Chapter 3

Fundamentals of Organization
Structure
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 What is Organizational Structure?

Definition:-
• 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 an
organization in obtaining its goals
to allow for future growth.
 Key components in the definition of organization structure

 There three key components in the definition of organization

structure. These are:
• Designates formal reporting relationships, including the
number of levels in the hierarchy and the span of control of
managers and supervisors.
• Identifies the grouping together of individuals into departments
and of departments into the total organization.
• It includes the design of systems to ensure effective
communication, coordination, and integration of efforts across
departments.
 Two approaches of Organizational structures
 Centralized Structure
• In this type of organizational structure, all decisions, as well as
processes, are defined; and handled by the top management.
• Employees and managers are responsible for the successful
implementation of decisions and have to follow them.
• The employees low in the chain of command play a minimal role
in the process of decision-making.
• Few real-life examples of such organizations are Army, companies
like Flipkart, Apple, McDonald’s, etc. where the power of
decision- making is held at the top level.
• A centralized structure gives most of the authority and decision-
making power to the team at the top.
• Thus, the centralized structure has a top-down approach for
decision flow.
 Pros and cons of Centralized Structure

Pros Cons
• Clear communication and • Dictatorship interms of
chain of command. Leadership.
• Cost reduction i.e • Work delays due to
administrative cost. dependency on management.
• Fast implementation of of
• Employees feel disconnected
decisions.
in result reduce work
• Improved work quality and
efficiency.
reduction in task replication.
• Lack of authority in
managers.
 Two approaches of Organizational structures

 Decentralized Structure
– In such type of organizations, day-to-day tasks and the decision-
making processes are delegated to the supervisors at the middle and
lower level by the top management for fast and effective decisions and
to improve efficiency.
– By letting the middle and lower level executives jump in the process
of decision-making, the top management can focus on other major
decisions.
– It distributes authority and decision making power at lower levels
which might include departments, groups, or business units.
– This also increases the responsibility and accountability of the
employees.
 Pros and cons of Decentralized Structure

Pros Cons
• Better customer service. • Difficult coordination.
• Better staff motivation. • Expensive process.
• Quick decisions. • Unnecessary cost increase
• Effective communication. due to benefits by external
• Improved supervision and factors.
control.

by Gizaw B.
 Organization chart
 The organization chart is the visual representation of a whole set of
underlying activities and processes in an organization.

 Organization chart shows how employees going about their duties,

performing different tasks, and working in different locations.

Organizational chart shows the various parts of an organization, how

they are interrelated, and how each position and department fits into the
whole.

The concept of an organization chart, showing what positions exist,

how they are grouped, and who reports to whom, has been around for
centuries
Information Processing Perspective in Organization Structure

 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 not vital.
 Vertical Information Sharing
 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 information systems.
 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.
 Rules and Plans
 Is Rules and procedures that 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.
 Vertical Information Systems
• A vertical information system is another strategy for increasing
vertical information capacity.
• Vertical information 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.

by Berhanu T
 Vertical Organization Designed for Efficiency:-
 Vertical structure is dominant :-
 Specialized tasks
 Strict hierarchy,
 Many rules Vertical communication and reporting systems
 Few teams, task forces, or integrators
 Centralized decision making
 Horizontal Information Sharing
 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 decision.
 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.
– Typically, they are disbanded after their tasks are accomplished.
by Berhanu T
 Horizontal Organization Designed for Learning

 Horizontal structure is dominant:-

 Shared tasks ,empowerment
 Relaxed hierarchy , few rules
 Horizontal communication, face-to-face
 Many teams and task forces
 Decentralized decision

by Berhanu T
 Organization design alternatives
•A company can be organized in a number of ways.

• It might be built around divisions, functions, geography, or with a

matrix approach

The next we will see ,

Functional, divisional, and

geographical designs.
Functional Structure:-
 A functional structure is based on job functions often labeled as
departments

 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.

 All human knowledge and skills with respect to specific

activities are consolidated, providing a valuable depth of
knowledge for the organization.
Strengths of functional organizing:-
 Allows economies of scale within functional departments
 Enables in-depth knowledge and skill development
 Enables organization to accomplish functional goals
 Is best with only one or a few products

Weaknesses of functional organizing:-

 Slow response time to environmental changes
 May cause decisions to pile on top; hierarchy overload
 Leads to poor horizontal coordination among departments
 Results in less innovation
Divisional Structure:-

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 profit centers
Strengths:- Weaknesses:-
 Suited to fast change in unstable
 Eliminates economies of scale
environment
 Leads in functional departments
to customer satisfaction
because product responsibility and  Leads to poor coordination
contact points are clear across product lines
 Involves high coordination across
 Eliminates in-depth
functions
competence and technical
 Allows units to adapt to differences
in products, regions, customers specialization
 Best in large organizations with  Makes integration and
several products standardization across product
 Decentralizes decision making
lines difficult
Geographic Structure:
Is 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
Advantages:-

• It helps in exploiting local advantages.

• Places emphasis on local markets
and problems.
• It helps the company to reach close to
raw materials.

by Berhanu T
Disadvantages:-
 Duplication of effort.
 The necessity of having a relatively large number of
managers.
 It poses serious problems of coordination and control.
 It may create gaps between head offices and branch
offices.
 It is costly to host many geographically dispersed
departments. by Berhanu T
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
by Berhanu T
 Con`t-----

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.

by Berhanu T
•In a matrix organization structure, every employee has
two superiors.

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.

by Berhanu T
Con`t----
Both dimensions of structure are permanent and balanced, with
power held equally by both 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 to time assigned to one or more projects.
On completion of the project these employees revert back to their
respective departments until the next assignment to a project

by Berhanu T
Strengths
 Achieves coordination necessary to meet dual
demands from customers
 Flexible sharing of human resources across
products
 Suited to complex decisions and frequent
changes in unstable environment
 P Best in medium-sized organizations with
multiple products
 Best in medium-sized organizations with
multiple products
by Berhanu T
Weaknesses
 Causes participants to experience dual authority, which can
be frustrating and confusing
 Means participants need good interpersonal skills and
extensive training
 Is time consuming; involves frequent meetings and conflict
resolution sessions
 Will not work unless participants understand it.
 Requires great effort to maintain power balance.
 Best in medium-sized organizations with multiple products

by Berhanu T
Horizontal structure
 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.
 A process refers to an organized group of related tasks
and activities that work together to transform inputs
into outputs that create value for customers.
by Berhanu T
 Con`t-----
 Re engineering 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.

by Berhanu T
Strengths and Weaknesses of Horizontal Structure

Strengths:

 Promotes flexibility and rapid response to changes in

customer needs
 Directs the attention of everyone toward the production and
delivery of value to the customer
 Each employee has a broader view of organizational goals
 Promotes a focus on teamwork and collaboration
 Improves quality of life for employees by offering
them the opportunity to share responsibility, make
decisions, and be accountable for outcomes
by Berhanu T
Weaknesses:
 Determining core processes is difficult and time
consuming
 Requires changes in culture, job design,
management philosophy, and information and
reward systems
 Traditional managers may balk when they have
to give up power and authority
 Requires significant training of employees
to work effectively in a horizontal team
environment
 Can limit in-depth skill development
by Berhanu T
Hybrid structure:-
 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
by Berhanu T
flexibility
Thank you !!

by Berhanu T