1. Designing Organizational Structures
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.

2. Merritt’s Bakery’s Evolving Organizational Structure
Merritt’s Bakery has grown over the years, and throughout this growth the Tulsa, Oklahoma, company has adapted its organizational structure.
Merritt’s Bakery has grown over the years, and throughout this
growth the Tulsa, Oklahoma, company has adapted its
organizational structure

3. Organizational Structure Defined
Division of labor and patterns of coordination, communication, workflow, and formal power that direct organizational activities
Relates to many OB topics (e.g. job design, teams, power, work standards, information flow)
Division of labor and patterns of coordination, communication,
workflow, and formal power that direct organizational activities
• Important part of organizational behavior – more than just an
organizational chart
• Relates to job design, information flow, work standards and
rules, team dynamics, and power relationships

4. 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
• Subdivision of work into separate jobs assigned to different
people – leads to job specialization
• Division of labor is limited by the feasibility of coordinating that
work
• Potentially increases work efficiency – tasks mastered quickly,
reduce training costs, easer to match people with jobs
• Necessary as company grows and work becomes more complex

5. Coordinating Work Activities
Informal communication
Sharing information, forming common mental models
Good for flexibility, nonroutine and ambiguous situations
Easiest in small firms
Larger firms apply informal communication through
Liaison roles
Integrator roles
Concurrent engineering
1. Informal communication
• Sharing information on mutual tasks and forming common
mental models to synchronize work activities
• Good in nonroutine and ambiguous situations – allows
exchange of information through face-to-face and other media
rich channels
• Easiest in small firms – information technologies have
leveraged this coordinating mechanism in large firms
Larger organizations also apply informal communication
through:
1. Liaison roles – employees who are expected to communicate and
share information with co-workers in other work units
2. Integrator roles – Employees responsible for coordinating a work
process by encouraging others to share information
3. Concurrent engineering – cross-functional project team of people
from various functional departments

6. Coordinating Work Activities
Formal hierarchy
Direct supervision
Assigns legitimate power to manage others
Necessary in most firms, but has problems
Standardization
Standardized processes (e.g., job descriptions)
Standardized outputs (e.g., sales targets)
Standardized skills (e.g., training)
2. Formal hierarchy
• Direct supervision i.e. the chain of command
• Assigns formal (legitimate) power to manage others
• Necessary in most firms, but has problems e.g. conflicts with
employee autonomy and involvement
3. Standardization
• Standardized processes e.g. job descriptions and procedures
• Standardized outputs e.g. clearly defined goals and output
measures (such as sales targets)
• Standardized skills e.g. extensive training so people acquire
precise role behaviors

7. Elements of Organizational Structure
Department-alization
Span of Control
Elements of Organizational
Structure
Four basic elements of organizational structure
1. Span of control
2. Centralization
3. Formalization
4. Departmentalization
Formalization
Centralization

8. KenGen’s Flatter Structure
KenGen, Kenya’s leading electricity generation company, reduced its hierarchy from 15 layers to just 6 layers. “This flatter structure has reduced bureaucracy and it has also improved teamwork,” explains KenGen executive Simon Ngure.
KenGen, Kenya’s leading electricity generation company,
reduced its hierarchy from 15 layers to just 6 layers. “This
flatter structure has reduced bureaucracy and it has also
improved teamwork,” explains KenGen executive Simon Ngure
13-8

9. Span of Control Number of people directly reporting to the next level
Related to coordination through direct supervision
Wider span of control possible when:
Other coordinating mechanisms are present
Routine tasks
Low employee interdependence
Number of people directly reporting to the next level
• Related to coordination through direct supervision
• Narrow span of control – few people report directly to a
manager
Wider span of control is possible when:
1. Other coordinating mechanisms are present e.g. self-directed
teams coordinate through informal communication and
specialized knowledge
2. Tasks are routine – less frequent need for direction from
supervisors
3. Low employee interdependence – supervisors will not have to
spend as much time resolving conflicts, coaching and providing
feedback
13-9

10. Tall vs Flat Structures
As companies grow, they:
Build a taller hierarchy
Widen span, or both
Problems with tall hierarchies
Overhead costs
Worse upward information
Focus power around managers, so staff less empowered
Span of control is interconnected with organizational size
(number of employees) and number of layers in the hierarchy
As companies grow, they:
• Build a taller hierarchy
• Widen span of control, or both
Problems with tall hierarchies
• Higher overhead costs – more managers
• Lower quality and less timely information from the external
environment – information is transmitted slowly (or not at all)
up the hierarchy
• Focus power around managers rather than employees –
undermines employee empowerment and engagement
13-10

11. Centralization and Decentralization
Centralization -- Formal decision making authority is held by a few people, usually at the top
Decentralization increases as companies grow
Varying degrees of centralization in different areas of the company
Example: sales decentralized; info systems centralized
Information Systems
Production
Sales
Upper Mgt
Middle Mgt
Front line
Supervisory
Upper Mgt
Upper Mgt
Middle Mgt
Middle Mgt
• Centralization – formal decision making authority held by a
small group of people, typically at the top of the hierarchy
• Decentralization – decision authority and power dispersed
throughout the organization
• Firms decentralize as they get larger and older
• Varying degrees of centralization can occur simultaneously in
different parts of the organization e.g. decentralized marketing
decisions to remain responsive to local markets; centralized
production to improve cost efficiencies
Supervisory
Supervisory
Front line
Front line
= locus of decision making authority

12. Formalization
The degree to which organizations standardize behavior through rules, procedures, formal training, and related mechanisms.
Formalization increases as firms get older, larger, and more regulated
Problems with formalization
Reduces organizational flexibility
Discourages organizational learning/creativity
Reduces work efficiency
Increases job dissatisfaction and work stress
Degree to which organizations standardize behavior through
rules, procedures, formal training, and related mechanisms.
• Formalization increases as firms get older, larger, and more
regulated
Problems with formalization
• Reduces organizational flexibility – employees follow prescribed
behaviors even when the situation calls for a customized
response
• Discourages organizational learning and creativity
• Reduces work efficiency – work rules sometimes become so
convoluted they reduce efficiency
• Increases job dissatisfaction and work stress
• Rules become the focus of attention

13. TAXI’s Organic Structure
TAXI, Canada’s creative agency of the decade, has an organic structure that relies on small teams, low formalization, and decentralized decision making. “We needed a flexible infrastructure, able to move with the pace of change,” says co-founder Paul Lavoie (right in photo with CEO Rob Guenette).
TAXI, Canada’s creative agency of the decade, has an organic
structure that relies on small teams, low formalization, and
decentralized decision making. “We needed a flexible
infrastructure, able to move with the pace of change,” says cofounder
Paul Lavoie (right in photo) with CEO Rob Guenette.

14. Mechanistic vs. Organic Structures
Mechanistic Structure
Narrow span of control
High formalization
High centralization
Organic Structure
Wide span of control
Low formalization
Decentralized decisions
Mechanistic structure
• Narrow span of control – large hierarchies of people in
specialized roles
• High degree of task formalization – many rules and procedures
rigidly defined, vertical communication
• High degree of centralization – limited decision making at lower
levels
• Operate better in stable environments because they rely on
efficiency and routine behaviors
Organic structure
• Wide span of control
• Low formalization – fluid tasks, free-flowing communication,
values knowledge
• Highly decentralized decision making
• Work better in rapidly changing environments because they are
more flexible and responsive to these changes
Note: Liability of newness – newness makes start-up firms
more organic, however, employees may lack sufficient
experience for effectiveness

15. Effects of Departmentalization
Specifies how employees and their activities are grouped together
Three functions:
Establishes chain of command
Creates common mental models, measures of performance, etc
Encourages staff to coordinate through informal communication
Specifies how employees and their activities are grouped
together – reflected in organizational chart
Three functions of departmentalization:
1. Establishes chain of command (supervision structure)
2. Creates common mental models, measures of performance
3. Encourages staff to coordinate through informal communication
– members typically work near each other
Features of Simple Structures
• Employ only a few people and typically offer only one distinct
product or service
• Minimal hierarchy – employees usually report to the owners
• Roles are broadly defined – to maintain flexibility
• Informal communication for coordination – minimizes walls
between employees
• Centralized structure – owners provide direct supervision to
coordinate tasks

16. Functional Organizational Structure
Organizes employees around specific knowledge or other resources (e.g., marketing, production)
CEO
Organizes employees around specific knowledge or resources
(marketing, production)
Typically centralized – to coordinate diverse activities
Most firms have functional structure at some level of the hierarchy
or at some time in their history
Finance
Production
Marketing

17. Evaluating Functional Structures
Benefits
Economies of scale
Supports professional identity and career paths
Easier supervision
Limitations
More emphasis on subunit than organizational goals
Higher dysfunctional conflict
Poorer coordination -- requires more controls
Benefits
• Economies of scale – specialized pools of talent
• Supports employee identity with the specialization or profession
• Direct supervision is easier – employees have common issues/
expertise
Limitations
• More emphasis on skills/professional needs than on the
company’s product, service, or client needs
• Higher dysfunctional conflict across units
• Poorer coordination – requires more controls

18. Divisional Structure
Organizes employees around outputs, clients, or geographic areas
CEO
Organizes employees around geographic areas, outputs
(products or services), or clients
Healthcare
Lighting
Products
Consumer Lifestyle

19. Divisional Structure Different forms of divisional structure
Geographic structure
Product structure
Client structure
Best form depends on environmental diversity or uncertainty
Different forms of divisional structure
• Geographic divisional structure – organizes employees around
distinct regions of the country or world
• Product divisional structure – organizes employees around
distinct outputs
• Client divisional structure – organizes employees around
specific customer groups
Best form depends on primary source of environmental
diversity or uncertainty
• e.g. product structure if company sells several types of
products and customer preferences and government
regulations are similar
• e.g. geographic structure if customers have different needs
across regions and government regulations differ

20. Globally Integrated Enterprise
Fewer geographic divisions because:
Less need for local representation
Reduced geographic variation
More global clients
Globally integrated enterprise
Connects work processes around the world rather than replicating them within each country or region
Functional heads are geographically distributed
Firm’s “home” country is no longer focus of business
Fewer geographic regions because
• Less need for local representation – clients can purchase online
and communicate with businesses from anywhere
• Reduced geographic variation – consumer preferences are
converging around the world
• More global clients who demand one global point of purchase
Globally integrated enterprise
• Work processes and executive functions are distributed around
the world through global centers, rather than developed in a
home country and replicated in satellite countries or regions
• Functional heads are geographically distributed – sensitive to
cultural and market differences
• Firm’s “home” country is no longer focus of business –
divisional

21. 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
Revising divisional structure emphasis produces politics and conflict among executives
Benefits
• Building block structure – accommodates growth
• Focuses employee attention on products or customers rather
than tasks
Limitations
• Duplicates resources (e.g. production equipment, expertise);
inefficient use of resources because resources are not pooled
• Specializations are dispersed, creating silos of knowledge
• Politics/conflict among executives as organizations revise their
structures to align with primary source of environmental
diversity and uncertainty

22. Team-Based Structure Self-directed work teams
Teams organized around work processes
Typically organic structure
Usually found within divisionalized structure
• Built around self-directed work teams
• Teams organized around work processes
• Typically organic structure – wide span of control because
teams operate with minimal supervision; highly decentralized
with day-to-day decisions made by team members; low
formalization i.e. relatively few rules
• Usually found within divisionalized structure, however, some
firms apply team-based structure throughout the organization
e.g. W.L. Gore & Associates
13-22

23. 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
Benefits
• Responsive, flexible in turbulent environments
• Lower administrative costs – less formal hierarchy
• Quicker and informed decision making
Limitations
• Ongoing need for costly interpersonal skill training
• Teamwork may take more time during early stages of team
development
• Role ambiguity increases employee stress
• Problems with supervisor role changes e.g. loss of functional
power; unclear career progression
• Duplication of resources across teams

24. Matrix Structure (Project-based)
Employees ( ) are temporarily assigned to a specific project team and have a permanent functional unit
CEO
Game1
Project Leader
Game2
Game3
Audio Dept
Leader
Software Dept Leader
Art Dept Leader
In this example (similar to BioWare’s matrix structure):
• Organized around functions (art, audio, programming) and
team-based game development projects
• Employees are assigned to a cross-functional team responsible
for a specific game project, yet also belong to a permanent
functional unit from which they are reassigned
Note: Many large global firms use matrix structure that has
geographic divisions on one axis and products/services or
client divisions on the other

25. Evaluating Matrix Structures
Benefits
Uses resources and expertise effectively
Improves communication, flexibility, innovation
Focuses specialists on clients and products
Supports knowledge sharing within specialty
Solution when two divisions have equal importance
Limitations
Increases goal conflict and ambiguity
Two bosses dilutes accountability
More conflict, organizational politics, and stress
Benefits
• Uses resources and expertise effectively – good for fluctuating
workloads
• Improves communication, project flexibility, innovation when
managed properly
• Focuses employees on serving clients or creating products
• Supports knowledge sharing within specialty across groups
• Solution when two divisions deserve equal importance
Limitations
• Increases goal conflict (among managers who equally share
power) and ambiguity related to priorities
• Two bosses dilutes accountability
• More dysfunctional conflict and stress

26. Network Organizational Structure
Product development partner (France)
Call center partner (Philippines)
Alliance of firms creating a product or service
Supporting firms beehived around a “hub” or “core” firm
Core Firm (USA)
Accounting partner
(USA)
Package design partner (UK)
Alliance of firms creating a product/service
• Supporting firms beehived around a “hub” or “core” firm
• Emphasis on core competencies
• More likely to form network structures when technology is
changing quickly and production processes are complex –
outsource to specialists
Assembly partner (China)

27. 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
Less control over subcontractors than in-house
Benefits
• Highly flexible – easy to change alliances
• Potentially better use of skills and technology
• Not saddled with nonessential facilities and resources
Limitations
• Exposed to market forces – risk of higher costs
• Less control over subcontractors than in-house

28. External Environment & Structure
Dynamic
• High rate of change
• Use team-based, network, or other organic structure
Stable
• Steady conditions, predictable change
• Use mechanistic structure
Complex
• Many elements (such as stakeholders)
• Decentralize
Simple
• Few environmental elements
• Less need to decentralize
What is the most appropriate organizational structure?
External Environment & Structure
1. Dynamic vs. stable environments
• Dynamic environments: (high rate of change, novel situations)
– organic structures are best e.g. team-based, network
• Stable environments: (regular cycles of activity) – mechanistic
structures are best (when environment is predictable)
2. Complex vs. simple environments
• Complex environment – more elements to consider
• Simple environments – few things to monitor
• Decentralized structures better for complex environments
because decisions are pushed down to people with the
necessary information to make informed choices

29. External Environment & Structure (con’t)
Diverse
• Several products, clients, regions
• Use divisional form aligned with the diversity
Integrated
• Single product, client, place
• Use functional structure, or geographic division if global
Hostile
• Competition and resource scarcity
• Use organic structure for responsiveness
Munificent
• Plenty of resources and product demand
• Less need for organic structure
3. Diverse vs. integrated environments
• Diverse environment – greater variety of products/services,
clients, regions
• Integrated environment – only one client, product, and
geographic area
• The more diversified the environment, the more the firm needs
to use a divisional structure aligned with that diversity
4. Hostile vs. munificent environments
• Hostile environment – face resource scarcity and more
competition; dynamic
• Munificent environment – plenty of resources and product
demand
• Organic structures most appropriate in hostile environments –
if environments are extremely hostile, organization may need
to temporarily centralize so that decisions can be made more
quickly and executives can feel in control
Effects of

30. 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
As organizations grow, they have:
1. More division of labor (job specialization)
2. More elaborate coordinating mechanisms (e.g. standardization)
3. More hierarchy and formalization
4. More decentralization – decision making pushed down

31. 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
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 work
• Example: when employees perform tasks with high variety and
low analyzability an organic structure should be used e.g.
research

32. Organizational Strategy
Structure follows strategy
Strategy points to the environments in which the organization will operate
Leaders decide which structure to apply
Innovation strategy
Providing unique products or attracting clients who want customization
Cost leadership strategy
Maximize productivity in order to offer competitive pricing
Represents the decisions and actions applied to achieve the
organization’s goals
Structure follows strategy
• Strategy points to the environments in which the organization
will operate
• Leaders decide which structure to apply – results from
conscious human decisions
Compete through innovation
• Providing unique products or attracting clients who want
customization – more organic structure is preferred
Cost leadership strategy (low-cost strategy)
• Maximize productivity to offer competitive pricing – mechanistic
structure is preferred

33. Designing Organizational Structures