Richard L. Daft - Management. 9th ed., 2010

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PART 4 ORGANIZING250

team was top quality and needed little supervision, and they were all located on the

same  oor of an of ce building.

Centralization and Decentralization

Centralization and decentralization pertain to the hierarchical level at which decisions

are made. Centralization means that decision authority is located near the top of the

organization. With decentralization, decision authority is pushed downward to lower

organization levels. Organizations may have to experiment to  nd the correct hierar-

chical level at which to make decisions. For example, most large school systems are

highly centralized. However, a study by William Ouchi found that three large urban

school systems that shifted to a decentralized structure giving school principals and

teachers more control over staf ng, scheduling, and teaching methods and materials

performed better and more ef ciently than centralized systems of similar size.

In the United States and Canada, the trend over the past 30 years has been toward

greater decentralization of organizations. Decentralization is believed to relieve the bur-

den on top managers, make greater use of employees’ skills and abilities, ensure that

decisions are made close to the action by well-informed people, and permit more rapid

response to external changes. However, this trend does not mean that every organization

should decentralize all decisions. Managers should diagnose the organizational situa-

tion and select the decision-making level that will best meet the organization’s needs.

Factors that typically in uence centralization versus decentralization are as follows:

1. Greater change and uncertainty in the environment are usually associated with

decentralization. A good example of how decentralization can help cope with

rapid change and uncertainty occurred following Hurricane Katrina. Mississippi

Power restored power in just 12 days thanks largely to a decentralized manage-

ment system that empowered people at the electrical substations to make rapid

on-the-spot decisions.

2. The amount of centralization or decentralization should  t the  rm’s strategy.

Top executives at New York City Transit are decentralizing the subway system

to let managers of individual subway lines make almost every decision about

what happens on the tracks, in the trains, and in the stations. Decentralization

 ts the strategy of responding faster and more directly to customer complaints

or other problems. Previously, a request to  x a leak causing slippery conditions

in a station could languish for years because the centralized system slowed

decision making to a crawl.

Taking the opposite approach, Procter & Gamble

recentralized some of its operations to take a more focused approach and lever-

age the giant company’s capabilities across business units.

3. In times of crisis or risk of company failure, authority may be centralized at the

top. When Honda could not get agreement among divisions about new car mod-

els, President Nobuhiko Kawamoto made the decision himself.

DEPARTMENTALIZATION

Another fundamental characteristic of organization structure is departmentalization,

which is the basis for grouping positions into departments and departments into the

total organization. Managers make choices about how to use the chain of command

to group people together to perform their work. Five approaches to structural design

re ect different uses of the chain of command in departmentalization, as illustrated

in Exhibit 9.3. The functional, divisional, and matrix are traditional approaches that

rely on the chain of command to de ne departmental groupings and reporting rela-

tionships along the hierarchy. Two innovative approaches are the use of teams and

virtual networks, which have emerged to meet changing organizational needs in a

turbulent global environment.

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CHAPTER 9 DESIGNING ADAPTIVE ORGANIZATIONS 251

Organizing

EXHIBIT 9.3 Five Approaches to Structural Design

PART 4 ORGANIZING252

The basic difference among structures illustrated in Exhibit 9.3 is the way in

which employees are departmentalized and to whom they report.

Each structural

approach is described in detail in the following sections.

Vertical Functional Approach

What It Is Functional structure is the grouping of positions into departments based

on similar skills, expertise, work activities, and resource use. A functional structure can

be thought of as departmentalization by organizational resources, because each type of

functional activity—accounting, human resources, engineering, and manufacturing—

represents speci c resources for performing the organization’s task. People, facilities,

and other resources representing a common function are grouped into a single depart-

ment. One example is Blue Bell Creameries, which relies on in-depth expertise in its var-

ious functional departments to produce high-quality ice creams for a limited regional

market. The quality control department, for example, tests all incoming ingredients

and ensures that only the best go into Blue Bell’s ice cream. Quality inspectors also test

outgoing products and, because of their years of experience, can detect the slightest

deviation from expected quality. Blue Bell also has functional departments such as sales,

production, maintenance, distribution, research and development, and  nance.

How It Works Refer back to Exhibit 9.1 on page 245 for an example of a functional

structure. The major departments under the president are groupings of similar expertise

and resources, such as accounting, human resources, production, and marketing. Each of

the functional departments is concerned with the organization as a whole. The marketing

department is responsible for all sales and marketing, for example, and the accounting

department handles  nancial issues for the entire company.

The functional structure is a strong vertical design. Information

 ows up and down the vertical hierarchy, and the chain of command

converges at the top of the organization. In a functional structure, peo-

ple within a department communicate primarily with others in the same

department to coordinate work and accomplish tasks or implement

decisions that are passed down the hierarchy. Managers and employ-

ees are compatible because of similar training and expertise. Typically,

rules and procedures govern the duties and responsibilities of each

employee, and employees at lower hierarchical levels accept the right of

those higher in the hierarchy to make decisions and issue orders.

Divisional Approach

What It Is In contrast to the functional approach, in which people

are grouped by common skills and resources, the divisional structure

occurs when departments are grouped together based on similar orga-

nizational outputs. The divisional structure is sometimes called a prod-

uct structure, program structure, or self-contained unit structure. Each of

these terms means essentially the same thing: Diverse departments are

brought together to produce a single organizational output, whether it

is a product, a program, or service to a single customer.

Most large corporations have separate divisions that perform dif-

ferent tasks, use different technologies, or serve different customers.

When a huge organization produces products for different markets,

the divisional structure works because each division is an autono-

mous business. For example, United Technologies Corporation (UTC),

which is among the 50 largest U.S. industrial  rms, has numerous

divisions, including Carrier (air conditioners and heating), Otis (eleva-

tors and escalators), Pratt & Whitney (aircraft engines), and Sikorsky

(helicopters).

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Mary Berner started

her job as chief executive of Reader’s Digest As-

sociation by realigning its business units. She broke

up the book and magazine units and reorganized

them along consumer interests. This new divisional

structure created ad-friendly clusters of consumer

interests such as the new Food and Entertaining

unit, which includes magazines Every Day with Rachael

Ray and Taste of Home along with Allrecipes.com.

CHAPTER 9 DESIGNING ADAPTIVE ORGANIZATIONS 253

Organizing

How It Works Functional and divisional structures are illustrated in Exhibit 9.4.

In the divisional structure, divisions are created as self-contained units with separate

functional departments for each division. For example, in Exhibit 9.4, each functional

department resource needed to produce the product is assigned to each division.

Whereas in a functional structure, all R&D engineers are grouped together and work

on all products, in a divisional structure separate R&D departments are created

within each division. Each department is smaller and focuses on a single product line

or customer segment. Departments are duplicated across product lines.

The primary difference between divisional and functional structures is that the

chain of command from each function converges lower in the hierarchy. In a divi-

sional structure, differences of opinion among research and development, marketing,

manufacturing, and  nance would be resolved at the divisional level rather than by

the president. Thus, the divisional structure encourages decentralization. Decision

making is pushed down at least one level in the hierarchy, freeing the president and

other top managers for strategic planning.

Geographic- or Customer-Based Divisions An alternative for assigning divi-

sional responsibility is to group company activities by geographic region or customer

group. For example, the Internal Revenue Service shifted to a structure focused on four

distinct taxpayer (customer) groups: individuals, small businesses, corporations, and

nonpro t or government agencies.

Top executives at Citigroup are considering reor-

ganizing to a geographic structure to give the giant global corporation a more uni ed

face to local customers.

A global geographic structure is illustrated in Exhibit 9.5. In

a geographic-based structure, all functions in a speci c country or region report to

the same division manager. The structure focuses company activities on local market

conditions. Competitive advantage may come from the production or sale of a prod-

uct or service adapted to a given country or region. Colgate-Palmolive Company is

organized into regional divisions in North America, Europe, Latin America, the Far

East, and the South Paci c.

The structure works for Colgate because personal care

products often need to be tailored to cultural values and local customs.

Large nonpro t organizations such as the United Way, National Council of YMCAs,

Habitat for Humanity International, and the Girl Scouts of the USA also frequently

use a type of geographical structure, with a central headquarters and semiautono-

mous local units. The national organization provides brand recognition, coordinates

EXHIBIT 9.4 Functional Versus Divisional Structures

PART 4 ORGANIZING254

fund-raising services, and handles some shared administrative functions, while day-

to-day control and decision making are decentralized to local or regional units.

Matrix Approach

What It Is The matrix approach combines aspects of both functional and divi-

sional structures simultaneously in the same part of the organization. The matrix

structure evolved as a way to improve horizontal coordination and information

sharing.

One unique feature of the matrix is that it has dual lines of authority. In

Exhibit 9.6, the functional hierarchy of authority runs vertically, and the divisional

hierarchy of authority runs horizontally. The vertical structure provides traditional

control within functional departments, and the horizontal structure provides coor-

dination across departments. The matrix structure therefore supports a formal chain

of command for both functional (vertical) and divisional (horizontal) relationships.

As a result of this dual structure, some employees actually report to two supervi-

sors simultaneously.

EXHIBIT 9.5 Geographic-Based Global Organization Structure

EXHIBIT 9.6 Dual-Authority Structure in a Matrix Organization

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CHAPTER 9 DESIGNING ADAPTIVE ORGANIZATIONS 255

Organizing

How It Works The dual lines of authority make the matrix unique. To see how

the matrix works, consider the global matrix structure illustrated in Exhibit 9.7. The

two lines of authority are geographic and product. The geographic boss in Germany

coordinates all subsidiaries in Germany, and the plastics products boss coordinates

the manufacturing and sale of plastics products around the world. Managers of local

subsidiary companies in Germany would report to two superiors, both the country

boss and the product boss. The dual authority structure violates the unity-of-com-

mand concept described earlier in this chapter but is necessary to give equal empha-

sis to both functional and divisional lines of authority. Dual lines of authority can be

confusing, but after managers learn to use this structure, the matrix provides excel-

lent coordination simultaneously for each geographic region and each product line.

The success of the matrix structure depends on the abilities of people in key

matrix roles. Two-boss employees, those who report to two supervisors simultane-

ously, must resolve con icting demands from the matrix bosses. They must work with

senior managers to reach joint decisions. They need excellent human relations skills

with which to confront managers and resolve con icts. The matrix boss is the prod-

uct or functional boss, who is responsible for one side of

the matrix. The top leader is responsible for the entire

matrix. The

top leader oversees both the product and

functional chains of command. His or her responsibility

is to maintain a power balance between the two sides of

the matrix. If disputes arise between them, the problem

will be kicked upstairs to the top leader.

Team Approach

What It Is Probably the most widespread trend in depart-

mentalization in recent years has been the implementa-

tion of team concepts. The vertical chain of command is

a powerful means of control, but passing all decisions up

the hierarchy takes too long and keeps responsibility at

the top. The team approach gives managers a way to del-

egate authority, push responsibility to lower levels, and

be more  exible and responsive in the competitive global

environment. Chapter 17 will discuss teams in detail.

How It Works One approach to using teams in orga-

nizations is through cross-functional teams, which con-

sist of employees from various functional departments

EXHIBIT 9.7 Global Matrix Structure

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Hospitals and other health care

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needs to be integrated. For instance, collaborative care, like this

cross-functional team of a nurse, doctor, and dietitian, helps patients

with chronic illnesses require fewer emergency department visits. Rush

University Medical Center in Chicago started its Virtual Integrated

Practice project to give physicians in private practice access to

teams of physicians, dieticians, pharmacists, and social workers. VIP

replicates the collaboration that can occur in a hospital setting by

enabling members to share information via email, phone, and fax.

PART 4 ORGANIZING256

who are responsible to meet as a team and resolve mutual problems. Team members

typically still report to their functional departments, but they also report to the team,

one member of whom may be the leader. Cross-functional teams are used to provide

needed horizontal coordination to complement an existing divisional or functional

structure. A frequent use of cross-functional teams is for change projects, such as new

product or service innovation.

The second approach is to use permanent teams, groups of employees who

are organized in a way similar to a formal department. Each team brings together

employees from all functional areas focused on a speci c task or project, such as

parts supply and logistics for an automobile plant. Emphasis is on horizontal com-

munication and information sharing because representatives from all functions are

coordinating their work and skills to complete a speci c organizational task. Author-

ity is pushed down to lower levels, and front-line employees are often given the free-

dom to make decisions and take action on their own. Team members may share or

rotate team leadership. With a team-based structure, the entire organization is made

up of horizontal teams that coordinate their work and work directly with custom-

ers to accomplish the organization’s goals. At SEI, an investment services company,

all work is distributed among 140 or so teams. Some are permanent, such as those

that serve major customers or focus on speci c markets, but many are designed to

work on short-term projects or problems. Most desks are on wheels, and computer

links called pythons drop from the ceiling in SEI’s open of ce environment. As people

change assignments, they unplug their pythons and move to a new locations to work

on the next project.

The Virtual Network Approach

What It Is The most recent approach to departmentalization extends the idea of

horizontal coordination and collaboration beyond the boundaries of the organization.

In a variety of industries, vertically integrated, hierarchical organizations are giving

way to loosely interconnected groups of companies with permeable boundaries.

Outsourcing, which means farming out certain activities, such as manufacturing or

credit processing, has become a signi cant trend. In addition, partnerships, alliances,

and other complex collaborative forms are now a leading approach to accomplish-

ing strategic goals. In the music industry,  rms such as Vivendi Universal and Sony

have formed networks of alliances with Internet service providers, digital retailers,

software  rms, and other companies to bring music to

customers in new ways.

Some organizations take this

networking approach to the extreme to create an inno-

vative structure. The virtual network structure means

that the  rm subcontracts most of its major functions

to separate companies and coordinates their activities

from a small headquarters organization.

Indian tele-

com company Bharti Tele-Ventures Ltd., for example,

outsources everything except marketing and customer

management.

How It Works The organization may be viewed as

a central hub surrounded by a network of outside spe-

cialists, as illustrated in Exhibit 9.8. Rather than being

housed under one roof, services such as accounting,

design, manufacturing, and distribution are outsourced

to separate organizations that are connected electroni-

cally to the central of ce.

Networked computer sys-

tems, collaborative software, and the Internet enable

organizations to exchange data and information so

rapidly and smoothly that a loosely connected network

William Wang, founder of Vizio,

Inc., produces a competitively priced plasma television using the

virtual network approach. Wang keeps costs down by running a lean

operation, outsourcing manufacturing, research and development,

and technical support. Vizio plasma televisions are priced about

50 percent lower than most brands. “I would never imagine four or

ﬁ ve years ago that Sony would look at us a competitor,” says Wang.

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CHAPTER 9 DESIGNING ADAPTIVE ORGANIZATIONS 257

Organizing

of suppliers, manufacturers, assemblers, and distributors can look and act like one

seamless company.

The idea behind networks is that a company can concentrate on what it does

best and contract out other activities to companies with distinctive competence in

those speci c areas, which enables a company to do more with less.

Strida, a com-

pany based in Birmingham, England, provides an example of the virtual network

approach.

How do two people run an entire company that sells thousands of high-tech folding bicycles

all over the world? Steedman Bass and Bill Bennet do it with a virtual network approach that

outsources design, manufacturing, customer service, logistics, accounting, and just about

everything else to other organizations.

Bass, an avid cyclist, got into the bicycle business when he and his partner Bennet

bought the struggling British company Strida, which was having trouble making enough

quality bicycles to meet even minimum orders. The partners soon realized why Strida was

struggling. The design for the folding bicycle was a clever engineering idea, but it was a

manufacturing nightmare. Bass and Bennet immediately turned over production engineer-

ing and new product development to an American bicycle designer, still with intentions

of building the bikes at the Birmingham factory. However, a large order from Italy sent

them looking for other options. Eventually, they transferred all manufacturing to Ming Cycle

Company of Taiwan, which builds the bikes with parts sourced from parts manufacturers in

Taiwan and mainland China.

Finally, the last piece of the puzzle was to contract with a company in Birmingham that

would take over everything else—from marketing to distribution. Bass and Bennet concentrate

their energies on managing the partnerships that make the network function smoothly.

With a network structure such as that used at Strida, it is dif cult to answer the

question “where is the organization?” in traditional terms. The different organiza-

tional parts may be spread all over the world. They are drawn together contractu-

ally and coordinated electronically, creating a new form of organization. Much like

building blocks, parts of the network can be added or taken away to meet changing

needs.

A similar approach to networking is called the modular approach, in which a

manufacturing company uses outside suppliers to provide entire chunks of a prod-

uct, which are then assembled into a  nal product by a handful of workers. The

Canadian  rm Bombardier’s Continental business jet is made up of about a dozen

huge modular components from all over the world: the engines from the United

States, the nose and cockpit from Canada, the fuselage from Northern Ireland, the

tail from Taiwan, the wings from Japan, and so forth.

Automobile manufactur-

ers are leaders in using the modular approach. The modular approach hands off

Strida

Innovative Way

EXHIBIT 9.8 Network Approach to Departmentalization

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PART 4 ORGANIZING258

responsibility for engineering and production of entire sections of an automobile,

such as the chassis or interior, to outside suppliers. Suppliers design a module,

making some of the parts themselves and subcontracting others. These modules

are delivered right to the assembly line, where a handful of employees bolt them

together into a  nished vehicle.

Advantages and Disadvantages of Each Structure

Each of these approaches to departmentalization—functional, divisional, matrix,

team, and network—has strengths and weaknesses. The major advantages and dis-

advantages of each are listed in Exhibit 9.9.

Functional Approach Grouping employees by common task permits economies

of scale and ef cient resource use. For example, at American Airlines, all information

technology (IT) people work in the same, large department. They have the expertise

and skills to handle almost any IT problem for the organization. Large, functionally

based departments enhance the development of in-depth skills because people work

on a variety of related problems and are associated with other experts within their

own department. Because the chain of command converges at the top, the functional

structure also provides a way to centralize decision making and provide uni ed

direction from top managers. The primary disadvantages re ect barriers that exist

across departments. Because people are separated into distinct departments, commu-

nication and coordination across functions are often poor, causing a slow response

to environmental changes. Innovation and change require involvement of several

departments. Another problem is that decisions involving more than one department

may pile up at the top of the organization and be delayed.

Divisional Approach By dividing employees and resources along divisional lines,

the organization will be  exible and responsive to change because each unit is small

and tuned in to its environment. By having employees working on a single product line,

the concern for customers’ needs is high. Coordination across functional departments

is better because employees are grouped together in a single location and committed

Structural Approach Advantages Disadvantages

Functional Efﬁ cient use of resources; economies of scale

In-depth skill specialization and development

Top manager direction and control

oor communication across functional departments

Slow response to external changes; lagging innovation

Decisions concentrated at top of hierarchy, creating delay

Divisional Fast response, ﬂ exibility in unstable environment

Fosters concern for customer needs

Excellent coordination across functional departments

Duplication of resources across divisions

Less technical depth and specialization

Poor coordination across divisions

Matrix More efﬁ cient use of resources than single hierarchy

Flexibility, adaptability to changing environment

Interdisciplinary cooperation, expertise available to

all divisions

Frustration and confusion from dual chain of command

High conﬂ ict between two sides of the matrix

Many meetings, more discussion than action

Team Reduced barriers among departments, increased

compromise

Shorter response time, quicker decisions

Better morale, enthusiasm from employee involvement

Dual loyalties and conﬂ ict

Time and resources spent on meetings

Unplanned decentralization

Virtual Network Can draw on expertise worldwide

Highly ﬂ exible and responsive

Reduced overhead costs

Lack of control; weak boundaries

Greater demands on managers

Employee loyalty weakened

EXHIBIT 9.9 Structural Advantages and Disadvantages

CHAPTER 9 DESIGNING ADAPTIVE ORGANIZATIONS 259

Organizing

to one product line. Great coordination exists within divisions; however, coordina-

tion across divisions is often poor. Problems occurred at Hewlett-Packard, for example,

when autonomous divisions went in opposite directions. The software produced in one

division did not  t the hardware produced in another. Thus, the divisional structure

was realigned to establish adequate coordination across divisions. Another major dis-

advantage is duplication of resources and the high cost of running separate divisions.

Instead of a single research department in which all research people use a single facility,

each division may have its own research facility. The organization loses ef ciency and

economies of scale. In addition, the small size of departments within each division may

result in a lack of technical specialization, expertise, and training.

Matrix Approach The matrix structure is controversial because of the dual chain

of command. However, the matrix can be highly effective in a complex, rapidly

changing environment in which the organization needs to be  exible and adapt-

able.

The con ict and frequent meetings generated by the matrix allow new

issues to be raised and resolved. The matrix structure makes ef cient use of human

resources because specialists can be transferred from one division to another. The

major problem is the confusion and frustration caused by the dual chain of com-

mand. Matrix bosses and two-boss employees have dif culty with the dual report-

ing relationships. The matrix structure also can generate high con ict because it pits

divisional against functional goals in a domestic structure, or product line versus

country goals in a global structure. Rivalry between the two sides of the matrix can

be exceedingly dif cult for two-boss employees to manage. This problem leads to

the third disadvantage: time lost to meetings and discussions devoted to resolving

this con ict. Often the matrix structure leads to more discussion than action because

different goals and points of view are being addressed. Managers may spend a great

deal of time coordinating meetings and assignments, which takes time away from

core work activities.

As a new manager, understand the advantages and disadvantages of each approach

to departmentalization. Recognize how each structure can provide beneﬁ ts but might

not be appropriate for every organization and situation.

Team Approach The team concept breaks down barriers across departments and

improves coordination and cooperation. Team members know one another’s prob-

lems and compromise rather than blindly pursue their own goals. The team con-

cept also enables the organization to more quickly adapt to customer requests and

environmental changes and speeds decision making because decisions need not go

to the top of the hierarchy for approval. Another big advantage is the morale boost.

Employees are typically enthusiastic about their involvement in bigger projects rather

than narrow departmental tasks. At video games company Ubisoft, for example, each

studio is set up so that teams of employees and managers work collaboratively to

develop new games. Employees don’t make a lot of money, but they’re motivated by

the freedom they have to propose new ideas and put them into action.

Yet the team approach has disadvantages as well. Employees may be enthusiastic

about team participation, but they may also experience con icts and dual loyalties. A

cross-functional team may make different work demands on members than do their

department managers, and members who participate in more than one team must

resolve these con icts. A large amount of time is devoted to meetings, thus increasing

coordination time. Unless the organization truly needs teams to coordinate complex proj-

ects and adapt to the environment, it will lose production ef ciency with them. Finally,

the team approach may cause too much decentralization. Senior department managers

who traditionally made decisions might feel left out when a team moves ahead on its

own. Team members often do not see the big picture of the corporation and may make

decisions that are good for their group but bad for the organization as a whole.

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