CHAPTER 6

ORGANIZATIONAL
STRUCTURE
 Learning Objectives
• Understand the meaning of organizing and
organizational structure;
• To know the elements of organizational
structure;
• To understand the difference b/w mechanistic
and organic structures;
• To know the different form of contemporary
organizational structures
Designing Organizational Structure
• The function of organization in management involves
structuring resources and activities in a way that
facilitates the achievement of the organization’s goals.
It includes the following key components:
• When managers create or change the structure,
they’re engaged in organizational design, a process
that involves decisions about six key elements:
• 1) work specialization, 2)departmentalization, 3)chain
of command, 4)span of control, 5)centralization and
decentralization, and 6)formalization
• This structure can be shown visually shown as
organizational chart.
 Work Specialization
• Work Specialization: Dividing tasks into smaller jobs to allow
individuals or groups to focus on specific areas, improving
efficiency and expertise.
• It is also known as division of labor, a concept introduced in
the management history.
• Example:
• For example, McDonald’s uses high work specialization to get
its products made and delivered to customers efficiently and
quickly—that’s why it’s called “fast” food. One person takes
orders at the drive-through window, others cook and assemble
the hamburgers, another works the fryer, another bags orders,
and so forth. Such single-minded focus on maximizing
efficiency has contributed to increasing productivity.
 Departmentalization
• Departmentalization: Grouping jobs or activities into
departments based on function, product, geography, or
customer needs. For example, marketing, sales, or
production departments.
• Five common forms of departmentalization are used,
although an organization may develop its own unique
classification.
• Example:
• A hotel might have departments such as front desk
operations, sales and catering, housekeeping and
laundry, and maintenance.
 Five Common Forms of
Departmentalization
• The common forms of departmentalization
are:
• Functional,
• Divisional (geographical, product, and
customer) and
• Matrix (Functional and divisional)
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 Self-reading-Contemporary view
• Most large organizations continue to use combinations of most or all of these
types of departmentalization.
• For example, General Electric (GE) organizes its corporate staff along
functional lines, including public relations, legal, global research, human
resources, and finance.
• Black & Decker organizes its divisions along functional lines, its manufacturing
units around processes, and its sales regions around customer groupings.
• One popular departmentalization trend is the increasing use of customer
departmentalization. Because getting and keeping customers is essential for
success, this approach works well because it emphasizes monitoring and
responding to changes in customers’ needs.
• Another popular trend is the use of teams, especially as work tasks have
become more complex and diverse skills are needed to accomplish those
tasks. One specific type of team that more organizations are using is a cross-
functional team, a work team composed of individuals from various functional
specialties. For instance, Harley-Davidson relies on cross-functional teams at
 Chain of command
• Chain of Command: Establishing a clear
hierarchy that defines authority and reporting
relationships, ensuring accountability and clarity
in decision-making.
• The chain of command is the line of authority
extending from upper organizational levels to
lower levels, which clarifies who reports to
whom. Managers need to consider it when
organizing work because it helps employees with
questions such as “Who do I report to?” or “Who
do I go to if I have a problem?”
 Continued…
• Span of Control: Determining how many employees a
manager can effectively supervise, balancing between
too wide a span (which can dilute supervision) and
too narrow a span (which can lead to micro-
management).
• The traditional view was that managers could not—
and should not—directly supervise more than five or
six subordinates.
• Determining the span of control is important because,
to a large degree, it determines the number of levels
and managers in an organization. Thus, the wider or
larger the span, the more efficient the organization.
 Example
• Assume two organizations both have approximately
4,100 employees.
• If one organization has a span of four and the other a
span of eight, the organization with the wider span will
have two fewer levels and approximately 800 fewer
managers. At an average manager’s salary of $62,000 a
year, the organization with the wider span would save
over $49 million a year. Obviously, wider spans are
more efficient in terms of cost. However, at some point,
wider spans may reduce effectiveness if employee
performance worsens because managers no longer
have the time to lead effectively.
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 Self-reading-The contemporary view
• The contemporary view of span of control recognizes there is no magic
number. Many factors influence the number of employees a manager can
efficiently and effectively manage. These factors include the skills and
abilities of the manager and the employees and the characteristics of the
work being done. For instance, managers with well-trained and
experienced employees can function well with a wider span.
• Apple CEO Tim Cook has 17 direct reports. At first glance, that seems like a
lot. But Cook indicates otherwise: “If you have smart people, a strong
organizational culture, and a well-defined and articulated strategy that
everyone understands, you can [have] numerous direct reports because
your job isn’t to tell people what to do.”
• Other contingency variables that determine the appropriate span include
similarity and complexity of employee tasks; the physical proximity of
subordinates; the degree to which standardized procedures are in place;
the sophistication of the organization’s information system; the strength
of the organization’s culture.
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• The trend in recent years has been toward larger spans of
control, which is consistent with managers’ efforts to
speed up decision making, increase flexibility, get closer
to customers, empower employees, and reduce costs.
Managers are beginning to recognize that they can
handle a wider span when employees know their jobs
well and when those employees understand
organizational processes.
• For instance, at PepsiCo’s Gamesa cookie plant in Mexico,
56 employees now report to each manager. However, to
ensure that performance doesn’t suffer because of these
wider spans, employees were thoroughly briefed on
company goals and processes.
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• Although early management theorists (Fayol, Weber, Taylor,
Barnard, and others) believed that chain of command,
authority (line and staff), responsibility, and unity of
command were essential, times have changed.
• Those elements are far less important today. Information
technology has made such concepts less relevant today.
• Employees can access information that used to be available
only to managers in a matter of a few seconds. It also means
that employees can communicate with anyone else in the
organization without going through the chain of command.
Also, many employees, especially in organizations where work
revolves around projects, and themselves reporting to more
than one boss, thus violating the unity of command principle.
 Centralization and Decentralization
• Centralization:
• Centralization is a structure where decision-making authority is concentrated at the top
levels of management. In centralized organizations, key decisions are made by a small
group of senior executives or managers, and lower levels of management have limited
decision-making authority.
• Example: In a centralized company, like a multinational corporation, headquarters may
decide on all important business strategies, product launches, and budgets. Branch
managers may only implement these decisions without altering them based on local needs.
• Decentralization:
• Decentralization is a structure where decision-making authority is distributed throughout
various levels of the organization. In decentralized organizations, lower-level managers and
employees are empowered to make decisions related to their specific areas of
responsibility.
• Example: In a decentralized company, such as a retail chain, store managers may have the
authority to adjust product offerings, set prices, and make promotional decisions based on
local customer preferences, without waiting for approval from corporate headquarters.
• Also known as Delegation of Authority, which means assigning decision-making authority
to lower-level managers or employees, empowering them to take action within certain
boundaries.
 Difference b/w Centralization and Decentralization
Aspect Centralization Decentralization
Spread across various levels of
Decision-Making Concentrated at the top levels
management

Tight control by top Control is distributed, more

Control
management autonomy for lower levels

Less flexible, slower response to More flexible, quicker response to

Flexibility/Adaptability
local needs local or specific issues

Accountability Top managers are accountable Local managers or department

for major decisions heads are accountable for their
decisions
Examples Military organizations, Franchise models, multinational
government bodies companies with regional offices
 When to Use Centralization vs.
Decentralization
• Centralization is often better when the organization requires
consistency, uniform policies, or operates in a stable
environment. It’s also common when decisions need to align
with a long-term vision set by senior leadership.
• Decentralization is more effective in dynamic environments
where quick decision-making is essential, or when the
organization operates in diverse markets that require localized
strategies. It also fosters innovation and initiative at lower
levels.
• In summary, centralization emphasizes control and uniformity,
while decentralization promotes flexibility and local decision-
making.
 Contemporary view
• Today, managers often choose the amount of centralization or
decentralization that will allow them to best implement their decisions
and achieve organizational goals. What works in one organization,
however, won’t necessarily work in another, so managers must
determine the appropriate amount of decentralization for each
organization and work units within it. As organizations have become
more flexible and responsive to environmental trends, there’s been a
distinct shift toward decentralized decision making. This trend, also
known as employee empowerment, gives employees more authority
(power) to make decisions.
• In large companies especially, lower-level managers are “closer to the
action” and typically have more detailed knowledge about problems and
how best to solve them than top managers. For instance, decentralized
management is the cornerstone of Johnson & Johnson’s business model.
 Formalization
• Formalization refers to how standardized an
organization’s jobs are and the extent to which
employee behavior is guided by rules and
procedures. In highly formalized organizations,
there are explicit job descriptions, numerous
organizational rules, and clearly defined
procedures covering work processes. Employees
have little discretion over what’s done, when it’s
done, and how it’s done. However, where there is
less formalization, employees have more
discretion in how they do their work.
 Contemporary view
• Although some formalization is necessary for consistency and control, many
organizations today rely less on strict rules and standardization to guide and
regulate employee behavior. For instance, consider the following situation: A
customer came into a coffee shop to buy a cinnamon roll, but the tray was empty,
prompting her to ask whether there were cinnamon rolls in the kitchen. The
employee informed her that several were just removed from the tray because the
sell-by date had elapsed. She strongly expressed her disappointment and became
quite angry. The customer insisted that he should sell her a cinnamon roll. Even
though policy dictates that he should not, he did so anyway because the
company has a policy of ensuring high customer satisfaction. And he reasoned
that the pastry should still be good to eat because the rolls were removed just
two hours before. Has this employee done something wrong? He did “break” the
rule. But by “breaking” the rule, he actually brought in revenue and provided
good customer service. Considering there are numerous situations where rules
may be too restrictive, many organizations have allowed employees some
latitude, giving them sufficient autonomy to make those decisions that they feel
are best under the circumstances. It doesn’t mean throwing out all organizational
rules because there will be rules that are important for employees to follow—and
these rules should be explained so employees understand why it’s important to
adhere to them. But for other rules, employees may be given some leeway.
 Mechanistic and organic structures

• Basic organizational design revolves around these two organizational

forms.
• The mechanistic organization (or bureaucracy) was the natural result of
combining the six elements of structure. Adhering to the chain-of-
command principle ensured the existence of a formal hierarchy of
authority, with each person controlled and supervised by one superior.
Keeping the span of control small at increasingly higher levels in the
organization created tall, impersonal structures. As the distance between
the top and the bottom of the organization expanded, top management
would increasingly impose rules and regulations. Because top managers
couldn’t control lower-level activities through direct observation and
ensure the use of standard practices, they substituted rules and
regulations. The early management writers’ belief in a high degree of
work specialization created jobs that were simple, routine, and
standardized. Further specialization through the use of
departmentalization increased impersonality and the need for multiple
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• The organic organization is a highly adaptive form that is as loose and
flexible as the mechanistic organization is rigid and stable. Rather than
having standardized jobs and regulations, the organic organization’s
loose structure allows it to change rapidly, as required. It has division of
labor, but the jobs people do are not standardized. Employees tend to
be professionals who are technically proficient and trained to handle
diverse problems. They need few formal rules and little direct
supervision because their training has instilled in them standards of
professional conduct. For instance, a petroleum engineer doesn’t need
to follow specific procedures on how to locate oil sources miles offshore.
The engineer can solve most problems alone or after conferring with
colleagues. Professional standards guide his or her behavior. The organic
organization is low in centralization so that the professional can respond
quickly to problems and because top-level managers cannot be
expected to possess the expertise to make necessary decisions.
 Formal and informal organization
• An organization may be formal or informal. In
most organizations, formal groups will function as
it is essential to execute specific tasks of the
concerned formal organization.
• A formal organization is mainly guided by its rules,
systems and procedures.
• In a formal organization, authority, and
responsibility and relationships must be clear,
fixed and definite.
• In a formal organization delegation of authority is
done in a legal way.
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• An informal organization does not have the features of a
formal organization. It comes into existence because of social
connections of employees within the workplace. Informal
organization has several benefits to the management such as:
• It makes the work and workplace a better place to work.
• Informal work groups provide satisfaction and stability to the
organization.
• They provide a very effective channel of communication
within the organization. (grapevine)
• It keeps a check of the managers and mangers will be more
careful while performing their job due to pressure from
informal organization.
 Traditional vs. contemporary organizational designs
• Traditional organizational designs refer to structures that have been prevalent in many businesses
for a significant period. Some common types of traditional organizational designs include:
• Functional Structure: This design groups employees based on their specific functions or roles, such
as marketing, finance, operations, etc. Each department operates independently and is headed by
a functional manager. It's a hierarchical structure with clear reporting lines.
• Divisional Structure: Organizations using a divisional structure are divided based on products,
geographical regions, or customer groups. Each division operates as a separate entity with its own
resources, functions, and sometimes even its own leadership.
• Hierarchical Structure: Hierarchical structures are characterized by clear, vertical lines of authority
and control. Decision-making flows from the top-down, with each level having authority over the
levels below. This structure often includes multiple layers of management.
• Centralized Authority: In traditional designs, decision-making authority tends to be centralized at
the top levels of the organization. Most major decisions are made by top management, and lower-
level employees have limited autonomy.
• Bureaucratic Approach: Traditional designs often incorporate bureaucratic principles, including
standardized procedures, formalized rules and regulations, and adherence to established
protocols. This can sometimes lead to rigidity and slow responses to change.
• These traditional designs have been prevalent in many organizations for their clarity in roles, clear
reporting structures, and stability. However, they may also have limitations in adapting to rapidly
changing environments, fostering innovation, and promoting employee empowerment due to their
 Contemporary structures
• Many organizations are finding that traditional
organizational designs often aren’t appropriate for today’s
increasingly dynamic and complex environment. Instead,
organizations need to be lean, flexible, and innovative;
that is, they need to be more organic. So managers are
finding creative ways to structure and organize work.
• In recent times, many organizations have been
transitioning from these traditional designs to more
contemporary and flexible structures that encourage
agility, collaboration, and responsiveness to change in
order to stay competitive in dynamic markets.
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• Some of the prominent contemporary organizational designs include:
• Flat Organizations: These structures have fewer hierarchical levels between management and staff. They promote
quicker decision-making, more direct communication, and often encourage employee empowerment and involvement
in decision-making processes.
• Matrix Organizations: In this design, employees report to both functional managers and project managers. It allows
for specialization within functions while also facilitating collaboration across different projects or initiatives.
• Network Organizations: These structures are built around networks of independent entities or individuals
collaborating to achieve common goals. They are flexible and adaptive, relying on partnerships, alliances, and
outsourcing to access specialized skills and resources.
• Strategic alliance: Strategic alliances are partnerships between companies to achieve mutual goals while maintaining
their independence.
• Virtual organizations: A virtual organization is a flexible, networked organizational structure where geographically
dispersed individuals, teams, or companies collaborate and work together through the use of digital technologies,
without a physical centralized office. Members of a virtual organization are connected via the internet,
telecommunications, and collaboration tools, allowing them to work remotely or from different locations while still
functioning as part of a unified entity.
• Boundaryless Organizations: These organizations eliminate traditional boundaries, both internally (between
departments) and externally (with external partners, customers, etc.). They focus on cross-functional teams,
collaboration, and knowledge sharing to enhance innovation and flexibility.
• Holacracy: This approach distributes decision-making authority to self-organizing teams or circles. It replaces
traditional hierarchical structures with a system of distributed power, encouraging autonomy and innovation at
various levels.
• Agile Organizations: Agile methodologies, often used in software development, have extended to organizational
design. These organizations are highly adaptive, emphasizing iterative processes, quick responses to change, and
customer-centricity.
• Hybrid Structures: Many contemporary organizations use a mix of different designs, combining elements of various
structures to suit their specific needs. For example, a company might have a flat hierarchy but use aspects of a matrix
 Matrix and Project Structures
• Other popular contemporary designs are the matrix and project
structures. The matrix structure assigns specialists from different
functional departments to work on projects led by a project manager.
• One unique aspect of this design is that it creates a dual chain of
command because employees in a matrix organization have two
managers, their functional area manager and their product or project
manager, who share authority. The project manager has authority over
the functional members who are part of his or her project team in
areas related to the project’s goals. However, any decisions about
promotions, salary recommendations, and annual reviews typically
remain the functional manager’s responsibility. The matrix design
“violates” the unity-of-command principle, which says that each
person should report to only one boss; however, it can—and does—
work effectively if both managers communicate regularly, coordinate
work demands on employees, and resolve conflicts together.
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• Many organizations use a project structure, in which employees
continuously work on projects. Unlike the matrix structure, a project
structure has no formal departments where employees return at the
completion of a project. Instead, employees take their specific skills,
abilities, and experiences to other projects. Also, all work in project
structures is performed by teams of employees. For instance, at
design firm IDEO, project teams form, disband, and form again as the
work requires.
• Project structures tend to be more flexible organizational designs,
without the departmentalization or rigid organizational hierarchy that
can slow down making decisions or taking action. In this structure,
managers serve as facilitators, mentors, and coaches. They eliminate
or minimize organizational obstacles and ensure that teams have the
resources they need to effectively and efficiently complete their work.
 Network organizations
• Network organizations are a type of organizational structure in which a
central hub coordinates activities with a network of external partners,
such as suppliers, manufacturers, or specialized service providers, rather
than relying solely on in-house resources. These organizations are often
highly flexible and decentralized, using technology and communication
systems to manage relationships and processes across different entities.
• Nike: Nike operates as a network organization by outsourcing most of
its manufacturing to independent suppliers around the world, while the
core company focuses on design, marketing, and sales. Nike coordinates
with these external manufacturers, forming a flexible network.
• Uber: Uber exemplifies a network organization by connecting drivers
(who are independent contractors) with customers via its platform.
Uber manages the network without owning cars or directly employing
drivers.
 Strategic alliance
• A strategic alliance is a partnership between two or more
organizations that collaborate to achieve shared goals while
remaining independent entities.
• Apple and IBM: Apple partnered with IBM to bring IBM’s
enterprise software solutions to Apple devices. The alliance
focuses on developing mobile apps and services for
businesses, helping Apple expand into the corporate sector
while leveraging IBM’s strong presence in enterprise IT.
• Tesla and Panasonic: Tesla partnered with Panasonic to
manufacture batteries for Tesla's electric vehicles and energy
storage products. This alliance enables Tesla to benefit from
Panasonic's expertise in battery technology while Panasonic
gains from Tesla's growing demand for batteries.
 Boundryless organization

• A boundaryless organization is a type of organizational structure that seeks to

eliminate traditional barriers and boundaries within the organization, such as
those between departments, hierarchical levels, or between the organization
and its external environment. The goal is to create a highly flexible, adaptive,
and open structure where information flows freely, collaboration is encouraged,
and the organization can quickly respond to changes in the environment.
• Google: Google encourages a boundaryless culture by promoting open
communication across all levels and departments. Employees are encouraged to
collaborate on projects, even across different business units, and they have easy
access to information. Google also uses cross-functional teams to foster
innovation.
• Haier: The Chinese appliance company Haier has implemented a boundaryless
management model by breaking its large organization into small self-managed
teams called micro-enterprises. These teams operate with high autonomy and
collaborate with external partners, customers, and suppliers, enhancing
flexibility and innovation.
 Virtual organization
• A virtual organization is a flexible, networked
organizational structure where geographically
dispersed individuals, teams, or companies
collaborate and work together through the use of
digital technologies, without a physical centralized
office. Members of a virtual organization are
connected via the internet, telecommunications,
and collaboration tools, allowing them to work
remotely or from different locations while still
functioning as part of a unified entity.
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