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Chapter Three: Fundamentals of Organization Structure

Organization Structure
There are three key components in the definition of organizational structure:
1. Organization structure designates formal reporting relationships, including the
number of levels in the hierarchy and the span of control of managers and supervisors.
2. Organization structure identifies the grouping together of individuals into departments
and of departments into the total organization.
3. Organization structure includes the design of systems to ensure effective
communication, coordination and integration of efforts across departments.
Organization structure represented visually in organization charts

The organization chart is the visual representation of a whole set of underlying activities and
processes in an organization. Develop organization charts that describe task responsibilities,
reporting relationships and the grouping of individuals into departments. Provide sufficient
documentation so that all people within the organization know to whom they report and how
they fit into the total organization picture.
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 the
information requirements of the organization, 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 provide the mechanism for control,
horizontal linkages are designed for coordination and collaboration, processes that can reduce
top management control.
Organizations can choose whether to focus toward a traditional organization design, which
emphasizes vertical communication and control, or toward a contemporary learning
organization which emphasizes horizontal communication and coordination.
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An emphasis on control and efficiency is associated with specialized tasks, a hierarchy of

authority, rules and regulations, formal reporting systems, few teams or task forces and
centralized decision making. Centralized decision making means problems and decisions are
funneled to top levels of the hierarchy for resolution. An emphasis on learning organization is
associated with shared tasks, a relaxed hierarchy, few rules, face-to-face communication,
many teams and task forces and informal, decentralized decision making.
Managers are always searching for the best combination of vertical control and horizontal
collaboration, centralization and decentralization, taking advantages of communications
advances to perfect interaction both vertically and horizontally.
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. Organizations may
use any of a variety of structural devices to achieve vertical linkages including hierarchical
referral, rules, plans, and formal management information systems.
Hierarchical Referral: If a problem arises and employees do not know how to solve it, it
can be referred up to the next level in the hierarchy. The lines of organization chart act as
communication channels.
Rules and Plans: Rules provide a standard information source enabling employees to be
coordinated without actually communicating about every task. A plan also provides standing
information for employees.
Vertical Information Systems: It is used for increasing vertical information capacity. It
includes the periodic reports, written information and computer-based communications.
Horizontal Information Linkages
Horizontal information linkages refer to the amount of communication and coordination
horizontally across organizational departments. Following devices are structural alternatives:
Information Systems: It is a significant method of providing horizontal linkage in today’s
organizations is the use of cross-functional information systems. Computerized information
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systems can enable managers or frontline workers throughout the organization to routinely
exchange information about problems, opportunities, activities or decisions.

Direct Contact: It is a higher level of horizontal linkage is direct contact between managers
or employees affected by a problem. One way to promote direct contact is 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.
Task Forces: It 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. It
is mostly used for temporary issues.
Full-Time Integrator: It has frequently a title such as product manager, project manager or
brand manager. Unlike the liaison person the integrator 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.
Teams: Teams are permanent task forces and are often used in conjunction with a full-time
integrator. When activities require long period of time, a cross-functional team is the solution.
Also special teams may be used when organizations have large-scale projects, a major
innovation or a new product line.
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 frequently use online collaborative technologies to work together,
rather than meeting face-to-face.
Four dimensions of teamwork: (Developed by Ben Kuipers and Marco de Witte)

 Job enlargement: Encouraging employee multi-functionality and thus eliminate the

inefficiency within the team.
 Job enrichment: Redesign of supervision system to delegate management
responsibilities to the team members.
 Cooperation: Members work together and build communication within a sense of
shared responsibility.
 High performance: Team is able to work together to resolve non-routine issues.
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The higher-level provide more horizontal information capacity, although the cost to the
organization in terms of time and HR greater. If horizontal communication is insufficient it
will be resulting in inefficiency and ineffectiveness.

Organization Design Alternatives

Overall, the design of organization structure indicates three things; required work activities,
reporting relationships and departmental groupings.
Required Work Activities
Departments are created to perform tasks considered important to the company. For instance;
in a manufacturing company, work activities are organized into a range of functions such as
HR department to recruit and train employees, a purchasing department to obtain supplies
and raw materials, a production department to build products, a sales department to sell
products and so forth.
Reporting Relationships
Often called the chain of command that are represented by vertical lines on an organization
chart. The chain of command is typically an unbroken line of authority that links all persons
in an organization and shows who reports to whom.
Departmental Grouping Options
Options for departmental grouping, including functional grouping, divisional grouping, and
multi focused grouping, horizontal grouping and virtual network grouping.
 Functional Grouping: Places together employees who perform similar functions or
work processes or who bring similar knowledge and skills.
 Divisional Grouping: Means people are organized according to what the
organization produces.
 Multi-Focused Grouping: Means an organization embraces two 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 or support strategic development.
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 Virtual Network Grouping: is the most recent approach to departmental grouping.
With this grouping, the organization is a loosely connected cluster of separate
components. In essence, departments are separate organizations that are electronically
connected for the sharing of information and completion of tasks. Departments can be
spread all over the world rather than located together in one geographic location.
Functional, Divisional and Geographical Designs
Functional Structure
In a functional structure design, activities are grouped together by common function from the
bottom to the top of the organization. With a functional structure, 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.

Functional Structure with Horizontal Linkages

During the late years of the 20th century, criticism of extended hiearchical structures
promoted a shift toward flatter, more horizontal structures, as business activities become
more complex and companies identified the potential for restructuring the business processes
to achieve synergies.
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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. The distinctive feature of a divisional structure is that
grouping is based on organizational outputs.
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Geographical Structure

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. The geographic division can adapt to specific conditions
of its own country or region, and employees may identify with regional goals rather than with
the overall corporate vision. Horizontal coordination within a region may be emphasized
rather than linkages across regions or to the head office and this can detract from overall
corporate synergies. This is true both for national firms with regional divisions, and for
multinational firms with national or regional units around the world.
Matrix Structure
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. One way to achieve this
is through the matrix structure. 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
geographic structures combined with horizontal linkage mechanisms will not work.
Conditions for the Matrix
 Condition 1. Pressure exists to share scarce resources across product lines.
 Condition 2. Environmental pressure exists for two or more critical outputs, such as
for in-depth technical knowledge (functional structure) and frequent new products
(divisional structure).
 Condition 3. The environmental domain of the organization is both complex and
uncertain.
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Many companies have found a balanced matrix hard to implement and maintain because one
side of the authority structure often dominates. As consequence, two variations of matrix
structure have evolved—the functional matrix and the product matrix. In a functional matrix,
the functional bosses have primary authority and the project or product managers simply
coordinate product activities. In a product matrix, by contrast, the project or product
managers have primary authority and functional managers simply assign technical personnel
to projects and provide advisory expertise as needed.
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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.

Characteristics
 Structure is created around cross-functional core processes rather than tasks,
functions, or geography. Thus, boundaries between departments are obliterated.
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 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 central to the team’s performance. Team members are cross-trained to
perform one another’s jobs, and the combined skills are sufficient to complete a major
organizational task.
 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 (based on the goal of bringing value to the customer),
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.

Virtual Network Structure

Recent developments in organization design extend the concept of horizontal coordination
and collaboration beyond the boundaries of the traditional organization. The most widespread
design trend in recent years has been the outsourcing of various parts of the organization to
outside partners.
Outsourcing means to contract out certain tasks or functions, such as manufacturing, human
resources, or credit processing, to other companies. With a virtual network structure,
sometimes called a modular structure, the firm subcontracts most of its major functions or
processes to separate companies and coordinates their activities from a small headquarters
organization.
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How Structure Works

Rather than being housed under one roof or located within one organization, services such as
accounting, design, manufacturing, marketing, and distribution are outsourced to separate
companies that are connected electronically to a central office.
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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 flexibility.
Applications of Structural Design
Each type of structure is applied in different situations and meets different needs. Each form
of structure—functional, divisional, matrix, horizontal, network, hybrid—represents a tool
that can help managers make an organization more effective, depending on the demands of its
situation.
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Structural Alignment

Ultimately, the most important decision that managers make about structural design is to find
the right balance between vertical control and horizontal coordination, depending on the
needs of the organization. Vertical control is associated with goals of efficiency and stability,
while horizontal coordination is associated with learning, innovation, and flexibility. The
functional structure is appropriate when the organization needs to be coordinated through the
vertical hierarchy and when efficiency is important for meeting organizational goals.
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The functional structure uses task specialization and a strict chain of command to gain
efficient use of scarce resources, but it does not enable the organization to be flexible or
innovative. At the opposite end of the scale, the horizontal structure is appropriate when the
organization has a high need for coordination among functions to achieve innovation and
promote learning. The horizontal structure enables organizations to differentiate themselves
and respond quickly to changes, but at the expense of efficient resource use. The virtual
network structure offers even greater flexibility and potential for rapid response by allowing
the organization to add or subtract pieces as needed to adapt and meet changing needs from
the environment and marketplace.
Symptoms of Structural Deficiency
• Decision making is delayed or lacking in quality.
• The organization does not respond innovatively to a changing environment.
• Too much conflict is evident.