Unit 8.

Designing organizational structure

8.1 The concept and elements of organizing

8.2 Chain of command
8.3 Departmentalization
a) Functional approach
b) Divisional approach
c) Matrix approach
d) Team approach
e) Virtual network approach

8.1 The concept and elements of organizing

Some people thrive in less hierarchical, even bossless, organizations, whereas others have
difficulty without a clearly defined vertical structure. New managers in particular are typically
more comfortable and more effective working in an organization system that is compatible with
their leadership beliefs. All organizations wrestle with the question of structural design, and
reorganization often is necessary to reflect a new strategy, changing market conditions, or
innovative technology.
Organizing is the deployment of organizational resources to achieve strategic goals. The
deployment of resources is reflected in the organization’s division of labor into specific
departments and jobs, formal lines of authority, and mechanisms for coordinating diverse
organization tasks.
Organizing is important because it follows strategy. Strategy defines what to do;
organizing defines how to do it. Structure is a powerful tool for reaching strategic goals, and a
strategy’s success often is determined by its fit with organizational structure.
The organizing process leads to the creation of organization structure, which defines how
tasks are divided and resources deployed. Organization structure is defined as (1) the set of
formal tasks assigned to individuals and departments; (2) formal reporting relationships,
including lines of authority, decision responsibility, number of hierarchical levels, and span of
managers’ control; and (3) the design of systems to ensure effective coordination of employees
across departments. Ensuring coordination across departments is just as critical as defining the
departments to begin with. Without effective coordination systems, no structure is complete.
The set of formal tasks and formal reporting relationships provides a framework for
vertical control of the organization. The characteristics of vertical structure are portrayed in the
organization chart, which is the visual representation of an organization’s structure. A sample
organization chart for a water bottling plant is illustrated in Exhibit 1. The plant has four major
departments—accounting, HR, production, and marketing. The organization chart delineates the
chain of command, indicates departmental tasks and how they fit together, and provides order
and logic for the organization. Every employee has an appointed task, line of authority, and
decision responsibility. The following sections discuss several important features of vertical
structure in more detail.
Work Specialization
Organizations perform a wide variety of tasks. A fundamental principle is that work can
be
performed more efficiently if employees are allowed to specialize. Work specialization,
sometimes called division of labor, is the degree to which organizational tasks are subdivided
into separate jobs. Work specialization in Exhibit 1 is illustrated by the separation of production
tasks into bottling, quality control, and maintenance. Employees within each department perform
only the tasks relevant to their specialized function. When organizations face new strategic
issues, managers often create new positions or departments to deal with them.
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 When work specialization is extensive, employees specialize in a single task. Jobs tend to
be small, but they can be performed efficiently. Work specialization is readily visible on an
automobile assembly line, where each employee performs the same task over and over again. It
would not be efficient to have a single employee build the entire automobile, or even perform a
large number of unrelated jobs. Despite the apparent advantages of specialization, many
organizations are moving away from this principle. With too much specialization, employees are
isolated and do only a single, boring job. In addition, too much specialization creates separation
and hinders the coordination that is essential for organizations to be effective. Many companies
are implementing teams and other mechanisms that enhance coordination and provide greater
challenge for employees.

Exhibit 1. Organization Chart for a Water Bottling Plant

8.2 Chain of Command

The chain of command is an unbroken line of authority that links all employees in an
organization and shows who reports to whom. It is associated with two underlying principles.
Unity of command means that each employee is held accountable to only one supervisor. The
scalar principle refers to a clearly defined line of authority in the organization that includes all
employees. Authority and responsibility for different tasks should be distinct. All individuals in
the organization should know to whom they report, as well as the successive management levels
all the way to the top.

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 Authority, Responsibility, and Delegation
The chain of command illustrates the authority structure of the organization. Authority is
the formal and legitimate right of a manager to make decisions, issue orders, and allocate
resources to achieve organizationally desired outcomes. Authority is distinguished by three
characteristics:
1. Authority is vested in organizational positions, not people. Managers have authority because
of the positions they hold, and other people in the same positions would have the same authority.
2. Authority flows down the vertical hierarchy. Positions at the top of the hierarchy are vested
with more formal authority than are positions at the bottom.
3. Authority is accepted by subordinates. Although authority flows from the top down,
subordinates comply because they believe that managers have a legitimate right to issue orders.
The acceptance theory of authority argues that a manager has authority only if subordinates
choose to accept his or her commands. If subordinates refuse to obey because the order is outside
their zone of acceptance, a manager’s authority disappears.
Responsibility is the flip side of the authority coin. Responsibility is the duty to perform
the task or activity as assigned. Typically, managers are assigned authority commensurate with
their responsibilities. When managers have responsibility for task outcomes but little authority,
the job is possible but difficult. They rely on persuasion and luck. When managers have authority
exceeding responsibility, they may become tyrants, using authority to achieve frivolous
outcomes.
Accountability is the mechanism through which authority and responsibility are brought
into alignment. Accountability means that the people with authority and responsibility are subject
to reporting and justifying task outcomes to those above them in the chain of command. For
organizations to function well, everyone needs to know what they are accountable for and accept
the responsibility and authority for performing it.
Another important concept related to authority is delegation. Delegation is the process
that managers use to transfer authority and responsibility to positions below them in the
hierarchy. Most organizations today encourage managers to delegate authority to the lowest
possible level to provide maximum flexibility to meet customer needs and adapt to shifts in the
environment. Delegating decision making to lower-level managers and employees can be highly
motivating and improve speed, flexibility, and creativity. However, many managers find
delegation difficult. When managers can’t delegate, they undermine the role of their subordinates
and prevent people from doing their jobs effectively.
Line and Staff Authority
An important distinction in many organizations is between line authority and staff
authority, reflecting whether managers work in line departments or staff departments in the
organization’s structure. Line departments perform tasks that reflect the organization’s primary
goal and mission. In a software company, line departments make and sell the product. In an
Internet-based company, line departments would be those that develop and manage online
offerings and sales. Staff departments include all those that provide specialized skills in support
of line departments. Staff departments have an advisory relationship with line departments and
typically include marketing, labor relations, research, accounting, and HR.
Line authority means that people in management positions have the formal authority to
direct and control immediate subordinates. Staff authority is narrower and includes the right to
advise, recommend, and counsel in the staff specialists’ area of expertise. Staff authority is a
communication relationship; staff specialists advise managers in technical areas. For example,
the finance department of a manufacturing firm would have staff authority to coordinate with
line departments about which accounting forms to use to facilitate equipment purchases and
standardize payroll services.
Span of Management

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 The span of management is the number of employees reporting to a supervisor.
Sometimes called the span of control, this characteristic of structure determines how closely a
supervisor can monitor subordinates. Traditional views of organization design recommended a
span of management of about 7 to 10 subordinates per manager. However, many lean
organizations today have spans of management as high as 30, 40, and even higher. Generally,
when supervisors must be closely involved with subordinates, the span should be small, and
when supervisors need little involvement with subordinates, it can be large. The following list
describes the factors that are associated with less supervisor involvement and thus larger spans of
control:
● Work performed by subordinates is stable and routine.
● Subordinates perform similar work tasks.
● Subordinates are concentrated in a single location.
● Subordinates are highly trained and need little direction in performing tasks.
● Rules and procedures defining task activities are available.
● Support systems and personnel are available for the manager.
● Little time is required in nonsupervisory activities, such as coordination with other
departments or planning.
● Managers’ personal preferences and styles favor a large span.
The average span of control used in an organization determines whether the structure is
tall or flat. A tall structure has an overall narrow span and more hierarchical levels. A flat
structure has a wide span, is horizontally dispersed, and has fewer hierarchical levels. Having
too many hierarchical levels and narrow spans of control is a common structural problem for
organizations. One recent study found that the span of management for CEOs has doubled over
the past two decades, rising from about 5 to around 10 managers reporting directly to the top
executive, with the span of management for those managers also increasing.
Centralization and Decentralization
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.
With decentralization, decision authority is pushed downward to lower organization levels.
Organizations may have to experiment to find the correct hierarchical level at which to make
decisions.
In the United States and Canada, the trend over the past 30 years has been toward greater
decentralization of organizations. Decentralization is believed to relieve the burden on top
managers, make greater use of employees’ skills and abilities, ensure that decisions are made
close to the action by well-informed people, and permit more rapid response to external changes.
However, not every organization should decentralize all decisions. Within many
companies, there is often a “tug of war between centralization and decentralization,” as top
executives want to centralize some operations to eliminate duplication while business division
managers want to maintain decentralized control. Managers should diagnose the organizational
situation and select the decision-making level that will best meet the organization’s needs.
Factors that typically influence centralization versus decentralization are as follows:
●● Greater change and uncertainty in the environment are usually associated with
decentralization.
●● The amount of centralization or decentralization should fit the firm’s strategy.
●● In times of crisis or risk of company failure, authority may be centralized at the top.

8.3 Departmentalization

Another fundamental characteristic of organization structure is departmentalization,

which is the basis for grouping positions into departments and departments into the total
organization. Managers make choices about how to use the chain of command to group people
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together to perform their work. Five approaches to structural design reflect different uses of the
chain of command in departmentalization, as illustrated in Exhibit 2. The functional, divisional,
and matrix are traditional approaches that rely on the chain of command to define departmental
groupings and reporting relationships along the hierarchy.
Two innovative approaches are the use of teams and virtual networks, which have
emerged to meet changing organizational needs in a turbulent global environment. The basic
difference among structures (illustrated in Exhibit 2) is the way in which employees are
departmentalized and to whom they report. Each structural approach is described in detail in the
following sections.

Exhibit 2. Five Approaches to Structural Design

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 a) Vertical Functional Approach
In a functional structure, also called a U-form (unitary structure), activities are grouped
together by common function from the bottom to the top of the organization. The functional
structure groups positions into departments based on similar skills, expertise, work activities, and
resource use. A functional structure can be thought of as departmentalization by organizational
resources because each type of functional activity—accounting, HR, engineering, and
manufacturing—represents specific resources for performing the organization’s task. People,

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facilities, and other resources representing a common function are grouped into a single
department.
The major departments under the president are groupings of similar expertise and
resources, such as accounting, HR, production, and marketing. Each of the functional
departments is concerned with the organization as a whole. The marketing department is
responsible for all sales and marketing, for example, and the accounting department handles
financial issues for the entire company.
The functional structure is a strong vertical design. Information flows up and down the
vertical hierarchy, and the chain of command converges at the top of the organization. In a
functional structure, people within a department communicate primarily with others in the same
department to coordinate work and accomplish tasks or implement decisions that are passed
down the hierarchy. Managers and employees are compatible because of similar training and
expertise. Typically, rules and procedures govern the duties and responsibilities of each
employee, and employees at lower hierarchical levels accept the right of those higher in the
hierarchy to make decisions and issue orders.
Functional Advantages and Disadvantages
Grouping employees by common task permits economies of scale and efficient resource
use. Large, functionally based departments enhance the development of in-depth skills because
people work on a variety of related problems and are associated with other experts within their
own department. Because the chain of command converges at the top, the functional structure
also offers a way to centralize decision making and provide unified direction from top managers.
The primary disadvantages reflect barriers that exist across departments. Because people are
separated into distinct departments, communication and coordination across functions are often
poor, causing a slow response to environmental changes. Innovation and change require
involvement of several departments. Another problem is that decisions involving more than one
department may pile up at the top of the organization and be delayed.

b) Divisional Approach
In contrast to the functional approach, in which people are grouped by common skills and
resources, the divisional structure occurs when departments are grouped together based on
similar organizational outputs. With a divisional structure, also called an M-form
(multidivisional) or a decentralized form, separate divisions can be organized with responsibility
for individual products, services, product groups, major projects or programs, divisions,
businesses, or profit centers. The divisional structure is also sometimes called a product
structure, program structure, or self-contained unit structure. Each of these terms means
essentially the same thing: Diverse departments are brought together to produce a single
organizational output, whether it is a product, a program, or service to a single customer. Most
large corporations have separate divisions that perform different tasks, use different
technologies, or serve different customers. When a huge organization produces products for
different markets, the divisional structure works because each division is an autonomous
business.
In a divisional structure, divisions are created as self-contained units, with separate
functional departments for each division. Each functional department resource needed to produce
the product is assigned to each division. Whereas in a functional structure, all R&D engineers are
grouped together and work on all products, in a divisional structure, separate R&D departments
are created within each division. Each department is smaller and focuses on a single product line
or customer segment. Departments are duplicated across product lines.
The primary difference between divisional and functional structures is that in a divisional
structure, the chain of command from each function converges lower in the hierarchy. In a
divisional structure, differences of opinion among R&D, marketing, manufacturing, and finance
would be resolved at the divisional level rather than by the president. Thus, the divisional
structure encourages decentralization. Decision making is pushed down at least one level in the
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hierarchy, freeing the president and other top managers for strategic planning. Only if the
divisions can’t agree, fail to coordinate, or start making decisions that hurt the organization are
some decisions pulled back up to the top. An alternative for assigning divisional responsibility is
to group company activities by geographic region or customer group.
Divisional Advantages and Disadvantages
By dividing employees and resources along divisional lines, the organization will be
flexible and responsive to change because each unit is small and tuned in to its environment. By
having employees working on a single product line, the concern for customers’ needs is high.
Coordination across functional departments is better because employees are grouped together in
a single location and committed to one product line. Great coordination exists within divisions;
however, coordination across divisions is often poor. Problems can occur when autonomous
divisions go in opposite directions. Another major disadvantage is duplication of resources and
the high cost of running separate divisions. Instead of a single research department in which all
research people use a single facility, each division may have its own research facility. The
organization loses efficiency and economies of scale. In addition, the small size of departments
within each division may result in a lack of technical specialization, expertise, and training.

Exhibit 3. Functional vs Divisional Structures

c) Matrix Approach
The matrix approach combines aspects of both functional and divisional structures
simultaneously, in the same part of the organization. The matrix structure evolved as a way to
improve horizontal coordination and information sharing. One unique feature of the matrix is
that it has dual lines of authority. The functional hierarchy of authority runs vertically, and the
divisional hierarchy of authority runs horizontally. The vertical structure provides traditional
control within functional departments, and the horizontal structure provides coordination across
departments.
The U.S. operation of Starbucks, for example, uses geographic divisions for Western/
Pacific, Northwest/Mountain, Southeast/Plains, and Northeast/Atlantic. Functional departments
including finance, marketing, and so forth are centralized and operate as their own vertical units,
as well as supporting the horizontal divisions. The matrix structure, therefore, supports a formal
chain of command for both functional (vertical) and divisional (horizontal) relationships. As a
result of this dual structure, some employees actually report to two supervisors simultaneously.

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 The dual lines of authority make the matrix unique. The two lines of authority are
geographic and product. The geographic boss in Germany coordinates all subsidiaries in
Germany, and the plastics products boss coordinates the manufacturing and sale of plastics
products around the world. Managers of local subsidiary companies in Germany would report to
two superiors, both the country boss and the product boss. The dual authority structure violates
the unity-of-command concept described earlier in this chapter, but that is necessary to give
equal emphasis to both functional and divisional lines of authority. Dual lines of authority can be
confusing, but after managers learn to use this structure, the matrix provides excellent
coordination simultaneously for each geographic region and each product line.
The success of the matrix structure depends on the abilities of people in key matrix roles.
Two-boss employees, those who report to two supervisors simultaneously, must resolve
conflicting demands from the matrix bosses. They must work with senior managers to reach joint
decisions. They need excellent human relations skills with which to confront managers and
resolve conflicts. The matrix boss is the product or functional boss, who is responsible for one
side of the matrix. The top leader is responsible for the entire matrix. The top leader oversees
both the product and functional chains of command. His or her responsibility is to maintain a
power balance between the two sides of the matrix. If disputes rise between them, the problem
will be kicked upstairs to the top leader.
Matrix Advantages and Disadvantages
The matrix can be highly effective in a complex, rapidly changing environment in which
the organization needs to be flexible, innovative, and adaptable. The conflict and frequent
meetings generated by the matrix allow new issues to be raised and resolved. The matrix
structure makes efficient use of HR because specialists can be transferred from one division to
another. A major problem with the matrix is the confusion and frustration caused by the dual
chain of command. Matrix bosses and two-boss employees have difficulty with the dual
reporting relationships. The matrix structure also can generate a high level of conflict because it
pits divisional against functional goals in a domestic structure, or product line versus country
goals in a global structure. Rivalry between the two sides of the matrix can be exceedingly
difficult for two-boss employees to manage. This problem leads to the third disadvantage: time
lost to meetings and discussions devoted to resolving this conflict. Often the matrix structure
leads to more discussion than action because different goals and points of view are being
addressed. Managers may spend a great deal of time coordinating meetings and assignments,
which takes time away from core work activities.

Exhibit 4. Dual-Authority Structure in a Matrix Organization

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 Exhibit 5. Global Matrix Structure

d) Team Approach
Probably the most widespread trend in departmentalization in recent years has been the
implementation of team concepts. The vertical chain of command is a powerful means of
control, but passing all decisions up the hierarchy takes too long and keeps responsibility at the
top. The team approach gives managers a way to delegate authority, push responsibility to lower
levels, and be more flexible and responsive in a complex and competitive global environment.
One approach to using teams in organizations is through cross-functional teams, which
consist of employees from various functional departments who are responsible to meet as a team
and resolve mutual problems. Cross-functional teams can provide needed horizontal coordination
to complement an existing divisional or functional structure. A frequent use of cross-functional
teams is for change projects, such as new product or service innovation. Team members typically

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still report to their functional departments, but they also report to the team, one member of whom
may be the leader.
The second approach is to use permanent teams, groups of employees who are organized
in a way similar to a formal department. Each team brings together employees from all
functional areas focused on a specific task or project, such as parts supply and logistics for an
automobile plant. Emphasis is on horizontal communication and information sharing because
representatives from all functions are coordinating their work and skills to complete a specific
organizational task. Authority is pushed down to lower levels, and front-line employees are often
given the freedom to make decisions and take action on their own. Team members may share or
rotate team leadership.
With a team-based structure, the entire organization is made up of horizontal teams that
coordinate their work and work directly with customers to accomplish the organization’s goals.
Teams are responsible for all key operating decisions, such as product selection, pricing,
ordering, hiring, and in-store promotions, and they are accountable for their performance. Teams
are related to the “bossless” trend.
Team Advantages and Disadvantages
The team approach breaks down barriers across departments and improves coordination
and cooperation. Team members know one another’s problems and compromise rather than
blindly pursuing their own goals. The team concept also enables the organization to adapt more
quickly to customer requests and environmental changes and speeds decision making because
decisions need not go to the top of the hierarchy for approval. Another big advantage is the
morale boost. Employees are typically enthusiastic about their involvement in bigger projects
rather than narrow departmental tasks.
Yet the team approach has disadvantages as well. Employees may be enthusiastic about
team participation, but they may also experience conflicts and dual loyalties. A cross-functional
team may make different work demands on members than do their department managers, and
members who participate in more than one team must resolve these conflicts. A large amount of
time is devoted to meetings, thus increasing coordination time. Unless the organization truly
needs teams to coordinate complex projects and adapt to the environment, it will lose production
efficiency with them. Finally, the team approach may cause too much decentralization. Senior
department managers who traditionally made decisions might feel left out when a team moves
ahead on its own. Team members often do not see the big picture of the corporation and may
make decisions that are good for their group, but bad for the organization as a whole.

e) Virtual Network Approach

The most recent approach to departmentalization extends the idea of horizontal
coordination and collaboration beyond the boundaries of the organization. In a variety of
industries, vertically integrated, hierarchical organizations are giving way to loosely
interconnected groups of companies with permeable boundaries. Outsourcing, which means
farming out certain activities, such as manufacturing or credit processing, has become a
significant trend. Some organizations take this networking approach to the extreme to create an
innovative structure. The virtual network structure means that the firm subcontracts most of its
major functions to separate companies and coordinates their activities from a small organization
at headquarters.
The organization may be viewed as a central hub surrounded by a network of outside
specialists, sometimes spread all over the world. Rather than being housed under one roof,
services such as accounting, design, manufacturing, and distribution are outsourced to separate
organizations that are connected electronically to a central office. Networked computer systems,
collaborative software, and the Internet enable organizations to exchange data and information so
rapidly and smoothly that a loosely connected network of suppliers, manufacturers, assemblers,
and distributors can look and act as one seamless company.

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 The idea behind networks is that a company can concentrate on what it does best and
contract out other activities to companies with distinctive competence in those specific areas,
which enables a company to do more with less.
Virtual Network Advantages and Disadvantages
The biggest advantages to a virtual network approach are flexibility and competitiveness
on a global scale. A network organization can draw on resources and expertise worldwide to
achieve the best quality and price and can sell its products and services worldwide. Flexibility
comes from the ability to hire whatever services are needed and to change a few months later
without constraints from owning plants, equipment, and facilities. The organization can redefine
itself continually to fit new product and market opportunities. This structure is perhaps the
leanest of all organization forms because little supervision is required. Large teams of staff
specialists and administrators are not needed. A network organization may have only two or
three levels of hierarchy, compared with ten or more in traditional organizations.
One of the major disadvantages is lack of hands-on control. Managers do not have all
operations under one roof and must rely on contracts, coordination, negotiation, and electronic
linkages to hold things together. Each partner in the network necessarily acts in its own self-
interest. The weak and ambiguous boundaries create higher uncertainty and greater demands on
managers for defining shared goals, managing relationships, keeping people focused and
motivated, and coordinating activities so that everything functions as intended. Customer
service and loyalty can also suffer if outsourcing partners fail to perform as expected. Finally, in
this type of organization, employee loyalty can weaken. Employees might feel that they can be
replaced by contract services. A cohesive corporate culture is less likely to develop, and turnover
tends to be higher because emotional commitment between organization and employee is fragile.
Exhibit 10.9 summarizes the major advantages and disadvantages of each type of structure that
we have discussed.

Exhibit 6. Network Approach to Departmentalization

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