Business 10 Chapter 6: Organizing the Business

Learning Objectives for Organizing the Business

• $\text{Learning Objective 1}$: Discuss the Factors that influence a firm’s organizational structure.
• $\text{Learning Objective 2}$: Explain specialization and departmentalization as two of the building blocks of organizational structure.

Defining Organizational Structure and Tools

• Organizational Structure: Defined as the specialization of the jobs to be done within an organization and the specific ways in which those jobs relate to one another.
• Organizational Chart: A visual diagram depicting a company’s structure. It serves to show employees exactly where they fit into the company's operations.
• Chain of Command: Refers to the reporting relationships within a company. This hierarchy usually flows from the highest level of authority down to the lowest level.
• Scaling Structure: In large firms, it is common to create separate organizational charts for each individual division and for specific departments or units to manage complexity.

Case Study: The Organizational Chart of Contemporary Landscape Services, Inc.

• $\text{Figure 6.1}$ illustrates the hierarchical structure of Contemporary Landscape Services, Inc. as follows:
  • President/Owner: The top level of the organization.
  • Direct Reports to the President/Owner:
    • Retail Shop Manager: Oversees the Buyer.
    • Nursery Manager: Oversees the Supervisor.
    • Landscape Operations Manager: Oversees the Residential Manager and the Commercial Manager.
    • Office Manager: Oversees the Buyer.

Determinants of Optimal Organizational Structure

• Management Planning: Ideally, managers must carefully assess a variety of important factors when planning and creating a structure to ensure the organization functions with maximum efficiency and effectiveness.
• Key Drivers of Structure:
  • Mission and Strategy: A dynamic and rapidly growing business requires an organizational structure that provides flexibility. This allows the firm to respond quickly to changes in its external environment and strategy to facilitate growth.
  • Stability vs. Growth: Conversely, a stable organization with only modest growth goals and a conservative strategy functions best with a different, often more rigid, organizational structure.
  • Size of the Company: The overall scale of the firm dictates the complexity and type of structure needed.
  • Elements of Organization: Organizing is a core part of the management process. It must be conducted with awareness of both the firm’s internal and external environments.
  • Evolution: Most organizations do not remain static; they change their structures on an almost continuing basis to adapt to new needs.

The Three Building Blocks of Organizational Structure

• Developing the structure of any business involves three primary activities:
  1. Specialization: The process of determining who will do what specific task.
  2. Departmentalization: The process of determining how people performing certain tasks can best be grouped together logically.
  3. Establishment of a Decision-making Hierarchy: The process of deciding who will be empowered to make specific decisions and who will possess authority over others.

Job Specialization: The Division of Labor

• Definition: The process of identifying the specific jobs that need to be done and designating the people who will perform them.
• Sample Major Jobs by Industry:
  • Automobile Manufacturing: Making cars (examples: Ford, Toyota, Nissan).
  • Retail: Selling finished goods to consumers (examples: Panda, H&M, Footlocker).
  • Telecommunications: Providing telecom services (examples: STC, Mobily, Orange, AT&T).
• The Specialization Process: Managers take one overall job and break it down into several smaller, specialized jobs. As a business grows, the need for specialization naturally increases so that others can perform tasks originally handled by the owner.
• Advantages of Job Specialization:
  • Specialized jobs are learned more easily by employees.
  • Tasks can be performed with much higher efficiency.
  • Replacing employees is significantly easier because the jobs are narrowly defined.
• Disadvantages of Job Specialization:
  • Overspecialization can occur, particularly at lower levels of the organization.
  • Jobs can become so narrowly defined that employees become bored and careless.
  • Employees may derive less job satisfaction and lose sight of their actual role within the wider organization, which often prompts them to seek employment elsewhere.

Departmentalization: Groups and Profit Centers

• Definition: The process of grouping individual jobs into logical units.
• Benefits:
  • Facilitates easier maintenance, control, and coordination of tasks.
  • Simplifies performance evaluation for top management.
  • Allows a firm to treat each unit as a Profit Center.
• Profit Center: A separate company unit that is made responsible for its own costs and its own profits.
• Logic of Grouping: Managers departmentalize based on common threads or shared purposes.

Specific Types of Departmentalization

• Functional Departmentalization:
  • Involves dividing an organization according to the functions or activities of the groups.
  • Commonly used in service and manufacturing companies, especially smaller startups.
  • Typical departments: Production, Marketing and Sales, Human Resources, and Accounting and Finance.
• Product Departmentalization:
  • Involves dividing the organization based on the specific products or services being created.
  • Widely used in manufacturing and service industries.
  • Example: Kraft Foods divisions:
    • Oscar Mayer Division: Responsible for hotdogs and lunch treats.
    • Kraft Cheese Division: Responsible for cheese products.
    • Maxwell House and Post Division: Responsible for coffee and breakfast cereals.
• Process Departmentalization:
  • Involves dividing the organization according to the production processes used to create a good or service.
  • Example: Vlasic uses $3$ departments to transform cucumbers:
    • Fresh-packed pickles.
    • Pickles cured in brine.
    • Pickle relishes.
  • Each specific process requires different specialized equipment and worker skills.
• Customer Departmentalization:
  • Dividing an organization to offer products and meet the needs of identifiable customer groups.
  • Frequently used by retail stores, department stores, and banks.
• Geographic Departmentalization:
  • Dividing an organization according to the specific areas of the country or the world served by the business.
  • Example: Tracking products sold in MENA (Middle East and North Africa) or Asia Pacific.
• Multiple Forms of Departmentalization:
  • As firms scale and grow, they often adapt different types of departmentalization at various levels of the organization to leverage the specific advantages of each type.