Merritt's bakery case study

370 Part Four Organizational Processes

repeatability,” says Valve’s employee handbook. “But when you’re an entertainment

company that’s spent the last decade going out of its way to recruit the most

intelligent, innovative, talented people on Earth, telling them to sit at a desk and do

what they’re told obliterates 99 percent of their value.”1

Valve Corporation’s organizational structure is different from that of most companies, but this design seems to serve the game maker and entertainment firm’s strategic objectives. Organizational structure refers to the division of labor and the patterns of coordination, communication, workflow, and formal power that direct organizational activities. It for- mally dictates what activities receive the most attention, as well as financial, power, and in- formation resources. At Valve, for example, power and resources flow mainly to teams, which have almost complete autonomy over their work objectives and work processes.

Although the topic of organizational structure typically conjures up images of an organiza- tional chart, this diagram is only part of the puzzle. Organizational structure includes these reporting relationships, but it also relates to job design, information flow, work standards and rules, team dynamics, and power relationships. As such, the organization’s structure is an im- portant instrument in an executive’s toolkit for organizational change, because it establishes new communication patterns and aligns employee behavior with the corporate vision.2

This chapter begins by introducing the two fundamental processes in organizational struc- ture: division of labor and coordination. This is followed by a detailed investigation of the four main elements of organizational structure: span of control, centralization, formalization, and departmentalization. The latter part of this chapter examines the contingencies of organiza- tional design, including external environment, organizational size, technology, and strategy.

Division of Labor and Coordination All organizational structures include two fundamental requirements: the division of labor into distinct tasks and the coordination of that labor so that employees are able to accom- plish common goals.3 Organizations are groups of people who work interdependently to- ward some purpose. To efficiently accomplish their goals, these groups typically divide the work into manageable chunks, particularly when there are many different tasks to perform. They also introduce various coordinating mechanisms to ensure that everyone is working effectively toward the same objectives.

DIVISION OF LABOR Division of labor refers to the subdivision of work into separate jobs assigned to different people. Subdivided work leads to job specialization, because each job now includes a narrow subset of the tasks necessary to complete the product or service. Although Valve Corpora- tion’s leaders don’t do the organizing, employees self-organize into project teams, and members of each team agree to the tasks they should perform. Valve encourages its staff to become multiskilled, but most people gravitate toward one area of expertise or another. As companies get larger, this horizontal division of labor is usually accompanied by a vertical division of labor: Some people are assigned the task of supervising employees, others are re- sponsible for managing those supervisors, and so on. Valve has been able to avoid (or limit) this vertical division of labor by relying on employees to manage themselves and each other. But even Valve has team leaders who coordinate the work, as well as marketing and strategy leaders who guide and support employees’ decisions on these matters.

Why do companies divide the work into several jobs? As we described in Chapter 6, job specialization increases work efficiency.4 Job incumbents can master their tasks quickly because work cycles are shorter. Less time is wasted changing from one task to another. Training costs are reduced because employees require fewer physical and mental skills to

organizational structure The division of labor and patterns of coordination, communication, workflow, and formal power that direct organizational activities.

LO 13-1

mcs62589_ch13_368-395.indd Page 370 27/11/13 4:49 PM f-500 /204/MH02010/mcs62589_disk1of1/0077862589/mcs62589_pagefiles

Chapter Thirteen Designing Organizational Structures 371

accomplish the assigned work. Finally, job specialization makes it easier to match people with specific aptitudes or skills to the jobs for which they are best suited. Although one per- son working alone might be able to design a new online game, doing so would take much longer than having the work divided among several people with the required diversity of skills. Some employees are talented at thinking up innovative storylines, whereas others are better at preparing online drawings or working through financial costs.

COORDINATING WORK ACTIVITIES When people divide work among themselves, they require coordinating mechanisms to ensure that everyone works in concert. Coordination is so closely connected to the division of labor that the optimal level of specialization is limited by the feasibility of coordinating the work. In other words, an organization’s ability to divide work among people depends on how well those people can coordinate with each other. Otherwise, individual effort is wasted due to misalign- ment, duplication, and mistiming of tasks. Coordination also tends to become more expensive and difficult as the division of labor increases. Therefore, companies specialize jobs only to the point at which it isn’t too costly or challenging to coordinate the people in those jobs.5

Every organization—from the two-person corner convenience store to the largest corporate entity—uses one or more of the following coordinating mechanisms:6 informal communication, formal hierarchy, and standardization (see Exhibit 13.1). These forms of coordination align the work of staff within the same department as well as across work units. These coordinating mechanisms are also critical when several organizations work together, such as in joint ventures and humanitarian aid programs.7

Coordination Through Informal Communication All organizations rely on infor- mal communication as a coordinating mechanism. This process includes sharing information on mutual tasks and forming common mental models so that employees synchronize work activities using the same mental road map.8 Informal communication is vital in nonroutine

Visit connect.mcgrawhill.com for activities and test questions to help you learn about coordinating mechanisms and other organizational structure topics.

FORM OF COORDINATION DESCRIPTION SUBTYPES/STRATEGIES

EXHIBIT 13.1 Coordinating Mechanisms in Organizations

Sources: Based on information in J. Galbraith, Designing Complex Organizations (Reading, MA: Addison-Wesley, 1973), pp. 8–19; H. Mintzberg, The Structur- ing of Organizations (Englewood Cliffs, NJ: Prentice Hall, 1979), Ch. 1; D. A. Nadler and M. L. Tushman, Competing by Design: The Power of Organizational Architecture (New York: Oxford University Press, 1997), Ch. 6.

Sharing information on mutual tasks; forming common mental models to synchronize work activities

Assigning legitimate power to individuals, who then use this power to direct work processes and allocate resources

Creating routine patterns of behavior or output

• Direct communication • Liaison roles • Integrator roles • Temporary teams

• Direct supervision • Formal communication channels

• Standardized skills • Standardized processes • Standardized output

Informal communication

Formal hierarchy

Standardization

mcs62589_ch13_368-395.indd Page 371 27/11/13 4:49 PM f-500 /204/MH02010/mcs62589_disk1of1/0077862589/mcs62589_pagefiles

372 Part Four Organizational Processes

and ambiguous situations, because employees need to exchange a large volume of information through face-to-face communication and other media-rich channels. Valve Corporation relies heavily on informal communication as a coordinating mechanism. Employees organize them- selves into teams and physically move close to each other to communicate directly, often on projects that typically enter uncharted territory.

Although coordination through informal communication is easiest in small firms, infor- mation technologies have further enabled this coordinating mechanism in large organiza- tions.9 Companies employing thousands of people also support informal communication by keeping each production site small. Magna International, the global auto parts manufac- turer, keeps its plants at a maximum size of around 200 employees. Magna’s leaders believe that employees have difficulty remembering others’ names in plants that are any larger, a situation that makes informal communication more difficult as a coordinating mechanism.10

Larger organizations also encourage coordination through informal communication by assigning liaison roles to employees, who are expected to communicate and share informa- tion with coworkers in other work units. When coordination is required among several work units, companies create integrator roles. These people are responsible for coordinating a work process by encouraging employees in each work unit to share information and informally coordinate work activities. Integrators do not have authority over the people involved in that process, so they must rely on persuasion and commitment. Brand managers for luxury per- fumes have integrator roles because they ensure that the work of fragrance developers, bottle designers, advertising creatives, production, and other groups are aligned with the brand’s image and meaning.11

Another way that larger organizations encourage coordination through informal commu- nication is by organizing employees from several departments into temporary teams. Tem- porary cross-functional teams give employees more authority and opportunity to coordinate through informal communication. This process is now common in vehicle design. As the design engineer begins work on product specifications, team members from manufacturing, engineering, marketing, purchasing, and other departments are able to provide immediate feedback, as well as begin their contribution to the process. Without the informal coordina- tion available through teams, the preliminary car design would pass from one department to the next—a much slower process.12

Coordination Through Formal Hierarchy Informal communication is the most flexible form of coordination, but it can become chaotic as the number of employees increases. Consequently, as organizations grow, they rely increasingly on a second coordinating mechanism: for- mal hierarchy.13 Hierarchy assigns legiti- mate power to individuals, who then use this power to direct work processes and allocate resources. In other words, work is coordinated through direct supervision— the chain of command.

A century ago, management scholars applauded the formal hierarchy as the best coordinating mechanism for large organizations. They argued that organiza- tions were most effective when managers exercised their authority and employees received orders from only one supervisor. The chain of command—in which

of 524 U.S. employees surveyed say they occasionally or frequently feel micromanaged by their boss.

of 500 U.S. employees surveyed say they work for a “micromanager.”

of 150 senior executives surveyed from the 1,000 largest American companies identify micromanaging as having the most negative impact on employee morale (third highest factor, after lack of communication and recognition).

of 11,045 U.S. employees surveyed identify micromanagement as the most significant barrier to their productivity.

31% of 97,000 employees surveyed in 30 countries describe their company’s leadership as oppressive or authoritative.

Coordination Through Micromanagement14

mcs62589_ch13_368-395.indd Page 372 12/5/13 6:47 PM f-496 /204/MH02010/mcs62589_disk1of1/0077862589/mcs62589_pagefiles

Chapter Thirteen Designing Organizational Structures 373

information flows across work units only by going through supervisors and managers—was viewed as the backbone of organizational strength.

Although still important, formal hierarchy is much less popular today. One problem, which Valve’s cofounders have tried to avoid, is that hierarchical organizations are not as agile for coordination in complex and novel situations. Communicating through the chain of command is rarely as fast or accurate as direct communication between employ- ees. Another concern with formal hierarchy is that managers are able to closely supervise only a limited number of employees. As the business grows, the number of supervisors and layers of management must increase, resulting in a costly bureaucracy. Finally, today’s workforce demands more autonomy over work and more involvement in company deci- sions. Formal hierarchy coordination processes tend to conflict with employee autonomy and involvement.

Coordination Through Standardization Standardization, the third means of coordination, involves creating routine patterns of behavior or output. This coordinating mechanism takes three distinct forms:

• Standardized processes. The quality and consistency of a product or service can often be improved by standardizing work activities through job descriptions and procedures.15 For example, flow charts represent a standardized process coordinating mechanism. This coordinating mechanism works best when the task is routine (e.g., mass produc- tion) or simple (e.g., stocking shelves), but it is less effective in nonroutine and complex work such as product design (which Valve employees do).

• Standardized outputs. This form of standardization involves ensuring that individuals and work units have clearly defined goals and output measures (e.g., customer satis- faction, production efficiency). For instance, to coordinate the work of salespeople, companies assign sales targets rather than specific behaviors.

• Standardized skills. When work activities are too complex to standardize through processes or goals, companies often coordinate work effort by extensively training employees or hiring people who have learned precise role behaviors from educational programs. Valve Corporation relies on coordination through standardized skills. It carefully hires people for their skills in software engineering, animation, and related fields, so they can perform tasks without job descriptions or precise guidelines. Training is also a form of standardization through skills. Many companies have in-house training programs where employees learn how to perform tasks consistent with company expectations.

The division of labor and coordination of work represent the two fundamental ingredients of all organizations. But how work is divided, which coordinating mechanisms are empha- sized, who makes decisions, and other issues are related to the four elements of organiza- tional structure that we discuss over the next two sections of this chapter.

Elements of Organizational Structure Organizational structure has four elements that apply to every organization. This section introduces three of them: span of control, centralization, and formalization. The fourth element—departmentalization—is presented in the next section.

Which organizational structure do you prefer? Visit connect. mcgrawhill.com to identify your organizational structure and help you learn about this topic.

LO 13-2

mcs62589_ch13_368-395.indd Page 373 27/11/13 4:49 PM f-500 /204/MH02010/mcs62589_disk1of1/0077862589/mcs62589_pagefiles

374 Part Four Organizational Processes

SPAN OF CONTROL Chief executive officers are much busier today managing their direct reports than they were two or three decades ago. In the 1980s, an average of five people (typically vice-presidents) reported directly to the CEOs of Fortune 500 companies. By the end of the 1990s, this span of control increased an average of 6.5 direct reports. Today, CEOs of the largest U.S. firms have an average of 10 direct reports, double the number a few decades earlier. This increase reflects the fact that most Fortune 500 companies are far more complex today. They operate in many markets, have more variety of products, and employ people with a broader array of technical specialties. Each of these types of variation demand top-level attention, so there are more people reporting directly to the chief executive.16

Span of control (also called span of management) refers to the number of people directly reporting to the next level in the hierarchy. A narrow span of control exists when very few people report directly to a manager, whereas a wide span exists when a manager has many direct reports.17 A century ago, French engineer and management scholar Henri Fayol strongly recommended a relatively narrow span of control, typically no more than 20 em- ployees per supervisor and six supervisors per manager. Fayol championed formal hierarchy as the primary coordinating mechanism, so he believed that supervisors should closely mon- itor and coach employees. His views were similar to those of Napoleon, who declared that senior military leaders should have no more than five officers directly reporting to them. These prescriptions were based on the belief that managers simply could not monitor and control any more subordinates closely enough.18

Today, we know better. The best-performing manufacturing plants currently have an average of 38 production employees per supervisor (see Exhibit 13.2).19 What’s the secret here? Did Fayol, Napoleon, and others miscalculate the optimal span of control? The answer is that those sympathetic to hierarchical control believed that employees should perform the physical tasks, whereas supervisors and other management personnel should make the decisions and monitor employees to make sure they performed their tasks. In contrast, the best-performing manufacturing operations today rely on self-directed teams, so direct supervision (formal hierarchy) is supplemented with other coordinating

Figures represent the average number of direct reports per manager. “Max.” figures represent the maximum spans of control recommended by Napoleon Bonaparte, Henri Fayol, and Lindall Urwick. “Min.” figure represents the minimum span of control recommended by Tom Peters. “Goal” figures represent span of control targets that the U.S. government and the State of Iowa have tried to achieve. The State of Texas figure represents the span of control mandated by law. The Saratoga Institute figure is the average span of control among U.S. companies surveyed. The Best U.S. Plants figure is the average span of control in American manufacturing facilities identified by Industry Week magazine as the most effective. “Actual” figures are spans of control in the city of Seattle, State of Oregon, Multnomah County (including Portland, Oregon), State of Iowa, and Fedex Corporation in the years indicated.