Chapter Three

Fundamentals of
Organization Structure

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A Sample Organization Chart

C EO

V ic e P r e s id e n t V ic e P r e s id e n t D ir e c t o r
F in a n c e M a n u f a c tu r in g H u m a n R e s o u rc e s

C h ie f B udget P la n t M a in t e n a n c e T r a in in g B e n e f its
A c c o u n ta n t A n a ly s t S u p e rin t e n d e n t S u p e rin t e n d e n t S p e c ia lis t A d m in is t r a t o r

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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
Dominant communication
• Many teams and task forces
Structural Vertical structure is dominant
• Decentralized decision making
• Specialized tasks
Approach • Strict hierarchy, many rules
• Vertical communication and reporting systems
• Few teams, task forces or integrators
• Centralized decision making

Vertical Organization
Designed for Efficiency
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Project Manager Location
in the Structure
President

Finance Engineering Marketing Purchasing

Department Department Department Department
Financial
Project Manager
Accountant Product
Market New
Designer
Researcher Product A
Buyer
Budget
Analyst Draftsperson Advertising Project Manager
Specialist New
Buyer Product B
Management
Accountant Electrical Project Manager
Designer Market New
Planner Buyer Product C

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 Teams Used for Horizontal
Coordination at Wizard Software
Company
President

Marketing Vice Pres. Programming Vice Pres Research Vice Pres

Videogames Videogames Basic Research

Videogames
Chief Engineer Supervisor
Sales Manager

Videogames Product Team Applications and Testing

Supervisor

Memory Products Memory Products Memory Products

Sales Manager Chief Programmer Research Supervisor
Memory Products Team
Memory Products
International Manager
Customer Service Procurement
Manager Supervisor
Advertising Manager

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Ladder of Mechanisms for Horizontal
Linkage and Coordination

H IGH Teams
Coordination Required

Full-time Integrators
Amount of Horizontal

Task Forces

Direct Contact

LOW Information Systems

LOW HIGH
Cost of Coordination in
Time and Human Resources
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 Structural Design Options for
Grouping Employees into
Departments
Functional
Grouping CEO

Engineering Marketing Manufacturing

Divisional
Grouping C E O

P ro d u c t P r o d u c t P r o d u c t
D iv is io n 1 D iv is io n 2 D iv is io n 3
Source: Adapted from David Nadler and Michael Tushman,
Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.

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 Strengths and Weaknesses of
Functional Organization Structure
WEAKNESSES:
STRENGTHS: – Slow response time to
– Allows economies of environmental changes
scale within functional – May cause decisions to pile
departments on top, hierarchy overload
– Enables in-depth – Leads to poor horizontal
knowledge and skill coordination among
development departments
– Enables organization to – Results in less innovation
accomplish functional
goals – Involves restricted view of
– Is best with only one or organizational goals
a few products
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the Answer,”

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Organizational Dynamics (Winter 1979): 429.
 Strengths and Weaknesses of
Divisional Organization Structure
STRENGTHS: WEAKNESSES:
– Suited to fast change in unstable – Eliminates economies of
environment scale in functional
– Leads to client satisfaction departments
because product responsibility and – Leads to poor
contact points are clear
coordination across
– Involves high coordination across
product lines
functions
– Allows units to adapt to differences – Eliminates in-depth
in products, regions, clients competence and
– Best in large organizations with technical specialization
several products – Makes integration and
– Decentralizes decision-making standardization across
product lines difficult

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Source: Adapted from Robert Duncan, “What Is the
Right Organization Structure? Decision Tree Analysis
Provides the Answer,” Organizational Dynamics
(Winter 1979): 431.
Reorganization from Functional Structure
to Divisional Structure at Info-Tech

Functional Info-Tech
Structure President

R&D Manufacturing Accounting Marketing

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

E le c tr 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

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 Structural Design Options for
Grouping Employees (Continued)

Multifocused
Grouping
CEO

Marketing Manufacturing

Product
Division 1

Product
Division 2

Source: Adapted from David Nadler and Michael

Tushman, Strategic Organization Design (Glenview, Ill.:

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Scott Foresman, 1988), 68.
 Structural Design Options for
Grouping Employees (Continued)

Horizontal
Grouping
CEO

Human Resources Finance

Core
Process 1

Core
Process 2

Source: Adapted from David Nadler and Michael Tushman,

Strategic Organization Design (Glenview, Ill.: Scott Foresman,

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1988), 68.
Dual-Authority Structure in a
Matrix Organization

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

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Strengths and Weaknesses of
Matrix Organization Structure

STRENGTHS: WEAKNESSES:
– Achieves coordination – Causes participants to experience dual
necessary to meet dual authority, which can be frustrating and
demands from customers confusing
– Flexible sharing of human – Means participants need good
resources across products interpersonal skills and extensive
– Suited to complex decisions training
and frequent changes in – Is time consuming; involves frequent
unstable environment meetings and conflict resolution
– Provides opportunity for sessions
both functional and product – Will not work unless participants
skill development understand it and adopt collegial rather
– Best in medium-sized than vertical-type relationships
organizations with multiple – Requires great effort to maintain power
products balance
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the
Answer,”Organizational Dynamics (Winter 1979): 429. 14
 Matrix Structure for
Englander Steel
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.

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 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
Sources: Based on Frank Ostroff,
The Horizontal Organization, (New York:
Oxford University Press, 1999); John A. Byrne, Procurement and Logistics Process
“The Horizontal Corporation,” Business Week,

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December 20, 1993, 76-81; and Thomas A. Stewart,
“The Search for the Organization of Tomorrow,”
Fortune, May 19, 1992, 92-98.
Strengths and Weaknesses of
Horizontal Structure
STRENGTHS:
– Flexibility and rapid response to WEAKNESSES:
changes in customer needs
– Determining core processes to
– Directs the attention of everyone organize around is difficult and
toward the production and delivery of time-consuming
value to the customer – Requires changes in culture, job
– Each employee has a broader view of design, management philosophy,
organizational goals and information and reward
– Promotes a focus on teamwork and systems
collaboration—common commitment – Traditional managers may balk
to meeting objectives when they have to give up power
and authority
– Improves quality of life for employees
– Requires significant training of
by offering them the opportunity to employees to work effectively in
share responsibility, make decisions, a horizontal team environment
and be accountable for outcomes – Can limit in-depth skill
development
Sources: Based on Frank Ostroff, The Horizontal Organization: What the

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Organization of the Future Looks Like and How It Delivers Value to
Customers, (New York: Oxford University Press, 1999);
and Richard L. Daft, Organization Theory and Design, 6th ed.,
(Cincinnati, Ohio: South-Western College Publishing, 1998) 253.
 Hybrid Structure
Part 1. Sun Petrochemical Products

President

Functional Chief
Human Technology Financial
Resources Vice Services
Structure Counsel
Director President Vice Pres.

Product Fuels Lubricants Chemicals

Vice Vice Vice
Structure President President President

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

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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.
 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

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Sources: Based on Linda S. Ackerman, “Transition Management:
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.
 The Relationship of Structure to
Organization’s Need for Efficiency vs.
Learning
Functional with
Functional cross-functional Divisional Matrix Horizontal Modular
Structure teams, integrators Structure Structure Structure Structure

Horizontal:
• Coordination
• Learning
Dominant • Innovation
Structural Vertical: • Flexibility
• Control
Approach
• Efficiency
• Stability
• Reliability

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 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

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