Chapter 6: Organizational Structure and Design

• What is Organizational Structure?

• Departmentalization
• Coordination and Authority
• Organizational Design Decisions
• Contemporary Organizational Designs
Organizational structure
• Organizational structure is the typically hierarchical arrangement of lines of
authority, communications, rights and duties of an organization.
• Organizational structure determines how the roles, power and responsibilities
are assigned, controlled, and coordinated, and how information flows between
the different levels of management.

• A structure depends on the organization's objectives and strategy. In a

centralized structure, the top layer of management has most of the decision
making power and has tight to control over departments and divisions. In a
decentralized structure, the decision making power is distributed and the
departments and divisions may have different degrees of independence.
Designing Organizational Structure
• Organizing – Arranging and structuring work to accomplish an organization’s
goals.
• Organizational Structure – The formal arrangement of jobs within an
organization.
• Organizational Chart – The visual representation of an organization’s structure.
• Organizational Design – A process involving decisions about six key elements:
• Work specialization
• Departmentalization
• Chain of command
• Span of control
• Centralization and decentralization
• Formalization
Purposes of Organizing
• Divides work to be done into specific jobs and departments. (Division
of work )
• Assigns tasks and responsibilities associated with individual jobs.
(Assignment of tasks)
• Coordinates diverse organizational tasks.(Coordinates tasks)
• Clusters jobs into units. (grouping jobs)
• Establishes relationships among individuals, groups, and
departments. (Relationship)
• Establishes formal lines of authority. (Authority)
• Allocates and deploys organizational resources. (Allocation of
resources)
Organizational Structure

Work Specialization – Dividing work activities into

separate job tasks.
• Early proponents *of work specialization believed it
could lead to great increases in productivity.
• Overspecialization can result in human diseconomies
such as boredom, fatigue, stress, poor quality, increased
absenteeism, and higher turnover.
Economies and Diseconomies of Work
Specialization
Departmentalization
Departmentalization – The basis by which jobs are grouped
together.

• Functional
• Grouping jobs by functions performed
• Product
• Grouping jobs by product line
• Geographical
• Grouping jobs on the basis of territory or geography
• Process
• Grouping jobs on the basis of product or customer
flow
• Customer
• Grouping jobs by type of customer and needs
 Departmentalization Trends
• Increasing use of customer departmentalization
• Cross-functional team – A work team composed of
individuals from various functional specialties.

Chain of Command
• Chain of Command – The continuous line of authority
that extends from upper levels of an organization to the
lowest levels of the organization—clarifies who reports to
whom.
 Authority
• Authority – The rights inherent in a managerial
position to tell people what to do and to expect them to
do it.
• Acceptance Theory of Authority – The view that
authority comes from the willingness of subordinates to
accept it.
• Line Authority – Authority that entitles a manager to
direct the work of an employee.
• Staff Authority – Positions with some authority that
have been created to support, assist, and advise those
holding line authority.
Chain of Command and Line Authority
Line Versus Staff Authority
Responsibility and Unity of Command

• Responsibility – The obligation or expectation to

perform.
• Unity of Command – The management principle that
each person should report to only one manager.

Span of Control
• Span of Control – The number of employees who can
be effectively and efficiently supervised by a manager.
Contrasting Spans of Control
Centralization and Decentralization

• Centralization – The degree to which decision-making is concentrated

at the upper levels of the organization.

• Decentralization – The degree to which lower-level employees provide

input or actually make decisions.

• Employee empowerment – Giving employees more authority (power)

to make decisions.
Centralization or Decentralization
More Centralization
• Environment is stable.
• Lower-level managers are not as capable or
experienced at making decisions as upper-level
managers.
• Lower-level managers do not want a say in
decisions.
• Decisions are relatively minor.
• Organization is facing a crisis or the risk of
company failure.
• Company is large.
• Effective implementation of company strategies
depends on managers retaining say over what
happens.
More Decentralization
• Environment is complex, uncertain.
• Lower-level managers are capable and experienced at making
decisions.
• Lower-level managers want a voice in decisions.
• Decisions are significant.
• Corporate culture is open to allowing managers a say in what
happens.
• Company is geographically dispersed.
• Effective implementation of company strategies depends on
managers having involvement and flexibility to make
decisions.
Formalization

• Formalization – The degree to which jobs within the

organization are standardized and the extent to which
employee behavior is guided by rules and procedures.
• Highly formalized jobs offer little discretion over what is
to be done.
• Low formalization means fewer constraints on how
employees do their work.
 Mechanistic and Organic Structures
• Mechanistic Organization – An organizational design
that’s rigid and tightly controlled.
• Organic Organization – An organizational design that’s
highly adaptive and flexible.
Mechanistic Organic

• High specialization • Cross-functional teams

• Rigid departmentalization • Cross-hierarchical teams

• Clear chain of command • Free flow of information

• Narrow spans of control • Wide spans of control

• Centralization • Decentralization

• High formalization • Low formalization

Contingency Factors Affecting Structural
Choice

• Strategy and Structure

• Changes in corporate strategy should lead to changes in an organization’s
structure that support the strategy.
• Certain structural designs work best with different organizational strategies.
• The organic structure works well for organizations pursuing meaningful and unique
innovations.
• The mechanistic organization works best for companies wanting to tightly control
costs.
Contingency Factors

• Size and Structure – As an organization grows larger, its structure

tends to change from organic to mechanistic with increased
specialization, departmentalization, centralization, and rules/regulations.
• Technology and Structure
• Organizations adapt their structures to their technology.
• Woodward’s classification of firms based on the complexity of the technology
employed:
• Unit production of single units or small batches.
• Mass production of large batches of output.
• Process production in continuous process of outputs.
• Environmental Uncertainty and Structure
• Mechanistic organizational structures tend to be most effective in stable and
simple environments.
• The flexibility of organic organizational structures is better suited for dynamic
and complex environments.
Woodward’s Findings on Technology and
Structure
blank Unit Production Mass Production Process Production

Structural Low vertical Moderate vertical

characteristics: differentiation differentiation High vertical differentiation

Low horizontal High horizontal

blank differentiation differentiation Low horizontal differentiation

blank Low formalization High formalization Low formalization

Most effective
structure: Organic Mechanistic Organic
Traditional Organizational Designs

• Simple Structure – An organizational design with low departmentalization,

wide spans of control, centralized authority, and little formalization.

• Functional Structure – An organizational design that groups together similar

or related occupational specialties.

• Divisional Structure – An organizational structure made up of separate,

semiautonomous units or divisions.
Traditional
organizational
design
Contemporary Organizational Designs
• Team Structure – An organizational structure in which the entire organization is made
up of work teams.
• Matrix Structure – An organizational structure that assigns specialists from different
functional departments to work on one or more projects.
• Project Structure – An organizational structure in which employees continuously work
on projects.
• Boundary less Organization – An organization whose design is not defined by, or
limited to, the horizontal, vertical, or external boundaries imposed by a predefined
structure.
• Virtual Organization – An organization that consists of a small core of full-time
employees and outside specialists temporarily hired as needed to work on projects.
• Network Organization – An organization that uses its own employees to do some work
activities and networks of outside suppliers to provide other needed product components
or work processes.
• Learning Organization – An organization that has developed the capacity to
continuously learn, adapt, and change.
1. Simple structure

Owner Manager

Production Finance
Marketing Department
Department Department
Workers
Workers Workers
Advantages and Disadvantages of Simple
structure
Advantages Disadvantages
• The owner exercise direct control. • It is not suitable for complex
Hierarchy is minimal situation
• Decision making is speedy • There is no division of work
• It is flexible and Dynamic
• Professionalism is lacking
• Motivation of the owner is high
• Authority and responsibility is
• Personal relationships are developed
not clear among subordinates
with suppliers, employees, and
customers through direct • There is poor motivation
communication
2. Functional Structure

Chief Executive Officer

Production Marketing Finance R&D HR

Department Department Department Department Department
Advantages and Disadvantages of
Functional Structure
Advantages Disadvantages
• There is a clear definition of responsibility, • Managers are overburden with
authority, roles and tasks. Functional
expertise is developed routine matters
• Efficiency is achieved through specialization. • Coordination is poor between
Professionalism is developed
functions
• There is direct supervision and control by
chief executive. • Functional goals are emphasized
• Career development of functional manager is only
facilitated
• It is simple and inexpensive • Conflicts between functions
• Delegation of authority is possible • Decision delay
3. Multi Divisional Structure

Chief Executive Officer

Division B
Division A (Food) (Electronic)

Every Division has functional managers

Advantages and disadvantages of
multidivisional structure
Advantages
• Effective management of diversity
• It tailors structure to needs of markets,
customers, products, and areas.
• It is decentralized
• Suitable for multi-product business
• Strategic control is easy
• It is flexible
• It facilitates performance measurement
of divisions
Disadvantages
• Conflicts arises between divisions
due to poor communication
• Lack of coordination among them
• Problem in resource allocation
• Organizational complexity may
increase due to multiple divisions.
• It is costly due to duplication of
activities
4. Strategic Business Unit (SBU) Structure

Chief Executive Officer

General Manager General Manage General Manager

(SBU-1) (SBU-2) (SBU-3)

Automobile
Clothes Hospital

Textile Medicine Electronic

Advantages and Disadvantages of SBU
structure
Advantages
• Maintain coordination between
divisions with similar product lines
having similar strategic concerns
• Accountability for performance of
SBU is clear
• Management development is
facilitated within SBU
• It brings efficiency
Disadvantages
• It creates extra layers of
management in the organization
• Conflicts may arise in resource
allocation
• Controlling may be complex
• Cost may increase due to extra
layers of management
 5. Holding Company Structure

Present Company/Head Office

Company B
Company D
Wholly Owned
90% Owned

Company A
Company C
Wholly Owned
25% Owned
Advantages and Disadvantages of Holding
Company Structure
Advantages
• Flexibility and independency
• Easy for divestment
• Business risk can be allocated to
subsidiary company
• The cost burden decreases due to
allocation of overhead to subsidiaries.
• The holding company concentrates itself
in financial control only
• The subsidiary company can address their
problems quickly
Disadvantages
• There may be lack of
coordination among subsidiaries
• There is always risk involves in
subsidiary
• There is duplication of efforts
and resources
• There may be lack of skills at the
centre to assist subsidiaries.
 6. Project Based Structure

Chief Executive Officer

Manager Project A Manager Project B Manager Project C

Admin Admin
Admin
Finance Finance Finance

Design Design Design

Construction Construction Construction

Project based structure

Advantages Disadvantages
• This structure is focuses on project • There is duplication of resources
objectives and efforts
• There is clarity of authority and • There is lack of job security for
responsibility
employees. Therefore
• There is flexibility in operation commitment of employees to
• Resource can be availed as and when project can be poor.
necessary
• Communications is effective within
the project
7. Matrix Structure
Matrix structure
Advantages
• It facilitates quick environmental
adaptation
• There is flexibility organization wide.
• Efficiency in utilization of resources is
realized
• Effective use of specialized human
resources is done
• There is increased motivation,
commitment and communication
• Creativity and quality decisions
Disadvantages
• Decision making is slower
• There is confusion and contradiction in policies
• There are two bosses for one employees.
Functional manager and project manager. Dual
channel of authority and control is present
• There is duplication of efforts, dilution of
priorities and loss of accountability
• It is costly and difficult to implement. It is
complex
• Conflicts arise due to unclear roles and
responsibilities.
 8. Team based structure
CEO

Operation Marketing Finance HR R&D

Mixed knowledge

Team B
Team A
Team based structure

Advantages Disadvantages
• Members of the team work • Team may duplicate the efforts
collectively to achieve team objectives of departments
• Team has authority to make decisions
• Team effectiveness is situational
• There is no rigid hierarchy
• Conflicts may arise between
• Employee talents and skills are better
utilized team and department
• Performance evaluation is done by • Teams may work as islands.
members themselves
• Productivity and satisfaction is high
9. Network structure
Packagers
Suppliers

Designers

Corporate
Headquarter
Distributors

Manufacturers
Advertising
Agencies
Network Structure
Advantages
• Provides flexibility to adopt to
changing environment
• Takes advantages of efficiency
of expert firms through
outsourcing
• Allows concentration in
distinctive competencies
Disadvantages
• Too many partners cause
conflicts
• Information sharing with
networked firms can create
competitors
• Problem in technology
Multinational Company Structure
• International division structure: Under international
division structure, the activities of a multinational
company are divided into domestic and international
divisions.
• International subsidiaries: Under international
subsidiaries, the parent company has a large number of
subsidiaries around the world.
• Global product company: Under global product
company, different product divisions are created.
• Transnational corporations: A transnational corporation
has its headquarters in one country and has offices or
production units in several other countries.
Contemporary Organizational Designs
Organizing for Collaboration

• Internal collaboration
– Cross-functional team – A work team composed of individuals from various
functional specialties.
– Task force (or ad hoc committee) – A temporary committee or team formed
to tackle a specific short-term problem affecting several departments.
• External Collaboration
- Open Innovation – Opening up the search for new ideas beyond the
organization’s boundaries and allowing innovations to easily transfer
inward and outward.
- Strategic Partnerships – Collaborative relationships between two or
more organizations in which they combine their resources and
capabilities for some business purpose.
Today’s Organizational Design Challenges
• Keeping Employees Connected – Mobile computing and communication
technology have given organizations and employees ways to stay connected
and to be more productive.
– E-mail, calendars, wireless networks, corporate databases, video conferences
and web cams.
• Managing Global Structural Issues
– When designing or changing structure, managers may need to think about the
cultural implications of certain design elements.
– Formalization may be more important in less economically developed
countries and less important in more economically developed countries where
employees may have higher levels of professional education and skills.
1. Describe six key elements in organizational design.

• The key elements in organizational design are:

• Work specialization
• Chain of command
• Span of control
• Departmentalization
• Centralization-decentralization
• Formalization
2. Contrast mechanistic and organic structures.
• Mechanistic organization – A rigid and tightly controlled structure.
• Organic organization – Highly adaptive and flexible.

3. Discuss the contingency factors that favor either the mechanistic model or
the organic model of organizational design.
• Structural decisions are influenced by:
• Overall strategy of the organization
• Size of the organization
• Technology use employed by the organization
• Degree of environmental uncertainty
4.Describe traditional organizational designs.
• Simple structure – Low departmentalization, wide spans of control,
authority centralized in a single person, and little formalization.
• Functional structure – Groups similar or related occupational specialties
together.
• Divisional structure – Made up of separate business units or divisions.
5. Describe contemporary organizational designs.

– Team structure – The entire organization is made up of work teams.

– Matrix structure – Assigns specialists from different functional departments
to work on one or more projects being led by project managers.
– Project structure – Employees continuously work on projects
– Virtual organization – Consists of a small core of full-time employees and
outside specialists temporarily hired as needed to work on projects.
– Network organization – Uses its own employees to do some work activities
and networks of outside suppliers to provide other needed product
components or work processes.
– Learning organization – One that has developed the capacity to
continuously learn, adapt, and change.
6. Discuss how organizations organize for collaboration.
– Internal collaborative – Structural options include cross-
functional teams, task forces, and communities of practice.
– External – Collaborative options include open innovation
and strategic partnerships.

7. Describe today’s organizational design challenges.

– The two main organizational design challenges for today
include keeping employees connected and managing global
structural issues.