How to Design an Organizational Structure

Organizational structure is used to develop how groups and individuals are arranged or
departmentalized to help meet an organization's goals. It defines a reporting structure, jobs,
compensation and responsibilities for each role. Designing an organizational structure requires
consideration of an organization's values, financial and business goals. It should allow for growth
for the organization and the ability to add additional jobs or departments
1. Define business units or departments.
Each business unit should have similar goals and responsibilities that can be overseen and
directed by one or several managers. The business units or departments will then align to assist in
creating an appropriate organizational structure. Depending on which type of organizational
structure is used, departments may align laterally with other departments or one may oversee
another.

2. Determine which type of organizational structure best fits your business needs.
The several types of organizational structure ensure an organization can successfully function
with its reporting structure, expand if necessary and successfully meet its goals. For example, if
your organization is small, it may simply require the organizational structure be broken into
departments, such as production, human resources and finance. Your organization's business type,
units and how it operates will determine which type of organizational structure to choose
3. Define the executive and management teams.
Executives and managers are responsible for ensuring each business unit meets the organization's
goals. This may include one or several top executives to oversee the entire organization and
managers to direct each business unit within the organizational structure. the organization may
require one supervisor to oversee all operations, or several supervisors to direct each business unit,
ultimately reporting to a top executive or owner
4. Establish performance metrics and compensation.
When the organizational structure is determined, job descriptions can be clearly defined and where
each job fits in the hierarchy. Each job description should reflect the competencies required to do
the job and the expectations of each job to meet the organization's goals. After each job within the
structure is defined, compensation should be defined based on the responsibilities of each job

1. What are mechanistic versus organic organizational structures?

First, an organizational structure is a system for accomplishing and connecting the activities that
occur within a work organization. People rely on structures to know what work they should do,
how their work supports or relies on other employees, and how these work activities fulfill the
purpose of the organization itself.
Second, organizational design is the process of setting up organizational structures to address
the needs of an organization and account for the complexity involved in accomplishing business
objectives.
Next, organizational change refers to the constant shifts that occur within an organizational
system—for example, as people enter or leave the organization, market conditions shift, supply
sources change, or adaptations are introduced in the processes for accomplishing work.
Through managed change, leaders in an organization can intentionally shape how these shifts
occur over time.
Finally, organizational development (OD) is the label for a field that specializes in change
management. OD specialists draw on social science to guide change processes that simultaneously
help a business achieve its objectives while generating well-being for employees and sustainable
benefits for society. An understanding of OD practices is essential for leaders who want to
maximize the potential of their organizations over a long period of time.
Together, an understanding of these concepts can help managers know how to create and
direct organizations that are positioned to successfully accomplish strategic goals and objectives.
To understand the role of organizational structure, consider the experience of Justin, a young
manager who worked for a logistics and transportation company. His success at leading change
in the United States gave his leaders the confidence that he could handle a challenging assignment:
organize a new supply chain and distribution system for a company in Northern Europe. Almost
overnight, Justin was responsible for hiring competent people, forming them into a coherent
organization, training them, and establishing the needed infrastructure for sustained success in
this new market.
If you were given this assignment, what would you do? How would you organize your
employees? How would you help them understand the challenge of setting up a new organization
and system? These are the kinds of questions that require an understanding of organizational
structure, organizational design, organizational change, and organizational development.
One of the first issues Justin will need to address deals with how he will organize the system
he will manage. “The decisions about the structure of an organization are all related to the concept
of organizational design. There are two fundamental forms of structure to remember when
designing an organization.
To address these questions, we need to be familiar with two fundamental ways of building an
organization.
The formal organization is an officially defined set of relationships, responsibilities, and
connections that exist across an organization. The traditional organizational chart is perhaps the
most common way of depicting the formal organization. The typical organization has a
hierarchical form with clearly defined roles and responsibilities.

Formal Organizational Chart

When Justin sets up his formal organization, he will need to design the administrative
responsibilities and communication structures that should function within an organizational
system. The formal systems describe how flow of information and resources should occur within
an organization. To establish the formal organization, he will identify the essential functions that
need to be part of the system, and he will hire people to fill these functions. He will then need to
help employees learn their functions and how these functions should relate to one another.
The informal organization is sometimes referred to as the invisible network of interpersonal
relationships that shape how people actually connect with one another to carry out their activities.
The informal organization is emergent, meaning that it is formed through the common
conversations and relationships that often naturally occur as people interact with one another in
their day-to-day relationships. It is usually complex, impossible to control, and has the potential
to significantly influence an organization’s success.
The informal organization can also be mapped, but it is usually very different than the formal
organization. The chart you see in this example is called a network map, because it depicts the
relationships that exist between different members of a system. Some members are more central
than others, and the strength of relationships may vary between any two pairs or groups of
individuals. These relationships are constantly in flux, as people interact with new individuals,
current relationships evolve, and the organization itself changes over time.
Informal Organizational Chart

The informal organization in Justin’s design will form as people begin interacting with one
another to accomplish their work. As this occurs, people will begin connecting with one another
as they make sense of their new roles and relationships. Usually, the informal organization closely
mirrors the formal organization, but often it is different. People quickly learn who the key
influencers are within the system, and they will begin to rely on these individuals to accomplish
the work of the organization. The informal organization can either help or hinder an organization’s
overall success.
In sum, the formal organization explains how an organization should function, while the
informal organization is how the organizational actually functions. Formal organization will come
as Justin hires and assigns people to different roles. He can influence the shape of the informal
organization by giving people opportunities to build relationships as they work together. Both
types of structures shape the patterns of influence, administration, and leadership that may occur
through an organizational system.
 As we continue our discussion of structure and design, we will next examine different ways
of understanding formal structure.

Types of Formal Organizational Structures

Now, Justin will need to choose and implement an administrative system for delegating duties,
establishing oversight, and reporting on performance. He will do this by designing a formal
structure that defines the responsibilities and accountability that correspond to specific duties
throughout an organizational system. In this section, we’ll discuss the factors that any manager
should consider when designing an organizational structure.
Smoke coming out of chapel chimney
Almost all organizations have established organizational hierarchies and customs. As an older,
large organization, the Catholic Church has a tall global structure with the pope in the Vatican at
the apex. A process of succession has the cardinals voting on a new pope, and white smoke
billowing out of the Sistine Chapel signals that they have chosen the new pope.

Bureaucracy

One of the most common frameworks for thinking about these issues is called the bureaucratic
model. It was developed by Max Weber, a 19th-century sociologist. Weber’s central assumption
was that organizations will find efficiencies when they divide the duties of labor, allow people to
specialize, and create structure for coordinating their differentiated efforts, usually within a
hierarchy of responsibility. He proposed five elements of bureaucracy that serve as a foundation
for determining an appropriate structure: specialization, command-and-control, span of control,
centralization, and formalization.
Specialization

The degree to which people are organized into subunits according to their expertise is referred to
as specialization—for example, human resources, finance, marketing, or manufacturing. It may
also include specialization within those functions. For instance, people who work in a
manufacturing facility may be well-versed in every part of a manufacturing process, or they may
be organized into specialty units that focus on different parts of the manufacturing process, such
as procurement, material preparation, assembly, quality control, and the like.
Command-and-Control

The next element to consider is the reporting and oversight structure of the
organization. Command-and-control refers to the way in which people report to one another or
connect to coordinate their efforts in accomplishing the work of the organization.

Span of Control

Another question addresses the scope of the work that any one person in the organization will be
accountable for, referred to as span of control. For instance, top-level leaders are usually
responsible for all of the work of their subordinates, mid-level leaders are responsible for a
narrower set of responsibilities, and ground-level employees usually perform very specific tasks.
Each manager in a hierarchy works within the span of control of another manager at a level of the
organization.

Centralization

The next element to consider is how to manage the flows of resources and information in an
organization, or its centralization. A highly centralized organization concentrates resources in
only one or very few locations, or only a few individuals are authorized to make decisions about
the use of resources. In contrast, a diffuse organization distributes resources more broadly
throughout an organizational system along with the authority to make decisions about how to use
those resources.

Formalization

The last element of bureaucracy, formalization, refers to the degree of definition in the roles that
exist throughout an organization. A highly formalized system (e.g., the military) has a very
defined organization, a tightly structured system, in which all of the jobs, responsibilities, and
accountability structures are very clearly understood. In contrast, a loosely structured system (e.g.,
a small, volunteer nonprofit) relies heavily on the emergent relationships of informal organization.

Mechanistic and Organic Structures

Using the principles of bureaucracy outlined above, managers like Justin have experimented with
many different structures as way to shape the formal organization and potentially to capture some
of the advantages of the informal organization. Generally, the application of these principles leads
to some combination of the two kinds of structures that can be seen as anchors on a continuum
(see (Figure)).
 Elements of Organizational Structure and Their Relationship to Mechanistic and Organic
Forms

Mechanistic Organic

Highly formalized Standardization Low

High/Narrow Specialization Low/Broad

Centralized Centralization Decentralized

Functional Departmentalization Divisional

On one end of the continuum is mechanistic bureaucratic structure. This is a strongly hierarchical
form of organizing that is designed to generate a high degree of standardization and control.
Mechanistic organizations are often characterized by a highly vertical organizational structure, or
a “tall” structure, due to the presence of many levels of management. A mechanistic structure
tends to dictate roles and procedure through strong routines and standard operating practices.
In contrast, an organic bureaucratic structure relies on the ability of people to self-organize
and make decisions without much direction such that they can adapt quickly to changing
circumstances. In an organic organization, it is common to see a horizontal organizational
structure, in which many individuals across the whole system are empowered to make
organizational decision. An organization with a horizontal structure is also known as a flat
organization because it often features only a few levels of organizational hierarchy.
The principles of bureaucracy outlined earlier can be applied in different ways, depending on
the context of the organization and the managers’ objectives, to create structures that have features
of either mechanistic or organic structures.
For example, the degree of specialization required in an organization depends both on the
complexity of the activities the organization needs to account for and on the scale of the
organization. A more organic organization may encourage employees to be both specialists and
generalists so that they are more aware of opportunities for innovation within a system. A
mechanistic organization may emphasize a strong degree of specialization so that essential
procedures or practices are carried out with consistency and predictable precision. Thus, an
organization’s overall objectives drive how specialization should be viewed. For example, an
organization that produces innovation needs to be more organic, while an organization that seeks
reliability needs to be more mechanistic.
Similarly, the need for a strong environment of command-and-control varies by the
circumstances of each organization. An organization that has a strong command-and-control
system usually requires a vertical, tall organizational administrative structure. Organizations that
exist in loosely defined or ambiguous environments need to distribute decision-making authority
to employees, and thus will often feature a flat organizational structure.
The span of control assigned to any specific manager is commonly used to encourage either
mechanistic or organic bureaucracy. Any manager’s ability to attend to responsibilities has limits;
indeed, the amount of work anyone can accomplish is finite. A manager in an organic structure
usually has a broad span of control, forcing her to rely more on subordinates to make decisions.
A manager in a mechanistic structure usually has a narrow span of control so that she can provide
more oversight. Thus, increasing span of control for a manager tends to flatten the hierarchy while
narrowing span of control tends to reinforce the hierarchy.
Centralization addresses assumptions about how an organization can best achieve efficiencies
in its operations. In a mechanistic structure, it is assumed that efficiencies will occur in the system
if the resources and decisions flow through in a centralized way. In an organic system, it is
assumed that greater efficiencies will be seen by distributing those resources and having the
resources sorted by the users of the resources. Either perspective may work, depending on the
circumstances.
Finally, managers also have discretion in how tightly they choose to define the formal roles
and responsibilities of individuals within an organization. Managers who want to encourage
organic bureaucracy will resist the idea of writing out and tightly defining roles and
responsibilities. They will encourage and empower employees to self-organize and define for
themselves the roles they wish to fill. In contrast, managers who wish to encourage more
mechanistic bureaucracy will use tools such as standard operating procedures (SOPs) or written
policies to set expectations and exercise clear controls around those expectations for employees.
When a bureaucratic structure works well, an organization achieves an appropriate balance
across all of these considerations. Employees specialize in and become highly advanced in their
ability to perform specific functions while also attending to broader organizational needs. They
receive sufficient guidance from managers to stay aligned with overall organizational goals. The
span of control given to any one manager encourages them to provide appropriate oversight while
also relying on employees to do their part. The resources and decision-making necessary to
accomplish the goals of the organization are efficiently managed. There is an appropriate balance
between compliance with formal policy and innovative action.
 Functional Structures

Aside from the considerations outlined above, organizations will often set structures according to
the functional needs of the organization. A functional need refers to a feature of the organization
or its environment that is necessary for organizational success. A functional structure is designed
to address these organizational needs. There are two common examples of functional structures
illustrated here.
Product structures exist where the business organizes its employees according to product
lines or lines of business. For example, employees in a car company might be organized according
to the model of the vehicle that they help to support or produce. Employees in a consulting firm
might be organized around a particular kind of practice that they work in or support. Where a
functional structure exists, employees become highly attuned to their own line of business or their
own product.
Geographic structures exist where organizations are set up to deliver a range of products
within a geographic area or region. Here, the business is set up based on a territory or region.
Managers of a particular unit oversee all of the operations of the business for that geographical
area.
In either functional structure, the manager will oversee all the activities that correspond to
that function: marketing, manufacturing, delivery, client support systems, and so forth. In some
ways, a functional structure is like a smaller version of the larger organization—a smaller version
of the bureaucracy that exists within the larger organization.
One common weakness of a bureaucratic structure is that people can become so focused on
their own part of the organization that they fail to understand or connect with broader
organizational activities. In the extreme, bureaucracy separates and alienates workers from one
another. These problems can occur when different parts of an organization fail to communicate
effectively with one another.
Some organizations set up a matrix structure to minimize the potential for these problems. A
matrix structure describes an organization that has multiple reporting lines of authority. For
example, an employee who specializes in a particular product might have both the functional
reporting line and a geographic reporting line. This employee has accountability in both directions.
The functional responsibility has to do with her specialty as it correlates with the strategy of the
company as a whole. However, her geographic accountability is to the manager who is responsible
for the region or part of the organization in which she is currently working. The challenge is that
an employee may be accountable to two or more managers, and this can create conflict if those
managers are not aligned. The potential benefit, however, is that employees may be more inclined
to pay attention to the needs of multiple parts of the business simultaneously.

1. What is an organizational structure?

2. What are different types of organizational structures?
3. What is organizational design?
4. What concepts should guide decisions about how to design structures?

1. What are mechanistic versus organic organizational structures?

The organizational structure is designed from both the mechanistic and the organic points of view,
and the structure depends upon the extent to which it is rigid or flexible. Flexible structures are
also viewed as more humanistic than mechanistic structures. The mechanistic organizational
structure is similar to Max Weber’s bureaucratic organization. Organic structures are more
flexible in order to cope with rapidly changing environments. These structures are more effective
if the environment is dynamic, requiring frequent changes within the organization in order to
adjust to change. It is also considered to be a better form of organization when employees seek
autonomy, openness, change, support for creativity and innovation, and opportunities to try new
approaches.
All organizations need structures to accomplish their work, and they need an ability to change
in order to sustain and renew themselves over time

External Environment & Organizational Structure

Different businesses need different working conditions to reach their respective strategic goals.
Organizational structure provides the foundation for these working conditions. To design a
structure, a small-business owner first considers the company’s situation, looking at both the
internal and external conditions the business faces. With that information, the owner can align the
company’s goals with opportunities, protect the business from threats, and build a structure that
best promotes the company’s agenda. Since opportunities and threats emerge from the external
environment, it directly influences the choice of a company’s organizational structure.
PEST
The acronym PEST — political/legal, economic, sociocultural and technological — is an easy
way to remember areas of the external environment that should be assessed when deciding
strategy and designing structure. Changes or stabilization in these areas impact businesses. For
instance, a stable political environment won’t require the adaptability that an unstable political
environment will. A technological breakthrough, meanwhile, may demand a transformation in the
way a company operates, suggesting that the structure must be flexible enough to accommodate
the evolution.
Organic Structures
Free-flowing, loose structures are known as organic because they can change as conditions
demand. This adaptability suits dynamic or unstable external environments. The innovative ideas
and visions needed to compete in a dynamic environment find fertile ground in a company built
on an organic structure. The setup encourages empowerment by minimizing management,
resulting in a flat organizational chart. Because of this characteristic, companies using an organic
structure are sometimes called flat companies. Flat companies decentralize authority
Mechanistic Structures
Tight, controlled structures are mechanistic, operating in a predictable way and according to many
rules. Jobs are specialized, broken down into simple tasks to increase efficiency. Because
standardization and control take supervision, a management hierarchy characterizes the
organizational structure, making it tall or vertical. Mechanistic structures can take advantage of a
stable external environment to ramp up production, standardize products, or increase efficiency
and lower costs through economies of scale. Power flows down from the top, retained as much as
possible by management.
Structures for Stability
The most mechanistic forms of organization are the functional and divisional structures. To build
a mechanistic structure, a small-business owner would group jobs according to the company’s
most basic operations, typically resulting in departments such as production and marketing. To
build the divisional structure, the owner would first divide the company into small business units,
called SBUs. These SBUs coalesce around a single product line, customer group or location. Each
SBU usually organizes as a functional structure. Being mechanistic, the functional and divisional
structures lack the creative potential and nimbleness of organic organizations.
Adaptable Structures
The two most organic structures are the network and team structures. The network is the loosest
because it relies on external companies to provide the work. A small management nucleus
coordinates a network of these independent suppliers. If conditions change, the company can take
on or release suppliers. The team approach gives temporary employee teams the authority to
oversee projects and company goals. Teams keep management — perhaps only the owner —
apprised of progress. The owner forms and coordinates teams.

Influence of Environment on Organizational Structure

Organizational structure provides the framework of an organization and its pattern of
management. The purpose of structure is division of work and co-ordination of activities among
members, so that they can achieve objectives of the organization. The organizational structure
directly determines the formal command system and communication network, which not only
affect the flow of information and material and utilization efficiency, but also affect the
psychological and social functions inside the organization. Therefore, the appropriate organization
structure is very crucial to effectively reach goals of the organization. In the following paragraphs,
I will explain the vital impacts of technology and environment on the creation of organizational
structure.

An organizational structure is a construction which directs members through controlling,

coordinating and motivation to complete organizational goals. Horizontal division of labour is
related to specialization of the labour force. The vertical division of labour is associated with
controlling, monitoring, decision making and program of authority distribution.

An organization has different ways and styles to be structured, owing to different goals and
conditions. There are three opinions about which factor affects variation of organization structure
.The first argument in favour of environment condition, which is a very important constraint to
select an effective structure form. The remaining factors which are considered to influence
organizational structures are technology and size.

Technology mainly refers to the process from input to output within the organization. The level
of certainty on technical activities of the organization determines different management and
coordination requirements for the organizational structure. A high degree of certainty can
strengthen formalization and centralization of organizational structure. On the contrary, the
structure of organization in this circumstance needs to have greater flexibility.

Technology is a transformation process of mechanism to complete its tasks in an organization. A

crucial issue in technology is meeting an organizational customers’ demand for output
customization. The speed of which products must be changed is related to this. When the demand
for product change or output customization is high, a stable organizational structure (for instance,
machine bureaucracy) is inappropriate for controlling the production process. In order to
efficiently fulfill needs of customization and change, an adaptive structure (for example, organic)
is more effective and advisable. For instance, in the Microsoft, the development of new technology
and product is a major mission in the fierce market competition. To achieve the goal, employees
and departments need to pay more attention to market demand and other competitors. Therefore,
flexible structure is essential to take effective measures in terms of environmental changes.

If outputs are standardized, product life-cycles are long, and consumer exceptions are few, more
bureaucratic or mechanistic structures will be suitable. It is likely that organizations which are
faced with high demands for output customization or change pay higher attention to effective
problem solving, while organizations with relatively stable transformation technologies focus
more on the efficient performance. As the work in organizations with routine technologies is
standardized, employees are likely to be required less training and education. Employees in
organization with non-routine technologies need professional training and relevant work
experience. Compared to a worker in the assembly line, a costume designer may be required more
professional knowledge and skill training.

Span of control refers to the number of subordinates supervised by a manager or a supervisor.

Span of control is also different in organizations with different types of technology. The more
complex the technology, the more that the requirement of a supervisor for problem solving.
However, it relies on professional employees in an organization with non-routine technologies.
Professional staffs have expert knowledge and personal experience that can perform well without
close supervision, so the span of control can be larger. The span of control in organizations with
non-routine technologies is smaller than that in organizations with routine technologies.

Centralization of decision making is also a character of organizations with routine technologies.

Moreover, coordination and control are contained within a centralized management structure. The
organization’s task is usually in the form of memos, reports and procedures when it is analyzable
and the communication is frequent. On the contrary, if the task is less analyzable, information is
conveyed by interpersonal communication, for instance, telephone conversation and group
meetings. The scope of decision making authority is extended in organizations with non-routine
technologies, so are coordination and control activities.

Based on the relationship between technology and organizational structure, we can predict that
which organizational structure is appropriate for which form of technology. For instance, machine
bureaucracies should only be applied to routine technologies. Organic structure is adequate for
other kinds of technologies, even though it may work best with non-routine technologies.

There is a technological determinism which argues that technology is the primary force to
determine jobs, attitudes, behaviours and organizational structures. Joan Woodward, James
Thompson and Charles Perrow are the representative figures in this school.

Joan Woodward found that an organization structure was related to its performance through
technology. She believed that it was the complexity of technology determined which structure to
be used. Woodward discovered that as the technology became more complex, the length of the
chain demand would increase, so did the proportion of managers in total employment. With the
increasing complexity of technology, the management personnel’s span of control enlarged.

James Thompson argues that organizational structures are determined by the type of coordination,
which is indicated by interdependence between individuals, groups and divisions. Different kinds
of technology create different types of interdependence, so technology indirectly influences the
organization structure. It is the pooled task interdependence when the contributions made by
individuals and departments are separate and independent. In such a case, it is easy to evaluate the
performance of each group member or division, so a bureaucratic organization structure with low
coordination costs is adapted. Long-linked technology is a technology that requires a series of
tasks to be performed in a predetermined order. One division or an individual cannot perform until
the former has completed their tasks. It is sequential task interdependence when the performance
of a team member or a department is difficult to be evaluated, so different divisions need to
achieve a consensus through coordination and integration. For instance, in the flow process of
fruit juice production, fruit juice has to be processed before it can be packaged.

External environment factors, trends and developments lead to change in internal organization
structure, processes and behaviours. As the external environment is becoming more and more
complex, organizations have to adapt to the changes. The strategies an organization uses to
manage its environment are reflected in the structure of the organization. Organizational structure
is not static, it will change as the times progress and variation of surroundings. For example, in
2004, Motorola announced reorganization in the framework of company, because the first deficit
in the last three years occurred. Motorola attributed the losses to lower demand for highpoint
mobile phones and continuous decline of market prices. There were only two business
departments in the firm after reorganization: research and development department and marketing
department.

Organic structure and mechanistic are two patterns of organizational structure that can be created
by environmental conditions. An organic structure is suitable for a company operated in a
turbulent environment, while the organization with stable surroundings should employ the
mechanistic structure. As these two structures are appropriate for different environment, so it is
difficult to judge which one is more efficient.

To some extent, the success of an organization’s operation depends on its responds to

environmental conditions. Environmental variability is the main element which is taken into
consideration of decision makers. It refers to the degree of change in environmental activities
relating to the operation of organizations. Mintzberg classified environmental elements which are
related to organizational framework into four areas, including stability, complexity, market
diversity, and hostility.

Differentiation is the process of dividing an organization into different departments and each of
them is responsible for different types of tasks. As differentiation allows employees to make more
efficient response to the environment, many organizations increase their differentiation when their
environment becomes more uncertain. However, excessive differentiation of departments may
lead to difficulties in co-operation and aggravation of conflicts. In order to prevent this from
happening, organizations must strengthen co-ordination between different departments. It is the
reason why the environment determinists believe that the level of environment uncertain
determined the organization structure.

Duncan produced the typology of organizational environments, which is different from the
viewpoint that external environments determine internal structures. He argues that organizational
reaction made to the environmental changes depends on the managers’ perception rather than
objective observer’s classification. If a manager have not realised that the environment is
changing, he will not give a corresponding response. The internal structures and processes will
transform with changes in our perception. Since different managers focus on different aspects of
the environment, they get different information and make different decisions about organizational
strategy and structure.

Conclusion
In conclusion, the selection of organizational structure depends largely on the technology and
environment it faces. Even though a lot of modern theorists of technology do not consider that
technological determinism is an accurate concept to express the relationship between organization
structure and technological improvements, it makes a significant contribution to development of
organizational theory. Organizational structure plays an important role in the operation of
organizations and development of organizational behaviour. The study of organization structure
can help us learn how to establish efficient and functional form of organizations.