Entrepreneur's Handbook
Formalization, Classification and Participation in Decision Making
Technological advances, which were integrated with production with the Industrial Revolution, led to a very significant increase in productivity. In addition, with the acceptance that venture partners have "limited liability" to venture creditors, a large increase has occurred in both the number of ventures established and the capital invested in ventures, and this has also reflected on the scale of production and hence the employee. Bureaucratic management principles have been adopted so that the increase in scale does not conflict with the efficiency target. The basis of these principles are formalization, segmentation according to rational foundations and decentralization in decision making.
2.1. Definition and Importance of Formalization
Formalization, means the degree to which the rules and roles in the enterprise are determined and defined clearly and independently from the personal characteristics and relationships of the individuals in the enterprise. The rules in the enterprise are created to give them a predictable quality by ruling the behavior. With the existence of rules and compliance with the rules, the behavior in the enterprise becomes stable, the arbitrariness disappears and the expectations are met. Similarly, the enterprise's IT expertise, accounting chieftain, production engineering, etc. roles show expectations for the behavior of individuals who occupy social positions in the enterprise. Employees who observe the relationships between roles and roles understand clearly the structure and work flow in the enterprise and can intervene when necessary (Scott & Davis, 2007).
Typical indicators of formalization; the existence of written policies, handbooks, job descriptions and organizational charts. Studies show that over-formalization tends to hinder innovation in the enterprise and suppress communication (Hatch, 2018). On the other hand, formalization brings along various advantages. First, many people want to know what is expected of them and their powers in the workplace. Clearly defined and applied rules and roles provide clarity to people in this respect. Second, rules and roles become low-cost tools for ensuring coordination among the employees in the enterprise, once they have been tried, rather than employing dedicated coordination staff or holding “endless meetings”. Third, formalization; It provides convenience in controlling the overall costs of the enterprise. Fourth, formalization is an effective control tool when the expertise and skill levels of employees are low. Finally, formalization compared to direct observation provides a significant convenience in supervising employees in large enterprises (Child, 2015).
2.2. Definition and Importance of Compartmentalization
Compartmentalization, is grouping the positions in the enterprise into separate units and the units into the whole enterprise. Managers make choices about how to group people as they do their jobs (Daft & Marcic, 2009). Four important segmentation approaches lead to different organizational structures: simple, functional, multi-part and matrix structures.
2.2.1. Basit Compartmentalization
In small enterprises, a simple structure with limited division of labor, almost no hierarchy and almost all decisions made by the top management is preferred. Smallness limits employee specialization because everyone must share the responsibility to carry out tasks as the need arises. The simple structure is typical of small startups or businesses with low growth potential, such as restaurants, greengrocers and butchers in neighborhoods (Hatch, 2018). The most important advantages of the simple structure are the ability to make and implement fast decisions, flexibility, low cost of maintenance and clarity in the accountability of employees. As the initiative grows, inadequacy and over-dependence on people are the most important weaknesses of the simple structure (Robbins & Coulter, 2018).
2.2.2. Functional Structure
A group of people who have similar skills or who use similar types of knowledge, tools, or techniques to do their job and work together is called a function. The functional structure includes all units that the enterprise needs to produce goods or services (Jones & George, 2016). The functional structure of a medium-sized manufacturing enterprise is shown below as an example.
The functional structure has important advantages. First, it allows the work to be done by qualified experts, thus reducing errors and increasing productivity. Second, because everyone will be busy with the job in their field of expertise, there is no risk of getting a job done over and over again by more than one person. Thus, costs are reduced. Third, communication and coordination will be easier for department managers since employees in the same department will have similar work experience or training. At the same time, the functional structure has some weaknesses. First, interdepartmental coordination and communication can be difficult because departmental managers and employees may be more concerned with doing what is right for their functions rather than doing what is right for the entire organization. In addition, as the enterprise grows, the functional structure can lead to slower decision making and the presence of managers and employees with limited experience and expertise (Williams, 2017).
2.2.3. Multi-Part Structure
When it comes to producing different types of products, focusing on different types of customers, or producing and selling in different geographic regions, enterprises solve control problems with a multi-divisional structure. The multi-division structure groups the works according to the specific demands of the product, region or customers, and each group is called the strategic business unit (SBU). The main reason for adopting the multi-divisional structure is to create smaller and more manageable units within the enterprise. Which type of multi-part structure is chosen depends on the control problem. If the control problem arises from the number of product types and the complexity of the products, if the product is based on the number of geographical regions where the enterprise produces and sells, and if it arises from the need to serve a large number of different customer groups, then the customer-based multi-divisional structure is preferred (Jones, 2013).
The multi-part structure has several advantages. First, specialization; Since it allows more focus on the works in which each SBU operates, the needs of the customers are responded better according to the functional structure. Second, the multi-divisional structure provides accountability based on SBU profits. The profitability of each SBU can be used to compare the unit with both other units and competitors. Third, the multi-divisional structure is superior to the functional structure in training future top managers. The top managers at the center of the enterprise have extensive experience that cannot be obtained in a business with a functional structure. Over time, an SBU manager will have the same perspectives and responsibilities as top managers (Hatch, 2018).
The first weakness of the multi-part structure is that generally the same functional units are found in each SIB and this situation is repeated in different units. This often leads to higher costs. The second weakness is that it is difficult to ensure coordination between different SBUs. Initiatives may have difficulty in standardizing policies and procedures in various SBUs (Williams, 2017). The third weakness is that the transition from functional structure to multi-division structure adds one more step to the hierarchy, thus increasing paperwork and the necessity of obtaining approval from the top manager of the enterprise for decisions that may affect another SBU or the whole enterprise slows down the decision making. The last weakness is the possible tension situation between the units, as each SBU is an independent profit and loss center. While SBUs are competing with each other in order to get more shares from venture resources; For the success of the venture, they should also share the management and skills they have developed. It is not easy to achieve this balance (Rothaermel, 2016).
2.2.4. Matrix Structure
Sometimes, the enterprise's structure may need to be focused on the function / product, the customer or the region at the same time. The matrix structure provides the opportunity to implement functional and multi-part structures together. Function / product, or regional managers, have equal authority within the enterprise, and employees report to both managers (Daft & Marcic, 2009).
Matrix structure has two important advantages. Its first advantage is that it is only necessary to appoint the project manager and select project team members to start new projects, so the matrix structure is extremely flexible. However, when starting new projects in functional and multi-departmental structures, it is necessary to either assign new responsibilities to the functions or to create a new department. The second is to make more use of the capacities of the employees in the organization. Employees in the matrix structure will have responsibilities related to the product, customer or region in addition to their functional responsibilities and thus they will be able to contribute more to the initiative (Hatch, 2018). The biggest weakness of the matrix structure is that an employee's accountability to both the function manager and the product, region or customer manager at the same time can cause time confusion and increase the stress level of some employees (Williams, 2017).
2.3. Participation in Decision Making and the Importance of Participation in Decision Making
Decision making means making a choice or choosing between multiple options. Decisions in initiatives, goal setting or problem definition; addressing goals or problems or setting priorities; choosing options; It is obtained as a result of the evaluation of options and determining the selection criteria and making a selection (Koçel, 2018)
Ensuring employee participation at every stage of the decision-making process increases the probability of success of the process because participation provides individuals with the opportunity to express their feelings, increases the quality of the process and employees' commitment to the final decision (Robbins & Coulter, 2018). In addition, offering individuals the opportunity to express their emotions reduces their stress and increases their efficiency. The factor affecting the quality of the decision making process the most is individual prejudices. According to the researches, the most common prejudices are ignoring information that contradicts the ideas; the perception that extremely striking and sensational events are much more likely to occur; value the first acquired knowledge well above the later knowledge; Don't trust the first impression too much; Although it is clear that time has come from any issue where labor and / or money is invested, it is always seen that the probability of failure and success is far above the probability of failure (Stillman, 2016). All of these biases can be reduced by getting as much participation as possible in the decision-making process.
Especially the phase of determining the options is the phase where new ideas are most needed. The most commonly used technique at this stage is the "Brainstorming Technique". The first step of the brainstorming technique is that group members express any ideas that come to their minds about ways to achieve a goal or solution options for a problem, without being subjected to any criticism and evaluation. Thus, the emergence of a large number of new ideas will be encouraged. After a list is developed in this way, the ideas on the list are examined one by one, analyzed, evaluated and combined or eliminated. Finally, a consensus list of options emerges (Koçel, 2018).