Reference no: EM132214513

Assume you have the job of setting up an organization structure for a new company which will be a retail store operation to sell health-food products. The owner is an independently wealthy woman who is starting this business because she thinks people ought to eat better. You have been asked to design the organization. When the business opens there will be a dozen retail stores and a wholesale operation to sell the products to existing food stores. She also plans to eventually have two organic farms to grow healthy food. Based on your reading of the class material for this week, what do you think are the important principles to consider in designing this organization? What would you suggest to the owner regarding the organizational structure?

READING

Organization Structure

The central questions for this week are: How does one design an organization structure? Is there one best way? Probably not!

We begin with bureaucracy. Earlier, we talked about the concept of bureaucracy. According to Max Weber, bureaucracy is an ideal organizational form. A bureaucracy has a hierarchy and chain of command, an understood authority structure, clear division of labor, and rules for consistent decision making. Beginning in the late 19th century, this organizational form was seen as the ideal structure. It was thought that a well-designed organization should look like a Max Weber bureaucracy. Such an organization would be organized by function with a distinction between line and staff and a clear hierarchy. In the 1920s, several major corporations such as Sears, DuPont, and General Motors began to redesign their organizations along divisional lines. As they grew, this structure allowed them to become more efficient by decentralizing many important decisions to each division. For General Motors, the Buick and Chevrolet divisions each acted fairly autonomously. Each division would not have to coordinate their activities with the other and could act fairly independently.

Without this kind of change from a functional to a divisional structure, these companies would have had trouble growing the way they did because coordination would become even more difficult. As the chart below illustrates, General Motors with a functional design requires more and more high-level coordination (at the CEO level) as the company grows. From a financial standpoint, it is also harder for the CEO to know what it really costs to produce a Chevrolet and how much profit a Chevrolet makes versus a Buick; however, once GM adopted a divisional structure with each product line a separate division, then all of the relevant costs fell within that division. From the CEO's perspective, each division can be evaluated on the basis of its total profitability without the CEO needing to be involved in coordination between production and sales within the Chevrolet division. Most decisions relating to the Chevrolet line are decentralized to the VP for that division, and little coordination is needed between the Chevrolet division and the Buick division.

Starting in the1930s, management scholars began to better understand that, in addition to the formal structural arrangements, one needed to appreciate the "informal organization" , which consists of the social networks within any organization. This informal organization, along with the social dynamics of behavior among organizational participants, began to be seen as an important consideration in design of organizations.

In the early 1960s, the work of the British scholars Burns and Stalker, along with the follow up work of Harvard scholars Lawrence and Lorsch, led to new ways of thinking about the design of organizations. Burns and Stalker distinguished between mechanistic (bureaucratic) and organic organizational design. In the organic design, the hierarchy is flatter with much greater informal interaction and communication across the various parts of the organization. They argued that an organic design was a better fit for an organization that needed to quickly absorb information from the environment. The research they used to confirm this concept was the emerging electronics industry in England in the 1950s. Those firms with a more traditional hierarchy (mechanistic) were less successful than those with a flatter and less bureaucratic structure (organic).

The research of Lawrence and Lorsch expanded these ideas by studying the plastics industry in the U.S. and comparing it with the cardboard box and food processing industry. They found that the structure of firms in each industry had developed organization designs that balanced differentiation (putting specialized people together in the same units) with integration(making sure the various distinct units effectively communicated with each other).

Lawrence and Lorsch found that in the plastics industry of the early 1960s, technological change and product innovation were the keys to success. Firms with a structural design that enhanced integration were more successful. Integration was less important in the cardboard box industry, which was characterized by very little technological change. The cardboard box industry had a stable external environment, and this put a premium on low unit cost of production. A more bureaucratic structure was appropriate for this industry. The food processing industry fell in between the other two. The view of organizational design developed by Burns and Stalker, and later expanded upon by Lawrence and Lorsch, has become the dominant paradigm. The basic model can be articulated in this fashion:

In designing an organization, one needs to consider both the kind of differentiation (or specialization) and the extent of integration (or coordination) needed. One of the critical design factors is the nature of the external environment. A more dynamic environment probably requires more attention to integration. For example, in the plastic industry of the 1960s new production technologies were making it possible to manufacture new types of plastic products. A plastics company needed to quickly absorb and apply this new knowledge from a dynamic and rapidly changing environment; and,

Traditional bureaucracies have a high degree of differentiationor specialization and low integration. A plastics company organized along traditional bureaucratic principles may have more trouble absorbing relevant information from the external environment; thus, its structure may limit its ability to innovate in an industry characterized by technological and product innovation.

Conclusion

Mintzberg suggests five types of design configuration, and discusses why one might be better than another in a given situation. This is called contingency theory, meaning there is no one best design for all organizations, but structural design is contingent on other factors. This view is similar to that of Lawrence and Lorsch, who also took a contingent approach to design.

In a recent Rogers and Blenko article in the Harvard Business Review, they link the design of an organization to decision making. In their view, effective decision making ought to be an important consideration in structural design.

One of the more recent developments in organization design is the network organization. This organizational design strategy is discussed by Bateman and Snell. In essence, this is the organic organizational design carried to the next logical step. In the network organization traditional organizational boundaries are blurred and different units or even different organizations achieve a high degree of integration as they pursue some common goals.

Today's paradigm on organizational design stresses the contingency approach. This is not a rejection of the traditional principles of bureaucracy, which are still at the heart of every effective organization; however, the contingency approach assigns importance to both integration and differentiation, and assumes that not every organization should be designed the same way.