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The Handbook for Quality ManagementA Complete Guide to Operational Excellence
By Thomas Pyzdek Paul Keller
McGraw-Hill Companies, Inc.Copyright © 2013 The McGraw-Hill Companies, Inc.
All right reserved.
Chapter OneOrganizational Structures
Organizations exist because they serve a useful purpose. The transaction-cost theory of a firm (Coase, 1937) postulates that there are costs associated with market transactions, and organizations prosper only when they provide a cost advantage. Examples of these costs include the cost of discovering market prices, negotiation and contracting costs, sales taxes and other taxes on exchanges between firms, cost of regulation of transactions between firms, and so on.
Transaction-cost theory offers a framework for understanding limits on the size of a firm. As firms grow, it becomes more costly to organize additional transactions within the firm, called "decreasing returns to management." When the cost of organizing an additional transaction equals the cost of carrying out the transaction in the open market, growth of the firm will cease. Of course, these costs are also affected by technology: facsimile machines (in their day), satellites, computers, and more recently the Internet each altered the cost of organization, impacting the optimal size of the firm accordingly. Such inventions simultaneously impact the cost of using external markets, so the relative impact of the technology on market costs and organization costs determines the overall impact on the organization. Clearly, the ability to efficiently carry out market transactions, with minimal bureaucratic overhead, impacts an organization's usefulness to the market, and its prosperity and eventual life span.
General Theory of Organization Structure
Organizations consist of systems of relationships that direct and allocate resources; therefore the purpose of organization structure is to develop relationships that perform these functions well. There are several possible ways in which these relationships can be viewed. The most common is the reporting relationship view. Here the organization is viewed as an entity consisting of people who have the authority to direct other people, their "reports." In this view the organization appears as a stratified triangle, with the positions higher in a given strata of the triangle having the authority to direct the lower positions. In modern organizations, the authority to set policy and plan strategic direction is vested in the highest level of the structure: the strategic apex. The middle line consists of management personnel who deploy the policy and plan to the operating core (at the bottom of the structure). Technological expertise and support are provided by groups of professionals not directly involved in operations. The entire organization is held together by a common set of beliefs and shared values known as the organization's ideology. Figure 1.1 illustrates these ideas.
The Functional/Hierarchical Structure
The traditional organization that results from the above view of the organization is the functional/hierarchical structure. This is a command and control structure with ancient military origins. In this type of organization, work is divided according to function, for example, marketing, engineering, finance, manufacturing, etc. A stratum within the organization is given responsibility for a particular function. Work is delegated from top to bottom within the stratum to personnel who specialize in the function. An example of the traditional functional hierarchical organization chart is shown in Fig. 1.2.
A key component of the hierarchal structure is its command and control elements, facilitated by the theories of scientific management developed by Frederick Taylor. Taylor believed that management could never effectively control the workplace unless it controlled the work itself, that is, the specific tasks performed by the workers to get the job done. Management could improve the efficiency of work, to the benefit of both management and workers, by applying the methods of science in (1) selecting the individuals best suited to a particular job and (2) identifying the optimal way in which the jobs could be performed. Henry Ford further advanced this de-skilling of the workforce through production mechanization.
In spite of resistance from craftsmen and machinists, who understood the value of their knowledge and skill in terms of monetary rewards and job security, the reduction of work to a series of simple tasks done with relatively small investment in training is one of the major results of scientific management. The ramifications of these efforts includes better management oversight, reduced investment in worker training, and easier replacement of those who did unsatisfactory work (with employee incentives to improve performance). Unfortunately, the de-skilled work is usually far more boring, leading to a variety of problems such as high levels of stress and employee turnover.
The legacy of de-skilling is that the workforce is less able to change as new conditions arise. Whereas a machinist could work for any number of companies in many industries, machine loaders had limited mobility outside their current employer, thus increasing worker demands for job security. In the modern era, lack of generalized employee skills can be a major impediment to a quick reaction to rapidly changing market conditions. When rapid change creates new tasks, the workers' previous experience does not help them adapt to the new circumstance; they must be constantly "retrained."
Organizationally, the introduction of scientific management perpetuated the growth of the bureaucratic form, and increasingly led to larger and larger organizational support structures. On the technical side, organizational units were formed to codify the detailed knowledge of necessary work practices, including manufacturing engineering, industrial engineering, quality control, human resources, and cost accounting. This de-skilling of the workforce creates an increasingly large number of transactions to manage, which leads in turn to larger bureaucracies and decreasing returns to management, an issue described earlier by Coase.
The traditional organization structure has come under pressure in recent years. One problem with the structure is that it tends to produce a "silo mentality" among those who work in a particular stratum: they tend to see the company from the perspective of an "accountant" or an "engineer" rather than from a companywide perspective. This produces a tendency to optimize their function without regard for the effect on the rest of the organization—a tendency that produces markedly suboptimal results when viewed from a holistic perspective. Cooperation is discouraged in such an organization. In these structures, employees tend to think of their superiors as their "customers." The focus becomes pleasing one's boss rather than pleasing the external customer. Finally, the top- down arrangement often results in resource allocation that does not optimally meet the needs of external customers, who are generally served by processes that cut across several different functions.
Given these problems, one might wonder why such organizations still dominate the business scene. There are several reasons, chief among them the comfort level employees have with this model: this has been the dominant model for decades, so there is an organizational resistance to change. Furthermore, such organizations maximize the development and utilization of specialized skills. They produce a cost-effective division of labor within the subprocess (but not necessarily across the system). In many organizations, particularly larger ones, the functional/hierarchical structure provides economies of scale for specialized activities. Finally, these organizations provide clear career paths for specialists. A case in point is the quality function, where one can enter into the specialty out of high school and potentially advance to progressively higher positions throughout one's career.
In a matrix organization the functional hierarchy remains intact but a horizontal cross- functional team structure is superimposed on the functional hierarchy. The matrix form is depicted in Fig. 1.3.
The matrix form was used extensively in the 1970s as a general method of organizing work. Most businesses concluded that organizing routine work in this way was impractical. Still, because of this experience, the matrix structure is well understood. Also, the matrix did prove to be useful as a method of conducting large, cross-functional projects. To an extent, the matrix form overcomes the "silo" mentality of the functional hierarchy by creating cross-functional teams.
When used for projects, the matrix approach creates structures that are focused (on the project) and can exist temporarily. In fact, most large, multifunctional quality improvement projects are organized using the matrix form. This approach to project management organization is discussed in greater detail in Chap. 15.
Cross-Functional Organization Structure
As discussed earlier, a major problem with the functional/hierarchical structure is the proliferation of focused, departmental perspectives. This invariably results in neglect of company-wide issues. Cross-functional structures provide a way of breaking down this mind-set. Figure 1.4 shows the basic layout of a cross-functional organization structure. Note that the appearance is similar to that of the matrix structure. However, there are a number of important differences between matrix and cross-functional structures:
Scope. Cross-functional organizations deal with company-wide issues, while matrix organizations focus on specific tasks, goals, or projects.
Duration. Matrix organizations are temporary, while cross-functional organizations are often permanent.
Focus. Cross-functional organizations often deal with external groups such as customers, society at large, or regulators. Matrix organizations are typically focused on internal concerns.
Membership. Membership in cross-functional organizations typically consists of high-level functional executives. Membership in matrix organizations usually consists of personnel with technical skills needed to complete a specific task.
Compared with traditional organizations, cross-functional organizations offer better coordination and integration of work, faster response times, simplified cost controls, greater use of creativity, and higher job satisfaction. It should be noted that cross-functional organizations are an addition to, rather than a replacement for, traditional organizations.
Process- or Product-Based (Horizontal) Organization Structures
Process-based and product-based "horizontal organizations" present an entirely different focus than traditional organizations. The basis of this organizational structure is the goal of the work being organized, that is, the product or service being created. This differs markedly from the traditional structure, which is based on reporting relationships. An example of a customer process–focused organization structure is shown in Fig. 1.5, which is a "patient-focused" labor and delivery process in a hospital.
The knowledgeable quality manager will immediately recognize the similarity of Fig. 1.5 to the cause-and-effect diagram. This is a useful analogy. The "effects" being sought must be clearly defined before the design of this type of organization can proceed. The "causes" are built into the organization such that the desired effects can be consistently and economically produced. Note that the design can accommodate multiple customers, suppliers, and internal subprocesses; in this example the mother and baby are the primary customers. The scope is neither internal nor external: it embraces the entire process.
Also noteworthy is the complete absence of reporting relationships. The foundation of this type of organization is work flow, not authority. In effect, everyone "reports" to the customer. This blurring of lines of authority is a characteristic of this type of organization, which can be a source of discomfort for those accustomed to the clear chain of command inherent in traditional organizations. Clearly this involves a significant cultural change. Another cultural change is the obliteration of the professional reference group. In functional organizations, professionals (e.g., accountants, nurses, doctors, engineers) report to and work with others in the same profession and are often more loyal to their profession than to their employer. This is changed dramatically in horizontal organizations. The transition from a traditional management approach to a horizontal structure must deal explicitly with the cultural aspects of the change.
Horizontal organizations maximize core competencies, rather than suboptimizing quasi- independent functions. For example, in the patient-focused-care example several support activities are involved in the delivery of care (lab services, transportation, etc.). In a traditional organization there would be a tendency for the laboratory manager to optimize the laboratory, the transportation manager to optimize transportation, etc. However, in the horizontal organization the optimization is focused on delivery of care. This may well result in a perceived "suboptimal" performance of support activities, if each are (inappropriately) viewed in isolation.
Experience has shown that horizontal organizations have achieved dramatically improved efficiencies, compared to traditional hierarchal organizations. One reason is in the intelligent reintegration of work to correct the disintegrated work practices advocated by Taylor's scientific management theories. This segregation of work was done partly in response to conditions that no longer exist: a better-educated workforce combined with modern technology makes it possible to design integrated processes that combine related tasks and bring the needed resources under local control. In addition to improved efficiencies, the new approach to work creates other welcome results, notably: improved employee morale, increased customer satisfaction, and greater supplier loyalty and cooperation.
Table 1.1 summarizes the changing pattern of the marketplace. In some ways the changing business environment involves a return to the craftsman era of the past: more complex jobs with the resulting need for workers with a broader repertoire of skills. Other tendencies are continuations of past trends: international markets are the next logical step after moving from local markets to national markets. In other ways the new world of business is simply different: modern flexible systems diverge in fundamental ways from previous systems.
It follows that yesterday's organizations, which evolved in response to the realities of the past, might not be suited to the changing reality. In fact, there is strong evidence to suggest that organizations that do not adapt will simply disappear. Over 40 percent of the 1979 list of the Fortune 500 had disappeared by 1990 (Peters, 1990). The organizations that have managed to progress have not stood still.
Forms of Organization
In addition to describing organizations in terms of their structures, Mintzberg (1994) also describes them in terms of forms. Mintzberg proposes a framework of five basic forms of organization:
1. The Machine Organization. Classic bureaucracy, highly formalized, specialized, and centralized, and dependent largely on the standardization of work processes for coordination. Common in stable and mature industries with mostly rationalized, repetitive operating work (as in airlines, automobile companies, retail banks).
2. The Entrepreneurial Organization. Nonelaborated, flexible structure, closely and personally controlled by the chief executive, who coordinates by direct supervision. Common in start-up and turnaround situations as well as in small business.
3. The Professional Organization. Organized to carry out the expert work in relatively stable settings, hence emphasizing the standardization of skills and the pigeonholing of services to be carried out by rather autonomous and influential specialists, with the administrators serving for support more than exercising control; common in hospitals, universities, and other skilled and craft services.
4. The Adhocracy Organization. Organized to carry out expert work in highly dynamic settings, where the experts must work cooperatively in project teams, coordinating the activities by mutual adjustment, in flexible, usually matrix forms of structure; found in "high technology" industries such as aerospace and in project work such as filmmaking, as well as in organizations that have to truncate their more machinelike mature operations in order to concentrate on product development.
5. The Diversified Organization. Any organization split into semi-autonomous divisions to serve a diversity of markets, with the "headquarters" relying on financial control systems to standardize the outputs of the divisions, which tend to take on the machine form.
Chapter TwoThe Quality Function
As discussed in Chap. 1, organizations are traditionally structured according to functional specializations, for instance, marketing, engineering, purchasing, manufacturing. Conceptually, each function performs an activity essential in delivering value to the customer. In the past, these activities were performed sequentially. As shown in Fig. 2.1, Shewhart, Deming, and Juran all depict these activities as forming a circle or a spiral, where each cycle incorporates information and knowledge acquired during the previous cycle.
Excerpted from The Handbook for Quality Management by Thomas Pyzdek Paul Keller Copyright © 2013 by The McGraw-Hill Companies, Inc. . Excerpted by permission of McGraw-Hill Companies, Inc.. All rights reserved. No part of this excerpt may be reproduced or reprinted without permission in writing from the publisher.
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