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Chapter 10
Designing organisation structure
Learning objectives
After studying this chapter, students should be able to:
1 discuss the fundamental characteristics of organising the vertical structure of
organisations and explain concepts such as work specialisation, chain of
command, span of management and centralisation versus decentralisation
2 describe the ways that organisations are often departmentalised, with focus
given to the different functional and divisional approaches to structure
3 explain the matrix approach to structure and its application to both domestic
and international organisations
4 describe the contemporary team and virtual network structures and why they
are being adopted by organisations
5 explain why organisations need coordination across departments and
hierarchical levels, and describe mechanisms for achieving coordination
6 identify how structure can be used to achieve an organisation’s strategic goals
and define production technology, and explain how it influences organisation
structure.
Chapter outline
Organising is the deployment of organisational resources to achieve strategic goals. This
can be seen in the organisation’s division of labour into specific departments and jobs,
formal lines of authority and mechanisms for coordinating diverse organisational tasks.
Reorganisation is often necessary to reflect a new strategy or to deal with changing
market conditions or innovative technology. For example, many companies have found
a need to make structural changes compatible with use of the Internet for e-business,
which requires stronger horizontal coordination.
Departmentalisation
Departmentalisation is the basis for grouping positions into departments and
departments into the total organisation. Managers make choices about how to use the
chain of command to group people together to perform their work. The basic difference
among structures is the way employees are departmentalised and to whom they report.
The following five approaches to structural design (see Exhibit 10.3) reflect different
uses of the chain of command in departmentalisation:
1 vertical functional approach. People are grouped together into departments by
common skills and work activities, such as in an engineering department or an
accounting department.
2 divisional approach. Departments are grouped together into separate, self-
contained divisions based on common product, program or geographical area.
3 horizontal matrix approach. Functional and divisional chains of command are
implemented simultaneously and overlay one another in the same departments.
4 team-based approach. The organisation creates a series of teams to accomplish
specific tasks and to coordinate major departments.
5 network approach. The organisation becomes a small, central hub electronically
connected to other organisations that perform vital functions.
Vertical functional approach
Functional structure is the grouping of positions into departments based on similar
skills, expertise and resource use (see Exhibit 10.4). People and facilities representing a
common organisational resource are grouped together into a single department.
• Advantages include:
– efficient use of resources and economies of scale
– in-depth skill specialisation and development
Matrix approach
The matrix approach combines aspects of both functional and divisional structures
simultaneously in the same part of the organisation. The matrix has dual lines of
authority (see Exhibit 10.9). The functional hierarchy of authority runs vertically. The
vertical structure provides traditional control within functional departments. The
Team-based approach
The team-based approach is probably the most widespread trend in
departmentalisation. The vertical chain of command is a powerful means of control, but
passing all decisions up the hierarchy takes too long and keeps responsibility at the top.
Organisations are trying to find ways to:
• delegate authority
• push responsibility to lower levels in the organisation
• create participative teams that gain the commitment of workers.
Cross-functional teams consist of employees from various functional departments
that meet as a team to resolve mutual problems. Team members typically still report to
their functional departments and also report to the team.
Teaching tip
• The New Manager Self-Assessment entitled: ‘What are your leadership beliefs?’
could be modified to give students an indication of their preference for a
mechanistic or organic structure. That is, change the instructions to ‘answer the
following questions by rating the statement according to the extent to which it
accurately describes your views’.
Discussion questions
1 Sandra Holt, manager of Electronics Assembly, asked Hector Cruz, her senior
technician, to handle things in the department while she worked on the budget.
Sandra needed peace and quiet for at least a week to complete her
figures. After 10 days, Sandra discovered that Hector had hired a senior secretary,
not realising that Sandra had promised interviews to two other people. Evaluate
Sandra’s approach to delegation.
Students should use the information in the Management in Practice box to evaluate
Sandra’s approach to delegation. The guidelines to effective delegation provided
there include:
a Delegate the whole task. By not telling Hector about the interviews she had
promised, Sandra appears to have delegated only some of the activities
involved in looking after the department.
b Select the right person. We can only assume that Hector is the right person as
he is Sandra’s senior technician. Hector is certainly not afraid of taking on more
responsibility and making decisions.
c Ensure that authority equals responsibility. Hector appears to have been
given both authority and responsibility as he had no problem in completing the
hiring process.
d Give thorough instructions. Unfortunately, Sandra appears to have told Hector
only part of the story. If Sandra wanted the other two people interviewed
before the decision was made, she should have told Hector.
e Maintain feedback. Open lines of communication do not appear to have been
maintained because Sandra did not find out about the hiring until 10 days
later. There is no information of how well Sandra evaluated and rewarded
Hector’s performance.
2 If you wanted to add a group of big data scientists to a large organisation, such as
Coles Group Ltd, would you centralise the scientists in a central pool at headquarters
or decentralise them to separate divisions? Discuss your reasons.
Decentralisation can help to ensure that decisions are made at the right level, lower-
level employees are motivated, and employees can develop decision-making skills.
Group challenge
Family business
Functional structure is the grouping of positions into departments based on similar
skills, expertise and resource use. People and facilities representing a common
organisational resource are grouped together into a single department.
The order in which students rank the departmental functions (Step 3) based on
assigning additional resources to improve future business (Step 2) will depend on their
limited knowledge of each function. When discussing the rank and reasoning in Step 4,
students will begin to have a better understanding of the importance that their peers
place on the functions listed and how these differ from their own list (Step 5).
2 Based on the information available in the case, sketch a picture of the organisational
structure following the adoption of modern technologies (such as the Internet) and
diversified products (such as service stations). Has the original type of organisation
structure changed? Explain.
While the case detail is limited, it is known that Coles is one division of Wesfarmers
and Coles itself is divisional in its structure. Exhibit 10.8 includes an example of how
to draw a divisional structure.
3 Should Coles consider an alternative structure? What types of factors would need
to exist or emerge to make changing the organisation’s current structure a priority?
• Advantages of the divisional approach include:
− fast response and flexibility in an unstable environment
− concern for customer’s needs
− excellent coordination across functional departments
− easy pinpointing of responsibility for product problems
− emphasis on overall product and division goals
− development of general management skills.
• Disadvantages of the divisional approach include:
− duplication of resources across divisions
− less technical depth and specialisation in divisions
− poor coordination across divisions
− less top management control
− competition for corporate resources.
P a g e 17 | 22 Instructor’s Manual Chapter 10
Designing organisation structure
• Advantages of the matrix approach include:
− more efficient use of resources than in single hierarchy organisations
− flexibility and adaptability to changing environment
− development of both general and specialist management skills
− interdisciplinary cooperation and expertise available to all divisions
− enlarged tasks for employees.
• Disadvantages of the matrix approach include:
− frustration and confusion from dual chain of command
− high conflict between two sides of the matrix
− many meetings and more discussion than action
− human relations training needed
− power domination by one side of matrix.
It is too early to tell whether the matrix approach will be a better fit for the firm,
but from what the case outlines (tension, frustration and no autonomy with the
divisional approach), it is believed that a matrix approach will yield better long-term
results for Abraham’s Grocery.
Student recommendations may vary. Any decision about structure has to be
mindful that it defines the way tasks are divided and resources deployed. The
strategy of the organisation is facilitated by the structure and the structure likewise
affects how the strategy may or may not be achieved.
Useful weblinks
Nissan
http://www.nissan.com.au (the website of Nissan, a Japanese multinational automobile
manufacturer)
Tesla Motors
http://www.teslamotors.com (the website of Tesla Motors, a US company that designs,
manufactures and sells electric cars and electric vehicle powertrain components)
Southwest Airlines
http://www.southwest.com (the website of Southwest Airlines, a major US airline and the
world’s largest low-cost carrier)
Airbus