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Organizational Structure White Paper v7b
Organizational Structure White Paper v7b
August 2007
Northeastern University
College of Business Administration
Based on:
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 2
The 4 Essential Management Functions
“Too often ideas get rejected The first thing to consider is that most people who study Management
because they have to travel know that Organizational Structure is a crucial component of the overall
too far in the organization business strategy, just as important as Planning, Leading, and Controlling
filled with fiefdoms and an organization.
inevitable roadblocks.”
Mitch Thrower, Author,
"The Attention Deficit
Workplace“
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 3
Examples of Strategic Renewal
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 4
Those are great examples of companies that not only changed their
business strategies, but changed organizational structures to match their
new strategies.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 5
such as Total Quality Management (TQM), which has been a trend for
about fifteen years. Any company still embracing TQM at this point
certainly needs to consider changing its organizational structure.
Process re-engineering and concurrent engineering, as the terms
suggest, are measures taken to turn a company’s engineering practices
towards process analysis and concurrent engineering, combining both
the design and manufacture into one division.
Adapting to Six Sigma demands company-wide process improvements
and close scrutiny of those processes from one division to another.
Globalization is an intimidating and sometimes controversial issue that
also tends to drive companies to change their Organizational Structures.
Business model reinvention — such as IBM changing from a product
manufacturer into a services and consulting firm — is one of the more
drastic examples of business reorganization; but even this sort of
sweeping change must be an option for a truly flexible organization.
Of course, these examples represent evolving business trends that have
come and gone over the years. Flexible organizations try to adapt to
such trends as quickly and efficiently as possible to enhance business
and achieve organizational goals.
Key Terms
Organizational In any discussion of Organizational Structure, it’s helpful to become
Structure acquainted with a few key terms that describe specific aspects of
The manner in which business organization practices. Very simply, Organizational Structure is
an organization aligns the manner in which an organization arranges (or rearranges) itself. 5
(or realigns) itself.
Once an organization investigates its options and decides upon how it’s
going to structure itself, it’s common to draw up an Organizational Chart.
Org Charts are not only quite interesting, they’re very handy tools.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 6
Some organizations consider their Organizational Charts as confidential,
while other organizations — most of them, in fact, do not. Some
companies go so far as to post their Organizational Charts on their
publicly accessible websites.
Other key terms include Centralized and Decentralized Decision Making.
Centralized decision making refers to a business model in which decisions
are directed to the top of the organization. Decentralized decision
making is a model in which the organization tends to push the decisions
down to the lowest levels, which can be a good thing.
With decentralized decision making, the benefit is that the individuals
who best know the company’s processes are those lower in the
organization, those who roll up their sleeves and work with the processes
every day. Theoretically, such individuals are in a better position to
respond to external and internal drivers and make rapid decisions to
control those drivers before they get out of hand and negatively affect
the organization.
Every company organizes Decentralized decision making tends to be a trap, as it may dangerously
itself differently, so there is undermine upper management in the organization. Nonetheless,
no absolute right and no decentralized decision making is increasingly accepted as a viable
absolute wrong way to
business model today.
design an organization.
Yet another key term is one known as Formalization, the degree to which
an organization tends to document its processes, rules, and regulations. 6
Centralized and Decentralized Decision Making and Formalization will
vary from one organizational structure to another, depending upon the
options for change that are open to a company.
Hierarchy of Authority
Another key term that is familiar in the designing an organization is what
we call a Hierarchy of Authority. 7
The concept of Hierarchy of Authority says that an organization must
know who is in charge of which elements and who reports to whom. Of
course, this has implications for the division of labor because, under the
Hierarchy of Authority, many tasks are divided and distributed across the
organization. This process necessarily entails varying degrees of
specialization of jobs and tasks, which we see a lot these days as the
business environment grows more sophisticated.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 7
unique sense of products and services, and its management of these
considerations as they are dispersed throughout the enterprise.
The most common organizational types may be classified as follows:
The Functional Structure
The Divisional Structure
The Matrix Structure, and
The Horizontally Linked Structure
Before we discuss each of these structures, I’d like to note that with any
given company, and especially with a very large company (an
organization with ten, fifteen, twenty, forty thousand people, for
instance), we typically do not see that a single organization adheres to a
single organizational structure. Different structures may benefit different
portions of the organization in both subtle and profound ways.
Different organizational For a hypothetical example, the very controversial Matrix Structure may
structures may benefit work extremely well in a company’s research and development
different portions of the environment; however, the sales environment of the same company
organization in both subtle may benefit greatly from the Divisional option. The distinctions and
and profound ways.
benefits of these structures will become more apparent as we discuss
each of the organizational types.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 8
manufacturing facility, the work is most likely driven by machines.
Certainly, in this environment there will be numerous processes and
procedures, but there’s not going to be a great deal of latitude as to
what an individual does on the job. It’s a simple matter of following Step
One with Step Two, Step Two with Step Three, and so forth.
However, a software company or a video game manufacturing firm will
call for an entirely different type of task, entirely different skill sets, with an
entirely different type of people executing the work. Herein we find
people who are very well versed in computer technology, and they tend
to excel in creative and innovative tasks. Their work is not driven by rigid
processes and procedures. It is a creative environment. And, in a case
like this, obviously the Span of Control would need to be smaller,
because a manager cannot oversee as many people when those
individuals are granted greater creative latitude.
Span of Control
Span of Control is simply
the number of people
who can report to a
single manager inside of
the hierarchy.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 9
fourteen, sixteen or more levels between the top of the structure and the
lowest level person in the organization.
Because there are so many levels, managers in a Tall Organization tend
to have a Narrow Span of Control, which means there are no more than
five or six people reporting to any individual manager or supervisor.
In the lower half of Figure 5, we see a so-called Flat Organization. The
Flat structure results from substantially fewer levels (five or six levels at the
maximum).
In the Flat Organizational Structure, because there are fewer levels,
managers tend to have a Wide Span of Control, so there could be as
many as ten or twelve people reporting to any individual manager or
supervisor, depending upon the tasks involved.
So, essentially, as an organizational structure flattens out, the Span of
Control increases. As the organizational structure becomes taller, the
Span of Control decreases (see Figure 6).
Vertical Complexity:
Contrasting Spans of Control in Functional Structures
We can now look at the most prevalent types of structures and discuss
the pros and cons of each. The first structure, which is more in line with
the Vertical Dimension, is known as the Functional Structure.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 10
Functional Structures
Functional Structures
create a high degree of
stability and efficiency
within an organization, but
this structure type has its
disadvantages, as well.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 11
those departments don’t think in terms of company-wide teamwork.
They only attend the business of their specific department.
Communication and collaboration between the departments is difficult,
at best, and this is not a good organizational situation. Also, customers
can become frustrated by the lack of responsiveness from organizations
that are functionally structured — the scenario of customer complaints
“passed off” from one department to another is familiar to most of us.
Another disadvantage of the Functional Structure is that employees tend
to identify themselves with their respective departments but not so much
with the organization as a whole. Although the Functional Structure is
the most popular and pervasive in the business world, companies should
understand that the siloing effect is potentially detrimental to individual
employees, departments, and the organization as a whole. 10
Divisional Structure
The Divisional Structure is not so much based on the grouping of people
according to their skill sets as it is concerned with placing groups of
people with similar abilities where they are needed all across the
organization. For instance, while under the Functional Structure you
would expect to find accountants only in the Accounting Department,
under the Divisional Structure you will find accountants in different
divisions of the same company, in separate Accounting Departments
which are dedicated to separate product lines.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 12
As you can see in Figure 8, each product line has its own Functional
Organization with Production, Sales, R&D and Accounting teams,
permitting each product line to function independently of the other
product lines. Yet each product line is a component of a larger
organization.
A solid example of Divisional Structure can be seen in the Boeing
Company. Boeing has three divisions within its organization: the
Commercial Airline division; the Military Aircraft division; and a fledgling
new division or product group called Private Aviation. Each of these
divisions is a functional organization unto itself, each with its own R&D
and Production and Sales and Accounting teams; yet, each is only a
component of a much larger organization called Boeing Company.
Of course, organizational divisions can be and usually are much more
than mere product lines. The divisions may be based on different
consumer markets. Everyone knows that Black & Decker, for example,
manufactures and sells construction equipment, but its divisions target
different consumer markets. One division markets to the layman builder,
another division markets to the private professional builder, and yet
another division markets to large government contractors.
Organizational divisions may even be based on geographic markets —
for instance, a global corporation may have a North American division, a
European division, an Asian division, and so forth. In fact, an
organization’s Divisional Structure may be based upon anything.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 13
Matrix Structure
I have personally worked in a couple of companies that utilized the
Matrix Structure of organization, and it’s interesting, to say the least. This
structure incorporates elements of both Functional and Divisional
structures, yet in the end it operates like neither.
At a glance, the structures in Figure 9 are easily identifiable — our
illustration depicts a single division of a large corporation, and closer
examination reveals elements of a functional structure comprised of a
Production Department, a Legal Department, an Engineering
Department, and an Accounting Department.
Matrix Structures
Matrix Structures
incorporate elements of
both Functional and
Divisional structures, yet
the Matrix operates in its
own unique fashion.
Less recognizable are the entities Project Alpha, Project Beta, and
Project Gamma, which seem to cut across the functional structure.
These are, indeed, projects that must pass through the functional
structure of this division; however, each project must be allocated its
own Production Support team, its own Legal Support team, its own
Engineering Support team and its own Accounting Support team.
The manager of each project has no staff at all. His job is to assemble his
staff from the functional areas of the organization in order to see his
project through from conception to completion. The project manager,
in other words, must borrow his staffing from each department.
The challenge is that each department has a finite staff, and the
demands of each project are not equal — so one project may require
more staffing than the others.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 14
Accordingly, if we have three different projects with three different
project managers, there’s going to be some competition between them
for staffing, because the project managers have no staff of their own,
and there is a finite number of available staff in the organization to
accommodate them.
Of course, when we refer to “projects” we could as easily be referring to
clients or customers of the organization, and I’ll provide an example for
the sake of clarity.
When I worked at the ABB Group in the nuclear power industry, my
company had only twelve customers; however, these were huge
customers, multi-billion dollar customers. We at ABB organized ourselves
into a Matrix Structure with a manager (a “project manager”) assigned
to each customer. When one of our customers required personal
attention, the manager assigned to that customer would then borrow
staff from the functional areas of our organization in order to fulfill that
customer’s specific needs. When several of our customers required
attention simultaneously, you may well imagine the competition among
our managers to borrow sufficient staff to accommodate the customers.
Or you may try to imagine the workload of those people who are in the
middle — those staffers who are borrowed and moved from project to
project, working two or three projects at a time on occasion. The
demands of the Matrix Structure require great flexibility and fortitude on
the part of the participants. It’s an environment in which some people
excel, but the pace can be overwhelming for others.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 15
acquire the “best” project support staff from the finite pool of available
people. And a great deal of valuable time is expended in meetings to
coordinate staff for two or three or more concurrent projects.
But don’t dismiss the positive elements of the Matrix Structure. While this
type of organizational structure is more demanding and perhaps more
stressful than others, it is also very, very efficient.
Horizontally Linked Under the Horizontally Linked Structure, an organization groups its people
Structures along the value chain of activities and processes that produce, market,
A Horizontally Linked deliver, and service the firm’s offerings. 14
Structure groups people A very basic way of illustrating this type of organizational structure is seen
along the value chain of in Figure 10, a simple Plan, Build and Run model. Let’s say a company
processes that produce,
will group its people and resources from R&D or Finance for the express
market and service the
firm’s offerings. purpose of planning projects or programs in the company’s interest;
these plans are passed to the next group comprised of Manufacturing
personnel for actual production; and then another group of IT personnel
maintain and perpetuate the projects or programs. This is an interesting
and growing trend in organizational structure, and it’s one that is well
worth watching in the future.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 16
Classical vs. Neoclassical Theories
of Organizational Structure
There are two overriding theories of optimal Organizational Structure that
hold forth in the business world, known as Classical Organizational Theory
and Neoclassical Organizational Theory. As the names suggest, the
former is a traditional approach while the latter is a more progressive
approach.
The Classical Organization Theory assumes that there is a single best way
to design organizations — that managers should have tight control over
their subordinates, and that calls for designing organizations with tall
hierarchies and a narrow Span of Control. Classical Theory entails a high
degree of written documentation and rules and procedures intended to
direct and control employees. As such, the Classical Theory advocates
a decidedly functional type of organization.
The flip side is an attempt to improve on the classical theory. Today we
know this as Neoclassical Organization Theory, which argues that
employee satisfaction, as well as economic effectiveness, should be the
ultimate goal of an organization. Neoclassical Theory assumes that
managers do not tightly control their subordinates and calls for designing
organizations with flat hierarchies and a wide Span of Control. Following
Neoclassical Theory, the manager relies more on the employees to make
decisions, and these organizations are less rigid with fewer rules,
regulations, and processes.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 17
Modern Trends in Delayering Organizational Structure
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 18
However, with the modern trend toward Flattened Organizational
Structure, decentralized decision-making, fewer organizational layers,
and more direct access to upper management, the employee is
motivated to contribute his voice to matters that affect the entire
organization. A flattened structure that permits a wider Span of Control
with less supervision and fewer procedural hurdles will enhance and
encourage the employee’s autonomous decision making.
As an aside, I will add that most theories of motivation maintain that it’s
not money that inspires people to excel in the workplace; rather, it’s the
broader opportunity for autonomous decision making, greater personal
responsibility, direct contributions to upper-level matters that benefit the
entire company, a sense of accomplishment, and so forth. In other
words, employees are motivated by the freedom to pursue excellence,
both for themselves and for their organization as a whole.
Is it any wonder that more and more organizations are gravitating to
flatter, more modern, and more personally rewarding organizational
structures?
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 19
knowledge in the course of daily interaction, making for a continuous
and fast-paced learning environment.
If there is one significant lesson that we can take from this examination of
Organizational Structure, it is perhaps that organizations should very
carefully weigh their corporate structure options before committing to
them — and the same is true for the employee in selecting his working
environment. Mounting evidence indicates that employees should very
carefully choose the organizations best suited to their individual
temperaments, skill sets and, yes, personalities.
Personality is possibly the most important factor for a prospective
employee to consider when choosing an organization:
Is this job, this setting, this organizational structure
right for my personality?
Some studies have attempted to provide an answer: People who have a
need for power and achievement tend to prefer the tall structures,
because they thrive on every promotion that comes their way; people
who have a need for autonomy prefer the flat structures for the freedom
to make decisions and exercise wider control in their work environment. 17
If you’re presently working in a company that doesn’t seem right for you,
you may have stepped into an organizational structure that cannot
satisfy your personality and your career goals, and perhaps you should
consider changing jobs, if you can. Otherwise, you’re not benefiting the
company any more than the company is benefiting you.
More importantly, people coming out of college and looking for a job
should very, very carefully examine a company’s organizational structure
before applying for a position therein. Determine the organization’s
structure in advance, and make certain that it matches your personality
and your career objectives — in this way, you may reap the benefits and
avoid the pitfalls of the diverse Organizational Structures we have
discussed, thus ensuring long-term satisfaction with your career choice
and with your contribution to the organization as a whole.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 20
An Organization/Employee Match
NOTE: Only persons who are very flexible, adaptive, energized, and
who enjoy multi-tasking should work in a Matrix Structure.
Conclusion
Organizational Structure is critical both for a company and its
employees. People should think very carefully about the organizational
structure of the companies for which they intend to work. In the long run,
Organizational Structure can spell the difference between success and
failure for a company, as well as for the individuals who work there.
References
1Based on Bateman, T.S. & Snell, S., (2004), Management: The New
Competitive Landscape, 6th ed., McGraw-Hill, p. 13.
2Mische, M.A., (2001), Strategic Renewal: Becoming a High-Performance
Organization, Prentice Hall, p. 23.
3Spector, B., (2007), Implementing Organization Change: Theory and
Practice, 1st ed., Pearson Prentice Hall, p. 3.
4 Ibid p. 5.
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 21
5Galbraith, J., (1973) Designing Complex Organizations, Reading,
Massachusetts, Addison-Wesley.
6Nohria, N. (1991) Note on Organizational Structure, Boston, Harvard
Case Services, p. 2.
7Perrow, C. (1986) Complex Organizations: A Critical Essay, 3rd ed.,
Random House.
8Adapted from: Ouchi, W. and Dowling, J., (1974), "Defining Span of
Control", Administrative Sciences Quarterly, Vol. 19.
9 Ibid.
pp. 4-5.
13 Galbraith, J.R., (1994) Competing with Flexible Lateral Organizations,
Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 22