Functional Structure

The organization is structured according to functional areas instead of product lines. The
functional
structure groups specialize in similar skills in separate units. This structure is best used when
creating
specific, uniform products. A functional structure is well suited to organizations which have a
single or
dominant core product because each subunit becomes extremely adept at performing its particular
portion
of the process. They are economically efficient, but lack flexibility. Communication between
functional
areas can be difficult.
The most widely used structure is the functional or centralized type because this structure is the
simplest
and least expensive of the seven alternatives. A functional structure group’s tasks and activities by
business
function such as production/operations, marketing, finance/accounting, research and development,
and
computer information systems. A university may structure its activities by major functions that
include
academic affairs, student services, alumni relations, athletics, maintenance, and accounting.
Besides being
simple and inexpensive, a functional structure also promotes specialization of labor, encourages
efficiency,
minimizes the need for an elaborate control system, and allows rapid decision making. Some
disadvantages
of a functional structure are that it forces accountability to the top, minimizes career development
opportunities, and is sometimes characterized by low employee morale, line/staff conflicts, poor
delegation of authority, and inadequate planning for products and markets.

Divisional Structure
Divisional structure is formed when an organization is split up into a number of self-contained
business
units, each of which operates as a profit centre. such a division may occur on the basis of product or

market or a combination of the two with each unit tending to operate along functional or product
lines,
but with certain key function (e.g. finance, personnel, corporate planning) provided centrally,
usually at
company headquarters.

The divisional or decentralized structure is the second most common type used by
American businesses.
As a small organization grows, it has more difficulty managing different products and services in
different
markets. Some form of divisional structure generally becomes necessary to motivate employees,
control
operations, and compete successfully in diverse locations. The divisional structure can be organized
in one
of four ways: by geographic area, by product or service, by customer, or by process. With a
divisional
structure, functional activities are performed both centrally and in each separate division.
A divisional structure has some clear advantages. First and perhaps foremost, accountability is
clear. That
is, divisional managers can be held responsible for sales and profit levels. Because a divisional
structure is
based on extensive delegation of authority, managers and employees can easily see the results of
their good
or bad performances. As a result, employee morale is generally higher in a divisional structure than
it is in
a centralized structure. Other advantages of the divisional design are that it creates career
development
opportunities for managers, allows local control of local situations, leads to a competitive climate
within an
organization, and allows new businesses and products to be added easily.
The divisional design is not without some limitations, however. Perhaps the most important
limitation is
that a divisional structure is costly, for a number of reasons. First, each division requires functional
specialists who must be paid. Second, there exists some duplication of staff services, facilities, and
personnel; for instance, functional specialists are also needed centrally (at headquarters) to
coordinate
divisional activities. Third, managers must be well qualified because the divisional design forces
delegation
of authority; better-qualified individuals require higher salaries. A divisional structure can also be
costly
because it requires an elaborate, headquarters-driven control system. Finally, certain regions,
products, or
customers may sometimes receive special treatment, and it may be difficult to maintain consistent,
companywide practices. Nonetheless, for most large organizations and many small firms, the
advantages
of a divisional structure more than offset the potential limitations.

119
A divisional structure by geographic area is appropriate for organizations
whose strategies need to be
tailored to fit the particular needs and characteristics of customers in different geographic areas.
This type
of structure can be most appropriate for organizations that have similar branch facilities located in
widely
dispersed areas. A divisional structure by geographic area allows local participation in decision
making and
improved coordination within a region.
The divisional structure by product is most effective for implementing strategies
when specific products
or services need special emphasis. Also, this type of structure is widely used when an organization
offers
only a few products or services, or when an organization's products or services differ substantially.
The
divisional structure allows strict control and attention to product lines, but it may also require a
more
skilled management force and reduced top management control.
When a few major customers are of paramount importance and many different services are
provided to
these customers, then a divisional structure by customer can be the most
effective way to implement
strategies. This structure allows an organization to cater effectively to the requirements of clearly
defined
customer groups. For example, book publishing companies often organize their activities around
customer
groups such as colleges,

secondary schools, and private commercial schools. Some airline companies have
two major customer divisions: passengers and freight or cargo services. Merrill Lynch is organized
into
separate divisions that cater to different groups of customers, including wealthy individuals,
institutional
investors, and small corporations.
A divisional structure by process is similar to a functional structure, because
activities are organized
according to the way work is actually performed. However, a key difference between these two
designs is
that functional departments are not accountable for profits or revenues, whereas divisional process
departments are evaluated on these criteria. An example of a divisional structure by process is a
manufacturing business organized into six divisions: electrical work, glass cutting, welding, grinding,

painting, and foundry work. In this case, all operations related to these specific processes would be
grouped under the separate divisions. Each process (division) would be responsible for generating
revenues and profits. The divisional structure by process can be particularly effective in achieving
objectives when distinct production processes represent the thrust of competitiveness in an
industry.

The Strategic Business Unit (SBU) Structure

Strategic Business Unit or SBU is understood as a business unit within the overall
corporate identity which
is distinguishable from other business because it serves a defined external market where
management can
conduct strategic planning in relation to products and markets. When companies become really
large, they
are best thought of as being composed of a number of businesses (or SBUs).
These organizational entities are large enough and homogeneous enough to exercise control over
most
strategic factors affecting their performance. They are managed as self contained planning units for
which
discrete business strategies can be developed. A Strategic Business Unit can encompass an entire
company,
or can simply be a smaller part of a company set up to perform a specific task. The SBU has its own

business strategy, objectives and competitors and these will often be different from those of the
parent
company.
As the number, size, and diversity of divisions in an organization increase, controlling and
evaluating
divisional operations become increasingly difficult for strategists. Increases in sales often are not
accompanied by similar increases in profitability. The span of control becomes too large at top levels
of
the firm. For example, in a large conglomerate organization composed of 90 divisions, the chief
executive
officer could have difficulty even remembering the first names of divisional presidents. In
multidivisional
organizations an SBU structure can greatly facilitate strategy-implementation efforts.
The SBU structure group’s similar divisions into strategic business units and delegate’s
authority and
responsibility for each unit to a senior executive who reports directly to the chief executive officer.
This
change in structure can facilitate strategy implementation by improving coordination between
similar
divisions and channeling accountability to distinct business units. In the ninety-division
conglomerate just
mentioned, the ninety divisions could perhaps be regrouped into ten SBUs according to certain
common
characteristics such as competing in the same industry, being located in the same area, or having
the same
customers.
Two disadvantages of an SBU structure are that it requires an additional layer of management,
which
increases salary expenses, and the role of the group vice president is often ambiguous. However,
these

120
limitations often do not outweigh the advantages of improved coordination and accountability.
Atlantic
Richfield and Fairchild Industries are examples of firms that successfully use an SBU-type structure.

The Matrix Structure

A matrix structure is the most complex of all designs because it depends upon both vertical and
horizontal
flows of authority and communication (hence, the term matrix). In contrast, functional and
divisional
structures depend primarily on vertical flows of authority and communication. A matrix structure
can
result in higher overhead because it creates more management positions. Other characteristics of a
matrix
structure that contribute to overall complexity include dual lines of budget authority (a violation of
the
unity-of-command principle),

dual sources of reward and punishment, shared authority, dual reporting

channels, and a need for an extensive and effective communication system.
Despite its complexity, the matrix structure is widely used in many industries, including
construction,
healthcare, research, and defense. Some advantages of a matrix structure are that project
objectives are
clear, there are many channels of communication, workers can see visible results of their work, and
shutting down a project can be accomplished relatively easily.

Restructuring, Reengineering, and E-Engineering

Restructuring and reengineering are becoming commonplace on the corporate landscape across the
United
States and Europe. Restructuring—also called downsizing, rightsizing, or delayering—involves
reducing
the size of the firm in terms of number of employees, number of divisions or units, and number of
hierarchical levels in the firm's organizational structure. This reduction in size is intended to improve
both
efficiency and effectiveness. Restructuring is concerned primarily with shareholder well-being rather
than
employee well-being.
In contrast, reengineering is concerned more with employee and customer well-being than
shareholder
well-being. Reengineering—also called process management, process innovation, or process
redesign—
involves reconfiguring or redesigning work, jobs, and processes for the purpose of improving cost,
quality,
service, and speed. Reengineering does not usually affect the organizational structure or chart, nor
does it
imply job loss or employee layoffs. Whereas restructuring is concerned with eliminating or
establishing,
shrinking or enlarging, and moving organizational departments and divisions, the focus of
reengineering is
changing the way work is actually carried out.
Reengineering is characterized by many tactical (short-term, business function-specific) decisions,
whereas
restructuring is characterized by strategic (long-term, affecting all business functions) decisions.

Matrix management is a technique of managing an organization (or, more commonly,

part of an organization) through a series of dual-reporting relationships instead of a more
traditional linear management structure. In contrast to most other organizational
structures, which arrange managers and employees by function or product, matrix
management combines functional and product departments in a dual authority system. In
its simplest form, a matrix configuration may be known as a cross-functional work team,
which brings together individuals who report to different parts of the company in order to
complete a particular project or task. The term "matrix" is derived from the representative
diagram of a matrix management system, which resembles a rectangular array or grid of
functions and product/project groups.

The practice is most associated with highly collaborative and complex projects, such as
building aircraft, but is also widely used in many product/project management situations.
Even when a company does not label its structure a matrix system or represent it as such
on an organization chart, there may be an implicit matrix structure any time employees
are grouped into work teams (this does not normally include committees, task forces, and
the like) that are headed by someone other than their primary supervisor.

NEW ORGANIZATIONAL MODELS

In the late 1800s and early 1900s, during the U.S. industrial revolution, a need emerged
for more formalized structures in large business organizations. The earliest models
emphasized efficiency of process through managerial control. Described as
"mechanistic," those systems were characterized by extensive rules and procedures,
centralized authority, and an acute division of labor. They sought to create organizations
that mimicked machines, and usually departmentalized workers by function, such as
finance and production. Important theories during that era included German sociologist
Max Weber's (1881-1961) ideal bureaucracy, which was based on absolute authority,
logic, and order.

During the 1920s and 1930s, new ideas about the structure and nature of organizations
began to surface. Inspired by the work of thinkers and behaviorists such as Harvard
researcher Elton Mayo, who conducted the famed Hawthorne Experiments, theories
about management structure began to incorporate a more humanistic view. Those
theoretical organizational structures were classified as "organic," and recognized the
importance of human behavior and cultural influences in organizations. While the
mechanistic school of thought stressed efficiency and production through control, organic
models emphasized flexibility and adaptability through employee empowerment. From a
structural standpoint, mechanistic organizations tended to be vertical or hierarchical with
decisions flowing down through several channels. Organic models, on the other hand,
were comparatively flat, or horizontal, and had few managerial levels or centralized
controls.

Many proponents of organic organizational theory believed it was the solution to the
drawbacks of mechanistic organizations. Indeed, mechanistic organizations often stifled
human creativity and motivation and were generally insensitive to external influences,
such as shifting markets or consumer needs. In contrast, companies that used organic
management structures tended to be more responsive and creative. However, many
organizations that adopted the organic approach also discovered that, among other
drawbacks, it sometimes lacked efficiency and personal accountability and failed to make
the most productive use of some workers' expertise.
As an alternative to basic organic structures, many companies during the mid-1900s
embraced a model that minimized the faults and maximized the benefits of different
organic management structures, as discussed below. Possibly the first application of what
would later be referred to as the "matrix" structure was employed in 1947 by General
Chemicals in its engineering department. In the early 1960s a more formalized matrix
method called "unit management" was implemented by a large number of U.S. hospitals.
Not until 1965, however, was matrix management formally recognized.

The first organization to design and implement a formal matrix structure was the National
Aeronautics and Space Administration (NASA). NASA developed a matrix management
system for its space program because it needed to simultaneously emphasize several
different functions and projects, none of which could be stressed at the expense of
another. It found that traditional management structures were too bureaucratic,
hierarchical, slow-moving, and inflexible. Likewise, basic organic structures were too
departmentalized (i.e. myopic), thus failing to productively use the far-reaching expertise
NASA had at its disposal. NASA's matrix solution overcame those problems by
synthesizing projects, such as designing a rocket booster, with organizational functions,
such as staffing and finance.

Despite doubts about its effectiveness in many applications, matrix management gained
broad acceptance in the corporate world during the 1970s, eventually achieving fad
status. Its popularity continued during the 1980s as a result of economic changes in the
United States, which included slowing domestic market growth and increasing foreign
competition. Those changes forced many companies to seek the benefits offered by the
matrix model.

MATRIX BASICS

FUNCTIONAL ORGANIZATION.

Most organizational structures departmentalize the work force and other resources by one
of two methods: by products or by functions. Functional organizations are segmented by
key functions. For example, activities related to production, marketing, and finance might
be grouped into three respective divisions. Within each division, moreover, activities
would be departmentalized into subdepartments. The marketing division, for example,
might encompass sales, advertising, and promotion departments.

The chief advantage of functionally structured organizations is that they usually achieve a
fairly efficient specialization of labor and are relatively easy for employees to
comprehend. In addition, functional structures reduce duplication of work because
responsibilities are clearly defined on a company-wide basis. However, functional
division often causes departments to become short-sighted and provincial, leading to
incompatible work styles and poor communication.

DIVISIONAL ORGANIZATION.
Companies that employ a product or divisional structure, by contrast, break the
organization down into semiautonomous units and profit centers based on activities, or
"projects," such as products, customers, or geography. Regardless of the project used to
segment the company, each unit operates as a separate business. For example, a company
might be broken down into southern, western, and eastern divisions. Or, it might create
separate divisions for consumer, industrial, and institutional products. Again, within each
product unit are subdivisions.

One benefit of product or project departmentalization is that it facilitates expansion

(because the company can easily add a new division to focus on a new profit opportunity
without having to significantly alter existing systems). In addition, accountability is
increased because divisional performance can be measured more easily. Furthermore,
divisional structures permit decentralized decision making, which allows managers with
specific expertise to make key decisions in their area. The potential drawbacks to
divisional structures include duplication of efforts in different departments and a lack of
horizontal communication. In addition, divisional organizations, like functionally
structured companies, may have trouble keeping all departments focused on an overall
company goal.

MATRIX ORGANIZATION.

Matrix management structures combine functional and product departmentalization. They

simultaneously organize part of a company along product or project lines and part of it
around functional lines to get the advantages of both. For example, a diagram of a matrix
model might show divisions, such as different product groups, along the top of a table
(See Figure 1). Along the left side of the same table would be different functional
departments, such as finance, marketing, and production. Within the matrix, each of the
product groups would intersect with each of the functional groups, signifying a direct
relationship between product teams and administrative divisions. In other words, each
team of people assigned to manage a product group might have an individual(s) who also
belonged to each of the functional departments, and vice-versa.

Theoretically, managers of project groups and managers of functional groups have

roughly equal authority within the company. As indicated by the matrix, many employees
report to at least two managers. For instance, a member of the accounting department
might be assigned to work with the consumer products division, and would report to
managers of both departments. Generally, however, managers of functional areas and
divisions report to a single authority, such as a president or vice president.

Although all matrix structures entail some form of dual authority and multidisciplinary
grouping, there are several variations. For example, Kenneth Knight identified three basic
matrix management models: coordination, overlay, and secondment. Each of the models
can be implemented in various forms that differ in attributes related to decision-making
roles, relationships with outside suppliers and buyers, and other factors. Organizations
choose different models based on such factors as competitive environments, industries,
education and maturity level of the workforce, and existing corporate culture.
In the coordination model, staff members remains part of their original departments (or
the departments they would most likely belong to under a functional or product
structure). Procedures are instituted to ensure cross-departmental cooperation and
interaction towards the achievement of extra-departmental goals. In the overlay model,
staff members officially become members of two groups, each of which has a separate
manager. This model represents the undiluted matrix form described above. In the third
version, the secondment model, individuals move from functional departments into
project groups and back again, but may effectively belong to one or the other at different
times.

TEMPORARY VERSUS PERMANENT.

As these examples and models suggest, matrix structures are more likely than other
structures to exist on a temporary or ad hoc basis. Indeed, some scholars group matrix
structures under a broader category of organizational forms called "adhocracies," or
temporary work configurations, created to deal with a particular problem or project.
Large-scale use of adhocracies dates to U.S. military practices during World War II,
when the war effort required flexible teams of experts to be convened on short notice and
delegated certain tasks, often without a great deal of micromanagement by military brass.
Once the objectives were reached, the team would be disbanded and the members
reassigned to other duties. A similar rationale and process exist in the business world, and
thus many formal matrix structures fall into the ad hoc category.

Permanent matrix structures are centered on more enduring aspects of business

operations, such as product lines or processes. A common practice is to have a product or
brand manager who is responsible for overseeing the development and production of an
ongoing product, but staff who work on the product may also contribute to other products
from time to time. This permanent set-up creates accountability, coordination, and
perhaps most of all, continuity for the product as a whole, while enabling staff, who
generally have a direct supervisor who is not a product manager, to be flexibly assigned
where they are needed most.

ADVANTAGES, DISADVANTAGES, AND APPLICATIONS

ADVANTAGES.

The cardinal advantage of a matrix structure is that it facilitates rapid response to change
in two or more environments. For instance, a telecommunications company might be
extremely concerned about both unforeseen geographic opportunities and limited capital.
By departmentalizing its company with the financial function on one axis and the
geographic areas on the other, it might benefit from having each of its geographic units
intertwined with its finance department. For example, suppose that an opportunity to
purchase the cellular telephone rights for a specific area arose. The matrix structure
would allow the company to quickly determine if it had the capital necessary to purchase
the license and develop the area, or if it should take advantage of an opportunity in
another region.
Matrix structures are flatter and more responsive than other types of structures because
they permit more efficient exchanges of information. Because people from different
departments are cooperating so closely, they are eager to share data that will help them
achieve common goals. In effect, the entire organization becomes an information web;
data is channeled both vertically and horizontally as people exchange technical
knowledge, marketing data, product ideas, financial information to make decisions.

In addition to speed and flexibility, matrix organization may result in a more efficient use
of resources than other organic structures. This occurs because highly specialized
employees and equipment are shared by departments. For example, if the expertise of a
computer programmer is needed in another department, he or she can move to that
department to solve its problems, rather than languishing on tasks of low priority as
might happen in a nonmatrix setting.

Other benefits of matrix management include improved motivation and more adept
managers. Improved motivation results from decision-making within groups becoming
more democratic and participatory because each member brings specialized knowledge to
the table—and since employees have a direct impact on day-to-day decisions, they are
more likely to experience higher levels of motivation and commitment to the goals of the
departments to which they belong. More adept management is the result of top decision
makers becoming more involved in, and thus better informed about, the day-to-day
operations of the company. This involvement can also lead to improved long-term
planning.

DISADVANTAGES.

Despite their many theoretical advantages, matrix management structures have been
criticized as having a number of weaknesses. For instance, they are typically expensive to
maintain, partly because of more complex reporting requirements. In addition, many
workers become disturbed by the lack of a chain of command and a seeming inability to
perceive who is in charge. Indeed, among the most common criticisms of matrix
management is that it results in role ambiguity and conflict. For instance, a functional
manager may tell a subordinate one thing, and then a product/project boss will tell him or
her something different. As a result, companies that change from a comparatively
bureaucratic structure to matrix management often experience high turnover and worker
dissatisfaction.

Supporting critics' derision of matrix management are several examples of companies

that have implemented and later abandoned matrix structures. For example, one study
showed that between 1961 and 1978 about one-quarter of all teaching hospitals in the
United States moved to unit or matrix management structures. By the late 1970s, though,
nearly one-third of those hospitals had rejected the concept, citing reasons such as high
costs, excessive turnover, and interpersonal conflict. Although the hospital study
suggested that matrix management was better suited to larger organizations, General
Motors Corp.'s experience indicated otherwise. After a seven-year test of a matrix
structure, GM jettisoned matrix management in the 1980s in favor of a more traditional,
product oriented organizational structure. It cited managers' lack of control over
incentives as a primary shortcoming of the matrix system.

Although matrix management was often viewed during the 1970s as a cure-all for
organizational design, the perceived breadth of its potential for application has gradually
diminished. In general, matrix structures are assumed to be most appropriate for larger
corporations that operate in unique or fast-paced environments; a coal-mining company,
for example, might be less likely to benefit from a matrix structure than would a
pharmaceutical company. Matrix management also works best for organizations that are
managed and staffed mostly by professionals or semi-professionals, e.g., engineers and
scientists. Matrix management further requires a workforce that has a diverse set of skills
and employees that have strong interpersonal abilities. Finally, matrix management is
usually more effective when a project manager, who is technically working under the
authority of a product and a functional boss, is given the authority to make critical
decisions.

Because of their limitations, matrix management structures frequently are integrated into
an organization as one facet of a larger plan. For example, a research team organized to
develop a new product might be placed in a division of the company that is set up as a
matrix. After the initial stages of the project are completed, the ongoing management of
the product might be moved to a division of the company that reflects a more
conventional functional or product/project structure. Indeed, as evidenced by NASA's
successes in the 1960s, matrix management is particularly effective in accomplishing
"crash" and high-tech projects, such as those related to medical, energy research,
aerospace, defense, and competitive threats.

MATRIX STRUCTURE IN INTERNATIONAL SETTINGS

A special and popular application of matrix management is in the overseas operations of

an international firm. This is sometimes known as a three dimensional matrix when
management intersects along product/market, function, and country lines. Under such an
arrangement there is typically a worldwide product manager, a local or worldwide
functional manager, and a country specific manager; however, many variations of the
international matrix exist. The product manager is generally concerned with product-
specific issues that cut across regional or national boundaries. Depending on the type of
task and the company's preference, the functional manager may focus on international
issues (e.g., worldwide finance) or local concerns (e.g., domestic finance). Finally, the
country manager is concerned with all the implications—both product and function—of
producing and/or marketing the goods or services in a particular locale.

As with other uses of the matrix structure, the international format is not without its
weaknesses. A particular concern is the role of ambiguity across international lines, and
especially when it pits managers of different nationalities against one another. If the
system is not handled carefully and the potential for cultural bias recognized by top
management, it could lead to favoritism of some international managers while
disenfranchising others, thereby defeating the purpose of a matrix structure. In addition,
international matrix structures may be unacceptably inefficient and costly to maintain.

CASE STUDY

Bayer AG of Germany—the company best known in the United States for its Bayer
aspirin products—is one of the largest and oldest chemical and health-care products
companies in the world. Because of massive sales gains and increased activity overseas in
the early 1980s, Bayer announced a reorganization in 1984. Bayer had been successful
with a conventional organizational structure that was departmentalized by function.
However, in response to new conditions the company wanted to create a structure that
would allow it to achieve three primary goals: (1) shift management control from the
then-West German parent company to its foreign divisions and subsidiaries; (2)
restructure its business divisions to more clearly define their duties; and (3) flatten the
organization, or empower lower level managers to assume more responsibility, so that top
executives would have more time to plan strategy.

Bayer selected a relatively diverse matrix management format to pursue its goals. It
delineated all of its business activities into six groups under an umbrella company called
Bayer World. Within each of the six groups were several subgroups made up of product
categories such as dyestuffs, fibers, or chemicals. Likewise, each of its administrative and
service functions were regrouped under Bayer World into one of several functions, such
as human resources, marketing, plant administration, or finance. Furthermore, top
managers who had formally headed functional groups were given authority over separate
geographic regions, which, like the product groups, were supported by and entwined with
the functional groups. The net effect of the reorganization was that the original nine
functional departments were broken down into 19 multidisciplinary, interconnected
business groups.

After only one year of operation, Bayer management lauded the new matrix structure as a
resounding success. Not only did matrix management allow the company to move toward
its primary goals, but it had the added benefits of increasing its responsiveness to change
and emerging opportunities, and of helping Bayer to streamline plant administration and
service division activities.

SEE ALSO: Organization Theory