Organizations and Organizational Effectiveness: 1 - What Is An Organization?
Organizations and Organizational Effectiveness: 1 - What Is An Organization?
Organizations and Organizational Effectiveness: 1 - What Is An Organization?
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Organizational structure is the formal system of task and authority relationships that control how
people coordinate their actions and use resources to achieve organizational goals. Its purpose is to
control the way people coordinate their actions to achieve organizational goals and to control the
means used to motivate people to achieve these goals.
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Promoting Efficiency, Speed and Innovation. The ability of companies to compete successfully in
today’s competitive environment is increasingly a function of how well they innovate and how
quickly they can introduce new technologies.
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secure scarce and valued skills and resources from outside the organization (external
resource approach)
coordinate resources with employee skills creatively to innovate products and adapt to
changing customer needs (internal systems approach)
convert skills and resources efficiently into finished goods and services (technical approach).
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To measure the effectiveness of their control over the environment, managers use indicators such
as stock price, profitability, and return on investment, which compare the performance of their
organization with the performance of other organizations.
Companies have to listen closely to their customers and decide how best to meet their changing
needs and preferences.
An important factor is management’s ability to perceive and respond to environmental change.
Stakeholders value aggressiveness and an entrepreneurial spirit.
Thus, for example, an increase in the number of units produced without the use of additional labor
indicates a gain in productivity, and so does a reduction in the cost of labor or materials required to
produce each unit of output.
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Official goals are guiding principles that the organization formally states in its annual report and in
other public documents. Usually these goals lay out the mission of the organization: They explain
why the organization exists and what it should be doing.
Organizational effectiveness is evaluated by both official and operative goals. Official goals are the
formal mission of an organization.
Operative goals are specific long-term and short-term goals that direct tasks. Managers use
operative goals to measure effectiveness. To measure control, managers examine market share and
costs; to measure innovation, they review decision-making time. To measure efficiency, they use
benchmarking to compare the company to competitors.
Operative goals are specific long and short-term goals that guide managers and employees as they
perform the work of the organization. Managers can use operative goals to measure how well they
are managing the environment.
Summary
We have examined what organizations are, why they exist, the purpose of organizational theory,
design, and change, and the different ways in which they can be evaluated.
Organizations play a vital role in increasing the wealth of a society, and the purpose of managing
organizational design and change is to enhance their ability to create value and thus organizational
effectiveness.
Chapter 1 has made the following main points:
An organization is a tool that people use to coordinate their actions to obtain something
they desire or value—to achieve their goals.
Organizations are value-creation systems that take inputs from the environment and use
skills and knowledge to transform these inputs into finished goods and services.
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The use of an organization allows people jointly to increase specialization and the division of
labor, use large-scale technology, manage the organizational environment, economize on
transaction costs, and exert power and control—all of which increase the value the
organization can create.
Organizational theory is the study of how organizations function and how they affect and are
affected by the environment in which they operate.
Organizational structure is the formal system of task and authority relationships that control
how people coordinate their actions and use resources to achieve an organization’s goals.
Organizational culture is the set of shared values and norms that control organizational
members’ interactions with each other and with suppliers, customers, and other people
outside the organization.
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. Organizational design has important implications for a company’s competitive
advantage, its ability to deal with contingencies and manage diversity, its efficiency, its
ability to generate new goods and services, its control of the environment, its coordination
and motivation of employees, and its development and implementation of strategy.
Organizational change is the process by which organizations redesign and transform their
structures and cultures to move from their present state to some desired future state to
increase their effectiveness. The goal of organizational change is to find new or improved
ways of using resources and capabilities to increase an organization’s ability to create value
and hence performance.
Managers can use three approaches to evaluate organizational effectiveness: the external
resource approach, the internal systems approach, and the technical approach. Each
approach is associated with a set of criteria that can be used to measure effectiveness and a
set of organizational goals.
Discussion Questions
1. How do organizations create value? What is the role of entrepreneurship in this process?
Value is created at the input, conversion, and output stages. At the input stage, value depends on
how an organization selects and obtains the inputs; certain inputs create more value than others.
At the conversion stage, value is a function of employees’ skills, including learning from and
responding to the environment. Output creates value if it satisfies a need. Entrepreneurship is
important to value creation by recognizing a need, gathering inputs, and transforming them into a
product or service. The value creation cycle will continue if customers are satisfied; profits will
generate inputs and improve the conversion process.
2. What is the relationship among organizational theory, design, change, and organizational
structure and culture?
Organizational theory is the study of how organizations function, impact, and are impacted by
employees and society. Organizational theory deals with the whole organization. Organizational
design entails decisions about structure and culture. Structure is the formal set of task and authority
relationships. Culture is a set of shared values that influence behavior.
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innovation, and efficiency. The external resource approach evaluates a company’s ability to obtain
scarce resources and valued skills. Indicators include stock prices, return on investment, and market
share. These indexes are compared to competitors’ indexes. However, this approach fails to consider
organizational culture and structure. The internal approach reviews the organization’s ability to
innovate and respond to the environment quickly. Some measures include the length of time to get
a product to market, decision-making speed, and coordination time. This approach does not
consider costs or the external environment. The technical approach reviews an organization’s ability
to use skills and resources efficiently. This approach considers neither the environment nor structure
and culture. It is important to evaluate an organization in all three areas—control, innovation, and
efficiency.
4. Draw up a list of effectiveness goals you would use to measure the performance of (a) a fast-
food restaurant and (b) a school of business. Answers may vary slightly.
A fast-food restaurant’s goals will differ from a business school’s goals because a school is a
nonprofit organization.
(a) Some goals used to measure effectiveness at a fast-food restaurant are as follows:
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[MANAGERS]: employees responsible for coordinating organizational resources and ensuring that an
organization’s goals are met successfully.
Top managers are responsible for investing shareholder money in resources to maximize the value
of an organization’s future output of goods and services. Managers contribute skills to receive
compensation and satisfaction and they often leave an organization if contributions exceed
inducements.
Top managers are indirectly appointed by shareholders through a board of directors.
[CUSTOMERS]: an organization’s largest outside stakeholder group. Customers are induced to select
a particular product (and thus a specific organization) from alternative products by their estimation
of the value of what they receive from it relative to what they have to pay for it. Their contribution
to the organization is the money they pay for the product. Unless they get value, customers
withdraw monetary support, and the company loses a stakeholder.
[SUPPLIERS]: provide raw materials and parts and directly affect company efficiency. Suppliers have
a direct effect on the organization’s efficiency and an indirect effect on its ability to attract
customers because high-quality inputs lead to high-quality products. U.S. automakers are imitating
the Japanese, whose cars have high-quality parts, by creating strong ties with suppliers to improve
quality.
[THE GOVERNMENT]: controls the rules of good business practice and has the power to punish any
company that breaks these rules by taking legal action against it.
Wants companies to:
The government makes a contribution to the organization by standardizing regulations so they apply
to all companies and no company can obtain an unfair competitive advantage.
[TRADE UNIONS]: Trade unions directly impact a company’s productivity and effectiveness, but
union demands can conflict with shareholder demands. The nature of the relationship has a direct
effect on the productivity and effectiveness of the organization and the union.
Cooperation between managers and the union can lead to positive long-term outcomes if both
parties agree on an equitable division of the gains from an improvement in a company’s fortunes.
[THE GENERAL PUBLIC]: The wealth of a nation is tied to the success of its businesses. The public
wants corporations to behave in a socially responsible way. The public was upset in 1992 when the
president of United Way misused funds.
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To be effective an organization must at least minimally satisfy the interests of all the groups that
have a stake in the organization
Problems that an organization faces as it tries to win stakeholders’ approval:
-> choosing which stakeholder goals to satisfy
-> deciding how to allocate organizational rewards to different stakeholder groups
-> balancing short-term and long-term goals
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There are two kinds of directors: inside directors and outside directors.
Inside directors are directors who also hold offices in a company’s formal hierarchy; they are full-
time employees of the corporation.
Outside directors are not employees of the company; many are professional directors who hold
positions on the board of many companies, or they are executives of other companies who sit on
other companies’ boards. They exist to bring objectivity to a company’s decision making and to
balance the power of inside directors, who obviously side with an organization’s management.
Corporate-level management is the inside stakeholder group that has the ultimate responsibility for
setting company goals and objectives, for allocating organizational resources to achieve objectives,
and for designing the organization’s structure.
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CEO is responsible for setting the organization’s goals and design its structure. The CEO
allocates authority and task responsibilities so that all an organization’s employees are
coordinated and motivated to achieve organizational goals.
CEO selects key executives to occupy the topmost levels of the managerial hierarchy. It is a
vital part of the CEO’s job because the quality of decision making is directly affected by the
abilities of an organization’s top managers.
CEO determines top management’s rewards and incentives. The CEO influences the
motivation of top managers to pursue organizational goals effectively.
CEO controls the allocation of scarce resources such as money and decision-making power
among the organization’s functional areas or business divisions. This control gives the CEO
enormous power to influence the direction of the organization’s future value creation
activities—the kinds of products the company will make, the markets in which it will
compete, and so on.
CEO’s actions and reputation have a major impact on inside and outside stakeholder’s
views of the organization and affect the organization’s ability to attract resources from his
environment. A CEO’s personality and charisma can influence an organization’s ability to
obtain money from banks and shareholders and influence customers’ desire to buy a
company’s products.
At the next level of top management are the executive vice presidents. People with this title have
responsibility for overseeing and managing a company’s most significant line and staff
responsibilities.
A line role is held by managers with direct responsibility for the production of goods and services.
A staff role is held by managers who are in charge of a specific organizational function such as sales
or R&D. Staff roles are advisory only; they have no direct production responsibilities, but their
occupants possess enormous influence on decision making.
All the member of the top-management team are corporate managers, whose responsibility is to set
strategy for the corporation as a whole.
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Self-dealing is the term used to describe the conduct of corporate managers who take advantage of
their position to act in their own interests rather than in the interests of stakeholders, such as taking
advantage of opportunities to misappropriate corporate resources—including secret information.
Stock based compensation schemes: Managers receive a large part of their monetary reward in the
form of stocks or stock options that are linked to the company’s performance. If the company does
well, then the value of their stock options and monetary compensation is much enhanced.
Promotion tournaments and career paths: this allows managers to rise to the top of the
organization. By directly linking promotion to performance, the board of directors can send out a
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clear signal about future managerial behaviours that would lead to promotion—and make managers
focus on long-term, not short-term, objectives.
organizational environment?
2. Am I willing to see the decision communicated to all stakeholders affected by it—for example, by
having it reported in newspapers or on television?
3. Would the people with whom I have a significant personal relationship, such as family members,
friends, or even managers in other organizations, approve of the decision?
Professional ethics are the moral rules and values that a group of people uses to control the way
they perform a task or use resources. In an organization, there are many groups of employees whose
behavior is governed by professional ethics, such as lawyers, researchers, and accountants. These
cause them to follow certain principles in deciding how to act in the organization. A good example is
athletics. In football or basketball, it is acceptable and not considered cheating to try and sneak
something by an official. Players don’t call penalties on themselves.
Individual ethics are the personal and moral standards used by individuals to structure their
interactions with other people. Personal ethics influence how a person acts in an organization. For
example, managers’ behavior toward other managers and subordinates depends on the personal
values and beliefs they hold.
Personal Ethics. People learn ethical principles and moral codes as they mature as individuals in a
society from sources as family and friends, places of worship, education, professional training.
Individuals may believe that any help to the organization is acceptable, even if it harms others.
Self-interest. We normally confront ethical issues when we are weighing our personal interests
against the effects of our actions on others. Companies with financial problems are more likely to
commit unethical and illegal acts such as collusion, price fixing, or bribery. Research suggests that
individuals with high stakes are more likely to behave unethically.
Outside pressure. The probability of unethical behavior increases when outsiders pressure
individuals to perform. (Example: shrink the weight of the contents). The social costs of unethical
behavior can be easily seen over the long run in the form of mismanaged organizations that become
less innovative and spend less and less on R&D and more and more on advertising or managerial
salaries.
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Summary
Organizations are embedded in a complex social context that is driven by the needs and desires of
its stakeholders. The interests of all stakeholders have to be considered when designing an
organizational structure and culture that promotes effectiveness and curtails the ability of managers
and employees to use organizational resources for their own ends or which damages the interests of
other stakeholders. Creating an ethical culture, and making sure organizational members use ethical
rules in their decision making, is a vital task for all those who have authority over organizational
resources. The chapter has made the following main points:
1. Organizations exist because of their ability to create value and acceptable outcomes for
stakeholders. The two main groups of stakeholders are inside stakeholders and outside
stakeholders. Effective organizations satisfy, at least minimally, the interests of all stakeholder
groups.
2. Problems that an organization faces as it tries to win stakeholders’ approval include choosing
which stakeholder goals to satisfy, deciding how to allocate organizational rewards to different
stakeholder groups, and balancing short- and long-term goals.
3. Shareholders delegate authority to managers to use organizational resources effectively. The CEO,
COO, and top-management team have ultimate responsibility for the use of those resources
effectively.
4. The agency problem and moral hazard arise when shareholders delegate authority to managers,
and governance mechanisms must be created to align the interests of shareholders and managers to
ensure managers behave in the interests of all stakeholders.
5. Ethics are the moral values, beliefs, and rules that establish the right or appropriate ways in which
one person or stakeholder group should interact and deal with another. Organizational ethics are a
product of societal, professional, and individual ethics.
6. The board of directors and top managers can create an ethical organization by designing an
ethical structure and control system, creating an ethical culture, and supporting the interests of
stakeholder groups.
Discussion questions
1. Give some examples of how the interests of different stakeholder groups may conflict.
Imagine that an organization has much more profit at the end of the year than originally forecasted.
What would each stakeholder group want to do with the profits? For example, employees would
want a bonus, shareholders would want a dividend, customers would like to see reduced prices, etc.
This is a good way to illustrate how different groups will view the same issue.
3. What is the agency problem? What steps can be taken to solve it?
The main focus of this is to understand the problems that can occur when individuals that need to
work together have different goals, and have the opportunity and motivation to pursue their own
self interests. The solution is to make sure systems are in place that keep everyone focused on the
same goals.
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The term organizational domain refers to the particular range of goods and services that the
organization produces, and the customers and other stakeholders it serves.
An organization, to obtain:
- Inputs, has to decide which suppliers to deal with.
- Money, has to decide which bank to deal with and how to manage its relationship.
- Customers, has to decide which set of customers to serve and then how to satisfy their needs.
One major way in which an organization can enlarge and protect its domain is to expand
internationally allowing it to seek new opportunities and take advantage of its core competences to
create value for stakeholders.
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Changes in the number and types of customers, and in customer tastes, that affects an
organization that must have a strategy to manage its relationship with customers and attract their
support—and the strategy must change over time as customer needs change.
Global supply chain management is the process of planning and controlling supply/distribution
activities such as acquiring and storing raw materials and semifinished products, controlling work-in-
process inventory, and moving finished goods from point of manufacture to point of sale as
efficiently as possible.
Other outside stakeholders include the government (controlling businesses conduction through laws
and regulations), unions, and consumer interest groups..
An organization must engage in transactions with each of the forces in its specific environment if it is
to obtain the resources it requires to survive and to protect and enhance its domain.
Economic forces, such as interest rates, the state of the economy, and the unemployment rate,
determine the level of demand for products and the price of inputs. Generally, organizations attempt
to obtain their inputs or to manufacture their products in the country with the lowest labor or raw-
materials costs.
Technological forces, such as the development of new production techniques and new information-
processing equipment, influence many aspects of organizations’ operations.
Political, ethical, and environmental forces influence government policy toward organizations and
their stakeholders.
Demographic, cultural, and social forces—such as the age, education, lifestyle, norms, values, and
customs of a nation’s people—shape organizations’ customers, managers, and employees.
Cultural and social values affect a country’s attitudes toward both domestic and overseas products
and companies.
Countries differ in how they do business and in the nature of their business institutions. They also
differ in their attitudes toward union–management relationships, in their ethical standards, and in
their accounting and financial practices.
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Thus an organization must simultaneously manage two aspects of its resource dependence:
- It has to exert influence over other organizations so it can obtain resources
- It must respond to the needs and demands of the other organizations in its environment.
Interdependencies are symbiotic when the outputs of one organization are inputs for another; Intel
and PC makers like HP and Dell have a symbiotic interdependency.
Competitive interdependencies exist among organizations that compete for scarce inputs and
outputs. HP and Dell are in competition for customers for laptops, tables, inputs (Intel’s microchips)
In general, an organization aims to choose the interorganizational strategy that offers the most
reduction in uncertainty for the least loss of control.
A linkage is formal when two or more organizations agree to coordinate their interdependencies
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Reputation and trust are probably the most common linkage mechanisms for managing symbiotic
interdependencies. Over the long run, companies that behave dishonestly are likely to be
unsuccessful.
4.2 - Co-optation
Co-optation neutralizes problematic forces in the specific environment.
An organization gives to the opponents a stake in or claim on what it does and tries to satisfy their
interests.
A common way to co-opt problematic forces such as customers, suppliers, or other important
outside stakeholders is to bring them within the organization and, in effect, make them inside
stakeholders.
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A strategic alliance is an agreement that commits two or more companies to share their resources to
develop joint new business opportunities.
Long-Term Contracts: Their purpose is, usually, to reduce costs by sharing resources or by sharing
the risk of research and development, marketing, construction, and other activities. Contracts are the
least formal type of alliance because no ties link the organizations apart from the agreement set
forth in the contract.
Networks: are clusters of different organizations whose actions are coordinated by contracts and
agreements rather than through a formal hierarchy of authority. Members of a network work closely
to support and complement one another’s activities. The goal of the organization that created the
network is to share its manufacturing, marketing, or R&D skills with its partners to allow them to
become more efficient and help it to reduce its costs or increase product quality.
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Opportunism and small numbers: When an organization is dependent on one supplier or on a small
number of trading partners, the potential for opportunism is great. The organization has no choice
but to transact business with the supplier, and the supplier, knowing this, might choose to supply
inferior inputs to reduce costs and increase profit.
When the prospect for opportunism is high because of the small number of suppliers to which an
organization can go for resources, the organization has to expend resources to negotiate, monitor,
and enforce agreements with its suppliers to protect itself.
Risk and specific assets: Specific assets are investments—in skills, machinery, knowledge, and
information—that create value in one particular exchange relationship but have no value in any
other exchange relationship.
An organization’s decision to invest money to develop specific assets for a specific relationship with
another organization in its environment involves a high level of risk.
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From a transaction cost perspective, the movement from less formal to more formal linkage
mechanisms occur because of an organization’s need to reduce the transaction costs of its exchanges
with other organizations.
Formal mechanisms minimize the transaction costs associated with reducing uncertainty,
opportunism, and risk.
Summary
Managing the organizational environment is a crucial task for an organization. The first step is
identifying sources of uncertainty and examining the sources of complexity, how rapidly it is
changing, and how rich or poor it is. An organization then needs to evaluate the benefits and costs of
different interorganizational strategies and choose the one that best allows it to secure valuable
resources. Resource dependence theory weighs the benefit of securing scarce resources against the
cost of a loss of autonomy. Transaction cost theory weighs the benefit of reducing transaction costs
against the cost of increasing bureaucratic costs. An organization must examine the whole array of
its exchanges with its environment to devise the combination of linkage mechanisms that will
maximize its ability to create value. Chapter 3 has made the following main points:
1. The organizational environment is the set of forces in the changing global environment that affect
the way an organization operates and its ability to gain access to scarce resources.
2. The organizational domain is the range of goods and services that the organization produces and
the clients that it serves in the countries in which it operates. An organization devises
interorganizational strategies to protect and enlarge its domain.
3. The specific environment consists of forces that most directly affect an organization’s ability to
secure resources. The general environment consists of forces that shape the specific environments
of all organizations.
4. Uncertainty in the environment is a function of the complexity, dynamism, and richness of the
environment.
5. Resource dependence theory argues that the goal of an organization is to minimize its
dependence on other organizations for the supply of scarce resources and to find ways of
influencing them to make resources available.
6. Organizations have to manage two kinds of resource interdependencies: symbiotic
interdependencies with suppliers and customers and competitive interdependencies with rivals.
7. The main interorganizational strategies for managing symbiotic relationships are the development
of a good reputation, cooptation, strategic alliances, and merger and takeover. The main
interorganizational strategies for managing competitive relationships are collusion and cartels, third-
party linkage mechanisms, strategic alliances, and merger and takeover.
8. Transaction costs are the costs of negotiating, monitoring, and governing exchanges between
people and organizations. There are three sources of transaction costs: (a) the combination of
uncertainty and bounded rationality, (b) opportunism and small numbers, and (c) specific assets and
risk.
9. Transaction cost theory argues that the goal of organizations is to minimize the costs of
exchanging resources in the environment and the costs of managing exchanges inside the
organization. Organizations try to choose interorganizational strategies that minimize transaction
costs and bureaucratic costs.
10. Interorganizational linkage mechanisms range from informal types such as contracts and
reputation to formal types such as strategic alliances and ownership strategies such as merger and
takeover.
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Discussion Questions
1. Pick an organization, such as a local travel agency or supermarket. Describe its organizational
domain, then draw a map of the forces in its general and specific environments that affect the way it
operates.
For a local supermarket, the domain includes neighborhood customers. Specific environmental
forces include customers, unions, competitors, suppliers, and the government. Customer preference
influences store offerings. Unions ensure fair wages and good working conditions. Suppliers must
provide high-quality items. The government ensures that FDA, employment, and safety
requirements are met. General environmental forces are economic, technological, demographic and
cultural, and environmental. High unemployment dictates low-margin items. Technology facilitates
convenience and fast checkout. Demographic and cultural forces determine the food offered (baby
food, ethnic food). Environmental issues ensure recycling plastic bags.
2. What are the major sources of uncertainty in an environment? Discuss how these sources of
uncertainty affect a small biotechnology company and a large carmaker.
Resource dependence theory states that interorganizational linkages minimize dependence on other
organizations for scarce resources and influence them to make resources available. Strategic
alliances allow for symbiotic and competitive interdependencies and ensure a supply of high-quality,
low-cost inputs. Strategic alliances require resource sharing, reducing risks and costs. Partners can
pool distinctive competences to produce a competitive product.
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Transaction cost theory states that interorganizational linkages minimize transaction and
bureaucratic costs. An organization chooses a more formal linkage mechanism as transaction costs
increase. Formal linkage mechanisms should be used when the transaction cost savings outweigh
bureaucratic costs.
5. What interorganizational strategies might work most successfully as a company expands globally?
Why?
The key to this question is to make sure that students understand that to manage the environment,
they must match the strategy needed with the level of complexity in the environment. For example,
a starting point for expanding globally is to build a good reputation. A more complex situation may
call for something much more complex, such as a long-term contract or a joint venture.
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Basic Challenges of
Organizational Design
1 - Differentiation
Differentiation is 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.
In short, it is the process of establishing and controlling the division of labor, or degree of
specialization, in the organization.
A function is a subunit composed of a group of people, working together, who possess similar skills or
use the same kind of knowledge, tools, or techniques to perform their jobs.
A division is a subunit that consists of a collection of functions or departments that share
responsibility for producing a particular good or service.
The number of different functions and divisions that an organization possesses is a measure of the
organization’s complexity—its degree of differentiation.
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As organizations grow in size, they differentiate into five different kinds of functions.
Vertical differentiation establishes the distribution of authority between levels to give the
organization more control over its activities and increase its ability to create value.
Horizontal differentiation refers to the way an organization groups organizational tasks into roles
and roles into subunits (functions and divisions). Horizontal differentiation establishes the division of
labor that enables people in an organization to become more specialized and productive and
increases its ability to create value.
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Hierarchy of Authority: differentiates people by the amount of authority they possess. Because the
hierarchy dictates who reports to whom, it coordinates various organizational roles.
Direct Contact: The principal problem with integration across functions is that a manager in one
function has no authority over a manager in another. Establishing personal relationships and
professional contacts between people at all levels in different functions is a crucial step to overcome
the problems that arise because subunit orientations differ.
Liason Roles: one or a few members from each subunit are often given the primary responsibility to
work together to coordinate subunit activities. The people who hold these connecting, or liaison,
roles are able to develop in-depth relations with people in other subunits.
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Task forces: As an organization increases in size and complexity, more than two subunits may need
to work together to solve common problems. The solution commonly takes the form of a task force,
a temporary committee set up to handle a specific problem.
Teams: A team is a permanent task force or committee. Most companies today, for example, have
formed product development and customer-contact teams to monitor and respond to the ongoing
challenges of increased competition in a global market.
Managers, when deciding how and how much to differentiate and integrate, must do two things:
- carefully guide the process of differentiation so an organization builds the core competences that
give it a competitive advantage;
- carefully integrate the organization by choosing appropriate coordinating mechanisms that allow
subunits to cooperate and work together to strengthen its core competences.
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If authority is too decentralized, managers have so much freedom that they can pursue their own
functional goals and objectives at the expense of organizational goals.
In contrast, if authority is too centralized and top management makes all important decisions,
managers lower down in the hierarchy become afraid to make new moves and lack the freedom to
respond to problems as they arise in their own groups and departments.
The ideal situation is a balance between centralization and decentralization of authority so that
middle and lower managers who are at the scene of the action are allowed to make important
decisions, and top managers’ primary responsibility becomes managing long-term strategic decision
making.
The right balance makes many actions predictable so that ongoing organizational tasks and goals are
achieved, yet it gives employees the freedom to behave flexibly so they can respond to new and
changing situations creatively.
Mutual adjustment typically implies decentralization of authority because employees must have the
authority to commit the organization to certain actions when they make decisions.
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At the functional level, each function is separate, and communication and cooperation among
functions are the responsibility of someone at the top of the hierarchy. Thus, in a mechanistic
structure, the hierarchy is the principal integrating mechanism both within and between functions.
Promotion is normally slow, steady, and tied to performance, and each employee’s progress in the
organization can be charted for years to come. Because of its rigidity, a mechanistic structure is best
suited to organizations that face stable environments.
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Organizing in a Digital World – Chapters 1 to 4
People assume the authority to make decisions as organizational needs dictate. Roles are loosely
defined and people continually develop new kinds of job skills to perform continually changing tasks
In an organic structure specific norms and values develop that emphasize personal competence,
expertise, and the freedom to act in innovative ways. Status is conferred by the ability to provide
creative leadership, not by any formal position in the hierarchy.
Lawrence and Lorsch measured the degree of differentiation in the production, R&D, and sales
departments of a set of companies in each industry.
They found that when the environment was perceived by each of the three departments as very
complex and unstable, the attitudes and orientation of each department diverged significantly. Each
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department developed a different set of values, perspectives, and way of doing things that suited
the part of the specific environment it was dealing with. Thus the extent of differentiation between
departments was greater in companies that faced an uncertain environment than in companies that
were in stable environments.
Lawrence and Lorsch also found that when the environment is perceived as unstable and uncertain,
organizations are more effective if they are less formalized, more decentralized, and more reliant on
mutual adjustment.
When the environment is perceived as relatively stable and certain, organizations are more
effective if they have a more centralized, formalized, and standardized structure. Moreover, they
found that effective companies in different industries had levels of integration that matched their
levels of differentiation.
As a result of this high degree of differentiation, such organizations require more coordination (a
When the environment is rapidly changing and on-the-spot decisions have to be made, lower-level
employees need to have the authority to make important decisions—in other words, they need to
be empowered. Moreover, in complex environments, rapid communication and information sharing
are often necessary to respond to customer needs and develop new products.
When the environment is stable, in contrast, there is no need for complex decision-making systems.
according to one increasingly influential view organizational design, the most successful
organizations are those that have achieved a balance between the two, so that they are
simultaneously mechanistic and organic.
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Organizing in a Digital World – Chapters 1 to 4
Studies by Lawrence and Lorsch and by Burns and Stalker indicate that organizations should adapt
their structure to reflect the degree of uncertainty in their environment.
Companies with a mechanistic structure tend to fare best in a stable environment. Those with an
organic structure tend to fare best in an unstable, changing environment.
Summary
This chapter has analyzed how managers’ responses to several organizational design challenges
affect the way employees behave and interact and how they respond to the organization. We have
analyzed how differentiation occurs and examined three other challenges that managers confront as
they try to structure their organization to achieve organizational goals. Chapter 4 has made the
following main points:
1. Differentiation is the process by which organizations evolve into complex systems as they allocate
people and resources to organizational tasks and assign people different levels of authority.
2. Organizations develop five functions to accomplish their goals and objectives: support,
production, maintenance, adaptive, and managerial.
3. An organizational role is a set of task-related behaviors required of an employee. An organization
is composed of interlocking roles that are differentiated by task responsibilities and task authority.
4. Differentiation has a vertical and a horizontal dimension. Vertical differentiation refers to the way
an organization designs its hierarchy of authority. Horizontal differentiation refers to the way an
organization groups roles into subunits (functions and divisions).
5. Managers confront five design challenges as they coordinate organizational activities. The choices
they make are interrelated and collectively determine how effectively an organization operates.
6. The first challenge is to choose the right extent of vertical and horizontal differentiation.
7. The second challenge is to strike an appropriate balance between differentiation and integration
and use appropriate integrating mechanisms.
8. The third challenge is to strike an appropriate balance between the centralization and
decentralization of decision-making authority.
9. The fourth challenge is to strike an appropriate balance between standardization and mutual
adjustment by using the right amounts of formalization and socialization.
10. Different organizational structures cause individuals to behave in different ways. Mechanistic
structures are designed to cause people to behave in predictable ways. Organic structures promote
flexibility and quick responses to changing conditions. Successful organizations strike an appropriate
balance between mechanistic and organic structures.
11. Contingency theory argues that to manage its environment effectively, an organization should
design its structure and control systems to fit with the environment in which the organization
operates.
Discussion Questions
1. Why does differentiation occur in an organization? Distinguish between vertical and horizontal
differentiation.
Differentiation occurs because as organizations grow and become more complex, they establish a
division of labor. Complex organizations must control and coordinate activities to achieve goals.
Vertical differentiation is a hierarchy of authority with reporting relationships established to connect
organizational roles and subunits. Horizontal differentiation groups roles according to task
responsibilities, establishes division of labor, and forms subunits.
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2. Draw an organizational chart of the business school or college that you attend. Outline its major
roles and functions. How differentiated is it? Do you think the distribution of authority and division
of labor are appropriate?
Answers will vary. The hierarchy from top to bottom is president; vice presidents; dean of the
business school; department heads from each of the functional departments—finance,
management, marketing, accounting, and information systems. Under department heads are faculty
members, then student assistants and workers. Horizontally there are five functions and
specializations within each function. Vertically the hierarchy has several layers.
4. What factors determine the balance between centralization and decentralization, and between
standardization and mutual adjustment?
The balance depends on organizational goals and the environment. To discourage risk-taking, the
structure is centralized with control through standardization. To encourage risk-taking, the structure
is decentralized with control through mutual adjustment. Centralization and standardization
promote predictability; decentralization and mutual adjustment promote innovation. Centralization
and standardization fit a stable, unchanging environment, whereas decentralization and mutual
adjustment fit a changing, uncertain environment.
5. Under what conditions is an organization likely to prefer (a) a mechanistic structure, (b) an
organic structure, or (c) elements of both?
a. An organization prefers a mechanistic structure to encourage predictable behavior in a stable
environment. If technology doesn’t change and the tasks are simple, a mechanistic structure is
preferable. A mechanistic structure is preferred when formalized rules must be followed. b. An
organization prefers an organic structure to foster innovation in a changing, uncertain environment,
or if a project requires cross-functional coordination. If technology changes and a company has
skilled workers, it needs an organic structure. c. Most organizations adopt both a mechanistic and
organic structure and simply lean more toward one. The military has a mechanistic structure, but
remains flexible, faced with uncertainties on the battlefield. An organization can have rules and
centralized decision making, but still decentralize some decisions. A balance between mechanistic
and organic structures results in a competitive advantage.
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