Organizational Structure

Organizational

Structure

Professor Craig W FontaineNortheastern University

College of Business Administration

The 4 Essential Management Functions

Planning Organizing Leading Controlling

Defining goals, estab-lishingstrategy, anddeveloping subplans tocoordinateactivities

Determiningwhat needsto be done, how it willbe done, and who is to do it

Directing and moti-vating allinvolved parties andresolvingconflicts

Monitoringactivitiesto ensurethat they areaccomplishedas planned

Achieving theorganization’s

statedpurpose

Lead to

Designing organizational structures is part of organizing, one of the four basic management functions.

Organizing

• The deployment of resources to achieve strategic goals. It is reflected in:– The organization’s division of labor that forms

jobs and departments (Who does what?)– Formal lines of authority (Who reports to who?)– The mechanisms used for coordinating diverse

jobs and roles in the organization.• Strategy indicates what needs to be done.• Organizing shows how to do it.

Structure Concepts I

Hierarchy of AuthorityHierarchy of Authority: A configuration of the reporting relationships within organizations; that is, who reports to whom.Division of LaborDivision of Labor: The process of dividing the many tasks performed within an organization into specialized jobs.Span of ControlSpan of Control: The number of subordinates in an organization who are supervised by an individual manager.

Basic Concepts

Organizational StructureOrganizational Structure: The formal configuration between individuals and groups with respect to the allocation of tasks, responsibilities, and authorities within organizations.

Organizational ChartOrganizational Chart: A diagram representing the connections between the various departments within an organization: a graphic representation of organizational design.

Sample Organizational Chart

Skills for Designing Organizational Structures

Understanding Understanding the chain of the chain of commandcommand

Understanding Understanding the dimensions the dimensions of organization of organization

structurestructure

Organization Structure

Think of an any Organization’s structure has having two dimensions:– Vertical dimension (Tall or Flat)– Horizontal dimension (Wide or narrow)

The Vertical Dimension of Organization Structure:

• The organization structure element that indicates:– Who has the authority to make decisions.– Who is expected to supervise which

subordinates.

The Vertical Dimension of Organization Structure: (continued)

• Unity of Command – a subordinate should have only one direct supervisor.– A decision can be traced back from the

subordinates who carry it out to the manager who made it.

• Authority – The formal right of a manager to make decisions, give orders, and expect the orders to be carried out.– Line Authority– Staff Authority

The Vertical Dimension of Organization Structure: (continued)

• Responsibility – the manager’s duty to perform an assigned task.

• Accountability – the manager (or other employee) with authority and responsibility must be able to justify results to a manager at a higher level in the organizational hierarchy.

The Vertical Dimension of Organization Structure: (continued)

• Span of control – the feature of vertical structure that outlines:– The number of subordinates who report to a

manager.– The number of managers.– The layers of management within an

organization.

Span of Control or Tall vs. Flat Organizations

Assuming Span of 4

Vertical complexityContrasting Spans of Control

(Highest) Assuming Span of 8

1

2

3

4

5

6

7

1

4

16

64

256

1,024

4,096

1

8

64

512

4,096

Org

aniz

atio

n L

evel

(Lowest) Span of 4:4,096 Operatives. 1,365 Managers

Span of 8:4,096 Operatives. Only 585 Managers!

Which organization looks more appealing to you?

The Vertical Dimension of Organization Structure: (continued)

• Centralization – the location of decision authority at the top of the organization hierarchy.

• Decentralization – the location of decision authority at lower levels in the organization.

• Formalization – the degree of written documentation that is used to direct and control employees.

The Horizontal Dimension of Organization Structure:

• The organization structure element that is the basis for:

– Dividing work into specific jobs and tasks.

– Assigning jobs into units such as departments or teams.

• Departmentalization:

– Functional

– Divisonal

• Product

• Geograhical

– Matrix

Functional Organization Structure

Advantages and Disadvantages of the Functional Approach:

Advantages• Decision authority is

centralized at the top of the organization hierarchy

• Career paths foster professional identity with the business function

• High degree of efficiency

• Economies of scale help develop specialized expertise in employees

Disadvantages• Communication barriers• Conflict between departments• Coordination of products and

services is difficult• Diminished responsiveness to

customers’ needs• Employees identify with

functional department goals and not organization goals or needs of the customer

Product Based Organizational Structure

Advantages and Disadvantages of the Product Based

Advantages• Coordination among different

business functions

• Improved and speedier service

• Accountability for performance

• Development of general manager and executive skills

Disadvantages• Duplication of resources by two

or more departments

• Reduced specialization in occupational skills

• Competition among divisions

Simplified Geographic-Based Organization Structure

U .S . an dC an ad aD ivis ion

L a tinA m ericaD ivis ion

E u rop eanD ivis ion

A s ianD ivis ion

P res id en t

PERSONNEL

PRESIDENT

RESEARCH FINANCE PLANNINGMANUFAC-

TURINGMARKETING

VICE-PRESIDENTINTERNATIONAL

DIVISION

VICE-PRESIDENTDOMESTICDIVISION C

VICE-PRESIDENTDOMESTICDIVISION A

VICE-PRESIDENTDOMESTICDIVISION D

VICE-PRESIDENTDOMESTICDIVISION B

STAFFLATIN AMERICAEUROPE/MIDDLE

EAST/AFRICAASIA/PACIFIC

COUNTRY SUBSIDIARIES

COUNTRYSUBSIDIARIES

COUNTRY SUBSIDIARIES

LINE MANAGEMENT

PRESIDENT

MARKETING PERSONNELPLANNINGFINANCERESEARCHMANUFAC-

TURING

CORPORATE STAFF

LINE MANAGEMENT

AREA MANAGERNORTH AMERICA

AREA MANAGERLATIN AMERICA

AREA MANAGEREUROPE

AREA MANAGERMIDDLE

EAST/AFRICA

AREA MANAGERFAR EAST

Executives with total corporate and worldwide responsibilities. Corporate staff activities on a worldwide basis generally involve policy matters, strategic planning, basic product planning, functional guidance to line geographic unit, and coordination of activities between geographic units

Executives with line responsibility for all operations in a particular geographic area

PRODUCT STRUCTURE

PRESIDENT

PRESIDENTPRESIDENTPRESIDENTPRESIDENTPRESIDENTPRESIDENTPRESIDENT

CORPORATE STAFF

LINE MANAGEMENT

PRODUCT GROUPEXECUTIVE

PRODUCT GROUPEXECUTIVE

PRODUCT GROUPEXECUTIVE

PRODUCT GROUPEXECUTIVE

Product Group A Product Group B Product Group C Product Group D

Latin America

Europe

Middle East/Africa

Far East

North America

Executives with total corporate and worldwide responsibilities. Corporate staff activities on a worldwide basis involve policy matters, over-all strategic planning, coordination between product groups, and specialized advice to product groups.

Executives with staff responsibilities in a particular geographic area, chiefly identifying potential investment opportunities and providing information to individual affiliates and corporate management

Executives with worldwide responsibility for product groups

Booz Allen Hamilton

US EMEA LA A,Au,J

IT OM SLP S IT OM SLP S IT OM SLP S IT OM SLP S

GEOGRAPHIC SECTORS

GLOBAL FUNCTIONAL PRACTICE

COMMUNICATIONS, MEDIA AND TECHNOLOGY

ENERGY

CONSUMER AND HEALTH

FINANCIAL SERVICES

AUTOMOTIVE, AEROSPACE AND INDUSTRIAL

GLOBAL INDUSTRIAL PRACTICES

Matrix Organization

Advantages and Disadvantages of the Matrix Approach:

Advantages• Efficient utilization of scarce,

expensive specialists

• Flexibility that allows new projects to start quickly

• Development of cross-functional skills by employees

• Increased employee involvement in management decisions affecting project or product assignments

Disadvantages• Employee frustration and confusion

as a result of the dual chain of command

• Conflict between product and functional managers over deadlines and priorities

• Too much time spent in meetings to coordinate decisions

The Contingency Approach

The contemporary approach that recognizes that no one approach to organizational design is best, but that the best design is the one that best fits with the existing environmental conditions.

Mechanistic OrganizationMechanistic Organization: An internal organizational structure in which people perform specialized jobs, many rigid rules are imposed, and authority is vested in a few top-ranking officials.

Organic OrganizationOrganic Organization: An internal organizational structure in which jobs tend to be very general, there are few rules, and decisions can be made by lower-level employees.

Boundaryless OrganizationBoundaryless Organization: : An organization in which chains of command are eliminated, spans of control are unlimited, and rigid departments give way to empowered teams

Mechanistic, Organic, and Boundaryless Designs

Mechanistic Organic Boundaryless

Rigid hierarchical relationships

Collaboration (both vertical and horizontal)

Collaboration (vertical, horizontal, customers, suppliers, competitors)

High formalization Low formalization Low formalization

Top-down communication Informal communication Informal communication

Centralized decision authority

Decentralized decision authority

Decentralized decision authority

Narrowly defined specialized jobs

Broadly defined flexible jobs Broadly defined flexible jobs

Emphasis on individuals working independently

Emphasis on teams Emphasis on teams that also may cross organization boundaries

Mechanistic vs. Organic Designs

Two Extremes for Organizational Types

Rigid hierarchicalrelationships

Fixed duties

High formalization

Formalized communicationchannels

Centralizeddecision authority

Vertical and horizontalcollaboration

Adaptable duties

Low formalization

Informalcommunication

Decentralizeddecision authority

Mechanistic Organic

Woodward’s Findings on Technology, Structure, and Effectiveness

UnitProduction

MassProduction

ProcessProduction

Structuralcharacteristics

Low vertical differentiation

Moderate verticaldifferentiation

High verticaldifferentiation

Low horizontaldifferentiation

High horizontaldifferentiation

Low horizontaldifferentiation

Low formalization

Highformalization

Low formalization

Most effectivestructure

Organic Mechanistic Organic

Design Effectiveness

Boundaryless Organization

Boundaryless Organization

An organization in which chains of command are eliminated, spans of control are unlimited, and rigid departments give way to empowered teams.

Modular OrganizationModular Organization: An organization that surrounds itself by a network of other organizations to which it regularly outsources noncore functions.

Virtual OrganizationVirtual Organization: A highly flexible, temporary organization formed by a group of companies that join forces to exploit a specific opportunity.

Modular Organization

Virtual Organization

Classical vs. Neoclassical Theory

Classical Organizational TheoryClassical Organizational Theory: The approach that assumes that there is a single best way to design organizations.

– This approach assumes that managers need to have close control over their subordinates and calls for designing organizations with tall hierarchies and a narrow span of control.

Neoclassical Organizational TheoryNeoclassical Organizational Theory: An attempt to improve on the classical organizational theory that argues that not only economic effectiveness, but also employee satisfaction, should be goals of an industrial organization.

– This approach assumes that managers do not have to carefully monitor their subordinates and calls for designing organizations with flat hierarchies and a wide span of control.

Classical vs. Neoclassical Theory

Modern Trends: Delayering

As today’s organizations restructure, the middle layers of organizational hierarchies tend to get removed. The result is a flatter organizational structure, which puts managers

closer to the issues about which they have to make decisions.

Interorganizational Designs

Organizational designs in which two or more organizations come together.ConglomeratesConglomerates: A form of organizational diversification in which an organization (usually a very large, multinational one) adds an entirely unrelated business or product to its organizational design.Strategic AllianceStrategic Alliance: A type of interorganizational design in which two or more separate companies combine forces to develop and operate a specific business.

Strategic Alliances

Mutual Service ConsortiaMutual Service Consortia: A type of strategic alliance in which two similar companies from the same or similar industries pool their resources to receive a benefit that would be too difficult or expensive for either to obtain alone.

Value-Chain PartnershipsValue-Chain Partnerships: Strategic alliances between companies in different industries that have complementary capabilities.

Joint VenturesJoint Ventures: Strategic alliances in which several companies work together to fulfill opportunities that require the capabilities of one another.

Continuum of Alliances