A key function of management is organizational structure design. While organizational design is often dependent on the company’s specific situation, previous organizational patterns, internal circumstances, and company politics, there are several other factors that almost all companies must consider during the structure design process. They must determine which value chain activities are most critical and which are best being outsourced, they must work to align the structure with the strategy, and they have to decide how they intend to delegate authority.
Strategy – critical activities
During the structure design stage of organizational development, it is important for management to evaluate which activities they intend to perform in house and which activities need to be delegated to outside vendors. Sometimes it is more beneficial to outsource those activities that are not as strategy-critical (i.e. administrative support) in order to free up more time and resources to focus on those activities that are most essential to out-differentiating the competition (i.e. research and development, marketing, design).
Focusing on specific value chain activities also increases the efficiency of internal operations by flattening the organizational structure and speeding up decision-making. Plus, as market conditions change, they are better able to increase their response times to those conditions.
Finally, by partnering with external service providers, companies can increase their overall capabilities. When a company works to do everything themselves, they may miss out on the expertise that outside providers can provide. However, when a partnership is formed, the organization is able to add that particular expertise to their portfolio of competencies.
As a result of market changes and cost, several large U.S. based companies decided to outsource key functions to other countries. AOL began outsourcing software engineering jobs to India in 2004. Bank of America outsourced jobs to Hyderabad. Honeywell moved thousands of manufacturing jobs to India, Europe, Mexico, and the Czech Republic, and even Levi Strauss closed down all of their North American manufacturing locations, after outsourcing jean production to Asia, the Caribbean, and Latin America.
Aligning organizational structure with strategy
A firm’s organizational structure is made up of the combination of tasks, responsibilities, reporting relationships, and lines of authority that work within the company. Managers must design a structure in which each of the parts are not only aligned with each other, but also aligned to the overall strategy because this design is key to creating value for the customers, generating a profit, and maintaining a competitive advantage. Additionally, decreased operating costs, increased efficiency, and better internal communication can help the company beat rivals to market.
The type of structure that an organization forms also depends on the company’s size and complexity. This structure typically falls within one of four basic categories: A simple structure in which a central executive handles all major decisions and staff is small, a functional structure in which department managers report to the CEO and a corporate staff, a multidivisional structure in which the central corporate headquarters supports and monitors several operating divisions, or a matrix structure which is a combination of two or more other structures. Further, as the needs and size of an organization changes, so too does their structural form.
The primary decision to consider in organizational structure design is, how much authority to give to top managers versus how much to give to the individual employees. In other words, companies must decide how much centralization or decentralization is in the best interest of the organization, respectively. While the size and complexity of the organization often plays a part in determining which structure may work best, each structure has its pros and cons.
For example, the Ritz Carlton Hotel Company empowers employees at all levels “to create unique, memorable and personal experiences for [the] guests”. Additionally, they believe that each employee is responsible for owning and resolving whatever guest problem they may encounter. This somewhat decentralized structure encourages initiative and responsibility among the employees, it fosters motivation and a sense of involvement, and it encourages new ideas and creative thinking. However, for organizations this structure might also place a strain on cross-unit collaboration, causing a breakdown in communication and efficiency between departments.
Business managers are often tasked with designing an organizational structure that is based on their company’s situation, patterns, circumstances, and bureaucracies. However, if they can determine the best value chain activities on which to focus their strategic efforts, then outsourcing the rest could prove to be beneficial to their organization. Additionally, by aligning their organizational structure with their strategy, and finding an effective balance between centralized and decentralized decision-making, they ultimately increase their chances of solidifying a competitive advantage in the marketplace.
Thompson, Jr., A. A., Peteraf, M.A., Strickland III, A. J. & Gamble, J.E. (2012). Crafting & Executing Strategy (18th Ed.) New York: McGraw Hill/Irwin.
Ritz Carlton. (2013). Service Values: I am proud to be Ritz-Carlton. Ritz Carlton Gold Standards. Retrieved from http://corporate.ritzcarlton.com/en/About/GoldStandards.htm
Ehow. (2012). List of outsourced companies. Ehow Money. Retrieved from http://www.ehow.com/list_5854931_list-outsourced-companies.html