Chapter 6 Organizing the Business Enterprise

Chapter Overview Organizational structure varies according to a firms mission, purpose, and strategy. Size, technology, and changes in environmental circumstances also influence structure. The building blocks of organizational structure are job specialization and departmentalization. Common forms of departmentalization are customer, product, process, geographic, and functional. Multiple forms are often used within large organizations. The decision-making hierarchy which defines responsibility, authority, delegation, and accountability plays a critical role in organizational structure. In a centralized organization, senior management holds most authority and decisionmaking power; in a decentralized organization, lower levels of management also hold significant decision-making authority. Span of control refers to the number of subordinates a manager supervises directly. The more people a manager supervises, the wider the span of control. The four basic forms of organizational structure reflected in most firms are: functional, divisional, matrix, and international. However, the informal organization can be as powerful and sometimes more so than the formal organization. Some firms harness the power of the informal organization by encouraging intrapreneuring: creating and maintaining the innovation and flexibility of a small-business environment within a large company. The purpose of intrapreneuring is to foster productive creativity. Chapter Objectives 1. Discuss the elements that influence a firms organizational structure. 2. Explain specialization and departmentalization as the building blocks of organizational structure. 3. Distinguish between responsibility, authority, delegation, and accountability, and explain the differences between decision making in centralized and decentralized organizations. 4. Explain the differences among functional, divisional, matrix, and international organizational structures and describe the most popular new forms of organizational design. 5. Describe the informal organization and discuss intrapreneuring.

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REFERENCE OUTLINE
Opening Case: Cooking Up a New Structure I. What Is Organizational Structure? A. Determinants of Organization B. Chain of Command The Building Blocks of Organizational Structure A. Specialization B. Departmentalization 1. Customer Departmentalization 2. Product Departmentalization 3. Process Departmentalization 4. Geographic Departmentalization 5. Functional Departmentalization Establishing the Decision-Making Hierarchy A. Assigning Tasks: Responsibility and Authority B. Performing Tasks: Delegation and Accountability C. Distributing Authority: Centralization and Decentralization 1. Centralized Organizations 2. Decentralized Organizations 3. Tall and Flat Structures 4. Span of Control D. Three Forms of Authority 1. Line Authority 2. Staff Authority 3. Committee and Team Authority Basic Forms of Organizational Structure A. Functional Organization B. Divisional Organization C. Matrix Organization D. International Organization E. Organizational Design in the Twenty-First Century 1. Boundary-less Organization 2. Team Organization 3. Virtual Organization 4. Learning Organization Informal Organization A. Formal vs. Informal Organizational Systems 1. Informal Groups 2. Organizational Groups B. Intrapreneuring

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LECTURE OUTLINE
I. What Is Organizational Structure? (Use PowerPoint 6.4.) Organizational structure defines an organization through specification of the jobs to be performed and the ways in which these jobs relate to one another. All organizations develop their own appropriate structures. A. Determinants of Organization (Use PowerPoint 6.5.) Numerous factors influence the planning and creating of an efficient organizational structure. Managers not only consider the organizations purpose, mission, and strategy, but also the organizations size, technology, and environmental changes. B. Chain of Command (Use PowerPoint 6.6.) Organizational charts are prepared to clarify structure and to show employees where they fit into a firms operations. The chain of command represents the hierarchy of who reports to whom in the organization. Notes: _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ ___ II. The Building Blocks of Organizational Structure (Use PowerPoint 6.7.) A. Specialization 1. Specialization and Growth. Job specialization, a natural part of an organizations growth, is the process of identifying the specific jobs that need to be done and designating the people who will perform them. Job specialization may even involve breaking jobs into small components prior to assigning them to individuals. B. Departmentalization Departmentalization is the grouping of similar or related jobs into logical units. Several types of departmentalization exist.

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1. Customer Departmentalization. This grouping of jobs simplifies shopping by providing identifiable store segments. 2. Product Departmentalization. Organizations are divided according to the products or services being produced. 3. Process Departmentalization. Organizations are divided according to production processes utilized. 4. Geographic Departmentalization. Organizations are divided according to the areas of the country or world that they serve. 5. Functional Departmentalization. Organizations are divided according to a groups functions or activities. Examples include a firms production, marketing, human resource, accounting, and finance departments. Notes: _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ ___ III. Establishing the Decision-Making Hierarchy (Use PowerPoint 6.8.) The decision-making hierarchy is created by assigning tasks, performing tasks, and distributing authority. A. Assigning Tasks: Responsibility and Authority Responsibility is the duty to perform an assigned task; authority is the power to make decisions. B. Performing Tasks: Delegation and Accountability Delegation begins when responsibility is granted to a subordinate from a supervisor; accountability falls to the subordinate, who must carry out the assigned responsibilities. C. Distributing Authority: Centralization and Decentralization (Use PowerPoint 6.9, 6.10.)

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1. Centralized Organizations. In a centralized organization, authority is held by upper-level management. 2. Decentralized Organizations. In a decentralized organization, authority is delegated to lower levels of management. 3. Tall and Flat Organizations. Tall organizations are multi-tiered, characterized by many layers of employees; flat organizations have few layers of employees. 4. Span of Control. A managers span of control is the number of people managed by one supervisor; many factors can lead to a wide or narrow span of control. D. Three Forms of Authority (Use PowerPoint 6.11.) Forms of authority result when individuals are delegated authority and responsibility in a firm. Various forms of authority may be found in any given company. 1. Line Authority. This authority flows vertically up and down the chain of command. 2. Staff Authority. This authority is found among departments of advisors and counselors, including specialists such as lawyers, engineers, accountants, and human resource personnel. These individuals aid line departments in making decisions, but do not have the authority to make final decisions. 3. Committee and Team Authority. This is the authority that is granted to committees and teams that play central roles in the firms daily operations. Employees are typically empowered to plan and organize their own work and to perform that work with minimal supervision. Notes: _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ ___

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IV.

Basic Forms of Organizational Structure (Use PowerPoint 6.12.) A. Functional Organization Often used by most small- and medium-sized firms, functional organizations divide job responsibilities by functional areas, such as marketing or finance. B. Divisional Organization Corporate divisions usually operate under this structure as relatively autonomous businesses under the larger corporate umbrella. Divisions are departments that resemble separate businesses in that they produce and market their own products. C. Matrix Organization (Use PowerPoint 6.13.) In this structure, teams are formed in which individuals report to two or more managers, usually including a line manager and a staff manager. The matrix structure is highly flexible and readily adaptable to changing circumstances. D. International Organization (Use PowerPoint 6.14.) International organizational structures have been developed in response to the need to manufacture, purchase, and sell in global markets. E. Organizational Design in the Twenty-First Century (Use PowerPoint 6.15.) 1. Boundary-less Organization. In a boundary-less organization, traditional boundaries and structure are minimized or eliminated. 2. Team Organization. Team organization relies mostly on project-type teams; people float from one project to another as dictated by their skills and the demands of the projects. 3. Virtual Organization. This organization has little or no formal structure; this organization exists only in response to its own needs.

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4. Learning Organization. The learning organization works to integrate continuous improvement with continuous employee learning and development. Notes: _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ ___ V. Informal Organization (Use PowerPoint 6.16.) A. Formal vs. Informal Organizational Systems A companys informal organization is comprised of the everyday social interactions between and among employees that transcend formal jobs and job interrelationships. 1. Informal Groups. Informal organization can be just as powerful as formal organization. 2. Organizational Grapevine. The organizational grapevine, or the rumor mill, is an informal communication structure in which people communicate through ways that transcend the formal communication processes. B. Intrapreneuring A relatively new concept, intrapreneuring is encouraged among businesses as a way of enhancing creativity and flexibility in large, bureaucratic structures. Notes: _________________________________________________________________ _________________________________________________________________ _________________________________________________________________ ___ Answers to Questions and Exercises Questions for Review 1. What is an organization chart? What purpose does it serve?

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An organization chart represents the firms structure and shows where employees fit into the hierarchy. Organization charts depict the extent of line and staff authority, departmentalization, and span of control at various levels. 2. Explain the significance of size as it relates to the organizational structure. Describe the changes that are likely to occur as an organization grows. Larger firms develop more complex organizational structures. As a firms size increases, job specialization becomes increasingly important, followed by departmentalization, and a more definitive decision-making hierarchy. 3. What is the difference between responsibility and authority? Responsibility is the duty to perform an assigned task; authority is the power to make the decisions necessary to complete that task. Responsibility and authority should be closely linked for any given assignment. 4. Why do some managers have difficulties in delegating authority? Why does this problem tend to plague smaller businesses? Some of the reasons managers have difficulty delegating authority include: (a) fear that employees cant do anything as well as they can; (b) fear that something will go wrong if someone else does it; (c) fear that that employee will show up the manager; (d) too bogged down in day-to-day activities to delegate; (e) dont know how to delegate; and (f) want to keep control. Delegating is especially difficult for small business owners because they typically began by doing everything themselves and having complete control. 5. Why is a companys informal organization important? The everyday social connections among employees can transcend formal job-related relationships, creating a very powerful dynamic that can either support or disrupt a firms effectiveness. Questions for Analysis 6. Draw up an organization chart for your college or university. Charts will vary, but students should recognize and depict the mix of customer and functional structures.

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7. Describe a hypothetical organizational structure for a small printing firm. Describe changes that might be necessary as the business grows. Answers will vary, but the firm will probably begin with a centralized structure in which the owner will either perform or oversee every job. Various types of departmentalization will probably emerge as the firm grows and it may become more decentralized as management delegates authority downward. With additional growth, the firm may advance from a functional to a divisional or matrix organization. 8. Compare and contrast the matrix and divisional approaches to organizational structure. How would you feel personally about working in a matrix organization in which you were assigned simultaneously to multiple units or groups? A divisional structure consists of corporate divisions that operate as relatively autonomous units under the larger corporate umbrella. In a matrix structure, however, group members report to two or more managers, usually one line and one staff manager. The matrix structure is often used to address specific issues on a project-by-project basis. Answers to the second question will vary, but students should address the pros and cons of reporting to more than one manager. Application Exercises 9. Interview the manager of a local service business a fast food restaurant. What types of tasks does this manager typically delegate? Is the appropriate authority also delegated in each case? Answers will vary, but managers in fast food restaurants typically delegate tasks like cleaning, cooking, serving, etc. Depending on the size of the business, ordering, scheduling, and payroll functions may be delegated as well. 10. Using books, magazines, or personal interviews, identify a person who has succeeded as an intrapreneur. In what ways did the structure of the intrapreneurs company help this individual succeed? In what ways did the structure pose problems? Students answers will vary, but they will probably find that intrapreneurs are most likely to succeed in flexible environments with managers who are open to innovation and willing to reward creativity. Answers to Exercising Your Ethics 1. What are the ethical issues in this situation?

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The ethical issues revolve around the employees responsibility to the company. While he claims that he is not using company resources directly, he is using an extra hour of company time. In addition, he is assuming no conflict of interest, but without directly discussing the issue with his manager he cannot be sure. 2. What do you think most people would do in this situation? Answers will vary. 3. What would you do in this situation? Answers will vary. Answers to Building Your Business Skills 1. With the average computer programmer earning nearly $75,000, and with all competitive firms paying top dollar, why might organizational issues be critical in determining employee loyalty? Dissatisfied employees can obtain other jobs easily, so firms will try to limit turnover by creating the most possible satisfactory work environment. 2. If you were a programmer, what organizational factors would make a difference to you? Why? Answers will vary, but possibilities include variety of job tasks, degree of decision-making authority, international involvement, and job related benefits. 3. As the company founder, how willing would you be to make major organizational changes in light of the shortage of qualified programmers? Answers will vary, but students should demonstrate awareness that without making the changes needed to retain qualified programmers, the business is unlikely to thrive long-term. Classroom Activities 1. Diagram various examples of organization charts on the board or overhead. Ask students to identify various characteristics about each organization that could possibly be observed by looking at the organization chart. For example, students should be able to observe a long/tall vs. short/flat structure, span of control, departmentalization,

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perhaps decentralized vs. centralized decision making, chain of command, etc. 2. Numerous exercises could be conducted to illustrate the grapevine. Divide the class into groups of three. Ask Group #1 to explain either a process or an idea to Group #2, secluded in a room away from all other groups. Bring in Group #3, asking Group #2 to explain the same process or idea. Then, bring in Group #4, asking Group #3 to explain the process or idea. After all groups have presented the topic, ask the final group to present what they have just heard. Ask the class to explain how the process or idea changed from one group to the next as it was being presented.

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