Ch.

8 Structuring Organizations for Today’s Challenges

LO 8–1 Outline the basic principles of organizational management.

The principles of organization apply to businesses of all sizes. Structuring the business,
making an appropriate division of labor using job specialization and departmentalization,
establishing procedures, and assigning authority are tasks found in most firms.

The process of setting up individual departments to do specialized tasks is called

departmentalization.

LO 8–2 Compare the organizational theories of Fayol and Weber.

Business growth led to economies of scale. This term refers to the fact that companies can
reduce their production costs by purchasing raw materials in bulk.

economies of scale
The situation in which companies can reduce their production costs if they can purchase raw
materials in bulk; the average cost of goods goes down as production levels increase.

Fayol’s Principles of Organization

Henri Fayol introduced several management principles still followed today, including the
idea that each worker should report to only one manager and that managers, in turn, should
have the right to give orders for others to follow and the power to enforce them.
Fayol introduced such principles as the following:
1. Unity of command. Each worker is to report to one, and only one, boss.
2. Hierarchy of authority. All workers should know to whom they report. Managers
should have the right to give orders and expect others to follow.
3. Division of labor. Functions are to be divided into areas of specialization such as
production, marketing, and finance.
4. Subordination of individual interests to the general interest. Workers are to think of
themselves as a coordinated team. The goals of the team are more important than
the goals of individual workers.
5. Authority. Managers have the right to give orders and the power to enforce
obedience. Authority and responsibility are related: whenever authority is exercised,
responsibility arises
6. Degree of centralization. The amount of decision-making power vested in top
management should vary by circumstances.
7. Clear communication channels. All workers should be able to reach others in the firm
quickly and easily.
8. Order. Materials and people should be placed and maintained in the proper location.
9. Equity. A manager should treat employees and peers with respect and justice.
10. Esprit de corps. A spirit of pride and loyalty should be created among people in the
firm.
Max Weber and Organizational Theory
 Max Weber promoted an organizational structure composed of middle managers who
implement the orders of top managers. He believed less-educated workers were best
managed if supervisors gave them strict rules and regulations to follow and monitored
their performance.

Weber’s principles of organization resembled Fayol’s. In addition, Weber emphasized:

1. Job descriptions.
2. Written rules, decision guidelines, and detailed records.
3. Consistent procedures, regulations, and policies.
4. Staffing and promotion based on qualifications.

Turning Principles into Organizational Design

hierarchy
A system in which one person is at the top of the organization and there is a ranked or
sequential ordering from the top down of managers who are responsible to that person.

chain of command
The line of authority that moves from the top of a hierarchy to the lowest level.

organization chart
A visual device that shows relationships among people and divides the organization’s work;
it shows who is accountable for the completion of specific work and who reports to whom.

Typical organization chart

bureaucracy
An organization with many layers of managers who set rules and regulations and oversee all
decisions.

LO 8–3 Evaluate the choices managers make in structuring organizations.

Decisions to Make in Structuring Organizations
When designing responsive organizations, firms have to make decisions about several
organizational issues:
1. centralization versus decentralization,
2. span of control
3. tall versus flat organizational structures
4. departmentalization.

1. Choosing Centralized or Decentralized Authority

centralized authority
An organizational structure in which decision-making authority is maintained at the top level
of management at the company’s headquarters.

decentralized authority
An organizational structure in which decision-making authority is delegated to lower-level
managers more familiar with local conditions than headquarters management could be.

2. Choosing the Appropriate Span of Control

span of control
The optimum number of subordinates a manager supervises or should supervise.

A broad span of control allows one supervisor to be responsible for many workers whose
work tasks are predictable and standardized.
 3. Choosing between Tall and Flat Organizational Structures
tall organizational structure
An organizational structure in which the pyramidal organization chart would be quite tall
because of the various levels of management.

The cost of all these managers and support people was high, the paperwork they generated
was enormous, and the inefficiencies in communication and decision making were often
intolerable.

flat organizational structure

An organizational structure that has few layers of management and a broad span of control.

Flat structures can respond readily to customer demands because lower-level employees
have authority and responsibility for making decisions, and managers can be spared some
day-to-day tasks.

4. Weighing the Advantages and Disadvantages of

Departmentalization
The traditional way to departmentalize is by function—such as design, production,
marketing, and accounting. Departmentalization groups workers according to their skills,
expertise, or resource use so that they can specialize and work together more effectively.

departmentalization
The dividing of organizational functions into separate units.

Advantages of departmentalization:
 Save costs
 Improve efficiency
 Development of skills for employees
 The company can achieve economies of scale by centralizing all the resources it
needs
 Employees can coordinate work within the function, and top management can easily
direct and control various departments’ activities.

Disadvantages of departmentalization:
 Departments may not communicate well.
 Employees may identify with their department’s goals rather than the organization’s.
 Slow external change of the company
 People may not be trained to take different managerial responsibilities
 Department members may engage in groupthink and may need input from outside
to become more creative.

ways to departmentalize
LO 8–4 Contrast the various organizational models.

four ways to structure an organization:

1. line organizations
2. line-and-staff organizations
3. matrix-style organizations
4. cross-functional self-managed teams.

1. Line Organizations

line organization
An organization that has direct two-way lines of responsibility, authority, and
communication running from the top to the bottom of the organization, with all people
reporting to only one supervisor.

A line organization does not have any specialists who provide managerial support. There is
no legal department, accounting department, human resource department, or information
technology (IT) department. Line organizations follow all of Fayol’s traditional management
rules. Line managers can issue orders, enforce discipline, and adjust the organization as
conditions change.

2. Line-and-Staff Organizations

To minimize the disadvantages of simple line

organizations, many organizations today have
both line and staff personnel.

line personnel
Employees who are part of the chain of
command that is responsible for achieving
organizational goals.

staff personnel
Employees who advise and assist line
personnel in meeting their goals.

One important difference between line and

staff personnel is authority. Line personnel
have formal authority to make policy decisions. Staff personnel have authority to advise line
personnel and influence their decisions, but they can’t make policy changes themselves. The
line manager may seek or ignore the advice from staff personnel.
 3. Matrix-Style Organizations

matrix organization
An organization in which specialists from different parts of the organization are brought
together to work on specific projects but still remain part of a line-and-staff structure.

advantages:
 It gives managers flexibility in assigning people to projects.
 It encourages interorganizational cooperation and teamwork.
 It can produce creative solutions to product development problems.
 It makes efficient use of organizational resources.

disadvantages:
 It’s costly and complex.
 It can confuse employees about where their loyalty belongs—with the project
manager or with their functional unit.
 It requires good interpersonal skills as well as cooperative employees and managers
to avoid communication problems.
 It may be only a temporary solution to a long-term problem.

4. Cross-Functional Self-Managed Teams

cross-functional self-managed teams

Groups of employees from different departments who work together on a long-term basis.

Self-managed means that they are empowered to make decisions without management
approval. The barriers among design, engineering, marketing, distribution, and other
functions fall when interdepartmental teams are created.

You can think of a team of medical specialists in an operating room as a cross-functional,

self-managed team. Doctors, nurses, technicians, and anesthesiologists from different
departments and areas in the hospital work together to complete successful operations.
LO 8–5 Identify the benefits of interfirm cooperation and coordination.

networking
Using communications technology and other means to link organizations and allow them to
work together on common objectives.

Transparency and Virtual Organizations

Networked organizations are so closely linked online that each can find out what the others
are doing in real time. Real time simply means the present moment or the actual time in
which an event takes place. The Internet has allowed companies to send real-time data to
organizational partners as they are developed or collected.

Networked organizational structures tend to be flexible.8 A company may work with a

design expert from another company in Italy for a year and then not need that person
anymore. It may hire an expert from a company in another country for the next project.

virtual corporation
A temporary networked organization made up of replaceable firms that join and leave as
needed.

core competencies
Those functions that the organization can do as well as or better than any other organization
in the world.

digital natives
Young people who have grown up using the Internet and social networking.

Restructuring for Empowerment

restructuring
Redesigning an organization so that it can more effectively and efficiently serve its
customers.

inverted organization
An organization that has contact people at the top and the chief executive officer at the
bottom of the organization chart.

LO 8–6 Explain how organizational culture can help businesses adapt to change.

organizational (or corporate) culture

Widely shared values within an organization that provide unity and cooperation to achieve
common goals.
Managing the Informal Organization

formal organization
The structure that details lines of responsibility, authority, and position; that is, the
structure shown on organization charts.

informal organization
The system that develops spontaneously as employees meet and form cliques, relationships,
and lines of authority outside the formal organization; that is, the human side of the
organization that does not appear on any organization chart.