and Coordination
Learning Objectives
In this chapter the second principal issue in organizational design is addressed: how to group and coordinate tasks to create a division of labor that increases efficiency and effectiveness and increases organizational performance. The design challenge is to create the optimal pattern of vertical and horizontal relationships among roles, functions or departments, teams, and divisions that will enable an organization to best coordinate and motivate people and other resources to achieve its goals. After studying this chapter you should be able to:
1. Explain why most organizations initially have a functional structure and why, over time, problems arise with this structure that require a change to a more complex structure. 2. Distinguish among three kinds of divisional structures (product, geographic, and market),
describe how a divisional structure works, and explain why many organizations use this structure to coordinate organizational activities and increase their effectiveness.
3. Discuss how the matrix and product team structures differ, and why and when they are chosen to coordinate organizational activities.
4. Identify the unique properties of network structures and the conditions under which they are most likely to be selected as the design of choice.
6
C H A P T E R
Functional structure A design that groups people together on the basis of their common expertise and experience or because they use the same resources.
CHAPTER 6 • DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 149
Focus on New Information Technology
Amazon.com, Part 4
A
s we saw in Chapter 1, Jeff Bezos, the founder of Amazon.com, achieved phenomenal success with his concept for an online bookstore. In large part, his success has been due to the functional structure he created for his company that has allowed Amazon.com’s proprietary Internet software to be used so effectively to link employees to cus- tomers (see Figure 6.1).First, Bezos created Amazon.com’s R&D department to continue to develop and improve the in-house software that he had initially de- veloped for Internet-based retailing. Then, he established the infor- mation systems department to handle the day-to-day implementation
of these systems and to manage the interface between the customer and the organization. Third, he created the materials management/ logistics department to devise the most cost-efficient ways to obtain books from book publishers and distributors and to ship them quickly to customers. For example, the department developed new IT to en- sure one-day shipping to customers. Next, as Amazon.com grew, he created a separate financial department and a strategic planning de- partment to help chart the company’s future. As we will see in later chapters, these departments have allowed Amazon to expand and provide many other kinds of products for its customers in the 2000s, such as electronics, housewares, food, and cloud computing services, and different departments have been created to manage each of these distinct product lines.
competitive prices.1As functions specialize, employees’ skills and abilities improve and
the core competences that give an organization a competitive advantage emerge. Different functions are formed as an organization responds to increasingly complex task requirements. The owner of a very small business, for example, might hire outside special- ists to handle accounting and marketing. As an organization grows in size and complexity, however, it normally develops these functions internally because handling its own
Figure 6.1 Functional Structure
Research and Development Sales and Marketing Materials Management Manufacturing Finance CEO This format shows that each function has its own hierarchy
A.
This format shows the position of each function within the organization's hierarchy
B. CEO Research and Development Sales and Marketing Manufacturing Materials Management Finance
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accounting and marketing activities becomes more efficient than hiring outside contrac- tors. This is how organizations become more complex as they grow: They develop not only more functions but also more specialization within each function. (They also become ver- tically differentiated and develop a hierarchy of authority, as we saw in Chapter 5.) Focus on New Information Technology: Amazon.com, Part 4, provides an example of how the company used horizontal differentiation to develop a functional structure as it grew.
By focusing on the best way to divide into functions the total task facing the organiza- tion (the creation of valuable products for customers) and recruiting experienced functional managers from other organizations like Walmart to run them, Bezos created core compe- tences that allowed his online bookstore to compete effectively with bricks-and-mortar bookstores. Many bookstores have disappeared because their small size did not allow them to differentiate and provide customers with the sheer range of books and convenient service that Amazon.com can. Amazon.com is able to do this because of the way it has developed a structure to manage its new information technology effectively.
Advantages of a Functional Structure
Functional structure develops first and foremost because it provides people with the oppor- tunity to learn from one another and become more specialized and productive. When people with skills in common are assembled into a functional group, they can learn the most efficient techniques for performing a task, or the best way to solve problems, from one another. The most skilled employees are given responsibility to train new recruits, and they are the people who are promoted to become supervisors and managers. In this way an or- ganization can increase its store of skills and abilities. For example, Google’s value-creation ability is embedded in the skills of its employees and in the way it groups and organizes them to develop and utilize their skills. In 2010, Google’s revenues exceeded $31 billion and it had 24,000 employees; by June 2011 it had added almost 3000 more employees to support its rapid growth into new businesses such as cloud computing services and mobile device applications.
Another advantage of the functional structure is that people who are grouped to- gether by common skills can supervise one another and control one another’s behavior. We discussed in Chapter 5 how a hierarchy develops within each function to allow an or- ganization to control its activities (see Figure 5.8). In addition to functional managers, peers in the same function can monitor and supervise one another and keep work activi- ties on track. Peer supervision is especially important when work is complex and relies on cooperation; in such situations, supervision from above is very difficult.
Finally, people in a function who work closely with one another over extended time periods develop norms and values that allow them to become more effective at what they do. They become team members who are committed to organizational activities. This commitment may develop into a core competence for an organization.
Control Problems in a Functional Structure
All organizations become divided into independent functions because this promotes spe- cialization and the division of labor, a major source of increased effectiveness. As in Amazon.com, functional structure breeds core competences that increase an organiza- tion’s ability to control people and resources. However, as an organization continues to grow and differentiate, functional structure creates new problems. Often the problems arise from the organization’s success: As an organization’s skills and competences increase and it becomes able to produce a wider variety of goods or services, its ability to provide adequate functional support for its growing product line is stretched. For example, it be- comes increasingly difficult for sales and marketing to provide the in-depth attention that the launch of new products requires, so new products fail to meet sales targets. Similarly, as more customers perceive value in the products an organization creates, demand goes up. Increasing customer demand pressures manufacturing to find ways to increase production quickly, which often results in decreased product quality and rising costs. In turn, the pres- sure of staying ahead of the competition places more demands on R&D and engineering to improve product quality and increase the range or sophistication of products, such as Apple’s quest to offer a continuous flow of improved iPods and iPhones.
CHAPTER 6 • DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 151
The problem facing a successful organization is how to keep control of increasingly complex activities as it grows and differentiates. As it produces more and more products, becomes geographically diverse, or faces increasing competition for customers, control problems impede managers’ ability to coordinate organizational activities.2
COMMUNICATION PROBLEMS As more organizational functions develop, each with its own hierarchy, they become increasingly distant from one another. They develop different subunit orientations that cause communication problems.3 For example, sales thinks the organization’s main problem is the need to satisfy customer demands quickly to increase revenues; manufacturing thinks the main problem is to simplify products to reduce costs; and R&D thinks the biggest problem is to increase a product’s technical sophistication. As a result of such differences in perception, communication problems develop that reduce the level of coordination and mutual adjustment among functions and make it more difficult for the organization to respond to customer and market demands. Thus, differentiation produces communication problems that companies try to solve, in part, by using more complex integrating mechanisms.
MEASUREMENT PROBLEMS To exercise control over a task or activity, there has to be a way to measure it; otherwise there is no benchmark to use to evaluate how task performance changes over time. However, as organizations grow and the number and complexity of their functions and products increases, the information needed to measure the contribution of any one function or product to overall profitability is often difficult to obtain. The reason for the difficulty is that the cost of each function’s contribution to the development of each product becomes increasingly difficult to measure. For example, one or more products might actually be losing the company money, but managers are unaware of this because they cannot allocate functional costs to each individual product. Thus the organization is not making the most effective use of its resources.
LOCATION PROBLEMS As a company grows, it may need to set up shop and establish manufacturing or sales facilities in different geographic regions to serve customers better. Geographic spread can pose a control problem within a functional structure when centralized control from one geographic location prevents this from happening: Manufacturing, sales, and other support activities are not allowed to become responsive to the needs of each region.An organization with more than one location must develop a control and information system that can balance the need to centralize decision-making authority with the need to decentralize authority to regional operations. In fact, as Amazon.com expanded, it established five main U.S. distribution centers, located in Delaware, Nevada, Georgia, Kansas, and Kentucky.
CUSTOMER PROBLEMS As the range and quality of an organization’s products increases, more and more customers are attracted to the organization and they have different kinds of needs. Servicing the needs of new kinds of customer groups and tailoring products to suit them are relatively difficult in a functional structure. Functions like production, marketing, and sales have little opportunity to specialize in the needs of a particular customer group; instead, they are responsible for servicing the complete product range. Thus in an organization with a functional structure, the ability to identify and satisfy customer needs may fall short, and sales opportunities are lost.
STRATEGIC PROBLEMS As an organization becomes more complex, top managers may be forced to spend so much time finding solutions to everyday coordination problems that they have no time to address the longer-term strategic problems facing the company. For example, they are likely to be so involved in solving communication and integration problems between functions that they have no time to plan for future product development. As a result, the organization loses direction.
Solving Control Problems in a Functional Structure
Sometimes managers can solve the control problems associated with a functional struc- ture, such as poor communication between functions, by redesigning the functional struc- ture to increase integration between functions (see Figure 6.2). For example, one ongoing
152 PART 2 • ORGANIZATIONAL DESIGN
Figure 6.2 Improving Integration in a Functional Structure by Combining Sales and Marketing
Before A. CEO Sales Marketing After B. CEO Sales and Marketing
organizational challenge is how to manage the relationship between sales and marketing. Figure 6.2A shows the traditional relationship between them: Each is a separate function with its own hierarchy. Many organizations have recognized the need to alter this design and have combined those activities into one function. Figure 6.2B shows that modifica- tion. Such changes to the functional structure increase control by increasing integration between functions.