Chapter 7.

Designing Organizational Structure

1. The factors that influence managers’ choice of an organizational

structure.

Organizing is the process by which managers establish the structure of

working relationships among employees to allow them to achieve organizational
goals efficiently and effectively. Organizational structure is the formal system of
task and reporting relationships that determines how employees use resources to
achieve goals. Organizational design is the process by which managers make
specific organizing choices that result in the construction of a particular
organizational structure.
According to contingency theory, managers design organizational structures
to fit the factors or circumstances that are affecting the company and causing them
the greatest uncertainty. Thus, there is no one best way to design an organization.
Four factors are important determinants of organizational structure. They
are: 1) the nature of the organizational environment, 2) the type of strategy the
organization pursues, 3) the technology the organization uses, and 4) the
characteristics of the organization’s human resources.
The Organizational Environment. The more quickly the external
environment is changing and the greater the uncertainty within it, the greater the
need to speed decision-making and communication so that scarce resources can be
obtained. In such situations, the manager’s goal is to make organizing decisions
that result in greater flexibility. Therefore, they are likely to decentralize authority
and empower lower-level employees.
In contrast, if the external environment is relatively stable, uncertainty is
low, and resources are readily available, managers make organizing decisions that
bring more stability or formality to the organization’s structure.
 In today’s marketplace, change is rapid and competition is intense.
Therefore, most managers are seeking ways to structure organizations that allow
people and departments to behave flexibly.
Strategy. Different strategies often call for the use of different
organizational structures. A differentiation strategy aimed at increasing quality
usually succeeds best in a flexible structure.
A low-cost strategy aimed at driving down costs works best in a more formal
structure, which gives managers greater control.
At the corporate level, when managers pursue a strategy of vertical
integration or diversification, a flexible structure is needed to provide sufficient
coordination between different business divisions.
Managers are also challenged to create organizational structures that allow
flexibility on a global level.
Technology. Technology is the combination of skills, knowledge, tools,
machines, computers, and equipment that are used in the design, production, and
distribution of goods and services.
The more complicated the technology, the greater the need for a more
flexible structure that allows managers to respond quickly to unexpected situations.
If technology is routine, a formal structure is more appropriate because tasks are
simple and procedures for performing tasks can be outlined in advance.
Two factors determine how complicated or nonroutine technology is,
according to researcher Charles Perrow. They are task variety and task
analyzabilitiy. Nonroutine technologies are characterized by high task variety and
low task analyzability. Routine technologies are characterized by low task variety
and high task analyzability.
The more that a technology is based upon the skills, knowledge, and abilities
of people working together on an ongoing basis, as opposed to automated
machines that cam be programmed in advance, the more complex the technology
is.
 Joan Woodard, a professor who investigated the relationship between
technology and organizational structure, differentiated among three kinds of
technology on the basis of the relative contribution made by people or machines.
1. Small-batch technology is used to produce small quantities of
customized, one-of-a-kind products and is based on the skills of people who work
together in small groups.Because small-batch goods are customized, a structure
that decentralizes authority and allows employees to respond flexibly to the unique
requirements of each product is most appropriate.
Mass-production technology is based primarily on the use of automated
machines that are programmed to perform the same operations time and time
again. There is less need for flexibility, and a formal organizational structure is
preferred because it gives managers more control over the production process.
2. Continuous-process technology is almost completely mechanized.
Products are produced by automated machines working in sequence and controlled
through computers from a central monitoring station. A flexible organizational
structure is the preferred choice with this kind of technology, since employees must
be able to respond quickly and appropriately to prevent disaster, in the event of an
unexpected situation.
Information Technology is changing methods of organizing, since an IT-
enabled organizational structure allows for new kinds of relationships among
electronically connected people. An example is knowledge management, the
sharing and integrating of expertise within and between functions and divisions
through real-time, interconnected IT.
Human Resources. The more highly skilled a workforce and the more
people are required to work together in groups or teams to perform tasks, the more
likely an organization is to use a flexible, decentralized structure.
Flexible structures, characterized by decentralized authority and empowered
employees, are well suited to the needs of highly skilled people.
The way an organization’s structure works depends upon the organizing
choices that managers make about four issues: 1) how to group tasks into
individual jobs, 2) How to group jobs into functions and divisions, 3) how to
allocate authority in the organization among jobs, functions, and divisions, and 4)
how to coordinate or integrate jobs, functions, and divisions.

2. The types of organizational structures.

The next organizing decision is how to group jobs together to best match the
needs of the organization’s environment, strategy, technology, and human
resources. Most top-management teams group jobs into departments and develop a
functional structure. As the organization grows, managers design a divisional
structure or a more complex matrix or product team structure.
Functional Structure
A function is a group of people working together who possess similar skills
or use the same knowledge, tools, or techniques to perform their jobs. A functional
structure is a structure composed of all the departments that an organization
requires to produce its goods or services.
The advantages of grouping jobs according to function are:
1. When people who perform similar jobs are grouped together, they can
learn from observing one another.
2. When people who perform similar jobs are grouped together, it is easier
for managers to monitor and evaluate their performance.
3. The functional structure allows managers to create the set of functions
they need to scan and monitor the task and general environments.
As an organization grows, the functional structure may become less efficient
and effective for the following reasons:
4. Managers in different functions may find it more difficult to communicate
and coordinate with one another.
4. Functional managers may become so preoccupied with supervising their
own specific departments that they lose sight of organizational goals.
 Divisional Structures: Product, Market, and Geographic
As the problems associated with growth and diversification increase over
time, most managers of large organizations choose a divisional structure and
create a series of business units, each of which produces a specific kind of product
for a specific kind of customer. There are three different forms of divisional
structure: product structure, geographic structure, and market structure.
Product Structure
When using a product structure managers place each distinct product line in
its own self-contained division and give divisional managers the responsibility for
division business-level structure. Each division is self-contained because it has a
complete set of all the functions that it needs to produce goods or services.
Advantages of using a product structure are:
- It allows functional managers to specialize in only one product area, so
they build expertise.
- Each division’s managers can become experts in their industry.
- It frees corporate managers from the need to supervise directly each
division’s day-to-day activities.
- The extra layer of management (the divisional management layer) can
improve the use of organizational resources.
- It puts divisional managers close to their customers and lets them respond
quickly and appropriately.

Matrix and Product Team Designs

When the environment is dynamic, changing rapidly, and uncertainty is high,
even a divisional structure may not provide enough flexibility. Matrix and product
team designs are the most flexible type of organization structures.
Matrix Structure: In a matrix structure, managers group people in two ways
simultaneously: by function and by product. The result is a complex network of
reporting relationships that makes the matrix structure very flexible.
 Each person in a product team reports to two bosses: 1) a functional boss,
who assigns individuals to a team and evaluates their performance, and 2) the boss
of the product team, who evaluates their performance on the team. Product teams
are empowered and team members are responsible for making important decisions,
to keep the matrix structure flexible.
Matrix structures have been successfully used for years at high-tech
companies where new product development takes place frequently and the need to
innovate quickly is vital to the organization’s survival.
Product Team Structure: The dual reporting relationships of a matrix
structure have always been difficult for managers and employees to deal with. To
avoid these problems, managers have devised another way of organizing people
and resources: a product team structure.
The product team structure differs from a matrix in that: 1) it does away with
dual reporting relationships and two-boss managers, and 2) functional employees
are permanently assigned to a cross-functional team.
A cross-functional team is a group of managers brought together from
different departments to perform organizational tasks. They report only to the
product team manager. Increasingly, organizations are making empowered cross-
functional teams an essential part of their organizational architecture to help them
gain a competitive advantage in fast-changing organizational environments.

Hybrid Structure
A large organization that has many divisions and simultaneously uses many
different structures has a hybrid structure. For example, most large organizations
use product division structures to create self-contained divisions. Then, each
division manager selects the structure that best meets the needs of their particular
environment, strategy, etc.