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Chapter 17 - Organizational Design, Effectiveness, and Innovation
17-1
CHAPTER SEVENTEEN: Organizational Design, Effectiveness, and Innovation
LEARNING OJBECTIVES
See Slides 17-2, 17-3
When you finish studying the material in this chapter, you should be able to:
• Describe the four characteristics common to all organizations, and explain the
difference between closed and open systems.
• Define the term learning organization.
• Review the factors that hinder an organization’s ability to learn from success and
failure.
• Describe seven basic ways organizations are structured.
• Discuss Burns and Stalker’s findings regarding mechanistic and organic
organizations.
• Identify when each of the seven organization structures is the right fit.
• Describe the four generic organizational effectiveness criteria.
• Discuss the difference between innovation, invention, creativity, and integration.
• Review the myths about innovation.
• Explain the model of innovation.
CHAPTER SUMMARY
Chapter 17 defines organizations and describes the dimensions of organizational
structure. It contrasts open versus closed systems and describes learning
organizations. The concept of organizational design is addressed and traditional
approaches to organizational design are contrasted with collaborative and open
boundary approaches. The contingency approach to designing organizations is
addressed and mechanistic versus organic organizations are contrasted. Each of the
organization structures has its advantages and disadvantages and it is important for
managers to use an appropriate structure to get the right fit. Four generic
organizational-effectiveness criteria of goal accomplishment, resource acquisition,
internal process and strategic constituencies satisfaction are discussed. Finally,
Chapter 17 - Organizational Design, Effectiveness, and Innovation
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organizational innovation is discussed, including the seeds, challenges, and nutrients of
innovation.
An organization is defined as a system of consciously coordinated activities or forces of
two or more persons. All organizations have in common: coordination of effort, a
common goal, division of labor, and a hierarchy of authority. These four factors
represent the organization’s structure. Traditionally, managers have maintained the
hierarchy of authority by adhering to the unity of command principle that specifies that
each employee should report to only one manager. An organization chart is a graphic
representation of formal authority and division of labor relationships. It indicates the
hierarchy of authority, division of labor, span of control, and line and staff positions.
Span of control refers to the number of people reporting directly to a given individual. A
closed system is a relatively self-sufficient entity while an open system must constantly
interact with the environment to survive.
A learning organization is one that proactively creates, acquires, and transfers
knowledge and that changes its behavior on the basis of new knowledge and insights.
Learning organizations actively try to infuse their organizations, and associated team
mental models, with new ideas and information. Learning organizations strive to reduce
structural, process, and interpersonal barriers to the sharing of information, ideas, and
knowledge among organizational members. Organizations can learn from their
successes and their failures. Factors that impede learning from success are the self-
serving bias, the decision-making bias of overconfidence, and the natural tendency of
“not asking why” we succeeded at something. Table 17-1 identifies factors that detract
from an organization’s ability to learn from failure. Creating a learning infrastructure
requires the use of evidence-based decision making.
Organizational design refers to the structures of accountability and responsibility used to
develop and implement strategies, and the human resource practices and information
and business processes that activate those structures. There are seven basic ways
organizations are structured. Traditional designs include functional structures, in which
work is divided according to function; divisional structures, in which work is divided
according to product or customer type or location; and matrix structures, with dual
reporting structures based on division and function. Organizations may be designed
horizontally, with cross-functional teams responsible for entire processes. Organization
design also may reduce barriers between organizations, creating hollow organizations
that outsource functions; modular organizations that outsource the production of a
product’s components; or virtual organizations that temporarily combine the efforts of
members of different companies in order to complete a project.
The contingency approach to organization design contends that organizations tend to
be more effective when they are structured to fit the demands of the situation.
Mechanistic organizations are rigid, command-and-control bureaucracies with strict
rules, narrowly defined tasks, and top-down communication. Organic organizations are
fluid and flexible networks of multitalented individuals who perform a variety of tasks.
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Mechanistic versus organic is a matter of degree as organizations tend to be relatively
mechanistic or relatively organic rather than pure forms of either approach. Decision
making tends to be centralized in mechanistic organizations and decentralized in
organic organizations. Even though mechanistic structures may alienate some
employees, both mechanistic and organic structures have their place and not all
organizations can or should be organic.
Each of the organizational designs has situations when it is most likely to be effective.
The clear roles and strict hierarchy of a mechanistic organization are beneficial when
careful routines and a set of checks and balances are important. In a fast-changing
environment with a great deal of uncertainty, an organization would benefit from a more
organic structure. The benefits of a functional structure are easiest to realize in a stable
environment. Divisional structures increase employees’ focus on customers and
products. The matrix organization requires superior managers who communicate
extensively, foster commitment and collaboration, manage conflict, and negotiate
effectively to establish goals and priorities consistent with the organization’s strategy.
Horizontal designs are a good fit when specialization is less important than the ability to
respond to varied or changing customer needs. Organizations that open their
boundaries to become hollow, modular, or virtual work best when the organizations
have suitable partners they trust; efficiency is very important; and the organization can
identify functions, processes, or product components to outsource profitably.
Figure 17-4 illustrates four ways to assess organizational effectiveness, which can be
used in varying combinations. No single approach is appropriate in all circumstances or
for all organizations. The first approach, goal accomplishment, is the most widely used.
Key organizational results or outputs are compared with previously stated objectives.
Effectiveness is measured by how well the organization meets or exceeds its goals.
According to the second approach, resource acquisition, an organization is effective if it
acquires necessary factors of production. The internal processes criterion measures
the extent to which the organization functions smoothly with a minimum of internal strain
and the extent to which the organization achieves its standards for innovation, customer
service, operational excellence and being a good corporate citizen. Finally, the
strategic constituencies satisfaction approach considers the extent to which the
demands and expectations of key interest groups (i.e., strategic constituencies) are at
least minimally satisfied. A strategic constituency is any group of people with a stake in
the organization’s operation or success. These strategic constituencies generally have
competing or conflicting interests and it is up to management to balance the opposing
demands. Managers must use an appropriate combination of effectiveness criteria
when assessing the effectiveness of their firm, as no single criterion is always
appropriate.
There are 16 early warning signs of organizational decline. Managers who monitor
these early warning signs are better able to take corrective action in a timely and
effective manner. Organizational problems may be attributed to external causes when
Chapter 17 - Organizational Design, Effectiveness, and Innovation
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there has been little turnover among top executives, while internal attributions of
organizational problems tend to be made by top management teams with many new
members.
Innovation is creation of something new that is used by consumers. Successful
innovation relies on invention, creativity, and integration. Innovation is a time-
consuming activity that takes hard work and dedication—it does not need to involve an
epiphany or eureka moment. The success of innovation is unpredictable and the
process cannot be systematized. Figure 17-6 illustrates that the seeds, challenges, and
nutrients of innovation influence the benefits of innovation. There are six seeds of
innovation and eight challenges of innovation profiled in the chapter. The nutrients of
innovation are an organization’s culture, its leadership, its people, and the ability to
execute. Organizations are more likely to experience the benefits of innovation when
the dynamic interplay between the seeds and challenges of innovation are supported
and reinforced by the nutrients of innovation. The ability to execute ultimately makes or
breaks an organization’s attempts at bringing new products and services to market
since the consumer in the end determines what is and what is not an innovative product
or service.
Lecture Outline
I. Organizations: Definition and Perspectives
i) What Is an Organization?
(1) Organization: system of consciously coordinated activities of two or more
people. See Slide 17-4
(2) Common denominators of all organizations: coordination of effort, a
common goal, division of labor, and a hierarchy of authority. See
Slide 17-5
(3) Coordination of effort is achieved through formulation and enforcement of
policies, rules, and regulations.
(4) Division of labor occurs when the common goal is pursued by individuals
performing different but related tasks.
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(5) The hierarchy of authority, also called the chain of command, is a control
mechanism dedicated to making sure the right people do the right things
at the right time.
(6) Unity of command principle: each employee should report to a single
manager. See Slide 17-6
ii) Organization Charts See Slide 17-9
(1) Organization Charts Overview
(a) Organization chart: a graphic representation of formal authority and
division of labor relationships. See Slide 17-8
(b) Figure 17-1: Sample Organization Chart for a Hospital reveals four
basic dimensions of organizational structure. See Slide 17-10
(2) Hierarchy of Authority
(a) The formal hierarchy of authority delineates who reports to whom and
delineates the official communication network.
(3) Division of Labor
(a) At each successively lower level in the organization, jobs become
more specialized.
(4) Spans of Control
(a) Span of control: the number of people reporting directly to a given
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manager. See Slide 17-11
(b) Organization theorists have not arrived at a consensus regarding the
ideal span of control.
(c) The Real World/Real People: Companies Have Different Views
about the Optimum Span of Control profiles companies with varying
spans of control.
(d) The narrower the span of control, the closer the supervision and the
higher the administrative costs as a result of a higher manager-to-
worker ratio.
(e) Recent emphasis on leanness and administrative efficiency dictates
spans of control as wide as possible but guarding against inadequate
supervision and lack of coordination.
(f) Wider spans also complement the trend toward greater worker
autonomy and empowerment.
(5) Line and Staff Positions See Slide 17-12
(a) Staff personnel: provide research, advice, and recommendations to
line managers.
(b) Line managers: have authority to make organizational decisions.
(c) Line positions generally are connected by solid lines on organization
charts while dotted lines indicate staff relationships.
(d) Modern trends such as cross-functional teams and reengineering are
blurring the distinction between line and staff.
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iii) An Open-System Perspective of Organizations See Slide 17-13
(1) Closed system: a relatively self-sufficient entity; one that is closed to its
surrounding environment.
(2) Open system: organism that must constantly interact with its environment
to survive.
(3) Open systems are capable of self-correction, adaptation, and growth,
thanks to characteristics such as homeostasis and feedback control.
(4) Moving away from the historical perspective that organizations are closed
systems, current thinking is that organizations are open systems and
dependent on the external environment for survival.
(5) Figure 17-2: The Organization as an Open System reveals the
organization to be a living organism that transforms inputs into various
outputs. See Slide 17-14
iv) Learning Organizations
(1) Learning Organization Overview
(a) Organizations are said to have human-like cognitive functions, such as
the abilities to perceive and interpret, solve problems, store
information, and learn from experience.
(b) Learning organization: one that proactively creates, acquires, and
transfers knowledge and that changes its behavior on the basis of new
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knowledge and insights. See Slide 17-15
(c) Team mental model: represents team members’ shared, organized
understanding and mental representation of knowledge about key
elements of the team’s relevant environment. See Slide 17-15
(d) Learning organizations actively try to infuse their organizations, and
associated team mental models, with new ideas and information.
(e) Learning organizations strive to reduce structural, process, and
interpersonal barriers to the sharing of information, ideas, and
knowledge among organizational members.
(2) Learning from Success
(a) Success provides the opportunity to learn what an organization did
right in terms of accomplishing a goal or implementing a project.
(b) Factors that impede learning from success are the self-serving bias,
the decision-making bias of overconfidence, and the natural tendency
of “not asking why” we succeeded at something.
(3) Learning from Failure
(a) Managers can learn from their mistakes and failure, but many
organizations and managers don’t make a point to learn from failure.
(b) Table 17-1: Factors That Detract from an Organization’s Ability to
Learn from Failure identifies factors that influence the extent to which
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organizations learn from failure. See Slide 17-16
(c) A recent study on organizational learning indicated that organizations
learned from both success and failure, but learning was stronger and
longer lasting when it was based on failure.
(4) Creating a Learning Infrastructure
(a) The following four-step process for developing a learning infrastructure
is recommended:
(i) First, organizations which focus on execution-as-learning use the
best knowledge obtainable to inform the design of specific process
guidelines.
(ii) Second, they enable their employees to collaborate by making
information available when and where it’s needed.
(iii)Third, they routinely capture process data to discover how work is
really being done.
(iv)Finally, they study these data in an effort to find ways to improve.
(b) This process requires the use of evidence-based decision making.
(c) The Real World/Real People: Admiral Thad Allen Changed Mental
Models When Dealing with the Aftermath of Hurricane Katrina
profiles someone who tried to create a learning organization.
II. Organization Design
i) Organization Design Overview
(1) Organizational design: the structures of accountability and responsibility
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used to develop and implement strategies, and the human resource
practices and information and business processes that activate those
structures. See Slide 17-17
(2) Organizations are more effective or successful when their structure
supports the execution of corporate strategies.
(3) Changes in organizational design frequently produce bad results.
(4) There are seven fundamental types of organizational structures.
(5) Traditional designs rely on vertical hierarchy and attempt to define clear
departmental boundaries and reporting relationships.
ii) Traditional Designs See Slide 17-18
(1) Functional Structure
(a) A functional structure groups people according to the business
functions they perform, for example, manufacturing, marketing, and
finance.
(b) This arrangement puts together people who are experts in the same or
similar activities.
(2) Divisional Structure
(a) In a divisional structure, the organization groups together activities
related to outputs, such as type of product or type (or location) of
customer.
(b) The people in a division can become experts at making a particular
type of product or serving the particular needs of their customer group
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or geographic area.
(3) Matrix Structure
(a) A matrix structure combines functional and divisional chains of
command to form a grid with two command structures, one shown
vertically according to function, and the other shown horizontally, by
product line, brand, customer group, or geographic region. See
Slide 17-19
(b) Figure 17-3: Matrix Structure presents a matrix structure. See
Slide 17-20
iii) Focus on Collaboration: Horizontal Design
(1) Organizations that want people to share knowledge and continually
improve the way things are done emphasize horizontal relationships more
than vertical relationships characteristic of a traditional organizational
design.
(2) The horizontal approach to organizational design tends to focus on work
processes—every task and responsibility needed to meet a customer
need.
(3) Experts in organization design have identified five principles for designing
a horizontal organization: See Slide 17-21
(a) Organize around complete workflow processes rather than tasks.
(b) Flatten hierarchy and use teams to manage everything.
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(c) Appoint process team leaders to manage internal team processes.
(d) Let supplier and customer contact drive performance.
(e) Provide required expertise from outside the team as required.
iv) Designs that Open Boundaries between Organizations
(1) Open Boundaries Overview
(a) Some structures are based on the idea that not even barriers between
organizations are ideal because sometimes organizations can perform
better by creating structures in which they can pool their resources to
work toward a shared goal.
(b) The result of opening boundaries between organizations may be a
hollow, modular, or virtual organization.
(2) Hollow Structure See Slide 17-22
(a) A hollow organization results from strategic application of the trend
toward outsourcing.
(b) A hollow organization results when a company only performs the
functions the organization can do better and more profitably than other
organizations and outsources the remaining functions to outside firms.
(3) Modular Structure See Slide 17-22
(a) A modular organization outsources parts of a product and is
responsible for ensuring that the parts meet quality requirements, that
the parts arrive in a timely fashion, and that the organization is capable
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of efficiently combining the parts into the final whole.
(4) Virtual Structure
(a) A virtual organization exists when separate companies work jointly
toward a common goal, such as developing a new product or entering
a new market. See Slide 17-24
(b) Members of virtual organizations use information communication
technologies rather than rely heavily on face-to-face meetings.
III. The Contingency Approach to Designing Organizations
i) Contingency Approach Overview See Slide 17-25
(1) Contingency approach to organization design: organizations tend to
be more effective when they are structured to fit the demands of the
situation.
(2) Each of the seven organizational designs has situations when it is most
likely to be effective.
ii) Mechanistic versus Organic Organizations See Slide 17-26
(1) Mechanistic versus Organic Overview
(a) Tom Burns and G M Stalker drew a very instructive distinction between
what they called mechanistic and organic organizations.
(b) Mechanistic organizations: rigid, command-and-control
bureaucracies with strict rules, narrowly defined tasks, and top-down
communication.
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(c) A mechanistic organization generally would have one of the traditional
organization designs.
(d) The “orderliness” of mechanistic structures is expected to produce
reliability and consistency in internal processes, thereby resulting in
higher efficiency, quality, and timeliness.
(e) The Real World/Real People: Has Toyota Become Too
Mechanistic? profiles the dangers of mechanistic structures.
(f) Organic organization: a fluid and flexible network of multitalented
individuals who perform a variety of tasks.
(g) The qualities of an organic organization are easiest to maintain with
the lowered boundaries of horizontal and virtual organizations.
(2) A Matter of Degree
(a) Table 17-2: Characteristics of Mechanistic and Organic
Organizations contrasts mechanistic and organic organizations on
eight dimensions. See Slide 17-27
(b) Each of the mechanistic-organic characteristics is a matter of degree.
(c) Organizations tend to be relatively mechanistic or relatively organic,
and pure types are rare.
(3) Different Approaches to Decision Making See Slide 17-28
(a) Centralized decision making: when key decisions are made by top
management.
Chapter 17 - Organizational Design, Effectiveness, and Innovation
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(b) Decentralized decision making: when lower-level managers make
important decisions.
(c) Decision making tends to be centralized in mechanistic organizations
and decentralized in organic organizations.
(d) Generally, centralized organizations are more tightly controlled, while
decentralized organizations are more adaptive to changing situations.
(e) The challenge is to achieve a workable balance between the two
approaches.
(4) Practical Research Insights
(a) Research by Burns and Stalker demonstrated that one type is not
superior to the other as each type has its appropriate place depending
on the environment.
(i) When the environment was relatively stable and certain,
organizations tended to be mechanistic.
(ii) Organic organizations tended to be successful ones when the
environment was unstable and uncertain.
(b) A study of 42 voluntary church organizations demonstrated that as the
organizations became more mechanistic (more bureaucratic), the
intrinsic motivation of their members decreased.
(c) Command-and-control (downward) communication was used in a
mechanistic factory, while consultative or participative (two-way)
communication prevailed in an organic factory.
