Summary Organisational Theory, Chapter 3 - 6
Organizational Structure (EBP670C05)
Rijksuniversiteit Groningen
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Chapter 3 - Organisational effectiveness Each organisation strives to be as effective as possible. Because of the countless different organisations, each with their own structures and goals, the following main questions in Organisation Theory arises; ‘when is an organisation effective and how do we measure effectiveness?’
Although there is almost unanimous agreement that different organisations have to be evaluated using different characteristics, the following definition is proposed; ‘organisational effectiveness is the degree to which an organisation attains its short-term (ends) and long- term (means) goals, the selection of which reflect strategic constituencies in the organisation’s environment, the self-interest of the evaluator and the life stage of the organisation.’
In the study of organisational effectiveness there are four diverse approaches: The goal- attainment approach, the systems approach, the strategic-constituencies approach and the balanced scorecard approach.
The goal-attainment approach states that an organisation is effective when it achieves its stated goals. Important to notice is the fact that organisations have to pursue both short-term and long-term goals and that these goals could be contradictory. A second problem is the question ‘whose goals have to be pursued?’ since an organisation exists of many persons who all have their own opinions and private goals. For example, for the shareholders of Oil Company Shell the goal is a high profit, but the top management also wants satisfied costumers and a green environment.
The systems approach focuses not only on the output (goals) but also looks critically to the ability to acquire inputs (resources), to maintain stability between the various subsystems internally and to interact successfully with its external environment. It is more about the means necessary to ensure the continued survival of the organisation and therefore, the validity of the selected goals and the measures used for assessing the progress towards these goals are questioned. One problem is that some rates about subsystems are very difficult to measure; it is easy to measure your profit, but measuring innovation and community goodwill is a different story. Another problem, critics say, is the fact that the systems approach focuses too much on the means necessary to achieve effectiveness rather than effectiveness itself.
However, the first two approaches are complementing each other; the goal-attainment approach focuses only on the end goals and the systems approach on the means goals. Both are important because if you do not reach your end goals, you have to look in the means goals why this may be so.
The strategic-constituencies approach proposes that for an organisation to be effective it needs to appease those that can threaten the survival of the organisation. Making it operative is done by determining the political influential constituencies and their power. The organisation needs to identify the wishes and find a preference order for the goals of their organisation.
The stakeholder approach to organisational effectiveness is a wider approach than the strategic constituencies approach. It says that an organisation is only effective when it takes into account the wider community that has an interest in the decisions of the organisation, even if this is at the cost of profit.
The problem with these approaches is that it is hard to separate the strategic constituencies from the larger environment. Managers with different fields of expertise have different views on these strategic constituencies which may create unwanted friction in an organisation.
The balanced scorecard approach integrates all the previous approaches mentioned in this chapter. It attempts to view performance in several areas and find out how these results were achieved. The balance scorecard approach is made operative by looking if an organisations strategy and execution are contributing to making profit or at least covering the costs. Also looking what an organisation has to do internally to satisfy its customers and if an organisation is able to innovate and improve to keep creating value. The balance scorecard enables managers to see if improvement in one area is achieved at expense of creating problems in another area. The problem is that it is prone to subjectivity about what the problems are in an organisation. This can result in an organisation managing the wrong problems.
Chapter 4 - Dimensions of organisation structure In Australia, many firms have undergone major restructions. Why are all these firms restructuring? And what measures and terms can we use to compare these organisations? There are four key terms to describe and compare organisations.
The first one is called complexity which refers to the differentiation existing within an organisation. Complexity can be compromised by three components: Horizontal differentiation, vertical differentiation and spatial dispersion. The first element in complexity, horizontal differentiation describes the degree of differentiation among units based on the orientation of members, the nature of the tasks they perform and their education and training. Almost all organisations rely on job specialisation that reinforces differences and is also described as division of labour. Efficiency as another division of labour represents the increase of skills and knowledge through repetition and concentration on a particular specialised area. Though, every worker has unique talents, why not only focusing on these skills instead of teaching a whole range of tasks they may not be very good in? This leads to the creation of specialised groups organised into departments by managers. The managerial areas of responsibilty reflect the complexity of the organisation. Managers have to make sure that all important areas have someone responsible for them. Vertical differentiation referes to as layers of management. The greater the number of hierarchical levels in an organisation, the more complexity is given. Concerning this, the more levels exist, the greater the potential of communication breakdown. One distinquishes between tall and flat organizations. The number of subordinates that a manager can supervise effectively represent the span of control, either wide or narrow. The last component of complexity, spatial dispersion is described as the degree to which the location of an organisation's facilities and personnel is dispersed geographically. There is a difference between high and low dispersion. A low spatial dispersion means a small geographic distance and therefore fewer communication problems. A high level of spatial dispersion causes also a higher level of complexity because of a greater need for effective communication, coordination and control devices. Increased complexity ultimately represents a difficulty in managing organisational change.
The second component of organisational structure is formalisation. the degree to which jobs and procedures within the organisation are standarised. A high formalised job means that workers have a very small amount of discretion over what is to be done. Employees undertake
If the strategic apex (top-level managers charged with the overall responsibilty for the organisation) dominates, the organisation has a simple structure. In this first structural configuration control is centralised in a single authority person. Basic characteristics are low compexity, little formalisation and fast decision-making within a flexible and flat organisation. Problems of simple structure are not only that it is applicable only to small organisations, but also the concentration of executive power in one person which can result in abuse of authority or lack of managerial skills. Almost all organisations pass through the simple structure, some remain in it by staying small, but if organisations grow, they need more managers, decentralised operations and have a higher complexity. In that case, simple structures grow then into machine bureaucracy.
For large-sized organization, with stable environment and with repetitive, routine work, the machine bureaucracy is highly efficient. There are several departments in these organizations responsible for different parts, but finally all will be centralized. However, when operating over too wide a geographic area or too diverse a product range, the weakness of machine bureaucracy can be obvious.
Divisional structure, the third structural configuration is highly centralized. Middle managers are most significant, who need report to head office but also control individual business. Separate units minimize the effects on the organization and other divisions, also set head free to focus on long term. The problem of this structure is cooperation between divisions can be difficult. Also, repeated departments on different level can be costly and inefficient.
The professional bureaucracy is decentralized and has highly trained professionals. Decentralisation and internalized professional standards rather than external formalization are also the features of this structural form. Large amounts support staff are involved to serve the operating core. Professional tasks where highly trained professionals are needed can be performed. However, in this structure, more attention can be paid to self-interest rather than organization problem is that it is hard to manage employees in the same way due to the constraints from profession. Also, coordination between various professionals can be difficult especially for complex work, because normal work is allocated to people with related skills.
The last structure Mintzberg developed is called adhocracy, characterised by low vertical differentiation, low formalization, high horizontal differentiation, also with intensive coordination. Decentralized teams of professionals and employees with high skills are decision makers. People with expertise rather than high position enjoy more power. It is a adaptable and creative form to deal with collaboration of specialists from diverse disciplines. On another hand, this flexible and responsive structure is inefficient and standardization is unavailable. Rapid changes in work leads to stress of members. The adhocracy is suitable for solving non-routine problems, where the environment is dynamic and unforeseen.
To describe intangible organizations, metaphors are used or attributed to organisations either in human or familiar form. It helps people to understand the environment and the working place.
Chapter 5 - Strategy What is strategy? Strategy decisions establish the general purpose and direction of the enterprise and the method by which they will be achieved. Planning mode views strategy as an explicit and systematic set of set of guidelines. Evolutionary mode is a strategy that evolves over time as a pattern in a stream of significant decisions.
Levels of strategy Organisations need to develop different strategies for different levels of activities. If an organisation is in more than one line of business, it will need a corporate-level strategy, which attempts to define the nature of the business in which the firm seeks to operate. For organisations with only one line of activity, a business level strategy is needed, which refers to those strategies adopted by business units of the organisation.
Chandler’s strategy-structure thesis According to Chandler, changes in corporate strategy precede and lead to changes in an organisation’s structure. Moreover, a company has to develop new structures to meet new needs which result from an expansion of a firm’s activities. As companies begin to grow, their strategies become more ambitious and elaborate. Chandler studied nearly 100 American firms between 1900 and 1950 to get these results, but the theory gets criticism, for example because he only looked at large and successful firms.
Contemporary strategy-structure theories Raymond Miles and Charles Snow classify organisations into one of four strategic types, based on the rate at which they change their products or markets. They call these types defenders, prospectors, analysers and reactors. Defenders seek stability by producing only a limited set of products directed at a narrow segment of the total potential markets. Prospectors are almost the opposite of defenders. The prospector’s strengths lie in finding and exploiting new product and market opportunities. Analysers attempt to minimise risk by adapting innovations after they have been proven by others. Reactors represent a residual strategy. The label is meant to describe the inconsistent and unstable patterns that arise when one of the other three strategies is pursued improperly.
Porter’s competitive strategies According to Porter an organisation should put its strength where the competition’s is not. He states that there are four possible strategies: cost-leadership strategy, which focuses on being the low-cost producer in an industry; differentiation strategy, which focuses on being unique in an industry in a valued way; and focus strategy, which focuses on a cost advantage or differentiation advantage in a narrow segment. The fourth term is a condition that should be avoided, the stuck in the middle: these organisations are unable to gain a competitive advantage by one of the three previous strategies.
Strategy and globalisation Globalisation means that barriers to the flow of goods, services and capital between countries are reduced. According to Bartlett and Ghoshal there are four strategies possible when a company is entering overseas markets: international strategy, which requires firms to transfer valuable skills and product knowledge to the overseas markets; multidomestic strategy, which tries to achieve maximum local responsiveness with customized products; global strategy, which sells a product with little modification at the lowest possible costs on a global basis; and transnational strategy, which tries to achieve maximum local
Conclusions on the size-structure relationship It is questionable to what extent size and structure are related and whether size is the cause of a certain structure or the other way around. In any scenario, size is not the only force that influences a company’s structure. It can be argued that size affects complexity, but at a decreasing rate. The best argument can be made for the impact of size on vertical differentiation; the larger the company, the more layers of management there are. As a company grows, it is natural that formalisation increases in order to create uniformity and control the employees, by means of rules and regulations. Also, a bigger size of a company may either increase or decrease centralisation, depending on the characteristics of activities and management, although the general tendency is decentralisation as the size increases.
Large and small companies In general, a company is considered large when it exceeds 2000 employees, because beyond this number, an increase is unlikely to cause any major structural changes.
Special issues relating to organisation size The problems of large size We can identify a number of problems that will come up at managements of larger organisations. Such as; The growth of bureaucracy, Turning information to knowledge, Adapt to changing technologies, Long time frames for action, Need for accurate costing information, Managing over a wide geographic spread and Bounded rationality (and Bounded reliability). There are also a few solutions to overcome those problems; Divisionalisation, Outsourcing, Decentralisation, Structuring to facilitate change, Allocating responsibilities and Physical separation of organisation areas of work.
The influence of the owner A small business is an organisation where one person makes all the major decisions and decision making is highly centralised. Owner-managers influence the way that small businesses are structured and managed. In a large organisation, the management acts as agents for the owners. They act within the parameters given to them by the owners.
Issues of reduced importance Small businesses have a minimal degree of horizontal, vertical and spatial differentiation, that is characterised by low formalisation and high centralisation (centralised decision making). The organisational structures tend to be flat. In small businesses there are fewer barriers to communication, this should provide a competitive advantage. Stimulating innovation has reduced importance. Small organisations are likely to require change that is implemented more easily.
Issues of greater importance Issues that take on greater importance for small businesses include control (direct supervision and involvement) and accountability, economies of scale and environmental dependence. The larger an organisation, the less it depends on constituencies.
Downsizing Downsizing is defined as the planned elimination of positions or jobs. There are several reasons for downsizing; Increased competition, Computerisation and automation, Technological obsolescence, Declining profitability, Information technology and middle management, Limitations of size advantages, Changes in strategy, Changes in Structure and
Rise of outsourcing. Of course this leads to benefits; Lowered overheads, less bureaucracy, Faster decision making, Smoother communications, Greater entrepreneurship and Increased productivity.
The effects of downsizing The effect of downsizing could be a so called “survivor’s syndrome”. This means that there is a lowering of commitment and morale, more job insecurity, productivity drops and failure to maintain trust of other employees than the management. Most of the time downsizing is counterproductive. The larger the organisation, the likelier it is judgements of managements are best guesses, because they are “far-away” from the actual production process.
The need to maintain investments in the future If you want to keep your organisation profitable you should have the future just as high in mind as the present. If you do not allocate resources to prepare for the future, downsizing will definitely be counterproductive.
Summary Organisational Theory, Chapter 3 - 6
Vak: Organizational Structure (EBP670C05)
Universiteit: Rijksuniversiteit Groningen
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