Causes and Effects of Organisational Structure Change

Causes and Effects of Organisational Structure Change ABSTRACT This dissertation will help to understand the reasons, why organizations change and its affect on the organizational structure. To comprehend the selected topic various secondary sources from the public domain has been taken. Information from these sources has been addressed under the heading literature review. It gives an overview of the triggers of change in the first section with special reference to role of the change agent in the change process, followed by a section how the organizational structure is affected by triggers of change. Next section addresses the contribution of the structure towards change followed by employees attitude to the change process. This literature review helped to understand already established concepts on the topic. And to realize the commercial application of the management theories two companies have been selected, Atari and Oticon. One of them changed its structure because of triggers in the external environment and it was successful and still perfo rming well but the other did not change and it perished. At the end this dissertation helped to look at the ways of making the changing process a subtle experience instead of making it a knee-jerk incident as suggested by many authors in the field. AIMS AND LEARNING OBJECTIVES This dissertation is an attempt to examine the relevance of theoretical studies to real commercial situations. And it gives us an opportunity to demonstrate our understanding and application of the concepts and theories taught in the MSc programme. While undertaking this task it also tested our ability to exhibit business research skills and to make a clear presentation of findings. And finally at the end it allows us to do a critical evaluation of our future career path. METHODOLOGY As a part of MSc Management course work this dissertation is to be completed based on secondary research. And it consists of published journals, books, annual reports of the companies, corporate and other websites. Most of the published journals are available through the University of Glasgow library database belonging to different disciplines from psychology to management reviews. There are certain limitations and challenges faced during its completion like it did not allow any primary research which means restriction of work only through secondary research. But the availability of overwhelming amount of research works on the selected topic posed another challenge. It was challenging to sieve through it and extract the relevant information which would help to conclude the topic. Other challenges faced are the time limit of only four months, and word limit of maximum twelve thousand which is quite less to compress all the work from literature review, company history to analysis of ea ch part. I have called this principle, by which each slight variation, if useful, is preserved, by the term Natural Selection Charles Darwin Charles Darwin was the British naturalist who was renowned for his theories of evolution and natural selection (www.lucidcafe.com). As the theory of natural selection suggests that in the biological world organisms develop certain characteristics that help them to survive in the environment. That is, the strongest survive in certain environmental conditions and these characteristics are transferred from one generation to the next through genes (www.allaboutscience.org). Change is inevitable and environment is changing at a much faster rate than anticipated, influencing all levels of the society, from individual to the corporate settings making the world a vibrant place to live. From organizational perspective, change in an organization can be triggered by advancement of technology, to the quest of the management to excel in the market. And to avoid annihilation one has to transform itself and adapt to its environment. To understand each aspect of change from organizational point of view will be an enormous task with amount of literature available. So the core focus will be to understand the triggers of change, role of a change agent in the changing process. The next aspect is to know why changes within the organization affect its structure. Subsequently the nature of change, that is how organizations change and finally the aspect of employees reaction to the change. And for a better understanding of all the aspects, first it is an attempt to understand the literature available on this topic and to comprehend their application in real life situation two companies have been chosen, Oticon and Atari as the case studies. LITERATURE REVIEW 5.0 INTRODUCTION Literature review is an effort to study the research work done by various authors ranging from 1958 to 2008. The main topic of this research is to understand what makes organizations change and its consequences on the structure. It includes an introduction on various forms of triggers of change comprising of a discussion on the role of a change agent, its leadership style and power skills in the first section. The second section is about how change affects organizational structure. Next section consists of the nature of change that is, the type of change that organizations go through. And the last section deals with employees reaction to change with a discussion on Hofstedes work on culture. There has been an overwhelming amount of research work on different aspect of organizational change and it will be beyond the scope of this dissertation in terms of time and words to cover each topic. So it has been decided to get an overview on a part of organizational change as mentioned above. SECTION 5.1 TRIGGERS OF CHANGE This section would cover the reasons that might activate a change process in an organization. Some authors have classified trigger of change into groups based on their relation to the organization, while others have a more generalised view. Triggers of change have been categorized into external and internal triggers. External triggers would include change in customer needs, competition, innovative technology, new opportunities, change in social and cultural values, change in trading conditions, change in legislation and government policies (Huczynski and Buchanan, 2000a). Scarcity of essential resources also results in change and can lead to formulation of new strategies, policies, rules and regulations, innovative ways of communication, encouraging team work, developing new technology which can lead to the change of the entire structure of the organization (Chackerian and Mavima, 2000). Globalization of marketplace, enhanced technologies, fierce competition, liberalization of economies, single European currency, electronic-trading, reduction of cost in production, information and transportation through economies of scale, supply chain integration (Daft, 2006), environmental awareness towards global warming, industrial waste disposal management, use of renewable and non-renewable raw materials, health awareness towards obesity, diabetes etc making consumers move towards natural food from the synthetic ones, change in lifestyle due to increase in disposable income leading to the change in attitude towards work, leisure-time and society etc. Changing perspective towards work style from traditional to teleworking, outsourcing, advances in communication allows organization to be multinationals without leaving their own countries (Paton and McCalman, 2000a). Internal triggers would include appointment of a new senior executive, new and better ways of serving customers, infrastructure relocation, innovative product development (Huczynski and Buchanan, 2000b). Presence of influential group within the organization can trigger change (Greenwood and Hinings, 1996) or change in top hierarchy may lead to change through accepting and implementing innovation (Boeker, 1997a; Kraatz Moore, 2002). Change of managers within the hierarchy of the organization may lead to change (Boeker, 1997b), new responsibility can bring new motivation to do better and can lead to change through enhance learning, communication and introducing new technology etc (Fernandez and Pitts, 2007a). Organizations experience several types of triggers and thus implement several types of changes. It has been reported that 50% of organizations adapts changes due to crisis (Beddowes and Wille, 2007a). Organizational crisis can arise from external triggers such as competitors which can be a new firm or a rival, change in legislation, action of a stake holder by selling or buying a significant amount of shares, buy-out from an organisation etc (Eccles, 1994a). And 23% of organizations proactively change while anticipating threats and while doing so 44% percent of organizations change their organizational structure. (Beddowes and Wille, 2007b). According to a study of 100 companies, majority showed re-structuring as successful, as there are examples of companies running in losses for millions of dollars for a decade and then turning into a profit making company in two years with evidence of effective work through teams and employee empowerment. So triggers of change can be financial losses leading to drop in profits which can attract new leadership and which may lead to changes in the structure (Haveman, Russo and Meyer, 2001a), increased competition leading to loss of market share, industry in recession, appointment of new chief executive officer, proactive action (opportunities or threats foreseen), technological development and effective ways of staff utilisation (Beddowes and Wille, 2007c). According to Champy and Nohria (1996) there are three major triggers of change; technology, government and globalization. Technology especially information technology has transformed business in many different ways. For example e-banking has opened new strategies for the banks of doing their business electronically and over the net, giving better access to customers with personalised services. Another example is the use of information technology in the field of publishing of research journals. It has helped in speeding up the process of research and its publication. The government role as a trigger of change is by changing the policies which affects businesses. Deregulation, privatisation and free trade etc are opening up new ways for businesses and encouraging them to change their strategies. This type of change in government policies has been termed as regulatory punctuation which gives organizations new opportunities for expansion (Haveman, Russo and Meyer, 2001b). Another trigger of change is the observable fact of globalization. It has helped in developing new concepts of this century like outsourcing and forced companies to work in virtual environment. Change can be a powerful energizer and creative force which can be good and would lead to development of innovative ways of getting a competitive advantage as well as bad with callous demands on employees and other measures like downsizing for cost cutting etc. As mentioned earlier organizations appoint change agent to deal with external triggers which leads to internal changes in the organization. There is evidence that 16% of changes takes place due to appointment of new Chief Executive Officer (CEO) with characteristics like charismatic personality, with a clear idea of what and how changes are to be made, capable of taking a holistic view of the organization and who believes in team work (Beddowes and Wille, 2007d). Managers do play a crucial role in planning and in implementing organizational change (Fernandez and Pitts, 2007b). For effective implementation of change there are three factors that need to be considered, the attitude, motivation and mind set of the change agent designing the change (Newman, 1973a). Previous research suggests that there exists a difference in the role of a change agent in the public sector and the private sector organizations. For example, there is significant amount of work directing towards the fact that public organizations although show more resistance to change but they often change according to Peters and Hogwood (1988) cited in Fernandez and Pitts (2007c). But some authors argued that organizational change has little to do with managerial leadership. As suggested by Hannan and Freeman (1984a) organizations survive because they are strong enough for a particular environment marked by size, age and complexity of the organization. But an organization stands for collective work of individuals and groups to fulfil the objectives and goal through set of rules, which needs direction and vision which is the responsibility of the organizational leader (Burke, 2002). And in order to influence individuals to work collectively towards a common goal is a complex task in itself on the part of the organizational leader. As stated influence is the essence of leadership (Yulk, 2002: P 141). The role of a change agent becomes effective when there is adequate leadership skill or influencing power to let others follow the vision and reach the goal. There is a list of twelve traits which consist of strong drive for responsibility , focus on completing the task , vigorous and persistence in pursuit of goals, venturesomeness and originality in problem solving drive to exercise initiative in social settings, self-confidence , sense of personal identity, willingness to accept consequences of decisions and actions, readiness to absorb interpersonal stress, willingness to tolerate frustration and delays, ability to influence the behaviour of others, capacity to structure social systems to the purpose in hand according to Stogdill (1950, 1954) cited in Huczynski and Buchanan (2007c). While studying American executives, 15 indispensible leadership traits were identified, which are judgement, initiative, integrity , foresight, energy, drive, human relations skill, decisiveness, dependability, emotional stability, fairness, ambition, dedication, objectivity and co-operation according to Stewart (1963) and there are as many as 80 leadership traits, identified in various studies as cited in Huczynski and Buchanan (2007d). As leadership is all about influential skills or power skills on the part of the change agent so that the vision of the change is followed by others (followers). The power to influence others measures the extent of leadership value (Huczynski and Buchanan, 2007e). At individual level power can be seen as a motivational tool when an individual tries to control and influence events and when this is manifested in terms of observable action by others then power is seen as a behavioural aspect. Power in behavioural terms has been divided into eight categories reward, coercive, referent, legitimate, expert power (French and Raven, 1958a), informative, affiliation and group power (Benfari, et.al, 1986a). Reward power describes the ability to influence others in such a manner that followers believe the leader have the capacity to offer valuable reward or incentive in return of the obedience shown to the leaders demand. Coercive nature of power shows that the leader has the capacity to punish in the form of penalties and sanctions in return of noncompliance to the leaders demand. Referent power describes the ability of the leader to control by his/her enigmatic personality. Power is said to be of legitimate nature based on the authoritative position of the leader which is followed by the others as a compulsion. And the expert power which is described by its name that leader has expert knowledge and experience to make other people follow the instructions as it is regarded as of superior nature (French and Raven, 1958b). Informative power is similar to expert power and describes the leader to have undisclosed information crucial to the organization which makes the leader superior and thus followed by others. Affiliation power shows the leader to have strong relations with influential figures in the organization and society and thus followed on this basis. And the last category is the group power which is associated with the leaders ability to lead a team or group with sharing of power and responsibilities. All the eight categories are perceived either as positive (P+), beneficial or negative (P-) as exploitation or mixed response (P+ and P-) by the receiving party according to its characteristics. For example reward and referent power are received as P+. Coercion and information form of power as P-(Benfari, et.al, 1986b). But all are situational that is they have different influential power when used under different situation and the most effective leadership style that has emerged with time is the g roup power with sharing of power between the leader and others, as it can give the feeling of responsibility to take decision which can be rewarding (Huczynski and Buchanan, 2007f). Summary So in brief triggers are mainly external that pressurises organizations to undertake internal changes. And it is a crucial responsibility of the change leader to assess the external situation and act accordingly so that the internal changes are done in a subtle way. When an organization becomes successful in making the relevant changes and performs well, it will pose a threat to other organizations and thus trigger another set of changes taking the course of a chain reaction. But why does an organization has to change its structure? This can be understood in the next section of the literature review. Section 3. 2 Affect of change on the organizational structure As mentioned earlier 44% percent of organizations change their organizational structure (Beddowes and Wille, 2007e) while adopting internal changes. The structure of an organization can be defined simply as the sum total of the ways in which it divides its labour into distinct tasks and then achieves coordination among them.(Mintzberg, 1979a: 2) According to Newman (1973b: xiii) Organization is a system for enabling people to reach or attempt to reach certain objectives and it involves the use of resources to carry out activities towards those objectives. The basic features of an organization involve presence of objective(s), people and the environment in which it operates. Objective(s) would be the reason behind its existence, people working in an organization communicate, coordinate with occasional conflicts carry out activities in an organised way which is in par with the objective(s) of the overall organization. And these objective(s) are the opportunities and constraints provided by the environment, within which an organization exists. In order to survive, an organization must be able to understand the environment i.e. its complex surroundings and establish a relation with the trading market, products and services, suppliers, finances, customer preferences, competitors, employees, government policies, social settings, c ulture etc which would eventually help it to formulate the objective(s). Organization tends to establish relationship between people, units, roles etc with a degree of consistency embracing all the relationships which is the basic source of structure for an organization. The three basic features of organization that demands the need of a structure are first is the organizations desired activity in order to fulfil its objective(s) through effective use of available resources, second, the way of carrying out its activities i.e. the process and the third is the behaviour of the people working for the organization while carrying out the first two features. The function of a structure is to give stability, consistency, by holding things together giving it a form and reducing randomness while outlining its operations. The design of the structure must facilitate the fulfilment of the organizational objective(s). The conventional forms of organization design were the functional form, the e xecutive or administrative form and line or staff form. The functional form of the structure reflects the kind of function performed by the people. As required, new positions are developed along with new divisions or departments. But as complexity of work increases and it requires more coordination among divisions this structure becomes inadequate otherwise this form works well for independent work in each divisions. TOP MANAGEMENT DIVISION A DIVISION B DIVISION C DIVISION D Source: The Functional Form (Newman, 1972c:81) The administrative form separates the organizations actual work and the internal management of the organization. As it is difficult to separate the executive side of the organization which is more result orientated and the administrative side of the organization which controls the resources . Communication plays an important role in coordinating between the two; otherwise it can give rise to conflicts. The line or staff form shows relationship between the operation and the people within the organization that is, work demand and it is an extension of the executive form. One problem faced in this form is the control of managers over the subordinates and another is the orientation of the structure to the kind of work the organization is engaged with. For example line structure can be marketing orientated, sales orientated and so on. But as demand from the environment increases there is a need for multi-functional structure. The inadequacies of the conventional forms led to the formation of the new structure called the matrix form. TOP MANAGEMENT FACILITIES STRUCTURE OUTPUT STRUCTURE Source: Matrix Form (Newman, 1972d:85) Matrix structure is task based or project based that is, based on work demand. It is flexible as it changes according to the project or task at hand. And this type became popular among organizations dealing with large projects like civil engineering, research and development organizations etc. This structure deals with two basic objectives, first is the output of the organization and second is the ability to produce the output. Both are interconnected and interdependent on each other with the top management being responsible for its control and ensuring efficient utilization of resources. As it is project specific, unutilised resources needs to be reallocated or used for training etc. According to Mintzberg (1979b) there are five basic elements of a structure, mutual adjustment, direct supervision, standardization of work process, work outputs and worker skills and these hold the organization together. Mutual adjustment is achieved through informal communication while coordinating work. Direct supervision is the process of scrutinizing and instructing others work by an individual which again ensures mutual adjustment. Standardization of work process, output and worker skills can be achieved when they are precisely specified. In complex organizational environment these five factors work in a loop. Standardization Work Process Of Output Mutual Adjustment Mutual Adjustment Direct Supervision Worker Skills Source: The coordination mechanism among the five basic elements of a structure. (Mintzberg, 1979c: P 7) Organizational change reflects re-organization in the structure of the organization which includes the patterns of roles, policies and procedures which affects the relationship between them and thus affects the structure. The change can be due to new customer preferences, new work requirements, new strategies etc. In order to have an effective process of change, reviewing of the consequences of change is necessary and making relevant adjustments to the structure and policies from the results. The second factor is the change itself and for effective change it is necessary to have adequate information from the past and present as change begins with the analysis of these situations. As change means weakening of old or existing relationships and strengthening new ones and a critical situation is reached when old ties are weakened and new ties are not strong enough. Problems are faced when relationships between various factors in an organisation which were compatible in the old situation becomes incompatible in the new situation. So it is important to develop all the factors in such a way that will reinforce rather than inhibiting peoples work. For an organization to be effective, its structure, policies etc should enhance peoples output and attitude towards change. The third factor is the development of the relationship between the people and the new settings. This can be done by effective communication, consultation, discussion, participation among the employees and involving people in the change process (Newman, 1973e). According to Greiner (1972) as cited in Meredith and Mantel (2003) an organization tends to develop a structure whilst growing and adding resources and establishing relationship between them and at the core is the specialization factor of the human element of the organization. The structure remains stable till it facilitates the completion of the task but if there is change in the nature of the task due to any of the above mentioned triggers of change, and the present structure hinders the completion of the new task, it will indicate a need for change and which affects the structure of the organization. According to Chandler (1962a) organizational structure reflects the health of an organization. Structure is defined as the design of the organization through which the enterprise is administered (p: 14). The design has two aspects, first is the line of control and communication between various units and people working in them and second aspect is the flow of information within these lines. And these two aspects are essential to fulfil the organizational goal. Structure follows the strategy of the organization, for example when an organization decides to expand and increase the number of offices; it requires more administrative infrastructure and people to handle it and thus changes the structure. Again if an organization has overseas expansion plans it will have departments and headquarters to administer its individual units. Diversification to new type of function or vertical integration will attract a multi-departmental structure with a central main office. Diversification into new product line will be supported by multi-divisional structure with a general office to control the divisions. This multidivisional structure would attract decentralisation of authority from the centralised control in departmental structure. The coordination and control of business units takes place through centralisation and decentralisation form of decision making. Centralization means power to control and coordinate resides in one person while decentralisation means division of power into many individuals. Research shows cognitive limitation in centralized decision making as it involves only one person and organizations face many complex situations. And a rational way of making decisions in such situations is through decentralisation. Other benefits of decentralisation are that it allows better understanding of the environment and it facilitates innovation and creativity as it involves many brains (Mintzberg, 1979d). According to Drucker (1988) as soon as a company changes its strategy from paper work to electronic mode it starts affecting the decision process, management structure, over all way of working style of the organization eventually affecting the organizational structure. And this includes change from command and control mode of working in departments and divisions into information based organization of knowledge specialists. According to Burns and Stalker (1961) as cited in Mintzberg (1979e), that if the environment is volatile the organizations have to have a flexible and an organic structure in order to adapt itself to changing environment but if the environment is stable organizations can have bureaucratic structures performing routine and standardised tasks. Organizations have adopted flat, flexible structure which emphasizes on empowerment and team work culture in order to cope up with the changing nature of the environment. Successful organizations show involvement of employees in decision making and also as a part of the change the organization needs (Piderit, 2000a). As stated by Burns and Stalker (1961) cited in Meadows (1980a) organic structure has the following characteristics, team work to complete a common task, no fixed rules or methods to accomplish the task, periodic re-examine of the task so that it can be readjusted according to demands of the surroundings through communication, consultative nature of communication instead of autocratic nature, closely knitted network of communication, devotion towards the organization and the task and appreciation for intellectual and technological soundness. Summary Organizational structure is the reflection of its internal relationship between all its resources (people and work) which are constantly influenced by the external factors. And thus when an organization makes internal changes in order to cope up with the external triggers eventually changes its structure. Organizations need to have a flexible structure (organic) so that it can adapt to the environment which is volatile in nature due to external triggers. And as suggested growth without structural adjustment can lead to economic failure (Chandler, 1962b; p: 16). The next question that arises is that does the structure of the organization affects or facilitates changes within an organization? This can be understood in the next section of the literature review. Section 3.3 Nature of change While organizations adapt to environment, structure plays an important role, if the inherent nature of the structure is flexible then changes are easily done otherwise it poses a threat to both the process and content of change. Organizational change is the difference in organizational features measured over a period of time. Organizational features can range from functions performed by individuals or organizational subunits or relationship among other organizations and the environment (Van de Ven, 2004a). Organizational theories are either focused on the content of change or process of change. Barnett and Carroll (1995a) have suggested a distinction between process and content aspect of the changing organizations. Content refers to the element of the organization that changes and process refers to the actual course of action or procedure that is adopted to make those changes. The outcomes of both content and process changes have different effects on the organization although there is a clear interaction between them. Types of changes due to various triggers can be at various levels. For example, at organisational level, change may occur in the culture and structure of the organization with new work practices, emphasising on training and team work, introducing new reward systems and innovative ways of communication etc. Another prominent type of changing is through cost cutting measures like staff reduction or downsizing. Market led issues may lead to customer orientated focus with new products with better quality, adapting innovative technology (Beddowes and Wille, 2007f). A similar list suggested by Van De Ven (2004b) consists of structural change featuring decentralization or centralization; functional change in strategies to bring new and better products and services; compositional change featuring downsizing and recruitment, resource allocation; change in relationship between organization units through effective communication, exchange of resources across units; change in boundary through bus iness expansion or contraction using mergers, acquisition, joint ventures etc; environmental changes due to resource scarcity etc, and lastly change in performance showing profitability, job satisfaction etc. These comprises of the content aspect of the organization change.