978-0134728391 Chapter 6 Part 1

Chapter 6: Organizing the Business

Chapter Overview

Like a thumbprint, every organization has a unique structure. Some new business start-ups begin

with a simple structure and over time evolve into an elaborate structure. All organizational

structures change, but some change more quickly than others.

This chapter presents the building blocks of organizational structure—specialization and

departmentalization. It also describes centralization and decentralization, delegation, and

authority as the key ingredients in establishing the decision-making hierarchy. Along the way,

the chapter looks at the differences among functional, divisional, matrix, and international

organizational structures and examines the most popular new forms of organizational design.

Finally, the chapter explores the informal organization and intrapreneuring.

Learning Objectives

6-1. Discuss the factors that influence a firm’s organizational structure.

6-3. Describe centralization and decentralization, delegation, and authority as the key

ingredients in establishing the decision-making hierarchy.

6-4. Explain the differences among functional, divisional, matrix, and international

6-5. Describe the informal organization and discuss intrapreneuring.

LIST OF IN-CLASS ACTIVITIES: INSTRUCTOR’S CHOICE

Activity

Description

Time Limit

1. Ice-Breaker:

Organizational

Structure

Students consider their college’s

organizational chart and chain of

command and discuss the relationships of

the layers of management and why the

organizational chart is specifically

structured the way that it is.

30 min.

2. Small-Group

Discussion:

Centralization versus

Decentralization

Students consider the advantages of

centralization and decentralization.

30 min.

3. Up for Debate:

Making the Grade

Students are divided into teams to discuss

the advantages and disadvantages of

intrapreneurship at FedEx.

30 min.

4. Up for Debate: Who

Runs the Grapevine?

Students are divided into teams to discuss

―who‖ within the organization most likely

creates the grapevine.

30 min.

CHAPTER OUTLINE

Learning Objective 6-1:

Discuss the factors that influence a firm’s organizational structure.

What Is Organizational Structure?

Organizational structure is the specification of the jobs to be done within an organization and

the ways in which those jobs relate to one another.

A. Organization Charts

Organizational charts are prepared to clarify structure and to show employees where they fit

into a firm’s operations. The chain of command represents the hierarchy of who reports to

whom in the organization.

B. Determinants of Organizational Structure

Numerous factors influence the planning and creating of an efficient organizational structure.

Managers not only consider the organization’s mission, and strategy, but also the

organization’s size and environment.

KEY TEACHING TIP

 Remind students that organizational structure refers to the specification of jobs within a

firm and how those jobs relate to one another. It can be viewed as the way in which

employees’ positions and departments are connected in an organization’s framework.

 Many factors play a part in determining an organization’s optimal structure, including the

organization’s mission, strategy, size, and environment. Most organizations change their

structures on a continuing basis.

QUICK QUESTION

What does an organization chart tell us?

Use In-Class Activity 1: Ice-Breaker: Organizational Structure

Time Limit: 30 minutes

Learning Objective 6-2:

Explain specialization and departmentalization as two of the building blocks of organi–

zational structure.

The Building Blocks of Organizational Structure

The first step in developing the structure of any business involves three activities: specialization,

departmentalization, and establishing the decision-making hierarchy.

A. Job Specialization

Job specialization, a natural part of an organization’s 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.

In a very small organization, the owner may perform every job. As the firm grows, however,

B. Departmentalization

Departmentalization is the grouping of similar or related jobs into logical units.

Departmentalization allows the firm to treat each department as a profit center—a separate

company unit responsible for its own costs and profits. Several types of departmentalization

exist:

1. Functional Departmentalization. Organizations are divided according to a group’s

2. Product Departmentalization. Organizations are divided according to the products or

services being produced.

4. Customer Departmentalization. This grouping of jobs simplifies shopping by providing

departments that offer products and meet the needs of identifiable customer groups.

6. Multiple Forms of Departmentalization. Larger companies tend to adopt different

types of departmentalization for various levels and in various areas.

KEY TEACHING TIPS

 Students should recognize that the first step in developing the structure of any business

involves specialization, departmentalization, and the establishment of a decision-making

hierarchy.

 An interesting point to make is that larger companies tend to adopt different types of

departmentalization for various levels of the company.

QUICK QUESTIONS

 How does the need to specialize increase as a firm grows?

 What type of company might opt to use process departmentalization?

 What type of company might opt to use functional departmentalization?

 What type of company might opt to use customer departmentalization?

Learning Objective 6-3:

Describe centralization and decentralization, delegation, and authority as the key

ingredients in establishing the decision-making hierarchy.

Establishing the Decision-Making Hierarchy

The decision-making hierarchy is created by formalizing reporting relationships. When the focus

is on the reporting relationships among individual managers and the people who report to them,

it is referred to as delegation. When it is on the overall organization, it becomes a question of

decentralization versus centralization.

A. Distributing Authority: Centralization and Decentralization

Some managers make the conscious decision to retain as much decision-making authority as

possible at the higher levels of the organizational structure; others decide to push authority as

far down the hierarchy as possible.

1. Centralized Organizations. In a centralized organization, authority is held by upper-

2. Decentralized Organizations. In a decentralized organization, authority is delegated to

3. Tall and Flat Organizations. Tall organizations are characterized by many layers of

4. Span of Control. A manager’s span of control is the number of people managed by one

supervisor; many factors can lead to a wide or narrow span of control.

B. The Delegation Process

Delegation begins when responsibility is granted to a subordinate from a supervisor.

Responsibility is the duty to perform an assigned task; authority is the power to make the

decisions necessary to complete the task. Accountability is the obligation employees have to

their manager for the successful completion of the assigned task.

C. Three Forms of Authority

Forms of authority develop when individuals are delegated authority and responsibility in a

firm.

2. Staff Authority. This authority is based on special expertise and usually involves

make final decisions. While staff members generally provide services to management,

line managers are directly involved in producing the firm’s products.

3. Committee and Team Authority. This is the authority that is granted to committees and

teams that play central roles in the firm’s daily operations. Employee committees or

teams are typically empowered to plan and organize their own work and to perform that

work with minimal supervision.

KEY TEACHING TIPS

 Remind students that in a centralized organization, most decision-making authority is

held by upper-level managers; in a decentralized organization, decision-making authority

is delegated to levels of management at various points below the top.

 Make sure students understand that a flat organizational structure tends to have fewer

layers of management, whereas a tall organizational structure has many layers of

management.

 Students often forget exactly what delegation involves: (1) the assignment of

responsibility, (2) the granting of authority, and (3) the creation of accountability.

 Students can remember line authority because it is the type of authority that flows up and

down the chain of command.

 Students often forget that staff members help line departments in making decisions but do

QUICK QUESTIONS

 How many employees do you think you can effectively control? What are some factors

that inhibit or enhance a manager’s span of control?

 Why do managers sometimes have trouble delegating authority?

 What are some examples of managers who use line authority, staff authority, and

committee and team authority? Might one type of authority be easier to use than another?

Use In-Class Activity 2: Small-Group Discussion: Centralization versus Decentralization

Time Limit: 30 minutes

HOMEWORK

Interview a Manager

Now is a good time to assign Application Exercise 9 from the end-of-chapter materials as

homework. This assignment asks students to interview a manager to gain first-hand knowledge

of how the delegation process is actually carried out at a local service business.

At-Home Completion Time: 1 to 2 hours

Learning Objective 6-4:

Explain the differences among functional, divisional, matrix, and international

organizational structures and describe the most popular new forms of organizational

design.

Basic Forms of Organizational Structure

Four basic forms of organizational structure reflect the general trends followed by most firms:

functional, divisional, matrix, and international.

A. Functional Structure

Often used by most small- and medium-sized firms, functional organizations divide job

responsibilities by functional areas, such as marketing or finance. As firms grow,

accountability becomes more difficult, so firms tend to move away from this structure.

B. Divisional Structure

Corporate divisions usually operate under this structure as relatively autonomous businesses

C. Matrix Structure

Sometimes a ―combination‖ structure—one that combines two separate structures—works

better than either simpler structure alone. A so-called matrix structure is organized along two

D. International Structure

International organizational structures have been developed in response to the need to

manufacture, purchase, and sell in global markets. These structures frequently change as a

company becomes more globalized.

E. New Forms of Organizational Structure

Among the most popular new forms of organization are team organization, virtual

organization, and learning organization.

2. Virtual Organization. This organization has little or no formal structure; this

3. Learning Organization. The learning organization works to integrate continuous

improvement with continuous employee learning and development. The most consistent

and logical strategy for achieving continuous improvement as a firm is to constantly

upgrade employee talent, skill, and knowledge.

KEY TEACHING TIPS

 Students often have a hard time grasping matrix structure, so make sure they understand

purchase, and sell its products.

QUICK QUESTIONS

 Functional structure can be thought of as authority that is determined by the relationships

between group functions and activities. What are the benefits of a functional structure?

 With divisional structure, a firm organizes itself around product-based divisions. How

can an organization benefit from a divisional structure?

 With matrix structure, a firm chooses to combine two separate structures. How can this

be an advantage to the organization?

HOMEWORK

Determine Type of Organization

Now is a good time to assign Application Exercise 10 from the end-of-chapter materials as

homework. This assignment asks students to research a company at which they would like to

work someday and determine how the company is organized. This assignment lets them

investigate a company in which they have interest and learn about how it is organized and

whether the organization type fits the mission.

At-Home Completion Time: 1 hour

Learning Objective 6-5:

Describe the informal organization and discuss intrapreneuring.

Informal Organization

Frequently, the informal organization—everyday social interactions among employees that

transcend formal jobs and job interrelationships—effectively alters a company’s formal

structure.

A. Informal Groups

Informal groups are groups of people who decide to interact among themselves. Informal

organization can be just as powerful as formal organization.

B. Organizational Grapevine

The grapevine or the rumor mill is an informal communication structure in which people

communicate through ways that transcend the formal communication processes. By

identifying the key people in the grapevine, the manager can get valuable information.

C. Intrapreneuring

A relatively new concept, intrapreneuring, is encouraged among businesses as a way of

enhancing creativity and flexibility in large, bureaucratic structures. It involves identifying

and supporting inventors, the product champions, and the sponsors of new ideas, products,

services, or processes.

KEY TEACHING TIPS

 Students should recall that in a team organization, people float from project to project as

QUICK QUESTIONS

 What is the informal organization at your job?

 If your CEO is seen in a nightclub with someone other than his or her spouse, how long

will it take the grapevine to disseminate that information?

Use In-Class Activity 3: Up for Debate: Making the Grade

Time Limit: 30 minutes

Use In-Class Activity 4: Up for Debate: Who Runs the Grapevine?

Time Limit: 30 minutes