As organizations grow, managers must decide how to control and coordinate the activities that are required for

the
organization to create value. The principal design challenge is how to manage differentiation to achieve organizational goals.
Differentiation is the process by which an organization allocates people and resources to organizational tasks and establishes
the task and authority relationships that allow the organization to achieve
its goals. In short, it is the process of establishing and controlling the division of labor, or degree of specialization, in the
organization.

In a simple organization, differentiation is low because the division of labor is low. Typically, one person or a few people
perform all organizational tasks, so there are few problems with coordinating who does what, for whom, and when. With
growth, however, comes complexity. In a complex organization, both the division of labor and differentiation are high.

The basic building blocks of differentiation are organizational roles. An organizational role is a set of task-related behaviors
required of a person by his or her position in an organization.

Organizational structure is based on a system of interlocking roles, and the relationship of one role to another is defined by
task-related behaviors

Authority is the power to hold people accountable for their actions and to make decisions about how to invest and use
organizational resources. The differentiation of an organization into individual organizational roles results in clear authority and
responsibility requirements for each role in the system. When an individual clearly understands the responsibilities of his or her
role and what a superior can require of a person in that role, the result within the organization is control the ability to
coordinate and motivate people to work in the organization’s interests.

In most organizations, people with similar and related roles are grouped into a subunit. The main subunits that develop in
organizations are functions (or departments) and divisions. A function is a subunit composed of a group of people, working
together, who possess similar skills or use the same kind of knowledge, tools, or techniques to perform their jobs. A division is a
subunit that consists of a collection of functions or departments that share responsibility for producing a particular good or
service.

The number of different functions and divisions that an organization possesses is a measure of the organization’s complexity—
its degree of differentiation. Differentiation into functions and divisions increases an organization’s control over its activities
and allows the organization to accomplish its tasks more effectively.

As organizations grow in size, they differentiate into five different kinds of functions.
 1. Support functions facilitate an organization’s control of its relations with its environment and its stakeholders.
Support functions include purchasing, to handle the acquisition of inputs; sales and marketing, to handle the disposal
of outputs; and public relations and legal affairs, to respond to the needs of outside stakeholders.
2. Production functions manage and improve the efficiency of an organization’s conversion processes so that more
value is created. Production functions include production operations, production control, and quality control
3. Maintenance functions enable an organization to keep its departments in operation. Maintenance functions include
personnel, to recruit and train employees and improve skills; engineering, to repair broken machinery; and janitorial
services, to keep the work environment safe and healthy—conditions that are very important
4. Adaptive functions allow an organization to adjust to changes in the environment. Adaptive functions include
research and development, market research, and long-range planning, which allow an organization to learn from and
attempt to manage its environment and thus increase its core competences
5. Managerial functions facilitate the control and coordination of activities within and among departments. Managers at
different organizational levels direct the acquisition of, investment in, and control of resources to improve the
organization’s ability to create value. Top management, for example, is responsible for formulating strategy and
establishing the policies the organization uses to control its environment. Middle managers are responsible for
managing the organization’s resources to meet its goals. Lower-level managers oversee and direct the activities of the
workforce.

In large organizations each division is likely to have its own set of the five basic functions and is thus a self-contained division.

The organizational chart vertically differentiates organizational roles in terms of the amount of authority that goes with each
role. A classification of people according to their relative authority and rank is called a hierarchy. The organizational chart
horizontally differentiates roles according to their main task responsibilities

Vertical differentiation refers to the way an organization designs its hierarchy of authority and creates reporting relationships
to link organizational roles and subunits.7 Vertical differentiation establishes the distribution of
authority between levels to give the organization more control over its activities and increase
its ability to create value.
Horizontal differentiation refers to the way an organization groups organizational tasks into roles and roles into subunits
(functions and divisions). Horizontal differentiation establishes the division of labor that enables people in an organization to
become more specialized and productive and increases its ability to create value

Three more design challenges that confront managers who attempt to create a structure that will maximize their organization’s
effectiveness.
1. The first of the three is how to link and coordinate organizational activities.
2. The second is to determine who will make decisions.
3. The third is to decide which types of mechanisms are best suited to controlling specific employee tasks and
roles.

Horizontal differentiation is supposed to enable people to specialize and thus become more productive. However, companies
have often found that specialization limits communication between subunits and prevents them from learning from one
another. As a result of horizontal differentiation, the members of different functions or divisions develop a subunit orientation
—a tendency to view one’s role in the organization strictly from the perspective of the time frame, goals, and interpersonal
orientations of one’s subunit. To solve this find new or better ways to integrate functions—that is, to promote cooperation,
coordination, and communication among separate subunits

Integration is the process of coordinating various tasks, functions, and divisions so they work together, not at cross purposes.
Seven integrating mechanisms or techniques that managers can use as their organization’s level of differentiation increases.
The simplest mechanism is a hierarchy of authority; the most complex is a department created specifically to coordinate the
activities of diverse functions or divisions.

1. HIERARCHY OF AUTHORITY The simplest integrating technique is the organization’s hierarchy of authority, which
differentiates people by the amount of authority they possess. Because the hierarchy dictates who reports to whom,
it coordinates various organizational roles. Managers must carefully divide and allocate authority within a function
and between one function and others to promote coordination.
2. DIRECT CONTACT Direct contact between people in different subunits is a second integrating mechanism; there are
often more problems associated with using it effectively than with the hierarchy of authority. The principal problem
with integration across functions is that a manager in one function has no authority over a manager in another.
Managers from different functions who have the ability to make direct contact with one another can then work
together to solve common problems—and prevent them from arising in the first place
3. LIAISON ROLES As the need for communication between two subunits becomes increasingly important, often because
of a rapidly changing environment, one or a few members from each subunit are often given the primary
responsibility to work together to coordinate subunit activities. The people who hold these connecting, or liaison,
roles are able to develop in-depth relations with people in other subunits. This interaction helps overcome barriers
between subunits.
4. TASK FORCES As an organization increases in size and complexity, more than two subunits may need to work together
to solve common problems. Increasing an organization’s ability to serve its customers effectively, for example, may
require input from production, marketing, engineering, and R&D. The solution commonly takes the form of a task
force, a temporary committee set up to handle a specific problem.
5. TEAMS When the issue a task force is dealing with becomes an ongoing strategic or administrative issue, the task
force becomes permanent. A team is a permanent task force or committee.
6. INTEGRATING ROLES OR DEPARTMENTS As organizations become large and complex, communication barriers
between functions and divisions are likely to increase. Managers in divisions making different products, for example,
may never meet one another. Coordinating subunits is especially difficult in organizations that employ many
thousands of people. One way to overcome these barriers is to create integrating roles that coordinate subunits.
7. integrating role is a full-time managerial position established specifically to improve communication between
divisions. (A liaison role, by contrast, is just one of the tasks involved in a person’s full-time job.)

The purpose of an integrating role is to promote the sharing of information and knowledge to better pursue organizational
goals such as product innovation, increased flexibility, and improved customer service.

A complex organization that is highly differentiated needs a high level of integration to coordinate its activities effectively. By
contrast, when an organization has a relatively simple, clearly defined role structure, it normally needs to use only simple
integrating mechanisms.
Managers facing the challenge of deciding how and how much to differentiate and integrate must do two things:
1. Carefully guide the process of differentiation so an organization builds the core competences that give it a
competitive advantage
2. Carefully integrate the organization by choosing appropriate coordinating mechanisms that allow subunits to
cooperate and work together to strengthen its core competences.

When the authority to make important decisions is retained by managers at the top of the hierarchy, authority is said to be
highly centralized. By contrast, when the authority to make important decisions about organizational resources and to initiate
new projects is delegated to managers at all levels in the hierarchy, authority is highly decentralized.

The advantage of centralization is that it lets top managers coordinate organizational activities and keep the organization
focused on its goals. Centralization becomes a problem, however, when top managers become overloaded and immersed in
operational decision making about day to- day resource issues.

The advantage of decentralization is that it promotes flexibility and responsiveness by allowing lower-level managers to make
on-the-spot decisions. Managers remain accountable for their actions but have the opportunity to assume greater
responsibilities and take potentially successful risks. Also, when authority is decentralized managers can make important
decisions that allow them to demonstrate their personal skills and competences and may be more motivated to perform well
for the organization. The downside of decentralization is that if so much authority is delegated that managers at all levels can
make their own decisions, planning and coordination become very difficult. Thus too much decentralization may lead an
organization to lose control of its decision-making process! Managers who want to encourage risk taking and innovation
decentralize authority

Mechanistic structures are designed to induce people to behave in predictable, accountable ways. Decision-making authority is
centralized, subordinates are closely supervised, and information flows mainly in a vertical direction down a clearly defined
hierarchy. In a mechanistic structure, the tasks associated with a role are also clearly defined. There is usually a one-to-one
correspondence between a person and a task. At the functional level, each function is separate, and communication and
cooperation among functions are the responsibility of someone at the top of the hierarchy. Thus, in a mechanistic structure, the
hierarchy is the principal integrating mechanism both within and between functions. Because tasks are organized to prevent is
communication, the organization does not need to use complex integrating mechanisms. Tasks and roles are coordinated
primarily through standardization, and formal written rules and procedures specify role responsibilities. Standardization, the
organization is very status conscious, and norms of “protecting one’s turf” are common. Promotion is normally slow, steady,
and tied to performance, and each employee’s progress in the organization can be charted for years to come. Because of its
rigidity, a mechanistic structure is best suited to organizations that face stable environments.

Organic structures promote flexibility, so people initiate change and can adapt quickly to changing conditions. Organic
structures are decentralized so that decision-making authority is distributed throughout the hierarchy; people assume the
authority to make decisions as organizational needs dictate. Roles are loosely defined and people continually develop new kinds
of job skills to perform continually changing tasks. Employees from different functions work together to solve problems; they
become involved in one another’s activities. As a result, a high level of integration is needed so that employees can share
information and overcome problems caused by differences in subunit orientation. The integration of functions is achieved by
means of complex mechanisms like task forces and teams.

The contingency approach to organizational design tailors organizational structure to the sources of uncertainty
facing an organization. The structure is designed to respond to various contingencies—things or changes that might happen and
therefore must be planned for. One of the most important of these is the nature of the environment. According to contingency
theory, in order to manage its environment effectively, an organization should design its structure to fit with the environment
in which the organization operates. In other words, an organization must design its internal structure to control the external
environment. A poor fit between structure and environment leads to failure; a close fit leads to success.

Uncertainty was highest in plastics because of the rapid pace of technological and product change. It was lowest in containers,
where organizations produce a standard array of products that change little from year to year. Food-processing companies
were in between because, although they introduce new products frequently, production technology is quite stable. Lawrence
and Lorsch also found that when the environment is perceived as unstable
and uncertain, organizations are more effective if they are less formalized, more decentralized, and more reliant on mutual
adjustment. When the environment is perceived as relatively stable and certain, organizations are more effective if they have a
more centralized, formalized, and standardized structure.
Companies with an organic structure were more effective in unstable, changing environments than were companies with a
mechanistic structure. The reverse was true in a stable environment: There, the centralized, formalized,
and standardized way of coordinating and motivating people that is characteristic of a mechanistic structure worked better
than the decentralized team approach that is characteristic of an organic structure. Burns and
Stalker’s conclusion was that organizations should design their structure to match the dynamism
and uncertainty of their environment.

The army, for example, is well known for having a mechanistic structure in which hierarchical reporting relationships are clearly
specified. However, in wartime, this mechanistic command structure allows the army to become organic and flexible as it
responds to the uncertainties of the quickly changing battlefield.

### Summary ####

1. Differentiation is the process by which organizations evolve into complex systems as they allocate people and resources to
organizational tasks and assign people different levels of authority.
2. Organizations develop five functions to accomplish their goals and objectives: support, production, maintenance, adaptive,
and managerial.
3. An organizational role is a set of task-related behaviors required of an employee. An organization is composed of interlocking
roles that are differentiated by task responsibilities and task authority.
4. Differentiation has a vertical and a horizontal dimension. Vertical differentiation refers to the way an organization designs its
hierarchy of authority. Horizontal differentiation refers to the way an organization groups roles into subunits (functions and
divisions).
5. Managers confront five design challenges as they coordinate organizational activities. The choices they make are interrelated
and collectively determine how effectively an organization operates.
6. The first challenge is to choose the right extent of vertical and horizontal differentiation.
7. The second challenge is to strike an appropriate balance between differentiation and integration and use appropriate
integrating mechanisms.
8. The third challenge is to strike an appropriate balance between the centralization and decentralization of decision-making
authority.
9. The fourth challenge is to strike an appropriate balance between standardization and mutual adjustment by using the right
amounts of formalization and socialization.
10. Different organizational structures cause individuals to behave in different ways. Mechanistic structures are designed to
cause people to behave in predictable ways. Organic structures promote flexibility and quick responses to changing conditions.
Successful organizations strike an appropriate balance between mechanistic and organic structures.
11. Contingency theory argues that to manage its environment effectively, an organization should design its structure and
control systems to fit with the environment in which the organization operates