CHAPTER 8
Organizational Structure
The theory of administration is concerned with how an organization should be constructed and operated in order to accomplish its work efficiently.
Structure is defined as “the way in which parts are arranged or put together to form a whole” (American Heritage 2007, p. 1347). In general, within an organization there are two types of structures: the physical structure (e.g., the facility layout) and the knowledge structure. The knowledge structure creates the communication channels, so that the right information arrives at the right time at the right place. The structure should not only enable a company to coordinate internal interdependencies between units but also allow for adaptations and adjustment to the environment.
The work performed by a company can be subdivided into tasks performed by the workers within certain units to which tasks were assigned. Specialized decisions should also be made within the specialized units since each unit of specialists is in the best position to make certain decisions. So, each unit performs tasks that have specific physical and information requirements. Moreover, there are dependencies between the various units which require coordination. The structure creates these units and ensures coordination.
Example: A perioperative services unit (POS) in a hospital is responsible for managing all of the tasks required to successfully perform surgery on patients. These tasks include having sterile instruments, ensuring the patient is prepared, having anesthesiologists available, and so on. They are concentrated within the POS unit because they are serving the same process (i.e., treating a patient from their arrival through their regaining of consciousness in the postanesthesia care unit [PACU]). The POS itself is subdivided so that there is a Preoperative holding area (Pre-Op), an operating room (OR), and a PACU.
In the Pre-Op unit, the patients, who arrive for surgery, are met by nurses who ensure that they are prepared for surgery by the time the OR is available. The Pre-Op unit is a separate physical structure adjacent to the ORs, but distinct from the ORs to help the ORs remain sterile. This physical separation means that there must be a structure for the information flows between the Pre-Op and the OR. Information has to flow between them about the status of the patients as well as information about the surgeon and room availability. Both units share information regarding which patients will arrive, when they will arrive, and which surgeon is performing the surgery as well as the status of the patient.
We learned in Chapter 3 that a process consists of a series of tasks or operations. While dividing a complex business process into individual tasks allows workers to become highly specialized in their particular aspects of the individual task, it increases the coordination requirements between the units due to the dependence of tasks, in part because there are tasks that must be completed before other tasks can begin. Coordination between dependent tasks requires structure and communication between people performing the task for example, on task progress or capacity requirements. For the process to seem effortless, a lot of work and practice is necessary. It is similar to two people dancing together in that the partners must communicate to move as a couple. Part of the thrill of dancing comes when coordination is achieved between the dance partners.
A great part of management tools consists of coordination mechanisms to achieve coordination between the different parts. One common example of a coordination mechanism in any company that has inventory is the inventory management system. This coordinates the ordering of inventory, the receipt of inventory, the stocking of inventory, and so on, so that it is available as needed.
Example: In order to sell a grocery item, the retailer has to perform several tasks in sequence over a period of time. The retailer has to order the item from the distributor, receive the item and put it onto a shelf, and take the money from the customer who selects the item from the shelf. This is an example of sequence dependence since the retailer needs to order the items before the retailer can receive the items and put them onto a shelf. Further, they have to be on the shelf before the customer can come and select the items for purchase.
The organizational structure determines the arrangement of the overall tasks into parts to perform the entire business process. In many companies there are units with names such as: Sales and Marketing, Operations and Accounting. Sales and Marketing are given the tasks required to obtain work for the company, while Operations is assigned tasks required to perform the manufacturing or service processes that add value for the customer, and Accounting ensures that the customer pays for the products or services. This specialization allows for higher levels of expertise within each unit. The company uses the organizational structure to arrange these units so that the entire business process is coordinated both physically and in terms of available knowledge.
Decisions related to the physical structure aim at ensuring that the right physical material and transforming capacity (e.g., in the form of equipment) is at the right time at the right place. On the other hand, decisions related to the supportive knowledge structure aim at ensuring that the right information and information processing capacity (e.g., in people’s skill) is at the right time at the right place to take informed decisions.
Thompson (1967) states that there are three types of coordination:
Coordination by standardization—this establishes routines and rules to ensure that each departments’ actions are consistent with the actions of other departments.
Coordination by plan—this uses schedules, which are developed for each of the departments.
Coordination by mutual adjustment—this is sometimes referred to as relationship coordination. It requires that each unit transmit new information to the other during the process.
The degree of continuous communication required to achieve coordination is the highest for coordination by mutual adjustment and the lowest for coordination by standardization. As communication is a complex, time consuming, and often costly task, companies tend to substitute coordination by mutual adjustment with scheduling and standardization, where standardization is one of the major tools of lean. As shown in Figure 8.1, standardization is the cheapest coordination mechanism, but it is the least responsive to change. All of the coordination methods are necessary. What lean provides through its insistence on continuous improvement is that standardization be accompanied by PDCA efforts so that standards are continuously updated. This greatly increases the level of coordination achieved and the responsiveness of this coordination type to change without greatly increasing costs.
The effects of achieving coordination through standardization in lean have been recognized by many managers and consultants. For example, Shingo says:
Gradually, operations were improved and standard operations were determined at each step. Deviations from a particular standard were checked in order to maintain the level of operations. At the same time, standard operations were printed up as “standard operation sheets” for everyone to see. This step facilitated continuous improvement and further boosted progress. (Shingo 1989, p. 228)
Figure 8.1 Relation between responsiveness and cost for different coordination methods
Structure is built by organizations to achieve communication and to facilitate communication. An organizational structure or infrastructure mechanism can do this and eliminate the need for explicit communication. One device commonly used in lean operations is to empower the employees by putting them onto teams with defined responsibilities and authority. When this structure effectively matches the knowledge requirements of the tasks and the decisions to be made with the knowledge capacity and capabilities of the team, it reduces the amount of information that has to be communicated.
Example: A simple example of using standards to eliminate communication is the use of recipes in a pizza restaurant. A commercial, fast-delivery pizza restaurant in the United States has a standard menu, but the customer may customize it. The person taking the order from the customer does not individually communicate to every person who will have some role in preparing the pizza. Rather, they communicate the size and the type of crust (e.g., thin), sauce, toppings, and so on in a standard format. The pizza is then prepared by the team members operating at work stations designed for one or more tasks. For example, the first workstation is crust preparation. The worker looks at the standard format, selects the proper size and type of crust and prepares it to the correct shape and places it onto the pan, where it is then passed to the next workstation.
When managers do not explicitly create a structure for communication and there is a need for communication of information and know ledge in order for the firm to correctly complete a task, then those involved in the process have to create their own structure for communication. These informal communication channels often do not work as efficiently or as effectively as properly designed communication channels, which in turn hurts the company’s performance.
Another reason to make the communication structure explicit is that only explicit processes can be improved. The communication structures can only be made explicit by the management engaging with the workers in mapping and clearly delineating how the communication is occurring and what information is being shared. Therefore, it is important to make communication explicit and provide the structure for the sharing of all required information and knowledge.
Communication Is Not the Same as Moving Data
It should be noted, that simple improvement in data transfer for example, through new IT systems, in itself is often not enough (Rabinovich, Dresner, and Evers 2003). The distinction between data, which are for example, measures from a sensor, and information, which is data that has been given meaning, is important. Information is obtained from data by structuring the data, which includes putting the data into context. Data is also transformed into knowledge, by processing it to allow for predictions, causal associations, or prescriptive decisions about what to do (Bohn 1994). While the transmission and gathering of data in the computer age is typically no problem, the communication of information (and thus meaning) and knowledge is difficult.
Example: As health systems create electronic health records (EHR) for their patients, they amass terabytes of data, but it is not clear how to use this data to improve the individual’s health. Analyzing the data means recognizing important patterns. As the amount of data becomes extremely large, meaningful patterns can be lost in the data. However, if a health system decides that the single most important indicator of future health problems is a patient’s Body Mass Index (BMI), the system could help the clinician make sense out of the data by providing a table or a graph which shows the correlation of other measures of the patient’s health with the BMI. In this way, the data is transformed into information that can be communicated.
Another important consideration when designing structure for the communication of information and knowledge is that they must be available at the right time and the right place when required. If it comes too late, it is typically worthless. In the preceding example, if the clinician does not see a relationship between a patient’s BMI and a symptom of heart trouble, until after the patient has died of sudden cardiac arrest, the information is not of value to the patient.
Another very important consideration is that there are different kinds of knowledge (Bohn 1994). Knowing about something is a different level of knowledge from knowing how something works or knowing how a technology can be incorporated into a process. For example, it is easier to “know about” some new lean tool and to transfer knowledge about it, than to “know how” this tool works or to “know how” this tool needs to be implemented. It is also another type of knowledge to know how to transfer what is often tacit knowledge between units and between workers. Thus when designing an operational structure, managers should consider:
Which kind of information is required;
Where the knowledge is required;
When the knowledge is required; and
How the right information can be communicated to be at the right time at the right place.
The organization structure facilitates and guides communication. The organization creates explicit communication channels. Communication then reinforces this structure through the use of these communication channels. While creating a stable structure is positive, there is the danger that the structure becomes rigid and does not adapt to environmental changes, for example, to customer needs.
When the organization structure becomes rigid and separated from the environment, the company may become detached from the market and customer and eventually fail. Therefore the job of the manager is not only to create a structure but also to question this structure and to favor the communication about this structure and its environment.
Example: In 1908, Henry Ford started to produce the Model T, which he continually refined and standardized. In 1920, Henry Ford had reduced the price of the model T to $355. In 1924, Ford had 55 percent of the auto market while General Motors (GM) had 17 percent market share. In 1925, Ford had a 45 percent market share. By 1927, Ford closed the production line for the Model T. Sales declined from 2,011,125 in 1923 to 1,554,465 in 1926, and only 399,725 were sold in the first half of 1927 before the factory was shut down. http://en.wikipedia.org/wiki/Ford_Model_T (accessed February 21, 2015). While Ford was dominant, GM was introducing many engineering innovations as well as changing its business practices to be more responsive to the market. The relative position of the companies changed dramatically in 1927, but it was not by chance.
Alfred P. Sloan (President of General Motors in 1923) describes Ford’s loss of dominance in this way:
… we [GM] proposed to improve our product regularly. We expected Ford, generally speaking, to stay put. We set this plan in motion and it worked as forecast. (Sloan 1990, p. 177)
… the rise of the closed body made it impossible for Mr. Ford to maintain his leading position in the low-price field, for he had frozen his policy in the model T … it was unsuited to the heavier closed body, and so in less than two years the closed body made the already obsolescing design of the Model T noncompetitive …. (Sloan 1990, p. 186)
The old master had failed to master change. Don’t ask me why. (Sloan 1990, p. 186)
His [Mr. Ford] precious volume, which was the foundation of his position, was fast disappearing. He could not continue losing sales and maintain his profits. And so, for engineering and market reasons, the Model T fell. … Mr. Ford, who had so many brilliant insights in earlier years, seemed never to understand how completely the market had changed from the one in which he made his name and to which he was accustomed. (Sloan 1990, p. 187)
Horizontal and Vertical Coordination
The organization structure creates a need to achieve both vertical and horizontal coordination (see Figure 8.2). Much of the vertical coordination is achieved by setting appropriate targets or goals for the units or subprocesses; to accomplish those goals, the firm must also achieve horizontal coordination. The major means of achieving horizontal integration is through communication about the means to achieve these targets or goals.
Figure 8.2 Horizontal and vertical coordination
Horizontal coordination is necessary between the different units because the units will be passing off portions of the business process to each other. This may be relatively simple hand-offs, for example, in an assembly line where one unit passes a subassembly to another. The dependencies that need to be managed may be sequence, timing, and quality. However, the dependencies could be more complex. For example, while perioperative services hands a patient off to the OR, the completion of the perioperative services function requires the surgeon or the surgeon’s representative to come to see the patient in perioperative services. But the surgeon needs to arrive after one part of the work is completed. So, there is a reciprocal dependency to manage.
Vertical coordination occurs as decisions are made by lower level units in accordance with goals and directives from above. Horizontal integration occurs as the hand-offs between organizational units are coordinated. Based on the strategy of the company, the company needs to create an organizational structure with the proper vertical and horizontal integration. As previously outlined, this is done by determining where in the structure certain decisions will be made. In order to make these decisions about the structure, the firm needs to understand what decisions must be made and what information is necessary for these decisions to be made competently.
The structure of a process often determines the expertise and the authority to make decisions or it reflects the required expertise and authority that are necessary to make an effective decision.
Example: In the computer industry, many products have a six month product life cycle. One company that no longer makes personal computers took nine months to obtain information and make it available to the product designers about their customers’ satisfaction with their personal computer. This meant that before this company could learn what customers found satisfactory or unsatisfactory about its product, the company was already selling the next generation of this product.
This delay meant it was a minimum of two product cycles for this company to put anything they learned from selling a model into its new products. The delay occurred because one unit of the company was responsible for gathering and processing information from the actual customers, while another unit was responsible for using this information to guide product development.
This company did not have horizontal integration between its departments. The departments did not talk with each other frequently enough with timely enough information. It also means that vertical integration was missing, since it is the responsibility of upper management to ensure that there is horizontal integration between its departments.
The outcome of this lack of coordination between the marketing unit and the product design unit was that the company’s products were not targeted at the customers’ expressed needs. Consequently, the correct information did not get to the correct place at the correct time.
The organization design must ensure that the organization’s information processing requirements are matched by its information processing capacity. This information processing capacity is inherent within its organization structure. If the organization cannot do this, then its decision making will be unresponsive to the needs of the company (Tushman and Nadler 1978).
This is a consequence of the law of requisite variety (Ashby 1956), which states that the variability (or flexibility) of any control solution must be equal to or greater than the variability of the system being controlled. Similarly, the responsiveness of any control solution should be equal to or greater than the uncertainty inherent to the system being controlled.
Using Self-Direct Work Teams for Coordination
There are several lean tools embedded in the concept of lean and continuous improvement which ensure that process structure and the environment within which it operates are continually examined. This ongoing examination of the match of the process structure to the environment helps to ensure that the right actions are taken at the right times to achieve the correct change. For example, if a particular setup of a work flow is no longer appropriate, the company can conduct a week long kaizen examination of it or engage in smaller PDCA cycles. These tools are discussed in the 2nd volume of this book. One important organizational tool to achieve coordination is the use of self-directed or self-managed work teams.
The use of self-directed work teams (SDWT) (i.e., teams that actually perform the department functions, but also have some administrative responsibility) is common in many industries. By definition a team consists of interdependent individuals who share responsibility for outcomes and are an entity within the larger social system (Cohen and Bailey 1997). One advantage of using SDWT in a team-based structure is that the individuals who are on the team do not have to be coordinated by an external coordinator such as a manager. This decreased need for external coordination between the team members occurs, because the SDWT gives the team members the responsibility for internally coordinating the tasks they are responsible for as a team.
The SDWT structure also gives the team members the responsibility to ensure that the individual team members perform the functions the team is responsible for to standards established for that function. To do this, the team is also responsible for ensuring that its members are capable of performing all the standard operations. Researchers have established that the team structure (i.e., the assignment of roles to individuals) and the reward structure of the team influence team performance.
To function well, a SDWT has to have a structure. One common structure is for the team responsibilities to be divided between team members by categories. For example, one team member may be assigned responsibilities as the human resources leader, while another is assigned the responsibilities of the maintenance leader. Other common assignments are scheduling leader, and quality leader. The team member who is assigned responsibility for a particular team task will be the team’s representative to departmental meetings on that function. The team member with a functional responsibility is also responsible for facilitating problem solving in that functional area. For example, the quality leader will attend departmental quality meetings and will be responsible for gathering the needed quality data and communicating with other team members about quality. Similarly, the team member for the other responsibilities will be the external communication link for that responsibility and perform the internal communications for that function.
Example: A study (Emery and Fredendall 2002) of car service technicians of an original equipment manufacturer’s dealerships in the United States found that the service technicians were organized in one of three ways. Some service dealerships treated the technicians as independent operators, who were each assigned their own car service bays, and were rewarded based on their individual productivity. Other service dealerships organized the technicians into teams where everyone was paid the same based on the entire team’s productivity. A third group of service dealerships organized the technicians into teams, but included an individual productivity bonus for the more productive members of the teams. The dealerships that were the most productive had teams that included both the individual bonuses and the group productivity pay. This system ensured that the inexperienced individuals learned their jobs faster and became more productive.
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