Chapter 16 Foundations of organization structure

Organizational structure defines how job tasks are formally divided, grouped, and coordinated.
Work specialization, departmentalization, chain of command, span of control, centralization and
decentralization, and formalization are components which determine organizational structure.

Work specialization or division of labour is the degree to which activities in the organization are
subdivided into separate jobs. Work specialization creates efficiency and productivity, but can also
result in boredom, fatigue, stress, low productivity, poor quality, increased absenteeism, and high
turnover. The trend towards specialization has been altered by the realization that productivity may be
increased by enlarging the scope of job activities.

Departmentalization is the basis by which jobs are grouped together. Organizations may be
departmentalized by function, product, geography, process, or customer. Functional
departmentalization groups activities by the functions performed, such as engineering, accounting, or
personnel. Organizations using product departmentalization have separate departments or divisions
devoted to a product or product line. Many sales and retail operations are departmentalized by
geography or territory. In process departmentalization, each department specializes in a specific
phase of the production process. Finally, customer departmentalization organizes along customer
markets. Many large organizations use all of the forms of departmentalization.

The chain of command is an unbroken line of authority that extends from the top of the organization
to the lowest level and clarifies who reports to whom. The concept of chain of command is related to
the concepts of authority and unity-of-command. Authority refers to the right of a manager to give
orders and expect them to be obeyed. The unity-of-command principle states that a person should
have only one supervisor to whom he or she is directly responsible.

Span of control refers to the number of employees that can be directed by one manager. Narrow
spans of control allow for close control, while wider spans of control reduce costs, speed up decision
making, increase flexibility, and empower employees. The ideal span of control will depend upon the
situation.

Centralization is the degree to which decision making is concentrated at a single point in the
organization. In a centralized organization, top management makes the key decisions with little or no
input from lower-level personnel. In contrast, decentralized organizations allow lower-level personnel
or provide input or actually make decisions. The recent trend has been towards decentralization.

Finally, formalization refers to the degree to which jobs within the organization are standardized. If a
job is highly formalized, individual employees have a minimum amount of discretion over what is to be
done, when it is to be done, or how it is to be done. The degree of formalization can vary widely
between organizations and within organizations.

Common organizational designs include simple structure, the bureaucracy, and the matrix
structure. Simple structures, characterized by a low degree of departmentalization, wide spans of
control, authority centralized in a single person, and little formalization are typically used in small
businesses. The simple structure is fast, flexible, and inexpensive to maintain and accountability is
clear. However, as the organization grows, the simple structure becomes inefficient. Its low
formalization and high centralization result in slow decision-making.

Over time, businesses have the tendency to evolve into bureaucracy, whose characteristics include
highly routine operating tasks, very formalized rules, tasks that are grouped into functional
departments, centralized authority, and narrow spans of control. The primary advantage of the
bureaucracy is its ability to perform standardized activities in a highly efficient manner. In spite of
these strengths, functional unit goals may eventually override the overall goals of the organization and
programmed decisions may eventually become ineffective.
The matrix structure, used in advertising agencies, aerospace firms, universities, and laboratories
combines two forms of departmentalization: functional and product. The direct and frequent contact
between different specialties can make for better communication and flexibility which are often lost in
the multiple layers of bureaucracy. However, the matrix structure violates the unity-of-command
concept by creating a dual chain of command. Matrix structures facilitate coordination when the
organization has many complex and interdependent activities. In addition, matrix structures facilitate
the efficient allocation of specialists. The major disadvantages of the matrix structure are confusion,
propensity for power struggles, and stress on individuals.

New design options that attempt to dissolve many of the layers of management associated with
both the matrix and bureaucracy include the virtual organization and the boundaryless organization.
In a virtual organization, the majority of functions are outsourced. Virtual organizations are highly
centralized, with little or no departmentalization. In this arrangement projects can be regrouped and
functions can be reconstituted with ease. The major advantage to the virtual organization is its
flexibility. At the same time, however, it reduces management’s control over key parts of its business.

The boundaryless organization attempts to flatten organizational hierarchy by using cross-

hierarchical teams, participative decision-making, combined with both extranets and intranets. Vertical
and horizontal boundaries are collapsed to create increased flexibility; external boundaries are
eliminated to create more options for organizational alliances. The boundaryless organization seeks to
eliminate the chain of command, have limitless spans of control, and replace departments with
empowered teams.

Organizational structures may be classified as mechanistic or organic. The mechanistic model has
extensive departmentalization, high formalization, a limited information network, and little
participation by low-level members in decision making. At the other end of the scale, an organic
organization uses flat, cross-hierarchal and cross-functional teams, has low formalization, posses a
comprehensive information network, and involves high participation in decision making.

The structure an organization chooses depends on its strategy. Common strategies include
innovation, cost minimization, and imitation. Innovators are most likely to prefer the flexibility of an
organic model, while those that choose a cost minimization strategy are more suited to the
mechanistic structure. Imitators combine the two structures.

Organization size also influences structure. As organizations increase in size, they tend to become
more mechanistic, although size affects structure at a decreasing rate. Once an organization has
around 2,000 employees, it’s already fairly mechanistic and additional employees have minimal
impact.

Technology refers to how a firm converts its inputs to outputs. Technologies may be differentiated by
their degree of routines. Routine tasks are associated with taller and more departmentalized
structures, while the relationship is not overwhelmingly strong. The degree of routineness is positively
correlated with high formalization or centralization when formalization is low.

Structure is also affected by environment, which is comprised of capacity, volatility, and complexity.
Capacity refers to the degree to which an environment can support growth; volatility refers to
environmental instability, and complexity refers to the degree of heterogeneity and concentration
among environmental elements. Taken together, these three components contribute to environmental
uncertainty. In scarce, dynamic, and complex environments, a more organic structure is preferable.
The more abundant, stable, and simple the environment, the more a mechanistic structure will be
preferred.

Finally, there are individual differences in employee preferences for structure. Generally, work
specialization contributes to higher employee productivity, but at the price of reduced job
satisfaction. Negative behavioural outcomes from high specialization are most likely to surface in
professional jobs occupied by individuals with high needs for personal growth and diversity. There is
no evidence to support a relationship between span of control and employee performance, in spite of
the intellectual or emotional appeal. There is a fairly strong relationship
between decentralization and job satisfaction, particularly for employees with low self-esteem.