8 ORGANIZATION STRUCTURE AND DESIGN
INTENDED LEARNING OUTCOMES
By the end of the learning experience, students must be able to:
1. Identify and define the foundational concepts of organization structure, including the informal
organization.
2. Specify the basic features of the bureaucratic form of organization structure, including how it is
divided into departments.
3. Describe two key modifications of a bureaucratic structure: matrix and flat.
4. Describe the nature of outsourcing and how it influences organization structure.
5. Describe the organizational designs referred to as “horizontal structures” and “network
structures.
Organization
Organization is a collection of people working together to achieve a common purpose (or simply
a big group). It is the act of forming or establishing something. It can also refer to a system of
arrangement or order, or a structure for classifying things.
Organization Structure
Organization structure is the arrangement of people and tasks to accomplish organizational
goals where the structure is usually indicated on the organizational chart. Organizational structure refers
to how individual and team work within an organization are coordinated. To achieve organizational goals
and objectives, individual work needs to be coordinated and managed
Organizational Design
The process of creating a structure that best fits a purpose, strategy and environment. It is a
human-centered approach to improving how people work together and how companies respond to
change. It involves many different aspects of life at work, including team formations, shift patterns, lines
of reporting, decision-making procedures, communication channels, and more.
Another perspective about the relationship between organizational structure and behavior is
that structure deals with the universal problems of division of labor and integration.
A. FOUNDATIONAL CONCEPTS OF ORGANIZATIONAL STRUCTURE
Organizations are so complex that many different variables are required to describe them, similar
to describing people or machines. To get started understanding: Formal versus informal, degree of
formalization, degree of centralization, span of control, and complexity.
Formal versus Informal Structure
Formal organization structure is an official statements of reporting relationships, rules and
regulations. It is embedded in the design of the organization and is seen as the pattern that should be
followed by employees. For example, the formal organization structure tells manager how to respond to
employees for an educational leave of absence or what to do with damaged parts from vendors.
In contrast, informal organization structure is a set of unofficial working relationships that
emerges to take care of the events and transactions not covered by the formal structure.
It includes personal relations, relations and interactions of people in the organization, created
naturally, informally and unofficially. They take place in an informal way outside the framework of formal
organizational structure, respectively, the informal organizational structure crosses it horizontally,
vertically and diagonally.
Social network analysis can benefit managers by revealing if people are getting the information,
they need to perform their jobs well. The same analysis can point to which employee are in best position
to disseminate useful information to other workers.
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Degree of Formalization
The dimension of formalization is the degree to which expectations regarding the methods of
work are specified, committed to writing, and enforced. It is the extent that roles are independent of
specific personal attributes of individuals occupying the roles. Formalization tries to standardize and
regulate behavior. Formalized structures are those in which there are many written rules and regulations.
These structures control employee behavior using written rules, so that employees have little autonomy
to decide on a case-by-case basis. An advantage of formalization is that it makes employee behavior
more predictable.
Degree of Centralization
Centralization is the degree to which decision-making authority is concentrated at higher levels
in an organization. In centralized companies, many important decisions are made at higher levels of the
hierarchy, whereas in decentralized companies, decisions are made and problems are solved at lower
levels by employees who are closer to the problem in question.
Many companies find that the centralization of operations leads to inefficiencies in decision
making. For example, in the 1980s, the industrial equipment manufacturer Caterpillar suffered the
consequences of centralized decision making. At the time, all pricing decisions were made in the
corporate headquarters in Peoria, Illinois.
Decentralization helps make large organizations more democratic because more managers
throughout the company have more decision-making authority. Yet decentralization can lead to
duplication of effort and high costs.
Decentralized companies give more authority to lower-level employees, resulting in a sense of
empowerment. Decisions can be made more quickly, and employees often believe that decentralized
companies provide greater levels of procedural fairness to employees. Job candidates are more likely to
be attracted to decentralized organizations.
Span of Control
The span of control is the number of workers reporting directly to a manager. The larger the span
of control, the more freedom and independence granted to subordinates. Correspondingly, the smaller
the span of control, them more closely subordinates are supervised. It also refers to the number of
subordinates that can be managed effectively and efficiently by supervisors or managers in an
organization. Typically, it is either narrow or wide resulting in a flatter or more hierarchical organizational
structure.
In addition, special consideration should be given to the direct reports of executive and senior
management levels. Typically, the number of direct reports for these individuals are lower than
supervisors and managers as too many direct reports at these levels can complicate communication and
lengthen response time for crucial decisions.
Complexity
Complexity refers to the number of different job titles and organizational units. In a complex
organization, many of the job titles are esoteric, such as “risk analyst’, “data scientist” and “fleet
manager”. The more complex the organization, the more difficult it is to manage. Complexity typically
increases in direct proportion to size.
Organizational complexity is how multiple entities of an organization differentiate among
themselves. It refers to the number of resources that are involved in a division, project, or team. If the
size of the organizational structure or system is huge that organization is said to be complex.
Complexity can have a downside because, as an organization becomes more complex, getting
task completed may take a lot of time.
B. THE BUREAUCRATIC FORM OF ORGANIZATION
Bureaucracy is a rational, systematic, and precise form of organization, in which rules,
regulations and techniques of control are precisely defined. Bureau is a French word for “office”
indicating that bureaucracy is an organization with many offices. Bureaucracy was conceived by Max
Weber having the following characteristics:
▪ Rules and procedures controlling organizational activities
▪ A high degree of differentiation among organizational functions
▪ A high degree of job specialization
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▪ An organization of offices determined by hierarchy, with each unit reporting to a higher unit and
no unit free-floating
▪ A heavy emphasis on rules and norms to regulate behaviour
▪ Interpersonal relations characterized by impersonality in place of favouritism
▪ Selection and promotion based on merit
▪ All administrative actions recorded in writing
Although many organizations have trimmed in size, the bureaucratic form of organization has
not disappeared. Between 1983 and 2014, the number of managers, supervisors, and support staff in the
U.S. workforce increased by 90 percent. Employment in other occupations grew by less than 40 percent.
Other countries also experienced a growth in managerial workers.
The bureaucratic organization is very organized with a high degree of formality in the way it
operates. Organizational charts generally exist for every department, and decisions are made through an
organized process. A strict command and control structure are present at all times. Bureaucracies are
meant to be orderly, fair and highly efficient.
Bureaucratic organizational structures have many layers of management, cascading down from
senior executives to regional managers to departmental managers - all the way down to shift supervisors
who work alongside frontline employees. So, authority is centered at the top, and information generally
flows from the top down. For example, a senior executive may implement a new policy stating that
employees must have all overtime approved by management before actually working the overtime. The
new policy will go from the desk of the senior executive all the way down to the frontline employees.
In visualizing a typical bureaucracy, it appears that one person is in charge of every function,
including running the enterprise. In reality, authority is shared to some extent in top-level positions. A
dual-executive team was more frequent for a while in major corporations. A company founder would
often divest day-to-day responsibilities to another executive, so the founder could concentrate more on
strategy and building relationships with the outside world.
The Contribution of Bureaucracy
Bureaucratic forms of organizations have persisted because, if used properly, they make possible
large-scale accomplishments that cannot be achieved by small groups of people working independently.
The basin defence of bureaucracy is that they form a large, needed tasks in a predictable fashion.
Bureaucracy is important also for the emotional reason that it fulfils our deep need for order and
security. Another positive role played by a bureaucracy is to serve as a system of checks and balances.
The positive outcome took place because the specialists in both settings recognized that making
bureaucracy work enabled them and their colleagues to maintain a sense of control of essential tasks.
The basic characteristics of a bureaucracy are:
• Rules and job responsibilities are written down and clearly stated
• Clear hierarchy of power is concentrated among a few high-ranking managers
• Appointments and promotions of officers are formal because these officers will be held
accountable
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• Employees are hired based on their skills and knowledge, not because of favoritism or luck
• Salaries are tied to a pay-grade system
• Bureaucracies are unable or unwilling to adapt to changing conditions quickly
• Micro-managing is common
Potential Dysfunctions of a Bureaucracy
Not all bureaucracies work like Max Weber intended. The major problem is that members of the
bureaucracy often carry out its characteristics to the extreme. Organizations that rely heavily on formal
controls to direct people sometimes suppress initiative and decision making at lower levels of
management. Too many controls and too many reviews of decisions can also lower productivity. A
bureaucracy is subject to rigidity in handling people and problems. Although a bureaucratic design is
supposed to hold people accountable for results, some people in large bureaucracies tend to “pass the
buck,” or claim that a particular problem is the responsibility of another department or person. A
bureaucracy’s well-intended rules and regulations sometimes create inconvenience and inefficiency.
A major problem within large bureaucracies is that they are clumsy and slow, often prompting
companies to go outside when they need something done in a hurry, such as developing a prototype of
a new product. (As described later, almost all bureaucracies have built-in structures to overcome the
slowness problem.)
Another frequent problem is a bureaucracy is high frustration accompanied by low satisfaction.
The sources of these negative feelings include the red tape, slow decision making, and an individual’s
limited influence on how well the organizations performs.
Three Types of Departmentalization
Departmentalization is the process of subdividing work into departments. It capitalizes upon the
classis bureaucratic principle of specialization and also helps avoids confusion.
Functional Departmentalization
Functional departmentalization refers to grouping of people according to their expertise.
Bureaucracies are almost always organized into functional departments. The advantages and
disadvantages of functional departmentalization follow those bureaucracy. Silo is a term frequently used
to point to disadvantages of functional departmentalization. It implies that the people within department
remain isolated and shut off from the rest of organization, instead of building working relationships with
people in other departments. Kevin Elkenberry gives two examples of how the silo mentally can be
overcome for the good of organization:
▪ A sales representative builds relationship with other departments as a way to better meet a customer
need.
▪ A middle manager in information technology shares her budget with another department that is
short in funds.
Product and Service Departmentalization
Product/Service departmentalization refers to the arrangement of departments according to
products and services they provide. When specific products or services are so important that they almost
become independent companies, product departmentalization makes sense. One purpose of a product
and service organization is to push decision making further down into the organization. Another purpose
of the structure is to help a company be nimble, while at the same time encouraging cooperation among
various product divisions.
Lines and Staff Units
Line and staff groups are present in most forms of departmentalization, yet the organizational
chart rarely makes such designations. The distinction between line and staffs is often blurred. (Line
groups are responsible for the primary purpose of the firm, whereas staff group are responsible for the
secondary purposes).
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FIGURE 14-3 Product Organization Structure at Caterpillar Corporation
Notes: 1. The organization structure at Caterpillar is not a pure product structure because four functional
groups also report to the CEO: legal & secretary, customer & dealer support, procurement, and human
resources. 2. Organization structures are subject to frequent change, and the above structure might not
be exactly the one used today.
C. KEY MODIFICATIONS OF THE BUREAUCRATIC STRUCTURE
To overcome several disadvantages of the bureaucratic and functional forms of organization,
several other functions have developed. Task forces and projects and projects follow a similar departure
from bureaucracy. Here we describe the matrix organizations structure and the flat structure as
organization arrangements.
Matrix Organization Structure
Matrix structure is composed of project structure superimposed on a functional structure. It is a
combination of two or more types of organizational structures. Usually, there are two chains of
command, where project team members have two bosses or managers. Project is a temporary group of
specialists working together under one manager to accomplish a fixed objective. Matrix refers to the
feature of something else, similar to a grid with numbers in the cells. (see Figure 14-4)
FIGURE 14-4 Matrix Organization in an Electronics Company
In a matrix organization, a project structure is superimposed on a functional structure.
The distinguishing feature of matrix organization is the responsibility of the project or program
manager to achieve results through employees who also report directly to another manager or have dual
reporting responsibilities. For example, a person assigned to a project manager and the manager in his
or her regular department.
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A major purpose of the matrix organization is to allow the firm to take advantage of new
opportunities and solve special problems. A key advantage of the matrix organization is its ability to
implement important projects and demands intense, sustained attention for a limited time. Matrix
organization highlights the importance of projects structure because projects are embedded in the
Matrix.
Flat Organization Structure and Downsizing
Flat organizational structure is defined as an entity where the top management is in direct
contact with the front-line salespeople, employees at the floor levels as well as the customers. In such an
organization leadership is decentralized, and there is no role and responsibility of the mid-management
levels. The purpose of a flat organizational structure is to have very little hierarchy so that everyone
becomes adept at handling whatever work comes their way.
In a flat organizational structure, the manager has more responsibility as the number
of people directly supervised by him is significant and these people at lower levels rely on him for support,
guidance, help, and direction. This type of structure is created to empower employees so that they can
take independent decisions. This structure is best for small and start-up organizations as it is designed to
minimize bureaucracy.
Flat structure is less bureaucratic for two reasons. First, fewer managers in this form of
organization are available to review the decision of other people. Second, because the chain of command
is shorter, there is less concern about the authority differences among people.
Small and medium sized business have held onto their traditionally flat structures, which are
usually imposed by not having enough money to build management depth. Flatter organization
structures create by downsizing lead to greater organizational efficiency. A controversial aspect of flat
structures created by downsizing is that they result in substantial human suffering.
D. OUTSOURCING AS AN ORGANIZATIONAL ARRANGEMENT
A widespread practice among organizations of all types and sizes is to outsource, or have work
performed for them by other organizations. When the work is performed by a company in an overseas
location, the process is often referred to as offshoring. Outsourcing, including offshoring is an integral
part of the globalization of business.
Outsourcing is linked to organization structure because it is a method of dividing work. Another
way of framing outsourcing is that it is a vast network of interconnected enterprises that depend on one
another for services. By outsourcing, a company can reduce its need for employees and physical assets
and reduce payroll costs.
The Scope of Outsourcing
Outsourcing has advanced so far that some companies do little more than develop an idea for a
product, with product development, manufacturing, and marketing being done by other firms.
Performing outsourced work for other companies has become an industry of its own, including
companies that fulfil orders for online stores.
Outsourcing can bring big benefits to your business, but there are significant risks and
challenges when negotiating and managing outsourcing relationships.
In information technology, an outsourcing initiative with a technology provider can involve a
range of operations, from the entirety of the IT function to discrete, easily defined components, such as
disaster recovery, network services, software development or QA testing.
Even activities as complex as the research and design of products are sometimes outsourced. A
company might design its own core product and have noncore products designed by another firm. The
purpose of outsourcing design is to have productive designed at high speed and low cost by a smaller
firm.
A key implication of outsourcing as an organizational design strategy is that people over whom
you have no direct control perform work for company. Outsourcing has led to sweatshops as smaller
firms compete to offer to lowest possible price for manufacturing goods. Outsourcing can therefore
create ethical dilemmas.
Another key human aspect of outsourcing is that it breeds conflict over high functions should be
outsourced. The opponents of a large-scale outsourcing are making gains in the form of reshoring, the
bringing of jobs back to a country that outsourced these jobs previously.
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Time Zone Advantages of Outsourcing
While one group is off duty, another group in a different time zone in a distant country prepares
the input the first group will need. A more complex possibility is for work to be performed in sequence
across three times zones. A group in one time zone collects data for a key report and then transmits the
data to a group in the next time zone that translates the data into power point slides. The slides and back
up data are then transmitted to a third group in another time zone that prepares the final report.
Businesses consider outsourcing for cost savings and increased organizational efficiency.
Outsourcing to Homes Instead of Offshoring
Offshoring has its problem, such as the language barrier of the call center workers not speaking
English in a manner comprehensible by all English-speaking people. The work home agents are carefully
monitored, and background noise such as dogs barking and plating children is usually not allowed.
Nevertheless, the appeal of working at home is strong for so many people that the industry is expanding
rapidly.
Offshoring is often criticized for transferring jobs to other countries. Other risks include
geopolitical risk, language differences and poor communication etc.
Often companies don't have in-house expertise for certain activities. In these cases, it is more
efficient to outsource, and resulting products and services tend to be of higher quality when provided by
outsourcing vendors. Usually companies outsource to take advantage of specialized skills, cost
efficiencies and labor flexibility.
E. LEADING-EDGE ORGANIZATION STRUCTURES
Spin-offs from traditional organization structures continue to emerge as organizations strive to
improve their efficiency and effectiveness. A major reason for these changes is that traditional
hierarchical organization can be too cumbersome to respond to changes in the environment. Two
leading- edge forms are the horizontal structure and the network organization.
Horizontal Structure
Horizontal structure is the arrangement of work by teams that are responsible for accomplishing
a process. The virtual organization is thereby similar to the establishment of work teams. Instead of
focusing on a specialized task, all team members focus on achieving the purpose of all activities.
One approach to switching from task emphasis to a process emphasis on horizontal structure is
through business process reengineering, radical redesign of work to achieve substantial improvements
in performance. The emphasis is on uncovering wasted steps, such as people handing off documents to
one another to obtain approval. Eliminating workers who perform nonessential tasks is another goal of
reengineering.
As a result of reengineering, work is usually organized horizontally rather than vertically. The
people in charge of the process act as a team leader who guide the team toward the completion of an
important core process such as new product development or filling a complicated order. A caution to
managers and prospective managers is to recognize that the push toward the horizontal structures and
reengineering should not be embraced without qualification.
FIGURE 14-5 A Horizontal Structure
In a horizontal structure, even though specialists are assigned to the team, they are expected to
understand one another’s tasks and perform some of those tasks as needed.
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The Network Structure
Network structure is a temporary association of otherwise independent firms that are linked
technologies to share expenses, employee talents, and access to one another market. A pure network
structure would have their corporate headquarters nor an organizational chart. Each contributor to the
network would stick to its core competency- what it does best, such as manufacturing a particular
component, marketing the finish product, or developing a new product.
The network structure supplements the regular structure. Many large organizations have small
units that use the network structure for forming strategic alliances with other companies. Proponents of
the network structure see it as a fluid and flexible entity taking the form of a group of collaborators who
linked together to capitalize on a specific opportunity.
The horizontal and virtual structures place additional demands on the interpersonal skills of the
workers involved. Relationships tend to be more stable in a functional, whereas horizontal and virtual
structures involve more temporary relationships.
Implications for Managerial Practice
1. An overriding decision in organizational design is the choice between a bureaucratic or a more
flexible structure. Bureaucratic structures are better suited to repetitive tasks in a stable
environment, in which centralized control is desirable. High technology firms such as
aerospace companies make extensive use of flexible structures, such as project and matrix
structures. Relatively low-technology firms such as lumber mills and refuse-collection firms
rely more on bureaucratic structures.
2. As an organization grows and matures, it inevitably needs centralized controls and some
degree of bureaucracy or formalization. Yet, when the firm becomes very large, it is necessary
to develop smaller, more flexible units, such as projects and task forces. These units help the
organization remain adaptive, and they are found in every large organization.
3. A design decision for a large organization is usually not an issue of hierarchical versus flexible,
but instead, one of choosing which units should be hierarchical and which ones should be
nonhierarchical or team-based.
4. Organization structure influences behavior in many ways. A key factor is that specialization
can lead to job dissatisfaction and boredom for many workers. An exception is that some
highly trained workers prefer to be superspecialists, such as package designers.
5. Leading-edge organizational designs are becoming increasingly popular. Managers and
nonmanagers alike need high-level interpersonal skills to function effectively in such structures
because they must often rely more on informal than formal authority.
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