Organizational

Structure

McGraw-Hill/Irwin
McShane/Von Glinow OB 5e Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.
Learning objectives

 Identify the two fundamental processes in

organisational structure
• Division of labour
• Coordination
- Informal communication
- Formal hierarchy
- Standardisation

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Organizational Structure Defined

Division of labor and patterns of

coordination, communication,
workflow, and formal power that
direct organizational
activities.

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Division of Labor
 Subdividing work into separate
jobs assigned to different
people
 Division of labor is limited by
ability to coordinate work
 Potentially increases work
efficiency
 Necessary as company grows
and work becomes more
complex

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Coordinating Work Activities

Informal communication
• Sharing information
• Allows flexibility
• Vital in non-routine and ambiguous situations
• Easiest in small firms
• Applied in team-based structures

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Coordinating Work Activities

Formal hierarchy
• Direct supervision
• Assigns formal (legitimate) power to manage others

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Coordinating Work Activities

Standardisation (routine patterns of behaviour or output)

• Standardised processes (making pizzas)
• Standardised outputs (e.g., sales targets, customer
satisfaction)
• Standardised skills (e.g., training professionals
such as surgeons, nurses)

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Learning objectives

 Describe the four main elements of

organisational structure
 Span of control
 Centralisation
 Formalisation
 Departmentalisation

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Elements of Organizational Structure

Department- Span of
alization Control

Elements of
Organizational
Structure

Formalization Centralization

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SPAN OF CONTROL

 Wide versus narrow span of control

 Tall versus flat structure

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Span of Control (wide vs narrow)

Number of people directly

reporting to the next level
• Assumes coordination through
direct supervision

Wider span of control possible

when:
• Other coordinating
mechanisms present
• Routine tasks
• Low employee
interdependence

13-11
 Tall vs Flat Structures

As companies grow, they:

• Build taller hierarchy
• Widen span, or both

Problems with tall hierarchies

• Overhead costs
• Worse upward information
• Focus power around managers, so staff less empowered 13-12
Issues with Tall vs Flatter Structures
 Trend: Firms moving toward flatter structures
(delayering) because taller hierarchies have:
• Higher management overhead costs
• Less information flow
• Less staff empowerment

 But also problems with flatter hierarchies

• Undermines management functions
• Increases workload and stress
• Restricts management career development

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CENTRALISATION
VERSUS
DECENTRALISTION

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Centralization and Decentralization

Centralization
Formal decision making authority is held
by a few people, usually at the top

Decision making authority is

dispersed throughout the organization
Decentralization
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13-16
FORMALISATION

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Formalization

 The degree to which organizations standardize behavior

through rules, procedures, formal training, and related
mechanisms. E.g. Fast foods, UTAR
 Formalization increases as firms get older, larger, and
more regulated because work activities become routinised
 Problems with formalization
• Reduces organizational flexibility
• Discourages organizational learning/creativity
• Reduces work efficiency (behavior prohibited because not part of company rules)
• Increases job dissatisfaction and work stress

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Mechanistic vs. Organic Structures

 Organic Structure
• Wide span of control
• Little formalization
• Decentralized decisions

 Mechanistic Structure
• Narrow span of control
• High formalization
• High centralization

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Departmentalization

Specifies how employees and their activities

are grouped together
Three functions of departmentalization
1. Establishes chain of command
2. Creates common measures of performance, etc
3. Encourages coordination through informal
communication

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 DEPARTMENTALISATION

Six pure types of departmentalisation

Simple
Functional
Divisional
Team-based
Matrix
network

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 Simple Organisational Structure

 For starters
 Few people, minimal hierarchy; report to
owners
 Highly flexible

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 Functional Organizational Structure

Organises employees around specific knowledge

or other resources (e.g., marketing, production)

CEO

Finance HR Marketing

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Evaluating Functional Structures

 Benefits
• Economy of scale
• Supports professional identity and career paths
• Easier supervision

 Limitations
• More emphasis on subunit than organizational
goals

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Divisional Organisational Structure

Organizes employees around outputs,

clients, or geographic areas

CEO

Video Games TV MUSIC

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Divisional Structure

 3 Different forms of divisional structure

• Geographic structure
• Product(output) structure
• Client structure
 Best form depends on environmental diversity or
uncertainty
 Why some companies move away from the
geographic form:
• Less need for local representation
• Reduced geographic variation
• More global clients

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Evaluating Divisional Structures

 Benefits
• Building block structure -- accommodates growth
• Focuses on markets/products/clients

 Limitations
• Duplication, inefficient use of resources
• Specializations are dispersed--silos of knowledge
• Politics/conflict when two forms of equal value

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 Team-Based Organisational
Structure
 Self-directed work teams (SDWT)
 Teams organized around work processes
 Typically organic structure
• Wide span of control – many employees work
without close supervision
• Decentralized with moderate/little formalization

 Usually found within divisionalized structure

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Evaluating Team-Based Structures

 Benefits
• Responsive, flexible
• Lower admin costs
• Quicker, more informed decisions

 Limitations
• Interpersonal training costs
• Slower during team development
• Role ambiguity increases stress
• Problems with supervisor role changes
• Duplication of resources

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Matrix Structure (Project-based)
Employees ( ) are temporarily assigned to a specific
project team and have a permanent functional unit

CEO

HR dept MKT dept Finance dept

Project leader
#1

Project leader
#2

Project leader
#3

13-30
13-31
Evaluating Matrix Structures

 Benefits
• Uses resources and expertise effectively
• Improves communication, flexibility, innovation
• Focuses specialists on clients and products
• Supports knowledge sharing within specialty

 Limitations
• Increases goal conflict
• Two bosses dilutes accountability
• More conflict, organizational politics, and stress

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 Network Organizational Structure

Product Callcenter
development partner
partner (Philippines)
(U.S.A.)
Alliance of firms
creating a
Core
product/service
Firm
Package
Supporting firms Accounting
design
partner
beehive around a (U.S.A.)
partner
(UK)
“hub” or “core” firm
Assembly
partner
(Mexico)

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Evaluating Network Structures

 Benefits
• Highly flexible
• Potentially better use of skills and technology
• Not saddled with same resources for all products

 Limitations
• Exposed to market forces – SS & DD, price
• Less control over subcontractors than in-house

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Learning objectives

 Identify the four characteristics of external

environment
• Dynamic versus stable
• Complex versus simple
• Diverse versus integrated environments
• Hostile versus munificent environments

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External Environment & Structure

Dynamic Stable
• High rate of change • Steady conditions,
• Use team-based, network, or predictable change
other organic structure • Use mechanistic structure

Complex Simple
• Many elements (such as
• Few environmental elements
stakeholders)
• Less need to decentralize
• Decentralize

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External Environment & Structure
(con’t)

Diverse Integrated
• Several products, clients,
• Single product, client, place
regions
• Use functional structure, or
• Use divisional form aligned
geographic division if global
with the diversity

Hostile Munificent
• Competition and resource • Plenty of resources and
scarcity product demand
• Use organic structure for • Less need for organic
responsiveness structure

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Learning objective

Explain how
organisational size
technology
strategy
influence organisational structure

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Effects of Organizational Size

As organizations grow, they have:

 More division of labor (job specialization)
 Greater use of standardization
 More hierarchy and formalization
 More decentralization

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Technology and Structure

 Technology refers to mechanisms or

processes by which an organization turns out
its product or service
 Two contingencies:
• Variability -- the number of exceptions to standard
procedure that tend to occur.
• Analyzability -- the predictability or difficulty of the
required work
- HV,LA > organic (research setting)
- LV,HA > mechanistic (assembly line)

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Organizational Strategy
 Organistional strategy is the way the
organisation positions itself in its setting in
relation to its stakeholders, given the
organisation’s resources, capabilities and
mission
 Structure follows strategy (i.e. strategy comes 1 )
st

• Strategy points to the environments in which the

organization will operate
• Leaders decide which structure to apply

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The role of strategy in designing
structures
 First, organisational strategy has an
intervening effect because the size,
environment and technology contingencies
shape management’s thinking about the best
structure for the organisation.

 This happens through strategy, not

automatically through the contingencies of
design.

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The role of strategy in designing
structures
 The second role of strategy is that it may
reshape the contingency factors which, in
turn, influence organisational structure.

 To the extent that the organisation is able to

move into different environments,
organisational strategy shapes organisational
structure.

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Organisational Strategy
 Differentiation strategy
• Providing unique products or attracting clients who
want customization
• Organic structure

 Cost leadership strategy

• Maximize productivity in order to offer competitive
(i.e. low) pricing
• Mechanistic structure

13-44
 Organizational
Structure

McGraw-Hill/Irwin
McShane/Von Glinow OB 5e
Copyright © 2010 by The McGraw-Hill Companies, Inc. All rights reserved.13-45