CHAPTER 12
Managing Organization Design
CHAPTER SUMMARY
This chapter deals with organization design. After introducing students to the nature of organization
design, it covers first universal perspectives and then situational perspectives on organization design. The
LEARNING OBJECTIVES
After covering this chapter, students should be able to:
1. Describe the basic nature of organization design.
2. Identify and explain two basic universal perspectives on organization design.
The opening case deals with Abercrombie & Fitch the retailing phenomenon that has caught the fancy 18
to 22 age group. While the company owns several brands (Hollister, Ruehl 25, etc.), it has structured
itself along functional line – the U-form structure, in contrast to the more traditional M-form structure.
This means that decisions in the area of purchasing and distribution, for example, are made by a single
group of people for all the brands.
Discussion Starter: Abercrombie & Fitch is very popular with college students. Find out from
LECTURE OUTLINE
I. THE NATURE OF ORGANIZATION DESIGN
Organization design is the overall pattern of structural components and arrangements used to
manage the total organization.
Cross-Reference: Note for your students that Chapter 11 was concerned with identifying and
Chapter 12: Managing Organization Design
II. UNIVERSAL PERSPECTIVES ON ORGANIZATION DESIGN
A. Bureaucratic Model
Bureaucracy is an organization based on a legitimate and formal system of authority. Weber
Discussion Starter: Ask your students to identify examples of bureaucratic rule and red tape they have
recently encountered.
Teaching Tip: Point out to your students that rules and regulations are sometimes necessary to ensure
3. Organizational hierarchy
4. Impersonal relationships among workers
5. Expertise-determined promotions
Group Exercise: Have small groups of your students develop a plan for making an organization less
bureaucratic.
Global Connection: The bureaucratic model is still very prevalent in China. Many managers there still
believe in the importance of hierarchy, rules, regulations, and standard operating procedures.
B. Behavioral Model
The behavioral model is a second universal model. It was developed by Rensis Likert.
whereas System 4 was the opposite of bureaucracy.
Teaching Tip: Note the distinctions between System 1 and System 4 as detailed in Table 12.1. Point
out the similarities between the System 1 design and the bureaucratic model discussed earlier.
Extra Example: In many ways, the transformations many organizations are currently undergoing
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III. SITUATIONAL INFLUENCES ON ORGANIZATION DESIGN
The situational view of organization design is based on the assumption that the optimal design for
any given organization depends on a set of relevant situational factors including core technology,
environment, organizational size, and organizational life cycle.
A. Core Technology
1. Technology is the conversion processes used to transform inputs into outputs.
2. While any organization often uses multiple technologies, its most important one is called
Extra Example: Other examples of unit or small-batch technology are: a medical laboratory that
performs blood tests on request, a cabinetmaker who makes special cabinets for customers, and a
software design firm that writes special programs to meet unique customer requirements.
b) Large-batch or mass-production—assembly line production.
Extra Example: Other examples of large-batch or mass-production technology are computer
c) Continuous-process—transformation of raw materials to finished goods is done by
a series of transformations.
Extra Example: Other examples of continuous-process technology include fertilizer makers like
Scott’s and paint manufacturers like Sherwin-Williams.
Group Exercise: Have small groups of students try to develop their own frameworks or taxonomies of
technology.
Cross-Reference: Remind students that the environment was covered from a variety of perspectives in
Chapter 3.
1. A mechanistic organization structures its activities in predictable ways by means of
rules, specialized jobs, and centralized authority. It is similar to a System 1 or a
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Extra Example: The Limited operates each of its businesses independently (highly differentiated).
4. Integration is the degree to which the various units must work together in a coordinated
fashion.
Discussion Starter: Ask students to speculate about the kinds of differences in organization design that
are likely to exist among larger versus smaller organizations.
D. Organizational Life Cycle
Organizational life cycle is a four-phase process through which organizations evolve. The
IV. STRATEGY AND ORGANIZATION DESIGN
A. Corporate-Level Strategy
It is important for an organization to match its corporate-level strategy to its design.
Teaching Tip: Note that The Limited’s corporate strategy is one of related diversification (clothing,
B. Business-Level Strategy
The type of business-level strategy an organization selects directly influences the design of the
organization.
Teaching Tip: Note the interrelationships among environment and business strategy and how each is
also related to organization design.
C. Organizational Functions
Teaching Tip: Note that the appropriate organization design for a particular firm is dependent on, or
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Cross-Reference: Note that we discussed the contingency perspective in Chapter 2. This perspective,
which argues that appropriate managerial action is contingent on the situation, is the basis for this
discussion of the situational nature of organization design.
V. BASIC FORMS OF ORGANIZATION DESIGN
A. Functional (U-Form) Design
Extra Example: Most local automobile dealerships use a U-form design. The Outback Steakhouse
restaurant chain also uses this form of organization design.
B. Conglomerate (H-Form) Design
Group Exercise: Have students research and identify other examples of H-form organizations.
C. Divisional (M-Form) Design
The divisional design is based on multiple businesses in related areas operating within a larger
organizational framework. Hence, the term M-form emphasizes the multiple businesses.
Extra Example: Other firms that use an M-form organization design include Bristol-Myers Squibb
D. Matrix Design
The matrix design is based on two overlapping bases of departmentalization. There is a base of
functional departments with a set of product groups superimposed across them.
Extra Example: Business schools often use a matrix form of organization design. Academic
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Cross-Reference: The foundation of matrix forms of organization design is work teams. Teams are
discussed more fully in Chapter 19.
E. Hybrid Designs
VI. EMERGING ISSUES IN ORGANIZATION DESIGN
A. The Team Organization
A team organization is a form of organization design that relies almost exclusively on teams.
Extra Example: Many high-tech and engineering firms like Hewlett-Packard and Microsoft are
Extra Example: In many ways a football team is a virtual organization. The coach puts players in and
takes others out on almost every play, depending upon the situation and tactics.
C. The Learning Organization
A learning organization is one that works to facilitate the lifelong learning and personal
Global Connection: Note the similarities and differences among domestic forms of organization
design and global forms of organization design.
Global Connection: Many international firms in the same industries have designs that are very similar
END OF CHAPTER QUESTIONS
Questions for Review
1. Describe the three forms of core technology. Tell about the differences in organizational structure
that occur in firms with each of the three types.
Unit or small-batch technology is used by organizations when custom products are made in small
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2. List the changes that occur as an organization grows in size. List the changes that occur as an
organization ages over time. Are the two lists the same? Explain any differences you find.
As organizations grow, they add employees and facilities, and they typically sell more products,
3. Describe the basic forms of organization design. What are the advantages and disadvantages of
each?
The U-form design is a functional approach that breaks the firm into specialties such as marketing,
production, and accounting. This design is simple and clear, but it may not be adequate for
4. Compare and contrast the matrix organization and the team organization telling about any
similarities and differences.
The matrix organization and the team organization are both attempts to improve the flexibility of an
Questions for Analysis
5. The business world today is increasingly complex and variable, in virtually every country and
industry. Thus organizations must become more organic. What are some of the outcomes that
companies will experience as they become more organic and less mechanistic? Be sure to include
both positive and negative outcomes.
An organic organization is most effective in responding to environments that are complex and
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6. Each of the organization designs is appropriate for some firms but not for others. Describe the
characteristics that a firm using the U-Form should have. Then do the same for the H-Form, the M-
Form, and the matrix design. For each item, explain the relationship between that set of
characteristics and the choice of organization design.
U-Form organization structure is best suited for organizations that uses functional
functions.
7. What are the benefits of using the learning organization approach to design? Now consider that, in
order to learn, organizations must be willing to tolerate many mistakes because it is only through the
effort of understanding mistakes that learning can occur. With this statement in mind, what are some
of the potential problems with the use of the learning organization approach?
Benefits include a well-trained and satisfied workforce, flexibility, improved quality and efficiency,
and continuous improvement. However, managers must balance the competing demands of learning
Questions for Application
8. Consider an organization (such as your workplace, a club or society, a sorority or fraternity, a
church, and so on) of which you are a member. Describe some structural elements of that
organization that reflect the bureaucratic model. Describe some elements that reflect the behavioral
model. In your opinion, is that organization more bureaucratic or more behavioral in its structure?
Why?
9. Use the Internet or library to investigate a corporation’s strategy. Then use the Internet or library to
obtain a description of the firm’s organization design. Can you identify any links between the
company’s strategy and structure? Share your findings with the class.
Clearly, answers will vary. However, students should be able to find links between the firm’s
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10. What form of organization does your university or college use? What form does your city or town
government use? What form do other organizations with which you are familiar use? What
similarities and differences do you see? Explain your answers.
The college or university is most likely utilizing some form of functional design.
END OF CHAPTER EXERCISES
Building Effective Conceptual Skills
I. Purpose
This exercise develops students’ conceptual skills by asking them to analyze a firm’s structure and
then draw an appropriate organization chart.
II. Format
This exercise is best done outside of class, either individually or in a small group. It should take
about 30 minutes to complete.
III. Follow-Up
A. Alone or with a partner, go online to research a publicly traded U.S. firm in which you’re
interested. Focus on information that will help you understand the company’s structure. If you
Building Effective Technical Skills
I. Purpose
This exercise uses the development of an organizational structure under various circumstances as a
way to build the students’ technical skills.
II. Format
Students must investigate the Segway technology outside of class using the Internet. Alternatively,
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III. Follow-Up
A. Your corporate-level strategy calls for continued production of a limited line of similar
products for sale in the United States. What would be the most appropriate organization
structure for your firm?
Most students will recommend the U-Form design because of the simple, functional nature of
a company that produces a modest number of identical products.
B. Your corporate-level strategy calls for continued production of a limited line of similar
C. Your corporate-level strategy calls for you to move into areas related to your core product,
integrating the design innovations that you developed for that product into several other
products. What would be the most appropriate organization structure for your firm?
Most students will recommend the M-Form design because that is most appropriate for a firm
pursuing related diversification.
E. Your corporate-level strategy calls for you to invest the revenue generated by core-product
sales in industries unrelated to that product. What would be the most appropriate organization
structure for your firm?
The U-Form design is most appropriate for firms that are pursuing unrelated diversification.
F. Review your responses to each of the five strategies listed above. Explain precisely how a
that a change in strategy can have on organization design.
MANAGEMENT AT WORK
There are three major airline alliances – Star Alliance, SkyTeam, and Oneworld. Alliances allow airlines
to offer codesharing – allowing passengers to book a destination not covered by an airline but covered by
an alliance partner. The case looks at the predicament of American Airlines which, though a member of
the Oneworld alliance, is vulnerable because its alliance is not the biggest and its major competitors have
grown bigger through acquisitions.
Management Update: For fiscal year 2010, AMR (the parent of American Airlines) reported revenues
of $23.08 billion and net income of $(-) 677 million. In early September 2009, the company had a
market capitalization of $1.1 billion.
1. Case Question 1: Take a situational view of organizational design. What roles have technology
and environment played in the development of alliances and virtual organizations in the airline
industry? In what ways does the corporate-level strategy of joining an alliance affect an airline’s
organizational functions?
Technology in the form of the Internet allows airlines to pool their reservation systems. This
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2. Case Question 2: In what ways might the divisional (m-form) designs of most airlines lend
themselves to the requirements of alliance membership? In what ways might they be compatible
with the organizational needs of the alliances themselves?
If, for example, an airline has the following divisions: North America, Latin America, Europe, and
3. Case Question 3: According to one industry analyst, “in a scale business … size does matter.”
What does he mean by “a scale business?” Why is the airline industry “a scale business?” Once
you’ve thought about these two questions, how would you describe the “specific opportunity”
which, as virtual organizations, airline alliances are designed to exploit?
A scale business is one where efficiencies come into play when a certain volume (or activity)
4. Case Question 4: Have you ever been on a flight that involved a codesharing arrangement? Did
you notice – or do you realize now – that there were advantages to the practice of codesharing?
Based on what you know about airline travel, list a few of the possible advantages of codesharing
for passengers.