Chapter 3

Fundamentals of Organization Structure

Organization Structure is one factor that helps companies execute their strategies and achieve
their goals. These three key components define OS.
1. It designates formal reporting relationships, including the number of levels in the hierarchy
and the span of control of managers and supervisors.
2. It identifies the grouping together of individuals into departments and of departments into the
total organization.
3. It 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.
For examples, the first two elements are the structural framework, which is the vertical
hierarchy. The third element pertains to the pattern of interactions among organizational
employees. An ideal structure encourages the employees to provide horizontal information and
coordination where and when it is needed.
Organization Chart- shows what positions exist, how they are grouped, and who reports to
whom. It is used by churches and other organizations for a long time.
-Thinking and decisions making done by those on top.
-Physical work performed by employees who are organized into departments.
-Not always effective, particularly in rapid changing environments.
Centralized vs Decentralized
Centralization and decentralization pertain to the hierarchical level at which decisions are made.
Centralization means that decision authority is located near the top of the organization.
Decentralization decision authority is pushed downward to lower organization levels.
Organizations may have to experiment to find the correct degree of centralization or
decentralization to meet their needs.
William Ouchi study found that 3 large school districts shifted to a more flexible, decentralized
structure, giving school principals more autonomy, responsibility, and control over resources,
performed better and efficient than large districts that were highly centralized.
Toyota is a great example of a strong tradition of centralization that are seeing the power of
change to decentralization for promoting a sense of ownership.
-the new version of Avalon is designed and built in America.
-The first prototype that is not developed in Japan.
-shows how well Toyota can decentralize decision making to the company's subsidiaries.
-Giving more decision making power to regional managers in charge of safety.
Information processing perspective in organization structure
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
the bottom of an organization and are designed primarily for control of the organization.
Hierarchical Referral- it is the first vertical device, or chain of command. If employees do not
know how to resolve a problem, it gets shifted up the ranks. Once the problem is solved, it gets
sent back down.
Rules and Plans- to the extent that problems and decisions are repetitious, a rule or procedure can
be established so that the employees know how to deal with it. It`s standard information for the
employees. Managers carefully brief the production workers on goals, so that employees
themselves do most of the work, and the production process continues running smoothly.
Vertical Information System
It is a strategy for increasing vertical information capacity. It includes period reports, written
information, and computer-based communication distributed to managers. It makes
communication up and down the hierarchy more efficient.
In today`s world of corporate financial scandals and ethical concerns, many top managers are
considering strengthening their organization`s linkage for vertical information and control. The
other major issue in organizing is to provide adequate horizontal linkages for coordination and
collaboration.
Horizontal Information Sharing and Collaboration
Collaboration - a joint effort between people from two or more departments to produce outcome
that meets a common goal or shared purpose and that are typically greater than what any of the
individuals or departments could achieve working alone.
Example: The 2011 U.S mission to raid Osama Bin Laden`s compound in Pakistan. The
collaboration between the CIA and the U.S military…go USA!!!
Horizontal linkage - Refers to communication and coordination horizontally across
organizational departments.
Example- Chrysler had a big problem in the 1980s. All of the departments were working
separately.
Small organizations usually have a high level of interaction among all employees, but in a large
organization, providing mechanism to ensure horizontal information sharing is critical to
effective collaboration, knowledge sharing, and decision making.
Structural alternatives that can improve horizontal coordination and information flow:
Information Systems - A significant method of providing horizontal linkage in today`s
organization 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 decisions.
Liaison Roles- A higher level of horizontal linkage is direct contact between managers or
employees affected by a problem. A liaison person is located in one department but has the
responsibility for communicating and achieving coordination and collaboration with another
department.
Task Forces- a temporary committee compound of representatives from each organization 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. It`s an effective linkage device for
temporary issues. They resolve problems by direct horizontal collaboration and reduce the
information load on the vertical hierarchy.
Full-time Integrator- frequently has a title, such as product manager, project manager, program
manager, or brand manager. He or she does not report to one of the functional departments being
coordinated. He or she is located outside the departments and has the responsibility for
coordinating several departments.
Integrator:
-need excellent people skills.
-Have a lot of responsibilities but little authority.
-Have to use expertise and persuasion to achieve coordination.
-Spans the boundary between departments and must be able to get people together, maintain
trust, confront problems, and resolve conflicts and disputes in the interest of the organization.
Teams. 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. Special
project teams may be used when organizations have a large-scale project, a major innovation, or
a new product line. A virtual team is one that is made up of organizationally or geographically
dispersed members who are linked primarily through advanced information and communications
technologies. Members mostly use internet for collaboration rather than meet face to face.
Relational Coordination
It`s the highest level of horizontal coordination. It refers to “frequent, timely, problem-solving
communication carried out through relationships of shared goals, shared knowledge, and mutual
respect. ”Relational coordination isn’t a device or mechanism, but rather part of the very fabric
and culture of the organization.
People share information freely across departmental boundaries, and people interact on a
continuous basis to share knowledge and solve problems. Coordination is carried out through a
web of ongoing positive relationships rather than because of formal coordination roles or
mechanism. Employees coordinate and collaborate directly with each other across units.

Building relational coordination into the fabric of the organization requires the active role of
managers.
Organization Design Alternatives
The overall design of organization structure indicates 3 things:
1. Required work activities
2. Reporting relationships.
3. Departmental groupings.
Required Work Activities
In a manufacturing company work activities fall into a range of functions that helps the
organization accomplish its goals, such as a human resource department to recruit and train
employees, a purchasing department to obtain supplies and raw materials, a production
department to build products, and a sale department to sell products.
Reporting Relationships
Often called the chain of command, 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 who.
Department Grouping Options
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.
Multi focused grouping- means an organization embraces two or more structural grouping
alternatives simultaneously. These structural forms are often called matrix or hybrid.
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- the organization is loosely connected cluster of separate components.
Departments are separated organizations that are electronically connected for the sharing of
information and completion of tasks.
Functional, Divisional, and Geographic Designs
Functional grouping and divisional grouping are the two most common approaches to structural
design.
Functional Structure
Also called a U-form, activities are grouped together by common function from the bottom to the
top of the organization. All human knowledge and skills with respect to 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. The structure can be quite effective if there is little need for horizontal
coordination.

One strength of functional structure is that it promotes economy of scale within functions.
Economy of scale results when all employees are located in the same place and can share
facilities. The main weakness of the functional structure is a slow response to environmental
changes the require coordination across departments.
Functional Structure with Horizontal Linkages
In today’s fast moving world, very few companies can be successful with a strictly functional
structure. As organizations grow larger, they typically need stronger mechanism for horizontal
linkage. Managers improve horizontal coordination by using information systems, liaison roles,
full-time integrators or project managers, task forces, or teams, and by creating the conditions
that encourage relational coordination.
Divisional Structure
Also called M-form, or a decentralized form, separate division can be organized with
responsibility for individual products, services, product groups, major projects or programs,
divisions, businesses, or profit centers. Sometimes called the product structure or strategic
business unit structure. The distinctive feature of a divisional structure is that grouping is based
on organizational outputs.
Organizations tend to switch from functional to divisional structures as they become more
complex. The difference between a divisional structure and a functional structure is that
functional structure can be designed into separate product groups, and each group contains the
functional departments of R&D, manufacturing, accounting, and marketing. Coordination is
maximized across functional departments within each product group. The divisional structure
promotes flexibility and change because each unit is smaller and can be adapted 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. The functional structure, by contrast, is
centralized because it forces decision all the way up to the top before problem affecting several
functions can be resolved.
Strength and Weaknesses
The divisional organization structure is excellent for achieving coordination across functional
departments. It works well when organizations can no longer be adequately controlled through
the traditional vertical hierarchy and when goals are oriented toward adaptation and change.
Strength- The structure is suited to fast change in an unstable environment and provides high
product or service visibility. Coordination across functions is excellent. Each product can adapt
to requirements of individual costumers or regions. It works best in organizations that have
multiple products or services and enough personnel to staff separate functional units.
Weaknesses- organizations lose economies of scale. Instead of 50 research engineers sharing a
common facility in a functional structure, 10 engineers may be assigned to each of five product
divisions. The critical mass required for in-depth research is lost, and physical facilities have to
be duplicated for each product line. Another problem is that product lines become separate from
each other, and coordination across product lines can be difficult.

Some companies that have a large number of divisions have had real problems with cross-unit
coordination. An example of that is SONY. It lost the digital music player business to APPLE
partly because of coordination. One division may produce products or programs that are
incompatible with products sold by another division, as at SONY.
Geographic Structure
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. For multinational
corporations, self-contained units are created for different countries and parts of the world.
Walmart stores are organized by geographical regions, such as Walmart Japan, Walmart India,
Walmart Brazil, etc. Until recently, U.S. operations were organized largely by functions, but
managers constructed U.S. operations into three geographical divisions, West, South, and North.
It helps Walmart expand into new markets and use resources more efficiently. The strength of
this is that the organization can adapt to specific needs of that region, and employees identify
with regional goals instead of national goals. Horizontal coordination within a region is
emphasized rather than linkages across regions or to the national office.
Matrix Structure
Organization’s structure is multi focused in that both product and function or product and
geography are emphasized at the same time. It can be used when both technical expertise and
product innovation and change are important for meeting organizational goals.
Conditions for the Matrix:
1. Condition 1- Pressure exist to share scarce resources across product lines. It feels pressure for
the shared and flexible use of people and equipment across those products.
2. Condition 2- Environmental pressure exists for two or more outputs. The dual pressure means
a balance of power is needed between the functional and product sides of the organization, and a
dual-authority structure is needed to maintain that balance.
3. Condition 3- The environmental domain of the organization is both complex and uncertain.
Frequent external changes and high interdependence between departments require a large
amount of coordination and information processing in both vertical and horizontal directions.
Functional matrix- the functional bosses have primary authority and the project or the project
managers simply coordinate products activities.
Product matrix- the project or product managers have primary authority and functional managers
simply assign technical personnel to projects and provide advisory expertise as needed.
Horizontal Structure
A recent approach to organizing, which organizes employees around core processes.
Organizations typically shift toward a horizontal structure during reengineering. It basically
means the redesign of a vertical organization along its horizontal workflows and processes. A
process refers to an organization 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 owner have responsibility for each of the core process in its entirety.
-People on the team are given the skills, tools, motivation, and authority to make decisions
central to the team’s performance.
-Teams have more creative freedman respond flexibly to new challenges.
-Customers drive the horizontal corporation. Effectiveness is measured by end-of-process
performance objectives, customer satisfaction, employee satisfaction, and financial contribution.

Hybrid Structure
Used by most large organizations, it 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. It tends to be used in rapidly changing
environments because they offer the organization greater flexibility.
Symptoms of Structural Deficiency
When organization structure is out of alignment with organization needs, one or more of the
following appears:
-There is an obscene of collaboration among units. When departments act at cross-purposes or
are under pressure to achieve departmental goals at the expenses of organizational goals, the
structure is often at fault.
-Decision making is delayed or lacking quality. Decision makers may be overloaded because the
hierarchy funnels too many problems and decisions to them.
-The organization does not respond innovatively to a changing environment.
-Employee performance declines and goals are not being met. This will happen if the structure
does not provide clear goals, responsibilities, and mechanism.