UVA-OB-0361

ORGANIZATIONAL STRUCTURE

Organizational structure is a powerful determinant of organizational behavior. In fact,

many people believe decisions about organizational structure to be the central determinant of
organizational behavior. Executives are constantly wrestling with whether or not to centralize or
decentralize, for example, and how to structure the various functions in their firms. Despite what
many executives seem to think, there is much more to organizational design than just rearranging
its structure. As Tom Peters has written in a note describing his approach to organizational
diagnosis, “structure is not organization.” 1 In the present note, we will describe some of the
major principles that influence the effectiveness of an organizational structure and outline some
of the more common structural forms.

A Definition of Organizational Structure

Organizational structure is the framework of reporting relationships in an organization.

These relationships can usually be diagramed in the form of an organization chart. The
organization chart does not necessarily reflect actual reporting or decision-making relationships
in an organization, so we can make a distinction between the formal and the informal structure.
This note will deal primarily with the formal structure.

Organizational structure is only one of many aspects of organizational design. Other

aspects would include the nature of an organization’s leadership, the various systems operating
in it, and organizational culture. Organizational structure reflects the way in which work in an
organization is divided. Historically, organizations have developed a number of ways to do this.
The Information Age is creating even more forms as we move ahead.

Organizational systems are the processes that attempt to coordinate those divisions of
work. The structure of an organization is like a skeleton: it defines the spatial relationships and
influences the power relationships among its various parts. The skeleton alone does not do much
work; it merely provides the framework within which the body tries to organize its resources to
accomplish its task. The systems of an organization are like the systems of the body that work

1
Robert H. Waterman, Thomas J. Peters, and Julien R. Phillips, “Structure is not Organization,” Business
Horizons (June, 1980): ff. 14.

This technical note was prepared by Tammy Pitts under the supervision of James B. Clawson, Professor of Business
Administration. Copyright  2000 by the University of Virginia Darden School Foundation, Charlottesville, VA.
All rights reserved. To order copies, send an e-mail to dardencases@virginia.edu. No part of this publication may
be reproduced, stored in a retrieval system, used in a spreadsheet, or transmitted in any form or by any means—
electronic, mechanical, photocopying, recording, or otherwise—without the permission of the Darden School
Foundation.
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around and through the skeleton to produce movement and activity. In the organization these
might include the recruiting, management development, reward, information processing,
performance appraisal and promotion, purchasing, materials handling, grievance,
communications, production, accounting, and financing systems (and others). Obviously, the
synergy between a skeleton and its various dynamic systems is critical to the organism’s success;
this is also true of organizations. If the structure does not fit the strategy of the organization and
the various systems operating within it, organizational effectiveness will be compromised.2

Important Considerations Affecting Organization Structure

When one thinks about how to structure an organization, either creating a new one or
attempting to change an existing one, knowledge of a number of design principles helps to shed
light on the problem. These principles include (but not exclusively) fit, differentiation and
integration, technology, size, span of control (centralization or decentralization), staffing, unity
of command, and line vs. staff.

Fit. Fit or “alignment” is an important consideration to keep in mind in designing and

modifying organizational structure. Structures that do not fit their environments or series of
internal systems will be much less effective. Misaligned organizations are like bodies in which
the muscles have been attached to the skeleton in random fashion—producing unnecessary
tension and counter-effort where none is needed. For example, if an organization is structured
around self-directed teams but the reward system only recognizes individual performance,
employees will waste time and energy trying to reconcile the two. The wisdom and judgment
required to assess whether and how organizational environment, structure, and systems might be
aligned or misaligned comes with theoretical understanding and application, experience, and
creativity.

Differentiation and integration. Two more processes that are fundamental to

organizational structure are differentiation and integration.3 Differentiation refers to “division of
labor” in which work is broken down into its component pieces and assigned to specialists in
various parts of the organization. Differentiation typically occurs when an organization grows
and becomes more complex and people become more specialized in what they do. Integration
refers to the need to coordinate and meld the divided activities into a whole outcome (product or
service). In general, the more one divides work, the more one needs to provide for its
integration, and the more difficult it becomes.

Differentiation produces high levels of relatively narrow skills and makes it more
difficult for managers to integrate those skills into whole products or services. Paul Lawrence
and Jay Lorsch in their classic book, Organization and Environment,4 identified some integration
problems caused by high levels of differentiation. These included the different backgrounds and
interests of people in different departments, minimal communication between groups, and the
2
See Albert Chandler, Strategy and Structure (Cambridge, MA: MIT Press, 1990).
3
See Paul Lawrence and Jay Lorsch, Organization and Environment (Irwin, 1965).
4
Ibid.
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tendencies of units and departments to give higher priority to their own roles and goals than to
those of other groups or the total organization.

Some common integrative mechanisms include providing integrator or liaison roles,

requiring interaction across groups, assigning joint responsibilities for common goals, going up
the chain of command, creating task forces, teams, or committees with joint membership,
making even more efficient information systems, and holding direct meetings to foster
familiarity with each others’ areas.

Technology. The kind of technology a firm uses can often shape its organizational
structure. Organizations built around batch technologies are typically structured differently than
continuous process organizations. Technologies that have highly interdependent parts demand
organizational structures that differ from those that involve independent, discrete pieces. The
series of tasks and the equipment and talent available for accomplishing them can have a
significant impact on the organization’s structure. Further, in today’s information age, the
rapidly expanding nature of computer- and satellite-based information systems is creating new
organizational forms.

Size. Differences in size of an organization place differing demands on it. Clearly it is

easier to monitor and manage 25 people than 2,500. Size, in and of itself and in conjunction with
other variables, can shape an organization’s structure. While size may not determine the
organizational form most suited to meet the demands of the organization, it must be taken into
account.

Span of Control. Another important consideration, growing out of size, is span of

control. This refers to the number of people reporting to a supervisor. While a good deal of
research has been conducted about the “right” number of subordinates, definitive answers have
not been found. Some suggest that four or five are the most that one person can reasonably and
effectively manage; at the same time, managers like Harold Geneen of ITT were known to have
worked with over 50 direct reports. Large spans of control like this imply a "flatter" organization
in that they produce fewer levels in the hierarchy. Greater attention to individual subordinates
means a narrower span of control and correspondingly a “taller” organization, one with more
levels of hierarchy. In general, the more subordinates an individual has, the more time and
energy it will take and the more difficult it will be to manage them effectively. There is,
therefore, a tension between “flat and responsive” and “tall and specialized” in trying to
determine the appropriate spans for an organization. Decisions about span of control are also in
part decisions based on leadership style and the degree of empowerment leaders desire to
develop in their organizations. Leaders with what we might call a lower “orientation to
hierarchy” might tolerate and encourage a wider span of control and feel comfortable delegating
more responsibility to others. Leaders with a stronger orientation to hierarchy might choose
narrower spans of control, less delegation, and a more centralized structure.

Staffing. Any organizational structure has to be staffed. Wise leaders consider carefully
the fit of the individual talents of the people and the jobs. The mere fact that a box on a piece of
paper has a job description associated with it does not mean that any individual put in that
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position will be able or willing to fulfill that description. When the talents of available
individuals do not match the job demands of particular parts of the organizational structure,
many senior managers are more willing to make changes in the structure than they are in the
personnel. Obviously, both options are available, each with its attendant costs.

Unity of Command. Early organizational theorists, probably influenced by the

organizational forms created in the Prussian army in the 17th century, concluded that every
employee of an organization should have one boss. This made it easy for each employee to
know to whom he or she might look for direction. The enormity and complexity of today’s
organizations have demanded, in many cases, more than one boss for employees. The unity of
authority to individuals in organizations is a design principle that should be considered in light of
the goals of the organization and the abilities of its members.

Line vs. Staff. People in organizations need to make decisions. Historically, it was
thought that organizations should follow the “scalar principle,” which says that authority for
decisions should flow in a single unbroken chain from the top of the organization to the bottom.
This is neat and simple for it allows one to identify a person responsible for any particular
activity—and it was a fundamental principle of bureaucracies. As organizations have grown
more complex, however, the clarity of the line of authority has faded. Managers in the Industrial
Age needed the assistance of staff specialists to help them make decisions. This decision-
making structure created a division between “line” and “staff.” To the extent that “knowledge is
power,” modern information systems are blurring the distinctions between senior and junior
decision-makers and between line and staff even more. The so-called “dotted line” relationships
on paper often do not work out the way the designer intended. Effective organizational designers
consider carefully how the organization will make its decisions. Armed with up-to-the-minute
databases, today’s staff personnel, answering phones, might be as influential on customer
responses as the front-line “sales force.” Further, many senior managers are realizing that they
are no longer able to make all the decisions that need to be made in today’s rapidly changing
environment. This creates the challenge to, as Jack Welch puts it, “grow big, but act small.”
When local, differentiated employees supported by fast information systems can make good
business decisions, a company can appear to be small and personalized while in fact, it may be
huge and have global reach.

These considerations work together in a multitude of ways to roughly define alternative

ways for an organization to be structured. We note before introducing the various forms
currently observable in business, that the Information Age technology is creating an enormous
change in the way companies are organized. When an organization has both the information
provided by timely databases and the wisdom to use that information well, decision-making is
being pushed further and further down in the organization. While some traditional executives
rue this development, those who embrace it see the strategic value of this de-facto
decentralization, and they work harder to train their people to make the same decisions they
would if they were on site. So the Information Age is reshaping and reforming the way the
principles introduced above are influencing the shape of today’s organizations.
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Varieties In Organizational Structures

Organizational structures reveal much about the way senior management thinks about the
nature and key activities of its business. Do they emphasize geography? Customers?
Manufacturing? Insights into senior management’s thinking about strategic direction lie in an
analysis of the structure—and the changes therein—that they built. We observe TEN basic
forms of organizational structure: functional, product, customer, geographic, divisional, matrix,
amorphous, hybrid, and some current ideas that are creating the new, emerging forms—which
the lead author calls “infocracies.” “Infocracies” because the power to make key decisions
emanates not from the family name as it did in the Aristocratic Age, and not from the title as it
did in the Bureaucratic Age, but from the installed hard IT and soft human processes that utilize
increasingly comprehensive information systems—such that the power (“-cracy”) really does
flow from the information network. Below we will describe each of these forms, present a
typical organizational chart, and outline briefly some of their chief advantages and
disadvantages.

Functional Structure

Description. The functional form divides work by type, e.g., marketing, finance,
production, and administration. Although the functions may vary from industry to industry, the
structure’s organizing concepts are the skills needed to perform clusters of tasks; plants are
assigned to the manufacturing function, sales perhaps in its own “arm,” and marketing perhaps as
a separate division. The underlying assumption in a functional structure is that the key, strategic
organizational capabilities lie in the various functional skills—and hence they are emphasized
and central. Functional organizations tend to be centralized in that it is only at the senior level
that the melding of the activities of the various functions occur, hence the term “general
management.” A simple functional organizational chart appears in Figure 1.

C h ie f E x e c u tiv e O ffic e r

V a rio u s
S ta ff F u n c tio n s

V ic e P re s id e n t V ic e P re s id e n t V ic e P re s id e n t V ic e P re s id e n t
M a rk e tin g F in a n c e O p e ra tio n s A d m in is tra tio n
Figure 1: Functional Form
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Advantages. The functional form’s primary advantage is the expertise of its functional
specialists. People who begin their careers in research and development, or manufacturing, or
sales, and work their way up through career ladders in those functions become practiced and
skilled at their area of competence. Management’s job is to integrate the functions and insure
that they are coordinated in delivering their goods and services to the market. Hiring and
retaining functional specialists is also a critical need. Functional forms make it easier for people
within and without the organization to know whom to call for particular needs. They avoid
duplication of resources and permit economies of scale in the use of the various specialties.
Finally, the functional organization is simple—there are clear assignments for each department
so that accountability is easier to track. Many smaller organizations begin with functional
organizations and then evolve into one or more of the other types.

Disadvantages. On the other hand, the functional form often tends to encourage empire
building and protecting behavior in that functional managers often find it difficult to relate to or
support the objectives of their counterparts. Boundaries between departments in a functional
organization become increasingly difficult to penetrate. Customers and employees may hear
people saying, “I’m sorry, that’s not my department”—what well-known speaker and author Ken
Blanchard calls “bureaucratic quackery.” It can be easy to lose sight of customers in a functional
organization—employees tend to be focused on their “jobs” rather than their customers. The
functional form also creates barriers to coordination and communication among the functional
units as units develop their own jargon, and reward systems. Each functional group tends to
develop its own sub-culture as well. Finding integrative systems and mechanisms sufficiently
strong to overcome functional barriers can be a major problem. Finally, functional forms are not
conducive to the early development of general management talent.

Product Structure

Description. Marketing or consumer goods firms often use the product form that groups
jobs associated with specific products under the direction of “product managers.” The product
manager is responsible for many or all of the aspects of a product or product line. In its pure
form, the product structure has the effect of creating several smaller, single product-line
companies, each with its functional specialties in support. Often, however, the product manager
only has responsibility for the marketing and sales of the product and must rely on an operations
manager for cost control and product quality and delivery. More commonly, the finance and
operations functions are left intact, and the marketing and sales functions are put under the
product manager, creating a hybrid of the product and functional forms. The key point here is
that the management of the product structure wants to emphasize the importance of the products
of the firm by holding the product manager accountable for the profitability of the line. The
product manager is driven to integrate the efforts of specialists toward the product’s goals. See
Figure 2 for a simple example of a product structure.
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C h ie f E x e c u tiv e O ffic e r

V a rio u s
S ta ff F u n c tio n s

V ic e P re s id e n t V ic e P re s id e n t
P ro d u c t G ro u p s O p e ra tio n s

P ro d u c t M a n a g e r P ro d u c t M a n a g e r P ro d u c t M a n a g e r P ro d u c t M a n a g e r
P ro d u c t O n e P ro d u c t T w o P ro d u c t T h re e P ro d u c t F o u r

S a le s

M a rk e tin g

A d v e rtis in g

Figure 2: Product Form

Advantages. The benefits of the product form are that it can enjoy the advantages of the
functional format while minimizing the disadvantages. Attention is given to a single product,
and specialized people and equipment can be targeted for the demanding products and eased off
the less successful ones. This is obviously a more responsive and efficient way to use resources
than the functional form, although it is usually too complex for the smaller firm. The product
form is also an excellent training ground for general managers; product managers learn to see
and manage across functions for the sake of an overall result.
Disadvantages. As with the functional form the product form has its disadvantages. The
product form is more costly because it is expensive to initiate and maintain the duplication of
resources of functional specialists in each product division. The duplication of resources will not
be a problem if there is enough sales volume for each product line, but corporate costs in the
aggregate remain a target for reduction. With these smaller, product-oriented functional
departments, however, there is a risk of inadequate attention to skill development and its efficient
use. Also, tight corporate control on profits may result in tight product-line controls that, in turn,
can limit risk taking, adaptability, and innovation. Barriers to communication and coordination
still commonly grow inside the product form because each product manager is paid and
encouraged to attend to his or her line and not to worry about others’.

Customer Structure
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Description. Departmentalization by customers is used when management wants to
insure a focus on the customer’s needs rather than on skill in producing (functional) or on brands
to sell (product). In our increasingly service-oriented society, the customer form is becoming
more and more common; we believe that the customer form is underutilized even in the
manufacturing sector, where historically managements have often focused on internal concerns
rather than customer concerns. Customer departmentalization or segmentation is also commonly
used within sales departments that offer different terms to different kinds of customers (volume
discounts to large customers, for instance). The customer structure signals that management is
sensitive to the needs of their customer segments and that they have identified segments that
have substantial sales potential. See Figure 3.

C h ie f E x e c u tiv e O ffic e r

V a rio u s
S ta ff F u n c tio n s

G e n e ra l M a n a g e r G e n e ra l M a n a g e r G e n e ra l M a n a g er V ic e P re s id e n t
In d u s tria l C onsum er R e ta il C h a in s A d m in is tra tio n

O p e ra tio n s

M a rk e tin g

S a le s

P e rso n n e l

Figure 3: Customer Form

Advantages. The customer form is very helpful in reminding management where the
revenue comes from. Companies that are differentiated by customer type tend to be more
sophisticated in understanding and meeting their customers’ needs.

Disadvantages. On the other hand, the customer form leads to pressure to meet the
various customers’ demands, which leads to greater complexities in production or service
scheduling and shorter production runs, which are expensive.

Geographic Structure
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Description. Some argue that the geographic structure is a hybrid of the customer form,
but we believe that geography does not necessarily line up with many customer market segments
and should therefore be considered separately. The geographic form divides the work in a firm
by location. Often this is a function of the product or service and the difficulty of transporting a
good or service over large distances. For instance, historically, despite many efforts to
nationalize the real estate business, it remained largely a geographic industry until recent
increasing use of the Internet has made it possible to regionalize and even nationalize its scope.
Meatpacking and construction are two more industries that have largely retained their regional
structures. Many companies organize their sales forces by region. Further, in a global economy,
many “regional divisions” are countries, each with their own cultural, legal, financial, and
managerial parameters.

Distance may not be the only reason to consider a geographic form. Changes in the legal
environment, cultural norms, and topography may also contribute to the decision to organize
geographically. Multi-national companies with subsidiaries in many countries, for instance,
often recognize the tradeoffs between centralized control and the complexity of differing
environments. See Figure 4.

C h ie f E x e c u tiv e O ffic e r

V a rio u s
S ta ff F u n c tio n s

G e n e ra l M a n a g e r G e n e ra l M a n a g e r G e n e ra l M a n a g e r V ic e P re s id e n t
N o rth e a st S o u th e a s t M id w e st A d m in is tra tio n

O p e ra tio n s

M a rk e tin g

S a le s

P e rso n n el

Figure 4: Geographic Form

Advantages. Departmentalization by geography allows an organization to focus on the

customer needs of a smaller area and to minimize the costs associated with transportation of
goods or services. Since mini-companies with all of the functions fully operating are often
arranged geographically, this form also provides training grounds for managerial personnel. It
also helps management stay closer to their clientele than a national or worldwide functional form
would.
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Disadvantages. Geographic boundaries in a firm can blur management’s view of the
customer segments in their markets. They also can build barriers to communication and
coordination across units. They add to the complexity of calculating returns on investment,
setting goals for financial and other kinds of achievement, and in even accounting for the results
of business activity.

Divisional Structure

Description. Perhaps the most common structure in many large American firms today
is the divisional form. Alfred Chandler’s classic book, Strategy and Structure, outlines the
development of this form in the early 20th century at Dupont and General Motors. William G.
Ouchi, more recently, has written about the form in detail in his book, The M-Form Society.5
The divisional structure may be considered an extension of the product form but with much
greater responsibility and scope of control for the general manager. In this form, an individual is
placed in charge of a “business” that may be defined by product group or location or clusters of
products. These divisions typically will be responsible for their own business from start to
finish, including financing, raw materials, manufacturing, and sales and marketing. They also
may have authority to organize their divisions the way they want to and that could be
appropriate, given that different businesses may face different environments. See Figure 5.

C h ie f E x e c u tiv e O ffic e r

V a rio u s
S ta ff F u n c tio n s

G e n e ra l M a n a g er G e n e ra l M a n a g er G e n e ra l M a n a g e r V ic e P re s id e n t
M e ta ls G ro u p E n e rg y G ro u p C onsum er G oo ds A d m in is tra tio n

O p e ra tio n s

M a rk e tin g

S a le s

P e rso n n e l

F in a n c e

Figure 5: Divisional Form

5
See William G. Ouchi, The M-Form Society (New York: Avon, 1984).
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Advantages. Ouchi argued that the M-form strikes a balance between independence and
interdependence among organizational units. He stated that the organization should not have
units completely dependent on each other as in the functional form or totally independent like the
product form (where there are profit and investment centers). By striking a balance between
these extremes, organizational units may maximize profits but still share in the allocation of
common expenses from product divisions.

Ouchi believed all units should be interdependent through shared resources.

Hewlett-Packard, for example, conforms well to the pure M-Form. In the late 20th century, H-P
was divided into nearly fifty semiautonomous divisions: one manufactured oscilloscopes,
another, hospital instruments, a third, computers and so on. Each division sold to a slightly
different set of customers; each employed different manufacturing methods.. But all shared in
common a base in the profession of electrical engineering and used some similar manufacturing
methods, and most depended upon a continual process of invention from central laboratories to
supplement their research. The formal structure of the divisional form reflects the tension
between dependence and independence in organizations and provides a means through which to
attain a balance between autonomy for the division and central control for the corporation.

Disadvantages. The divisional form is complex and requires experience and judgment to
manage well. It can lead to embarrassing redundancies and breakdowns in service to the
consumer. At Hewlett-Packard, for instance, at one point in the early 1980s, three different
divisions had produced computer machines that were incompatible with each other. This
fragmented H-P’s ability to influence that market and presented a confused array of products to
the buying public. The M-form creates tremendous needs for careful and thoughtful integration
systems and mechanisms. In other words, independence is much easier to attain than
interdependence.

Matrix Structure

Description. The matrix structure flew in the face of many of the organizational
principles outlined by the early management writers. Spans of control grew, unity of command
was forgotten, and lines of authority blurred to dissolution, yet the form persists because it
responded to a particular set of needs, experienced first in the aerospace industry: extremely
expensive projects, limited talent pools, and highly complex projects that required highly
specialized skills.

In the matrix organization, there are two or more lines of authority. One is essentially a
functional array, with managers for engineering, manufacturing, sales, procurement, and so forth.
The other is a line of project managers who are charged with the budget for a program. Thus, the
functional managers have the manpower and talent assigned to them and the project managers
have the money assigned to them; neither can live without the other. The functional employee
in the matrix form typically has at least two bosses, the project manager and the functional
department manager. One pays his salary and the other contributes heavily to his performance
review since he sees his or her work across several projects.
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Matrix organizations require special management and employee skills to run effectively.
High levels of trust, communication, negotiation, teamwork, ability to shift focus and priority,
and attention to detail are essential to managing and working in a matrix. TRW, for instance,
one of the pioneering companies of the matrix form, spent tremendous amounts of time and
energy teaching its employees how to work in and manage a matrix organization—something
management felt it had to do to compete successfully in the aerospace industry. Human resource
specialists worked to teach managers and employees that decisions must be based on expertise,
persuasion, and logic, rather than hierarchical position and formal roles, and that
misunderstandings, disagreements and conflicts must be dealt with through confrontation and
problem solving rather than through appeals to higher authority, win/lose domination, avoidance
or papering over the differences. The general atmosphere of the matrix firm must emphasize
task contribution and accomplishments above personal rank and status. The dual authority
structure of the matrix permits focus on project efficiency while maintaining the specialist
development of the functional structure—which ensures functional resources are available when
needed. See Figure 6.

C h ie f E x e c u tiv e O ffic e r

V a rio u s
S ta ff F u n c tio n s

n
V ic e P re s id e n t V ic e P re s id e n t V ic e P re s id e n t
E n g in e e rin g O p e ra tio n s C o n tr a c ts

P ro je c t M a n a g e r
P ro je c t A Engineer A Machinist A Specialist A

P ro je c t M a n a g e r
P r o je c t B Engineer B Machinist B Specialist B

P ro je c t M a n a g e r
P r o je c t C Engineer C Machinist C Specialist C

Figure 6: Matrix Form

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Advantages. The matrix form is useful for complex tasks such as designing
major weapon systems, moving to a new plant site or corporate acquisitions. Matrices, or
hybrids of them, are common where there are limited resources, high and temporary resource
demands, and high levels of complexity and uncertainty in a project. This “loose” structure
(compared with the functional form) is helpful in facilitating problem solving for situations like
these.

Disadvantages. The disadvantages to the matrix structure include the reality that the
maintenance of the two management hierarchies is expensive. Further, the “matrixed” employee
typically has two or more “bosses” and must determine whom to listen to when. This often
creates confusion and ambiguity in the system, which can be debilitating. Again, the expense of
training and maintaining this highly interpersonal skill-dependent form is significant if not
prohibitive. Many managers steeped in the more traditional forms simply cannot give up
assumptions about “one-person, one-boss” or the line-of-authority principle and are unable to
function in a matrix structure.

Amorphous Structure

Description. The amorphous structure grows of its own accord. In the absence of
guidelines or of formal organizational charts, individual managers develop the organizations they
need to accomplish their own purposes. Amorphous systems reflect either a tremendous amount
of senior management trust in its middle managers or apathy to the organizational structure.
Each group develops in its own way with its own resources and needs. Sometimes termed
“organic” organizations for the exponential ways in which they grow, amorphous organizations
represent a “high-risk, high-return” alternative to the organizational manager.

If amorphous organizations work, the people in them can be highly motivated and
productive. If they don’t, the people in them can be highly frustrated and unproductive. Perhaps
the best early modern example of the amorphous organization was Digital Equipment
Corporation (DEC) in its early years in which it grew, amorphously, to be the second largest
computer manufacturer. Organization charts were virtually non-existent in the firm.
Departments and divisions grew out of individual interests and decisions over the years.
Management was not completely without control; rather, they placed a high level of trust in the
capacity of subordinates to shape and determine the form of the work. A more recent example
comes from Denmark. Lars Kolind, president of a hearing-aid company, Oticon, reorganized his
company into what he called a “spaghetti organization.” 6 Concerned by the lack of fluid
communication and the boundaries between organizational departments, he threw out all job
descriptions, fired all secretaries, and tore down the walls in the headquarters office building.
Personal computers, telephones, and other office equipment were loaded onto carts and
employees were told that when you need to work on a project with someone, just wheel your
carts together so you are side-by-side. Oticon reported that profits and innovation soared and
costs came down subsequent to this radical reorganization.

6
See The Tom Peters Seminar (New York: Vintage Books, 1994), 29.
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“Organic” or “amorphous” forms seem to be gaining in popularity during the explosion
of the Information Age, entrepreneurial, high-tech companies, many based on Internet
connections. The emergence of the so-called “virtual organizations” in which most functions of
the traditional organization are sub-contracted also complicates the current panorama of
structural alternatives. If a company contracts with an independent manufacturer to produce a
product designed under contract and distributes and sells the product through an independent
sales organization, where is the organization? Does it have a structure? If the “organization”
consists of a pool of employees working at home on a variety of projects, connected through a
variety of networks, perhaps only temporarily until a project is completed, where is the
organization? New theories of network organizations are emerging and influencing design
decisions. The varieties are infinite. See Figure 7.

? ? ? ?

? C Ch hi ei ef f E E x x ee cc uu t i v e OO f ff fi ci ce er r ?

? ? ? ?
Figure 7: Amorphous Form
Advantages. Amorphous organizations have the
potential for providing a highly motivating environment for achievement-oriented, internally
motivated individuals. As long as they have the right kind of talent, they can respond relatively
quickly to environmental or technological changes. Further, they are often employed by
entrepreneurs who are focused on rapid growth and either believe that too much structure is
stifling or do not have enough time to pay attention to the challenges of organizing.

Disadvantages. Amorphous organizations can become morasses of confused, undirected

effort, producing little more than friction and heat. For an amorphous organization to persist, the
recruiting system must be refined to select only those who fit the needs of the organization.
This uncontrolled growth can be very expensive and even fatal.

Hybrid Structures
 -15- UVA-OB-0361
Description. We can readily identify a variety of hybrids of the foregoing types of
organizational structure in society. To try to get the benefits of all, many firms mix the features
of two or more of the forms. Obviously, the danger is getting the disadvantages of all instead.
Hybrids often build on one of the two forms by adding various mechanisms to increase
integration— like task forces and work teams which are frequently used to coordinate activities
among divisions of a functional or product form organization.

The common hybrid forms include (a) the functional/product where product managers
don’t have complete control over the operations or financing parts of the business and (b) the
geographic/customer type where the area managers also have customer segment breakdowns in
their sales forces. For example, see Figure 8.

C h ie f E x e c u tiv e O ffic e r

V a rio u s
S ta ff F u n c tio n s

V ic e P re s id e n t V ic e P re s id e n t V ic e P re s id e n t V ic e P re s id e n t
M a rk e tin g F in a n c e O p e ra tio n s A d m in is tra tio n

B ra n d M a n a g er
C o u n te r T o p

B ra n d M a n a g er
L e is u re

B ra n d M a n a g er
O f f ic e P r o d u c ts

Figure 8: Functional/Product Hybrid

Advantages. Hybrids provide the means for adapting an organization’s structure to the
demands of the environment, current staffing characteristics, and other design constraints like in-
place systems and historical momentum. The options are almost limitless, yet most
organizations tend to revolve around one or more of the seven previously outlined.

Disadvantages. Hybrids can be confusing. Managers and employees, people in general

actually, usually prefer to reduce uncertainty, and the more complex an organization is the more
ambiguous is the experience of each individual manager. In that confusion about who’s-doing-
what-and-reporting-to-whom-about-what, people working in hybrids can become frustrated and
disillusioned.
 -16- UVA-OB-0361
Conclusion

Organizational structure is a key element in the functioning of an effective organization.

It is also a common lever that many executives “pull” in the attempt to increase the efficiency of
their companies. If an organization’s structure does not fit well with its environment and internal
systems, it will be unable to function at high levels of effectiveness and efficiency. Yet seldom
is there a clearly appropriate organizational structure for any one situation. Managers charged
with redesigning or influencing the design of organizations should keep in mind the basic
considerations of fit, differentiation, integration, technology, size, span of control, and line
authority, as they seek to shape or create organizational structures that will work. As they do,
they have a variety of alternatives from which to choose—and a vast arena of possible variations.
Further, the new Information Age organizations—in which powerful new information networks
are distributing, de facto, greater decision-making power to people in all reaches—are evolving
into new forms. These “infocracies” are distributing power to the who have access to both
customers and information databases and can therefore merge the two to make good business
decisions.

The new Information Age organizations will evolve through the creativity of their
leader/managers and how they think about organizations. Gareth Morgan, for example, poses a
different perspective, in Images of Organizations, in which he poses metaphors for thinking
about organizations as a way of sharpening design thinking. Organizations, he suggests, can be
thought of as machines, as living organisms, as brains, as cultures, as political systems, as
psychic prisons, as foci of constant change, and as instruments of domination. 7 How we think
about organizations clearly will shape our design decisions in them. In Organizing for the
Future, Jay Galbraith and Ed Lawler collect articles about creating high-involvement
organizations where the collective creativity of most employees can be unleashed. 8 These ideas
would seem to inform managers who worry about the potential for “trapped” bureaucratic
behavior in their corporations. Clearly this is an issue widely considered in the explosion of e-
commerce companies springing up. Peter Drucker has postulated that the work of the future will
revolve around projects—an argument so convincing to many that Tom Peters has published a
new book, The Project 50, which outlines the characteristics of effective project managers—all
presumably operating within an organizational structure that encourages effective project
behavior.9 A project-based company in many respects would be the “next step” in the
decentralization design employed by H-P and Johnson & Johnson—keeping business units small
enough to be creative and highly coordinated.
This note was intended to give you a quick overview of the major organizing principles
developed over the last two hundred years, to introduce you to the types of organizational
structure commonly employed in the 20th century, to heighten your awareness that
organizational structure is a key leader decision point for building effective organizations, and to
stimulate your thinking about organizational hybrids - mixing and matching pieces of what we
“knew” historically about organizational design and theory as we embark on a new, information-
7
Gareth Morgan, Images of Organizations (Thousand Oaks, CA: Sage, 1986).
8
Jay R. Galbraith, Edward E. Lawler III and Associates, Organizing for the Future (San Francisco, CA:
Jossey-Bass, 1993).
9
Thomas J. Peters, The Project 50 (New York: Alfred Knopf, 1999).
 -17- UVA-OB-0361
based, millennium. It seems clear that organizational forms will continue to evolve and perhaps
even that new principles will be discovered and employed. The wise and effective
organizational leader will keep abreast of these developments and use them to good advantage in
organizing the efforts of employees to meet strategic objectives.
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Organizational Structure Bibliography

For those interested in learning more about organizational design and organization
structure in particular, here are some selected resources for further reading.

Chandler, Alfred D., Jr. Strategy and Structure: Chapters in the History of the American
Industrial Enterprise. Massachusetts: The M.I.T. Press, 1990.
Daft, Richard L. and Lee Lyon. Organization Theory and Design. Minnesota: West Publishing
Company, 1983.
Dalton, Gene W. and Paul R. Lawrence. Organizational Structure and Design. Illinois: Richard
D. Irwin, Inc., 1970.
Davis, Stanley M. and Paul R. Lawrence. Matrix. Pennsylvania: Addison-Wesley Publishing
Company, 1977.
Etzioni, Amitai. Modern Organization. New Jersey: Prentice-Hall, Inc., 1964.
Galbraith, Jay R. and Edward Lawler III and Associates. Organizing for the Future. San
Francisco, CA: Jossey-Bass, 1993.
Handy, Charles B. Understanding Organizations. England: Penguin Books, 1976.
Kast, Fremont E. and James E. Rosenzweig. Organization and Management: A Systems
Approach. New York : McGraw-Hill Book Company, 1970.
Lawrence, Paul R. and Jay W. Lorsch. Organization and Environment. Illinois: Richard D.
Irwin, Inc., 1969.
Miller, E. J. and A. K. Rice. Systems of Organization. London: Tavistock Publications, 1967.
Morgan, Gareth. Images of Organizations. Thousand Oaks, CA: Sage, 1986.
Organ, Dennis W. and Thomas Bateman. Organizational Behavior. Texas: Business
Publications, Inc., 1978.
Ouchi, William G. The M-Form Society. New York: Avon, 1984.
Pfeffer, Jeffrey. Organizations and Organization Theory. Massachusetts: Pitman Publishing,
Inc., 1982.
Pinchot, Gifford and Elizabeth. The End of Bureaucracy and the Rise of the Intelligent
Organization. San Francisco: Berrett-Kohler, 1994.
Thompson, James D. Organizations in Action. New York: McGraw-Hill Book Company, 1967.
Tosi, Henry, L. Theories of Organization. Chicago: St. Clair Press, 1975.