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This chapter is from the book

Organizations: Structure, Design, and Partnership

As we’ve reiterated numerous times, in order to be effective in our profession, we have to be businesspeople—not just HR professionals. Our profession is our craft, our skill. We need to be prepared to knowledgeably practice that craft within the organizations we support. In order to do so, one of the many things we need to understand is how organizations are structured.

As we begin to take a look at how organizations are functionally organized, let’s go back and revisit Henri Fayol. Fayol identified six functional groups within organizations, and suggested that all organizational activities can fit into one of those six functional areas:

  • Technical activities
  • Commercial activities: sales and marketing
  • Financial activities
  • Security activities
  • Accounting activities
  • Managerial activities

Despite the ongoing validity of Fayol’s theories, a few things have changed since Fayol’s time. One is the role of human resources in the organization, which at first glance is not well- reflected in these six areas. Another is information technology, non-existent in the early twentieth century when Fayol set forth his ideas. Something that can be said to hold true for both of these areas is that while each is its own independent function, each also supports and reinforces the efforts of every other area. This is important, in and of itself, since it reinforces the idea that Fayol’s areas—while illustrative—are not necessarily as clearly dichotomized as they were when Fayol originally set forth his ideas.

What HR Professionals Need to Know About the Organizations They Support

As HR professionals, there is specific business-related information we should know about the various structural elements of organizations. While any of these items could conceivably be on the PHR exam, discussing them goes beyond the scope of (and the page allocation for) this book. What we will do, then, is to set forth the concepts that are important for you to know and encourage you (in the strongest possible terms) to seek out, familiarize yourself with, learn, and (when appropriate) memorize facts, information, and formulas relating to the following:

  • Technical activities/operations:
    • Capacity
    • Standards
    • Scheduling
    • Inventory
    • Control
  • Commercial Activities—Sales and Marketing
    • The 4 Ps:
    • Product
    • Place
    • Price
    • Promotion
  • Finance and Accounting Activities
    • Budgeting:
      • Incremental budgeting
      • Formula budgeting
      • Zero-based budgeting
      • Activity based budgeting
    • Assets
    • Liability
    • Equity
    • Accounts payable
    • Accounts receivable
    • Balance sheet
    • Income statement
    • Gross profit margin
    • Statement of cash flows
    • Financial ratios:
      • Business activity ratios
      • Profitability ratios
      • Debt ratios
      • Liquidity
      • Current ratio
    • Acid test

Balanced Scorecard

In the early 1990s, a new approach to strategic management was developed by Dr. Robert Kaplan and Dr. David Norton. Called the "balanced scorecard," this new approach sought increased clarity and specificity by offering a clear and unequivocal prescription of what companies should measure in order to appropriately balance financial measures of success against non-financial measures of success.

In addition to being a measurement system, the balanced scorecard is also a management system. It turns strategic planning into a hands-on, reality driven, highly effective tool. It is important to note, however, that in creating and describing the balanced scorecard, Kaplan and Norton do not denounce the value of traditional financial measures. They do, however, share their premise that financial measures by themselves are not enough. Other perspectives must be incorporated in order to obtain a more accurate assessment of organizational performance.

The balanced scorecard embodies the following four perspectives:

  • Learning and Growth Perspective: This perspective looks at employee training, as well as attitudes toward individual and corporate growth. It emphasizes the criticality of the knowledge worker, of people as the organization’s primary resource, and of the need for employees to continually grow and learn so as to be able to perform in a manner that will truly support the attainment of organizational goals.
  • Business Process Perspective: This perspective scrutinizes key internal business processes so as to measure and ascertain how well those processes generate business results (such as products and services) that meet customer expectations. The business process perspective ascertains performance levels through specific measures that are unique to each particular organization.
  • The Customer Perspective: This perspective focuses on the criticality of customer focus and customer satisfaction—for every business and organization. Dissatisfied customers will eventually look to others who will meet their needs and expectations (often without ever sharing their reasons for doing so), which, if the numbers are large enough, can ultimately lead to organizational decline.
  • The Financial Perspective: The financial perspective is the most traditional of Kaplan’s and Norton’s four perspectives. As previously indicated, financial considerations cannot be overlooked—they simply have to be supplemented with other meaningful organizational measures.

Organizational Life Cycle

It’s particularly important for HR professionals to be familiar with organizational life cycles, since each phase will warrant different interventions. These phases or stages roughly approximate the phases of life experienced by humans—thereby further bolstering the perspective of the organization as a living, breathing entity.

The four stages of the lifecycle—though referred to slightly differently by different experts—are as follows:

  • Stage 1: Introduction (or "birth"). Excitement and energy are high and cash flow may be low. Struggling start-ups often find themselves searching for solid footing—financially as well operationally. The core group of highly talented employees may focus fixedly on the founder as a source of direction, wisdom, and inspiration.

  • In the introduction phase, employees may find themselves paid above market rates as a reflection of the founder's desire to "lure" them on board. Alternatively, if money is in short supply, employees in the introduction phase may earn less cash compensation, and have those diminished earnings offset by other non-cash rewards (equity, intrinsic rewards, and so on).

    Depending upon the organization, HR may or may not have a presence in this phase of the organizational life cycle.

  • Stage 2: Development (or "growth").The organization grows in so many ways during the development phase—market share, facilities, equipment, revenues, and the number of employees are all likely to expand, to varying degrees. Along with that growth, the organization is likely to experience some "growing pains."

  • Though it may be a challenging process for some organizations—one that might meet with resistance—it is important that policies and procedures are formalized, as a way of fostering equity, compliance, and consistency.

  • Stage 3: Maturity. The growing pains have passed, and the culture is well established. In fact, it's important to ensure that certain elements of the culture do not become a bit too well-established. If this were to happen, an "entitlement mentality" could begin to emerge relative to pay, benefits, and/or other terms and conditions of employment. The organizational structure could evolve in a somewhat rigid manner, and resistance to OD and change initiatives could be high.

  • As is the case with us humans, organizations must resist the onset of inertia during these years of maturity lest they begin to atrophy. In concert with senior leadership, HR must play a key role in ensuring that this doesn't happen.

  • Stage 4: Decline. If that inertia does set in, and if the atrophy does begin, decline is likely not far behind. There are many examples of the demise of long-standing organizations—retailers, in particular—"anchors" in our local and national communities that just weren't able to "keep up with these changing times." This can happen for any number of reasons such as salaries that are beyond what the organization can truly afford to pay, inflexible management, disengaged workers...the list goes on and on. In the wake of such decline, downsizing is likely to occur—either in pockets or across the organization as a whole.

Organizational Structure

Organizational structure refers to the various ways in which organizations can be designed to attain maximum levels of effectiveness and efficiency.

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