Organization Design

We reviewed how the four major environmental factors—suppliers, distributors, competitors, and customers—can affect the design of an organization. Although these four factors vary by industry, leaders need to assess them before choosing a business strategy. A business strategy indicates how the organization intends to compete in its industry. A cost leadership (low-cost) strategy focuses on achieving cost efficiencies that let the organization compete favorably against its rivals. An organization pursuing a differentiation strategy attempts to provide customers with a unique product and/ or service. Organizations pursing a focused strategy target a narrow market or niche for their product or service.

There are two fundamentals of organizing: differentiation and integration. Differentiation is created through a division of labor and job specialization. As organizations grow, they create departments to handle certain activities, such as payroll, manufacturing, and human resources. Because different units are part of the larger organization, some degree of integration (coordination) is needed among them for an organization to be effective. Integration is achieved through the use of mechanistic and organic management practices.

The vertical design of an organization has five major parts. The hierarchy shows relationships among the various management levels in an organization. These relationships are shown in the organization chart. The span of control refers to the number of subordinates reporting to each manager. Authority, responsibility, and accountability are the glue that holds an organization together because these indicate who has the right to make a decision, who will be held responsible for the decision, and who is accountable for the results. Delegation is the process of giving authority to a person (or group) to make decisions. Delegation should go hand in hand with responsibility and accountability. Centralization/decentralization refers to the overall philosophy of management as to where decisions are to be made.

The four primary types of design are (1) functional design—groups employees according to common tasks to be performed; (2) product design—groups employees by product or service in self-contained units, each responsible for its own goods or services; (3) geographical design—groups functions and employees by location; and (4) network design—subcontracts some or many of its operations to other organizations and coordinates them to accomplish specific goals.