Module 3: ORGANIZATIONAL STRUCTURE

Why does a manager need to understand organizational structure?

IBM Credit Corporation is the finance arm of parent company IBM Corp. and is
responsible for providing customer financing to facilitate the sale of computers,
software, and services. To be successful in this industry, it is important that
approvals for credit be timely so sales aren’t lost to competitors and their
finance subsidiaries. In other words, speedy credit approval serves as a
competitive advantage to a business.

Unfortunately, the approval turnaround time at IBM Credit was dreadfully slow.
It took six days to weeks from the time an application was submitted to reaching
a final credit decision. As you can imagine, this was a significant impediment to
IBM salespeople tasked with growing the company’s revenues.

Why did it take so long for credit decisions to be made? It turns out that it was
not a function of the effort involved in reaching a decision. Rather, it was a
result of the organizational structure in place at the time.

How could the organizational structure have such a significant impact on IBM
Corporation’s success? We will look at the answer to that question at the
conclusion of this module. First, it is important that you begin to understand
the fundamentals of various structures, which is what you will be learning in
this module.

Introduction to the Purpose of Organization

If you have a job now or you’ve had one in the past, you have some
understanding of organizational structure—you know who your manager is, and
you probably know who your manager reports to. You might also know who
your company’s CEO is. But where did this organizational structure come from?
There are reasons behind an organization’s structure, and understanding them
at your current or next job will help you recognize how specialized your work
will need to be, who you can talk to when you have questions, and what internal
and external elements may impact your work.

Common Organizational Structures

Learning Outcomes
 Differentiate between the four basic types of departmentalization
(function, product, customer, and geography).
 Distinguish matrix organizations from traditional departments.

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  Differentiate between team-based structures, networks, and modular
organizations.

Departmentalization

Based on an organization’s application of the common elements—common

purpose, coordinated effort, division of labor, hierarchy of authority, as well as
centralization/decentralization and formalization—the resulting structure will
typically exhibit one of four broad departmental structures: functional, product,
customer, and geographic.

Functional Structure

As sales increase, organizations generally adopt a functional structure. This

structure groups employees into functional areas based on their expertise.
These functional areas often correspond to stages in the value chain such as
operations, research and development, and marketing and sales. They also
include support areas such as accounting, finance, and human resources. The
graphic that follows shows a functional structure, with the lines indicating
reporting and authority relationships. The department head of each functional
area reports to the CEO; the CEO then coordinates and integrates the work of
each function.

Functional structure organizational chart.

A functional structure allows for a higher degree of specialization and deeper

domain expertise than a simple structure. Higher specialization also allows for
a greater division of labor, which is linked to higher productivity. [1] Although
work in a functional structure tends to be specialized, it is centrally coordinated
by the CEO, as in the earlier graphic. A functional structure allows for an
efficient top-down and bottom-up communication chain between the CEO and
the functional departments, and thus relies on a relatively tall structure. The
disadvantage inherent to a functional structure is that the emphasis on
specialization can cause high levels of job dissatisfaction and fewer process
improvements for the business.

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Product Structure

Companies with diversified product lines frequently structure based on the

product or service. GE, for example, has structured six product-specific divisions
supported by six centralized service divisions. (1) Energy, (2) Capital (3) Home
& Business Solutions, (4) Healthcare, (5) Aviation, and (6) Transportation.
Product divisions work well where products are more technical and require more
specialized knowledge. These product divisions are supported by centralized
services, which include: public relations, business development, legal, global
research, human resources, and finance.

This type of structure is ideal for organizations with multiple products and can
help shorten product development cycles. One disadvantage is that it can be
difficult to scale. Another disadvantage is that the organization may end up with
duplicate resources as different divisions strive for autonomy.

Customer Structure

Companies that offer services, such as health care, tend to use a customer-
based structure. While similar to the product structure, the different business
segments at the bottom are each split into a specific customer group—for
example, outpatient, urgent care, and emergency care patients. Since the
customers differ significantly, it makes sense to customize the service.
Employees can specialize around the type of customer and be more productive
with that type of customer. The directors of each customer center would report
directly to the chief medical officer and/or the hospital CEO. This is also
designed to avoid overlap, confusion, and redundancies. The customer

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structure is appropriate when the organization’s product or service needs to be
tailored to specific customers.

Customer structure organizational chart.

The customer-based structure is ideal for an organization that has products or

services unique to specific market segments, especially if that organization has
advanced knowledge of those segments. However, there are disadvantages to
this structure, too. If there is too much autonomy across the divisions,
incompatible systems may develop. Or divisions may end up inadvertently
duplicating activities that other divisions are already managing.

Geography Structure

If an organization spans multiple geographic regions, and the product or service

needs to be localized, it often requires organization by region. Geographic
structuring involves grouping activities based on geography, such as a Latin
American division. Geographic structuring is especially important if tastes and
brand responses differ across regions, as it allows for flexibility in product
offerings and marketing strategies. Also, geographic structuring may be
necessary because of cost and availability of resources, distribution strategies,
and laws in foreign countries. Coca Cola structures geographically because of
the cost of transporting water. NetJets, a private aviation company, had to
create a separate company in Portugal to operate NetJets Europe, because the
entity had to be owned by a European Union carrier.

McDonald’s is well-known for its geographic structure and localization strategy

for food preferences. The McDonald’s in Malaysia is certified halal (no pork
products) and you can order the McD Chicken Porridge: chicken and onions in
porridge. Other examples are Brie Nuggets (fried brie) in Russia; the Ebi Filet-
O (shrimp patty) in Japan; and in Canada, you can get poutine (fries and cheese
curds smothered in gravy).

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This type of structure is best for organizations that need to be near sources of
supply and/or customers. The main disadvantage of a geographical
organizational structure is that it can be easy for decision making to become
decentralized; geographic divisions can sometimes be hundreds, if not
thousands, of miles away from corporate headquarters, allowing them to have
a high degree of autonomy.

Matrix Organizations

Where two dimensions are critical, companies will use a matrix structure.
Employees may be organized according to product and geography, for example,
and have two bosses. The idea behind this type of matrix structure is to combine
the localization benefits of the geography structure with those of the functional
structure (responsiveness and decentralized focus).

Matrix structure with geographic and product (SBU) structure.

The advantage of the matrix structure is that it can provide both flexibility and
more balanced decision making (because two chains of command exist instead
of just one). Its primary disadvantage: complexity, which can lead to confused
employees.

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Team-based Structures, Networks, and Modular Organizations

The reality is that if an organization is successful enough to survive and grow,

it will eventually need some form of integration. Poor communication between
siloed departments often leads to a crisis that inspires efforts to integrate—
efforts such as teams, networks, and modular structures.

Team-based Structure

Over the last several decades, team-based structures of some variation have
become common in almost every industry. Lockheed Martin Aircraft Corporation
started its “Skunk Works” project in 1943 in response to the U.S. Army’s need
for a jet fighter. Based on a handshake, a small team of engineers worked
secretly in a tent to design and build the XP-80 Shooting Star Jet Fighter in 143
days—seven days less than was required. The level of secrecy needed for this
type of a project team is extremely rare in most organizations, yet it did spawn
the modern-day project team.

Project teams are focused on a few objectives and usually disbanded at a

project’s end. Similar to the Skunk Works® model, this team may locate in a
designated room or building with the intention to increase communication and
collaboration and minimize distractions. Although project teams are less
hierarchical, they typically still include a manager.

Team

In general, a team is made up of people with complementary skills who are

working toward a common purpose. Organizations create teams by grouping
employees in a way that generates a variety of expertise and addresses a
specific operational component of the organization. Teams that include
members from different functions are known as cross-functional teams.
Because of the success of early project teams, the belief is that a team will be
a more creative and productive structure to face new challenges. It is important
to remember, however, that every team is a group but not every group is a
team. A team structure must be less hierarchical, share the leadership, and be
more fluid than traditional structures (such as functional or divisional). True
teams do not disband after a project. Rather, they continue to change and
adapt to fulfill group and organizational objectives over several years.

The following table lists some of the differences between teams and groups.

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Differences Between Teams and Groups

Teams Groups

Indistinguishable from, or
Distinct, specific to the team’s
Purpose parallels that of, the
charter
organization

Interdependent with a collective Independent tasks with

Work
work product individual work products

Synergy – collectively we
Additive – the sum of the
Performance achieve more than the sum of
individual efforts
individual efforts

Skills Complementary Job-specific

Leadership Shared One leader

Mutual accountability, Individuals: For their own

Accountability responsibility for the collective products
work product Leader: For group product

Communication Performance conversations Hierarchical

Source: Information derived from Katzenbach and Smith (1993)

Team structures can eliminate layers of management, which allows employees

to make decisions without getting multiple approvals. This streamlines
processes and lowers administrative costs. However, motivating individuals in
a team-based organization can be more challenging as team accomplishments
are rewarded rather than individual achievements.

Network Structure

The newest, and most divergent, team structure is commonly known as a

network structure. A network structure has little bureaucracy and features
decentralized decision making. Managers coordinate and control relations both
internal and external to the firm. A social structure of interactions is fostered to
build and manage formal and informal relationships. The goal of this structure
is to achieve rapid organizational evolution and adaptation to constantly
changing external and internal environments.

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Zappos has embraced this model and labeled it holacracy. Rather than relying
on a traditional top-down hierarchical management
structure, holacracy attempts to achieve control and coordination by
distributing power and authority to self-organizing groups (so-called circles) of
employees. Circles of employees are meant to self-organize and own a specific
task, such as confirming online orders or authorizing a customer’s credit card.
Order is supposed to emerge from the bottom up, rather than rely on top-down
command and control as in traditional organizational structures. Rules are
explicit in a so-called constitution, which defines the power and authority of
each circle. For coordination, the employee circles overlap horizontally and
without vertical hierarchy. Once the teams are in place, the CEO effectively
relinquishes all executive powers.

A network structure is meant to promote communication and the free flow of

information between different parts of the organization as needed. However,
the circular structure can be confusing, especially for new employees. [2]

Modular Organizations

A business that has areas or departments that can be easily separated from the
company without jeopardizing the company are considered to have a modular
organizational structure. The key lies in the ability to identify which modules, or
departments, of a business are effective and which can be outsourced to create
a tighter organization.

Organizations that want to remain flexible and streamlined must know when it
is time to remove a module and allow the job to be done outside the company.
For example, a small specialty T-Shirt company may recognize that its design,
production, and customer service modules are at peak form and working well
together but that its website design and maintenance department is slowing it
down. The shop may externalize that module and send the work to an outside
business.[3]

Factors Impacting Organizational Design

Learning Outcomes
 Identify aspects of the external environment that influence the design of
an organization’s structure.
 Identify aspects of the internal environment that influence the design of
an organization’s structure.
 Explain how business growth cycle affects organizational choices.

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External Environment

The first factor to influence an organization’s design will be that of the external
environment. The external environment consists of everything outside of
organizations that can affect their performance and outcomes. Availability and
need for raw materials, human resources, and financial resources are elements
of the environment. Further key elements include customers and suppliers,
competitors, cultural factors, and the types of regulatory frameworks or
governmental influences on the organization.

The greater the number of external forces, the greater the complexity of the
external environment. A pharmaceutical company operates in a very complex
environment dealing with many groups such as doctors, hospitals, pharmacists,
external research establishments, regulators, health insurance providers, labor
markets, and many suppliers. In addition, a pharmaceutical company would
deal with these groups in many countries with varying local economic
conditions, health care arrangements, and regulatory regimes.

Environmental stability refers to how stable all of the environmental forces are
over time. There was a time when certain external forces were considered
stable, such as governmental regulations and laws, which could continue for
many years, even with new political administrations in place. However, the
financial crisis of 2008 and political changes in the United States have added
volatility. The high-tech and software industries would be considered unstable
because of the relative ease for new software and technology companies to
enter and take over an existing market.

Internal Environment

The internal environment is influenced by the jobs and the employees as they
relate to those jobs. The employees’ influence on the internal environment is
directly related to their level of engagement, or job satisfaction. The job
characteristics model, proposed by Richard Hackman and Greg Oldham in 1980,
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proposes that the right combination of skill variety, task identity, task
significance, autonomy, and feedback can lead to high-quality performance,
high internal motivation, and high satisfaction.

Skill variety: This is the degree to which the job requires a person to use
multiple high-level skills. A department store greeter whose job consists of
greeting customers and giving them a shopping cart demonstrates low levels of
skill variety, whereas the employee who acts as a cashier, stocks shelves, and
manages the inventory of outdoor furniture demonstrates high skill variety.

Task identity: This is the degree to which a person is responsible for

completing an identifiable task from start to finish. A graphic designer who
creates images for a website might have low task identity. This is because the
designer’s work is only part of a larger whole; other designers and coders
contribute their work to completing the website. However, a graphic designer
who creates a brochure for a client from the idea phase to the final proof will
have a high task identity.

Task significance: This is the degree to which a person’s job affects

customers or other people’s work. A nurse handling the diverse needs patients
in the intensive care unit may score high on significance, whereas new nurses
aiding in the same department may feel that they perform only busy work and
feel a low level of significance.

Autonomy: This is the degree to which a person can decide how to perform
his or her tasks. For instance, a grocery store clerk who is given a list of tasks
to complete by the end of the day has greater autonomy than a clerk who is
given that same list and told that the list needs to be completed in a particular
order, with certain tasks needing to be done by certain times of the day.

Feedback: This is the degree to which people learn whether they are doing
their job well. Feedback may come from other people, such as managers, peers,
subordinates, and customers, or it may come from the job itself. For instance,
a customer service representative might receive feedback from a supervisor, as
well as from the customers he or she has tried to help.

Taken all together, the job characteristics model links the task itself to employee
motivation. More specifically, a job that is challenging will improve employee
motivation but a job that is boring and repetitive will hamper employee
motivation. To make a job challenging, managers can ensure the following:

 There are a variety of tasks for the employee to complete.

 The employee feels a sense of autonomy.
 The employee is empowered to make certain decisions.

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Growth Cycle

Larry Greiner’s model of growth offers an organic view of the business life cycle.
Like people, organizations change as they age and grow. Each growth stage
encompasses an evolutionary phase of growth and a revolutionary phase where
an organizational crisis will occur, and the business’s ability to handle these
crises can determine its future.

Phase 1: Creativity

The creativity phase is marked by early growth of a company due to an

emphasis on creating a product or service. The founders of the company are
usually technically or entrepreneurially oriented, and they generally disdain
management activities. As the complexity of the business increases, the
founders will struggle to both grow and manage the business.

Phase 2: Direction

A strong business manager will be brought in to install a functional

organizational structure, with formal communication channels and hierarchy. A
strong focus on accounting and capital management will drive most business
decisions. Top management’s control of all operations diminishes the autonomy
that middle-level managers enjoyed, despite their superior knowledge of
markets and products.

Phase 3: Delegation

The delegation phase is marked by the application of a decentralized

organizational structure. Middle managers are freed up to make decisions and
executives monitor the operation and focus on bigger issues, such as mergers
or acquisitions. Better coordination of all the operations will be required as the
executives feel a loss of control over the middle managers.

Phase 4: Coordination

The coordination of the business structure involves the merging of local units
into product groups, a centralization of support functions, and establishment of
formal planning procedures. Although resource use becomes more efficient and
growth occurs, managers become frustrated with the bureaucratic red tape.
The rules and procedures appear more important than productivity and
innovation. In turn, corporate staff becomes frustrated with the uncooperative
and uninformed managers.

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Phase 5: Collaboration

All parts of the organization criticize the resulting bureaucratic structure, and it
will take all the key leaders, managers, and employees to collaborate in an
attempt to create a better structure. The formal systems and procedures will
have to give way to social control and self-discipline. A shift to a problem
solving-based approach is needed as teams combine across various business
functions and previous systems are simplified.

Current Trends in Organization and Job Design

Learning Outcomes
 Explain the advantages of flatter organizational structures.
 Explain the benefits of employee empowerment.
 Explain the trend toward flexible work schedules.

Flatter Organizational Structures

When Gen. Stanley McChrystal took charge of the U.S. Joint Special Operations
Task Force in 2003, he recognized that traditional tactics of warfare were failing
in Iraq. McChrystal wrote in his book Team of Teams that “To defeat a network,
we had to become a network.” A network in this context is a collection of small
cross-functional teams that have been empowered to self-organize, self-
manage, and self-execute.

The traditional career ladder follows a hierarchical path; entry-level position

followed by promotions up the chain with broader responsibilities and less job
or skill specificity. A flat structure model focuses on horizontal growth, digging
deeper, expanding knowledge and getting better at core competencies. The
benefit to employees is greater autonomy, as they have the freedom to work
amongst each other without the titles of hierarchy slowing down
communication.

Employee Empowerment

In many industries, the option to work from home is becoming increasingly

popular.

At the core of all of the trends in organizational structure is employee

empowerment. The traditional hierarchical structure took away most of an
employee’s power to make decisions. The movement is to trust the employee’s
ability and to give him or her the authority to make decisions, even mistakes.
The benefit to organizations can be greater productivity, innovation, and

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customer service. The responsibility of the organization is to clearly lay out the
roles and responsibilities to decrease ambiguity.

A good example of empowerment is flexible work arrangements (FWAs). FWAs

include reduced workload (part time), compressed work weeks, and remote
work (telework). The most important aspect of a FWA policy is that the
organization believes that the employees and their managers know best as to
how, when, and where to complete their work. Remote work is prevalent
throughout most industries and can range from working from home on certain
days when needed to fully remote workers with no corporate office. These
arrangements will work only if the organization values productivity over face
time.

Putting It Together- Organizational Structures

Back to IBM Credit Corporation

Let’s return to our case study of IBM’s credit arm that we considered at the
outset of this module. You’ll recall that credit applications could take six days
to several weeks to be processed, during which time sales were being lost to
competitors. So what did IBM do?

Two senior managers with the company decided to follow a credit application
throughout the entire process. When they did, they were surprised to discover
that the actual processing time for each application was only ninety minutes! It
quickly became evident that the delays were not a result of the amount of work
that needed to be completed. Instead, it was a function of the structure the
company had implemented. Each step in the approval process was routed to a
different specialist to be completed.

 Step 1: Central office operator receives a finance request from a

salesperson and records it on an input form → form is routed to the credit
department
 Step 2: Credit specialist reviews the customer and makes a credit decision
→ result is recorded on the form, which is routed to the business
practices department
 Step 3: Business practices approves any customer-requested changes to
the standard loan covenants → changes are noted on the form and it is
sent to the pricing department
 Step 4: Pricing specialist determines the appropriate rate to charge based
on the customer’s credit and specific loan covenants → form moves to
the administration department

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  Step 5: Administration specialist turns all information recorded on the
form into a quote letter → quote letter is routed to the sales specialist
for delivery to the customer

Based on what you learned in this module, how would you describe IBM Credit’s
organizational structure? Thinking back to Schein’s four key elements of an
organization, where do you see opportunities for improvement?

 Common Purpose – Do the specialists understand their role in the

overall purpose of the credit arm’s goal to support the sale of IBM
computers, software, and equipment?
 Coordinated Effort – Has management coordinated the effort of work
in a way that best adds value to the organization?
 Specialization and Division of Labor – Has management broken
down the tasks into optimum sizes to allow maximum efficiency?
 Hierarchy of Authority – Is the optimal reporting structure in place?

In the end, the company realized that it had done a poor job of coordinating
the efforts of the organization. Although each of the specialists was working
hard, the structure did not support the overall goal of maximizing IBM Corp’s
sales. In fact, the problem was based on an erroneous assumption that every
request that was received was unique and difficult. In reality, the majority of
credit requests were straightforward and easy to process. It generally did not
require someone with the in-depth knowledge of a specialist. The organization
had divided the labor too narrowly.

The company changed its structure, and instead of using specialists, it assigned
generalists trained to handle a standard credit request. They would own the
request from start to finish and would only engage the help of a specialist if the
situation was more complex than they could handle. The result? The new
turnaround time was closer to four hours compared with six days or weeks!

This example clearly illustrates the need for managers to carefully analyze their
organizational structure to ensure that it is capable of delivering the desired
results.

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