Designing Companies and Organizations

Axel J. Papendieck

- How Systemtheory Can be Utilized to Shape Coporations -

Part 3: Internal Company Structures

- Part 1
- Part 2
- Part 4
- Part 5
- Productivity
- History
- About

Shaping the internal company structure, the areal layouts, the pooling of workplaces can be achieved in four different ways. This is of determining impact on the appearance and performance of the entire organization. Besides the plain areal layout of workplaces the creating of sub-units has a substantial side effect. A high degree of specialization will develop within the staff. The staff over time will acquire more and more knowledge about the production processes and the tools. That constantly and gradually improves productivity. This effect is of greater importance than just the areal setup.

The four feasible alternatives for clustering and deploying workplaces of an organization are:
I. production process - according to order of operations
II. function - according to specific, same operations
III. product (project) - according to production lines of main products
IV. customer - according to customer groups, e.g. regions/countries, volume of revenues, language etc.

I Production process organization: the layout is analog to the production process. This type of organization is utilized basically just for one product - or products with few variations. The layout will lead to minimum costs and is used whenever possible. In this arrangement the economy of scale is of maximum impact. - Fledging businesses usually start as a one product organization. An Example in developed branches is the automobile industry: each assembly line is implementing the production process of one product - the numbers are large enough for this layout. Different products of that industry are manufactured on different assembly lines.

II Functional organization: in this set up only one specific operation is performed in each sub-unit. This type of organization is used for producing many different products. There are many different product-flows, all production processes more or less have a different routing through the shops, departments and workplaces. The different production processes require much higher information volumes to be handled for steering purposes (managing).
Most organizations today manufacture many or very many different products/services on given workplaces. Historically the change from a one product o
Advantage: The workplaces (staff & tools) become specialized to a high degree, operations are performed in best quality with lowest error probability - altogether with minimal costs for the single operation.
Disadvantage: The higher the number of different production processes are in one shop the more complex is monitoring, controlling and steering. The tasks of managing become more elaborate, the probability of wrong decisions increases and monitoring and steering costs rise. (This was very obvious when steering still was done manually). Costs may rise to a level that the functional organization becomes completely inadequate. At that point the number of different products has to be reduced or the change to production-line organization has to be done.
An additional negative side effect is, increasing numbers of products lead to higher throughput times for all products.

III Product-line organization: With this type the over-all organization is divided according to the main product groups of the company. In most cases just research & development and manufacturing are divided. Sales are usually exempted. This is in international business a widely established form of organization. Examples in industry are (auto): divisions according to size of cars (small, medium, premium), in insurance according to branches (life, health, property etc.). This form of organization still endeavors to be close to the one-product organization for cost effectiveness.- Actually it is a mixture of a one-product-organization and a functional organization, it tries to get as close to the one-product organization as possible.
The advantages compared to the functional organization are
A. The number of different production processes is reduced, throughput times are only moderately higher, the amount of work for steering, monitoring and controlling is rduced, so costs of steering are rising only to a sustainable degree. The main focus of the staff is aimed at the main products of the unit - not to an operation or function. All workplaces, staff and tools, are specialized in regard to the main products.
B. The internal service workplaces - sometimes called non-productive workplaces - are delivering services to all divisions. Examples: human resources, IT, general marketing etc. Their work is considered to be efficient because their services are delivered to workplaces of all product lines.

The disadvantage in regard to a functional or one-product organization is the economy of scale, the pure manufacturing costs are higher, steering costs however are smaller than in functional many-product organizations.

IV Customer organization: in this type of organization all workplaces are pooled in sub-units according to customer groups. This type of organization is considered the top level of internal organizations. It is the final goal of many international companies. In some cases it is already realized to full degree, i. e. all products of the company are indeed manufactured in the customer unit. Criteria for customer units can be: industrialized / developing countries, language (English /Spanish/ ...) etc.

Advantage: All products of the organization - with adjustments - can be delivered to the customer by just one company - "one face to the customer!". The close relations to the customer will help finding customer needs at an early stage which might be essential for developing new products. Besides strong indicators support the assumption that more sales per customer can be reached. The customer unit has a very good understanding of the customer needs, it has a complete overview of all current sales to each customer and in the market as well. The goal of this type is to achieve higher revenues, due to the intricate knowledge of the customer- and market-needs.

Disadvantage: The economy of scale is much smaller than in functional or in product-oriented organizations, technical knowledge regarding the production processes will tend to be lower, production costs are relatively high.

Customer organization very often is realized only in the sales units of product-line organization endeavoring to take advantage of both organization types. But the abilities of the sales staff for covering the functionalities of (many) different products are limited - due to the special knowledge which might be necessary to understand and explain the different product features. - To offset this disadvantage specialists of the product have to be engaged which however is expensive.