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Organizational Structure White Paper v7b
Organizational Structure White Paper v7b
August 2007
Based on: C.W. Fontaine, How Organizational Structure Impacts Organizations. First Annual Conference on Organizational Effectiveness, Chicago, IL 2006
Executive Summary
Organizational structure is perhaps the least understood and most under-appreciated topic in business. James Schermerhorn, Jr., Professor, Ohio University
Organizational Structure is a topic seldom contemplated by most people working in organizational settings. We all go to work every day, go to assigned locations, and perform our jobs and we dont ever think about how our organization is arranged. However, 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 work or of 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. The purpose of this white paper is to examine those challenges facing any company wherein Organizational Structure is not probably aligned with business strategy, and to consider the benefits and pitfalls of a number of Organizational Structure options as they pertain to the longterm success of individual employees and the company as a whole.
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction
The first thing to consider is that most people who study Management know that Organizational Structure is a crucial component of the overall business strategy, just as important as Planning, Leading, and Controlling an organization.
In essence, Organizing is the manner in which a company utilizes its resources specifically, its human resources. How do we organize jobs into departments? How do we answer the questions who does what and who reports to whom in the chain of command? There is also an implicit issue of how to coordinate all of these people and all of these duties across an extended enterprise. Organizational Structure is the framework for answering these questions and more.
While many companies today are still reluctant to change their Organizational Structure, more and more are coming to find that they need to be adaptive and they need to be flexible. In fact, Management Theorists people who study this at the academic level are starting to encourage organizations to change their structure because they need to be prepared to respond to what we call trigger points. A trigger point is an external event that has an impact on an organization. It could be a change in the markets; it could be a change in global competition; it could be the advent of new technology. These trigger points and any number of others call for immediate responses, as well as organizational flexibility and adaptation. 2
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction
Company
EG&G
Altered Strategy
Government Contractor
Commercial Vendor
Energy Production
Enron
Energy Trading
Commodity Product
GE
High-End Company
Products
IBM
Services/Consulting
Traditionally Conservative Adults
Renault
Internationally-Focused
Brick & Mortar Store Chain
Walgreens
A companys organizational realignment to pursue new business objectives, to create new products or services, or to target new consumer markets is referred to as Strategic Renewal. Figure 2 features several prominent examples of Strategic Renewal: Virtually 95% of EG&Gs business was government contract work until they changed their strategy and became a commercial vendor; Enron was an energy production company that became an energy trading company; GE was a commodity company that morphed into a Value-Added; Grand Union changed from a very low-end grocery business into a very high-end company; IBM changed from products to services and consulting; Marks and Spencer, a UK clothing company, switched from a conservative adult market to a young and trendy market; Renault, the almostexclusively French automobile manufacturer, finally expanded into the international market; and Walgreens, a brick-and-mortar mainstay, has now established a heavy Internet presence, with growing online sales.
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction
Those are great examples of companies that not only changed their business strategies, but changed organizational structures to match their new strategies.
Approach
Employee Involvement TQM
Key Points
Participation in decision making Continuous process improvement Redesigning work flow to drive out waste Integration of design, manufacturing, support Statistical control of variance; process improvement Geographic dispersal, national culture, laws Refine customer acquisition and retention Statistical control of variance; process improvement
Examples
General Motors Hampton Inn Hotels SAS Airlines Globe Metallurgical, Inc. Motorola Westinghouse Hewlett-Packard Lotus Development Southwest Airlines British Aerospace Carolla Development Comdial Corporation AlliedSignal General Electric Motorola Most large organizations to varying degrees IBM Ikon Office Solutions Southwest Airlines AlliedSignal General Electric Motorola
4
Such adaptation may entail initiatives aimed at increasing employee participation in the decision-making process, or embracing concepts
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction
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 companys 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 Structure
The manner in which an organization aligns (or realigns) itself.
In any discussion of Organizational Structure, its helpful to become acquainted with a few key terms that describe specific aspects of business organization practices. Very simply, Organizational Structure is the manner in which an organization arranges (or rearranges) itself. 5 Once an organization investigates its options and decides upon how its going to structure itself, its common to draw up an Organizational Chart. Org Charts are not only quite interesting, theyre very handy tools.
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction
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 companys 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 itself differently, so there is no absolute right and no absolute wrong way to design an organization.
Decentralized decision making tends to be a trap, as it may dangerously undermine upper management in the organization. Nonetheless, decentralized decision making is increasingly accepted as a viable business model today. 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
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, Id 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 structures may benefit different portions of the organization in both subtle and profound ways.
For a hypothetical example, the very controversial Matrix Structure may work extremely well in a companys research and development environment; however, the sales environment of the same company may benefit greatly from the Divisional option. The distinctions and 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
manufacturing facility, the work is most likely driven by machines. Certainly, in this environment there will be numerous processes and procedures, but theres not going to be a great deal of latitude as to what an individual does on the job. Its 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.
As you can see from the organizational chart in Figure 5, the top half may be called a Tall Organization. Actually, this illustration depicts only four to five levels in a truly large organization, of course, there will be many more levels. In an org chart for General Motors or Old Bethlehem Steel Company, for examples, there may be as many as twelve,
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction
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).
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Functional Structures
Functional Structures create a high degree of stability and efficiency within an organization, but this structure type has its disadvantages, as well.
The Functional Structure is by far the most popular organizational structure in the business world probably 65% to 75% of companies use the Functional Structure, because its basic and it makes sense. The Functional Structure is how most organizations align themselves into various departments (for example, Production Department, Sales Department, R&D, Accounting, et cetera). Within the Functional Structure, people of similar skill sets are grouped together and managed by somebody who presumably knows a great deal about those skill sets. But what are the advantages and disadvantages of the Functional Structure?
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those departments dont 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 Structures
Divisional Structures are concerned with placing groups of people with similar abilities where they are needed all across the organization.
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.
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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 organizations Divisional Structure may be based upon anything.
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Matrix Structure
I have personally worked in a couple of companies that utilized the Matrix Structure of organization, and its 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.
12
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.
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Accordingly, if we have three different projects with three different project managers, theres 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 Ill 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 customers 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. Its an environment in which some people excel, but the pace can be overwhelming for others.
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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 dont 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.
Plan
Build
(Often adopted by IT Departments)
Run
Under the Horizontally Linked Structure, an organization groups its people along the value chain of activities and processes that produce, market, deliver, and service the firms offerings. 14 A very basic way of illustrating this type of organizational structure is seen in Figure 10, a simple Plan, Build and Run model. Lets say a company will group its people and resources from R&D or Finance for the express purpose of planning projects or programs in the companys 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 its one that is well worth watching in the future.
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction
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Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction
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16
Given the increasing acceptance of Neoclassical Organization Theory and the rise of new models such as the Horizontally-Linked Organizational Structure, its apparent that modern trends are moving the business world toward a Flattening or Delayering of organizational structure.
With modern trends toward decentralized decision-making, fewer organizational layers, and more direct access to upper management, employees are motivated to contribute their voices to matters that affect the entire organization
Delayering refers to stripping out middle management from a companys organizational structure. The resulting structure is essentially flattened, with fewer managers, and those managers who remain are able to exercise a wider Span of Control. Those who work in these flattened structures have more decision-making ability, greater creative latitude, more autonomy, and more direct relationships with the higher level people inside the organization all of which contribute to employee satisfaction.
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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 employees autonomous decision making. As an aside, I will add that most theories of motivation maintain that its not money that inspires people to excel in the workplace; rather, its 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?
On the flip side, there is for most employees the allure of a secure and profitable career path, a reward that is pretty much assured through commitment to the tall and more traditional organizational structure. We find a greater number of inexperienced workers in the tall structures because they have that longing for a more defined and secure career path. Over time, they learn the ropes, all of their questions are eventually answered, and they prepare themselves for a series of promotions to their ultimate goal within the organization. Tall, multi-level companies are much more stable and predictable, offering the employee a long-term opportunity to climb the latter to success through such a series of promotions, providing the employee has the patience and fortitude to toe the line and pursue that particular goal. True, a fiercely dedicated employee can tread a rather well-defined path to the top in a tall organizational structure, while that path is not nearly so clear nor well-defined within a flattened organizational structure. Naturally, the flat structure has a very low ceiling for promotion, and there is a great deal of heated competition for promotions when they become available. Even so, the employee of a flat organization is granted much more autonomy, much more control, and many more decision-making opportunities, enabling him to sharpen his managerial skills on a fast track compared to the employee languishing for years in a tall organizational structure. We typically see older, more experienced employees populating a flat structure. These employees may even be specialists in their fields; as such, they dont require as much direct supervision nor as many rules and procedures to guide them. They bask in the autonomy and personal responsibility of flat structures. In addition, they rub elbows with other diverse and highly experienced specialists who pass on their
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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 youre presently working in a company that doesnt 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, youre 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 companys organizational structure before applying for a position therein. Determine the organizations 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.
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An Organization/Employee Match
Professor Craig W. Fontaine Northeastern University College of Business Administration Phone: 617-610-6079 Email: c.fontaine@neu.edu Web Site: www.professorfontaine.com
Employee
Younger and inexperienced Older and experienced High need for achievement High need for autonomy High need for power
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
1
Based on Bateman, T.S. & Snell, S., (2004), Management: The New Competitive Landscape, 6th ed., McGraw-Hill, p. 13. Mische, M.A., (2001), Strategic Renewal: Becoming a High-Performance Organization, Prentice Hall, p. 23. Spector, B., (2007), Implementing Organization Change: Theory and Practice, 1st ed., Pearson Prentice Hall, p. 3. Ibid p. 5.
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Galbraith, J., (1973) Designing Complex Organizations, Reading, Massachusetts, Addison-Wesley. Nohria, N. (1991) Note on Organizational Structure, Boston, Harvard Case Services, p. 2. Perrow, C. (1986) Complex Organizations: A Critical Essay, 3rd ed., Random House. Adapted from: Ouchi, W. and Dowling, J., (1974), "Defining Span of Control", Administrative Sciences Quarterly, Vol. 19. Ibid.
Adapted from Romme, A.G.L., (2003), Making a difference: Organization as design, Organization Science, 14, pp. 558-573.
10 11 12
Ibid.
Based on Spector, B., (2007), Implementing Organization Change: Theory and Practice, 1st ed., pp. 141, Pearson Prentice Hall.
14
Minkes, A.L. & Foxall G.R., (Oct. - Dec., 1980), Entrepreneurship, Strategy, and Organization: Individual and Organization in the Behaviour of the Firm, Strategic Management Journal, Vol. 1, No. 4, pp. 295-301.
15 16 Thompson, A. & Strickland, A., (2003), Strategic Management Concepts and Cases, 13th ed., pp. 129, McGraw-Hill Irwin. 17
Source: Discussion of personality is loosely based on: McClelland, D. C. (1975), Power: the inner experience, New York: Halstead.
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