If an organization (1) limits itself to producing a small number of similar products, (2) pro- duces those products in one or a few locations, and (3) sells them to only one major type of customer, managers will be able to solve many of the control problems associated with a functional structure. As organizations grow over time, however, they begin to produce more and more products that are often very different from one another. For example, GE pro- duces hundreds of different models of appliances, lightbulbs, turbine engines, and financial lending services. Moreover, when an organization increases the number and kinds of goods and services it produces, this also leads to an increase in the number and types of customers it has to serve, and to do this a company usually has to open up factories and offices at an increasing number of geographic locations.
When organizations grow in these ways, what is needed is a structure that will simultane- ously (1) increase managers’ control of its different individual subunits so that subunits can better meet product and customer needs, and (2) allow managers to control and integrate the operation of the whole company to ensure all its subunits are meeting organizational goals.
CHAPTER 6 • DESIGNING ORGANIZATIONAL STRUCTURE: SPECIALIZATION AND COORDINATION 153
Managers regain control of their organizations when they decide to adopt a more complex structure, which is the result of three design choices:
1. An increase in vertical differentiation. To regain control, managers need to in- crease vertical differentiation. This typically involves (a) increasing the number of levels in the hierarchy; (b) deciding how much decision-making authority to central- ize at the top of the organization; and (c) deciding how much to use rules, SOPs, and norms to standardize the behavior of low-level employees.
2. An increase in horizontal differentiation. To regain control, managers need to increase horizontal differentiation. This involves overlaying a functional grouping of activities with some other kind of subunit grouping—most often, self-contained product teams or product divisions that contain the functional resources needed to meet their goals.
3. An increase in integration. To regain control, managers need to increase integra- tion between subunits. The higher the level of differentiation, the more complex the integrating mechanisms that managers need to use to control organizational activi- ties. Recall from Chapter 4 that complex integrating mechanisms include task forces, teams, and integrating roles. Organizations need to increase integration between subunits to increase their ability to coordinate activities and motivate employees. Figure 6.3 shows the way those three design choices increase differentiation and inte- gration. The organization illustrated in Figure 6.3A has two levels in its hierarchy and three subunits, and the only integrating mechanism that it uses is the hierarchy of author- ity. Figure 6.3B shows the effects of growth and differentiation. To manage its more com- plex activities, the organization has developed three levels in its hierarchy and has eight subunits. Because of the increase in differentiation, it needed a greater degree of integra- tion and thus created a series of task forces to control activities among subunits.
Figure 6.3 Differentiation and Integration: How Organizations Increase Control over Their Activities
Vertical differentiation: Creating a hierarchy of authority to improve coordination vertically between subunits Horizontal differentiation: Creating separate subunits to increase control within a subunit A. CEO Ve rtical Horizontal Integration: Creating integrating mechanisms, such as a task force, laterally to improve coordination between subunits
B.
CEO
154 PART 2 • ORGANIZATIONAL DESIGN
Product structure
A divisional structure in which products (goods or services) are grouped into separate divisions, according to their similarities or differences.
Product division structure A divisional structure in which a centralized set of support functions services the needs of a number of different product lines.
All of the more complex organizational structures discussed in the remainder of this chapter come into being as a result of managers’ design decisions about vertical differen- tiation, horizontal differentiation, and integration. The move to a complex structure nor- mally involves changes in all three characteristics.
Moving to a Divisional Structure
The structure that organizations most commonly adopt to solve the control problems that result from producing many different kinds of products in many different locations for many different types of customers is the divisional structure. A divisional structure groups functions according to the specific demands of products, markets, or customers. The goal behind the change to a divisional structure is to create smaller, more manageable subunits within an organization. The type of divisional structure managers select depends on the specific control problems discussed earlier that need to be solved.
If the control problem is due to the number and complexity of products, the organiza- tion divides its activities by product and uses a product structure. If the control problem is due to the number of locations in which the organization produces and sells its products, the organization divides its activities by region and uses a geographic structure. If the con- trol problem is due to the need to service a large number of different customer groups, the organization divides its activities by customer group and uses a market structure.
Next, we discuss these types of divisional structure, which are designed to solve spe- cific control problems. Each type of divisional structure has greater vertical and horizon- tal differentiation than a functional structure and employs more complex integrating mechanisms.