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DESIGNING ORGANIZATIONAL STRUCTURE

Determinants of Organizational Structures

Figure 1. Organizational Structure of Apple

Source: https://research-methodology.net/apple-organizational-structure-a-hierarchical-structure-that-may-change-in-
near-future/

Organizational structure is the formal system of task and job reporting relationships that determines how
employees use resources to achieve an organization’s goals. In addition, it is the shared set of beliefs,
values, and norms that influence how people and groups work together to achieve an organization’s goals.
Organizational design is the process by which managers create a specific type of organizational structure
and culture so a company can operate in the most efficient and effective way.
The challenge facing all companies is to design a structure and a culture that (1) motivate managers and
employees to work hard and to develop supportive job behaviors and attitudes and (2) coordinate the
actions of employees, groups, functions, and divisions to ensure they work together efficiently and
effectively.
Four (4) factors are important determinants of the type of organizational structure or culture:

• The nature of the organizational environment;

• The type of strategy the organization pursues;

• The technology (and particularly information technology) the organization uses; and
• The characteristics of the organization’s human resources.

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The Organizational Environment

In general, the more quickly the external environment is changing and the greater the uncertainty within it,
the greater are the problems managers face in trying to gain access to scarce resources. In this situation,
to speed decision-making and communication and make it easier to obtain resources, managers typically
make organizing choices that result in more flexible structures and entrepreneurial cultures. They are likely
to decentralize authority, empower lower-level employees to make important operating decisions, and
encourage values and norms that emphasize change and innovation – a more organic form of organizing.
In contrast, if the external environment is stable, resources are readily available, and uncertainty is low,
then less coordination and communication among people and functions are needed to obtain resources.
Managers can make organizing choices that bring more stability or formality to the organizational structure
and can establish values and norms that emphasize obedience and being a team player. Managers in this
situation prefer to make decisions within a clearly defined hierarchy of authority and to use detailed rules,
standard operating procedures (SOPs), and restrictive norms to guide and govern employees’ activities –
a more mechanistic form or organizing.
Strategy
Different strategies often call for the use of different organizational structures and cultures. For example, a
differentiation strategy aimed at increasing the value customers perceive in an organization’s goods and
services usually succeeds best in a flexible structure with a culture that values innovation. Flexibility
facilitates a differentiation strategy because managers can develop new or innovative products quickly —
an activity that requires extensive cooperation among functions or departments. In contrast, a low-cost
strategy that is aimed at driving down costs in all functions usually fares best in a more formal structure
with more conservative norms, which gives managers greater control over the activities of an organization’s
various departments.
In addition, at the corporate level, when managers decide to expand the scope or organizational activities
by vertical integration or diversification, for example, they need to design a flexible structure to provide
sufficient coordination among the different business divisions.
Finally, expanding internationally and operating in many different countries challenges managers to create
organizational structures that allow organizations to be flexible on a global level.
Technology
Technology is the combination of skills, knowledge, machines, and computers that are used to design,
make, and distribute goods and services. As a rule, the more complicated the technology that an
organization uses, the more difficult it is to regulate or control because more unexpected events can arise.
Thus, the more complicated the technology, the greater is the need for a flexible structure and progressive
culture to enhance managers’ ability to respond to unexpected situations, and give them the freedom and
desire to work out new solutions to the problems they encounter. In contrast, the more routine the
technology, the more appropriate is a formal structure because tasks are simple and the steps needed to
produce goods and services have been worked out in advances.
Task variety is the number of new or unexpected problems or situations that a person or function encounters
in performing tasks or jobs. Task analyzability is the degree to which programmed solutions are available
to people or functions to solve the problems they encounter. Non-routine or complicated technologies are
characterized by high task variety and low task analyzability; this means many varied problems occur and
solving these problems requires significant non-programmed decision making. In contrast, routine
technologies are characterized by low task variety and high task analyzability; this means the problems
encountered do not vary much and are easily resolved through programmed decision making.

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Human Resources
In general, the more highly skilled workforce, and the greater the number of employees who work together
in groups or teams, the more likely an organization is to use a flexible, decentralized structure, and a
professional culture based on values and norms that foster employee autonomy and self-control.
Flexible structures, characterized by decentralized authority and empowered employees, are well suited to
the needs of highly skilled people. Similarly, when people work in teams, they must be allowed to
interactions, which also is possible in a flexible organizational structure. Thus, when designing
organizational structure and culture, managers must pay close attention to the needs of the workforce and
to the complexity and kind of work employees perform.
In summary, an organization’s external environment, strategy, technology, and human resources are the
factors to be considered by managers seeking to design the best structure and culture for an organization.
The way an organization’s structure works depends on the organizational structures. The way an
organization’s structure works depends on the organizing choices managers make about three (3) issues:
• Grouping tasks into individual jobs;
• Grouping jobs into functions and divisions; and
• Allocating authority and coordinate or integrate functions and divisions.
Organizational Structures
Companies must decide on an appropriate organizational structure. Organizational structure refers to the
specification of the jobs to be done within an organization and the ways in which those jobs relate to one
another.

Figure 2. Sample Organization Chart

Source: Business Essentials, 2017, p. 205

An organization chart refers to a diagram depicting a company’s structure and showing employees where
they fit into its operations.

The solid lines define the chain of command. The chain of command, in turn, refers to reporting relationships
within the company. In theory, such reporting relationships follow a “chain” from the highest level in the
organization to the lowest.

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Building Blocks of Organizational Structure

Specialization

The process of identifying the specific jobs that need to be done and designating the people who will perform
them leads to job specialization. In a sense, all organizations have only one major job, such as making cars
(Toyota), selling finished goods to consumers (Samsung), or providing telecommunications services
(Globe). Usually, that job is more complex in nature.

Departmentalization

After jobs are specialized, they must be grouped into logical units, which is the process of
departmentalization. Departmentalized companies benefit from this division of activities; control and
coordination are narrowed and made easier, and top managers can see more easily how various units are
performing.

• Functional Departmentalization. Most new startup firms, for instance, use functional
departmentalization. Such firms typically have production, marketing and sales, human resources,
and accounting and finance departments. Departments may be further subdivided. For example, the
marketing department might be divided into separate groups for market research, advertising, and
sales promotions.

• Product Departmentalization. Both manufacturers and service providers often opt for product
departmentalization, dividing an organization according to the specific product or service being
created. This becomes especially true when a firm grows and starts to offer multiple products or
services.

• Process Departmentalization. Other manufacturers favor process departmentalization, in which the

organization is divided according to production processes used to create a good or service.

• Customer Departmentalization. Retail stores actually derive their generic name, department stores,
from the manner in which they are structured — men’s department, women’s department, children’s
department, luggage department, and so on. Each department targets a specific customer category
(men, women, children, and people who want to buy luggage) by using customer departmentalization
to create departments that offer products and meet the needs of identifiable customer groups.

• Geographic Departmentalization. Geographic departmentalization divides firms according to the

areas of the country or the world that they serve.

Establishment of a Decision-Making Hierarchy

Although we can think of these two (2) extremes as anchoring a continuum, most companies fall
somewhere between the middle of such a continuum and one endpoint or the other.

Centralized Organizations

In a centralized organization, most decision-making authority is held by upper-level managers.

EXAMPLE: McDonald’s practices centralization as a way to maintain standardization. All restaurants

must follow precise steps in buying products and making and packaging menu items. Most advertising is
handled at the corporate level, and any local advertising must be approved by a regional manager.
Restaurants even have to follow prescribed schedules for facilities’ maintenance and upgrades such as

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floor polishing and parking lot cleaning. Centralized authority is most commonly found in companies that
face relatively stable and predictable environments and is also typical of small businesses.

Decentralized Organizations

As a company gets larger and more decisions must be made, the company tends to adopt a decentralized
organization, in which much decision-making authority is delegated to levels of management at various
points below the top. Decentralization is typical in firms that have complex and dynamic environmental
conditions. It is also common in businesses that specialize in customer services. Decentralization makes
a company more responsive by allowing managers increased discretion to make quick decisions in their
areas of responsibility.

EXAMPLE: Urban Outfitters practices relative decentralization in that it allows individual store managers
considerable discretion over merchandising and product displays. Whole Foods Market takes things even
further in its decentralization. Stores are broken up into small teams, which are responsible for making
decisions on issues such as voting on which new staff members to hire and which products to carry based
on local preferences. This practice taps into the idea that the people who will be most affected by
decisions should be the ones making them.

Basic Forms of Organizational Structure

Organizations can structure themselves in an almost infinite number of ways—according to specialization,

for example, or departmentalization, or the decision-making hierarchy. Nevertheless, it is possible to identify
four (4) basic forms of organizational structure that reflect the general trends followed by most firms: (a)
functional, (b) divisional, (c) matrix, and (d) international.

Functional Structure

Under a functional structure, relationships between group functions and activities determine authority.
Functional structure is used by most small to medium-sized firms, which are usually structured around basic
business functions: a marketing department, an operations department, and a finance department. The
benefits of this approach include specialization within functional areas and smoother coordination among
them.
In large firms, coordination across functional departments becomes more complicated. Functional structure
also fosters centralization (which can be desirable but is usually counter to the goals of larger businesses)
and makes accountability more difficult. As organizations grow, they tend to shed this form and move toward
one of the other three (3) structures (Ebert & Griffin, 2017).
Divisional Structures: Product, Market, and Geographic

As the problems associated with growth and diversification increase over time, managers must search for
new ways to organize their activities to overcome the problems associated with a functional structure. Most
managers of large organizations choose a divisional structure and create a series of business units to
produce to specific kind of product for a specific kind of customer. Each division is a collection of functions
or departments that work together to produce the product. There are three (3) forms of divisional structure.
When managers organize divisions according to the type of good or service they provide, they adopt a
product structure. When managers organize divisions according to the area of the country or world they
operate in, they adopt a geographic structure. When managers organize divisions according to the type of
customer they focus on, they adopt a market structure.
• Product Structure. Managers place each distinct product line or business in its own self-contained
division and give divisional managers the responsibility for devising an appropriate business-level
strategy to allow the division to compete effectively in its industry or market. Each division is self-

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contained because it has a complete set of all the functions—marketing, R&D, finance, and so on—
that it needs to produce or provide goods or services efficiently and effectively. Functional managers
report to divisional managers, and divisional managers report to top or corporate managers.
• Geographic Structure. When organizations expand rapidly both at home and abroad, functional
structures can create special problems because managers in one (1) central location may find it
increasingly difficult to deal with the different problems and issues that may arise in each region of a
country or area of the world.
• Market Structure. Sometimes the pressing issue facing managers is to group functions according to
the type of customer buying the product in order to tailor the products the organization offers to each
customer’s unique demands. To satisfy the needs of diverse customers, a company might adopt a
market structure, which groups divisions according to the particular kinds of customers’ changing
needs.
Matrix Structure

In a matrix structure, managers group people and resources in two (2) ways simultaneously: by function
and by product. Employees are grouped by functions to allow them to learn from one another and become
more skilled and productive. In addition, employees are grouped into product teams in which members of
different functions work together to develop a specific product. The result is a complex network of reporting
relationships among product teams and functions that makes the matrix structure very flexible.
Allocating Authority

• Authority: The power to hold people accountable for their actions and to make decisions concerning
the use of organizational resources.
• Hierarchy of authority: An organization’s chain of command, specifying the relative authority of each
manager.
• Span of control: The number of subordinates who report directly to a manager.
• Line manager: Someone in the direct line or chain of command who has formal authority over
people and resources at lower levels.
• Staff manager: Someone responsible for managing a specialist function such as finance or
marketing.
International Structure

Several different international organizational structures are also common among firms that actively
manufacture, purchase, and sell in global markets. These structures also evolve over time as a firm
becomes more globalized (Ebert & Griffin, 2017).
EXAMPLE:

Figure 3. Coca-Cola's International Structure

Source: http://cokemnc.blogspot.com/p/organizational-structure.html

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Organizational Culture
Organizational culture is the shared values, principles, traditions, and ways of doing things that influence
the way organizational members act. It is important because of the impact it has on decisions, behaviors,
and actions of organizational employees.

WHERE DOES CULTURE COME FROM? HOW DO EMPLOYEES LEARN CULTURE?

Usually reflects the vision or mission of the Organizational stories: narrative tales of
founders. significant events or people

Founders project an image of what the Corporate rituals: repetitive sequences of

organization should be and what its values activities that express and reinforce important
are. organizational values and goals

Material symbols or artifacts: layout of

Founders can “impose” their vision on
facilities, how employees dress, size of offices,
employees because of new organization’s
material perks provided to executives,
small size.
furnishings, etc.

Organizational members create a shared Language: special acronyms and unique terms
history that binds them into a community and to describe equipment, key personnel,
reminds them of “who we are.” customers, suppliers, processes, products, etc.

Strong, Adaptive Cultures

In a strong culture, the organization’s core values are both intensely held and widely shared. The more
members who accept the core values and the greater their commitment, the stronger the culture and the
greater its influence on member behavior. The reason is that a high degree of shared values and intensity
create a climate of high behavioral control. Zappos, an online shoe and clothing retailer, starts with a cultural
fit interview, which carries half the weight of whether the candidate is hired. New employees are offered
$2,000 to quit after the first week of training if they decide the job is not for them. Employee raises come
from workers who pass skill tests and exhibit increased capability, not from office politics. Portions of the
budget are dedicated to employee team building and culture promotion.
Adobe, a multinational computer software company, goes out of its way to give employees challenging
projects and then provide the trust and support to help them meet those challenges successfully. Adobe
products are synonymous with creativity, and only through the avoidance of micromanaging are the people
who create those products truly free to create. For example, Adobe does not use ratings to establish
employee capabilities, feeling that that inhibits creativity and harms how teams work. Managers take on the
role of a coach, more than anything, letting employees set goals and determine how they should be
assessed. Employees are also given stock options so that they know they have both a stake and reward in
the company’s success. Continual training and culture that promotes risk-taking without fear of penalty are
part of Adobe’s open company culture.
A strong culture should reduce employee turnover because it demonstrates high agreement about what the
organization represents. Such unanimity of purpose builds cohesiveness, loyalty, and organizational
commitment. These qualities, in turn, lessen employees’ propensity to leave (Robbins & Judge, 2018).

REFERENCES
Bateman, T. & Snell, S. (2013). Management: Leading and collaborating in a competitive world. New York: McGraw-Hill Education.
Dudovskiy, J. (2018, January 26). Apple organizational structure - A hierarchical structure that may change in near future. Retrieved on September 26,
2018, from https://research-methodology.net/apple-organizational-structure-a-hierarchical-structure-that-may-change-in-near-future
Ebert, R. J. & Griffin, R. W. (2017). Business essentials. Harlow: Pearson Education Limited.
Jones, G. & George, J. (2016). Contemporary management. New York: McGraw-Hill Education.
Patel, S. (2015, August 06). 10 examples of companies with fantastic cultures. Retrieved on December 6, 2018, from
https://www.entrepreneur.com/article/249174

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