PART FOUR

C H A P T E R

Organizational
Structure
and Design

132

N I N E

Once managers are done planning,

ow can we design an organizational
then what? This is when managers
structure
that will help us accomplish
need to begin to work the plan. And
our companys goals? Should our
the first step in doing that involves
designing an appropriate organizational structure be tall or flat? Traditional or
structure. This chapter covers the
contemporary? Will our chosen design
decisions involved with designing this enhance our capacity to continuously
structure. Focus on the following
learn, adapt, and change in a dynamic
learning outcomes as you read and
global environment? As tomorrows
study this chapter.

managers, many of your students will

soon face these questions. In Chapter 9,
Learning Outcomes
students learn about various elements
of
organizational
structure,
the
9.1 Describe six key elements in
contingency
factors
that
influence
organizational design.
organizational design, and traditional
9.2 Identify the contingency factors
that favor either the mechanistic model and contemporary design. In addition,
or the organic model of organizational they will study design challenges
design.
encountered by managers who work in
9.3 Compare and contrast traditional a variety of organizational structures.
and contemporary organizational
designs.

A Managers Dilemma tells of Torben

Ballegaard Srensens predicament as
CEO of Bang & Olufsen (B&O). Mr
Srensens job is to manage an organization
where success depends on the work of
employees in another company . As a firm

that contracts out what would usually be

considered a competitive advantage for
his company, Mr. Srensen is faced with
fostering strong relationships with his
contract designers. While this out of the
box thinking has worked for B&O, it will
be useful to explore with students what
they see as the advantages and
disadvantages of such a design. Are
there drawbacks from the employees
point of view? Ask students what it
would be like to work in this relationship
where you report to two bosses.
Students are asked to put themselves in
Mr Srensen s shoes. How should this
CEO structure his company to assure
continued success?

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ANNOTATED OUTLINE
INTRODUCTION
Designing organizational structure involves the process of
organizing (the second management function) and plays an
important role in the success of a company.
1.

DEFINING ORGANIZATIONAL STRUCTURE

Managers need to establish structural designs that will best
support and allow employees to do their work effectively and
efficiently.
Several important terms must be defined in order to understand
the elements of organizational structure and design:
1.
Organizing is arranging and structuring work to
accomplish the organizations goals. This process
has several purposes, as shown in Exhibit 9-1.
2.
Organizational
structure
is
the
formal
arrangement of jobs within an organization.
3.
Organizational design is developing or changing
an organizations structure. This process involves
decisions
about
six
key
elements:
work
specialization,
departmentalization,
chain
of
command,
span
of
control,
centralization/
decentralization, and formalization. Chapter 9
examines each of these structural elements.
A.
Work Specialization. Work specialization is dividing
work activities into separate job tasks. Most of todays
managers regard work specialization as an important
organizing mechanism, but not as a source of everincreasing productivity.
B.
Departmentalization.
When work tasks have been
defined, they must be arranged in order to accomplish
organizational
goals.
This
process,
known
as
departmentalization, is the basis by which jobs are
grouped. There are five major ways to departmentalize
(see Exhibit 9-2):
1.
Functional departmentalization groups jobs by
functions performed.
2.
Product departmentalization groups jobs by
product line.
3.
Geographical departmentalization groups jobs
on the basis of geographical region.
4.
Process departmentalization groups jobs on the
basis of product or customer flow.
5.
Customer departmentalization groups jobs on
the basis of specific and unique customers who
have common needs.
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6.

C.

D.

E.

Popular trends in departmentalization include the

following:
a.
Customer departmentalization continues to
be a highly popular approach because it
allows better monitoring of customers needs
and responds to changes in the needs of
customers.
b.
Cross-functional teams, which are work
teams composed of individuals from various
functional specialties, are being used along
with traditional departmental arrangements.

Chain of Command. The chain of command is the line of

authority extending from upper organizational levels to
the lowest levels, which clarifies who reports to whom.
Three concepts related to chain of command are
authority, responsibility, and unity of command.
1.
Authority is the rights inherent in a managerial
position to tell people what to do and to expect
them to do it.
2.
Responsibility is the obligation to perform any
assigned duties.
3.
Unity of command is the management principle
that each person should report to only one
manager.
Span of Control. Span of control is the number of
employees a manager can efficiently and effectively
manage.
1.
The span of control concept is important because it
determines how many levels and managers an
organization will have. (See Exhibit 9-3 for an
example)
2.
What determines the ideal span of control?
Contingency factors such as the skills and abilities
of the manager and the employees, the
characteristics of the work being done, similarity
and complexity of employee tasks, the physical
proximity of subordinates, the degree to which
standardized procedures are in place, the
sophistication of the organizations information
system, the strength of the organizations culture,
and the preferred style of the manager influence
the ideal number of subordinates.
3. The trend in recent years has been toward wider
(larger) spans of control.
Centralization and Decentralization. The concepts of
centralization and decentralization address who, where,
and how decisions are made in organizations.

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1.

F.

2.

Centralization is the degree to which decision

making is concentrated at upper levels of the
organization.
2.
Decentralization is the degree to which lowerlevel employees provide input or actually make
decisions.
3.
The current trend is toward decentralizing decision
making in order to make organizations more
flexible and responsive.
4.
Employee empowerment is giving employees
more authority (power) to make decisions.
5.
A number of factors influence the degree of
centralization or decentralization in an organization
(see Exhibit 9-4).
Formalization refers to the degree to which jobs within
an organization are standardized and the extent to which
employee behavior is guided by rules and procedures.
1.
In a highly formalized organization, employees
have little discretion, and a high level of consistent
and uniform output exists. Formalized organizations
have explicit job descriptions, many organizational
rules, and clearly defined procedures.
2.
In a less-formalized organization, employees have
much freedom and can exercise discretion in the
way they do their work.
3.
Formalization
not
only
fosters
relatively
unstructured job behaviors, but also eliminates the
need for employees to consider alternatives.
4.
The degree of formalization can vary widely
between
organizations
and
even
within
organizations.

MECHANISTIC AND ORGANIC STRUCTURES

Organizations do not have identical structures. Even companies
of comparable size do not necessarily have similar structures.
A.
Two Models of Organizational Design. (See Exhibit 9-5)
1.
A mechanistic organization is an organizational
design that is rigid and tightly controlled. It is
characterized
by
high
specialization,
rigid
departmentalization, narrow spans of control, high
formalization, a limited information network, and
little participation in decision making by lower-level
employees.
2.
An organic organization is an organizational
design that is highly adaptive and flexible. It is
characterized by little work specialization, minimal
formalization, and little direct supervision of
employees.
3.
Under what circumstances is each design favored?
It depends on contingency variables.
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B.

Contingency Factors
Appropriate organizational structure depends upon four
contingency variables:
1.
Strategy and structure. The
organizations
strategy is one of the contingency variables that
influences organizational design.
a.
Alfred Chandler originated the strategystructure relationship. His finding that
structure follows strategy indicates that as
organizations change their strategies, they
must change their structure to support that
strategy.
b.
Most current strategy/structure frameworks
focus on three strategy dimensions:
1)
Innovation needs the flexibility and
free flow of information present in the
organic organization.
2)
Cost
minimization
needs
the
efficiency, stability, and tight controls
of the mechanistic organization.
3)
Imitation
uses
some
of
the
characteristics of both mechanistic
and organic organizations.
2.
Size and structure.
Considerable historical
evidence indicates that an organizations size
significantly
affects
its
structure.
Larger
organizations tend to have more specialization,
departmentalization,
centralization,
and
formalization,
although
the
size-structure
relationship is not linear.
3.
Technology has been shown to affect an
organizations choice of structure.
a.
Every organization uses some form of
technology to transform inputs into outputs.
b.
Joan Woodwards study of structure and
technology shows that organizations adapt
to their technology. She found that three
distinct technologies have increasing levels
of complexity and sophistication.
1)
Unit production is the production of
items in units or small batches.
2)
Mass production is the production of
items in large batches.
3)
Process
production
is
the
production of items in continuous
processes.
c.
Woodward found in her study of these three
groups that distinct relationships exist
among these technologies, the subsequent
structure of the organization, and the
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4.

3.

effectiveness of the organization. Exhibit 96 and provides a summary of these findings.

Environmental uncertainty and structure
Environmental uncertainty is the final contingency
factor that has been shown to affect organizational
structure. Environmental uncertainty may be
managed
by
making
adjustments
in
the
organizations structure. The more uncertain the
environment, the more flexible and responsive the
organization needs to be.

COMMON ORGANIZATIONAL DESIGNS

A.
Traditional Organizational Designs
A number of different organizational designs can be found
in todays organizations. Exhibit 9-8 summarizes the
strengths and weaknesses of each of these designs.
1.
A simple structure is an organizational design
with low departmentalization, wide spans of
control, authority centralized in a single person,
and little formalization.
a.
Strengths of the simple structure are its
flexibility, speed, clear accountability and
low maintenance costs.
b.
The major limitation of a simple structure is
that it is most effective when used in small
organizations.
2.
As an organization grows, its structure tends to
become more specialized and formalized. When
contingency factors favor a bureaucratic or
mechanistic design, one of the following two
options is likely to be used:
a.
A functional structure is an organizational
design that groups similar or related
occupational specialties together.
b.
A divisional structure is an organizational
structure
made
up
of
separate,
semiautonomous units or divisions.

138

Thinking Critically About

Ethics

Workplace Values and

Workplace Skills

This critical thinking exercise asks students to think about an organizations

responsibility to the security of its employees. As more fast-food restaurants
are opening earlier and closing later, the question arises if these companies
inadvertently putting their employees at higher risk for robbery or other
criminal behavior. Students are asked what they think about companies having
young and inexperienced employees working at fast food chains after
midnight. Are these companies putting the lives of these employees at risk?
This example is part of a much larger issue for organizations, that is, the
extent to which an organization changes in response to environmental and
customer demands. You may want to have students think of cases where
companies have changed to keep pace with their competitors, i.e. companies
opening on Sunday. Were these changes positive for the long-term health of
the organization, or the motivation and morale of employees?

B.

Contemporary Organizational Designs

Many of todays organizations are finding that traditional
hierarchical organizational designs are not appropriate for
their increasingly dynamic and complex business
environments.
1.
Team structures
One of the newer concepts in organizational design
is team structure, an organizational structure in
which the entire organization is made up of work
groups or teams.
2.
Matrix and project structures
Other variations in organizational arrangements are
based on the fact that many of todays
organizations deal with work activities of different
time requirements and magnitude.
a.
One of these arrangements is the matrix
structure, an organizational structure that
assigns specialists from different functional
departments to work on one or more
projects. (See Exhibit 9-9)
b.
Another of these designs is the project
structure, an organizational structure in
which employees continuously work on
projects.
3.
The Boundaryless Organization
Another approach to organizational design is the
boundaryless organization, an organization
whose design is not defined by, or limited to, the
horizontal, vertical, or external boundaries imposed
by a predefined structure.
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4.

5.

C.

The Virtual Organization

A virtual organization operates with a small core
of full-time employees, while hiring outside
specialists to work on projects temporarily as
needed.
The Network Organization
A network organization uses its own employees
to do some work activities, while using networks of
outside suppliers to provide other needed product
components or work processes.

Todays Organizational Design Challenges

Many of todays organizations are finding that traditional
hierarchical organizational designs are not appropriate for
their increasingly dynamic and complex business
environments.
1.
Keeping employees connected
Todays managers face the major challenge of
keeping their employees connected to the
organization, since these employees are often
situated in widely dispersed locations and are
constantly moving.
2.
Building a learning organization
Many
organizations
have
adopted
the
organizational
philosophy
of
a
learning
organization, which is an organization that has
developed the capacity to continuously learn,
adapt, and change.

Managing IT

ITs Impact on
Organizational Design: The
Good and the Bad

140

Many of your students will be knowledgeable about some of the fascinating

technologies that are currently changing the way work is accomplished in
todays business environment. The following activity should enhance students
understanding of these technological capabilities and give them an opportunity
to enhance their communication and presentation skills.
After discussing Managing ITITs Impact on Organizational Design: The Good
and the Bad in class, ask your students to do research on the latest
technologies used in the business world. Each student should locate
information (including a photograph when applicable) describing one new
technological innovation used by businesspersons to accomplish work more
effectively and efficiently. The student should make one PowerPoint slide
illustrating the nature and purpose of this new technological innovation.
Students can present their slides to the class along with a brief description of
the product or technology.
A number of Internet sites could serve as a valuable resource when students
conduct
their
research.
One
such
site
is
[http://www.businessweek.com/technology/reviews/].

3.

Managing global structural issues

a.
Researchers have concluded that although
structures of organizations around the globe
are
similar,
cultural
uniqueness
is
maintained because of differences in
behavior within companies in different areas
of the world.
b.
These differences imply that managers must
be aware and respectful of the values and
practices of different cultures in todays
worldwide business environment.

Answers to Thinking About Management

Issues

1.

Can an organizations structure be changed quickly? Why or

why not? Should it be changed quickly? Explain
The speed with which structural changes can be implemented
depends partly upon an organizations size. A small organization
is usually able to change its structure more rapidly than a larger
one because a smaller company has fewer employees who are
involved in the restructuring process. However, a large
organization can change its structure and often does in response
to changing environmental conditions and changing strategies.

2.

Would you rather work in a mechanistic or an organic

organization? Why?
Students answers to this question will vary. Many students
prefer the structure provided by a mechanistic organization,
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whereas others would be less productive in an organization with

structural rigidity. Note that SAL #III.A.1 What Type of
Organization Structure Do I Prefer? addresses whether each of
your students would like to work in a bureaucracy (a
mechanistic organization). Students might want to revisit this
assessment in answering this question.
3.

What types of skills would a manager need to effectively work in

a project structure? In a boundaryless organization? In a
learning organization?
In all of these types of organizations, flexibility and adaptability
are critical. In the project structure, conflict management skills
are particularly useful. In a boundaryless organization, the
ability to interact effectively with people at all levels and in all
areas of the organization is crucial to success. In a learning
organization, a manager needs the ability to communicate both
by listening and by speaking because of the frequency and
importance of sharing information in this type of organization.

4.

The boundaryless organization has the potential to create a

major shift in our living and working patterns. Do you agree or
disagree? Explain.
Students responses to this will vary. This question could serve
as an interesting springboard for a class debate. Students could
break into teams, with each team taking the opposite position in
the debate. Give students an opportunity to discuss their
strategy as a team before presenting their viewpoints to the
class.

5.

With the availability of advanced information technology that allows an

organizations work to be done anywhere at any time, is organizing still an
important managerial function? Why or why not?
Although an organizations work may be done anywhere at any time, organizing
remains a vital managerial function because the work that must be accomplished
still must be divided, grouped, and coordinated.

6.

Researchers are now saying that efforts to simplify work tasks actually have
negative resultsfor both companies and their employees. Do you agree? Why or
why not?
Studies as far back as 1924 show that simplified jobs lead to boredom. In 1950
other researchers found that highly segmented and simplified jobs resulted in lower
employee morale and output. Other consequences of low employee motivation
include absenteeism and high employee turnover, both very costly for businesses.

Your Turn to be a Manager

Find three different examples of organizational charts. In a report, describe each of

them. Try to decipher the organizations use of organizational design elements,
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especially departmentalization, chain of command, centralizationdecentralization,

and formalization.

Survey at least 10 different managers about how many employees they supervise.
Also ask them whether they feel they could supervise more employees or whether
they feel the number they supervise is too many. Graph your survey results and
write a report describing what you found. Draw some conclusions about span of
control.

Draw an organizational chart of an organization with which youre familiar (where

you work, a student organization to which you belong, your college or university,
etc.). Be very careful in showing the departments (or groups) and especially be
careful to get the chain of command correct. Be prepared to share your chart with
the class.

Using the organizational chart you just created, redesign the organizations
structure. What structural changes might make this organization more efficient and
effective? Write a report describing what you would do and why. Be sure to
include an example of the original organizational chart as well as a chart of your
proposed revision of the organizational structure.

Steves and Marys suggested readings: Gary Hamel, The Future of Management
(Harvard Business School Press, 2007); Thomas Friedman, The World Is Flat 3.0
(Picador, 2007); Harold J. Leavitt, Top Down: Why Hierarchies Are Here to Stay
and How to Manage Them More Effectively (Harvard Business School Press,
2005); and Thomas W. Malone, The Future of Work (Harvard Business School
Press, 2004).

Choose one of the three topics discussed in the section on todays organizational
design challenges. Research this topic and write a paper about it. Focus on finding
current information and current examples of companies dealing with these issues.

In your own words, write down three things you learned in this chapter about
being a good manager.

Self-knowledge can be a powerful learning tool. Go to mymanagementlab and

complete these self-assessment exercises: How Well Do I Handle Ambiguity? What
Type of Organizational Structure Do I Prefer? How Good Am I at Playing
Politics? How Willing Am I to Delegate? Using the results of your assessments,
identify personal strengths and weaknesses. What will you do to reinforce your
strengths and improve your weaknesses?

WORKING
Exercise

TOGETHERTeam-Based

Form groups of three to four students and give several groups the
designation effective delegating and other groups the designation
ineffective delegating. After reading the Skills Module on Delegating,
each group should develop a role-play situation demonstrating
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delegation according to their designation (effective or ineffective

delegating). Have each group present their role-play scenario to the
class.
In lieu of this role-play activity, you might encourage students to
describe situations of effective or ineffective delegating they have
experienced in work situations or other group situations.
Answers to Case Application Questions

A New Kind of Structure

1.

Describe and evaluate what Pfizer is doing.

What Jordan Cohen has created at Pfizer is a network organization. Its a
form of the boundaryless organization structure where company employees
concentrate on the important aspects of the job, i.e. those elements that are
related to the companys core competencies, and other tasks are
outsourced to another organization.

2.

What structural implicationsgood and baddoes this approach have?

(Think in terms of the six organizational design elements.)
Have students break into groups and discuss how the advantages and
disadvantages of using a network organizational structure from the
perspective of:
Work Specialization
Departmentalization
Chain Of Command
Span Of Control
Centralization And Decentralization
Formalization
Some groups may be assigned more than one design element. For more
information on Pfizers new structure, go to the web
http://www.fastcompany.com/magazine/122/scuttling-scut-work.html.

3.

Do you think this arrangement would work for other types of

organizations? Why or why not?
The network organization design used by Pfizer has helped to balance
recent layoffs the company experienced after a nearly $4 billion yearly
budget cut. According to managers in the Fast Company article, the OOF
has cut some project costs by 90%. While this program has been a success
for Pfizer, it may not be realistic for other companies that either (a) have
not experienced such deep cuts in personnel, or (b) have such high
personnel costs.

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4.

What role do you think organizational structure plays in an organizations

efficiency and effectiveness? Explain.
Organizational structure plays a key role in enabling a company to function
smoothly, to remain responsive to its internal and external stakeholders,
and to adapt to changes in the marketplace. Innovation is facilitated by
fewer layers of management, and students have already learned that the
survival and success of a company is usually dependent upon its ability to
function as a learning organization that promotes innovation.

ADDITIONAL CHAPTER INFORMATION

You may want to visit the following URL:
[http://www.peoplesoft.com/media/zh/pdf/oct02_story1.pdf].
Here you will find an article entitled FedEx Delivers Employee Empowerment and
Process: Improvement in Real Time with PeopleSoft 8 HRMS. Read how globally
distributed firms can utilize technology in creating learning organizations and in
empowering employees.

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