Behavioral Implications of Different Organizational Designs

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  • 0:05 Organizational Design…
  • 0:50 Formal vs. Informal Structure
  • 2:18 Centralized vs. Decentralized
  • 3:27 Matrix, Divisional &…
  • 5:35 Lesson Summary
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Lesson Transcript
Instructor: Dr. Douglas Hawks

Douglas has two master's degrees (MPA & MBA) and a PhD in Higher Education Administration.

Organizational culture influences how employees behave and the design of an organization can affect its culture, thereby also impacting how employees act. In this lesson, we'll discuss the impact organizational structure can have on employee behavior.

Organizational Design & Culture

In organizational behavior, there's an important concept called the principal-agent problem, which essentially suggests that the motivation of an agent, or employee, to behave a certain way rarely aligns with how the principal, or company management, wants the agents to behave. This is how organizational design becomes an organizational behavior topic.

Organizational design is focused on how to structure employees, managers, and departments across the organization. There are many ways to do this, and each has benefits and drawbacks. The important thing to remember for now is that the way employees are organized, relative to each other, can really determine the culture of the organization and thus affect employee behavior.

Formal vs. Informal Structure

Imagine a company that decides to take a very formal approach to aligning the agent's behavior with the principal's incentives. A formal design would have a manager responsible for just a few employees (called a line manager), and each employee would have very specific responsibilities. Those line managers would also have managers, who would be responsible for just a few line managers. This is a costly structure and very steep, meaning there are many layers of management and staff between the agents and company headquarters. But with such control over staff, management may feel comfortable that work is getting done, even if it leads to employees feeling micromanaged.

Imagine another company that decides to take a more informal approach. Instead of focusing on steep management structures with a few employees to watch carefully, informal design focuses on a much flatter organization, where employees (or agents) have less supervision, but every employee receives some sort of financial incentive based on the performance of their group or the company overall. This may appear to be a cheaper model because it requires fewer managers; however, without that supervision even the financial incentive may not be enough to motivate people to work as hard, as such, the cost may be higher since more employees are needed to get the same amount of work done. Alternatively, this structure can motivate employees to get more done in ways that also cost the company more money, like cutting corners, jeopardizing safety, or compromising quality.

Centralized vs. Decentralized Structures

A combination of centralized and decentralized structures is often used by large companies that have many locations. For example, think about your favorite national food chain. In that industry, turnover among servers and cooks is high, so it wouldn't be smart to fly every candidate for every cook position to corporate headquarters to be hired. Hiring is thus generally decentralized, or left up to local locations. In many behavioral ways, a totally decentralized model is entrepreneurial. It can lead to close knit staff and managers, a fun environment, and a lot of people being hired that 'fit' the existing mold.

However, in business, most materials and supplies are cheaper when you buy in large volumes. So if every location purchased their own food, the company overall would be paying more than if they just placed one large order. Thus it makes sense for the purchasing function to be centralized , or controlled at corporate headquarters. Behaviorally, centralized structures tend to reflect a more corporate culture and can often lead to silo environments where departments focus on their own group rather than cross departmental work.

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