Fundamentals of

Organization Structure
Why Have a Structure?
All businesses have to organise
what they do

A clear structure makes it easier to see which

part of the business does what

There are many ways

to structure a business
 Three key components in the definition of
Organization Structure
Organization structure designates formal reporting
relationships, including the number of levels in the
hierarchy and the span of control of managers and
supervisors.
Organization structure identifies the grouping
together of individuals into departments and of
departments into the total organization.
Organization structure includes the design of systems
to ensure effective communication, coordination, and
integration of effort across departments.

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Structure Follows Strategy
(Alfred Chandler, Jr., Harvard Professor, 1918-2007)

You decide what you want to do (mission)

You decide how you will do it (strategy)
Then you design a structure that facilitates it.
FORD wanted to build a hybrid SUV.
Their traditional structure didnt fit with the new product
idea or with developing the new technologies.
They created a new structure to do it.
A cross-functional, autonomous team.
IBM also did this to create their first PC
Hierarchical Organizational Structure

In a hierarchical organization employees are ranked

at various levels within the organization, each level is
one above the other. At each stage in the chain, one
person has a number of workers directly under them,
within their span of control. A tall hierarchical
organization has many levels and a flat hierarchical
organization will only have a few. The chain of
command (ie the way authority is organized) is a
typical pyramid shape.
Hierarchical Organizational
Structure
Typical Hierarchical
Organizational Structure
Chief Executive
Directors
Middle Managers
Supervisor
Line workers
 Chief Executive
The highest ranking executive in a company whose main responsibilities include developing
and implementing high-level strategies, making major corporate decisions, managing the
overall operations and resources of a company, and acting as the main point of
communication between the board of directors and the corporate operations.

The CEO will often have a position on the board, and in some cases is even the chair .
Directors
An appointed or elected member of the board of directors of a company who, with other directors,
has the responsibility for determining and implementing the companys policy. The director
usually reports directly to a vice president or to the CEO directly in order to let them know the
progress of the organisation. Large organizations also sometimes have assistant directors or
deputy directors.
 Middle Managers
Middle management is the intermediate management of a
hierarchical organization that is subordinate to the
executive management and responsible for at least two lower levels of
junior staff.
Middle managers deal with goal setting and department-level decision-
making
 Supervisor
A supervisor, foreman, foreperson, boss, overseer, cell coach, facilitator,
or area coordinator is a manager in a position of trust in business.
An employee is a supervisor if he has the power and authority to do the following
actions :
Give instructions and/or orders to subordinates.
Be held responsible for the work and actions of other employees.

Line workers
A line of factory workers and equipment along which a product being assembled
passes consecutively from operation to operation until completed. Note:
Assembly lines are found in many industries but are particularly associated with
automobile manufacturing.
Identify : Hierarchical Levels
Identify : Hierarchical Levels
 A Simple Organization Chart
CEO

Vice President Vice President Director

Finance Manufacturing Human Resources

Chief Budget Plant Maintenance Training Benefits

Accountant Analyst Superintendent Superintendent Specialist Administrator

This is the traditional way to view an organization. Its been

around for over 150 years.

Whats traditional about this organizational chart?

Its structure is Functional. Traditionally, Organizations were

structured by functional areas.
Organization Design Alternatives

Required Work Activities

Reporting Relationships
Departmental Groupings

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Organization Design Alternatives

Required Work Activities

--Departments are created to perform tasks considered
strategically important to the company. e.g. Dept. of
HR
--As organizations grow larger and more complex, more
and more functions need to be performed.
--Organizations typically define new departments or
divisions as a way to accomplish tasks deemed
valuable by the organization.
--Today, many companies are finding it important to
establish departments. such as IT or e-business to
take advantage of new technology and new business
opportunities.
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Organization Design Alternatives

Reporting Relationships
--Reporting relationships, often called the chain
of command, are represented by vertical lines
on an organization chart.
--The definition of departments and the drawing
of reporting relationships defines how
employees are to be grouped into
departments.

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Organization Design Alternatives

Departmental Grouping Options

--Options for department grouping, including
functional grouping, divisional grouping,
multifocused grouping (Matrix or Hybrid),
horizontal grouping, and modular grouping.
(Fig. 3.6)
--Departmental grouping affects employees
because they share a common supervisor and
common resources, are jointly responsible for
performance, and tend to identify and
collaborate with one another.
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Major Factors Influencing Structure

The organizations Environment

SWOT Analysis to determine the
organizations mission (purpose) Culture Size
The Organizations Goals
Mission > Goals > Strategy
STRUCTURE
Its Technology Strategy,
Goals
Technology

Mission> Goals > Strategy >Technology

The Organizations Size
Mission > Goals > Strategy > Technology >Size Environment

The Organizational Culture

Mission > Goals > Strategy > Technology > Size > Culture > Structure
Some Key Terms
Flat or tall structure
Span of control
Chain of command
Hierarchy
Delegation
Empowerment
Centralization & Decentralization
Chain of command

Chain of command is a hierarchy of authority where

those at the top of the organization direct and control
the activities of the organizational members below
them.
Span of control

Span of control is simply the number of staff that report to a manager. Some
companies also have an ideal span of control, which is the number of reports
they feel a manager can effectively manage. In this case, if a manager has fewer
reports than the ideal, they may feel he or she is not being effectively used,
while if he or she is handling more they may feel that the manager is over-
stretched and the reports will not receive enough direction.
Centralization & Decentralization

Centralized organizational structures rely on one individual to

make decisions and provide direction for the company. Small
businesses often use this structure since the owner is
responsible for the companys business operations.

Decentralized organizational structures often have several

individuals responsible for making business decisions and
running the business. Decentralized organizations rely on a
team environment at different levels in the business. Individuals
at each level in the business may have some autonomy to make
business decisions.
 Delegation
The assignment to others of the authority
for particular functions, tasks and
decisions
Empowerment
A management practice of sharing information, rewards, and power with employees so that they
can take initiative and make decisions to solve problems and improve service and
performance.
Empowerment is based on the idea that giving employees skills, resources, authority,
opportunity, motivation, as well holding them responsible and accountable for outcomes of
their actions, will contribute to their competence and satisfaction.
 Three Fundamental Dimensions
of Organization Structure
Authority Relationships (reporting relationships)
Hierarchical Levels* (How many levels of management?)
Degree of Centralization* (How much delegation of authority?)
Spans of supervision (How many workers per manager?)
Types of authority (Line, Staff, Functional)
Groupings of Tasks and People
(Product, functional, customer type, geographic, etc.)
Complexity (Simple or complex groupings?)
Specialization* (What extent do workers do specialized tasks?)
Standardization (To what degree are tasks spelled out.)

Communication and Control Systems

Formalization* (Reliance on written rules, procedures and policies)
*One of the structural dimensions
 Line, Functional and Staff Authority
Tellpeople Holdpeople Reprimand
whattodo. accountable &reward
Line Yes Yes Yes
Functional Yes No No
Staff No No No
The Traditional Organization
The traditional organization was vertically structured.
Formalized (Lots of written documentation)
Centralized (Not much delegation of authority.)
Specialized (Tasks were narrowly defined.)
Tall (Many levels of management)
Communication was largely vertical for better control.
Emphasis was on internal efficiency.
Organizations were not very adaptable to change, but
suitable for stable environments.
Traditional organizations have had to adapt to changing
environments by increasing horizontal communication, reducing
the levels of management, doing more delegating and becoming
less formalized and less specialized.
The Relationship of Organization Design to
Efficiency vs. Learning Outcomes
Horizontal Organization
Designed for Learning

Horizontal structure is dominant

Shared tasks, empowerment
Relaxed hierarchy, few rules
Horizontal, face-to-face communication
Many teams and task forces
Dominant Decentralized decision making
Structural Vertical structure is dominant
Approach Specialized tasks
Strict hierarchy, many rules
Vertical communication and reporting systems
Few teams, task forces or integrators
Centralized decision making

Vertical Organization
Designed for Efficiency

Increasing amount of environmental uncertainty and change

 Degree of Coordination
and Information Capacity
Horizontal Linkage Mechanisms
Needed for coordination and collaboration Teams
The greater the environmental Full-Time
uncertainty and/or change, Integrators
the more an organization Vertical
needs the horizontal linkages Task
in order to be responsive. Forces Info. Systems
Liaison
Roles Plans &
Schedules
Direct
Contact Rules &
Info. Procedures Vertical Linkage
Systems Mechanisms are needed
primarily for top-down
Hierarchical Referral
delegation & control
Types of Horizontal Linkages
Information Systems: Memos, letters, E-mail, database access

Direct Contact: Informal contacts, meetings, interactions.

Liaison Roles: A part-time responsibility for someone to
coordinate between two or more structural groups.

Task Forces: A temporary group representing several departments

or areas, formed to deal with special problems or projects.

Full-Time Integrators: Like a liaison except its a full-time job.

Brand managers and Product managers are good examples.

Teams: Like a task force only permanent. Often used when there is
a continuing need for coordination across functional areas.
Ways to Structure a Business
By function: arranging the business according
to what each section
or department does

By product or activity: organising according to

the different products made

By area: geographical or regional structure

Ways to Structure a Business
By customer: where different customer
groups have different needs

By process: where products have to go

through stages as they are made

What are the advantages/disadvantages of

different types of business structure?
 Overview of Basic Structural Types
Functional Structure: People are grouped by skills relating to
a specific organizational function. (The traditional structure.)
Divisional (Product) Structure: People are grouped by
skills relating to organizational outputs or customer type.
Self-contained units that have all of the necessary functions.
Often the focus is on a product or service.
Geographical: People are grouped by skills relating to
geographical areas.
Matrix: Attempts to have the best of both functional and
divisional. Usually a last resort when other cross-functional
coordination techniques are insufficient.
Horizontal Groupings: Usually process-oriented and utilizing
self-directed teams.
Virtual (modular) Networks: Outsource the major functions.
 Functional Structure
President

R&D Manufacturing Marketing Accounting

STRENGTHS WEAKNESSES
Allows economies of scale. Has slow response time to
Enables in-depth skill development environmental changes *
Enables organizations to Top management may have
accomplish functional goals decision overload
Is best in small to medium-size Leads to poor horizontal
organizations coordination
Is best when only one or a few Results in less innovation
products Restricted view of organizational
goals
* Most companies with functional structures make heavy use of horizontal
linkages for cross-functional coordination in order to be more adaptable.
Functional Structure

Advantages Disadvantages
Specialisation each Closed communication
department focuses on could lead to lack
of focus
its own work
Departments can
Accountability become resistant
someone is responsible to change
for the section Coordination
Clarity know your and may take too long
others roles Gap between top and
bottom
 Divisional / Product Structure
President

Product Product
Group #1 Group #2

Mfg. Acct. Mkt. Mfg. Acct. Mkt.

STRENGTHS WEAKNESSES
Suited to fast change in unstable Prevents economies of scale
environments Leads to poor coordination across
Product responsibility is clear product lines
High cross-functional coordination Eliminates in-depth technical
Allows unit adaptation to regional specialization
situations Hard to integrate or standardize
Decentralizes decision making across product lines
Includes groupings by customer type, product type and/or service type.
Reorganization from Functional
Structure to Divisional Structure at Info-
Tech
Functional Info-Tech
Structure President

R&D Manufacturing Accounting Marketing

Divisional In fo -T e c h
Structure P r e s id e n t

E le c t r o n ic O ff ic e V ir t u a l
P u b lis h in g A u t o m a t io n R e a lit y

R&D M fg A c c tg M k tg R&D M fg A c c tg M k tg R&D M fg A c c tg M k tg

3-38
 An Example of Organisation
by Product/Activity
Hewlett Packard

Imaging and Personal Enterprise HP Financial

HP Services
Printing Group Systems Group Systems Group Services
Organisation by
Product/Activity
Advantages Disadvantages
Clear focus on market Duplication of functions
segment helps meet (e.g. different sales
customers needs force for each division)
Positive competition Negative effects of
between divisions
competition
Better control as each
division can act as
Lack of central control
separate profit centre over each separate
division
 Reorganizing from a Functional Structure to
a Divisional Structure at Info-Tech

Functional Info-Tech
Structure President

R&D Manufacturing Accounting Marketing

Divisional Info-Tech
Structure President

Electronic Office Virtual

Publishing Automation Reality

R&D Mfg Acctg Mktg R&D Mfg Acctg Mktg R&D Mfg Acctg Mktg
Organisation by Area
Hewlett-Packards Headquarters
Worldwide

Hewlett Packard

Americas Europe, Middle East, Africa Asia Pacific

Houston, Texas Geneva, Switzerland Hong Kong
Organisation by Area
Advantages
Disadvantages

Conflictlocal
Serve between
needslocal
better
and central management
Positive competition
Duplication of resources and functions
More effective communication between firm and local
customers
 Geographic Structure
President

East Coast MidWest South West Coast Europe

STRENGTHS
Suited to fast change in unstable
environments
Customer responsibility is clear
High cross-functional coordination
within geographic or area
Allows unit adaptation to regional
situations
Decentralizes decision making
WEAKNESSES
Prevents economies of scale
Leads to poor coordination across
customer / geographic lines
Eliminates in-depth technical
specialization
Hard to integrate or standardize
across geographic or customer lines

This is really a Divisional Structure that focuses on geographical

areas rather than product/service areas.
 Geographical Structure
for Apple Computer
CEO
Steve Jobs

Apple Apple Apple Apple

Products Americas Europe Pacific

Canada France Australia

Latin
America/ Japan
Caribbean

Sales Asia
Service and
Marketing
to Regions

Source: www.apple.com
3-45
Other Organisational
Structures
By Customer:
Similar effects to structuring
by product

By Process:
Similar to structuring by function
 Matrix Organization
Showing the dual authority relationships

President

Director Design Mfg Marketing Procure-

of Product Vice Vice Vice Controller ment
Operations President President President Manager

Product
Manager A

Product
Manager B

Product
Manager C

Product
Manager D

Often needed in complex and dynamic environments where other structures

with cross-functional coordination are not working well.
 Strengths and Weaknesses of the
Matrix Organization Structure
STRENGTHS
Achieves coordination
necessary to meet dual
demands from customers
Flexible sharing of human
resources across products
Suited to complex decisions
and frequent changes in
unstable environment
Provides opportunity for both
functional and product skill
development
Best in medium-sized
organizations with multiple
products and/or services
WEAKNESSES
Causes participants to experience dual
authority, which can be frustrating and
confusing
Requires participants to have good
interpersonal skills and extensive
training
Is time consuming; involves frequent
meetings and conflict resolution
sessions
Will not work unless participants
understand it and adopt collegial rather
than vertical-type relationships
Requires great effort to maintain power
balance between two sources of line
authority.
 Matrix Structure for
Worldwide Steel Company
President
Vertical Functions
Mfg. Industrial
Mfg. Marketing Finance Metallurgy Field Sales
Services Relations
Vice Vice Vice Vice Vice
Vice Vice
President President President President President
Horizontal Product Lines

President President

Open Die
Business Mgr.

Ring Products
Business Mgr.

Wheels & Axles

Business Mgr.

Steelmaking
Business Mgr.

3-49
 A Horizontal Structure
Top
Management
Team

Process Team Team Team

Owner 1 2 3

Market Product
Research Testing Customer
Analysis Planning
New Product Development Process

Process Team Team Team

Owner 1 2 3

Material
Analysis Purchasing
Flow
Distrib. Customer

Procurement and Logistics Process

Teams do their own scheduling, planning, innovating and decision making.
Process Owners are responsible for their teams and processes.
 Strengths and Weaknesses of
Horizontal Structure
STRENGTHS
Flexibility and rapid response to
changes in customer needs
Directs the attention of everyone
toward the production and delivery of
value to the customer
Each employee has a broader view of
organizational goals
Promotes a focus on teamwork and
collaborationcommon commitment to
meeting objectives
Improves quality of life for employees
by offering them the opportunity to
share responsibility, make decisions,
and be accountable for outcomes
WEAKNESSES
Determining core processed to
organize around is difficult and
time-consuming
Requires changes in culture, job
design, management philosophy,
and information and reward
systems
Traditional managers may balk
when they have to give up power
and authority
Requires significant training of
employees to work effectively in a
horizontal team environment
Can limit in-depth skill
development
 Virtual Networks
(Modular Structures)
Customer
Manufacturing support Marketing
Companies

Management
Accounting Core Advertising
Finance and PR
Payroll
Legal Logistics and
Services distribution
The organization outsources most of its major functions and/or processes.
 Strengths and Weaknesses of
Virtual Networks
STRENGTHS
Allows small organizations to start
up and have access to resources
and people.
Low start-up costs
Highly flexible and responsive
Lower overhead costs
WEAKNESSES
Loss of hands-on control
High need to manage
external relationships.
Higher potential for conflicts
Lack of corporate culture
At risk if partner/contract
firm drops out.
 Hybrid Structure
Sun Petrochemical Products
President

Functional Chief Human Technology Financial

Structure Counsel Resources Vice Services
Director President Vice Pres.

Product Fuels Lubricants Chemicals

Vice Vice Vice
Structure
President President President

A hybrid is simply the use of more than one type of structure. It is the most
common structure. Almost every organization has some functional
departments, even if they are utilizing a horizontal structure.
Hybrid Structure
Part 2. Ford Customer Service
Division
Vice President and
General Manager

Functional Strategy and Human

Structure Finance Communication Resources

Director and
Process Owner Teams
Horizontal Structure

Parts Supply / Logistics Group

Director and
Process Owner Teams

Vehicle Service Group

Director and
Process Owner Teams

Technical Support Group

Sources: Based on Linda S. Ackerman, Transition Management:

3-55
An In-Depth Look at Managing Complex Change, Organizational Dynamics
(Summer 1982): 46-66; and Frank Ostroff, The Horizontal Organization,
(New York: Oxford University Press, 1999), Fig. 2.1, 34.
Determining the right Structure
Much of structure is finding the right balance between
horizontal linkages and vertical control.
How Much Horizontal coordination?
Too much is time consuming and expensive.
Toolittle horizontal coordination causes confusion,
delays and inefficiency.
How much Vertical Control?
Too much stifles creativity, morale and motivation.
There is probably no ideal structure for most situations.
Neither will you find many pure structural types.
Symptoms of
Structural Deficiency
Decision making is delayed or lacking in
quality
The organization does not respond
innovatively to a changing environment
Too much conflict is evident

3-57
S.O.B. Structure 1970s -1984

Dean
Division of Business and Economics

Chairperson Chairperson Chairperson

BE/DE/AOM Business Administration Economics
S.O.B. Structure 1985 - 1992

DEAN
School Of Business

Chairperson Chairperson Chairperson Chairperson Chairperson

GEN BUS MGT / MKT Accounting Economics BE/DE/AOM
S.O.B. Structure 1993-1999

DEAN
School of Business

Assistant Assistant
Dean Dean

Coordinator Coordinator Coordinator Coordinator

MGT and MKT Accounting ECON / FIN IM /GEN BUS
S.O.B. Structure 2000-2003

DEAN
School of Business

Assistant Dean Assistant Dean

Faculty Students

Area Coordinator Area Coordinator

MGT / MKT / IM / GB ECO / ACC / FIN
 S.O.B. Structure 2003-2005

DEAN
School of Business

Assistant Dean Assistant Dean

Faculty Students

Program Leader Program Leader Program Leader Program Leader Program Leader
MGT / IM Marketing Accounting ECO & FIN International
S.O.B. Structure 2005 - 2008

DEAN
School of Business

Assistant Dean Assistant Dean

Faculty Students

Chairperson Chairperson Chairperson

MGT / MKT / IDS ACC / IM ECO / FIN / IB
S.O.B. Structure 2008 - Present

DEAN
School of Business

MGR SOB
Assistant Dean
Operations

Administrative
Assistant

Chairperson Chairperson Chairperson Chairperson

MGT / MKT / IB ACC / IM Economics Finance
 Improvement?
Dean
1970s Division of Business & Economics

Chairperson Chairperson Chairperson

BE/DE/AOM Business Administration Economics

DEAN
Today School of Business

MGR SOB
Assistant Dean
Operations

Administrative
Assistant

Chairperson Chairperson Chairperson Chairperson

MGT / MKT / IB ACC / IM Economics Finance
 The Relationship of Structure to Organizations
Need for Efficiency, Flexibility, and Learning

Functional with
Functional cross-functional Divisional Matrix Horizontal Modular
Structure teams, integrators Structure Structure Structure Structure

Horizontal

Dominant Coordination
Vertical Change
Structural Learning
Approach Control
Innovation

Flexibility
Efficiency
Stability

Stable
Reliability E N V I R O N M E N T Changing
You have Structural Problems if

Decision-Making is delayed or of poor

quality.
Organization does not respond
innovatively to a changing environment.
Too much conflict from departments
being at cross-purpose.
What to know
1. Recognize the basic strengths and
weaknesses of each structural type.
2. Understand which situations are best for
which structure.
3. Have a basic understanding of each linking
mechanism.
4. By the end of this course you should be able
to look at an organizational structure along
with its Size, Technology, Goals, Culture,
and Environmental situation, and see if there
is a good fit.