Activities and capabilities that are critical to achieving the strategic goals of the organization must be at the core of the internal organization. All other activities provide support for the core competence, and for successful organization design, one unit’s performance must be linked to another and must be part of an overarching competence or capability. [2-6] There are two main methods for organizing activities within a company. The first method organizes activities by function and tends to scatter strategically important activities over many departments. Because people and departments tend to buffer their work and create queues, a functionally organized company tends to have slower response to customer’s needs and longer lead times. Responsibility for outcomes and performance for customers can be lost over the
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stretch of the entire process and can result in “empire building” across departments. In such an environment, a general manager wastes time building cooperation between groups and serving as a communicator.
The other method for organizing activities is to use process structures where the all the work is performed in a “process-complete” unit, which performs all the cross-functional steps. [2-6] Work organization should not be confused with physical organization which can be categorized four ways: by product, by process, by cell, or fixed. [2-26] Physical organization is an industrial engineering concept where the term “process” layout means the exact opposite of “process” organization structure. Table 2-1 shows the relationships between activity organization and physical organization of activities.
Table 2-1. Relationship between Activity Organization and Physical Organization
Work Organization Physical Organization (Layout)
Process-Complete Departments Product Layout
Functional Departments Process Layout
Process-Complete Departments Cellular Layout Process-Complete Departments Fixed Layout
Many corporations tend to use hybrids of organizational structures and physical layouts where the strategy-critical processes are organized as “process- complete” operations and activities like finance, accounting, human resource management, R&D, and marketing are organized functionally.
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Activities may also be organized by geographic area, by position in the value chain, by business unit, or by a hybrid of function and process called matrix form. When organized by geographic area, often administrative roles are maintained at a corporate level and may include finance and accounting, human resources, legal, communications, IT and R&D. The general managers in each country would then be responsible for engineering, production, marketing, distribution, and customer service. The advantages of geographic structure include the ability to alter strategy to fit each market independently, to delegate responsibility to lower levels, to improve coordination, to lower costs using local economies, and to develop broadly skilled managers. Disadvantages include inefficiencies due to duplication of effort, increased levels in the corporation hierarchy, and loss of corporate unity. The decision to expand or retract into or from different geographic areas is another dimension of “scope” and should be considered at the corporate strategy level. [2-7]
Diversified businesses tend to prefer organizing by business unit. Any many cases, the business unit acts as a stand-alone unit, with responsibility to higher levels in the chain to achieve some level of return on investment or profit. A large diversified company may take this organizational type one step further by organizing as strategic business units. This organization involves combining business units that share important strategic elements. The choice to pursue or avoid business in multiple distinct product markets is the third dimension of “scope” which is also considered at the corporate strategy level. [2-7]
The matrix form of organization is a structure with two dimensions of organization, one of process and function. This method involves assigning individuals
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from pools of resources from functional groups to individual business ventures, projects, or product lines. This hybrid approach is often used to get the best of both worlds of the two organizational types. In many companies, hybrids of all organizational types can be found. In addition, other supplemental ways of organizing within these structures include: special project teams, cross-functional task forces, venture teams, self-contained work teams, process teams, contact managers, and relationship managers. [2-6]
Determining the degree of authority each person has in the organization affects the hierarchical nature of the organization. A flat organization, or horizontal organization is characterized by employee empowerment and decentralized decision making and the benefits achieved by such organizations often include: more efficient decision-making, faster decision making, creative thinking, innovation, and greater involvement and ownership by employees. [2-6] This type of organization fits for companies who want to be lean and agile because it reduces the number of communications necessary and allows for faster change and response to customer’s needs. Centralizing and vertical organizations are necessary when control is necessary for coordination or security of core competencies and activities.
Designing the linkages between the internal and external organization is critical and the operational aspects are usually handled by the supply chain management function. The decision whether to empower a few managers, or many people in the organization to make, develop, and sustain these critical relationships affects the potential gain in resource capability. [2-6] Empowering relationship managers is not usually effective, “multiple ties at multiple levels” are necessary to
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ensure proper communication, coordination, and control. [2-6] An analysis of these linkages and relationships could show whether current policy and practices align with the organization’s overall strategy and support core competencies.