CHAPTER 3- Fundamentals of Organization Structure

 Organizational structure is a system used to define a hierarchy within an organization.

 It identifies each job, its function and where it reports to within the organization.

This structure is developed to establish how an organization operates and assists anorganization in
obtaining its goals to allow for futuregrowth.
 The structure is illustrated using an organizationalchart.

There are three key components in the definition of organization structure:

1. Organization structure designates formal reporting relationships, including the number of
levels in the hierarchy and the span of control of managers andsupervisors.
2. Organization structure identifies the grouping together of individuals into departments and of
departments into the totalorganization.
3. Organization structure includes the design of systems to ensure effective communication,
coordination, and integration of efforts across departments.
These three elements of structure pertain to both vertical and horizontal aspects of organizing.
For example, the first two elements are the structural framework, which is the vertical hierarchy.
The third element pertains to the pattern of interactions among organizational employees. An
ideal structure encourages employees to provide horizontal information and coordination where
and when it isneeded.
Organizational structures typically use one of two approaches:
 A centralized structure gives most of the authority and decision-making power to
theteam at thetop.
 A decentralized structure distributes authority and decision-making power at
lowerlevels, which might include departments, groups, or businessunits.

Organization structure is reflected in the organization chart. It isn’t possible to see the internal
structure of an organization the way we might see its manufacturing tools, offices, or products.
Although we might see employees going about their duties, performing different tasks, and
working in different locations, the only way to actually see the structure underlying all this
activity is through the organization chart.
The organization chart is the visual representation of a whole set of underlying activities and
processes in an organization. The organization chart can be quite useful in understanding how a
company works. It shows the various parts of an organization, how they are interrelated, andhow
each position and department fits into thewhole.
The concept of an organization chart, showing what positions exist, how they are grouped, and
who reports to whom, has been around for centuries

3.2. Information processing perspective in organizationstructure.

The organization should be designed to provide both vertical and horizontal information flow as
necessary to accomplish the organization’s overall goals. If the structure doesn’t fit the
information requirements of the organization, people either will have too little information or
will spend time processing information that is notvital.
Vertical Information Sharing: Organization design should facilitate the communication among
employees and departments that is necessary to accomplish the organization’s overall task.
Managers create information linkages to facilitate communication and coordination among
organizational elements.
Vertical linkages are used to coordinate activities between the top and bottom of an organization
and are designed primarily for control of the organization. Employees at lower levels should
carry out activities consistent with top-level goals, and top executives must be informed of
activities and accomplishments at the lower levels. Organizations may use any of a variety of
structural devices to achieve vertical linkage, including hierarchical referral, rules, plans, and
formal management informationsystems.
Hierarchical Referral: The first vertical device is the hierarchy, or chain of command, which is
illustrated by the vertical lines. A problem arises that employees don’t know how to solve, it can
be referred up to the next level in the hierarchy. When the problem is solved, the answer is
passed back down to lower levels. The lines of the organization chart act as communication
channels.
Rules and Plans: The next linkage device is the use of rules and plans. To the extent that
problems and decisions are repetitious, a rule or procedure can be established so employees
know how to respond without communicating directly with their manager. Rules and procedures
provide a standard information source enabling employees to be coordinated without actually
communicating about every task.
Plans also provide standing information for employees. The most widely used plan is the budget.
With carefully designed and communicated budget plans, employees at lower levels can be left
on their own to perform activities within their resource allotment.
VerticalInformation Systems: A vertical information system is another strategy for increasing
vertical information capacity. Verticalinformation systems include the periodic reports, written
information, and computer-based communications distributed to managers. Information systems
make communication up and down the hierarchy more efficient.
Horizontal Information Sharing: Horizontal communication overcomes barriers between
departments and provides opportunities for coordination among employees to achieve unity of
effort and organizational objectives.
Horizontal linkage refers to communication and coordination horizontally across organizational
departments. The following devices are structural alternatives that can improve horizontal
coordination and information flow. Each device enables people to exchange information.

Information Systems: A significant method of providing horizontal linkage in today’s

organizations is the use of cross-functional information systems. Computerized information
systems enable managers or frontline workers throughout the organization to routinely exchange
information about problems, opportunities, activities, or decisions.
Direct Contact: A higher level of horizontal linkage is direct contact between managers or
employees affected by a problem.
Task Forces: Liaison roles usually link only two departments. When linkage involves several
departments, a more complex device such as a task force is required.
A task force is a temporary committee composed of representatives from each organizational
unit affected by a problem. Each member represents the interest of a department or division and
can carry information from the meeting back to that department. Task forces are an effective
horizontal linkage device for temporary issues. They solve problems by direct horizontal
coordination and reduce the information load on the vertical hierarchy. Typically, they are
disbanded after their tasks are accomplished.

3.3. Organization designalternatives

A company can be organized in a number of ways. It might be built around divisions, functions,
geography, or with a matrix approach:
3.4. Functional, divisional, and geographical designs.
Functional grouping and divisional grouping are the two most common approaches to structural
design.
In a functional structure: A functional structure is based on job functions often labeled as
departments – finance, purchasing, etc.
Activities are grouped together by common function from the bottom to the top of the
organization. All engineers are located in the engineering department, and the vice president of
engineering is responsible for all engineering activities. The same is true in marketing, R&D, and
manufacturing. With a functional structure, all human knowledge and skills with respect to
specific activities are consolidated, providing a valuable depth of knowledge for the
organization. This structure is most effective when in-depth expertise is critical to meeting
organizational goals, when the organization needs to be controlled and coordinated through the
vertical hierarchy, and when efficiency is important. The structure can be quite effective if there
is little need for horizontalcoordination.
Strengths and Weaknesses of Functional OrganizationStructure
Strengths
1. Allows economies of scale within functionaldepartments
2. Enables in-depth knowledge and skilldevelopment
3. Enables organization to accomplish functional goals
4. Is best with only one or a fewproducts
Weaknesses
1. Slow response time to environmentalchanges
2. May cause decisions to pile on top; hierarchyoverload
3. Leads to poor horizontal coordination among departments
4. Results in lessinnovation
5. Involves restricted view of organizational goals
Divisional Structure: A divisional structure is organized around divisions or business units that
are self-contained entities with their own functional departments such as human resources,
marketing, and so on. The term divisional structure is used here as the generic term for what is
sometimes called a product structure or strategic business units. With this structure, divisions
can be organized according to individual products, services, product groups, major projects or
programs, divisions, businesses, or profitcenters.
Strengths and Weaknesses of Divisional OrganizationStructure
Strengths
1. Suited to fast change in unstable environment
2. Leads to customer satisfaction because product responsibility and contact points areclear
3. Involves high coordination acrossfunctions
4. Allows units to adapt todifferences
in products, regions,customers
5. Best in large organizations with severalproducts
6. Decentralizes decision making
Weaknesses
1. Eliminates economies of scale in functionaldepartments
2. Leads to poor coordination across productlines
3. Eliminates in-depth competence and technicalspecialization
4. Makes integration and standardization across product linesdifficult
Geographic Structure: A geographical structure is often used when a company has multiple
locations. Each location operates independently.
Another basis for structural grouping is the organization’s users or customers. The most common
structure in this category is geography. Each region of the country may have distinct tastes and
needs. Each geographic unit includes all functions required to produce and market products or
services in that region.
3.5. Matrix structure: With a matrix structure, the company is organized around teams
assembled for specific tasks. Team members usually report to more than one person – the team
leader, and the supervisor for the team member’s functional area. Sometimes, an organization’s
structure needs to be multi-focused in that both product and function or product and geography
are emphasized at the same time. One way to achieve this is through the matrix structure. The
matrix can be used when both technical expertise and product innovation and change are
important for meeting organizational goals. The matrix structure often is the answer when
organizations find that the functional, divisional, and geographic structures combined with
horizontal linkage mechanisms will notwork.
The unique characteristic of the matrix organization is that both product divisions and functional
structures (horizontal and vertical) are implemented simultaneously. The product managers and
functional managers have equal authority within the organization, and employees report to both
of them.
 In a matrix organization structure, every employee has twosuperiors.
 One chain of command is functional and the other chain of command is a project
team.Hence, matrix structure is referred to as a multi command system, both vertical and
horizontal dimension.
 Both dimensions of structure are permanent and balanced, with power held equally
byboth functional and a project manager.
 Matrix structure is suitable when organizational tasks are uncertain, complex and highly
interdependent or when an organization has to cope with more than one function or
project.
 In large organizations employees from various functional departments are from time
totime assigned to one or more projects. On completion of the project these employees
revert back to their respective departments until the next assignment to aproject.
Strengths and Weaknesses of Matrix Organization Structure
Strengths
1. Achieves coordination necessary to meet dual demands fromcustomers
2. Flexible sharing of human resources across products
3. Suited to complex decisions and frequent changes in unstableenvironment
4. Provides opportunity for both functional and product skilldevelopment
5. Best in medium-sized organizations with multipleproducts
Weaknesses
1. Causes participants to experience dual authority, which can be frustrating andconfusing
2. Means participants need good interpersonal skills and extensivetraining
3. Is time consuming; involves frequent meetings and conflict resolutionsessions
4. Will not work unless participants understand it and adopt collegial rather than vertical type
relationships
5. Requires great effort to maintain powerbalance

3.6. Horizontalstructure
A recent approach to organizing is the horizontal structure, which organizes employees around
core processes. Organizations typically shift toward a horizontal structure during a procedure
called reengineering. Reengineering, or business process reengineering, basically means the
redesign of a vertical organization along its horizontal workflows and processes. Aprocess refers
to an organized group of related tasks and activities that work together to transform inputs into
outputs that create value for customers.50 Examples of processes include order fulfillment, new
product development, and customer service. Reengineering changes the way managers think
about how work is done. Rather than focusing on narrow jobs structured into distinct functional
departments, they emphasize core processes that cut horizontally across the organization and
involve teams of employees working together to serve customers.
Strengths and Weaknesses of Horizontal Structure
Strengths:
1. Promotes flexibility and rapid response to changes in customerneeds
2. Directs the attention of everyone toward the production and delivery of value to thecustomer
3. Each employee has a broader view of organizational goals
4. Promotes a focus on teamwork andcollaboration
5. Improves quality of life for employees by offering them the opportunity to share
responsibility, make decisions, and be accountable foroutcomes
Weaknesses:
1. Determining core processes is difficult and timeconsuming
2. Requires changes in culture, job design, management philosophy, and information and reward
systems
3. Traditional managers may balk when they have to give up power andauthority
4. Requires significant training of employees to work effectively in a horizontal team
environment
5. Can limit in-depth skill development
3.7. Modularstructure.
3.8. Hybridstructure.
As a practical matter, many structures in the real world do not exist in the pure forms we have
outlined in this chapter. Most large organizations, in particular, often use a hybrid structure that
combines characteristics of various approaches tailored to specific strategic needs. Most
companies combine characteristics of functional, divisional, geographic, horizontal, or network
structures to take advantage of the strengths of various structures and avoid some of the
weaknesses. Hybrid structures tend to be used in rapidly changing environments because they
offer the organization greater flexibility.

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