MGT504 - Organization Theory and Design - Lecture Handout 15

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One of the biggest changes occurring in the technology of organizations is the growing service sector. The percentage of work force employed in manufacturing continues to decline, not only in United States, but in Canada, France, Germany, the United Kingdom, and Sweden as well. In the United States, services now generate 74 percent of the gross domestic product and account for 79 percent of all jobs. Service technologies are different from manufacturing technologies and, in turn, require a specific organization structure


Definition: Whereas manufacturing organizations achieve their primary purpose through the production of products, service organizations accomplish their primary purpose through the production and provision of services, such as education, health care, transportation, banking, and hospitality, studies of service organizations have focused on the unique dimensions of service technologies. The characteristics of service technology are compared to those of manufacturing technology in Example.

The most obvious different is that service technology produces an intangible output, rather than a tangible product, such as a refrigerator produced by a manufacturing firm. A service is abstract and often consists of knowledge and ideas rather than a physical product. Thus, whereas manufacturers’ products can be inventories for later sale, services are characterized by simultaneous production and consumption. A client meets with a doctor or attorney, for example, and students and teachers come together in the classroom. A service is an intangible product that does not exist until it is requested by the customer; it cannot be stored, inventoried, or viewed as a finished good. If a service is not consumed immediately upon production, it disappears. This typically means that service firms are labor and knowledge intensive; with many employees needed o meet the needs of customers whereas manufacturing firms tend to be capital intensive, relying on mass production, continuous process, and advanced manufacturing technologies.

Direct interaction between customer and employee is generally very high with services, while there is little direct interaction between customer and employees in the technical core of a manufacturing firm. This direct interaction means that the human element (Employees) becomes extremely important in service firms. Whereas most people never meet the workers who manufactured their cars, they interact directly with the salesperson who sold them their Subaru or Pontiac Grand Am. The treatment received from the salesperson --- or by a doctor, lawyer, or hairstylist - -- affects the perception of the service received and the customer’s level of satisfaction. The quality of services is perceived and cannot be directly measured and compared in the same way that the quality of a product can. Another characteristic that affects customer satisfaction and perception of quality service is rapid response time. A service must be provided when the customer wants and needs it. When you take a friend to dinner, you want to be seated and served in a timely manner; you would not be very satisfied if the hostess or manager told you to come back tomorrow when there would be more tables or servers available to accommodate you.

The final defining characteristic of service technology is that site selection is often much more important than with manufacturing. Because services are intangible, they have to be located where the customer wants to be served. Services are dispersed and located geographically close to customer. For example, fast-food franchises usually disperse their facilities into local stores. Most towns of even moderate size today disperse their facilities into local stores. Most towns of even moderate size today have two or more McDonald’s restaurant rather than one huge one in order to provide service where customers want it.

In reality, it is difficult to find organizations that reflect 100 percent service or 100 percent manufacturing characteristics. Some service firms are placing a grater emphasis on customer service to differentiate themselves and be more competitive, which is one reason for the increased use of computer- integrated manufacturing. In addition, manufacturing organizations have departments such as purchasing, human resources, and marketing that are based on service technology. On the other hand, organizations such as gas stations, stockbrokers, retail stores, and fast – food restaurants may belong to the service sector, even though the provision of a product is a significant part of the transaction. The vast majority of organization involves some combination of products and services. The important point is that all organizations ca be classified along a continuum that includes both manufacturing and service characteristics, as illustrated in Example. 6.6.

New Directions in Services: Service firms have always tended toward providing customized output --- that is, providing exactly the service each customer wants and needs. For example, when you visit a hairstylist, you don’t automatically get the same cut the stylist gave the three previous clients. The stylist cuts your hair the way you request it. However, the trend toward mass customization that is revolutionizing manufacturing has had a significant impact on the service sector as well. Customer expectations of what constitutes good service are rising. Service companies such as the Ritz – Carlton Hotels, USAA, an insurance and financial services company, and wells Fargo Bank are using new technology to keep customers coming back. All Ritz – Carlton hotels are linked to a database filled with the preferences of half-a-million guests. Allowing any desk clerk or bellhop to find out what your favorite wine is whether you’re allergic to feather pillows, and how many extra towels you want in your room. At Wells Fargo, customers can apply over the internet and get a three – second decision on a loan structured specifically for them. Vincent Oliva, Paul Sanchez, and Joel Myers based their new company, Capital Protections Insurance Services, on the mass customization concept after they grew frustrated with the inflexibility of many insurance companies.


The feature of service technologies with a distinct influence on organizational structure and control systems is the need for technical core employers to be close to the customer.

The impact of customer contact on organization structure is reflected in the use of boundary roles and structural desegregation. Boundary roles are used extensively in manufacturing firms to handle customers and to reduce disruptions for the technical core. They are used less in boundary spanners, so service customers must interact directly with technical employees, such as doctors or brokers.

A service firm deals in information and intangible outputs and does not need to be large. Its greatest economies are achieved through desegregation into small units that can be located close to customers. Stockbrokers, doctors’ clinics, consulting firms, and banks disperse their facilities into regional and local offices. Some fast-food chains, such as Taco Bell, are taking this step further, selling chicken tacos and bean burritos anywhere people gather--- airports, supermarkets, college campuses, or street corners. Manufacturing firms, on the other hand, tend to aggregate operations in a single area that has raw materials and in available work force. A large manufacturing firm can take advantage of economies derived from expensive machinery and long production runs.

Service technology also influence internal organization characteristics used to direct and control the organization. For one thing, the skills of technical core employees need to be higher. These employees need enough knowledge and awareness to handle customer problems rather than just enough to perform a single, mechanical task. Some service organizational give their employees the knowledge and freedom to make decisions and do whatever is needed to satisfy customers, whereas others, such as McDonald’s have set rules and procedures for customer service. Yet in all cases, service employees need social and interpersonal skills as well as technical skills. Because of higher skills and structure dispersion, decision making often tends to be decentralized in service firms, and formalizations tends to be low. Many Taco Bell outlets operate with no manager on the premises. Self – directed teams manage inventory, schedule work, order supplies, and train new employees.

EXAMPLE: Configuration and Structural Characteristics of Service Organizations versus Product Organization

  Service Product
Separate boundary roles Few Many
Geographical dispersion Much Little
Decision making Decentralized Centralized
Formalization Lower Higher
Human Resources
Employees skill level Higher Lower
Skill emphasis Interpersonal Technical

Understanding the nature of service technology helps managers aligns strategy, structure, and management processes that may be quite different from those fro a product- based or traditional manufacturing technology. In additions, as mentioned earlier, manufacturing organizations are placing greater emphasis on service, and managers can use these concepts and ideas to strengthen their company’s service orientation.

Now let’s turn to another perspective on technology, that of production activities within specific organizational departments. Departments often have characteristics similar to those of service technology providing service to other departments within the organization.


This section shifts to the department level of analysis for departments not necessarily within the technical core. Each department in an organization has a production process that consists of a distinct technology. General Motors has departments for engineering, R&D, human resources, advertising, quality control, finance, and dozens of other functions. This section analyzes the nature of departmental technology and its relationship with departmental structure.
The framework that has had the greatest impact on the understanding of departmental technologies was developed by Charles Perrow. Perrow’s model has been useful for a broad range of technologies, which made it deal for research into departmental activities.


Perrow specified two dimensions of departmental activities that were relevant to organization structure and process. The first is the number of exceptions in the work. This refers to task variety, which is the frequency of unexpected and novel events that occur in the conversion process. When individuals encounter a large number of unexpected situations, with frequent problems, variety is considered high. When there are few problems, and when day –to-day job requirements are repetitious, technology contains little variety. Variety in departments can range from repeating a single act, such as on assembly line to work on a series of unrelated problems or projects.


The second dimension of technology concerns the analyzability of work activities, when the conversion process is analyzable, the work can be reduced to mechanical steps and participants can follow an objective, computational procedure to solve problems. Problem solution may involve the use of standard procedures, such as instructions and manuals, or technical knowledge, such as that in a textbook or handbook. On the other hand, some work is not analyzable. When problems arise, it is difficult to identify the correct solution. There is no store of techniques or procedures to tell a person exactly what to do. The cause of or solution to a problem is not clear, so employees rely on accumulated experience, intuition, and judgment. The final solution to a problem is often the result of wisdom and experience and not a result of standard procedures. Philippos Poulos, a tone regulator at Steinway & Sons, has an un-analyzable technology. Tone regulators carefully check each piano’s hammers to be sure they produce the proper Steinway Sound. These quality control tasks require years of experience and practice. Standard procedures will not tell a person how to do such tasks.

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