4 The configuration and

complexity of the firm

Introduction
The choice of a firm’s configuration – sometimes called its structure or
architecture – is a critical decision for the executive (Burton and Obel, 2004).
The next step in the step-by-step approach is for you to choose a configuration
and decide on the organizational complexity which will enable your firm to
perform well for its given goals and strategy and in its environment. A poor
choice of configuration leads to opportunity losses which can be a threat to the
organization’s short-term efficiency and effectiveness as well as its long-term
viability. As in the earlier chapters, for convenience of expression, we use the
term “firm” or “organization” as the unit of analysis, but you can substitute
team, department or division if that is the unit of analysis you chose in
Chapters 1, 2 and 3.
A firm’s configuration, frequently pictured as an organizational chart, tells
us how the firm partitions big tasks into smaller tasks either by specialization
or product, and then also indicates the formal communication patterns. As
discussed in Chapter 1, organizational design of configuration involves two
complementary problems: (1) how to partition a big task of the whole organiza-
tion into smaller basic tasks of the subunits, and (2) how to coordinate these
smaller subunit tasks so that they fit together to efficiently realize the bigger
task or organizational goals (Mintzberg, 1983). Once tasks are partitioned and
the smaller subunits specified, the information-processing questions for organ-
izational design are: Who makes what decisions based upon what information?
Who talks with whom about what, or what is the structure of communication
(March and Simon, 1958; Galbraith, 1973, 1974)? When you have answered
60 The configuration and complexity of the firm

these design questions for your firm, you know a good deal about how it will
work and can proceed to realize the goals. There are a number of choices for the
configuration. Here we will consider the basic choices and how they address
the fundamental questions of design.
A firm’s organizational complexity further specifies the organizational
design. For example, how many subunits are there? The number of departments
should be specified as well as the number of vertical levels in the hierarchy.
These are called the horizontal and vertical differentiation, which together are
called the organizational complexity of the firm. More “modern” dimensions of
the classic configurations include the degree of virtualization and the extent to
which IT systems are embedded in the configuration. These new types of
configurations are considered in Chapter 5.

Configuration

What are the dimensions for partitioning the larger task of the firm into
smaller tasks such that the smaller tasks can be coordinated and work well
together? In the literature on organization design two fundamental dimen-
sions have been used to distinguish the basic configurations: product/service/
customer orientation and functional specialization. The product/service/
customer dimension suggests that the total firm task will be partitioned by
the outputs of the firm, which give it an external focus. If the firm has
divisions or departments with product or customer names, then it has an
external focus and is high on this dimension. The functional specialization
dimension indicates that the work will be divided by specialized activities. If
the firm has departments with function names, such as production and
marketing, then it has a more internal focus and is high on this dimension.
These two product and functional dimensions indicate the focus of how the
work will be divided and then, given this breakdown, how it must be coordin-
ated. These two dimensions of configuration generate four basic configur-
ations, as shown in Figure 4.1. The four basic configurations are: simple,
functional, divisional, and matrix (Miles and Snow, 1978).
These four basic configurations can be combined in different patterns, and
thus are the building blocks of more complicated structures depending on
whether your unit of analysis is a team, a department, a division, or even the
whole organization. For example, in the case of a divisional configuration,
each of the several divisions of a divisional structure can be functional, matrix,
 Simple configuration 61

Figure 4.1 The alternative organizational configurations of the firm.

or another divisional. Thus these basic configurations may all be present inside
one large organization. They should be designed using the top-down approach
described in Chapter 1.
The four basic configurations of simple, functional, divisional, and matrix
score differently on the product/service/customer and functional specialization
dimensions. In Figure 4.1, we show the four configurations as they are located
on the two dimensions: product/service/customer orientation on the horizontal
axis and functional specialization on the vertical axis. The simple configur-
ation is low on the product/service/customer dimension and also low on the
functional specialization dimension. The functional configuration is also low on
the product/service/customer dimension, but it is high on functional orientation.
The divisional configuration is the opposite: high on the product/service/
customer dimension, but low on specialization. And finally, the matrix config-
uration is high on both dimensions, suggesting a need for a high information-
processing capacity to achieve the twin goals of efficiency and effectiveness.
Next, we discuss the four configurations, beginning with the simple config-
uration. In Figure 4.1, we begin in the lower left corner, move to the upper left,
then to the lower right, and finally to the upper right hand corner.

Simple configuration

The simple configuration is: low on the product/service/customer dimension

and low on the functional specialization dimension. The simple configuration
is usually a small organization, consisting of an executive and perhaps a few
other individuals. The executive tells the others what to do and manages the
62 The configuration and complexity of the firm

Figure 4.2 A simple configuration.

ongoing operations. The individual employees do not have specific tasks or

activities to perform, nor are there well-defined job descriptions. The total task
of the firm is broken down into smaller tasks and assigned to the employees by
the executive on an as-needed basis; the coordination of the activities is also
done by the executive. Both the task assignments and the coordination are
accomplished by the executive in an ongoing and continuous manner. Little is
fixed; things are very fluid and can be very flexible to adjust to the situation at
hand. The executive is at the center of the information flows, makes the
decisions, coordinates the activities of the employees, and controls the oper-
ations – telling others what to do. The executive is also the main contact with
the market, customers, suppliers, and clients of the firm. In Figure 4.2, there is
an organizational chart of the simple configuration where Sophia is the
executive.
The simple configuration is usual for small firms – whether new small start-
ups or older firms. In some rare situations, the executive of the larger firm may
choose the simple configuration – particularly for an owner-managed firm
which has grown from a small start-up to a larger firm. For all of these firms,
the executive is in charge of or oversees almost everything that goes on. In
terms of information processing, it can be a very demanding task.
The simple configuration is flexible but not usually efficient or effective. The
efficiencies of specialization are not realized, as the employees are asked to do
many tasks for which they may not be fully skilled. The simple configuration
 Functional configuration 63

depends heavily upon the vision of the executive for its effectiveness orienta-
tion. A danger is that the focus can be narrow and not very effective for the
firm’s customers if needs change and vary over time. Because the executive is
the focal point of all information processing in the firm, it can be difficult for
this one person to take time to adjust the firm’s direction or seek innovative
opportunities. In brief, the simple configuration does not take advantage of the
efficiencies of specialization, and its effectiveness depends heavily upon the
actions of one person – the top executive.
The executive is at the center of all that happens in the simple configuration.
It is the executive’s show. If the executive uses time well, makes good decisions,
and coordinates activities well, then the simple configuration leads to good
performance. But if the executive becomes overloaded and fails on any of these
tasks, the firm’s performance will suffer.

Functional configuration

The functional configuration is: low on the product/service/customer dimen-

sion and high on functional specialization. The focus of work is based on the
functional specialization – hence the name.
The functional configuration is more complex with respect to information
processing than the simple configuration. In the functional configuration, there
are department managers with specified subunits, each of which has well-
defined jobs. The total firm task is broken down and assigned to subunits;
the coordination, or putting together, is accomplished by the hierarchy, which
uses a combination of rules and directives. In contrast to the simple configur-
ation, where little is fixed (i.e., task assignment and the organizational struc-
ture can change frequently), much is fixed for the functional configuration. It is
more machine-like and can accommodate large-scale organization as well as a
high degree of information processing. The production flow is to hand off work
from one subunit to the next, e.g., operations to marketing, which requires
coordination. The executive is again at the center of the organization for
information flows to and from the top, making decisions, and coordinating
activities of the subunits.
Figure 4.3 shows an organizational chart that illustrates the functional
configuration where the functional departments are: supply, manufacturing,
and sales. There could also be functions such as operations, marketing, finance,
and human resources. Operations and marketing are usually called line
64 The configuration and complexity of the firm

Figure 4.3 A functional configuration.

functions and departments like finance and human resources are called staff
functions. The executive level coordinates the manufacturing, sales, and other
major efforts and is concerned with matters such as planning and realized
versus projected expectations of firm productivity. Although information flows
through the top of the organization, coordination is required among the
subunit activities, and each department processes information on its own,
offloading some of the information-processing demand that was pushed to
the executive level in the simple configuration.
The major advantage of the functional configuration is that specialization
provides the rationale to assign individuals and subunits to specific tasks which
they learn to do efficiently. From Adam Smith (1776) onward to this day, the
economies of specialization make the functional configuration the most
common configuration. The rationale is an efficient organization which is
directed by the executive level. There is a strong reliance on the skill of the
executive – both for the short-term coordination of ongoing operations and for
the long-run choice of specialization.
A frequent question about the functional configuration is, how many sub-
unit functions should there be? It is a question of (1) the limited time of the
executive who must make decisions and coordinate the subunits (departments),
and (2) the capacity of the subunits to process information. The time demands
on the executive grow as the number of subunits increases, but also the
 Divisional configuration 65

coordination demands increase as the number of products increases. Unfortu-

nately, as either the number of subunits or the number of products increase, the
coordination demands increase nonlinearly with the implication that only a
few functional subunits are possible (Burton and Obel, 1984). Most firms have
about five subunits and rarely should they have more than seven. More
formally, NK complexity theory shows that where N is the number of subunits
and K is the degree of interdependent information flows going through the top,
e.g., K ¼ N1, the coordination demands become overwhelming quickly as the
number of subunits increases. (See Siggelkow and Rivkin, 2005 for discussion
of NK theory.)
The LEGO Group has a functional organization with five functions: Markets &
Products (M&P) has global responsibility for product development, marketing
and sales. Community, Education & Direct (CED) is responsible for direct
contact with consumers via brand retail stores, online sales, and mail order.
In addition this business area handles contacts with fans and the development
of new business concepts aimed directly at end-users. And it is this unit that is
responsible for the Group’s development, marketing and sale of educational
materials. Corporate Center (CC) covers the administrative service departments:
IT, Human Resources, Corporate Communications, Corporate Governance and
Sustainability and Corporate Legal Affairs. Global Supply Chain (GSC) is the
business area responsible for the Group’s supply chain – from procurement and
production to shipping and distribution to the retail trade. Finally, Corporate
Finance is responsible for financial management and control as well as follow-
up on business planning and strategic initiatives.
As in the simple configuration, the executive in the functional configuration
is at the center of the organization and may become overloaded if the environ-
ment is not predictable. Where adjustment and change in work tasks are
required, the situation can become overwhelming. The functional configuration
is efficient for unchanging activities; however, that efficiency is lost when rapid
change is required. The functional configuration is a good choice if you want
the organization to operate with high efficiency and precision. The configur-
ation works well for tasks that are repeated frequently and in high volume.

Divisional configuration

The divisional configuration is high on the product/service/customer dimen-

sion and low on functional specialization. Here the focus is not so much on the
66 The configuration and complexity of the firm

internal specialization but more on the outside products and services that the
firm produces, or on the customers it serves.
There is an executive level that oversees subunits which are relatively
independent of each other and have limits on their contact with the headquar-
ters. Each subunit, which may be called a division, an SBU (strategic business
unit), product business, customer business, or country business, is its own
business, frequently organized as a simple or functional configuration within
the subunit. Each division is externally focused and has its own markets and
customers. It pursues its own destiny within the constraints and policies of the
headquarters. The most important relationship is financial, where each division
has its financial goals, receives its operating monies as well as its long-term
investment funds (Williamson, 1975). The top executive sets policy for the
divisions. These policies can be quite general, such as, “operate within the law,”
or they can be quite detailed including financial reporting standards, human
resource policies, and innovation directives for new processes and products.
The extent of involvement by the top executive can vary. At the one extreme,
the headquarters is a “bank” that provides financial oversight and not much
else, and at the other extreme, each division can be driven from the top. For the
latter case, the headquarters is likely to become overloaded with large infor-
mation flows and many decisions to make; performance suffers (Chandler,
1962). So, the divisional configuration works best when there is limited coord-
ination from the top and each division is left to run its own business where it
has resources and can coordinate its activities to focus on the market for its
products, its customers, or in its region (Burton and Obel, 1984). As noted
earlier, within each division, the organization can be configured as a simple or
functional configuration or even another division. In Figure 4.4, the divisional
configuration is shown where the product flows and information flows have
been added.
The advantage of the rationale for the divisional configuration is that it aims
to be effective with its external focus on the product, customer, or region. The
divisional configuration is more market-responsive than the functional con-
figuration. Because the divisions are relatively autonomous, they can make
decisions on their own, meet the needs of the marketplace in creative ways, and
thus foster opportunity for growth. Many firms treat new acquisitions as
divisions, allowing them to operate relatively independently of headquarters
so that they can continue with the success experienced prior to acquisition.
Dividing the firm into product or brand groups is another way to create
divisions that can grow or die depending on their success in the marketplace.
 Divisional configuration 67

Figure 4.4 The divisional configuration with product and information flows.

The disadvantage of the divisional form is that each division is relatively

independent of the other in its operations and markets. The divisional configur-
ation does not handle interdivisional dependencies well. For example, two
divisions selling competing products to the same customer or developing a
new technology which requires their joint efforts will find it difficult to
coordinate and/or avoid duplication of efforts. Interdependent efficiencies
are lost. If a customer goes to IBM to buy both consulting services and network
computers, they must deal separately with the two divisions that manage these
products. The divisions have separate sales and support groups, and the cus-
tomer must bear the coordination cost of dealing with the two divisions. But
each division can be efficient using a functional configuration. If a division
becomes less effective, it can be sold off in the marketplace, as IBM recently has
done with its PC division.
At the top, the executive of the divisional configuration is responsible
for the choice of the divisions and their level of activity, and more generally
the overall firm performance. There is a strong reliance on the divisions
and their own executives to relate to their own markets with products
and services. The divisional configuration requires a top management level
68 The configuration and complexity of the firm

in which the head of each division has strong executive capability beyond
those of the Chief Executive Officer.
How many divisions should a divisional firm have? Unlike the functional
configuration where more functions or more products increase the coordination
demands nonlinearly, additional divisions do not (Burton and Obel, 1984). In
the extreme, an additional division only means choosing the divisional execu-
tive, adding one more column to the financial reports and affirming that the
existing policies and information systems apply to the new division. In terms of
NK complexity theory, K is very low or the divisions are only loosely con-
nected. So, the number of divisions can be quite large, up to twenty or so.
Considerably more subunits are possible in the divisional configuration than in
the functional configuration. For example, General Electric has fourteen busi-
nesses, which include: aviation, healthcare, lighting, energy, finance, water,
among many other diverse products and customers. As is evident, it is a diverse
set of different businesses, products, services, and customers.
For the divisional configuration, the top executive is the center for corporate
finance and policy. If divisional interdependencies are abundant, then the
executive can become overloaded resolving interdivisional issues. The goal is
to have divisions with minimal interdependency.

Matrix configuration

The matrix configuration is high on both dimensions: product/service/

customer and functional specialization, suggesting a need for a high infor-
mation-processing capacity to achieve the twin goals of efficiency and effect-
iveness. There is both the functional hierarchy and the divisional hierarchy for
the same firm. The top executive is responsible for both the functional and
divisional dimensions – to set policy, set priorities and resolve conflicts among
the subunits. The top executive is not involved in the details of operations,
but does oversee the entire firm. Most of the difficult coordination problems
are handled by the matrix managers, i.e., those that act as a link between the
lateral divisions and the functional hierarchy. Matrix managers make multiple
variable tradeoffs which involve both the function and the division. Figure
4.5 illustrates a matrix in which functional specialization is combined with
product orientation to yield coordination of functions across the product
groups. As shown in Figure 4.5, the matrix configuration requires simultaneous
coordination of the functional specialties across the projects, products,
 Matrix configuration 69

Figure 4.5 A matrix configuration.

services, or customers that the firm services. When there is a change in the
timing of an activity, it ripples across the whole of the firm – called the jello
effect.
The matrix can be very flexible, dealing with new information and adjusting
to the new situations quickly to utilize limited resources to meet firm priorities.
In general, a matrix organization can handle much more information than
other organizational configurations. The advantage is that the matrix can
realize both the efficiency of the functional form and the effectiveness of the
divisional form – overcoming the limitations of both forms. When it works
well, both efficiency and effectiveness result. Complicated tradeoffs are con-
sidered; decisions are made; and the firm moves on. But when the matrix is not
well managed, it can be neither efficient nor effective. The challenges of
managing a matrix include reconciling conflicts between the lateral and verti-
cal subunits, information overload, excessive meetings, and decision delay. The
firm does not move. The matrix configuration requires managerial skills that
include a focus on the entire firm as well as one’s own function or division, the
acceptance of uncertainty, the willingness to consider complicated tradeoffs
and negotiate realistic solutions, and a focus on results. These benefits must
exceed the additional costs of coordination if the matrix is to be justified
beyond the functional or divisional configurations.
The matrix configuration has many two-dimensional names in practice:
function and product, function and project, specialty and industry customer,
product and customer, product and region or country, basic technology and
70 The configuration and complexity of the firm

product – to name a few. There are also three-dimensional matrices, as many

multinational firms have function, product, and country or regional dimen-
sions. Procter & Gamble has a four-dimensional matrix of: global functions,
global business units, regional products and the fourth, global customers
(Galbraith, 2010). Matrix relations go beyond setting up the matrix configur-
ation reporting relationships. Management must invest in developing cross-
organizational coordination. This is realized in many ways: lateral relations,
liaison roles, various coordinating committees – all of which consider issues
which are not dealt with well or quickly within the hierarchy. Combining the
matrix configuration together with its various other cross-organizational rela-
tions, it is quite possible to have eight dimensions: function, product, region,
customer, technology development, basic research, human resources, and
inter-country finances – perhaps more to be managed and involving compli-
cated tradeoffs and coordination. Most firms are not so complicated; yet, many
modern firms have an array of matrix relations, or cross-organizational mech-
anisms to coordinate across the dominant hierarchy in the firm.
How big can a matrix be? The matrix has both a functional and divisional
dimension to manage simultaneously, so the size is the number of functions
multiplied by the number of divisions. Given the jello effect, or more formally
in NK theory where N is the number of subunits and K, the degree of interde-
pendency, we suggest that the matrix can include only a small number of
subunits, say four or five on each dimension. However, the big Swedish-Swiss
multinational firm ABB at one time had a matrix configuration where there
were over 100 separate SBUs along one dimension. They used an additional
middle level of management in the matrix to support the complexity of
interdependency to be coordinated. Still, the matrix was too complex to
manage and was eventually dismantled and replaced with a simpler configur-
ation. Yet quite recently, IBM has adopted a multidimensional and reconfigur-
able organization which yields both the multidimensional coordinated and also
a continuing reconfiguration; it goes beyond even the four dimensions. Per-
haps more important is the reconfiguration aspect which permits it to adjust to
an ever changing environment (Galbraith, 2010). It should be emphasized that
the coordinating units do not span all of the dimensions of the organization as
found in a two-dimensional matrix. The capacity to reconfigure the matrix is
paramount here. In turbulent environments, it is not likely that one configur-
ation of the matrix will work well for an extended time, it must be reconfigured
regularly. It is both the matrix configuration and its capacity for reconfigur-
ation that are needed – not a static matrix configuration.
 Organizational complexity 71

When both efficiency and effectiveness are needed, the matrix configuration
is an appropriate choice. The matrix is usually more costly to manage than a
hierarchy as there are more managers, more information, and more compli-
cated coordination to be done. Further, the managers must consider and deal
with many considerations that simultaneously have overall effects as well as
effects on the subunit. Individuals who have been successful in a hierarchy
may not be comfortable or successful in a matrix configuration. The matrix
must be justified in terms of the strategy and the firm’s environment.
The top management in the matrix has a focus on both efficiency and
effectiveness – attempting to obtain both. The top management cannot direct
the organization but must rely heavily upon the functional and divisional
managers for the detailed, ongoing coordination adjustments in order to meet
the firm priorities. Yet, the executive has much to do: set priorities, resolve
differences among the subunits, and generally oversee the entire firm.
It is important to emphasize that the matrix can also lead to poor performance.
The dual coordination across the functions and the divisions can lead to conflicts
of priorities between the managers of subunits. If conflict management requires
great involvement by the top executive, a major advantage of the matrix has
been lost. The telltale signs of a matrix in trouble are, again: overload of
decisions at the top as the managers are not able to solve problems; problems
are not dealt with at all and opportunities are lost; budgets are exceeded;
operations are not coordinated and resource utilization is lost or inefficient;
employees are unhappy and confused; subunits are spending excessive time on
coordinating with other subunits to the detriment of subunit performance; and
opportunities are lost. When the matrix works well, it can achieve efficiency and
effectiveness. But when things go badly, they can be very bad.
The organizational configuration is not the whole story; the organizational
complexity is another property of the organization which can be designed to
meet the goals of efficiency and effectiveness.

Organizational complexity

The organization’s complexity (not to be confused with environmental com-

plexity, discussed in Chapter 3) is a property or characteristic of the organiza-
tional structure. Organizational complexity is the vertical and horizontal
differentiation of task management in the firm. It is how the firm’s configur-
ation is broken down into its several subunits. Roughly, it is the width and
72 The configuration and complexity of the firm

Figure 4.6 The organizational complexity space.

height of the hierarchy. The two organizational complexity dimensions are: the
horizontal differentiation, or width, and the vertical differentiation, or height.
The horizontal differentiation is the degree of task specialization across the
hierarchy; the vertical differentiation is the depth of the hierarchy – top to
bottom. Each of the configurations we discussed above can have high or low
horizontal and vertical differentiation; it is a property of the organization.
The practical design questions relating to organizational complexity include:
the width of specialization for the firm, the span of control for the firm, the
delayering of the firm to eliminate middle management, the scope in a div-
isional configuration, and the limitation on the number of functions and
divisions in the matrix configuration. Again, these design choices are to be
made in terms of efficiency and effectiveness goals.
As shown in Figure 4.6, choices regarding the degree of a firm’s horizontal
differentiation and vertical differentiation result in four types of organizational
complexity. The organizational complexity is classified as: blob, tall, flat, and
symmetric. These are not ideal types of configurations but rather archetypes
that show how information processing will be conducted in the firm based on
how work is allocated among subunits.
Next, we discuss four complexity types on the horizontal and vertical
dimensions: blob for low and low; tall for low and high; flat for high and
low; and symmetric for high and high, respectively.

Blob

If the firm does not formally divide its work into subunits, then it is like a blob.
It is undifferentiated; it is low on both horizontal and vertical differentiation.
 Tall 73

The blob has little specialization of task; the firm can be quite flexible and
quick to respond to ongoing changes. Job descriptions are very loose, or may
not exist. This lack of definition of who is to do what is very demanding on the
executive, requiring decision-making for new situations on a continuing basis,
where the executive can become overloaded and not be able to give adequate
attention to the activities. The blob can also be confusing to customers or to
newcomers who join the organization, since it is not clear who does what, or
where one should go for specific types of information.

Tall

The tall firm is low on horizontal differentiation and high on vertical differ-
entiation. The tall firm has a large middle management which focuses on
information processing – taking directions and information from the top and
making it precise for lower levels in the hierarchy; and taking detailed infor-
mation from the bottom and summarizing and interpreting it for the top
executives. The multilayered middle management connects the executive to
the specialized task level, e.g., the top executive to the factory or service
worker; the CEO to the programmer. The middle management takes directions
and orders from the executive and breaks them down into smaller task
implications which then must be coordinated across the subunits. For
example, the executive of an auto plant may set the production plan at
100 automobiles, which must be broken down into plans for many subunits
and coordinated among the subunits so that all of the functions work together
to meet the plan.
From the bottom, the middle management summarizes what is happening at
the bottom and passes it up the hierarchy, where the information is aggregated
as it goes up, so that the top can deal with simpler, but relevant, information for
decision-making and control. Both the down and up processes involve a good
deal of information processing; it takes managerial time and can lead to delay.
The span of control is limited as the information processing demands on the
middle managers can be quite high. The inter-level vertical information transf-
eral is usually large, involving frequent interaction of detailed information. If
an additional function is added, it must be coordinated across all the functions,
and thus the addition of one more function increases the information process-
ing demands nonlinearly. This limits the number of direct reports to a few;
most firms have five to seven functions.
74 The configuration and complexity of the firm

Recently, many firms have shortened their hierarchy, eliminating middle-

management levels in the firm. This is frequently called “delayering.” On the
organization chart, it can be simply the removal of a level, but much more is
involved. A simple removal creates a mismatch and miscommunication
between the two remaining levels. When a level is removed, the connections
between the level above and the level below must also be changed. So, the
information and communications must be redesigned, usually from top to
bottom. Without the informational assessment and modification, the newly
delayered firm will initially struggle. With more advanced information tech-
nology, it is now possible to achieve quickly the vertical coordination with a
shorter middle management, but it still requires a redesign of the organization
and its use of information. It is not simply a matter of removing a layer in the
hierarchy and seeing what happens.

Flat

The flat firm is high on horizontal differentiation and low on vertical differen-
tiation. There are fewer middle managers (or subunits) to coordinate between
the top executives and the lower levels in the organization. Usually, these
middle managers do not focus on detailed operations which take lots of time
and attention. They focus instead on resource allocation, general policy, and
finance. Other issues can be innovation, R&D, human resources – all of which
involve policy and strategy. The information is aggregated and minimal. Short-
term information exchanges focus on financial goals and cash flows. The long-
term information exchanges focus on capital budgets and technology plan-
ning. If your firm is flat in its structure, the scope of the firm work across
subunits can be quite varied, especially if there are no operational connections
among them. The span of control can be wide if the focus of information flow is
on policy, not detailed operations. Put another way, the information flows are
minimal if exchanges focus on general policy but grow quickly for detailed
operations.
A major advantage of the flat organizational structure is that each unit has
autonomy to focus on its own work. Subunits can attend to the needs of
customers or suppliers or new products – whatever is their particular charge, in
terms of focus of work. On the other hand, the executive level of the organization
bears the burden of coordinating among these subunits, and they can get out of
synch, lack coordination, leading to inefficiencies for the firm as a whole.
 Diagnostic questions 75

Symmetric

The symmetric firm is high on horizontal differentiation and high on vertical

differentiation. This means that the organization’s work is broken down into many
task specialties as well as many vertical reporting levels. Horizontally breaking
down tasks into smaller tasks means that work can be done simultaneously in the
horizontal subunits. Parallel processing of work, ability of each to deal with
customers or others in the marketplace, and the opportunity to work independ-
ently all help to facilitate organizational effectiveness. To overcome the problem
of the flat organization, in which the executive level must process information
generated by each of the task-based subunits, a middle level (or perhaps multiple
middle levels) are created that aggregate work from bottom to top and facilitate
information flow from top to bottom. The symmetric organization tries to hit the
ideal balance of vertical and horizontal breakdown of work into subunits. Middle
levels help to coordinate work to yield efficiencies and so that each unit can
concentrate on its activities for high effectiveness. The information-processing
requirements of the symmetric organization are very high because the coordin-
ation demands are high both horizontally and vertically throughout the firm.

Diagnostic questions

For your firm, you can examine the two dimensions: product/service/customer
orientation and functional specialization in Figure 4.7. Locate where you
are in the figure. Then you can categorize your firm as: simple, functional,
divisional, or matrix. To begin, answer the diagnostic questions overleaf.

Figure 4.7 Locate your firm in the configuration space.

76 The configuration and complexity of the firm

1. What is your unit of analysis that you chose in Chapters 1, 2, and 3? Use this
unit of analysis as the organization when answering the questions below.
The questions below will help you locate your organization
on the functional orientation dimension and the product/service/customer
dimension. For each item within question 2 and question 3, use a 1 to 5
rating scale to score your organization as follows:
1 2 3 4 5
very low moderate very high
2. Product/service/customer orientation
a. Is the focus of your activities on internal operations of the organization
(1) or, are you more focused toward products, services, and/or
customers (5)?
b. To what extent do you form subunits to organize work around your
customers, (1)–(5)?
c. To what extent do you form subunits to organize work around your
firm’s products or services, (1)–(5)?
Now mark your organization’s location on the horizontal axis in
Figure 4.7.1
3. Functional specialization
a. To what extent does your organization create subunits based on
specialties or skills of its workers, (1)–(5)?
b. Is your orientation toward specialization of functions and clear
definition of jobs, i.e., high on functional specialization, or is your
orientation low on specialization, (1)–(5)?
c. To what extent does the firm have clearly defined roles and
responsibilities for various subunits, (1)–(5)?
Now mark your organization’s location on the vertical axis in Figure 4.7.
4. You can now locate your organization on Figure 4.7. What is your firm’s
configuration?
Next consider the organizational complexity. In Figure 4.8, the firm’s
horizontal differentiation and vertical differentiation are the dimensions.
Here are questions which will help you locate your firm as blob, tall, flat,
or symmetric:

1
We suggest that you use an averaging procedure of the detailed scores to get to the overall score.
 Fit and misfits 77

Figure 4.8 Locate your firm in the organizational complexity space.

5. Horizontal differentiation
At the lowest level of your firm, how many subunits are there across the
firm (where many subunits indicate a high horizontal differentiation and a
few indicates low horizontal differentiation), few (1) or many (5)?
If there are more than five subunits, your organization is high in horizontal
differentiation.
6. Vertical differentiation
How many levels are there from the top of the firm to the bottom,
few (1) or many (5)?
How many levels are there between the lowest-level employee and the
CEO, few (1) or many (5)?
Roughly, if there are more than five levels, assign a rating of 5 (high vertical
differentiation). If there are four or five levels, assign a rating of 4. If there are
three levels, assign a rating of 3. If there are two levels, assign a level of 2.
If there is one level, assign a rating of 1 (low in vertical differentiation).
You can now locate your organization on the figure; what is its
complexity?

Fit and misfits

What is a good configuration for your firm, and what is an appropriate

organizational complexity? What is a good fit? Here we add fit for the config-
uration and organizational complexity to the goals, strategy, and environment
78 The configuration and complexity of the firm

Table 4.1 Fit among configuration, organizational complexity, environment, strategy,

and goals

Corresponding
quadrant in
organization
design space A B C D

Organizational Blob Tall Flat Symmetric

complexity

Configuration Simple Functional Divisional Matrix

Environment Calm Varied Locally Turbulent

stormy

Strategy types Reactor Defender Prospector Analyzer Analyzer

with without
innovation innovation

Organizational Neither Efficiency Effectiveness Efficiency and Effectiveness

goals

you assessed in the prior chapters. This is shown in Table 4.1. In each of the
columns A, B, C, and D, the fit relations can be read vertically from top to
bottom. Misfits are any set of relations which do not fall within one column.
There are a very large number of possible misfits. The critical issue is the
limited attention and time of the top management. Any of these misfits can
overload the executive management and lead to diminished performance for
the firm. The telltale signs are: decision backlogs where the adjustments are not
timely; individuals are either not told what to do or not given activities that are
coordinated one with the other; or the executive works excessively long hours,
but it is not enough.
In column A there is a fit among: the blob, a simple configuration, a calm
environment, a reactor strategy, and ill-defined goals. The executive has the
time and can devote attention to handling the relatively low information-
processing demands of the configuration. If the strategy or the environment
requires more information processing, then the executive can quickly become
overloaded with undesired consequences. The simple configuration has a misfit
with any condition or combination of conditions, which generates excessive
 Fit and misfits 79

information-processing demands for the executive: the firm is large; the

strategy is a defender or analyzer which requires time-consuming planning
and control; and the environment is not calm, which also requires adjustments
and changes.
For a simple configuration and blob type of complexity, the reactor strategy
is a good fit. This strategy lacks focus on the goals and usually is reactive to the
situation at hand. The simple configuration is well matched for a reactor
strategy as the executive can read the situation and then adjust to the market
and the customers. The simple configuration could also work well for the
prospector strategy where there is a narrow projective strategy. Here, rapid
adjustment is not required until a survival threat emerges. The simple configur-
ation is not a good fit for a defender strategy where efficiency is very important
or for an analyzer strategy where longer-term planning is the norm.
In column A the corresponding environment is the calm environment. At
first glance, the opposite turbulent environment may seem the better fit.
The simple configuration can adjust quickly, which may not be needed for
a calm environment which is predictable and not complex. But with all the
information-processing demand centered on one individual, the demand on the
executive quickly becomes overwhelming – especially when both the oper-
ational, tactical, as well as the strategic decisions are located with one individ-
ual. Nonetheless, the simple configuration can quickly adapt to operational
changes but usually has great difficulties adapting to strategic changes. There-
fore, the simple configuration works well for the calm environment, as there
are fewer adjustments required. With limited attention and time, the executive
finds the calm environment less demanding. The critical factor is the attention
and time limitation of the executive.
Moving to column B, there is a fit among: the tall complexity, the functional
configuration, the varied environment, the defender strategy and the efficiency
goal. The information-processing demands have increased considerably, but
the functional configuration and tall structure can handle a large amount of
information which is predictable within known variations. Detailed and
involved coordination can be realized. However, if the environmental unpre-
dictability increases requiring additional information processing, then the
functional configuration is not suited to making large coordinated changes
quickly – a misfit situation.
For the functional configuration and tall complexity, the defender strategy
with a focus on efficiency is a good fit where the defender strategy maintains
the firm’s position in its product/service market. Customers and clients are
80 The configuration and complexity of the firm

usually continuing, frequently with deep relationships. The marketing/sales

function maintains strong ties with the customer. There is little emphasis on
innovation in new products or services; however, there can be an emphasis on
process innovation to reduce costs. The tall firm with a large middle manage-
ment can focus on the efficient use of resources with detailed coordination of
operations. The focus is continuity of operations based upon detailed plans. The
firm can vary its production quantities efficiently within narrow limits, but
larger variations in quantity or new activities compromise that efficiency. The
tall firm is a misfit with the innovation-focused strategies. The defender wants
to keep things as they are and the functional configuration fits it well. For other
strategies, the functional configuration fits less well. It fits the analyzer without
innovation reasonably well as planned change is possible. But for the analyzer
with innovation or prospector, the functional configuration is too slow to be
effective.
The corresponding environment for the functional configuration and
tall complexity is the varied environment which is predictable and has high
complexity. The emphasis is on predictability where the executive can antici-
pate what will happen in the future. The executive can deal with the complex-
ity of the environment via rules and standard procedures that have been
developed and learned over time. But when the environment becomes
unpredictable – turbulent or locally stormy – then the functional configuration
loses its efficiency as quick adjustments are needed and it cannot adjust
quickly; it can perform the wrong activities as well. Frequently executive
managers will try to take on this additional burden of driving change and
become overloaded. The telltale signs of overload are backlogs of decisions and
changes that are not coordinated across the whole of the organization.
Column C describes the firm that has a flat complexity, a divisional configur-
ation, a locally stormy environment, a prospector strategy and an effectiveness
goal. Each division has its own environment, which is stormy but largely
independent of the others. The executive can create independent divisions to
deal with the local conditions. Then the high-level executive can deal with
policy and financial issues – limiting the information-processing demands. If,
however, the environment becomes interdependent, such as two divisions
competing for the same customer, the executive can become overloaded with
coordinating details – again, creating a misfit. The tall firm is a misfit for the
divisional configuration. It would be impossible for the top executive to
become involved in the detailed operations of the firm, which would only lead
to overload and its inefficient consequences.
 Fit and misfits 81

For the divisional configuration and flat complexity, the prospector strategy
with a focus on effectiveness is a good fit. The divisional configuration fits well
the corporate strategy of prospector, where each division’s own strategy is not
specified from the top but is developed within the opportunities of the div-
ision’s own markets and resources. The flat firm with a minimal middle
management can focus on the efficient allocation of resources across the
divisions using financial criteria. The divisional mix may include a defender
strategy for one division and a prospector for another. The flat firm is a misfit
with the intense information and high subunit coordination needed by a
defender or analyzer.
The divisional configuration and flat complexity are a good fit with a locally
stormy environment which can be highly unpredictable, sub-environment by
sub-environment. Each sub-environment should closely match the division
boundary. That is, for a product division the environment for each product
can be unpredictable but not interdependent among the products. For General
Electric (GE), the jet engine market is quite independent of the appliance
market, but each market and technology might be unpredictable. Here, the
top executive has partitioned the environment into independent segments,
where the divisional executive can deal with it. The flat firm does not deal
well with the highly coordinated operations which involve great detail; here
there will be opportunity losses from the poor coordination.
In column D, the firm has a symmetric shape, a matrix configuration, a
turbulent environment, an analyzer strategy and the dual goals of efficiency
and effectiveness. The information-processing demands are very large, and
detailed coordination of new situations is required (Galbraith, 1973, 2010). The
firm cannot be broken down into relatively independent divisions, nor can a
tall hierarchy handle all of the changes required.
The matrix configuration is a misfit with the following conditions: there is
not a dual focus on efficiency and effectiveness which justifies the costs of
additional management with particular managerial skills for coordinating up
and across the hierarchy; the strategy is defender or prospector, which can be
achieved with a single hierarchy; the environment is not complex or is pre-
dictable, which can be managed with a single hierarchy. When a single
hierarchy configuration is sufficient for the desired goals, then the matrix adds
cost without justification. When the strategy has a dual focus and the environ-
ment is turbulent, requiring large information processing to deal with the
difficult ongoing coordination to achieve efficient use of resources, then the
matrix configuration is appropriate.
82 The configuration and complexity of the firm

The analyzer strategy, both with and without innovation, is a good fit for
the matrix configuration and symmetric complexity. The analyzer operates in
two domains of symmetric complexity. The first is the exploitation of the
existing business, where efficiency is important; and, the second is explor-
ation of innovation or technology enhancement, where the effectiveness of
new ideas and products is paramount. The matrix configuration brings the
two together to realize the needed changes in a timely manner. The matrix
configuration fosters a dual focus on exploitation and exploration. It can
work well in a turbulent environment where there are a large number of
issues and problems to consider which are highly unpredictable, requiring
the firm to adjust quickly. Together, there is a very large requirement for
information processing to coordinate on an ongoing manner so that timely
decisions can be made and action taken. The matrix configuration can deal
well with the turbulent environment, and where there are many activities to
coordinate across the entire firm. The functional managers and the divisional
(product, project, or customer) managers are the coordinators both within
their own subunit and across all of the subunits of the firm. There are
ongoing adjustments and task changes due to the unpredictability of the
environment. The information exchanges are very large and detailed. The
span of control can be wide when the matrix managers work together and
make the needed adjustments themselves, i.e., when the matrix is working
well. When the matrix is not working well and many decisions move up to
the top management, then the span of control can be quite limited. The key is
the amount of information processing that the top management must deal
with to achieve the coordination. The growth of the matrix is quite limited if
the top management is involved in the details of operations. If the top
management is not so involved, growth can be larger but is limited because
the coordination difficulties grow nonlinearly as each new matrix dimension
adds many coordination interfaces (Burton and Obel, 1984). The symmetric
complexity is not a good fit unless the environment is both unpredictable
and complex. If one of these conditions holds and not the other, the simpler
tall or flat firm is sufficient.
If your firm is located in different columns based upon your answers to the
diagnostic questions of these four chapters, then you should think about what
you might do to bring all elements of the firm’s organizational design into fit in
the column that meets the firm’s goals. But also think about what is involved to
move to a different goal and thus a different column.
 Glossary 83

Summary

In this chapter, you have assessed your organization’s configuration and

organizational complexity and considered how these relate to your firm’s
strategy, environment, and goals. There are four configurations: simple, func-
tional, divisional, and matrix; and there are four complexity types: blob, tall,
flat, and symmetric. We discussed how your firm’s configuration and complex-
ity should be designed so as to improve the likelihood of the firm reaching
goals, given the environment and your firm’s strategy. If there are misfits
among the design components, then you should consider how these might be
changed in order to bring them into alignment.

Glossary

Blob complexity: an undefined organization in the sense that there are no formally
specified subunits.
Configuration: assignment of work to units of the organization; indicates the
hierarchy of responsibility; represented pictorially as an organization chart; an
icon of the organization; sometimes called the structure or architecture of the
organization.
Divisional configuration: tasks are assigned to relatively independent divisional
units by product, customer, region; or other externally oriented focus;
each division relatively self contained; executives make policy and financial
decisions; organizational chart represents the divisions reporting to the
headquarters.
Flat complexity: an organization with many jobs at the bottom and few levels bottom
to top; high horizontal differentiation and low vertical differentiation.
Functional configuration: tasks are assigned by specialization of work; tasks are
grouped by skills requirements.
Functional specialization: the primary partitioning of the firm’s task into smaller
specialized tasks and the efficient completion of each task.
Horizontal differentiation: the degree of task specialization across the hierarchy.
Jello effect: the situation where a small change in one part of the organization requires
change and adjustment throughout the organization. E.g., in a matrix
configuration, a change in one function or project frequently requires adjustments
in a number of other functions and projects.
Matrix configuration: a combination of a functional and divisional form; a dual focus;
a dual hierarchy.
Multi-dimensional matrix: a matrix organization with more than two dimensions.
84 The configuration and complexity of the firm

Organizational complexity: the vertical and horizontal differentiation dimensions of

the organization; the shape of the organization.
Product/service/customer orientation: the primary partitioning of the firm’s task into
smaller tasks by the output orientation and their effective completion.
Simple configuration: tasks or work activities are specified on an ongoing basis
rather than in advance; an organization where one individual, the boss,
is responsible for all activities; the organization chart usually shows
all employees reporting to one person.
Span of control: the horizontal complexity or width of the organization, usually
measured as the number of individuals reporting to a manager.
Symmetric complexity: an organization with a balance of specific jobs and levels;
neither tall nor flat; high on both horizontal and vertical differentiation.
Tall complexity: an organization with a large number of levels from bottom to top;
low horizontal differentiation and high vertical differentiation.
Vertical differentiation: the depth of the hierarchy; total number of levels, top to
bottom.