CHAPTER 11

ORGANIZATIONAL
STRUCTURE
AND DESIGN
- SHISHI KUMAR PIARALAL

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 Learning Outcomes
11.1 Discuss the basic elements of organizing.
11.2 Describe the bureaucratic perspective on organizational design.
11.3 Discuss the basic forms of organizational design in the
organization.
11.4 Evaluate the situational factors influencing organizational
design.
11.5 Discuss the emerging issues in organizational design.

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 Quotes
• The organizational architecture is really that a centipede walks on
hundred legs and one or two don't count. So if I lose one or two legs,
the process will go on, the organization will go on, the growth will go
on. (Mukesh Ambani)
• I must stress here the point that I appreciate clarity, order, meaning,
structure, rationality: they are necessary to whatever provisional
stability we have, and they can be the agents of gradual and
successful change. (A. R. Ammons)
• Ambiguity is great for certain kinds of creative activities but it is the
mortal enemy of systems design (Stephan Haeckel)

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 Introduction
• Competition, convergences and changes in technology are forcing the
organization to look into its organizational structure to be more
flexible in design.
• Organizational structure describes how the total work of the
organization is divided into subunits and how these subunits are
coordinated for the organization’s goals to be achieved.
• These new forms of organizing are highly adaptive and innovative but
require more advances in managerial capabilities to operate
successfully.

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 Introduction
• Organizing
• Bureaucratic model of organizational design
• Situational influences on organizational design
• Basic organizational forms
• Recent developments in organizational design

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 Basic Elements of Organizing
• Job specialization
• Departmentalization
• Reporting relationship
• Assigning authority
• Coordination
• Delegation
• Centralization
• Span of management/control

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 Job Specialization
Advantages
• Improvement in productivity.
• Straightforward, faster and efficient due to repetition of the tasks.
• Independent and requires less supervision .

Disadvantages
• Boredom from doing the same job.
• Development and career advancement are limited.

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 Departmentalization/Organisation Structure
• Functional structure
• Divisional structure
- Product
- Customer
- Geography (Location)
* Matrix structure
• Team structure
• Network/Virtual structure

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 Divisional Structure
• Product
• Geographic location
• Customer/Market

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 Functional Departmentalization
Exhibit 11.1: Functional Departmentalization

FACTORY
MANAGER

MANAGER OF
MANAGER OF MANAGER OF MANAGER OF MANAGER OF MANAGER OF
HUMAN
PRODUCTION FINANCE SALES ENGINEERING LOGISTIC
RESOURCE

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 Functional Structure
Advantages
• Pooling of specialists enhances coordination and control
• Centralized decision making enhances an organizational perspective
across functions
• Efficient use of managerial and technical talent
• Career paths and professional development in specialized areas are
facilitated

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 Functional Structure
Disadvantages
• Differences in functional area orientation impede communication and
coordination
• Tendency for specialists to develop short-term perspective and overly
narrow functional orientation
• Functional area conflicts may overburden top level decision makers
• Difficult to establish uniform performance standards

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Product Departmentalization

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Customer Departmentalization

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Geographic Departmentalization

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 Reporting relationship
• Chain of Command
• Span of Control or Management
• Tall versus Flat Organization

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Tall Organization

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Flat Organization

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 Coordination
• Structural techniques
• Managing chain of command or hierarchy
• Liaison Roles
• Task Force
• Integrating Departments
• Electronic coordination

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 Organization Structures
• Functional
• Divisional
- product
- geographic location
- customer
• Matrix
• Team
• Network

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 Matrix structure
• Combines both functional & divisional structures
• Set up for projects, product development or problem solving
Advantages
1. Easy & fast to set up
2. Less costly
3. Can adapt to environment
Disadvantages
4. Goes against unity of command
5. Tussle of power
6. conflicts
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 Organisation Design
1. Bureaucratic/Mechanistic
2. Adaptive/Organic

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 Bureaucratic/Mechanistic Model of Organizational
Design – 7 Elements
• Recruiting of people in the organization
• Career promotion within the organization
• Continuous hierarchy where each level is subject to control by the level above it.
• Efficiency and effectiveness in the division of labour
• Formal rules and procedures such as expected behaviour and decisions in jobs applied
fairly and uniformly to the all employees regardless of position.
• All the rules, procedures and written guidelines should be recorded in writing and kept for
historical record (formalisation)
• The organization should be managed and supervised by a professional manager instead of
the owner of the organization.
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Recruiting of people in the organization
• to carry the out the jobs well, based on competency, such as technical training or
educational qualifications—not recruiting people because of family or political
connections
Career promotion within the organization
• promotions are based on ability in demonstrated performance. The manager in
charge—not the owners—decide whether the employees are entitled to promotions
Continuous hierarchy where each level is subject to control by the level above it.
• Each position in the hierarchy exists in its own right and job holders have no right to
particular positions. High-level employees have the right to give commands, take
action and make decisions regarding their subordinates.

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Efficiency and effectiveness in the division of labour
• to increase the efficiency and effectiveness in the division of labor in
terms of tasks, responsibilities and authority given, which are clearly
defined to avoid misunderstandings and conflicts
Formal rules and procedures such as expected behaviour and decisions
in jobs applied fairly and uniformly to the all employees regardless of
position
• the formal rules and procedures, such as expected behavior and
decision-making in jobs, is applied fairly and uniformly to all
employees regardless of position
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All the rules, procedures and written guidelines should be recorded in
writing and kept for historical record

The organization should be managed and supervised by a professional

manager instead of the owner of the organization

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 Bureaucratic Model of Organizational
Design - Advantages
• Great control
• Strategic decision making is fast
• Job specialization
• Economies of scale
• Higher efficiency, proficiency and productivity

• Best-practices

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Great control - over organizational strategy decisions , works best for
managers who have a command-and-control style of managing
Strategic decision making is fast because there are fewer people
involved in the approval process
Job specialization and best-practices are normally highlights in
organizations with bureaucratic structures, which leads to economies
of scale, as employees’ work is consistently completed with higher
efficiency, proficiency and productivity

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Bureaucratic/Mechanistic Model of Organizational
Design - Disadvantages
• Discourages creativity and innovation in the organization
• Slow decisions about procedural changes
• Repetitive jobs
• Increased likelihood of employees resigning
• Can cause among employees discouragement, feelings of
helplessness, passivity, and even indifference to organizational goals,
due to the centralized power structure in the organization

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• some disadvantages with bureaucratic structures are that it can discourage
creativity and innovation in the organization, and that changes in procedure
must move through the chain of command for approval, which leads to slow
decisions
• as a result, the organization will be less able to adapt to changing conditions in
the marketplace and industry, and that leads to a risk of being irrelevant within
the own industry
• Also employees may receive less satisfaction from their jobs due to
repetitiveness, which can increase the rate of employee resignations
• employees may also feel discouraged, helpless, passive and even indifferent to
organization goals due to the centralized power structure in the organization

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 Organic Design
• Adaptive to uncertainty
• Focus on innovation
• Flat structure
• Decentralisation – employee participation
• Examples – software, handphone, computer, etc.

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 Situational Influences on Organizational
Design
• Core technology – unit/small batch, large/mass production &
continuous process production
• Environment
• Organization Size
• Life Cycle
• Human resources
• Strategy

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 Core Technology
• Technology used, such as equipment, techniques and systems, in the
organization can greatly affect efficiency and costs. According to
research, the correct structure of organization and technology, used
in combination, is very important to the success of the organization.
There are three basic forms of core technology suggested by Joan
Woodward that are required by the organization in the process of
transforming inputs (materials and labor) into outputs (products or
services) :

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• Small batch or unit technology refers to products that produce or are
manufactured in small quantity to fulfill customer requirements or customization.
Examples of small-batch technology are tailor shops, art work, printing presses
and photography studios.
• Large batch or mass production technology refers to uniform goods that are
produced in high volume using assembly line operations and automated machines.
Examples of mass production are automobiles, consumer electronic products and
computers.
• Continuous-process technology refers to the process of transforming raw materials
into finished products using highly automated system production processes with
minimal involvement of the workforce. Some examples of continuous process
technology are chemical plants, petroleum refineries and food processors.

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 Environment
• The type of design an organization is likely to adopt is influenced by
the environment where the organization is operating. The external
environmental factors that influence the organization are social‐
cultural, economic, technological, legal‐political and natural. There is
a relationship between environment and design, and two kinds of
organizational design:
1) mechanistic/bureaucratic design
2) organic design

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Low environmental uncertainty
• Mechanistic design is a more rigid and bureaucratic form of organizational
design that is most suitable in stable environments. Examples of
organizations that have stable environments include manufacturers of staple
items such as paper, soap, cleaning products and fast food chain
restaurants.
High environmental uncertainty
• Organic design is a fluid and flexible design that is most suitable in rapidly
changing and uncertain environments. Examples of organizations that
operate in this environment are manufacturers of electronics and mobile
phones.
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Differences between Mechanistic (M) & Organic (O) Designs
• Formalisation
• Centralisation
• Complexity

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 Organisation Size
• Organization size refers to how large the organization is, reflected by
the number of full-time employees employed by the organization.
The relationship between organization size and structure is supported
by studies carried out by a few researchers. There is considerable
historical evidence that an organizational size of 2000 employees or
more significantly affects its structure. The organization size that
affects the design of organizations can be divided into larger size and
small size.

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Larger organization
• Normally with 2000 or more full-time employees. The basic design of the
organization will involve highly specialized tasks with standard operating
procedures and detailed rules and regulations. Large organizations provide
the skills, economies of scale efficiency and suitable mechanistic systems.
Small organization
• Normally with a very small number of full-time employees such as in a retail
store, consulting firm or restaurant. Small organizations adopt flexible
designs or organic systems and have flat structures. Small organization size
is normally easy to adapt to customer requirement changes.

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 Organisation Life Cycle
• The life cycle of an organization, industry, and product can be
essential to organizational design. Organizations will progress in their
business or activities through stages that known as life cycle. Most
organizations will pass through four stages of the life cycle, namely
birth, youth, midlife and maturity.

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• Birth. In the birth stage, an organization is just starting out and
requires capital. The young organization does not yet have a formal
structure and there is not much delegation of authority because the
owner does everything.
• Youth: In this phase, the organization is trying to grow and needs
resources for expansion. In this phase the emphasis is on becoming
larger. During this stage the organization adopts something of an
organic structure, whereby a formal structure is designed and some
delegation of authority occurs.

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• Midlife: This phase occurs when the organization has achieved a high level of
success. The organization is enjoying gradual growth followed by stability. The
management level increases and appears in the chain of command, and the owner
has difficulty maintaining control. The owner must learn to decentralize authority
and separate tasks for his organization in order to survive and thrive during the
growth stage. In this phase the organization becomes more mechanistic in structure
because the organization becomes older
• Maturity: In the maturity phase the organization becomes less innovative, less
interested in expanding and more likely to maintain a stable and secure
environment. The organization emphasizes maximizing efficiency and profitability
and tends to become less innovative. At maturity, firms will demonstrate significantly
more concern for internal efficiency, establish more control mechanisms and
processes and become very bureaucratic.
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 Basic Organizational Forms
• Functional or U-Form Design
• Conglomerate or H-Form Design
• Divisional or M-Form Design
• Matrix Design
• Hybrid Design

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Functional or U-Form Design
• design groups similar or related workers based on expertise, skills and resources, for the
same activities.
• advantages of this design are that employees’ specialization in specific areas increases and
critical decision making is centralized to one person
• disadvantages of functional design are that it sometimes cannot absorb the complexity of
various jobs well, and operational problems can divert attention from strategic and
competitive issues; the coordination and communication across departments may be
limited because various departments are working separately and this can cause low
operating efficiency in the organization
• for example, the Revlon organization that is involved in cosmetic products has organized
the members and units in the organization according to the functions, such as finance,
operations, product research and development and operations

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• Conglomerate or H-Form Design consists of a combination of two more corporations engaged
in unrelated businesses that fall under one corporate group with a general manager on top for
each business
• the advantage of conglomerate is that the coordination is based on the allocation of resources
across companies in the portfolio; the organizations can use the advantages of internal capital
markets by allocating capital more effectively, for example, capital required in one business can
be taken from another business entity; the performance of each business unit, in terms of loss
and profit, is the responsibility of each individual manager
• the disadvantage is that extra layers of management increases costs for the organization;
managing, comparing and integrating activities among unrelated operations is difficult and can
result in a lack of focus
• this design is used by Samsung electronics company of Korea, which has separated the
semiconductors, telecommunications, appliances and media businesses, with a chief executive
officer on top

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Divisional or M-Form Design normally is used in larger companies to manage diversification while
controlling bureaucratic costs and control-loss problems
• this type of design is based on multiple businesses in related areas’ operations that group together people
who work on the same product, serve similar customers and are located in the same area
• the advantage of divisional design is that the managers will focus more on results through performance
measures, because they are responsible for results; more efficient in coordinating work across different
divisions and there is more flexibility to respond to the changes in market needs; a simpler process in
changing the size of the business by either adding or removing divisions
• the disadvantage is that the communication is slow because employees in different divisions are not
working together; costly because of its size and scope and requires more qualified managers for each
division; normally emphasis on divisional more than organizational goals, which results in duplication of
resources and efforts
• for example, the Malaysia conglomerate Sime Darby Berhad organized its business into five main divisions:
Sime Darby Plantations, property, industrial, motors, energy and utilities., whereby a chief executive
officer oversees his own division and is completely responsible for the success or failure of the division

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• Matrix Design is a hybrid design of which two or more forms of departmentalization
are used together
• the most common matrix combines the product and functional forms of
departmentalization used in large multinational companies
• advantages of matrix design: creates a more horizontal structure and the combination
of all the other designs and allows team members to share expertise and information
faster across task boundaries for achieving common goals; allows for specialization that
can increase depth of knowledge and allows individuals to be in a specific sector or
segment
• disadvantage of the matrix design: an increase in the complexity of the chain of
command, because of the differentiation between functional managers and product
managers, which can be confusing for employees as they attempt to understand who is
next in the chain of command.

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Hybrid Design
• operational in the public and private sectors
• some organizations use a design that represents a hybrid of two or more of the common forms of organizational design based on
strategy and business needs
• organizational formats that organizations can combine include divisional, functional, geographic and matrix
• advantages of the hybrid design
- the dual focus, such as combining product and geographic components, may help organizations better
meet customer needs.; allows various departments to enjoy a greater degree of authority and
responsibility within their individual areas; emphasizes giving employees the flexibility of working in areas
in which they are experts and creating a sense of unity among the employees of the organization to ensure that they deliver
good
performance for the benefit of the organization
- managers are responsible for decisions, reporting and goal-setting based on their areas of expertise, which can lead to more
precision and potential business growth.
• disadvantage of the hybrid design is that it creates a dual reporting system, for example, employees working in accounting will
have to report information to separate managers spread among the different product lines in the organization.

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 Recent Developments In Organizational
Design
• The team organization
• The virtual organization
• The learning organization

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• Team organization is one of the newest organizational designs developed in the 20th century, and spreading rapidly
• the team organization or work groups can define the entire organization
• a team organization is a design that is made up of teams, and the teams work for a common objective that requires coordination, interaction,
and integration among the members of the team
Benefits of team organization
- can assist in recognizing problems in the organization more precisely and discovering appropriate
resolutions to problems, and efficient ways to incorporate staffs in the management level, to jointly use
information and communication in the firm, and to create force and synergy in the firm and improve creativeness
- enables people to collaborate, improve individual skills, participate, enjoy their accomplishments, offer constructive feedback,
and improve knowledge and abilities
- the teams have the authority to make decisions quickly, without a chain of command, and must perform well because they are held accountable
for their performance.
- teams can work in finding the best way to perform their tasks effectively and efficiently.
Disadvantages of team organisation
- the complexities of team organization can create problems; for example, team members sometimes have to deal with conflicting loyalties
between their team and functional assignments.
- ultimately, in team organizations the project always takes time and the quality of results depend on how the team was managed and how well
team members work as group

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Virtual Organization
• The changes in markets, competition, and technology in global business have contributed to the growth of the virtual organization.
• The Virtual Organization conducts its business by using technology to collect and distribute information. It identifies customers’
specific requirements and needs and delivers products and services through a network of specialists.
• It uses a combination of networks in which many organizations share skills, costs, capabilities, markets and customers. For example
the entertainment sector has combined with consumer electronics, information technology, publishing and communications sectors,
to convert movies, books, and software into digital form.
• This organization has little or no format structure, with a small number of permanent employees and hired specialists when a
situation requires help, rented facilities, and outsourced basic support services, when necessary.
• An advantage of virtual organization is that members of the organizations can quickly combine their efforts in terms of design,
manufacturing and processes to meet customer needs faster. The virtual organization can benefits from competitive pricing,
uninterrupted supplies, group purchasing power that can lower costs, and shared knowledge that makes it technically stronger.
• A disadvantage is that once work has been outsourced, it can be difficult to control the quality of work done by network partners.
Furthermore managerial skills are tremendously important, because managers are required to make decisions, are accountable for
decisions made, and must put together networks of independent organizations which work well together, which is especially difficult
given the temporary relationships involved. The strong interdependencies can cause organizations' boundaries to be unclear, also, as
customers, suppliers and competitors enter into cooperative agreements, something which obligates organizations to innovate.

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Learning Organization is among the most widespread and fastest-growing interventions in
organizational design
• has been applied in organizations such as Boeing, Microsoft and Apple. A learning
organization is defined as an organization that has developed the capacity to continuously
learn, adapt, and change
• the organization must have knowledgeable employees who are able to share their knowledge
with others and use it in a job environment to improve performance
• learning organizations require strong organizational cultures, with employees sharing a
common goal and working together through sharing knowledge and information
• learning organization must have a strong leadership style. Learning organizations that are
flexible, innovative and knowledgeable can beat their competitors and excel in business
• furthermore, when knowledge is transformed into new products and services, it can become
a major source of wealth creation for organizations.

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