financial, and
information resources at all levels of the system | Framework
by which an organization communicates, develops goals,
and then works on achieving these goals
 Important factor in organization’s performance; not only affects
strategy, it affects other areas like stability, workflow, size &
life cycle, and corporate culture
 Provides guidelines on
 Division of work into activities
 Linkage between different functions
 Hierarchy
 Authority structure & relationship
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Principles of organizational structure
(1/2)
 Principles of organizational structure are the methods by
which the organization maintains that structure, and the
processes it uses to keep the structure efficient.
 Hierarchy of command: One of the principles that holds an
organizational structure together is the hierarchy of command.
Respect for the authority of management and the executive team
creates a functional line of communication. Everyone in the
company can follow the trail of responsibility for projects, and
employees understand who they report to and how the management
structure affects their jobs.
 Role Definition: An efficient organizational structure helps to
properly define everyone's role within the company. A clear definition
of the responsibilities and standing of each person within the
company creates an understanding of what is expected from each
individual, and how individual performance can affect the efficiency
of the entire organization.
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Principles of organizational structure
(2/2)
 Evaluating Outcomes: Monitoring the outcome of individual
projects, as well as the ongoing performance evaluation of individual
employees, helps to determine the strengths and weaknesses in the
organizational structure. The weaknesses can be dealt with either
through training, reallocation of company assets such as equipment, or
eliminating ineffective employees or those performing duplicate tasks.
The strengths of the organization can be amplified to help identify future
managers of the company, determine successful processes that can be
used in future projects, and improve the processes used to reach future
company goals.
 Altering Organizational Structure: One of the key principles of
organizational structure is the ability to remain dynamic and change to
suit the needs of the company. Some of the elements that necessitate
change in an organizational structure include changing customer
needs, a change in company management, new technology, and
reacting to the activities of your competition.
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Benefits of organizational structure?
(1/3)
 Streamline Operations
 Organizational structures can help companies streamline business
operations | Organizing business functions into departments
ensures business operations are completed and effective and
efficient manner | Companies may save money by reducing the
number of similar business functions completed by multiple
departments

 Improve Decision Making

 Companies can use organizational structure to improve their
business decision making process | Organizational structures can
be designed to promote the flow of information from frontline
operations to managers responsible for making business decisions |
Executive level management can use organizational structure
channels for sending information to managers or employees
responsible for completing business functions.
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Benefits of organizational structure?
(2/3)
 Operate Multiple Locations
 As small businesses continue to grow and expand, they may open
multiple locations in local, regional or domestic economic markets |
Organizational structures help business owners create a
management chain to ensure all business locations operate
according to the company’s standard procedures. Business owners
rely on organizational structures because the owner may not be
able to visit each location in a timely manner.

 Improve Employee Performance

 Organizational structures often outline employee tasks and which
manager is responsible for overseeing each employee.
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Benefits of organizational structure?
(3/3)
Focus on Customer Service &
Sales
 Companies using a well-
defined organizational
structure should be able to
spend more time focusing on
customer service rather than
correcting operational
issues
| Companies may also focus
on increasing sales revenues
and profits from business
operations by meeting
consumer needs and wants.
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What is an organizational chart?
 Visual representation of underlying activities & processes being
undertaken by the organization
 Key components
 Formal reporting relationships including number of levels in the
hierarchy and span of control of managers & supervisors
 Grouping of individuals into departments & of departments into the total
organization

 Underlying principle
 Vertical linkages primarily show control; Vertical control best associated
with goals of efficiency & stability
 Horizontal linkages indicate the coordination & collaboration; Horizontal
coordination is associated with learning, innovation & flexibility
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Factors considered during
organizational design
 Primary objective: Ensure clarity, understanding, de-
(1/2)
centralization, stability, and adaptability
 Organizational structure has become important
because of
 Size, Global spread, and complexity of the modern
business firm
 Expanding markets, new competitors, proliferation of products, need
for instant communication, and fierce focus on asset values
 Relationship between people, both internally & externally

 4 basic principles during organizational design

 Specialization is division of work into components in which people
specialize.
 Vertical – kinds of work at different levels in the organization
 Horizontal – division into departments
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Factors considered during
organizational design
4 basic principles during organizational design, (cont’d)
(2/2)
Coordination is integration of activities of these specialized units

towards a common objective. Involves placement of different units in the
organization together or separately and deciding on patterns of
relationship & communication
 Unity of Command, Authority & Responsibility, Span of
Control, Departmentalization
 Centralization is whether decision making is delegated to lower levels
(De-centralized) or concentrated at the top (Centralized)
 Design of systems should ensure effective communication, coordination,
and integration across departments
 Formalization refers to the extent to which rules & regulations
permeate the organization. Defines the formal relationship in the
organization
 Finding the right balance between vertical control & horizontal coordination
is an important design decision
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Traditional organizational structures
(1/6)
 Simple structure
 Single product or owner driven organization
 Little or no separation of management responsibilities & no clear
definition of functional division of labor
 Emphasis is on direct control & communication for increasing
business
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Traditional organizational structures
(2/6)
 Functional designs
 Structured around a CEO & limited corporate staff
 Activities are grouped together by common functions & functional
managers play critical role
(Production, Marketing, R&D, Accounting, etc.)
 Each functional unit has different set of duties & responsibilities
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Traditional organizational structures
(3/6)
 Functional Designs, (cont’d)
 Advantages: Provides functional clarity | Specialization is built into
the organizational structure | Promotes economies of scale & makes
it best suited for cost leadership strategy | Suits Small-Medium
sized organizations producing limited line of products where
dominant competitive issues are cost, efficiency & quality
 Disadvantages: Functional area managers tend to develop a narrow
focus on local issues instead of overall strategic issues | Rivalry
between departments | Coordination & delegating responsibility
among departments become increasingly difficult | Routine,
repetitive jobs leading to poor productivity | Slow to respond to
environmental changes
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Traditional organizational structures
(4/6)
 Divisional Structure
 Departments are grouped together based on organizational outputs
| Each division represents a separate business or profit center
 All activities for a single project or purpose are brought under one
manager | Easy to fix accountability, procedures & systems can be
standardized leading to better integration across different specialties
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Traditional organizational structures
(5/6)
 Divisional Structure, (cont’d)
 Advantages: Enables more accurate monitoring of the performance
of each business | Facilitates comparison between divisions |
Improves resource allocation | Motivates managers of poorly
performing divisions to look for ways to improve | Suited to fast
change in an unstable environment, enhanced corporate financial
control, and stronger pursuit of internal efficiency
 Disadvantages: Creates functional departments in each division
leading to duplication of effort | Economies of scale in functional
departments are reduced | Little incentive to promote cooperation
among divisions | Inter divisional trading becomes complex leading
to reduced transparency in operations | Conflicts between division &
headquarters on allocation of resources & support services
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Traditional organizational structures
(6/6)
 Geographical Structure
 Based on the concept of market segmentation | Organization’s
users or customers are grouped together by geographical area
 Relevance: Markets, legal framework, culture & economic
conditions of particular geographical region impacts organizational
performance
 Form of the multi-divisional organizational structure
 Skills & capabilities of board members with respect to dealing with
complex issues is important
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Modern Organizational Structures
 Matrix Organization
 Attempt to combine the
advantages of the pure
functional & divisional structure
| Ideally suited for companies
which are ‘project-driven’
 Each project manager reports
directly to the VP / GM |
Each project represents a
potential profit center, the
power & authority used by
project manager comes
directly from VP/GM | Project
Advantages
Manager has total
responsibility &
Project cost is minimized as resources are accountability for success of
shared | Authority & responsibility are project
shared  Functional departments have
Disadvantages responsibility to maintain
Role Conflict, Role ambiguity, & Role technical excellence on project
Overload
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Modern Organizational Structures
 Horizontal Structure
 Also referred as ‘Flat
organizations’ has few or no
levels of intervening
management between staff &
managers
 Principle, well-trained workers
will be more productive when
directly involved in decision-
making process | Promotes
employee involvement through
decentralized decision-
making process
Advantages  Generally possible only in
Lower costs as non-vital functions can be smaller organizations or
outsourced | More adaptable to change | individual units within large
Encourages open communication & organizations
collaboration | Higher innovation &
creativity
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Modern Organizational Structures
 Virtual Organization
 Boundary-less organization |
Doesn’t exist physically but
enabled by software | Exists within
a network of alliances, using the
internet
 Self management within teams &
units | Continually changing
participants | Goal oriented
 Why Virtual Organizations?
 Globalization, with growing
trends to include global
customers
 Rapidly changing needs
Advantages
Appropriate for short-term initiatives with  Increasingly
clearly defined products or outcomes | specialized products &
Responsive to rapidly changing environment |
services
 Ability to quickly pool expert
Non-existent overhead costs
Disadvantages resources
High dependence on technology for  Creation of communities
communication | Unstable or difficult to manage of excellence
| highly dependent on individuals & their
interests
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Organizational structure &
effectiveness (1/6)
 The decision for organizational structure usually lies with top
management. The size of a company is sometimes the
determining factor as to organizational structure effectiveness.
 Significance
 Larger companies often benefit from a taller organizational structure. A
tall organizational structure contains lots of management levels.
Decision makers dole out tasks and projects in which they hold
subordinates accountable. Upper management knows what strategies
they wish to implement and, subsequently, get all subordinates working
together to effectively meet company goals.
 Contrarily, small companies will often use flat organizational structures.
It is more effective for smaller companies to complete task and projects
without waiting on decisions from multiple managers. A flat structure is
often more effective in completing tasks and projects faster. Small
companies are often in a rapid growth state. Company owners and
employees must make quick decisions.
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Organizational structure &
effectiveness (2/6)
 Types of Structures
 Some companies may feel a divisional (product) organizational structure
is most effective for their needs. For example, department stores are
heavily focused on various product-oriented departments. A divisional
(product) organization structure may work best for department stores
because product expertise is required to effectively manage specific
departments. For example, the buying process may vary by type of
product. In addition, managers in certain departments may be more
experienced in terminology related to their special products
 Contrarily, a company may deem a functional organizational structure
works best for them. Departments that are divided by functional areas,
including marketing and engineering, may be more effective in grouping
people of special talents together. For example, a marketing team will
often be much more effective working together when testing a new
product concept.
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Organizational structure &
effectiveness (3/6)
 Customers
 Some companies may deal with a diverse group of customers. For
example, a software company that sets up electronic bill-paying may
target consumers, banks, corporations and health clubs.
Consequently, the software company may organize its structure by
customer type. Organizing by customer type may be more effective than
other organizational structures because the products and procedures
may vary greatly among customer type.

 Benefits
 The benefits that companies wish to achieve with various organizational
structures include increased communication, efficient use of resources
and even chain of command. For example, a company will usually
develop an organizational structure that facilitates communication
through various management levels. That way timely decisions can be
made by the right individuals. Companies also want to make efficient
use of resources and avoid any duplication of efforts. Companies that
can eliminate duplication resources, including labor or raw
materials, tend to operate more effectively.
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Organizational structure &
effectiveness (4/6)
 Considerations
 Some companies may need to decentralize their organizational
structure geographically. For example, a company that relies heavily
on direct sales may need to decentralize its sales and marketing
functions by region. Consumer product companies sometimes
decentralize sales and marketing functions because consumer
tastes vary per region. A geographically decentralized organizational
structure can also be more effective because production facilities
are spread out. Consequently, a production facility in Gurgaon
would likely get products to North India quicker than one in
Coimbatore.
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Organizational structure &
effectiveness (5/6)
 Type of Strategy
 A ‘low-price strategy’ will require an organization structure that
ensures cost efficient operation with emphasis on cost control
 A ‘differentiation strategy’ needs organization to possess high
degree of creativity to develop & sustain product or service quality
which provide competitive advantage

 Technology
 Mass production requires standardization of
processes, centralization with greater control & direction by senior
management
 Organizations with less standardized operational processes are
likely to have more informal decision-making processes
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Organizational structure &
effectiveness (6/6)
 Nature of Environment
 In simple & static environment, organizations can gear for operational efficiency
 With increasing complexity, there is need to devolve decision-making
responsibilities to lower levels or specialists

 Size
 Increase in organizational size increases the number of hierarchical
levels

 External Environment
 Factors such as economic conditions, changes in market conditions, advances
in technology, legal & political conditions

 People
 Depending on nature of work, organizations accommodate psychological
needs of employees. Example, organization in manufacturing has different
structure from organization involved in software development
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Indications of an ineffective
organizational structure (1/4)
 Breakdown in communication
 If departments are no longer efficiently sharing information and
processing data as they should be, then that is a problem with
organizational communication.
 One of the causes of a breakdown in company communication is
that departments have begun to act on their own. There are many
reasons why this could happen including a lack of trust between
departments, the feeling by one department that another
department is incapable of performing its job or incompetent
management in the departments.
 The departments bypass the organizational structure and
communication begins to break down.
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Indications of an ineffective
organizational structure (2/4)
 Quality Control Issues
 Organizational structure comes with a series of checks and
balances that are designed to perform certain levels of quality
control.
 Examples, The engineering department and the marketing
department work together to create instruction manuals for products
that the general public can use. Accounting works with Sales to
discuss client accounts and keep sales moving.
 When the organizational structure begins to deteriorate, these
checks and balances will stop. The marketing group starts to create
instruction manuals without extensive input from the marketing
group and information gets left out.
 If quality control is becoming an issue, it may be because the
organizational structure is breaking down.
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Indications of an ineffective
organizational structure (3/4)
 Low Morale
 When departments are not communicating and individuals within
those departments are getting reprimanded, morale in the company
will begin to suffer.
 Employees start to ignore the organizational structure because of
fear of discipline, they do not trust their manager or they no longer
feel included in the overall success or operation of the company.
 In some cases employees may have multiple managers due to a
breakdown in the company hierarchy, and this will cause confusion.
 An alienated workforce with low morale is a product of a failing
organizational structure.
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Indications of an ineffective
organizational structure (4/4)
 Customer Service
 An ineffective corporate structure sometimes lacks the ability to
monitor interactions with the customers.
 Example, If the sales group is not required to report customer issues
to the customer service group, then the customer service people will
be unaware of the problem if it should occur again.
 In an ineffective organizational structure, there is no cohesive way
of handling customer issues. When customers contact the
company, they may get three different answers if they talk to three
different people. This causes a problem with customer retention and
ongoing revenue.