Chapter Three

Fundamentals of
Organization Structure

Thomson Learning
© 2004 3-1
A Sample Organization
Chart

C E O

V i c e P r e s i d e n t V i c e P r e s i d e n t D i r e c t o r
F i n a n c e M a n u f a c t u r i n g H u m a n R e s o

C h i e f B u d g e t P l a n t M a i n t e n a T n r ca e i n i n g B e n e f i t s
A c c o u n t aA n n t a l y sS t u p e r i n tS e u n p d e e r n i n t t e S n p d e e c n i ta Al i s d t m i n i s t

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© 2004 3-2
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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© 2004 3-3
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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© 2004 3-4
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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© 2004 3-5
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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© 2004 3-6
 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 ro d u c t P ro 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.
Thomson Learning
© 2004 3-7
 Strengths and Weaknesses of
Functional Organization
Structure
 STRENGTHS:  WEAKNESSES:
Allows economies of scale


within functional
 Slow response time to
departments environmental changes
 Enables in-depth knowledge  May cause decisions to
and skill development pile on top, hierarchy
 Enables organization to overload
accomplish functional goals
 Is best with only one or a
 Leads to poor horizontal
few products coordination among
departments
 Results in less innovation
 Involves restricted view of
organizational goals
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the Answer,”
Organizational Dynamics (Winter 1979): 429. Thomson Learning
© 2004 3-8
 Strengths and Weaknesses of
Divisional Organization
Structure
 STRENGTHS:  WEAKNESSES:
 Suited to fast change in unstable  Eliminates economies
environment
of scale in functional
 Leads to client satisfaction departments
because product responsibility and
contact points are clear  Leads to poor
 Involves high coordination across coordination across
functions product lines
 Allows units to adapt to  Eliminates in-depth
differences in products, regions, competence and
clients technical specialization
 Best in large organizations with
several products
 Makes integration and
 Decentralizes decision-making standardization across
product lines difficult

Source: Adapted from Robert Duncan, “What Is the

Right Organization Structure? Decision Tree Analysis
Thomson Learning
Provides the Answer,” Organizational Dynamics © 2004 3-9
(Winter 1979): 431.
Reorganization from Functional
Structure to Divisional Structure at
Info-Tech
Functional Info-Tech
Structure President

R&D Manufacturing Accounting Marketing

Divisional I n f o - T e c h
Structure P r e s i d e n t

E l e c t r o n i c O f f i c e V i r t u a l
P u b l i s h i n g A u t o m a t i o n R e a l i t y

R & D M f g A c c Mt g k t gR & D M f g A c c Mt g k t gR & D M f g A c c Mt g k t g

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© 2004 3-10
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.:
Scott Foresman, 1988), 68.
Thomson Learning
© 2004 3-11
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,
1988), 68.
Thomson Learning
© 2004 3-12
 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
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© 2004 3-13
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

Thomson Learning
© 2004 3-14
 Strengths and Weaknesses
of Matrix Organization
Structure
 STRENGTHS:  WEAKNESSES:
 Achieves coordination necessary to  Causes participants to experience dual
meet dual demands from authority, which can be frustrating and
customers
confusing
 Flexible sharing of human
resources across products  Means participants need good
 Suited to complex decisions and interpersonal skills and extensive training
frequent changes in unstable  Is time consuming; involves frequent
environment meetings and conflict resolution sessions
 Provides opportunity for both  Will not work unless participants
functional and product skill understand it and adopt collegial rather
development than vertical-type relationships
 Best in medium-sized organizations 
with multiple products Requires great effort to maintain power
balance

Source: Adapted from Robert Duncan, “What Is the Right

Organization Structure? Decision Tree Analysis Provides the Thomson Learning
Answer,”Organizational Dynamics (Winter 1979): 429.
© 2004 3-15
 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
PresidentPresidentPresident PresidentPresident
Horizontal Product Lines

President President

Open Die
Business Mgr.

Ring Products
Business Mgr.

Wheels & Axles

Business Mgr.

Steelmaking
Business Mgr.

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© 2004 3-16
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,
December 20, 1993, 76-81; and Thomas A. Stewart,
“The Search for the Organization of Tomorrow,”
Thomson Learning
Fortune, May 19, 1992, 92-98. © 2004 3-17
 Strengths and
Weaknesses of Horizontal
Structure
 STRENGTHS:  WEAKNESSES:
 Flexibility and rapid response to changes
 Determining core processes to
in customer needs organize around is difficult and time-
consuming
 Directs the attention of everyone toward
the production and delivery of value to Requires changes in culture, job
design, management philosophy, and
the customer
information and reward systems
 Each employee has a broader view of  Traditional managers may balk when
organizational goals they have to give up power and
 Promotes a focus on teamwork and authority
collaboration—common commitment to Requires significant training of


meeting objectives employees to work effectively in a

 Improves quality of life for employees byhorizontal team environment
offering them the opportunity to share Can limit in-depth skill development
responsibility, make decisions, and be
accountable for outcomes

Sources: Based on Frank Ostroff, The Horizontal Organization: What the

Organization of the Future Looks Like and How It Delivers Value to
Customers, (New York: Oxford University Press, 1999);
Thomson Learning
and Richard L. Daft, Organization Theory and Design, 6th ed., © 2004 3-18
(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:

An In-Depth Look at Managing Complex Change,”
Organizational Dynamics (Summer 1982): 46-66;
Thomson Learning
and Frank Ostroff, The Horizontal Organization, © 2004 3-19
(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

Sources: Based on Linda S. Ackerman, “Transition Management:
Thomson Learning
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. © 2004 3-20
Organization Contextual
Variables that Influence
Structure

Culture Size
Chapter 10 Chapter 9

Structure
(learning vs.
Strategy, efficiency) Technology
Goals Chapters 7,8
Chapter 2

Environment
Chapters 4, 6

Sources: Adapted from Jay R. Galbraith,

Competing with Flexible Lateral Organizations, 2nd ed.
(Reading, Mass.: Addison-Wesley, 1994), Ch.1;
Jay R. Galbraith, Organization Design (Reading, Mass.:
Addison-Wesley, 1977), Ch. 1.
Thomson Learning
© 2004 3-21
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

Thomson Learning
© 2004 3-22
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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© 2004 3-23