Organizational Structure:

A Critical Factor for Organizational

Effectiveness and Employee Satisfaction

August 2007

Craig W. Fontaine, Ph.D.

Northeastern University
College of Business Administration

Based on:

C.W. Fontaine, How Organizational Structure Impacts Organizations. First Annual

Conference on Organizational Effectiveness, Chicago, IL 2006

© 2007 Northeastern University


“Organizational structure is
perhaps the least understood
and most under-appreciated
topic in business.”
James Schermerhorn, Jr.,
Professor, Ohio University
A Critical Factor for Organizational Effectiveness and Employee Satisfaction
Executive Summary
Organizational Structure is a topic seldom contemplated by most people
working in organizational settings. We all go to work every day, go to
assigned locations, and perform our jobs — and we don’t ever think
about how our organization is arranged.
However, Organizational Structure is critical both for a company and its
employees. People should think very carefully about the organizational
structure of the companies for which they work or of companies for
which they intend to work. In the long run, Organizational Structure can
spell the difference between success and failure for a company, as well
as for the individuals who work there.
The purpose of this white paper is to examine those challenges facing
any company wherein Organizational Structure is not probably aligned
with business strategy, and to consider the benefits and pitfalls of a
number of Organizational Structure options as they pertain to the long-
term success of individual employees and the company as a whole.
Organizational Structure:
2
 The 4 Essential Management Functions
“Too often ideas get rejected The first thing to consider is that most people who study Management
because they have to travel know that Organizational Structure is a crucial component of the overall
too far in the organization business strategy, just as important as Planning, Leading, and Controlling
filled with fiefdoms and an organization.
inevitable roadblocks.”
Mitch Thrower, Author,
"The Attention Deficit
Workplace“

Figure 1: Major Components for Achieving Organizational Objectives 1

In essence, Organizing is the manner in which a company utilizes its

resources — specifically, its human resources. How do we organize jobs
into departments? How do we answer the questions “who does what”
and “who reports to whom” in the chain of command? There is also an
implicit issue of how to coordinate all of these people and all of these
duties across an extended enterprise. Organizational Structure is the
framework for answering these questions and more.

Flexibility of the Organization

Trigger Point While many companies today are still reluctant to change their
An external event that Organizational Structure, more and more are coming to find that they
calls for immediate need to be adaptive and they need to be flexible. In fact,
organizational Management Theorists — people who study this at the academic level
response, flexibility — are starting to encourage organizations to change their structure
and adaptation because they need to be prepared to respond to what we call “trigger
points.” A trigger point is an external event that has an impact on an
organization. It could be a change in the markets; it could be a change
in global competition; it could be the advent of new technology. These
trigger points and any number of others call for immediate responses, as
well as organizational flexibility and adaptation. 2

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 3
 Examples of Strategic Renewal

Company Altered Strategy

EG&G Government Contractor
®Commercial Vendor
Enron Energy Production
®Energy Trading
GE Commodity Product
®Value-Added Products & Services
Grand Union Low-Cost Grocery Store
®High-End Company
Strategic Renewal
A company’s realignment
IBM Products
to pursue new business ®Services/Consulting
objectives, to create new
products or services, or to
Marks & Spencer, UK Traditionally Conservative Adults
target new consumer
markets is referred to as ®Young, Trendy Shoppers
Strategic Renewal
Renault French-Based Auto Manufacturer
®Internationally-Focused
Walgreens Brick & Mortar Store Chain
®Chain & Internet Sales

Figure 2: Major Businesses Adapt to Changing Business Environments 3

A company’s organizational realignment to pursue new business

objectives, to create new products or services, or to target new
consumer markets is referred to as Strategic Renewal. Figure 2 features
several prominent examples of Strategic Renewal: Virtually 95% of
EG&G’s business was government contract work until they changed their
strategy and became a commercial vendor; Enron was an energy
production company that became an energy trading company; GE was
a commodity company that morphed into a Value-Added; Grand Union
changed from a very low-end grocery business into a very high-end
company; IBM changed from products to services and consulting; Marks
and Spencer, a UK clothing company, switched from a conservative
adult market to a young and trendy market; Renault, the almost-
exclusively French automobile manufacturer, finally expanded into the
international market; and Walgreen’s, a brick-and-mortar mainstay, has
now established a heavy Internet presence, with growing online sales.

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 4
 Those are great examples of companies that not only changed their
business strategies, but changed organizational structures to match their
new strategies.

Other Drivers of Change

There are other reasons why organizations change their business
strategies and Organizational Structures. The table below cites a number
of these “drivers of change” and the key points of their impact on
business, as well as examples of companies that adapted to such
changes.

Approach Key Points Examples

Employee Participation in • General Motors
Involvement decision making • Hampton Inn Hotels
• SAS Airlines

TQM Continuous process • Globe Metallurgical, Inc.

improvement • Motorola
• Westinghouse

Process Redesigning work flow • Hewlett-Packard

Reengineering to drive out waste • Lotus Development
• Southwest Airlines

Concurrent Integration of design, • British Aerospace

Engineering manufacturing, • Carolla Development
support • Comdial Corporation

Six Sigma Statistical control of • AlliedSignal

variance; process • General Electric
improvement • Motorola

Globalization Geographic dispersal, Most large organizations

national culture, laws to varying degrees

Business Model Refine customer • IBM

Reinvention acquisition and • Ikon Office Solutions
retention • Southwest Airlines

Six Sigma Statistical control of • AlliedSignal

variance; process • General Electric
improvement • Motorola
Figure 3: Drivers of Change and Their Impact on Business 4

Such adaptation may entail initiatives aimed at increasing employee

participation in the decision-making process, or embracing concepts

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 5
 such as Total Quality Management (TQM), which has been a trend for
about fifteen years. Any company still embracing TQM at this point
certainly needs to consider changing its organizational structure.
Process re-engineering and concurrent engineering, as the terms
suggest, are measures taken to turn a company’s engineering practices
towards process analysis and concurrent engineering, combining both
the design and manufacture into one division.
Adapting to Six Sigma demands company-wide process improvements
and close scrutiny of those processes from one division to another.
Globalization is an intimidating and sometimes controversial issue that
also tends to drive companies to change their Organizational Structures.
Business model reinvention — such as IBM changing from a product
manufacturer into a services and consulting firm — is one of the more
drastic examples of business reorganization; but even this sort of
sweeping change must be an option for a truly flexible organization.
Of course, these examples represent evolving business trends that have
come and gone over the years. Flexible organizations try to adapt to
such trends as quickly and efficiently as possible to enhance business
and achieve organizational goals.

Key Terms
Organizational In any discussion of Organizational Structure, it’s helpful to become
Structure acquainted with a few key terms that describe specific aspects of
The manner in which business organization practices. Very simply, Organizational Structure is
an organization aligns the manner in which an organization arranges (or rearranges) itself. 5
(or realigns) itself.
Once an organization investigates its options and decides upon how it’s
going to structure itself, it’s common to draw up an Organizational Chart.
Org Charts are not only quite interesting, they’re very handy tools.

Figure 4: An Organizational Chart

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 6

Every company organizes
itself differently, so there is
no absolute right and no
absolute wrong way to
design an organization.
A Critical Factor for Organizational Effectiveness and Employee Satisfaction
Some organizations consider their Organizational Charts as confidential,
while other organizations — most of them, in fact, do not. Some
companies go so far as to post their Organizational Charts on their
publicly accessible websites.
Other key terms include Centralized and Decentralized Decision Making.
Centralized decision making refers to a business model in which decisions
are directed to the top of the organization. Decentralized decision
making is a model in which the organization tends to push the decisions
down to the lowest levels, which can be a good thing.
With decentralized decision making, the benefit is that the individuals
who best know the company’s processes are those lower in the
organization, those who roll up their sleeves and work with the processes
every day. Theoretically, such individuals are in a better position to
respond to external and internal drivers and make rapid decisions to
control those drivers before they get out of hand and negatively affect
the organization.
Decentralized decision making tends to be a trap, as it may dangerously
undermine upper management in the organization. Nonetheless,
decentralized decision making is increasingly accepted as a viable
business model today.
Yet another key term is one known as Formalization, the degree to which
an organization tends to document its processes, rules, and regulations. 6
Centralized and Decentralized Decision Making and Formalization will
vary from one organizational structure to another, depending upon the
options for change that are open to a company.
Hierarchy of Authority
Another key term that is familiar in the designing an organization is what
we call a Hierarchy of Authority. 7
The concept of Hierarchy of Authority says that an organization must
know who is in charge of which elements and who reports to whom. Of
course, this has implications for the division of labor because, under the
Hierarchy of Authority, many tasks are divided and distributed across the
organization. This process necessarily entails varying degrees of
specialization of jobs and tasks, which we see a lot these days as the
business environment grows more sophisticated.
Types Of Organizational Structures
Regarding Types of Organizational Structures, I will first critically note that
an appropriate organizational structure for any given company is a very
elusive animal, indeed. Every company tends to organize itself
differently, so there is no absolute right and no absolute wrong way to
design an organization. Appropriate organizational structure depends
upon the unique strategy of the business, its unique customer base, its
Organizational Structure:
7
 unique sense of products and services, and its management of these
considerations as they are dispersed throughout the enterprise.
The most common organizational types may be classified as follows:
ƒ The Functional Structure
ƒ The Divisional Structure
ƒ The Matrix Structure, and
ƒ The Horizontally Linked Structure
Before we discuss each of these structures, I’d like to note that with any
given company, and especially with a very large company (an
organization with ten, fifteen, twenty, forty thousand people, for
instance), we typically do not see that a single organization adheres to a
single organizational structure. Different structures may benefit different
portions of the organization in both subtle and profound ways.
Different organizational For a hypothetical example, the very controversial Matrix Structure may
structures may benefit work extremely well in a company’s research and development
different portions of the environment; however, the sales environment of the same company
organization in both subtle may benefit greatly from the Divisional option. The distinctions and
and profound ways.
benefits of these structures will become more apparent as we discuss
each of the organizational types.

Dimensions of Organizational Structure

Think about any Organizational Structure and visualize an Organizational
Chart in two dimensions: There is the Vertical Dimension, in which the
organization is considered to be either a tall or a flat structure; and there
is the Horizontal Dimension, in which an organization is considered to be
either wide or narrow.

The Vertical Dimension of Organizational Structure

The Vertical Dimension of the Organizational Structure basically lays out
who is in charge of whom and who makes the decisions inside an
organization. It is the hierarchy of authority within a company, and
herein we find something that we call the Span of Control, which plays
an especially important role in our discussion of the Functional Structure.
Span of Control is a very simple concept: It refers to the number of
people who can report to a single manager inside of the hierarchy.
However, the optimal Span of Control is very difficult to quantify,
because it varies based upon the type of organization and the work
being executed; the nature of the work, the level of Formalization, the
skills of the people, the business culture, and the management style of
the organization all influence the optimal Span of Control within any
given company.
Let’s take another hypothetical example: In a production or
manufacturing company, a single manager may very well be able to
handle a large number of people (say, 12 to 14 workers), because in a

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 8
 manufacturing facility, the work is most likely driven by machines.
Certainly, in this environment there will be numerous processes and
procedures, but there’s not going to be a great deal of latitude as to
what an individual does on the job. It’s a simple matter of following Step
One with Step Two, Step Two with Step Three, and so forth.
However, a software company or a video game manufacturing firm will
call for an entirely different type of task, entirely different skill sets, with an
entirely different type of people executing the work. Herein we find
people who are very well versed in computer technology, and they tend
to excel in creative and innovative tasks. Their work is not driven by rigid
processes and procedures. It is a creative environment. And, in a case
like this, obviously the Span of Control would need to be smaller,
because a manager cannot oversee as many people when those
individuals are granted greater creative latitude.

Span of Control (Tall vs. Flat Organizations)

The Span of Control has a major impact on organizational effectiveness.
So let’s take a look at two different types of organizations. We can more
easily refer to these as Tall Organizations and Flat Organizations.

Span of Control
Span of Control is simply
the number of people
who can report to a
single manager inside of
the hierarchy.

Figure 5: Tall vs Flat Organizational Structures

As you can see from the organizational chart in Figure 5, the top half
may be called a Tall Organization. Actually, this illustration depicts only
four to five levels — in a truly large organization, of course, there will be
many more levels. In an org chart for General Motors or Old Bethlehem
Steel Company, for examples, there may be as many as twelve,

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 9
 fourteen, sixteen or more levels between the top of the structure and the
lowest level person in the organization.
Because there are so many levels, managers in a Tall Organization tend
to have a Narrow Span of Control, which means there are no more than
five or six people reporting to any individual manager or supervisor.
In the lower half of Figure 5, we see a so-called Flat Organization. The
Flat structure results from substantially fewer levels (five or six levels at the
maximum).
In the Flat Organizational Structure, because there are fewer levels,
managers tend to have a Wide Span of Control, so there could be as
many as ten or twelve people reporting to any individual manager or
supervisor, depending upon the tasks involved.
So, essentially, as an organizational structure flattens out, the Span of
Control increases. As the organizational structure becomes taller, the
Span of Control decreases (see Figure 6).

Figure 6: Comparison of Span of Control in Tall and Flat Structures 8

Vertical Complexity:
Contrasting Spans of Control in Functional Structures
We can now look at the most prevalent types of structures and discuss
the pros and cons of each. The first structure, which is more in line with
the Vertical Dimension, is known as the Functional Structure.

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 10
 Functional Structures
Functional Structures
create a high degree of
stability and efficiency
within an organization, but
this structure type has its
disadvantages, as well.

Figure 7: The Functional Organization Structure 9

The Functional Structure is by far the most popular organizational

structure in the business world — probably 65% to 75% of companies use
the Functional Structure, because it’s basic and it makes sense. The
Functional Structure is how most organizations align themselves into
various departments (for example, Production Department, Sales
Department, R&D, Accounting, et cetera). Within the Functional
Structure, people of similar skill sets are grouped together and managed
by somebody who presumably knows a great deal about those skill sets.
But what are the advantages and disadvantages of the Functional
Structure?

Advantages and Disadvantages of The Functional Approach

First of all, the Functional Structure follows the Centralized Decision
Making model, such that decision making in the Functional Structure
occurs at the top. This can be advantageous in the sense that there is
more upper management control in the organization. It can also help
individuals in their career paths, inasmuch as motivated employees
move upward within the organization to assume decision-making
positions. For example, you come in from college, join the Accounting
Department as a Junior Accountant, move up to Accountant, and then
move up to Senior Accountant — it’s a very well-defined career path.
Functional Structures foster stability and efficiency. Everybody knows
what his job is, and as a group they all use similar processes, so it’s a very
effective way of operating. When you’re working with this type of
structure, you can also take advantage of economies of scale.
Of course, the Functional Structure has its disadvantages, as well.
Perhaps the most critical disadvantage is that of poor communication
and conflict between departments. A great deal of literature on
Functional Structure is focused on the effect of what we call Siloing.
Siloing is when an organization has very thick walls, so that the various
departments are entirely isolated from one another, and members of

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 11
 those departments don’t think in terms of company-wide teamwork.
They only attend the business of their specific department.
Communication and collaboration between the departments is difficult,
at best, and this is not a good organizational situation. Also, customers
can become frustrated by the lack of responsiveness from organizations
that are functionally structured — the scenario of customer complaints
“passed off” from one department to another is familiar to most of us.
Another disadvantage of the Functional Structure is that employees tend
to identify themselves with their respective departments but not so much
with the organization as a whole. Although the Functional Structure is
the most popular and pervasive in the business world, companies should
understand that the siloing effect is potentially detrimental to individual
employees, departments, and the organization as a whole. 10

Divisional Structures The Horizontal Dimension of Organizational Structure

Divisional Structures are
concerned with placing
groups of people with
similar abilities where they
are needed all across the
organization.
The other dimension of an organization, the one called the Horizontal
Dimension, basically addresses the division and assignment of tasks and
functions across various departments within the organization. Herein we
examine the second of the Organizational Structure types, the Divisional
Structure.

Divisional Structure
The Divisional Structure is not so much based on the grouping of people
according to their skill sets as it is concerned with placing groups of
people with similar abilities where they are needed all across the
organization. For instance, while under the Functional Structure you
would expect to find accountants only in the Accounting Department,
under the Divisional Structure you will find accountants in different
divisions of the same company, in separate Accounting Departments
which are dedicated to separate product lines.

Figure 8: The Divisional Organization Structure

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 12
 As you can see in Figure 8, each product line has its own Functional
Organization with Production, Sales, R&D and Accounting teams,
permitting each product line to function independently of the other
product lines. Yet each product line is a component of a larger
organization.
A solid example of Divisional Structure can be seen in the Boeing
Company. Boeing has three divisions within its organization: the
Commercial Airline division; the Military Aircraft division; and a fledgling
new division or product group called Private Aviation. Each of these
divisions is a functional organization unto itself, each with its own R&D
and Production and Sales and Accounting teams; yet, each is only a
component of a much larger organization called Boeing Company.
Of course, organizational divisions can be and usually are much more
than mere product lines. The divisions may be based on different
consumer markets. Everyone knows that Black & Decker, for example,
manufactures and sells construction equipment, but its divisions target
different consumer markets. One division markets to the layman builder,
another division markets to the private professional builder, and yet
another division markets to large government contractors.
Organizational divisions may even be based on geographic markets —
for instance, a global corporation may have a North American division, a
European division, an Asian division, and so forth. In fact, an
organization’s Divisional Structure may be based upon anything.

Advantages and Disadvantages of The Divisional Structure

The advantage of the Divisional Structure lies mainly in the coordination
of functions within the separate divisions. Behind any single product
group or market group or geographic group is one person who is in
charge of all the functions within his division. This improves the ability of a
company to respond to customer issues, because there is more
accountability — everyone in a given division reports to a single
individual at the top of the division, rather than to a mere supervisor of a
department. This arrangement also helps to develop managerial skills
and executive skills, because people working in a Divisional Structure are
exposed to all of the other functions, unlike the siloing effect seen in a
straight Functional Structure.
The disadvantage of the Divisional Structure lies in redundant effort and
resources due to multiple departments performing essentially the same
tasks across the organization, which spells inefficiency on many levels.
Within the Divisional Structure there is also a reduction in specialization
and occupational skills, not to mention a high probability of in-house
competition between the various divisions of the company. 11
Even so, the Divisional Structure is widely embraced by larger companies,
and it’s not nearly as controversial as the next type of organizational
structure we will examine — the Matrix Structure.

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 13
 Matrix Structure
I have personally worked in a couple of companies that utilized the
Matrix Structure of organization, and it’s interesting, to say the least. This
structure incorporates elements of both Functional and Divisional
structures, yet in the end it operates like neither.
At a glance, the structures in Figure 9 are easily identifiable — our
illustration depicts a single division of a large corporation, and closer
examination reveals elements of a functional structure comprised of a
Production Department, a Legal Department, an Engineering
Department, and an Accounting Department.

Matrix Structures
Matrix Structures
incorporate elements of
both Functional and
Divisional structures, yet
the Matrix operates in its
own unique fashion.

Figure 9: The Matrix Structure 12

Less recognizable are the entities Project Alpha, Project Beta, and
Project Gamma, which seem to cut across the functional structure.
These are, indeed, projects that must pass through the functional
structure of this division; however, each project must be allocated its
own Production Support team, its own Legal Support team, its own
Engineering Support team and its own Accounting Support team.
The manager of each project has no staff at all. His job is to assemble his
staff from the functional areas of the organization in order to see his
project through from conception to completion. The project manager,
in other words, must borrow his staffing from each department.
The challenge is that each department has a finite staff, and the
demands of each project are not equal — so one project may require
more staffing than the others.

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 14
 Accordingly, if we have three different projects with three different
project managers, there’s going to be some competition between them
for staffing, because the project managers have no staff of their own,
and there is a finite number of available staff in the organization to
accommodate them.
Of course, when we refer to “projects” we could as easily be referring to
clients or customers of the organization, and I’ll provide an example for
the sake of clarity.
When I worked at the ABB Group in the nuclear power industry, my
company had only twelve customers; however, these were huge
customers, multi-billion dollar customers. We at ABB organized ourselves
into a Matrix Structure with a manager (a “project manager”) assigned
to each customer. When one of our customers required personal
attention, the manager assigned to that customer would then borrow
staff from the functional areas of our organization in order to fulfill that
customer’s specific needs. When several of our customers required
attention simultaneously, you may well imagine the competition among
our managers to borrow sufficient staff to accommodate the customers.
Or you may try to imagine the workload of those people who are in the
middle — those staffers who are borrowed and moved from project to
project, working two or three projects at a time on occasion. The
demands of the Matrix Structure require great flexibility and fortitude on
the part of the participants. It’s an environment in which some people
excel, but the pace can be overwhelming for others.

Advantages and Disadvantages of The Matrix Structure

The advantage of the Matrix Structure is that it’s extremely efficient,
particularly when resources are scarce. This organizational structure is a
very good way to ensure that expensive specialists are kept busy all the
time and that they are using their skills on the most critical portions of a
project for the good of the organization. It also allows an organization to
start projects quickly, because there’s no need to hire staff from outside
— the staff is readily available, and they are already acquainted with
the pace, so projects can be launched very quickly. 13
The Matrix Structure also helps develop cross-functional skills in
employees, as they are dealing with many different types of projects,
working with and learning from many other participants with a diversity
of skill sets. The Matrix also increases employee involvement because
the project managers seldom possess all the necessary technical and
functional knowledge. They rely on the expertise of those “borrowed”
staffers to make more decisions at a technical level.
The main disadvantage of the Matrix Structure, certainly, is that many
employees become very frustrated and confused with the chain-of-
command in these hastily-assembled support teams — Who’s the boss?
My department head or my project manager? There are also conflicts
between project and department managers concerning deadlines and
priorities. There can be competition between project managers to

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 15
 acquire the “best” project support staff from the finite pool of available
people. And a great deal of valuable time is expended in meetings to
coordinate staff for two or three or more concurrent projects.
But don’t dismiss the positive elements of the Matrix Structure. While this
type of organizational structure is more demanding and perhaps more
stressful than others, it is also very, very efficient.

Horizontally Linked Structure

The last type of organizational structure that we’ll examine, the
Horizontally Linked Structure, is somewhat of a newcomer in the business
world — making its first appearance only three or four years ago, to my
knowledge — but it is gaining momentum and finding more and more
acceptance today, especially among IT departments in the high-tech
community.

Plan Build Run

(Often adopted by IT Departments)
Figure 10: The Horizontally-Linked Organizational Structure

Horizontally Linked Under the Horizontally Linked Structure, an organization groups its people
Structures along the value chain of activities and processes that produce, market,
A Horizontally Linked deliver, and service the firm’s offerings. 14
Structure groups people A very basic way of illustrating this type of organizational structure is seen
along the value chain of in Figure 10, a simple Plan, Build and Run model. Let’s say a company
processes that produce,
will group its people and resources from R&D or Finance for the express
market and service the
firm’s offerings. purpose of planning projects or programs in the company’s interest;
these plans are passed to the next group comprised of Manufacturing
personnel for actual production; and then another group of IT personnel
maintain and perpetuate the projects or programs. This is an interesting
and growing trend in organizational structure, and it’s one that is well
worth watching in the future.

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 16
 Classical vs. Neoclassical Theories
of Organizational Structure
There are two overriding theories of optimal Organizational Structure that
hold forth in the business world, known as Classical Organizational Theory
and Neoclassical Organizational Theory. As the names suggest, the
former is a traditional approach while the latter is a more progressive
approach.
The Classical Organization Theory assumes that there is a single best way
to design organizations — that managers should have tight control over
their subordinates, and that calls for designing organizations with tall
hierarchies and a narrow Span of Control. Classical Theory entails a high
degree of written documentation and rules and procedures intended to
direct and control employees. As such, the Classical Theory advocates
a decidedly functional type of organization.
The flip side is an attempt to improve on the classical theory. Today we
know this as Neoclassical Organization Theory, which argues that
employee satisfaction, as well as economic effectiveness, should be the
ultimate goal of an organization. Neoclassical Theory assumes that
managers do not tightly control their subordinates and calls for designing
organizations with flat hierarchies and a wide Span of Control. Following
Neoclassical Theory, the manager relies more on the employees to make
decisions, and these organizations are less rigid with fewer rules,
regulations, and processes.

Figure 11: Classical and Neoclassical Theories of Organizational Structure 15

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 17
 Modern Trends in Delayering Organizational Structure

Figure 12: Delayering the Organizational Structure 16

Given the increasing acceptance of Neoclassical Organization Theory

and the rise of new models such as the Horizontally-Linked
Organizational Structure, it’s apparent that modern trends are moving
the business world toward a Flattening or Delayering of organizational
structure.
With modern trends Delayering refers to stripping out middle management from a
toward decentralized company’s organizational structure. The resulting structure is essentially
decision-making, fewer flattened, with fewer managers, and those managers who remain are
organizational layers, and
able to exercise a wider Span of Control. Those who work in these
more direct access to
upper management,
flattened structures have more decision-making ability, greater creative
employees are motivated latitude, more autonomy, and more direct relationships with the higher
to contribute their voices level people inside the organization — all of which contribute to
to matters that affect the employee satisfaction.
entire organization
The Implications for Employees
Perhaps most importantly, we should consider the implications of these
evolving organizational structures for employees. In a more traditional
and ponderous Tall Organizational Structure, with centralized decision
making, the employee several levels down in the multi-multi-level
hierarchy may never be heard nor directly access the elite levels of
upper management. In the tall structure, with a very small Span of
Control and tight supervision, the employee tends to enjoy few decision
making opportunities, due to burdensome rules, regulations, and
procedures. This can, quite understandably, be more than a bit
disheartening for any employee.

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 18

The pros and cons of the
various organizational
structures are fairly well
balanced against one
another — There are yet
opportunities for personal
fulfillment, profit and
satisfaction regardless of
the organizational path
one chooses.
A Critical Factor for Organizational Effectiveness and Employee Satisfaction
However, with the modern trend toward Flattened Organizational
Structure, decentralized decision-making, fewer organizational layers,
and more direct access to upper management, the employee is
motivated to contribute his voice to matters that affect the entire
organization. A flattened structure that permits a wider Span of Control
with less supervision and fewer procedural hurdles will enhance and
encourage the employee’s autonomous decision making.
As an aside, I will add that most theories of motivation maintain that it’s
not money that inspires people to excel in the workplace; rather, it’s the
broader opportunity for autonomous decision making, greater personal
responsibility, direct contributions to upper-level matters that benefit the
entire company, a sense of accomplishment, and so forth. In other
words, employees are motivated by the freedom to pursue excellence,
both for themselves and for their organization as a whole.
Is it any wonder that more and more organizations are gravitating to
flatter, more modern, and more personally rewarding organizational
structures?
Some Final Observations
On the flip side, there is for most employees the allure of a secure and
profitable career path, a reward that is pretty much assured through
commitment to the tall and more traditional organizational structure. We
find a greater number of inexperienced workers in the tall structures
because they have that longing for a more defined and secure career
path. Over time, they learn the ropes, all of their questions are
eventually answered, and they prepare themselves for a series of
promotions to their ultimate goal within the organization. Tall, multi-level
companies are much more stable and predictable, offering the
employee a long-term opportunity to “climb the latter to success”
through such a series of promotions, providing the employee has the
patience and fortitude to toe the line and pursue that particular goal.
True, a fiercely dedicated employee can tread a rather well-defined
path to the top in a tall organizational structure, while that path is not
nearly so clear nor well-defined within a flattened organizational
structure. Naturally, the flat structure has a very low ceiling for
promotion, and there is a great deal of heated competition for
promotions when they become available.
Even so, the employee of a flat organization is granted much more
autonomy, much more control, and many more decision-making
opportunities, enabling him to sharpen his managerial skills on a fast track
compared to the employee languishing for years in a tall organizational
structure. We typically see older, more experienced employees
populating a flat structure. These employees may even be specialists in
their fields; as such, they don’t require as much direct supervision nor as
many rules and procedures to guide them. They bask in the autonomy
and personal responsibility of flat structures. In addition, they rub elbows
with other diverse and highly experienced specialists who pass on their
Organizational Structure:
19
 knowledge in the course of daily interaction, making for a continuous
and fast-paced learning environment.
If there is one significant lesson that we can take from this examination of
Organizational Structure, it is perhaps that organizations should very
carefully weigh their corporate structure options before committing to
them — and the same is true for the employee in selecting his working
environment. Mounting evidence indicates that employees should very
carefully choose the organizations best suited to their individual
temperaments, skill sets and, yes, personalities.
Personality is possibly the most important factor for a prospective
employee to consider when choosing an organization:
Is this job, this setting, this organizational structure
right for my personality?
Some studies have attempted to provide an answer: People who have a
need for power and achievement tend to prefer the tall structures,
because they thrive on every promotion that comes their way; people
who have a need for autonomy prefer the flat structures for the freedom
to make decisions and exercise wider control in their work environment. 17
If you’re presently working in a company that doesn’t seem right for you,
you may have stepped into an organizational structure that cannot
satisfy your personality and your career goals, and perhaps you should
consider changing jobs, if you can. Otherwise, you’re not benefiting the
company any more than the company is benefiting you.
More importantly, people coming out of college and looking for a job
should very, very carefully examine a company’s organizational structure
before applying for a position therein. Determine the organization’s
structure in advance, and make certain that it matches your personality
and your career objectives — in this way, you may reap the benefits and
avoid the pitfalls of the diverse Organizational Structures we have
discussed, thus ensuring long-term satisfaction with your career choice
and with your contribution to the organization as a whole.

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 20
 An Organization/Employee Match

Professor Craig W. Fontaine

Northeastern University Employee Tall Organizational Flat Organizational
College of Business Structure Structure
Administration
Phone: 617-610-6079 Younger and Preferred NOT Preferred
Email: c.fontaine@neu.edu inexperienced
Web Site: Older and NOT Preferred Preferred
www.professorfontaine.com experienced

High need for Preferred NOT Preferred

achievement

High need for NOT Preferred Preferred

autonomy

High need for Preferred NOT Preferred

power

NOTE: Only persons who are very flexible, adaptive, energized, and
who enjoy multi-tasking should work in a Matrix Structure.

Conclusion
Organizational Structure is critical both for a company and its
employees. People should think very carefully about the organizational
structure of the companies for which they intend to work. In the long run,
Organizational Structure can spell the difference between success and
failure for a company, as well as for the individuals who work there.

References

1Based on Bateman, T.S. & Snell, S., (2004), Management: The New
Competitive Landscape, 6th ed., McGraw-Hill, p. 13.
2Mische, M.A., (2001), Strategic Renewal: Becoming a High-Performance
Organization, Prentice Hall, p. 23.
3Spector, B., (2007), Implementing Organization Change: Theory and
Practice, 1st ed., Pearson Prentice Hall, p. 3.
4 Ibid p. 5.

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 21
 5Galbraith, J., (1973) Designing Complex Organizations, Reading,
Massachusetts, Addison-Wesley.
6Nohria, N. (1991) Note on Organizational Structure, Boston, Harvard
Case Services, p. 2.
7Perrow, C. (1986) Complex Organizations: A Critical Essay, 3rd ed.,
Random House.
8Adapted from: Ouchi, W. and Dowling, J., (1974), "Defining Span of
Control", Administrative Sciences Quarterly, Vol. 19.
9 Ibid.

Adapted from Romme, A.G.L., (2003), “Making a difference:

10

Organization as design”, Organization Science, 14, pp. 558-573.

11 Ibid.

Based on Davis, S. & Lawrence, P. (1977) Matrix, Addision-Wesley,

12

pp. 4-5.
13 Galbraith, J.R., (1994) Competing with Flexible Lateral Organizations,

Addision-Wesley, pp. 101-102.

14Based on Spector, B., (2007), Implementing Organization Change:
Theory and Practice, 1st ed., pp. 141, Pearson Prentice Hall.
15 Minkes, A.L. & Foxall G.R., (Oct. - Dec., 1980), “Entrepreneurship,
Strategy, and Organization: Individual and Organization in the Behaviour
of the Firm”, Strategic Management Journal, Vol. 1, No. 4, pp. 295-301.
16 Thompson, A. & Strickland, A., (2003), Strategic Management

Concepts and Cases, 13th ed., pp. 129, McGraw-Hill Irwin.

17Source: Discussion of personality is loosely based on: McClelland, D. C.
(1975), Power: the inner experience, New York: Halstead.

Organizational Structure:
A Critical Factor for Organizational Effectiveness and Employee Satisfaction 22