The primary factors that influence organization design decisions are environmental factors, business strategy, and technology. The environmental factors that managers and employees need to be aware of are
(1) the characteristics of the present and possible future environments and
(2) how they affect the organization's ability to function effectively.
Every organization exists in an environment and, although specific environmental factors vary from industry to industry, a few broad ones exert an impact on the strategies of most organizations including suppliers, distributors, competitors, and customers.
Business strategy refers to the strategic choices made by top management to enable an organization to capitalize on its unique capabilities in order to build and sustain a competitive advantage. Three underlying strategies appear to be essential in doing so: low-cost, differentiation, and focused. These strategic choices may call for different approaches to organization design. For example, a new organization pursuing a low-cost strategy may organize with a functional structure, with accountability and responsibility clearly assigned to various departments, to attain significant economies of scale in key business activities, such as purchasing and logistics. Such a simple structure would allow the organization to maintain a cost advantage in the sale of a standardized product to the "average" customer in a broad market. Because the environment is uniform and stable, few product modifications are needed to satisfy customers (such modifications would complicate organization design decisions through increased requirements for differentiation and integration). Again, the simplicity of the structure requires fewer resources, reinforcing the cost advantage demanded by the strategic choice. And again, strategic decisions may result in a choice of functional design.
Business strategy refers to the strategic choices made by top management to enable an organization to capitalize on its unique capabilities in order to build and sustain a competitive advantage. Three underlying strategies appear to be essential in doing so: low-cost, differentiation, and focused. These strategic choices may call for different approaches to organization design. For example, a new organization pursuing a low-cost strategy may organize with a functional structure, with accountability and responsibility clearly assigned to various departments, to attain significant economies of scale in key business activities, such as purchasing and logistics. Such a simple structure would allow the organization to maintain a cost advantage in the sale of a standardized product to the "average" customer in a broad market. Because the environment is uniform and stable, few product modifications are needed to satisfy customers (such modifications would complicate organization design decisions through increased requirements for differentiation and integration). Again, the simplicity of the structure requires fewer resources, reinforcing the cost advantage demanded by the strategic choice. And again, strategic decisions may result in a choice of functional design.
Finally, technology influences organization design in terms of the creation of teams and departments, the delegation of authority and responsibility, and the need for coordination. In organizations using simple technology departments may be appropriately formed on the basis of similarities in technological characteristics, resulting in the functional organizational structure. Again, the simplicity of the structure and limited resources required to operate the organization while competing effectively reinforce the appropriateness of the functional design in this context.
In the long run, managers must keep in mind the fact that organization design decisions may solve one set of problems but create others. Thus, the key to effective organization design is for managers to select a design that minimizes the drawbacks of any given design in the existing environment, but remain prepared to alter the organization design if the environment facing the organization changes significantly. Significant growth in the organization over time may ultimately require a shift from a functional structure to a place design, with a greater emphasis on differentiation and integration. In such a case, greater use of information technology may help the organization to conserve resources and maintain its competitive edge.
In the long run, managers must keep in mind the fact that organization design decisions may solve one set of problems but create others. Thus, the key to effective organization design is for managers to select a design that minimizes the drawbacks of any given design in the existing environment, but remain prepared to alter the organization design if the environment facing the organization changes significantly. Significant growth in the organization over time may ultimately require a shift from a functional structure to a place design, with a greater emphasis on differentiation and integration. In such a case, greater use of information technology may help the organization to conserve resources and maintain its competitive edge.
Primary factors that influence organizational design decisions
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