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10 chapter Let’s Get Real: Meet the Manager Cindy Brewer Customer Contact Channel Manager Sears Holdings Corporation Loves Park, IL MY JOB: You’ll be hearing more from this real manager throughout the chapter. I am a customer contact channel manager at Sears Holdings Corporation, and my main focus is on process improvement. BEST PART OF MY JOB: Being able to drive process improvements that positively impact the customer and employee experience as well as increase revenue and reduce costs. Basic Organizational Design 10.1 10.2 10.3 10.4 Describe six key elements in organizational design. page 264 Contrast mechanistic and organic structures. page 273 Discuss the contingency factors that favor either the mechanistic model or the organic model of organizational design. page 274 Describe traditional organizational designs. page 277 LEARNING OUTCOMES WORST PART OF MY JOB: The inability to fix everything at once. BEST MANAGEMENT ADVICE EVER RECEIVED: The definition of insanity is doing the same thing over and over while expecting different results. Also, tell the truth always and be responsible. 263 A Manager’s Dilemma $10 billion. That’s how much Eli Lilly & innovation and how to make [product develop- Co. stands to lose in annual revenues ment] pipelines more productive.” Developing new between now and 2016 as three of its products and moving them forward as quickly as major drug patents expire.1 Replac- possible on the thorough and mandatory approval ing that revenue is high on the list of process, which can be agonizingly slow, is critical “must-do’s” for CEO John Lechleiter. to the company’s present and future success. The solution is speeding up the pace One action Lechleiter took was revamping the of drug development, but his chal- company’s operational structure into five global lenge is how? business units: oncology, diabetes, established mar- Unlike its global competitors that kets, emerging markets, and animal health. Part of have addressed similar product de- the restructuring also involved creating an improved velopment challenges by using product research and development center. Now, large-scale mergers and acquisi- what other organizational design elements might tions, Lechleiter’s focus has been on Lechleiter use to ensure that Lilly achieves its goal of acquiring smaller drug companies. speeding up its product development process? He said large-scale combinations “provide short-term relief but don’t fundamentally address the issue of What Would You Do? Replacing $10 billion in revenue can’t and won’t be easy. However, Lilly’s CEO, John Lechleiter, understands the importance of organizational structure and design, especially when it comes to the difficult product development challenges facing his company. His initial restructuring actions are ones that many companies undergo when faced with radical environmental challenges in an attempt to become a stronger, more successful organization. His actions also illustrate the importance of designing or redesigning a structure that helps an organization accomplish its goals efficiently and effectively. In this chapter, we’ll look at what’s involved with that. LEARNING OUTCOME Describe six key elements in organizational design. 264 10.1 Designing Organizational Structure A short distance south of McAlester, Oklahoma, employees in a vast factory complex make products that must be perfect. These people “are so good at what they do and have been doing it for so long that they have a 100 percent market share.”2 They make bombs for the U.S. military and doing so requires a work environment that’s an interesting mix of the mundane, structured, and disciplined, coupled with high levels of risk and emotion. The work gets done efficiently and effectively here. Work also gets done efficiently and effectively at Cisco Systems although not in such a structured and formal way. At Cisco, some 70 percent of the employees work from home at least 20 percent of the time.3 Both of these organizations get needed work done although each does so using a different structure. Few topics in management have undergone as much change in the past few years as that of organizing and organizational structure. Managers are reevaluating traditional approaches to find new structural designs that best support and facilitate employees’ doing the organization’s work—designs that can achieve efficiency but are also flexible. The basic concepts of organization design formulated by early management writers, such as Henri Fayol and Max Weber, offered structural principles for managers to follow. (Those principles are described on pp. 31–32.) Over 90 years have passed since many of those principles were originally proposed. Given that length of time and all the changes that have taken place, you’d think that those principles would be pretty worthless today. Surprisingly, they’re not. For the most part, they still provide valuable insights into designing effective and efficient organizations. Of course, we’ve also gained a great deal of knowledge over the years as to their limitations. CHAPTER 10 | BASIC ORGANIZATIONAL DESIGN EXHIBIT • • • • • • • Divides work to be done into specific jobs and departments. Assigns tasks and responsibilities associated with individual jobs. Coordinates diverse organizational tasks. Clusters jobs into units. Establishes relationships among individuals, groups, and departments. Establishes formal lines of authority. Allocates and deploys organizational resources. 265 10-1 Purposes of Organizing In Chapter 1 we defined organizing as arranging and structuring work to accomplish organizational goals. It’s an important process during which managers design an organization’s structure. Organizational structure is the formal arrangement of jobs within an organization. This structure, which can be shown visually in an organizational chart, also serves many purposes. (See Exhibit 10-1.) When managers create or change the structure, they’re engaged in organizational design, a process that involves decisions about six key elements: work specialization, departmentalization, chain of command, span of control, centralization and decentralization, and formalization.4 Work Specialization At the Wilson Sporting Goods factory in Ada, Ohio, 150 workers (with an average tenure exceeding 20 years) make every football used in the National Football League and most of those used in college and high school football games. To meet daily output goals, the workers specialize in job tasks such as molding, stitching and sewing, lacing, and so forth.5 This is an example of work specialization, which is dividing work activities into separate job tasks. Individual employees “specialize” in doing part of an activity rather than the entire activity in order to increase work output. It’s also known as division of labor, a concept we introduced in the management history module. Work specialization makes efficient use of the diversity of skills that workers have. In most organizations, some tasks require highly developed skills; others can be performed by employees with lower skill levels. If all workers were engaged in all the steps of, say, a manufacturing process, all would need the skills necessary to perform both the most demanding and the least demanding jobs. Thus, except when performing the most highly skilled or highly sophisticated tasks, employees would be working below their skill levels. In addition, skilled workers are paid more than unskilled workers, and, because wages tend to reflect the highest level of skill, all workers would be paid at highly skilled rates to do easy tasks—an inefficient use of resources. This concept explains why you rarely find a cardiac surgeon closing up a patient after surgery. Instead, doctors doing their residencies in openheart surgery and learning the skill usually stitch and staple the patient after the surgeon has finished the surgery. Early proponents of work specialization believed that it could lead to great increases in productivity. At the beginning of the twentieth century, that generalization was reasonable. Because specialization was not widely practiced, its introduction almost always generated higher productivity. But, as Exhibit 10-2 illustrates, a good thing can be carried too far. At some point, the human diseconomies from division of labor—boredom, fatigue, stress, low productivity, poor quality, increased absenteeism, and high turnover—exceed the economic advantages.6 organizing organizational chart work specialization Arranging and structuring work to accomplish the organization’s goals The visual representation of an organization’s structure Dividing work activities into separate job tasks organizational structure organizational design The formal arrangement of jobs within an organization Creating or changing an organization’s structure 266 PART FOUR EXHIBIT | ORGANIZING 10-2 Economies and Diseconomies of Work Specialization High Productivity Impact from human diseconomies Impact from economies of specialization Low Low High Work Specialization TODAY’S VIEW. Most managers today continue to see work specialization as important because it helps employees be more efficient. For example, McDonald’s uses high work specialization to get its products made and delivered to customers efficiently and quickly— that’s why it’s called “fast” food. One person takes orders at the drive-through window, others cook and assemble the hamburgers, another works the fryer, another gets the drinks, another bags orders, and so forth. Such single-minded focus on maximizing efficiency has contributed to increasing productivity. In fact, at many McDonald’s, you’ll see a clock that times how long it takes employees to fill the order; look closer and you’ll probably see posted somewhere an order fulfillment time goal. At some point, however, work specialization no longer leads to productivity. That’s why companies such as Avery-Dennison, Ford Australia, Hallmark, and American Express use minimal work specialization and instead give employees a broad range of tasks to do. Departmentalization Does your college have a department of student services or financial aid department? Are you taking this course through a management department? After deciding what job tasks will be done by whom, common work activities need to be grouped back together so work gets done in a coordinated and integrated way. How jobs are grouped together is called departmentalization. Five common forms of departmentalization are used, although an organization may develop its own unique classification. (For instance, a hotel might have departments such as front desk operations, sales and catering, housekeeping and laundry, and maintenance.) Exhibit 10-3 illustrates each type of departmentalization as well as the advantages and disadvantages of each. TODAY’S VIEW. Most large organizations continue to use combinations of most or all of these types of departmentalization. For example, a major Japanese electronics firm organizes its divisions along functional lines, its manufacturing units around processes, its sales units around seven geographic regions, and its sales regions into four customer groupings. Black & Decker organizes its divisions along functional lines, its manufacturing units around processes, its sales around geographic regions, and its sales regions around customer groupings. EXHIBIT 10-3 The Five Common Forms of Departmentalization departmentalization The basis by which jobs are grouped together 267 268 PART FOUR | ORGANIZING One popular departmentalization trend is the increasing use of customer departmentalization. Because getting and keeping customers is essential for success, this approach works well because it emphasizes monitoring and responding to changes in customers’ needs. Another popular trend is the use of teams, especially as work tasks have become more complex and diverse skills are needed to accomplish those tasks. One specific type of team that more organizations are using is a cross-functional team, which is a work team composed of individuals from various functional specialties. For instance, at Ford’s material planning and logistics division, a cross-functional team of employees from the company’s finance, purchasing, engineering, and quality control areas, along with representatives from outside logistics suppliers, has developed several work improvement ideas.7 We’ll discuss crossfunctional teams (and all types of teams) more fully in Chapter 13. Chain of Command Suppose you were at work and had a problem with some issue that came up. What would you do? Who would you go to help you resolve that issue? People need to know who their boss is. That’s what the chain of command is all about. The chain of command is the line of authority extending from upper organizational levels to lower levels, which clarifies who reports to whom. Managers need to consider it when organizing work because it helps employees with questions such as “Who do I report to?” or “Who do I go to if I have a problem?” To understand the chain of command, you have to understand three other important concepts: authority, responsibility, and unity of command. Let’s look first at authority. AUTHORITY. Authority was a major concept discussed by the early management writers; they viewed it as the glue that held an organization together. Authority refers to the rights inherent in a managerial position to tell people what to do and to expect them to do it.8 Managers in the chain of command had authority to do their job of coordinating and overseeing the work of others. Authority could be delegated downward to lower-level managers, giving them certain rights while also prescribing certain limits within which to operate. These writers emphasized that authority was related to one’s position within an organization and had nothing to do with the personal characteristics of an individual manager. They assumed that the rights and power inherent in one’s formal organizational position were the sole source of influence and that if an order was given, it would be obeyed. Another early management writer, Chester Barnard, proposed another perspective on authority. This view, called the acceptance theory of authority, says that authority comes from the willingness of subordinates to accept it.9 If an employee didn’t accept a manager’s Early management writer Chester Barnard proposed that authority comes from the willingness of subordinates to accept it. The Jamba Juice employees shown here (in white T-shirts) illustrate Barnard’s acceptance theory of authority by putting their raised hands together with their manager as a sign of unity following a business meeting. Barnard’s view of authority contends that subordinates will accept orders when they understand the order, when they view the order as being consistent with the organization’s purpose, when the orders do not conflict with their personal beliefs, and when they are able to perform the task as directed. CHAPTER 10 | BASIC ORGANIZATIONAL DESIGN 269 order, there was no authority. Barnard contended that subordinates will accept orders only if the following conditions are satisfied: 1. 2. 3. 4. They understand the order. They feel the order is consistent with the organization’s purpose. The order does not conflict with their personal beliefs. They are able to perform the task as directed. Barnard’s view of authority seems to make sense, especially when it comes to an employee’s ability to do what he or she is being told to do. For instance, if my manager (my department chair) came into my classroom and told me to do open-heart surgery on one of my students, the traditional view of authority said that I would have to follow that order. Barnard’s view would say, instead, that I would talk to my manager about my lack of education and experience to do what he’s asked me to do and that it’s probably not in the best interests of the student (or our department) for me to follow that order. Yes, this is an extreme—and highly unrealistic—example. However, it does point out that simply viewing a manager’s authority as total control over what an employee does or doesn’t do is unrealistic also, except in certain circumstances like the military where soldiers are expected to follow their commander’s orders. However, do understand that Barnard believed most employees would do what their managers asked them to do if they were able to do so. The early management writers also distinguished between two forms of authority: line authority and staff authority. Line authority entitles a manager to direct the work of an employee. It is the employer–employee authority relationship that extends from the top of the organization to the lowest echelon, according to the chain of command, as shown in Exhibit 10-4. As a link in the chain of command, a manager with line authority has the right to direct the work of employees and to make certain decisions without consulting anyone. Of course, in the chain of command, every manager is also subject to the authority or direction of his or her superior. EXHIBIT Chain of Command and Line Authority Chief Executive Officer Executive Vice President District A 10-4 Executive Vice President President Vice President Vice President Vice President Vice President Vice President Region 1 Region 2 Region 3 Region 4 Region 5 District B District C District D District E District F District G cross-functional team authority line authority A work team composed of individuals from various functional specialties The rights inherent in a managerial position to tell people what to do and to expect them to do it Authority that entitles a manager to direct the work of an employee chain of command acceptance theory of authority The line of authority extending from upper organizational levels to the lowest levels, which clarifies who reports to whom The view that authority comes from the willingness of subordinates to accept it 270 PART FOUR | ORGANIZING Keep in mind that sometimes the term line is used to differentiate line managers from staff managers. In this context, line refers to managers whose organizational function contributes directly to the achievement of organizational objectives. In a manufacturing firm, line managers are typically in the production and sales functions, whereas managers in human resources and payroll are considered staff managers with staff authority. Whether a manager’s function is classified as line or staff depends on the organization’s objectives. For example, at Staff Builders, a supplier of temporary employees, interviewers have a line function. Similarly, at the payroll firm of ADP, payroll is a line function. As organizations get larger and more complex, line managers find that they do not have the time, expertise, or resources to get their jobs done effectively. In response, they create staff authority functions to support, assist, advise, and generally reduce some of their informational burdens. For instance, a hospital administrator who cannot effectively handle the purchasing of all the supplies the hospital needs creates a purchasing department, which is a staff function. Of course, the head of the purchasing department has line authority over the purchasing agents who work for him. The hospital administrator might also find that she is overburdened and needs an assistant, a position that would be classified as a staff position. Exhibit 10-5 illustrates line and staff authority. RESPONSIBILITY. When managers use their authority to assign work to employees, those employees take on an obligation to perform those assigned duties. This obligation or expectation to perform is known as responsibility. And employees should be held accountable for their performance! Assigning work authority without responsibility and accountability can create opportunities for abuse. Likewise, no one should be held responsible or accountable for work tasks over which he or she has no authority to complete those tasks. UNITY OF COMMAND. Finally, the unity of command principle (one of Fayol’s 14 management principles) states that a person should report to only one manager. Without unity of command, conflicting demands from multiple bosses may create problems as it did for Damian Birkel, a merchandising manager in the Fuller Brands division of CPAC, Inc. He found himself reporting to two bosses—one in charge of the department-store business and the other in charge of discount chains. Birkel tried to minimize the conflict by making a combined to-do list that he would update and change as work tasks changed.10 TODAY’S VIEW. Although early management theorists (Fayol, Weber, Taylor, Barnard, and others) believed that chain of command, authority (line and staff), responsibility, and unity of EXHIBIT 10-5 Line Versus Staff Authority Executive Director Line authority Assistant to the Executive Director Staff authority Director of Human Resources Director of Operations Director of Purchasing Unit 1 Manager Other Human Resources Operations Other Directors Unit 2 Manager Purchasing Human Resources Operations Purchasing Other CHAPTER 10 | BASIC ORGANIZATIONAL DESIGN command were essential, times have changed.11 Those elements are far less important today. For example, at the Michelin plant in Tours, France, managers have replaced the top-down chain of command with “birdhouse” meetings, in which employees meet for five minutes at regular intervals throughout the day at a column on the shop floor and study simple tables and charts to identify production bottlenecks. Instead of being bosses, shop managers are enablers.12 Information technology also has made such concepts less relevant today. Employees can access information that used to be available only to managers in a matter of a few seconds. It also means that employees can communicate with anyone else in the organization without going through the chain of command. Also, many employees, especially in organizations where work revolves around projects, find themselves reporting to more than one boss, thus violating the unity of command principle. However, such arrangements can and do work if communication, conflict, and other issues are managed well by all involved parties. Span of Control How many employees can a manager efficiently and effectively manage? That’s what span of control is all about. The traditional view was that managers could not—and should not— directly supervise more than five or six subordinates. Determining the span of control is important because to a large degree, it determines the number of levels and managers in an organization—an important consideration in how efficient an organization will be. All other things being equal, the wider or larger the span, the more efficient an organization is. Here’s why. Assume two organizations, both of which have approximately 4,100 employees. As Exhibit 10-6 shows, if one organization has a span of four and the other a span of eight, the organization with the wider span will have two fewer levels and approximately 800 fewer managers. At an average manager’s salary of $42,000 a year, the organization with the wider span would save over $33 million a year! Obviously, wider spans are more efficient in terms of cost. However, at some point, wider spans may reduce effectiveness if employee performance worsens because managers no longer have the time to lead effectively. TODAY’S VIEW. The contemporary view of span of control recognizes that there is no magic number. Many factors influence the number of employees that a manager can efficiently and effectively manage. These factors include the skills and abilities of the manager and the EXHIBIT Organizational Level Members at Each Level Contrasting Spans of Control (Highest) Assuming Span of 4 Assuming Span of 8 1 2 3 4 5 6 7 1 4 16 64 256 1,024 4,096 1 8 64 512 4,096 (Lowest) Span of 4: Employees: = 4,096 Managers (level 1–6) = 1,365 Span of 8: Employees: = 4,096 Managers (level 1–4) = 585 staff authority unity of command Positions with some authority that have been created to support, assist, and advise those holding line authority The management principle that each person should report to only one manager responsibility The number of employees a manager can efficiently and effectively manage The obligation or expectation to perform any assigned duties 10-6 span of control 271