Understanding Organizational Structures 13/07/2022, 9:11 AM

Understanding Organizational
Structures
Overview

Organizational structure aligns and relates parts of an organization, so it

can achieve its maximum performance. The structure chosen affects an
organization's success in carrying out its strategy and objectives.
Leadership should understand the characteristics, benefits and limitations
of various organizational structures to assist in this strategic alignment.

This article addresses the following topics related to organizational

structure:

The case for aligning organizational structure with the enterprise's

business strategy.
Key elements of organizational structure.
Types of organizational structures and the possible benefits and
limitations of each.
The impact of an organization's stage of development on its structure.
Communications, technology, metrics, global and legal issues.

Background

Organizational structure is the method by which work flows through an

organization. It allows groups to work together within their individual
functions to manage tasks. Traditional organizational structures tend to be
more formalized—with employees grouped by function (such as finance or
operations), region or product line. Less traditional structures are more
loosely woven and flexible, with the ability to respond quickly to changing
business environments.

Organizational structures have evolved since the 1800s. In the Industrial

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Revolution, individuals were organized to add parts to the manufacture of

the product moving down the assembly line. Frederick Taylor's scientific
management theory optimized the way tasks were performed, so workers
performed only one task in the most efficient way. In the 20th century,
General Motors pioneered a revolutionary organizational design in which
each major division made its own cars.

Today, organizational structures are changing swiftly—from virtual

organizations to other flexible structures. As companies continue to evolve
and increase their global presence, future organizations may embody a
fluid, free-forming organization, member ownership and an
entrepreneurial approach among all members. See Inside Day 1: How
Amazon Uses Agile Team Structures and Adaptive Practices to Innovate
on Behalf of Customers.

Business Case

A hallmark of a well-aligned organization is its ability to adapt and realign

as needed. To ensure long-term viability, an organization must adjust its
structure to fit new economic realities without diminishing core
capabilities and competitive differentiation. Organizational realignment
involves closing the structural gaps impeding organizational performance.

Problems created by a misaligned organizational structure

Rapid reorganization of business units, divisions or functions can lead to

ineffective, misaligned organizational structures that do not support the
business. Poorly conceived reorganizations may create significant
problems, including the following:

Structural gaps in roles, work processes, accountabilities and critical

information flows can occur when companies eliminate middle
management levels without eliminating the work, forcing employees
to take on additional responsibilities.

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Diminished capacity, capability and agility issues can arise when a)

lower-level employees who step in when middle management is
eliminated are ill-equipped to perform the required duties and b)
when higher-level executives must take on more tactical
responsibilities, minimizing the value of their leadership skills.
Disorganization and improper staffing can affect a company's cost
structure, cash flow and ability to deliver goods or services. Agile
organizations can rapidly deploy people to address shifting business
needs. With resources cut to the bone, however, most organizations'
staff members can focus only on their immediate responsibilities,
leaving little time, energy or desire to work outside their current job
scope. Ultimately, diminished capacity and lagging response times
affect an organization's ability to remain competitive.
Declining workforce engagement can reduce retention, decrease
customer loyalty and limit organizational performance and
stakeholder value.

The importance of aligning the structure with the business strategy

The key to profitable performance is the extent to which four business

elements are aligned:

Leadership. The individuals responsible for developing and deploying the

strategy and monitoring results.

Organization. The structure, processes and operations by which the

strategy is deployed.

Jobs. The necessary roles and responsibilities.

People. The experience, skills and competencies needed to execute the

strategy.

An understanding of the interdependencies of these business elements and

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the need for them to adapt to change quickly and strategically are essential
for success in the high-performance organization. When these four
elements are in sync, outstanding performance is more likely.

Achieving alignment and sustaining organizational capacity requires time

and critical thinking. Organizations must identify outcomes the new
structure or process is intended to produce. This typically requires
recalibrating the following:

Which work is mission-critical, can be scaled back or should be

eliminated.
Existing role requirements, while identifying necessary new or
modified roles.
Key metrics and accountabilities.
Critical information flows.
Decision-making authority by organization level.

See Meeting the Challenges of Developing Collaborative Teams for Future

Success.

Key Elements of Organizational Structures

Five elements create an organizational structure: job design,

departmentation, delegation, span of control and chain of command. These
elements comprise an organizational chart and create the organizational
structure itself. "Departmentation" refers to the way an organization
structures its jobs to coordinate work. "Span of control" means the number
of individuals who report to a manager. "Chain of command" refers to a
line of authority.

The company's strategy of managerial centralization or decentralization

also influences organizational structures. "Centralization," the degree to
which decision-making authority is restricted to higher levels of
management, typically leads to a pyramid structure. Centralization is

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generally recommended when conflicting goals and strategies among

operating units create a need for a uniform policy. "Decentralization," the
degree to which lower levels of the hierarchy have decision-making
authority, typically leads to a leaner, flatter organization. Decentralization
is recommended when conflicting strategies, uncertainty or complexity
require local adaptability and decision-making.

Types of Organizational Structures

Organizational structures have evolved from rigid, vertically integrated,

hierarchical, autocratic structures to relatively boundary-less, empowered,
networked organizations designed to respond quickly to customer needs
with customized products and services.

Today, organizations are usually structured vertically, vertically and

horizontally, or with open boundaries. Specific types of structures within
each of these categories are the following:

Vertical—functional and divisional.

Vertical and horizontal—matrix.
Boundary-less (also referred to as "open boundary")—modular,
virtual and cellular.

See What are commonly-used organization structures?

Vertical structures (functional and divisional)

Two main types of vertical structure exist, functional and divisional. The
functional structure divides work and employees by specialization. It is a
hierarchical, usually vertically integrated, structure. It emphasizes
standardization in organization and processes for specialized employees in
relatively narrow jobs.

This traditional type of organization forms departments such as

production, sales, research and development, accounting, HR, and

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marketing. Each department has a separate function and specializes in that

area. For example, all HR professionals are part of the same function and
report to a senior leader of HR. The same reporting process would be true
for other functions, such as finance or operations.

In functional structures, employees report directly to managers within

their functional areas who in turn report to a chief officer of the
organization. Management from above must centrally coordinate the
specialized departments. 

A functional organizational chart might look something like this: 

Advantages of a functional structure include the following:

The organization develops experts in its respective areas.

Individuals perform only tasks in which they are most proficient.
This form is logical and easy to understand.

Disadvantages center on coordination or lack thereof:

People are in specialized "silos" and often fail to coordinate or

communicate with other departments.
Cross-functional activity is more difficult to promote.
The structure tends to be resistant to change.

This structure works best for organizations that remain centralized (i.e., a
majority of the decision-making occurs at higher levels of the organization)
because there are few shared concerns or objectives between functional
areas (e.g., marketing, production, purchasing, IT). Given the centralized
decision-making, the organization can take advantage of economies of
scale in that there are likely centralized purchasing functions.

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An appropriate management system to coordinate the departments is

essential. The management system may be a special leader, like a vice
president, a computer system or some other format.

Also a vertical arrangement, a divisional structure most often divides work

and employees by output, although a divisional structure could be divided
by another variable such as market or region. For example, a business that
sells men's, women's and children's clothing through retail, e-commerce
and catalog sales in the Northeast, Southeast and Southwest could be
using a divisional structure in one of three ways:

Product—men's wear, women's wear and children's clothing.

Market—retail store, e-commerce and catalog.
Region—Northeast, Southeast and Southwest.

A divisional organizational structure might look like this:

The advantages of this type of structure are the following:

It provides more focus and flexibility on each division's core

competency.
It allows the divisions to focus on producing specialized products
while also using knowledge gained from related divisions.
It allows for more coordination than the functional structure.
Decision-making authority pushed to lower levels of the organization
enables faster, customized decisions.

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The disadvantages of this structure include the following:

It can result in a loss of efficiency and a duplication of effort because

each division needs to acquire the same resources.
Each division often has its own research and development, marketing,
and other units that could otherwise be helping each other.
Employees with similar technical career paths have less interaction.
Divisions may be competing for the same customers.
Each division often buys similar supplies in smaller quantities and
may pay more per item.

This type of structure is helpful when the product base expands in

quantity or complexity. But when competition among divisions becomes
significant, the organization is not adapting quickly enough, or when
economies of scale are lacking, the organization may require a more
sophisticated matrix structure.

Matrix organizational structures

A matrix structure combines the functional and divisional structures to

create a dual-command situation. In a matrix structure, an employee
reports to two managers who are jointly responsible for the employee's
performance. Typically, one manager works in an administrative function,
such as finance, HR, information technology, sales or marketing, and the
other works in a business unit related to a product, service, customer or
geography.

A typical matrix organizational structure might look like this:

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Advantages of the matrix structure include the following:

It creates a functional and divisional partnership and focuses on the

work more than on the people.
It minimizes costs by sharing key people.
It creates a better balance between time of completion and cost.
It provides a better overview of a product that is manufactured in
several areas or sold by various subsidiaries in different markets.

Disadvantages of matrix organizations include the following:

Responsibilities may be unclear, thus complicating governance and

control.
Reporting to more than one manager at a time can be confusing for
the employee and supervisors.
The dual chain of command requires cooperation between two direct
supervisors to determine an employee's work priorities, work
assignments and performance standards.
When the function leader and the product leader make conflicting
demands on the employee, the employee's stress level increases, and
performance may decrease.
Employees spend more time in meetings and coordinating with other
employees.

These disadvantages can be exacerbated if the matrix goes beyond two-

dimensional (e.g., employees report to two managers) to multidimensional
(e.g., employees report to three or more managers).

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Matrix structures are common in heavily project-driven organizations,

such as construction companies. These structures have grown out of
project structures in which employees from different functions formed
teams until completing a project, and then reverted to their own functions.
In a matrix organization, each project manager reports directly to the vice
president and the general manager. Each project is, in essence, a mini profit
center, and therefore, general managers usually make business decisions.

The matrix-structured organization also provides greater visibility,

stronger governance and more control in large, complex companies. It is
also well suited for development of business areas and coordination of
complex processes with strong dependencies.

Matrix structures pose difficult challenges for professionals charged with

ensuring equity and fairness across the organization. Managers working in
matrix structures should be prepared to intervene via communication and
training if the structure compromises these objectives. Furthermore,
leadership should monitor relationships between managers who share
direct reports. These relationships between an employee's managers are
crucial to the success of a matrix structure.

Open boundary structures (hollow, modular virtual and learning)

More recent trends in structural forms remove the traditional boundaries

of an organization. Typical internal and external barriers and
organizational boxes are eliminated, and all organizational units are
effectively and flexibly connected. Teams replace departments, and the
organization and suppliers work as closely together as parts of one
company. The hierarchy is flat; status and rank are minimal. Everyone—
including top management, managers and employees—participates in the
decision-making process. The use of 360-degree feedback performance
appraisals is common as well.

Advantages of boundary-less organizations include the following:

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Ability to leverage all employees' talents.

Faster response to market changes.
Enhanced cooperation and information sharing among functions,
divisions and staff.

Disadvantages include the following:

Difficulty in overcoming silos inside the organization.

Lack of strong leadership and common vision.
Time-consuming processes.
The possibility of employees being adversely affected by efficiency
efforts.
The possibility of organizations abandoning change if restructuring
does not improve effectiveness quickly.

Boundary-less organizational structures can be created in varied forms,

including hollow, modular and virtual organizations.

Hollow organizations. Hollow structures divide work and employees by

core and noncore competencies. Hollow structures are an outsourcing
model in which the organization maintains its core processes internally but
outsources noncore processes. Hollow structures are most effective when
the industry is price competitive and choices for outsourcing exist. An
example of a hollow structure is a sports organization that has its HR
functions (e.g., payroll and benefits) handled by outside organizations.

Advantages of this type of structure include the following:

Minimizing overhead.
Enabling the organization to focus on its core product and eliminating
the need to develop expertise in noncore functions.

Disadvantages include:

Loss of control over functions that affect employees regularly.

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Restriction by certain industries (e.g., health care) on the extent of

outsourcing.
Lack of competitive outsourcing options.

Modular organizations. Modular structures differ from hollow

organizations in that components of a product are outsourced. Modular
structures may keep a core part of the product in-house and outsource
noncore portions of the product. Networks are added or subtracted as
needs change. For a modular structure to be an option, the product must
be able to be broken into chunks. For example, computer manufacturer
Dell buys parts from various suppliers and assembles them at one central
location. Suppliers at one end and customers at the other become part of
the organization; the organization shares information and innovations
with all. Customization of products and services results from flexibility,
creativity, teamwork and responsiveness. Business decisions are made at
corporate, divisional, project and individual team member levels.

Advantages include the following:

Minimizing the specialization and specialists needed.

Minimizing overhead.
Enabling the company to outsource parts supply and coordinate the
assembly of quality products.

Disadvantages include concerns about the actions of suppliers outside the

control of the core management company. Risk occurs if the partner
organization removes itself form the quality check on the end product or if
the outsourced organization uses a second outsourced organization.
Examples of supplier concerns include the following:

Suppliers, or subcontractors, must have access to—and safeguard—

most, if not all, of the core company's data and trade secrets.
Suppliers could suddenly raise prices on or cease production of key
parts.

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Knowing where one organization ends and another begins may

become difficult.

Virtual organizations. A virtual organization (sometimes called a network

structure) is cooperation among companies, institutions or individuals
delivering a product or service under a common business understanding.
Organizations form partnerships with others—often competitors—that
complement each other. The collaborating units present themselves as a
unified organization.

The advantages of virtual structures include the following:

Contributions from each part of the unit.

Elimination of physical boundaries.
Responsiveness to a rapidly changing environment.
Lower or nonexistent organizational overhead.
Allows companies to be more flexible and agile.
Give more power to all employees to collaborate, take initiative, and
make decisions.
Helps employees and stakeholders understand workflows and
processes.

The disadvantages of virtual organizations include the following:

Potential lack of trust between organizations.

Potential lack of organizational identification among employees.
Need for increased communication.
Can quickly become overly complex when dealing with lots of offsite
processes.
Can make it more difficult for employees to know who has final say.

Virtual structures are collaborative and created to respond to an

exceptional and often temporary marketing opportunity. An example of a
virtual structure is an environmental conservancy in which multiple

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organizations supply a virtual organization with employees to save, for

example, a historic site, possibly with the intent of economic gain for the
partners.

Understanding the organizational environment is crucial in open

boundary models. For example, some industries cannot outsource noncore
processes due to government regulation. (For example, health insurance
organizations may be unable to outsource Medicare processes). Or, in some
cases, outsourcing may have to be negotiated with a union.

The key to effective boundary-less organizations is placing adaptable

employees at all levels. Management must give up traditional autocratic
control to coach employees toward creativity and the achievement of
organizational goals. Employees must apply initiative and creativity to
benefit the organization, and reward systems should recognize such
employees.

Learning organizations. A learning organization is one whose design

actively seeks to acquire knowledge and change behavior as a result of the
newly acquired knowledge. In learning organizations, experimenting,
learning new things, and reflecting on new knowledge are the norms. At
the same time, there are many procedures and systems in place that
facilitate learning at all organization levels.

The advantages of learning organizations include the following:

Open communication and information sharing.

Innovativeness
Ability to adapt to rapid change.
Strong organizational performance.
Competitive advantage.

The disadvantages of learning organizations include the following:

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Power difference is ignored.

Process of implementing will be complicated and take longer.
Fear of employee participation in organizational decisions.
Breaking of existing organizational rules.

See HR Roles in a Market-Oriented Ecosystem (MOE) Organization

The Impact of Growth Stages on Organizational Structure

Organizations typically mature in a consistent and predictable manner. As

they move through various stages of growth, they must address various
problems. This process creates the need for different structures,
management skills and priorities.

The four stages of development in an organization's life cycle include the

following:

Startup

The beginning stage of development is characterized by an inconsistent

growth rate, a simple structure and informal systems. At this stage the
organization is typically highly centralized. "Dotcom" companies are a
good example of startup companies.

Expansion

The expansion stage is evidenced by rapid, positive growth and the

emergence of formal systems. Organizations at this stage typically focus on
centralization with limited delegation.

Consolidation

The consolidation stage is characterized by slower growth,

departmentalization, formalized systems and moderate centralization.

Diversification

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The diversification stage occurs when older, larger organizations

experience rapid growth, bureaucracy and decentralization.

As an organization grows or passes from one stage of development to

another, carefully planned and well-conceived changes in practices and
strategies may be necessary to maximize effectiveness. There are no
guarantees that an organization will make it from one stage to the next. In
fact, a key opportunity for leadership is to recognize indicators that
suggest an organization is in a risky or unhealthy stage and to make
appropriate structural adjustments.

Metrics

The art of organizational design is assessing the environment's essential

aspects and their meaning for the organization's future. Translating those
characteristics into the right structure is critical to increasing efficiency and
controlling costs. When selecting the best structure for the organization,
company leaders should examine and evaluate current key structural
dimensions and contextual factors. SeeHow do I determine which HR
metrics to measure and report?

Structural dimensions

Leaders can develop an understanding of the organization's internal

environment through measurement and analysis of its structural
dimensions. Key dimensions, which are usually measured through a
survey, include:

Specialization. The extent to which an organization's activities are divided

into specialized roles.

Standardization. The degree to which an organization operates under

standard rules or procedures.

Formalization. The extent to which instructions and procedures are

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documented.

Centralization. The degree to which leaders at the top of the management

hierarchy have authority to make certain decisions.

Configuration. The shape of the organization's role structure, which

includes:

Chain of command. The number of vertical levels or layers on the

organizational chart.
Span of control. The number of direct reports per manager or the
number of horizontal levels or layers on the organizational chart.

Contextual factors

A review of contextual factors will provide a better understanding of the

external environment and the relationship between the internal and
external environment. Some of the significant contextual factors to
consider in this review include:

Origin and history. Was the organization privately founded? What

changes have occurred in ownership or location?

Ownership and control. Is the organization private or public? Is control

divided among a few individuals or many?

Size. How many employees does the organization have? What are its net
assets? What is its market position?

Location. How many operating sites does the organization maintain?

Productsand services. What types of goods and services does the

organization manufacture and provide?

Technology. Are the organization's work processes effectively integrated?

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Interdependence. What is the degree to which the organization depends

on customers, suppliers, trade unions or other related entities?

After examining the structural dimensions and contextual factors and

developing an understanding of the connection between an organization's
structure and strategy, organization leaders can consider alternative
structures. They may use diagnostic models and tools to guide the design
process.

Communications and Technology

The last few years have seen an unprecedented expansion and

improvement of online communication. Software has pushed the
boundaries of workplace communication beyond e-mail into collaborative
social media platforms and innovative intranets. The decline in traditional
communication methods and the dramatic increase in cyber
communication has had a major impact on the workplace and is leading to
restructuring.

As organizations continue to restructure to remain competitive,

communications can drive the transition to an effective new organizational
structure. Research suggests that companies can positively affect their
credibility with employees through various organizational communication
programs.

In establishing internal communication channels, leadership must be

aware of the advantages and shortcomings of communication technologies
and match them to the organization's needs, strategic goals and structure.
Employers should also be cognizant of, and be prepared to deal with, the
common communication challenges in various organizational structures.
For example, communications technology has enabled organizations to
create virtual workplaces and teams. In a virtual team, members from
various geographical locations work together on a task, communicating
via e-mail, instant messaging, teleconferencing, videoconferencing and

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web-based workspaces. Although virtual teams have significant

advantages—most notably reduced travel costs and flexibility in staffing
and work schedules—they also pose challenges. Virtual teams often find
coordinating team logistics and mastering new technologies difficult.
Communication is also a major challenge because of the absence of visual
(body language) and verbal (intonation) clues. Research suggests that
organizations can overcome these challenges through effective support
and training.

Global Issues

Organizational structures often need to change as companies expand

around the globe. An organization's leaders should plan carefully before
opening offices in another country.

Many issues arise when an employer plans to open an international

branch, hire international workers and formulate a globalized strategy.
Among the questions that must be answered are:

How do human resource legal requirements and practices vary from

country to country?
Should HR officials at headquarters do the work, or should a
company open HR offices in the other country?
Should an organization hire consultants to handle local hiring and
personnel services?

Unless employers have a sound HR strategy ready before leaping into

another country, they could fail.

When an organization opens international offices, HR professionals and

other business leaders should be able to communicate as effectively with
workers across the globe as around the corner. That can be a challenge.
Having a robust intranet and using videoconferencing are alternatives to
face-to-face communication.

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As rapid changes in technology affect global communication, employees

must be aware of linguistic, cultural, religious and social differences
among colleagues and business contacts. The organization should train all
employees (not just managers and CEOs who travel) in cultural literacy.

Moreover, employers should be aware that language difficulties, time-and-

distance challenges, the absence of face-to-face contact, and, above all, the
barriers posed by cultural differences and personal communication styles
make global virtual work far more complex than local structures. These
practices can enhance global virtual team relationships:

Using online chats, video- and audioconferencing in addition to one-

on-one conversations and e-mail.
Posting profiles of team members that outline their expertise and roles
in the organization.
Being sensitive to the level of engagement team members are likely to
deliver if they must meet at inconvenient hours across multiple time
zones.

Legal Issues

Regardless of the type of structure, employers must ensure compliance

with legal requirements in the countries where their organizations operate.
Some of those requirements will be quite extensive (for example, public
companies must ensure compliance with the Sarbanes-Oxley Act, and
most organizations must ensure compliance with the Fair Labor Standards
Act and its related state laws). When organizational structures change, or if
the chain of command is weak or fails to keep up-to-date with changes in
the business, a company may have compliance problems because the
structure has not been evaluated with regard to these laws. Imagine, for
example, a restructuring that reduces the number of direct reports for an
entire layer of management, which perhaps leads to those individuals no
longer being exempt.

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As an organization moves internationally, laws in the host countries must

also be evaluated and a plan put in place for compliance before the
expansion occurs. Employers must anticipate and plan for laws affecting
all aspects of the employee experience, including hiring, benefits, leaves
and termination.

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