CHAPTER : THREE

Fundamentals of Organization Structure

Contents of chapter:-
 Organization structure.

 Information processing perspective in organization structure.

 Organization design alternatives.

 Functional, divisional, and geographical designs.

 Matrix structure.

 Horizontal structure

 Modular structure.

 Hybrid structure.
Definition:-
 Organizational structure is a system used to define a
hierarchy within an organization.

 It identifies each job, its function and where it reports

to within the organization.

 This structure is developed to establish how an

organization operates and assists an organization in
obtaining its goals to allow for future growth.
There are three key components in the definition of organization
structure:

 Designates formal reporting relationships, including

the number of levels in the hierarchy and the span of
control of managers and supervisors.
 Identifies the grouping together of individuals into
departments and of departments into the total organization.
 It includes the design of systems to ensure effective
communication, coordination, and integration of efforts
across departments.
Two approaches Organizational structures:-

A centralized structure gives most of the

authority and decision-making power to the
team at the top.

A decentralized structure distributes

authority and decision-making power at
lower levels, which might include departments,
groups, or business units.
 Organization chart:
The organization chart is the visual representation of a whole
set of underlying activities and processes in an organization.

 Organization structure is reflected in the organization chart.

 It isn’t possible to see the internal structure of an

organization the way we might see its manufacturing tools,
offices, or products.

 Organization chart shows how employees going about

their duties, performing different tasks, and working in
different locations
 Con`t----
• Organizational chart shows the various parts of
an organization, how they are interrelated, and
how each position and department fits into the
whole .
• The concept of an organization chart, showing
what positions exist, how they are grouped, and
who reports to whom, has been around for
centuries
Information Processing Perspective in Organization Structure:-
 The organization should be designed to provide both
vertical and horizontal information flow as necessary
to accomplish the organization’s overall
goals.

 If the structure doesn’t fit the information

requirements of the organization, people either will
have too little information or will spend time
processing information that is not vital.
Vertical Information Sharing:-
 Managers create information linkages to facilitate
communication and coordination among
organizational elements.
 Vertical linkages are used to coordinate activities
between the top and bottom of an organization and
are designed primarily for control of the organization.
 Employees at lower levels should carry out activities
consistent with top-level goals, and top executives
must be informed of activities and accomplishments
at the lower levels.
 Organizations may use any of a variety of structural
devices to achieve vertical linkage, including
hierarchical referral, rules, plans, and formal
management information systems.
Hierarchical Referral:
 The first vertical device is the hierarchy, or
chain of command, which is illustrated by the
vertical lines.
 A problem arises that employees don’t know
how to solve, it can be referred up to the next
level in the hierarchy.
 When the problem is solved, the answer is
passed back down to lower levels
Rules and Plans:-
 Is Rules and procedures that provide a standard
information source enabling employees to be coordinated
without actually communicating about every task.

 Plans also provide standing information for employees. The

most widely used plan is the budget.

 With carefully designed and communicated budget plans,

employees at lower levels can be left on their own to
perform activities within their resource allotment.
Vertical Organization Designed for Efficiency:-
Vertical structure is dominant :-
 Specialized tasks
 Strict hierarchy,
 Many rules Vertical communication and reporting
systems
 Few teams, task forces, or integrators
 Centralized decision making
Horizontal Information Sharing:-
 Horizontal linkage refers to communication and
coordination horizontally across organizational
departments.
 The following devices are structural
alternatives that can improve horizontal
coordination and information flow.
Information Systems:
 A significant method of providing
horizontal linkage in today’s organizations
is the use of cross-functional information
systems.
 Computerized information systems enable
managers or frontline workers throughout the
organization to routinely exchange
information about problems, opportunities,
activities, or decision
Task Forces:
• Liaison roles usually link only two departments.
• When linkage involves several departments, a more
complex device such as a task force is required.
• A task force is a temporary committee composed
of representatives from each organizational unit
affected by a problem.
• Each member represents the interest of a
department or division and can carry information
from the meeting back to that department.
• Typically, they are disbanded after their tasks are
accomplished.
Horizontal Organization Designed for Learning
Horizontal structure is dominant:-
 Shared tasks ,empowerment
 Relaxed hierarchy , few rules
 Horizontal communication, face-to-face
 Many teams and task forces
 Decentralized decision

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Organization design alternatives:-

•A company can be organized in a number of ways.

• It might be built around divisions, functions, geography, or

with a matrix approach
The next we will see ,

Functional, divisional, and geographical designs.

Functional Structure:-
 A functional structure is based on job functions often labeled as
departments

 Activities are grouped together by common function from the

bottom to the top of the organization.

 All engineers are located in the engineering department, and the vice
president of engineering is responsible for all engineering activities.

 The same is true in marketing, R&D, and manufacturing.

 All human knowledge and skills with respect to specific

activities are consolidated, providing a valuable depth of
knowledge for the organization.
Strengths of functional organizing:-
 Allows economies of scale within functional departments
 Enables in-depth knowledge and skill development
 Enables organization to accomplish functional goals
 Is best with only one or a few products

Weaknesses of functional organizing:-

 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
Divisional Structure:-

The term divisional structure is used here as the generic

term for what is sometimes called a product structure or
strategic business units.

With this structure, divisions can be organized according to

individual products, services, product groups, major
projects or programs, divisions, businesses, or profit centers
Strengths:- Weaknesses:-
 Suited to fast change in unstable
 Eliminates economies of scale
environment
 Leads
in functional departments
to customer satisfaction
because product responsibility and  Leads to poor coordination
contact points are clear across product lines
 Involves high coordination across
 Eliminates in-depth
functions
competence and technical
 Allows units to adapt to differences
in products, regions, customers specialization
 Best in large organizations with  Makes integration and
several products standardization across product
 Decentralizes decision making
lines difficult
Geographic Structure:
Is used when a company has multiple locations. Each location
operates independently.

 Another basis for structural grouping is the organization’s users or

customers.

 The most common structure in this category is geography. Each

region of the country may have distinct tastes and needs.

 Each geographic unit includes all functions required to produce

and market products or services in that region
Advantages:-

• It helps in exploiting local advantages.

• Places emphasis on local markets
and problems.
• It helps the company to reach close to
raw materials.

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Disadvantages:-
 Duplication of effort.
 The necessity of having a relatively large number of
managers.
 It poses serious problems of coordination and control.
 It may create gaps between head offices and branch
offices.
 It is costly to host many geographically dispersed
departments. by Berhanu T
Matrix structure:
 With a matrix structure, the company is
organized around teams assembled for
specific tasks.
 Team members usually report to more than one
person the team leader, and the supervisor for
the team member’s functional area.
 Sometimes, an organization’s structure needs to
be multi-focused in that both product and
function or product and geography are
emphasized at the same time
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 Con`t-----

The unique characteristic of the matrix organization is that both

product divisions and functional structures (horizontal and vertical)
are implemented simultaneously.

The product managers and functional managers have equal authority

within the organization, and employees report to both of them.

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•In a matrix organization structure, every employee has
two superiors.

One chain of command is functional and the other chain

of command is a project team.
Hence, matrix structure is referred to as a multi
command system, both vertical and horizontal
dimension.

by Berhanu T
Con`t----
Both dimensions of structure are permanent and balanced, with
power held equally by both functional and a project manager.
Matrix structure is suitable when organizational tasks are uncertain,
complex and highly interdependent or when an organization has
to cope with more than one function or project.
In large organizations employees from various functional
departments are from time to time assigned to one or more projects.
On completion of the project these employees revert back to their
respective departments until the next assignment to a project

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Strengths
 Achieves coordination necessary to meet dual
demands from customers
 Flexible sharing of human resources across
products
 Suited to complex decisions and frequent
changes in unstable environment
 P Best in medium-sized organizations with
multiple products
 Best in medium-sized organizations with
multiple products
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Weaknesses
 Causes participants to experience dual authority, which can
be frustrating and confusing
 Means participants need good interpersonal skills and
extensive training
 Is time consuming; involves frequent meetings and conflict
resolution sessions
 Will not work unless participants understand it.
 Requires great effort to maintain power balance.
 Best in medium-sized organizations with multiple products

by Berhanu T
Horizontal structure
 A recent approach to organizing is the horizontal
structure, which organizes employees around core
processes.
 Organizations typically shift toward a horizontal
structure during a procedure called reengineering.
 Reengineering, or business process reengineering,
basically means the redesign of a vertical organization
along its horizontal workflows and processes.
 A process refers to an organized group of related tasks
and activities that work together to transform inputs
into outputs that create value for customers.
by Berhanu T
 Con`t-----
 Re engineering changes the way managers think
about how work is done.

 Rather than focusing on narrow jobs structured into

distinct functional departments, they emphasize core
processes that cut horizontally across the organization
and involve teams of employees working together to
serve customers.

by Berhanu T
Strengths and Weaknesses of Horizontal Structure

Strengths:

 Promotes flexibility and rapid response to changes in

customer needs
 Directs the attention of everyone toward the production and
delivery of value to the customer
 Each employee has a broader view of organizational goals
 Promotes a focus on teamwork and collaboration
 Improves quality of life for employees by offering
them the opportunity to share responsibility, make
decisions, and be accountable for outcomes
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Weaknesses:
 Determining core processes is difficult and time
consuming
 Requires changes in culture, job design,
management philosophy, and information and
reward systems
 Traditional managers may balk when they have
to give up power and authority
 Requires significant training of employees
to work effectively in a horizontal team
environment
 Can limit in-depth skill development
by Berhanu T
Hybrid structure:-
 Most large organizations, in particular, often use a hybrid
structure that combines characteristics of various
approaches tailored to specific strategic needs.

 Most companies combine characteristics of functional,

divisional, geographic, horizontal, or network structures to
take advantage of the strengths of various structures
and avoid some of the weaknesses.

 Hybrid structures tend to be used in rapidly changing

environments because they offer the organization greater
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flexibility
Thank you !!

by Berhanu T