TABLE OF CONTENT

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PAPER NO. 12: STRATEGIC MANAGEMENT

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ORGANIZATIONAL DESIGN & CHANGE

Subject COMMERCE

Paper No and Title 12: STRATEGIC MANAGEMENT

Module No and Title 30: ORGANIZATIONAL DESIGN & CHANGE

Module Tag COM_P12_M30

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TABLE OF CONTENT

1. Learning Outcomes 2. Introduction

3. Organisational Structure 3.1 Entrepreneurial Structure 3.2 Functional Structure 3.3 Divisional Structure 3.4 Matrix Structure 3.5 Network Structure

4. Organizational design and change 5. Summary

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1. Learning Outcomes

After Studying this module, we shall be able to:

 Know about the different types of structures used in strategy implementation

 Understand the concepts of organizational design and change

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2. Introduction

Organizations exist because they are more efficient at undertaking economic activities than individuals are on their own. Organizations enable the co-ordination of human economic activity. Mintzberg (1993) argues that all organized human activity gives rise to two opposing forces. Firstly the need to divide labour into separate tasks and secondly to co-ordinate these tasks to fulfill some objective. Organizational structure is concerned with the division of labour into specialised tasks and co-ordination between these tasks.

According to Wilson and Rosenfeld (1990, p.215) Organizational Structure is the established pattern of relationships between the component parts of an organization outlining both communication, control and authority patterns. Structure distinguishes the parts of an organization and delineates the relationship between them. The function of organizational design is to construct the right structure that matches the requirements of a strategy to be implemented. On the other hand, Organisation change is supposed to alter the existing structures that have gone wrong over a period of time and no longer fit the requirements of the strategy being implemented.

3. Organisational Structure

Organizational Structure refers to the types of formats used by different structures.

Following are the different types of structures discussed in detail 3.1 Entrepreneurial Structure

3.2 Functional Structure 3.3 Divisional Structure 3.4 Matrix Structure 3.5 Network Structure

3.1 Entrepreneurial Structure or Simple Structure

A simple structure is the oldest and most common organizational form. After all, most organizations are very small and have a single product line in which the founder controls all activities and takes major decisions. In simple words, Entrepreneurial structure revolves around the founder of the firm as shown in the following figure.

SIMPLE ORGANIZATIONAL STRUCTURE

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A simple structure is characterized by a high degree of informality. Activities are coordinated by direct supervision. Decision making is highly centralized and there is hardly any specialization of jobs. The performance evaluation and system of rewards is also informal. There are hardly any rules and regulations. Usually it is the owner who is actively involved in all the stages and departments of the business and at times a manager may be appointed to supervise operations on a daily basis if the entrepreneur is unable to manage functions such as finance and marketing as the organization grows in size. The vision of the entrepreneur and flexible work patterns of staff are major strengths of this type of structure.

Such small firms with a simple and straightforward structure tend to encourage creativity.

The lack of rigidity and rules also fosters individualism. However, such an informal environment may also create problems. Employees may not take their responsibilities seriously or may not understand them at all. This may result in unnecessary confusion and conflicts.

3.2 Functional structure

Functional structures are most appropriate for firms which produce one or a few related products or services, where volume of production is high and there is some vertical integration. Activities are grouped together according to functional specialism such as finance, marketing, personnel and R&D as shown in the following figure.

FUNCTIONAL STRUCTURE

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ORGANIZATIONAL DESIGN & CHANGE A manager will be responsible for a department which comprises these functions. A functional structure promotes efficiency through the specialised division of labour.

The coordination and integration of the functional areas becomes one of the most important responsibilities of the chief executive of the organization. The functional structure facilitates a high level of centralization with each functional manager reporting to the CEO and Board of directors. It ensures integration and control over all the related tasks in the value chain.

The functional structure has its limitations also. As the firm grows and its range of products increases, coordination between functions becomes complicated leading to a decline in performance. Another disadvantage is that each functional manager may begin to concentrate on their departmental goals at the cost of the organizational goals.

Companies such as Videocon Industries, Hindalco and Bajaj Auto follow such a functional organization structure.

3.3 Divisional structure

As organizations grow and diversify into producing different products for different markets a more effective and efficient structure is required. Divisional Structure also called the multidivisional structure refers to a structure that is centred on the markets, projects and products. Each division has departments with their respective functional specialists as shown in the following figure. This type of structure consists of independent units centrally governed by a corporate office. This decentralization of decision making is also necessary where the external environment is uncertain and turbulent. It gives managers substantial independency to respond to local market conditions.

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ORGANIZATIONAL DESIGN & CHANGE A divisional structure may be organized according to product, market or geographic areas.

DIVISIONAL STRUCTURE

The different divisions enjoy a fair degree of independence and deal with their respective products and services that are different from the other divisions. In such an operational structure, there is too much responsibility on the top management with regard to decision making. Therefore, it may become essential for the top management to delegate their responsibilities and decision making powers to lower-level managers in order to be able to attend matters concerning the organization in the long run.

General Motors was the first to adopt the divisional organizational structure. In the 1920’

the company formed five major product divisions (Cadillac, Buick, Oldsmobile, Pontiac and Chevrolet) as well as several industrial divisions. Other organizations that have adopted Divisional Structure includes DuPont and Procter & Gamble

Since then, many organizations have discovered that as they diversified into new product market activities, functional structures with their emphasis on single functional departments were unable to handle the increased complexity of the entire business.

There are many advantages associated with the divisional structure. By creating separate divisions to manage individual product markets, there is a separation of strategic and operating control. That is, divisional managers can focus their efforts on improving operations in the product markets for which they are responsible, and corporate officers can devote their time to overall strategic issues for the entire corporation. The focus on a division’s products and markets by the divisional executives provides the corporation

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ORGANIZATIONAL DESIGN & CHANGE with an enhanced ability to respond quickly to important

changes in the external environment.

Since there are functional departments within each division of the corporation, the problems associated with sharing resources across functional departments are minimized.

Under divisional structure, individuals are more likely to be aligned to the organization’s objectives. In addition, the profit contribution of each division is transparent which helps the centre to make efficient resource allocation decisions.

A divisional structure also has potential disadvantages. First, it can be very expensive; i.e.

the duplication of functions (personnel, operations and investment) across many different divisions as well as at head office leads to increased costs since each division must staff multiple functional departments. There can also be dysfunctional competition among divisions since each division tends to become self centred with its own operations.

Furthermore, divisional managers are often evaluated on common measures such as return on assets and sales growth. Therefore, if goals are conflicting, there can be a sense of a ‘zero-sum’ game that would discourage sharing of ideas and resources among the divisions for the common good of the corporation.

3.4 Matrix Structure

Matrix Structure is actually a blend of the functional and divisional structures. A matrix structure is a company structure in which the reporting relationships are set up as a grid or matrix rather than in the traditional hierarchy as shown in the figure.

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ORGANIZATIONAL DESIGN & CHANGE MATRIX STRUCTURE

It aims to simultaneously maximise the benefits from functional structure that comes from division of labour while increasing the efficiency of coordination across these functions. In a matrix structure an individual/ employee reports to both the functional manager and a product manager. Employees report to the functional manager who can help with skills and expertise and help prioritize and review work and to the product line manager who guides on product offerings by the company.

In some multinational companies, the matrix structure helps bring together product groups as well as geographical units. This is required when product managers are responsible for the global development, management and distribution of their product line; and the heads of geographical regions are responsible for the profits of their business units in their respective regions.

The matrix structure is successfully used in companies such as Disney, Caterpillar Inc.

and ABB. The advantage of a matrix structure is that it enables the firm to take benefit of specialized personnel, special equipment as well as facilities. Instead of duplicating functions, the resources are shared as required. Such sharing and collaboration of resources ensures efficient and effective utilization of resources.

Another benefit is that a matrix structure is flexible providing professionals with a wide range of responsibility, giving them more experience and the opportunity to develop their skills and competencies. Matrix structures also have many limitations. Their dual

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ORGANIZATIONAL DESIGN & CHANGE reporting structure (reporting to the functional manager

and a project manager) leads to uncertainty and conflict with regard to allocation of resources. This in turn causes complicated relationships at the workplace.

3.5 Network Structure

A network structure involves a configuration of outsourced activities that are controlled by a central hub. Network Structure is useful in responding to fast-moving and unpredictable environments such as the fashion industry. In a Network Structure, the principal organization sub contracts or outsources many of its functions to other organizations and coordinates their activities. The activities/tasks are outsourced to separate firms that are connected electronically to the central office as shown in the following figure. Sub-contractors flow in and out of the network depending upon its changing requirements. The main organization maintains control over work processed by various sub-contractors. Companies like Nike and United Colors of Benetton both outsource manufacturing activities to specialist firms, while maintaining tight control at the centre over their core capabilities.

NETWORK STRUCTURE

The network structure facilitates the core competencies of the firm to be focused at the centre while non-core activities are outsourced to specialist firms which allows for greater competence. Network structure is also known as Virtual Organization, which means a temporary network between a number of firms that come together to achieve a specific venture. The main advantage of the Network structure that it provides organizations the flexibility to enable them to respond quickly to changes in the marketplace. It facilitates choice of sub-contractors on the basis of quality and control. It also has the following limitations.

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ORGANIZATIONAL DESIGN & CHANGE 1. Coordination of various activities and sub contractors becomes difficult.

2. New relationships need to be developed when sub-contractors are changed.

4. Organizational design and change

Strategists say that there is no best structure available anywhere. There are no good structures or bad structures. There are only structures that fit or do not fit with the requirements of a strategy. If they match, then they are the right structures. If they do not match, then they are the wrong structures.

The function of organizational design is to construct the right structure that matches the requirements of a strategy to be implemented. On the other hand, Organisation change is supposed to alter the existing structures that have gone wrong over a period of time and no longer fit the requirements of the strategy being implemented.

Organizational change is an important issue in organizations. Organization change or Strategic Change is the fit between an organization’s resources and capabilities and its changing competitive environment. Organizational change is the process in which an organization changes its structure, strategies, operational methods, technologies to affect change within the organization.

There are four forms of change i.e. Planned change, unplanned change, Radical change and Transformational Change.

Planned change is a change resulting from a deliberate decision to alter the organization.

Companies that wish to move from a traditional hierarchy structure to one that facilitates self managed teams that use a pro active approach.

Unplanned Change is imposed on the organization and is often unforeseen. For example- Changes in government regulations and changes in the economy are often unexplained.

Radical Change is a process by which firms regain competitive advantage after it has been lost. The type and extent of change undertaken depends upon the firm’s resources and capabilities, its competitive environment.

Transformational change occurs when organizations incur drastic changes and must essentially transform themselves. This can occur when an organization faces different technologies, significant changes in supply and demand, unexpected losses etc.

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5. Summary

 Organizational Structure is concerned with the coordination of human activity into specialized tasks.

 Simple or Entrepreneurial Structure is a centralized structure in which the founder or manager takes all the major decisions and delegates the work to staff members.

 In a Functional Structure, tasks are grouped according to various functions such as sales, R&D, marketing, operations etc.

 The divisional structure involves individual business units that encompasses their own functional specialisms and have direct responsibility for their own performance.

 Matrix Organization is a hybrid structure combining two complementary structures i.e. functional depart mentation with pure project structure. Functional structure is the main feature of the matrix organization and retains authority for the overall operation of the functional units whereas project teams are created when specific projects require a high degree of technical skill and other resources for a temporary period.

 Network Structure is a chain of cooperative relationships of the central organization with its suppliers, distributors and other business associates.

 Organization change occurs when major sections of an organization are altered. It is defined as a change that has significant effects on the way work is performed in an organization.

 There are some four basic forms of change. Planned change, unplanned change, Radical change and Transformational Change.