CHAPTER 6 DESIGNING ORGANIZATIONAL STRUCTURE:

SPECIALIZATION AND COORDINATION

TEACHING OBJECTIVES
1. To show how to group and coordinate tasks and how an effective organizational design leads to core
competences and a competitive advantage. (6.1)
2. To demonstrate that grouping tasks by function is the foundation of horizontal differentiation. (6.1)
3. To illustrate that moving from a functional to a more complex structure increases vertical
differentiation, horizontal differentiation, and integration. (6.2)
4. To stress that structure must be evaluated periodically and may need to be changed. (6.2)
5. To show the differences among the three types of product structures: product division, multidivisional,
and product team. (6.3)
6. To explain the geographic and market structures. (6.4./6.5)
7. To outline the advantages and disadvantages of a matrix structure. (6.6)
8. To explain the concept of a multidivisional matrix structure. (6.6)
9. To discuss the emerging trends toward hybrid structures, network organizations, the boundaryless
organization, and e-commerce. (6.7)

CHAPTER SUMMARY
Company tasks are organized to provide customers with goods and services. The functional structure stands
as the foundation of horizontal differentiation by creating a division of labor that leads to core competences.
Functional structures face control problems as an organization grows and becomes more complex: lack of
communication, inability to measure performance, and lack of customer responsiveness. To resolve these
issues, a company adopts a more complex structure by increasing vertical differentiation, horizontal
differentiation, and integration. The source of control problems, the product, geography, or the customer,
determines the type of structure. Three product structures (product division, multidivisional, and product
team) are discussed, highlighting both advantages and disadvantages. The geographic structure and the
market structure are examined with their advantages and disadvantages.
The matrix structure is appropriate when a high level of coordination and a rapid development time are
necessary. The advantages and disadvantages of the matrix are reviewed, as well as the difference between
the matrix and the product team structures. The multidivisional matrix structure offers a high level of
coordination among divisions. Structures may need to be changed over time, so managers should
continually evaluate the cost/benefit ratio of company structure.
Trends in structure include network organizations, outsourcing, and the boundaryless organization, each
with advantages and disadvantages. A key issue in organizational design is how to group tasks and
coordinate activities to create a competitive advantage. Organizational structure fosters coordination,
motivation, and control. The appropriate structure depends on the complexity of activities, the amount of
coordination needed, the number of products marketed, the geographical location, and the customer served.
Reengineering an organization can increase performance.

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

57

CHAPTER OUTLINE
6.1

Functional Structure

Functional structure is the bedrock of horizontal differentiation, which begins when one person assumes a
functional task. As others assume specialized roles, a functional structure emerges, with people placed in
groups based on common skills or common use of resources. The B.A.R. and Grille grouped waiters and
busboys into the dining area function and chefs and kitchen staff into the kitchen function.
Q. How does the functional structure help a company reach its goals?
A. A company organizes jobs into functional areas to offer consumers high-quality products at reasonable
prices. As functional abilities increase, a company can attain a core competence and competitive advantage.

Refer to the B.A.R. and Grille example above for a good working example of how and why an
organization would group by function.

__________________________________________________________________________
__________________________________________________________________________
_
Focus on New Information Technology: Amazon.com, Part 4
Jeff Bezos achieved success due to the functional structure that effectively allowed Amazon.coms Internet
software to link employees to customers.
Q. Describe Amazons functional structure.
A. First, Bezos created R&D to develop and improve in-house software. Then he established the
information systems department to implement these systems and interact with customers. Finally, a
financial department and strategic planning department were added.
By focusing on the best way to divide the total task into functions and on recruiting experienced managers,
Bezos developed core competences that made Amazon.com competitive.
Notes________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
Advantages of a Functional Structure
1. People with common skills share information for problem solving or accomplishing a task. Learning
from peers increases skills and abilities.
2.
People can supervise each other and meet work schedules. Peer supervision is key if work is complex
because supervision from above is difficult.
3.
Working closely, peers develop norms and values that increase their effectiveness and loyalty.
Control Problems in a Functional Structure

A functional structure controls people and resources and develops core competences. As a
company grows and becomes more complex, each function tries to maintain the companys
position. Increased demand may strain manufacturing to produce products fast enough or in
sufficient quantity. Control problems arise.
Q. What problems do functional structures face?
58

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

A. Communication Problems. Functions communicate poorly because of subunit orientation.

Measurement Problems. Evaluating the cost and contribution of each function to a product is difficult.
Location Problems. With regional offices, a company must balance decision making between centralized
functions and regional managers.
Customer Problems. New types of customers require customized products to meet their needs.
Strategic Problems. Solving daily coordination problems prevents top managers from focusing on longterm strategic issues, resulting in a loss of strategic direction.
Notes_________________________________________________________________________

______________________________________________________________________________
______________________________________________________________________________
Redesigning Functional Structures to Solve Control Problems
Before adopting a more complex and costly structure, a company may solve control problems through
integrating mechanisms. Marketing and sales have functional hierarchies. Some companies consolidate
departments to resolve coordination problems. (Fig. 6.2)

6.2

From Functional Structure to Divisional Structure

A functional structure best serves a company that produces a few, similar products at a few production sites
and markets to one type of customer. When production expands to more products at more locations and to
several types of customers, a company requires a complex structure.
This move entails three design choices:
Increasing vertical differentiation, increasing the levels in the hierarchy, centralizing decision making, and
increasing control with rules.
Increasing horizontal differentiation, product teams, or divisions to overlay a functional grouping.
Increasing integration, using integrating mechanisms, such as task forces and teams, to improve
coordination between subunits and motivation. (Fig. 6.3)

Managerial Implications: Functional Structure

For an entrepreneur, division of labor within a function and between functions is a vital design task. A
diagram of task relationships shows if the organization is obtaining the advantages of a functional structure
or experiencing disadvantages. Reengineering the design of the functional structure can increase
effectiveness.
Notes_________________________________________________________________________

______________________________________________________________________________
______________________________________________________________________________
Moving to a Divisional Structure
A divisional structure groups people from different functions to provide customers with goods or services.
This structure makes subunits easier to manage as a company grows. The type of divisional
structure depends on the source of control problems. If many, complex products cause problems, a
product structure fits best. If multiple locations cause problems, a geographic structure fits best. If
different customer types cause problems, a market structure fits best.
Notes_________________________________________________________________________

______________________________________________________________________________
______________________________________________________________________________
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

59

6.3

Divisional Structure I: Three Kinds of Product Structure

As the number of products and/or services increases, tasks are grouped by product and function. A product
structure groups products into separate divisions. A company must determine the difference and complexity
of products and coordination methods between support functions and product divisions. Support functions
can be centralized at the top or grouped for each product division. These decisions determine a companys
product division, multidivision, or product team structure.
Product Division Structure
A product division structure with centralized support functions is appropriate when products are similar
and target the same market.
Q. What types of companies generally meet this criteria?
A. Food processors, furniture makers, and paper companies fit a product division structure. H. J. Heinz has
product divisions with manufacturing facilities and a manager who coordinates with support functions like
marketing. Vertical differentiation is increased and support functions centralized at the top. (Fig. 6.4)
Each support function is grouped into a product-oriented team. (Fig. 6.5) Sharing of skills and resources
increases a functions ability to create value across product divisions.
Multidivisional Structure
A multidivisional structure is appropriate if products are different and are sold in many markets. Divisions
are self-contained, each with their own support functions and control. Because products differ, centralized
support functions at the top are infeasible. An automaker doesnt know how to market a computer. The
multidivisional structure has a corporate headquarter, organized functionally and responsible for overseeing
division managers. Staff members facilitate integration to share information quickly among divisions.
Unlike a product division structure, a multidivisional structure can control many businesses. (Fig. 6.6)

Refer to Discussion question 2 here to distinguish between a product division and multidivisional
structure.
_________________________________________________________________________________
_________________________________________________________________________________

Q. What companies should use the multidivisional structure?

A. Most Fortune 500 companies, like General Motors, have a multidivisional structure because it permits
growth and retention of control. There are three management levels: corporate, divisional, and functional.
Advantages of a Multidivisional Structure
1.
Increased organizational effectiveness, due to a division of labor between corporate and divisional
managers.
2.
Increased control, because corporate managers monitor divisional managers and make comparisons.
3.
Profitable growth, because capital can be allocated to divisions with the greatest potential return on
investments.
4.
An internal labor market, because good divisional managers are promoted to corporate management.

Organizational Insight 6.1: Creating GMs Multidivisional Structure

Alfred Sloan took over GMs 25 product divisions in 1923 when Ford was highly centralized and achieved
economies of scale by producing one model. Sloan developed a multidivisional structure with diversity in
R&D, design, and marketing skills, but centralized control for economies of scale, cost control, and
strategic planning. Divisional managers made decisions, and corporate managers evaluated performance
60

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

and created strategic plans. In 1984 competition forced GM to consolidate divisions, but centralized control
resulted in look-alike cars, and layers of hierarchy slowed decision making. So GM returned design control
to the divisions, but kept R&D and purchasing centralized.
Q. How was GMs structure different from a product division structure? Evaluate GMs structure.
A. GMs structure had self-contained divisions and a corporate headquarters staff. GMs structure had
several benefits:
1.
The ability to measure each divisions performance and to allocate resources better
2.
Improvement in employee morale due to divisional decision making
3.
Sufficient time for corporate managers to focus on strategic issues
4.
Sharing of divisional information to compare profitability and product development time
Still, costs soared due to duplication of functions.
Disadvantages of a Multidivisional Structure
1.
Determining what authority to centralize or decentralize from the corporate to the divisional level
2.
Coordination problems from uncooperative divisions competing for resources
3.
Determining transfer pricing, the price of a product or service sold by one division to another
4.
Higher bureaucratic costs
5.
Distorted information, resulting in communication problems
Notes________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________
Product Team Structure
A hybrid of the product division and the multidivision structures, the product team structure customizes
products, speeds development time, and reduces costs. The poor communication leading to slow
development in the multidivisional structure is avoided. Functional specialists serve on self-contained,
product division teams. A team manager oversees design and manufacturing activities, and employees
become loyal to product, not function. Decentralization and integration facilitate rapid decision making.
(Fig. 6.8)

Organizational Insight 6.2: Iacocca Pioneers Chryslers Team Structure

To develop a car, Chrysler traditionally created a product division, responsible for acquiring inputs. This
ineffective method was successfully replaced by Chryslers product platform teams.
Q. Why did Chrysler change to a product team approach? What benefits did this structure provide?
A. The functional approach was ineffectivedevelopment time was seven to eight years compared to
Toyotas three; quality was poor; and costs were high. The product team structure was successfully tested
for a new sports car, with a development time of three years, good quality, and low costs. Customer demand
was high.
Notes________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

6.4

Divisional Structure II: Geographic Structure

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

61

As a company expands into different regions, it needs to organize its core competences to meet the needs of
different regional customers. The geographic divisional structure permits some functions to be centralized
and others to be decentralized. (Fig. 6.9)
This structure increases both horizontal and vertical differentiation. A regional hierarchy is added.

Organizational Insight 6.3 Wal-Mart Goes National, Then Global

Wal-Mart found the right balance between a mechanistic and organic style of operating and has prospered.
Q. What structural problems did Wal-Mart face?
A. Wal-Mart had to choose a structure complex enough to operate its growing empire and still maintain its
mechanistic/organic balance.
Q. Describe Wal-Marts structure.
A. Wal-Mart selected a geographic structure. Store operations are divided into regions, including
international operations, giving managers input into their regions product mix to maximize sales. As it
expands globally, Wal-Mart will further divide up its international division to meet customer needs.
Notes________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

6.5

Divisional Structure III: Market Structure

The customer is the focus in a market structure: commercial, consumer, corporate, and government
customers. Each division develops products for its customers but uses centralized support functions. This
structure permits a quick response to market changes. (Fig. 6.11)

Organizational Insight 6.4: Liz Claiborne Refashions its Structure

This company was involved in a major product expansion category in the 1990s. By the mid 2000s, they
had 36 different brands. Revenues were growing, but profits had not kept pace. The problem was that
each division faced different challenges. To reduce complexity, they reorganized their divisions. Instead of
grouping products by quality or price, they organized them based upon customer needs. This allowed them
to face the challenges of each customer type in a more efficient manner.

Managerial Implications: Changing Organizational Structure

Functional structures may require change to improve control. For production of many similar products, a
divisional structure is appropriate; for dissimilar products, a multidivisional structure. To reduce
development time through more integration, use a product development team structure. To customize
products for different regions, use a geographic structure; to coordinate among different customer types,
use a market structure. Structural changes should increase effectiveness.
Notes________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

6.6

62

Matrix Structure

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

The matrix structure includes both functional and product responsibility. It is used for a high level of group
coordination to respond to changing conditions. The matrix structure is flat with decentralized authority.
Functional employees remain under a functional head, but work under a product manager. The product
manager leads the team whose members are responsible to both functional and product managers. (Fig.
6.12)
Role and authority relationships are ambiguous. Control is exerted horizontally via teams. A matrix is an
organic structure. Although both a product team and matrix structure use teams, matrix team members
have two bosses and team membership is not fixed.
Advantages of a Matrix Structure
1.
Functional barriers and subunit orientation are reduced.
2.
Cross-functional communication allows members to learn and develop skills.
3.
Employee skills are utilized.
4.
Employees are concerned about both cost and quality.
Q. What are the drawbacks of a matrix structure?
A. Disadvantages of a Matrix Structure
1.
Lack of bureaucratic structure leads to role ambiguity and role conflict.
2.
Teams may fight over resources.
3.
Members often refuse transfers to stay with peers.
4.
Informal hierarchies emerge in response to uncertainty.
5.
Unmet expectations lead managers to increase control resulting in a taller, bureaucratic structure.
The Multidivisional Matrix Structure
A matrix design can enhance a multidivisional structure when placed at the companys top to increase
integration between corporate and division managers. Corporate specialists analyze divisional performance
and design action plans. Division heads and corporate executives exchange information and coordinate
activities. (Fig. 6.13)
Notes________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

Refer to Discussion question 3 here to compare the product structure and the matrix structure.
_________________________________________________________________________________
_________________________________________________________________________________

Hybrid Structure
Many large organizations make use of many different structures. Figure 6.14 details how Target takes
advantage of several different structures in its various divisions. The onion analogy on page 169 shows
that each division should select a structure based upon the contingencies and challenges that it faces.

6.7

Network Structure and the Boundaryless Organization

Companies are moving toward network structures, a group of organizations which coordinate activities via
contracts, not a hierarchy. Companies are using outsourcing, transferring activities to outside organizations
such as suppliers, manufacturers, and distributors. Network structures are becoming complex. Nike keeps
R&D in-house but outsources other functions to companies around the world.

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

63

Advantages of Network Structures

1.
Production costs reduced through partners with lower costs
2.
High bureaucratic costs avoided with a flat structure
3.
Organic organizational behavior
4.
Partners replaced for unmet performance expectations
5.
Access to low-cost foreign sources of inputs and expertise
Disadvantages of Network Structures
1.
Coordination problems emerge, followed by lack of cost reduction and improved quality
2.
Difficulty in replacing partners and keeping proprietary information from competitors
3.
Difficulty in obtaining ongoing learning to build core competences
The Boundaryless Organization
The boundaryless organization connects people by computers, faxes, video teleconferencing, and computeraided design systems. Functional experts join an organization to meet a contract and then go to another
project, but unlike members of a matrix structure, they are not part of the organization.
Outsourcing offers increased flexibility and reduced costs. Designing an organizational structure is an
increasingly complex management activity.
E-Commerce
E-commerce is trade that takes place between individuals and companies using information technology.
Figure 6.15 shows the different types of e-commerce.
Notes________________________________________________________________________________
____________________________________________________________________________________
____________________________________________________________________________________

DISCUSSION QUESTIONS AND ANSWERS

1.

As organizations grow and differentiate, what problems can arise with a functional structure?

As a company grows, it encounters control problems: lack of communication, inability to measure

performance, location issues, customer concerns, and neglect of strategic matters. Functions develop
hierarchies, become remote, and make coordination difficult. Determining the contribution and cost that
each function brings to a product is difficult. Balancing control between corporate and regional offices is
difficult. A functional design makes product customization difficult. Top managers spend time on
operational and coordination issues, neglecting long-term strategic concerns.
2.

How do the product division structure and the multidivisional structure differ?

There are structural differences:

The divisions in a multidivisional structure are independent with their own support functions; product
structure divisions share centralized support functions.
A multidivisional structure has a corporate headquarters staff.
A multidivisional structure permits a company to run many businesses; a product division structure is
appropriate for one business.
In a multidivisional structure, various divisions can have different structures.
3.

64

Why might an organization prefer to use a product team structure rather than a matrix structure?

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

A product team structure allows employees to report to only one boss, the team manager, not two. This
reporting structure reduces role conflict and role ambiguity, making responsibilities clear. Because of a
clearly defined hierarchy, a product team structure avoids conflicts over resources. Established procedures
are used because team membership is fixed; in a matrix, people rotate and feel unstable. Employees may
create their own structure, which leads to more bureaucracy and a taller hierarchy.
4.

What are the principal differences between a functional structure and a multidivisional structure?
Why does a company change from a functional to a multidivisional structure?

A functional structure is simpler and is used for one business. A multidivisional structure has more
integration, more horizontal and vertical differentiation. Corporate headquarters is a level with a division of
labor between corporate and divisional managers. Control increases because corporate managers oversee
and measure divisional performance. An internal labor market allows for the promotion of divisional
managers to corporate positions. A company adopts a multidivisional structure because the number and
complexity of different products cause control issues.
5.

What are the advantages and disadvantages associated with network structures?

Advantages:
1.
Production costs reduced through partners with lower costs
2.
High bureaucratic costs avoided with a flat structure
3.
Organic organizational behavior
4.
Partners replaced for unmet performance expectations
5.
Access to low-cost foreign sources of inputs and expertise
Disadvantages:
1.
Coordination problems emerge, followed by lack of cost reduction and improved quality
2.
Difficulty in replacing partners and keeping proprietary information from competitors

ORGANIZATIONAL THEORY IN ACTION

Practicing Organizational Theory: Which New Organizational Structure?
Small groups examine how to move from a functional structure to one suited for an organization trying to
expand into different regions of the country. Make sure they understand that each structural option has its
pros and cons, and they need to apply all of the principles discussed in previous chapters to determine the
most effective structure.

The Ethical Dimension #6

Students examine the ethical issues surrounding outsourcing. There are two basic positions. The first is
that outsourcing to other countries costs the U.S. jobs and is unethical. The other position is that the
consumer benefits in the long run by organizations running more efficiently.

Making the Connection #6

Ask students to find an example of a company that has changed its horizontal differentiation.

ANALYZING THE ORGANIZATION: DESIGN MODULE #6

Students will analyze the structure and problems of their companies.

CASE FOR ANALYSIS

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

65

A New Caterpillar Emerges

Caterpillar was a low-cost manufacturer in the construction equipment industry, but competition from the
Japanese threatened its position. Caterpillars functional approach was outdated, and structural changes
were needed to remain globally competitive. By observing Japanese manufacturers, the CEO saw that their
success resulted from cross-functional teams, decentralized control, and updated factories.
Caterpillar had slow decision making, high costs, and a long production time. Caterpillar restructured into
14 product and 4 support divisions, making managers responsible for all activities and coordination with
centralized support functions. R&D teams were assigned to specific products, but shared information, as
products were related. This structure was more effective.
1.

What were the problems with Caterpillars old organizational structure?

Its decision-making process was highly centralized; department heads, such as manufacturing, made
decisions and sent them down the hierarchy. Decisions were removed from those making the product, and
functional managers coordinated poorly. The result was higher costs, slow development time, and lower
productivity. These problems eroded Caterpillars market share.
2.

How did Fites change Caterpillars structure to improve its effectiveness?

Fites created 4 centralized support divisions and 14 product divisions. Each was a profit center with
responsibility for profits and losses, and return-on-investment goals. Each division had cross-functional
product teams responsible for marketing, product design, and manufacturing to increase productivity.
Requiring marketing, engineering, and manufacturing to work together reduced product development time
by 50 percent. Marketing decisions were decentralized to the regional level for rapid response time.
Manufacturing upgraded its facilities, used product teams, and increased productivity 30 percent. These
changes made Caterpillar compete more effectively.

TEACHING SUGGESTIONS
1. To illustrate control problems with a functional structure, divide students into finance, production, and

2.
3.

4.
5.
6.
7.

66

marketing functions of a company that manufactures ice cream. Marketing wants to offer many
flavors. Production says it can produce only three flavors, and finance is concerned with costs. This
exercise should show control problems associated with a functional structure. If the company also
offered yogurt, it could attract more customers. Management is too busy resolving coordination
problems to determine strategy. Students will suggest a more appropriate structure.
To make this even more realistic, separate the functions geographically by using several classrooms.
Students get a better flavor of how difficult it is to coordinate activities when they are not all in the
same room.
A role-play demonstrates the problems with a matrix structure. Ask for three students to volunteer. One
student will be a financial specialist who works on a certain product team and reports to the finance
manager and to the product manager. Show how role ambiguity and role conflict arise. The product
manager wants speed and low costs, and the functional manager wants quality.
A good discussion topic is how the matrix structure violates Webers bureaucratic principles. Ask
students what they think of this, and what their experiences are with working with multiple bosses.
In small groups, students are assigned a structure and will list its advantages and disadvantages and
give examples. Structures: functional, divisional (product, geographic, market), matrix, and network.
Look up General Motors on the Internet and report to the class about GMs structure.
To illustrate the value of a proper structure, have students design a really inefficient structure, such as
a restaurant that is organized by product instead of function. Show them how this would make the
restaurant very inefficient because it would need wait staff and cooks from multiple departments in
Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

order to serve the customer. Although this would be very costly and a poor dining experience for the
customer, it is a good example to show how important structure really is in an organization.

Copyright 2010 Pearson Education, Inc. publishing as Prentice Hall

67