CHAPTER 3- Fundamentals of Organization Structure

Organizational structure is a system used to define a hierarchy within an organization. It

identifies each job, its function and where it reports to within the organization. This structure is
developed to establish how an organization operates and assists an organization in
obtaining its goals to allow for future growth.

The structure is illustrated using an organizational chart . There are three key components in the
definition of organization structure:

1) Organization structure designates formal reporting relationships, including the

number of levels in the hierarchy and the span of control of managers and supervisors.
2) Organization structure identifies the grouping together of individuals into departments
and of departments into the total organization.
3) Organization structure includes the design of systems to ensure effective
communication, coordination, and integration of efforts across departments.

These three elements of structure pertain to both vertical and horizontal aspects of organizing.

For example, the first two elements are the structural framework, which is the vertical hierarchy.

The third element pertains to the pattern of interactions among organizational employees. An
ideal structure encourages employees to provide horizontal information and coordination where
and when it is needed.

Organizational structures typically use one of two approaches:

 A centralized structure gives most of the authority and decision-making power to the
team at the top.
 A decentralized structure distributes authority and decision-making power at
lower levels, which might include departments, groups, or business units.

Organization structure is reflected in the organization chart. It isn’t possible to see the internal
structure of an organization the way we might see its manufacturing tools, offices, or products.
Although we might see employees going about their duties, performing different tasks,
and working in different locations, the only way to actually see the structure underlying all this
activity is through the organization chart.

The organization chart is the visual representation of a whole set of underlying activities and
processes in an organization. The organization chart can be quite useful in understanding how
acompany works. It shows the various parts of an organization, how they are interrelated, and
how each position and department fits into the whole .The concept of an organization chart,
showing what positions exist, how they are grouped, and who reports to whom, has been around
for centuries
3.2. Information processing perspective in organization structure.

The organization should be designed to provide both vertical and horizontal information flow as
necessary to accomplish the organization’s overall goals. If the structure doesn’t fit
the information requirements of the organization, people either will have too little information or
will spend time processing information that is not vital.

Vertical Information Sharing: Organization design should facilitate the communication among
employees and departments that is necessary to accomplish the organization’s overall
task. Managers create information linkages to facilitate communication and coordination
among organizational elements.

Vertical linkages are used to coordinate activities between the top and bottom of an organization
and are designed primarily for control of the organization. Employees at lower levels should
carry out activities consistent with top-level goals, and top executives must be informed
of activities and accomplishments at the lower levels. Organizations may use any of a variety of
structural devices to achieve vertical linkage, including hierarchical referral, rules, plans, and
formal management information systems.

Hierarchical Referral: The first vertical device is the hierarchy, or chain of command, which is
illustrated by the vertical lines. A problem arises that employees don’t know how to solve, it can
be referred up to the next level in the hierarchy. When the problem is solved, the answer is
passed back down to lower levels. The lines of the organization chart act as communication
channels.

Rules and Plans: The next linkage device is the use of rules and plans. To the extent that
problems and decisions are repetitious, a rule or procedure can be established so employees
know how to respond without communicating directly with their manager. Rules and procedures
provide a standard information source enabling employees to be coordinated without actually
communicating about every task.

Plans also provide standing information for employees. The most widely used plan is the budget.
With carefully designed and communicated budget plans, employees at lower levels can be left
on their own to perform activities within their resource allotment.
Vertical Information Systems: A vertical information system is another strategy for
increasing vertical information capacity. Vertical information systems include the
periodic reports, written information, and computer-based communications distributed
to managers. Information systems make communication up and down the hierarchy more
efficient.

Horizontal Information Sharing: Horizontal communication overcomes barriers

between departments and provides opportunities for coordination among employees to achieve
unity of effort and organizational objectives.

Horizontal linkage refers to communication and coordination horizontally across organizational

departments. The following devices are structural alternatives that can improve
horizontal coordination and information flow. Each device enables people to exchange
information.

Information Systems: A significant method of providing horizontal linkage in

today’s organizations is the use of cross-functional information systems. Computerized
information systems enable managers or frontline workers throughout the organization to
routinely exchange information about problems, opportunities, activities, or decisions.

Direct Contact: A higher level of horizontal linkage is direct contact between managers or
employees affected by a problem.

Task Forces: Liaison roles usually link only two departments. When linkage involves several
departments, a more complex device such as a task force is required.

A task force is a temporary committee composed of representatives from each organizational

unit affected by a problem. Each member represents the interest of a department or division and
can carry information from the meeting back to that department. Task forces are an effective
horizontal linkage device for temporary issues. They solve problems by direct
horizontal coordination and reduce the information load on the vertical hierarchy.
Typically, they are disbanded after their tasks are accomplished.

3.3. Organization design alternatives

A company can be organized in a number of ways. It might be built around divisions, functions,
geography, or with a matrix approach

3.4. Functional, divisional, and geographical designs.

Functional grouping and divisional grouping are the two most common approaches to structural
design.

In a functional structure: A functional structure is based on job functions often labeled as

departments – finance, purchasing, etc.

Activities are grouped together by common function from the bottom to the top
of the organization. All engineers are located in the engineering department, and the vice
president of engineering is responsible for all engineering activities. The same is true in
marketing, R&D, and manufacturing. With a functional structure, all human knowledge
and skills with respect to specific activities are consolidated, providing a valuable
depth of knowledge for the organization. This structure is most effective when in-
depth expertise is critical to meeting organizational goals, when the organization needs to be
controlled and coordinated through the vertical hierarchy, and when efficiency is important. The
structure can be quite effective if there is little need for horizontal coordination

 Strengths and Weaknesses of Functional Organization Structure

Strengths

 Allows economies of scale within functional departments

 Enables in-depth knowledge and skill development
 Enables organization to accomplish functional goals
 Is best with only one or a few products

Weaknesses

 Slow response time to environmental changes

 May cause decisions to pile on top; hierarchy overload
 Leads to poor horizontal coordination among departments
 Results in less innovation
  Involves restricted view of organizational goals

Divisional Structure: A divisional structure is organized around divisions or business units that
are self-contained entities with their own functional departments such as human
resources, marketing, and so on. The term divisional structure is used here as the generic term
for what is sometimes called a product structure or strategic business units. With this structure,
divisions can be organized according to individual products, services, product groups, major
projects or programs, divisions, businesses, or profit centers

Strengths and Weaknesses of Divisional Organization Structure

Strengths

 Suited to fast change in unstable environment

 Leads to customer satisfaction because product responsibility and contact points are clear
 Involves high coordination across functions
 Allows units to adapt to differences in products, regions, customers
 Best in large organizations with several products
 Decentralizes decision making

Weaknesses

 Eliminates economies of scale in functional departments

 Leads to poor coordination across product lines
 Eliminates in-depth competence and technical specialization
 Makes integration and standardization across product lines difficult

Geographic Structure: A geographical structure is often used when a company has multiple
locations. Each location operates independently.

Another basis for structural grouping is the organization’s users or customers. The most common
structure in this category is geography. Each region of the country may have distinct tastes and
needs. Each geographic unit includes all functions required to produce and market products or
services in that region

3.5. Matrix structure:

With a matrix structure, the company is organized around teams assembled for
specific tasks. Team members usually report to more than one person – the team leader, and the
supervisor for the team member’s functional area. Sometimes, an organization’s structure needs
to be multi-focused in that both product and function or product and geography are emphasized
at the same time. One way to achieve this is through the matrix structure. The matrix can be
used when both technical expertise and product innovation and change are important
for meeting organizational goals. The matrix structure often is the answer when
organizations find that the functional, divisional, and geographic structures combined
with horizontal linkage mechanisms will not work.

The unique characteristic of the matrix organization is that both product divisions and functional
structures (horizontal and vertical) are implemented simultaneously. The product managers and
functional managers have equal authority within the organization, and employees report to both
of them.

In a matrix organization structure, every employee has two superiors.

One chain of command is functional and the other chain of command is a project team.
Hence, matrix structure is referred to as a multi command system, both vertical and
horizontal dimension.
Both dimensions of structure are permanent and balanced, with power held equally by
both functional and a project manager.
Matrix structure is suitable when organizational tasks are uncertain, complex and highly
interdependent or when an organization has to cope with more than one function
or project.
In large organizations employees from various functional departments are from time to
time assigned to one or more projects. On completion of the project these employees
revert back to their respective departments until the next assignment to a project
 Strengths and Weaknesses of Matrix Organization Structure
 Strengths
 Achieves coordination necessary to meet dual demands from customers
 Flexible sharing of human resources across products
 Suited to complex decisions and frequent changes in unstable environment
  P Best in medium-sized organizations with multiple products
 Best in medium-sized organizations with multiple products
 Weaknesses
 Causes participants to experience dual authority, which can be frustrating and
confusing
 Means participants need good interpersonal skills and extensive training
 Is time consuming; involves frequent meetings and conflict resolution sessions
 Will not work unless participants understand it and adopt collegial rather than
vertical type relationships
 Requires great effort to maintain power balance rovides opportunity for both
functional and product skill development
 Best in medium-sized organizations with multiple products
3.6. Horizontal structure

A recent approach to organizing is the horizontal structure, which organizes employees around
core processes. Organizations typically shift toward a horizontal structure during a procedure
called reengineering. Reengineering, or business process reengineering, basically means the
redesign of a vertical organization along its horizontal workflows and processes. A process refers
to an organized group of related tasks and activities that work together to transform inputs into
outputs that create value for customers. Examples of processes include order fulfillment, new
product development, and customer service. Re engineering changes the way managers think
about how work is done. Rather than focusing on narrow jobs structured into distinct functional
departments, they emphasize core processes that cut horizontally across the organization and
involve teams of employees working together to serve customers.

Strengths and Weaknesses of Horizontal Structure

 Strengths:
 Promotes flexibility and rapid response to changes in customer needs
 Directs the attention of everyone toward the production and delivery of value to
the customer
 Each employee has a broader view of organizational goals
 Promotes a focus on teamwork and collaboration
 Improves quality of life for employees by offering them the
opportunity to share responsibility, make decisions, and be accountable for
outcomes
 Weaknesses:
 Determining core processes is difficult and time consuming
 Requires changes in culture, job design, management philosophy, and information and
reward systems
 Traditional managers may balk when they have to give up power and authority
  Requires significant training of employees to work effectively in a horizontal
team environment
 Can limit in-depth skill development

3.7. Hybrid structure.

As a practical matter, many structures in the real world do not exist in the pure forms we have
outlined in this chapter. Most large organizations, in particular, often use a hybrid structure that
combines characteristics of various approaches tailored to specific strategic needs.
Most companies combine characteristics of functional, divisional, geographic, horizontal, or
network structures to take advantage of the strengths of various structures and
avoid some of the weaknesses. Hybrid structures tend to be used in rapidly changing
environments because they offer the organization greater flexibility