Despite the trend toward horizontal design, vertical hierarchies continue to thrive because they often provide important benefits for organizations.67 How do managers know whether to design a structure that emphasizes the formal, vertical hierarchy or one with an emphasis on horizontal communication and collaboration? The answer lies in the contingency fac- tors that influence organization structure. Research on organization design shows that structure depends on a variety of contingencies, as defined in Chapter 1. The right structure is designed to “fit” the contingency factors of strategy, environment, and production tech- nology, as illustrated in Exhibit 7.13. These three areas are changing quite dramatically for most organizations, creating a need for stronger horizontal coordination.
1. STRUCTURE FOLLOWS STRATEGY
In Chapter 5, we discussed several strategies that business firms can adopt. Two strategies proposed by Porter are differentiation and cost leadership.68 With a differentiation strat- egy, the organization attempts to develop innovative products unique to the market. With a cost leadership strategy, the organization strives for internal efficiency. The strategies of cost leadership versus differentiation typically require different structural approaches. A re- cent study demonstrated that business performance is strongly influenced by how well the company’s structure is aligned with its strategic intent, so managers strive to pick strategies and structures that are congruent.69
Exhibit 7.14 shows a simplified continuum that illustrates how structural approaches are associated with strategic goals. The pure functional structure is appropriate for achieving internal efficiency goals. The vertical functional structure uses task specialization and a strict chain of command to gain efficient use of scarce resources, but it does not enable the orga- nization to be flexible or innovative. In contrast, horizontal teams are appropriate when the primary goal is innovation and flexibility. Each team is small, is able to be responsive, and has the people and resources necessary for performing its task. The flexible horizontal struc- ture enables organizations to differentiate themselves and respond quickly to the demands of a shifting environment but at the expense of efficient resource use. New strategies also shape structure in government organizations. Under financial pressure to cut costs and po- litical pressure to keep customers happy, Departments of Motor Vehicles are farming out DMV business whenever possible by building strong partnerships with other companies. For example, in most states, auto dealers register new cars on site when they are sold.70
Exhibit 7.14 also illustrates how other forms of structure represent intermediate steps on the organization’s path to efficiency or innovation. The functional structure with cross- functional teams and project managers provides greater coordination and flexibility than the pure functional structure. The divisional structure promotes differentiation because each division can focus on specific products and customers, although divisions tend to be larger and less flexible than small teams. Exhibit 7.14 does not include all possible structures, but it illustrates how structures can be used to facilitate the strategic goals of cost leadership or differentiation.
2. STRUCTURE REFLECTS THE ENVIRONMENT
In Chapter 2, we discussed the nature of environmental uncertainty. Environmental uncer- tainty means that decision makers have difficulty acquiring good information and predicting external changes. Uncertainty occurs when the external environment is rapidly changing and complex. An uncertain environment causes three things to happen within an organization.
- Increased differences occur among departments. In an uncertain environment, each major department—marketing, manufacturing, research and development—focuses on the task and environmental sectors for which it is responsible and hence distinguishes itself from the others with respect to goals, task orientation, and time 71 Departments work autonomously. These factors create barriers among departments.
- The organization needs increased coordination to keep departments working together. Additional dif- ferences require more emphasis on horizontal coordination to link departments and overcome differ- ences in departmental goals and Image not available due to copyright restrictions orientations.
- 3. The organization must adapt to change. The organization must maintain a flexible, responsive posture toward the environment. Changes in prod- ucts and technology require cooper- ation among departments, which means additional emphasis on coor- dination through the use of teams, project managers, and horizontal information processing.72
The terms mechanistic and organic can be used to explain structural responses to the external environment.73 When the environment is stable, the organization uses a mechanistic system. It typically has a rigid, vertical, centralized structure, with most decisions made at the top. The organiza- tion is highly specialized and characterized by rules, procedures, and a clear hierarchy of authority. In rapidly changing environments, however, the organization tends to be much looser, free-flowing, and adaptive, using an organic system. The structure is more horizon- tal and decision-making authority is decentralized. People at lower levels have more re- sponsibility and authority for solving problems, enabling the organization to be more fluid and adaptable to changes in the environment.74
The contingency relationship between environmental uncertainty and structural approach is illustrated in Exhibit 7.15. When the external environment is stable, the orga- nization can succeed with a mechanistic structure that emphasizes vertical control. With little need for change, flexibility, or intense coordination, the structure can emphasize spe- cialization and centralized decision making. When environmental uncertainty is high, however, a flexible organic structure that emphasizes lateral relationships such as teams and horizontal projects is appropriate. Vertical structure characteristics such as specialization and centralization should be downplayed. In an uncertain environment, the organization figures things out as it goes along, departments must cooperate, and decisions should be decentralized to the teams and task forces working on specific problems. The flight deck of the USS Dwight D. Eisenhower, a nuclear-powered aircraft carrier, provides an excellent example of the relationship between structure and the environment.
Researchers studied this ability to glide smoothly from a rigid, hierarchical structure to a loosely structured, horizontal one, not only on aircraft carriers but in other organizations that need to be exceptionally responsive to environmental changes—for example, air-traffic controllers or workers at nuclear power plants. The hierarchical side helps keep discipline and ensure adherence to rules that have been developed and tested over many years to cope with expected and well-understood problems and situations. However, during times of complexity and high uncertainty, the most effective structure is one that loosens the lines of command and enables people to work across departmental and hierarchical lines to an- ticipate and avoid problems.76
Not all organizations have to be as super-responsive to the environment as the USS Dwight D. Eisenhower, but using the correct structure for the environment is important for businesses as well. When managers use the wrong structure for the environment, reduced performance results. A rigid, vertical structure in an uncertain environment prevents the organization from adapting to change. Likewise, a loose, horizontal structure in a stable environment is inefficient. Too many resources are devoted to meetings and discussions when employees could be more productive focusing on specialized tasks.
3. STRUCTURE FITS THE TECHNOLOGY
Technology includes the knowledge, tools, techniques, and activities used to transform or- ganizational inputs into outputs.77 Technology includes machinery, employee skills, and work procedures. A useful way to think about technology is as production activities. The production activities may be to produce steel castings, television programs, or computer software. Technologies vary between manufacturing and service organizations. In addition, new digital technology has an impact on structure.
Woodward’s Manufacturing Technology. The most influential research into the relationship between manufacturing technology and organization struc- ture was conducted by Joan Woodward, a British industrial sociologist.78 She gathered data from 100 British firms to determine whether basic structural characteristics, such as administrative overhead, span of control, and centralization, were different across firms. She found that manufacturing firms could be categorized according to three basic types of production technology:
- Small-batch and unit production. Small-batch production firms produce goods in batches of one or a few products designed to customer specification. Each customer orders a unique product. This technology also is used to make large, one-of-a-kind products, such as computer-controlled machines. Small-batch manufacturing is close to traditional skilled-craft work because human beings are a large part of the process. Examples of items produced through small-batch manufacturing include custom clothing, special-order machine tools, space capsules, satellites, and submarines.
- Large-batch and mass production. Mass production technology is distinguished by standardized production runs. A large volume of products is produced, and all cus- tomers receive the same product. Standard products go into inventory for sale as customers need them. This technology makes greater use of machines than does small-batch production. Machines are designed to do most of the physical work, and employees complement the machinery. Examples of mass production are auto- mobile assembly lines and the large-batch techniques used to produce tobacco products and textiles.
- Continuous process production. In continuous process production, the entire work flow is mechanized in a sophisticated and complex form of production tech- nology. Because the process runs continuously, it has no starting and stopping. Human operators are not part of actual production because machinery does all of the work. Human operators simply read dials, fix machines that break down, and manage the production process. Examples of continuous process technologies are chemical plants, distilleries, petroleum refineries, and nuclear power plants.
The difference among the three manufacturing technologies is called technical com- plexity. Technical complexity is the degree to which machinery is involved in the produc- tion to the exclusion of people. With a complex technology, employees are hardly needed except to monitor the machines.
The structural characteristics associated with each type of manufacturing technology are illustrated in Exhibit 7.16. Note that centralization is high for mass production technology and low for continuous process. Unlike small-batch and continuous process production, standardized mass-production machinery requires centralized decision making and well- defined rules and procedures. The administrative ratio and the percentage of indirect labor required also increase with technological complexity. Because the production process is nonroutine, closer supervision is needed. More indirect labor in the form of maintenance people is required because of the machinery’s complexity; thus, the indirect/direct labor ratio is high. Span of control for first-line supervisors is greatest for mass production. On an assembly line, jobs are so routinized that a supervisor can handle an average of 48 em- ployees. The number of employees per supervisor in small-batch and continuous process production is lower because closer supervision is needed. Overall, small-batch and continu- ous process firms have somewhat loose, flexible structures (organic), and mass production firms have tight vertical structures (mechanistic).
The important conclusion about manufacturing technology was described by Woodward as follows: “Different technologies impose different kinds of demands on in- dividuals and organizations, and these demands have to be met through an appropriate structure.”79 Woodward found that the relationship between structure and technology was directly related to company performance. Low-performing firms tended to deviate from the preferred structural form, often adopting a structure appropriate for another type of technology. High-performing organizations had characteristics similar to those listed in Exhibit 7.16.
Service Technology. Service organizations are increasingly important in North America. For the past two decades, more people have been employed in service organiza- tions than in manufacturing firms. Examples of service organizations include consulting companies, law firms, brokerage houses, airlines, hotels, advertising companies, amuse- ment parks, and educational organizations. In addition, service technology characterizes many departments in large corporations, even manufacturing firms. In a manufacturing company such as Ford Motor Company, the legal, human resources, finance, and market research departments all provide service. Thus, the structure and design of these depart- ments reflect their own service technology rather than the manufacturing plant’s technol- ogy. Service technology can be defined as follows:
- Intangible output. The output of a service firm is intangible. Services are perishable and, unlike physical products, cannot be stored in inventory. The service is either consumed immediately or lost forever. Manufactured products are produced at one point in time and can be stored until sold at another time.
- Direct contact with customers. Employees and customers interact directly to provide and purchase the service. Production and consumption are simultaneous. Service firm employees have direct contact with customers. In a manufacturing firm, technical employees are separated from customers, and hence no direct interactions occur.80
One distinct feature of service technology that directly influences structure is the need for employees to be close to the customer.81 Structural characteristics are similar to those for continuous manufacturing technology, shown in Exhibit 7.16. Service firms tend to be flexible, informal, and decentralized. Horizontal communication is high because employ- ees must share information and resources to serve customers and solve problems. Services also are dispersed; hence each unit is often small and located geographically close to cus- tomers. For example, banks, hotels, fast-food franchises, and doctors’ offices disperse their facilities into regional and local offices to provide faster and better service to customers.
Some services can be broken down into explicit steps, so that employees can follow set rules and procedures. For example, McDonald’s has standard procedures for serving cus- tomers, and Marriott has standard procedures for cleaning hotel rooms. When services can be standardized, a tight centralized structure can be effective, but service firms in general tend to be more organic, flexible, and decentralized.
Digital Technology. Digital technology is characterized by use of the Internet and other digital processes to conduct or support business online. E-commerce organiza- tions such as Amazon.com, which sells books and other products to consumers over the Internet; eBay, an online auction site; Google, an Internet search engine; and Priceline. com, which allows consumers to name their own prices and then negotiates electronically with its partner organizations on behalf of the consumer, are all examples of firms based on digital technology. In addition, large companies such as General Electric, Dell Inc., and Ford Motor Company are involved in business-to-business commerce, using digital tech- nology to conduct transactions with suppliers and partners.
Like service firms, organizations based on digital technology tend to be flexible and de- centralized. Horizontal communication and collaboration are typically high, and these companies may frequently be involved in virtual network arrangements. Digital technology is driving the move toward horizontal forms that link customers, suppliers, and partners into the organizational network, with everyone working together as if they were one orga- nization. People may use electronic connections to link themselves together into teams. For example, an employee may send an e-mail to people both within and outside the orga- nization who can help with a particular customer problem and quickly form a virtual team to develop a solution.82 In other words, digital technology encourages boundarylessness, where information and work activities flow freely among various organizational participants.
Centralization is low, and employees are empowered to work in teams to meet fast-changing needs. Verbal and electronic communication is high, both up and down as well as across the organization because up-to-the-minute information is essential. In the digital world, advantage comes from seeing first and moving fastest, which requires extraordinary openness and flexibility.83
Source: Daft Richard L., Marcic Dorothy (2009), Understanding Management, South-Western College Pub; 8th edition.