Organizational Theory

Chapter 4
(Fundamentals of organization structure)

4.1 Organization Structure

Vertical Aspect of organizing:

 Formal reporting relationships include the number of levels and

the span of control
 Grouping of individuals into departments and of departments into
the total organization.

Horizontal aspect of organizing:

 Design of systems to ensure effective communication,
coordination and integration of efforts

4.2 Information-Processing Perspective on Structure

1. Traditional organization versus learning organization:

 Traditional organization design emphasizes vertical
communication and control.
 Learning organization which emphasizes communication and
collaboration.

2. Centralized versus decentralized decision making:

 Centralized authority focused on top level decision making.
 Decentralized authority focused on shared tasks and decisions.

Vertical Information linkages

 1. Vertical linkages coordinate activities between the top and the
bottom of the organization.
2. Hierarchical referral are the vertical lines which identify the chain of
command.
3. Rules and plans: Rules provide a standard information source
enabling employees to be coordinated. Plans provide standing
information for employees.
4. Vertical Information Systems: Increases vertical information
capacity. It includes periodic reports, written information and
computer-based communications and makes the communication up
and down the hierarchy more efficient.

Horizontal Information linkages

1. Overcomes barriers between departments and provides opportunities

for coordination between employees to achieve unity of effort and
organizational objectives.
2. Horizontal linkage refers to the amount of communication and
coordinates activities across organizational departments.
3. Information Systems: Enables information exchange throughout the
organization.
4. Direct contact: Higher level of horizontal linkage is direct contact
between managers or employees affected by a problem (liaison role,
the person is located in one department but has responsibility for
communicating and achieving coordination with another department)
5. Task force: A temporary committee composed of representatives
from each department affected by a problem.
6. Full-time integrator: Located outside the departments and has the
responsibility for coordinating several departments.
7. Teams: Project teams are the strongest horizontal linkage
mechanism.

Organization Design Alternatives:

Three key indicators are required to design structure:

1. Work activities:
  Departments are created to perform tasks considered important to
the company.

2. Reporting Relationships:
 It’s the chain of command and are represented by vertical lines.
Who reports to whom.

3. Departmental Grouping Options:

In early stages companies are in loose structure, on an ad hoc basis,
on Simple grouping meaning that people work together without any
formal reporting relationship. But as time moves on, we are moving to
different groupings:

1. Simple Structure:
Often the first kind of structure used by a founder when a new
organization is formed. It’s the founder and a small number of
employees.
 No formal hierarchical reporting relationships, therefore, there is
no chain of command.
 The founder devotes his full energies to the technical activities
of production and marketing and the managers the simple
structure informally.
 The running of the organization is based on the personal values
of the founder rather than on bureaucratic rules.
 Employees handles their own customers so they learn from
close contact and they can also develop products individually
for each customer.

Strengths:
 Good for small companies
 Strong clan and adaptive culture with high responsiveness with
commitment to the end result.
 High employee commitment, loyalty and adaptability.
 Enables employees to focus on product development.
 Flexibility and quick response to changes in customer
demands.
 Weaknesses:
 Sometimes difficult to coordinate across different employees
and customers.
 Eliminates economies of scale among employees
 Limited use of cross-abilities and development.
 (I don’t agree but have to put it in.) Big product portfolio.
 Hard to know which employee do what.

2. Functional Structure:
Activities are grouped together by common function from the
bottom to the top of the organization.

Strengths:
 Enables in-depth knowledge, skill development and the
organization to accomplish functional goals.
 Best with only one or few products.

Weaknesses:
 Slow response time to environmental changes
 May cause decisions to pile on top, hierarchy overload.
 Leads to poor horizontal coordination among departments
 Results in less innovation and restricted view of organizational
goals.

3. Divisional Structure:
Each functional group (ex for each product) has its own
departments of R&D, manufacturing, accounting and marketing.

Strengths:
 Suited to fast change in unstable environment.
 Best in large organizations with several products and regions,
so they can adapt to differences among each one.
 Leads to customer satisfaction since product responsibility and
contact points are clear.
  Decentralizes decision-making and high coordination across
functions.

Weaknesses:
 Eliminates in-depth focus and technical specialization.
 May lead to poor coordination across product lines
 Loss of economies of scale in the departments (more effort I
the end of day, instead of 50 engineers sharing common
facility, 10 engineers may be assigned to each of five product
divisions.)
 Makes integration and standardization across product lines
difficult.

4. Geographical Structure:
The basic philosophy behind this structure is that you divide your
sections according to your geographical location.

 Organizing to meet need of users by geography (different

tastes, values, ethics for each continent, country…)
 Each unit includes all functions required to produce and
market products or services in that region (Coca cola)
 Common in large nonprofit organizations (NGOs) and
multinational corporations.
 Strengths and weaknesses similar to divisional organization.

5. Matrix (Mix) Structure:

Basically, is the combination of 2 structures while trying to give
equal emphasis and attention to both (attention to product and
function, or product and geography)

Conditions for the Matrix:

 There is pressure to share resources across the organization
(share engineers to several products/projects)
 Two or more critical outputs required, such as in-depth
technical knowledge (functional structure and frequent new
products (divisional structure). Requires to sharing power and
dual authority structure is needed to maintain that balance.
 Environment is complex and uncertain

The matrix formalizes horizontal teams along with the traditional

vertical hierarchy and tris to give equal balance to both. Because
sometimes can be hard to be followed there have been evolved 2
variations:
 Functional Matrix: The bosses have primary authority and the
product managers simply coordinate product activities

 Product Matrix: Product managers have primary authority and

functional managers simple assign technical personnel to
projects and provide advisory expertise as needed.

Strengths:
 Achieves coordination necessary to meet dual demands from
customers.
 Flexible sharing of human resources across products, which
can also lead to opportunity for both functional and product skill
development.
 Suitable to complex decisions and frequent changes in
unstable environment
 Best in medium-sized organizations with multiple products.

Weaknesses:
 Can lead to frustration and confusion since participants
experience dual authority.
 Participants need good interpersonal skills and extensive
training with frequent meetings and conflict resolution sessions,
so it’s time consuming.
 Requires great effort to maintain power balance.
 Won’t work unless participants understand it and adopt
collegial rather than vertical type relationships.
4. Virtual Network Structure:
Extends the concept of horizontal coordination and collaboration
beyond the boundaries of the organization.
Most common strategy is outsourcing, which means the
contracting out of aspects of work to other companies (a company
from Bulgaria handles all the network system of Coca Cola in
Greece). Essentially this means that a company’s main processes
to separate companies and coordinates their activities from a small
headquarters organization. Nike frequently produce non of their
clothing and instead they focus on building brand value through
marketing.

Strengths:
 With the use of the internets, there are no boards, so even
small companies can obtain talent and resources worldwide.
 Can boost a company’s scale and reach without huge
investments in factories, equipment or distribution facilities.
 The company can be very flexible and responsive to changes.
 Reduces administrative costs.

Weaknesses:
 Managers do not have hands-on control over many activities
and employees (Mr robot, E-corp giving away their security
systems to another company, they didn’t have full control and
you saw what can happen more easily).
 More time to deal and manage relationships and potential
conflicts with contract partners.
 There is a risk of failure if a partner fails to deliver or goes out
of business.

5. Horizontal Structure:
Organizes employees around core processes. They can change
later to an Horizontal structure, with Re-engineering which
involves the redesign of a vertical organization along its horizontal
workflows and processes.
 All the people throughout the organization who work on a
particular process/departments have better access to one another
so they can communicate and coordinate their efforts.

Characteristics:
 Structures is created around cross-functional processes.
 Self-directed teams are the basis of organization design and
performance.
 Process owners are the responsible for entire process and
people on the team are given authority for decisions.
 Can increase organization’s flexibility.
 The culture promotes openness, trust and collaboration.

Strengths:
 Promotes flexibility and rapid response to changes in customer
needs.
 Directs attention to everyone towards the production and
delivery of value to the customer.
 Promotes a focus on teamwork and collaboration while
employees have a broader view of organizational goals.
 Improves quality of life for employees by offering them the
opportunity to share responsibility, make decisions and be
accountable for outcomes.

Weaknesses:
 Determining core processes is difficult and time consuming.
 Often requires changes in culture, job design, management
philosophy and information and reward system.
 Traditional managers may baulk when they have to give up
power and authority.
 Requires significant training of employees to work effectively in
a horizontal environment.

6. Hybrid Structure:
  Organizations often use a hybrid structure that combines
characteristics of various structure approaches tailored to
specific needs
 One common type is the combination of the functional and
divisional structures.
 Often used I rapidly changing environments.
 Greater flexibility

Application of Structural Design:

The most important role of top managers in structural design is finding
the right balance between vertical control and horizontal coordination
and judge when to apply each type.
The structure must align with organizational goals

Symptoms of structural deficiency:

 Decision making is delayed or lacking quality
 Organization does not respond innovatively to a changing
environment.
 Employee performance declines, goals are not being met
 Too much conflict.