CHAPTER 3

Fundamentals of Organization Structure

 Outline
 Organization structure
 Information processing perspective in
organization structure
 Organization design alternatives
 Types of organizational structure
 Organizational Structure
 There are three key components in the definition of
organizational structure:
 Organizational structure designates formal reporting
relationships, including the number of levels in the
hierarchy and the span of control of managers and
supervisors
 Organizational structure identifies the grouping
together of individuals into departments and of
departments into the total organization
 Cont.…..
Organizational structure includes the design of

systems to ensure effective communication,

coordination, and integration of efforts across
departments
These three elements of structure pertain to both
vertical and horizontal aspects of organizing

 An ideal structure encourages employees to

provide horizontal information and coordination
where and when needed.
 Cont.…..
 Organizational structure is reflected in the
organization chart
 An organization chart is the visual representation
of a whole set of underlying activities and
processes in an organization at a particular point in
time.
 The organization chart can be quite useful in
understanding how an organization works.

 It shows the various parts of an organization, how

they are interrelated, and how each position and
department fits into the whole
 Information-Processing Perspective on 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 does not fit; people either will have too
little information or will spend time processing
information that is not vital to their tasks, thus reducing
effectiveness
However, there is an inherent tension between vertical and
horizontal mechanisms in an organization.
Vertical linkages are designed Horizontal linkages are designed for
primarily for control coordination and collaboration
 Organization designed
Traditional Contemporary learning
organization design organization
Emphasizes vertical Emphasizes horizontal
communication and communication and
control coordination
Emphasis on efficiency and
control is associated with Emphasis on learning is associated
specialized tasks, a strict with shared tasks, a horizontal
hierarchy of authority and hierarchy, few rules, face-to-face
rules, vertical reporting communication, many teams and
systems, few teams or task task forces, and informal
forces Decentralized
Centralized decision making, decision making
  Centralized decision making, which means problems
and decisions are funnelled to top levels of the hierarchy
for resolution.

 Decentralized decision making means decision-making

authority is pushed down to lower organizational levels.
 Managers are always searching for the best combination
of
 Vertical control and horizontal collaboration,
 Centralization and decentralization, for their own
situations
  Vertical Information Linkages
Linkage is defined as the extent of
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
The first vertical device is the hierarchy, or
Hierarchical chain of command, which is illustrated by
referral the vertical lines
Rules and Problems and decisions are repetitious
Plans Rules provide a standard information
source enabling employees to be
coordinated without actually
communicating about every task
Vertical Include the periodic reports, written
Information information, and computer-based
Systems communications distributed to managers.
 Horizontal Information Linkages
 Horizontal communication overcomes barriers between
departments and provides opportunities for coordination
among employees to achieve unity of effort and
organizational objectives.
 Horizontal linkage refers to the amount of
communication and coordination horizontally across
organizational departments
The following devices are structural alternatives that can
improve horizontal coordination and information flow.
[Link] Systems:
 Enable managers or front-line workers throughout the
organization to routinely exchange information about
problems, opportunities, activities, or decisions

2. Direct Contact
 One way to promote direct contact to create a special
liaison role
 A liaison person is located in one department but has
the responsibility for communicating and achieving
coordination with another department.
 [Link] 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
 Task forces are an effective horizontal linkage device
for temporary issues.
 4. Full-Time Integrator
 A stronger horizontal linkage device is to create a full-
time position or department solely for the purpose of
coordination.
 A full-time integrator frequently has a title such as
product manager, project manager, program manager,
or brand manager.
 Unlike the liaison person, the integrator does not report
to one of the functional departments being coordinated.
 [Link]
 Project teams tend to be the strongest horizontal linkage
mechanism.
Teams are permanent task forces and are often used in conjunction
with a full-time integrator.
When activities among departments require strong coordination
over a long period of time, a cross-functional team is often the
solution.
Special project teams may be used when organizations have a large-
scale project, a major innovation, or a new product line.
  Ladder of Mechanisms for Horizontal Linkage and Coordination

Team
High
Full Time
Amount of Horizontal Coordination

integrator
Task
Force
Required

Direct
contact
Informatio
n system

Low Low high

Cost of Coordination in Time and Human Resources

 Organizational Design Alternatives
The overall design of organizational structure indicates
three elements required work activities, reporting
relationships, and departmental grouping options.

Required Work Activities

 Departments are created to perform tasks considered
strategically important to the company.
 Work activities fall into a range of functions that help the
organization accomplish its goals
  Reporting Relationships
 Once required work activities and departments are
defined, the next question is how these activities and
departments should fit together in the organizational
hierarchy
Reporting relationships, often called the chain of
command, are represented by vertical lines on an
organization chart.
The chain of command should be an unbroken line of
authority that links all persons in an organization and
shows who reports to whom
 Departmental Grouping Options
 Five possible options for departmental groupings are a
 Functional grouping
 Divisional grouping
 Multifocused (or matrixed) grouping,
 Horizontal grouping, and
 Virtual network grouping.
 Departmental grouping affects employees because they
share a common supervisor and common resources, are
jointly responsible for performance, and tend to identify
and collaborate with one another
Functional grouping places together employees who
perform similar functions or work processes or who bring
similar knowledge and skills to bear

Divisional grouping means people are organized

according to what the organization produces.

Multifocused grouping means an organization embraces

two structural grouping alternatives simultaneously.
 Horizontal grouping means employees are organized
around core work processes, the end-to-end work,
information, and material flows that provide value directly
to customers.
Virtual network grouping is the most recent approach to
departmental grouping.
 Departments are separate organizations that are electronically
connected for the sharing of information and completion of tasks.
 Functional, Divisional, and Geographical Design
 Functional Structure
Activities are grouped together by common function from the
bottom to the top of the organization.

All human knowledge and skills for specific activities

are consolidated, providing a valuable depth of
knowledge for the organization.
This structure is most effective when in-depth expertise is
critical to meeting organizational goals, when the
organization needs to be controlled and coordinated
through the vertical hierarchy, and when efficiency is
important.
 STRENGTHS WEAKNESSES

 Allows economies of scale Slow response time to

within functional environmental changes
departments May cause decisions to pile up,
 Enables in-depth knowledge hierarchy overload
and skill development Leads to poor horizontal
 Enables organization to coordination among
accomplish functional goals departments
 Is best with only one or a few Results in less innovation
Involves restricted view of
products organizational goal
  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 centres
The divisional structure promotes flexibility and change
because each unit is smaller and can adapt to the needs of
its environment

The divisional structure decentralizes decision making,

because the lines of authority converge at a lower level in
the hierarchy.
 Strengths Weaknesses
Suited to fast change in unstable Eliminates economies of
environment scale in functional
 Leads to customer satisfaction
because product responsibility
departments
and contact points are clear Leads to poor coordination
Involves high coordination across product lines
across functions  Eliminates in-depth
Allows units to adapt to competence and technical
differences in products, specialization
regions, customers  Makes integration and
Best in large organizations with
several products
standardization across
 Decentralizes decision making product lines difficult
  Geographical Structure
 Another basis for structural grouping is the
organization’s users or customers.
 The most common structure in this category is
geography since each region of the country may have
distinct tastes and needs.
 Matrix Structure
Sometimes an organization’s structure needs to be
Multifocused in that both product and function or product
and geography are emphasized at the same time.
The matrix can be used when both technical expertise
and product innovation and change are important for
meeting organizational goals.
The matrix structure often is the answer when
organizations find that the functional, divisional, and
geographical structures combined with horizontal linkage
mechanisms will not work.
The matrix is a strong form of horizontal linkage.
The unique characteristic of the matrix organization is that
both product division and functional structures (horizontal
and vertical) are implemented simultaneously
 Strengths Weaknesses
 Achieves coordination  Causes participants to experience
necessary to meet dual dual authority, which can be
frustrating and confusing
demands from customers
 Means participants need good
Flexible sharing of human interpersonal skills and extensive
resources across products training
Suited to complex decisions  Is time consuming; involves frequent
and frequent changes in meetings and conflict-resolution
unstable environment sessions
 Will not work unless participants
Provides opportunity for both
understand it and adopt collegial
functional and product skill rather than vertical-type
development relationships
 Best in medium-sized  Requires great effort to maintain
organizations with multiple power balance
products
  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 re-engineering.
Re-engineering, or business process re-engineering, 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.
 Characteristics
 Structure is created around cross-functional core
processes rather than tasks, functions, or geography
Self-directed teams, not individuals, are the basis of
organizational design and performance.
 Process owners have responsibility for each core process
in its entirety
People on the team are given the skills, tools,
motivation, and authority to make decisions
Teams have the freedom to think creatively and respond
flexibly to new challenges that arise.
Customers drive the horizontal corporation. Effectiveness
is measured by end of-process performance objectives as
well as customer satisfaction, employee satisfaction, and
financial contribution.
The culture is one of openness, trust, and collaboration, focused on
continuous improvement. The culture values employee
empowerment, responsibility, and well-being
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
 Determining core processes is difficult and time
consuming
Weaknesses

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
 Virtual Network Structure
The virtual network structure extends the concept of
horizontal coordination and collaboration beyond the
boundaries of the traditional organization.

Sometimes called a modular structure, the firm

subcontracts many or most of its major processes to
separate companies and coordinates their activities from a
small headquarters organization.
 Strengths
 Enables even small organizations to obtain talent and
resources worldwide
 Gives a company immediate scale and reach without
huge investments in factories, equipment, or
distribution facilities
 Enables the organization to be highly flexible and
responsive to changing needs
 Reduces administrative overhead costs
 Weaknesses
 Managers do not have hands-on control over many activities and
employees
 Requires a great deal of time to manage relationships and
potential conflicts with contract partners
 There is a risk of organizational failure if a partner fails to deliver
or goes out of business
 Employee loyalty and organizational culture might be weak
because employees feel they can be replaced by contract services
 Hybrid Structures
Organizations often use a hybrid structure that combines
characteristics of various approaches tailored to specific strategic
needs.
Most companies combine characteristics of functional, divisional,
geographical, horizontal, or network structures to take advantage
of the strengths of various structures and to avoid some of the
weaknesses.
Hybrid structures tend to be used in rapidly changing
environments because they offer the organization greater
flexibility.
 Symptoms of Structural Deficiency
Decision making is delayed or lacking in quality

The organization does not respond innovatively to a

changing environment

Employee performance declines and goals are not being

met

Too much conflict is evident

Discussion Questions
1. What is the definition of organizational structure? Does
organizational structure appear on the organization chart? Explain.
2. How do rules and plans help an organization achieve vertical
integration?
3. When is a functional structure preferable to a divisional structure?
4. Why do large corporations tend to use hybrid structures?
5. What are the primary differences between a traditional
organization designed for efficiency and a more contemporary
organization designed for learning?
.
[Link] is the difference between a task force and a team
7. Why do companies using a horizontal structure have
cultures that emphasize openness, employee empowerment,
and responsibility? What do you think a manager’s job would
be like in a horizontally organized company?
8. Describe the virtual network structure. Why do you
think this is becoming a good structural alternative for some
of today’s organizations