Organizational Structure and Design

In the past, organizations were commonly structured as bureaucracies. A bureaucracy is a form of organization based on logic, order, and the legitimate use of formal authority. Bureaucracies are meant to be orderly, fair, and highly efficient. Their features include a clear‐cut division of labor, strict hierarchy of authority, formal rules and procedures, and promotion based on competency.

Today, many people view bureaucracies negatively and recognize that bureaucracies have their limits. If organizations rely too much on rules and procedures, they become unwieldy and too rigid—making them slow to respond to changing environments and more likely to perish in the long run.

But management theory doesn’t view all bureaucratic structures as inevitably flawed. Instead, they ask these critical questions:

• When is a bureaucracy a good choice for an organization?
• What alternatives exist when a bureaucracy is not a good choice?

Research, conducted in England by Tom Burns and George Stalker in the early 1960s, attempted to answer these questions. Burns and Stalker studied industrial firms to determine how the nature of each firm’s environment affected the way the firm was organized and managed. They believed a stable, unchanging environment demanded a different type of organization than a rapidly changing one. Although a stable environment worked well under a bureaucracy, managers in constantly changing, innovative environments needed an organizational structure that allowed them to be responsive and creative.

As a result, two distinct frameworks, the mechanistic and organic structures, were identified.

The mechanistic structure, sometimes used synonymously with bureaucratic structure, is a management system based on a formal framework of authority that is carefully outlined and precisely followed. An organization that uses a mechanistic structure is likely to have the following characteristics:

• Clearly specified tasks

• Precise definitions of the rights and obligations of members

• Clearly defined line and staff positions with formal relationships between the two

• Tendency toward formal communication throughout the organizational structure

Perhaps the best example of a mechanistic structure is found in a college or university. Consider the very rigid and formal college entrance and registration procedures. The reason for such procedures is to ensure that the organization is able to deal with a large number of people in an equitable and fair manner. Although many individuals do not like them, regulations and standard operating procedures pretty much guarantee uniform treatment. But those same rules and procedures, with their time‐consuming communication and decision‐making processes, tend to bog down organizations.

Mechanistic organizations are appropriate when the external environment is fairly stable. The biggest drawback to the mechanistic structure is its lack of flexibility, which may cause an organization to have trouble adjusting to change and coping with the unexpected.

The organic structure tends to work better in dynamic environments where managers need to react quickly to change. An organic structure is a management system founded on cooperation and knowledge‐based authority. It is much less formal than a mechanistic organization, and much more flexible. Organic structures are characterized by

• Roles that are not highly defined.
• Tasks that are continually redefined.
• Little reliance on formal authority.
• Decentralized control.
• Fast decision making.
• Informal patterns of both delegation and communication.

Because the atmosphere is informal and the lines of authority may shift depending on the situation, the organic structure requires more cooperation among employees than does a bureaucracy.

One example of an organic structure is the Salvation Army. Although branches are located throughout the nation, the organization does not have a complex structure; it encourages different units to take on new challenges. The Salvation Army does not rely heavily on written rules and procedures. Therefore, this organization can create the procedures that work best as different situations arise. The Salvation Army’s ability to take on new tasks and to fulfill its mission regardless of the circumstances it faces is one reason why it’s a hallmark of organic organizations.

Factors Affecting Organizational Design

Although many things can affect the choice of an appropriate structure for an organization, the following five factors are the most common: size, life cycle, strategy, environment, and technology.

Organizational size

The larger an organization becomes, the more complicated its structure. When an organization is small — such as a single retail store, a two‐person consulting firm, or a restaurant — its structure can be simple.

In reality, if the organization is very small, it may not even have a formal structure. Instead of following an organizational chart or specified job functions, individuals simply perform tasks based on their likes, dislikes, ability, and/or need. Rules and guidelines are not prevalent and may exist only to provide the parameters within which organizational members can make decisions. Small organizations are very often organic systems.

As an organization grows, however, it becomes increasingly difficult to manage without more formal work assignments and some delegation of authority. Therefore, large organizations develop formal structures. Tasks are highly specialized, and detailed rules and guidelines dictate work procedures. Interorganizational communication flows primarily from superior to subordinate, and hierarchical relationships serve as the foundation for authority, responsibility, and control. The type of structure that develops will be one that provides the organization with the ability to operate effectively. That’s one reason larger organizations are often mechanistic—mechanistic systems are usually designed to maximize specialization and improve efficiency.

Organization life cycle

Organizations, like humans, tend to progress through stages known as a life cycle. Like humans, most organizations go through the following four stages: birth, youth, midlife, and maturity. Each stage has characteristics that have implications for the structure of the firm.

• Birth: In the birth state, a firm is just beginning. An organization in the birth stage does not yet have a formal structure. In a young organization, there is not much delegation of authority. The founder usually “calls the shots.”

• Youth: In this phase, the organization is trying to grow. The emphasis in this stage is on becoming larger. The company shifts its attention from the wishes of the founder to the wishes of the customer. The organization becomes more organic in structure during this phase. It is during this phase that the formal structure is designed, and some delegation of authority occurs.

• Midlife: This phase occurs when the organization has achieved a high level of success. An organization in midlife is larger, with a more complex and increasingly formal structure. More levels appear in the chain of command, and the founder may have difficulty remaining in control. As the organization becomes older, it may also become more mechanistic in structure.

• Maturity: Once a firm has reached the maturity phase, it tends to become less innovative, less interested in expanding, and more interested in maintaining itself in a stable, secure environment. The emphasis is on improving efficiency and profitability. However, in an attempt to improve efficiency and profitability, the firm often tends to become less innovative. Stale products result in sales declines and reduced profitability. Organizations in this stage are slowly dying. However, maturity is not an inevitable stage. Firms experiencing the decline of maturity may institute the changes necessary to revitalize.

Although an organization may proceed sequentially through all four stages, it does not have to. An organization may skip a phase, or it may cycle back to an earlier phase. An organization may even try to change its position in the life cycle by changing its structure.

As the life‐cycle concept implies, a relationship exists between an organization’s size and age. As organizations age, they tend to get larger; thus, the structural changes a firm experiences as it gets larger and the changes it experiences as it progresses through the life cycle are parallel. Therefore, the older the organization and the larger the organization, the greater its need for more structure, more specialization of tasks, and more rules. As a result, the older and larger the organization becomes, the greater the likelihood that it will move from an organic structure to a mechanistic structure.

Strategy

How an organization is going to position itself in the market in terms of its product is considered its strategy. A company may decide to be always the first on the market with the newest and best product (differentiation strategy), or it may decide that it will produce a product already on the market more efficiently and more cost effectively (cost‐leadership strategy). Each of these strategies requires a structure that helps the organization reach its objectives. In other words, the structure must fit the strategy.

Companies that want to be the first on the market with the newest and best product probably are organic, because organic structures permit organizations to respond quickly to changes. Companies that elect to produce the same products more efficiently and effectively will probably be mechanistic.

Environment

The environment is the world in which the organization operates, and includes conditions that influence the organization such as economic, social‐cultural, legal‐political, technological, and natural environment conditions. Environments are often described as either stable or dynamic.

• In a stable environment, the customers’ desires are well understood and probably will remain consistent for a relatively long time. Examples of organizations that face relatively stable environments include manufacturers of staple items such as detergent, cleaning supplies, and paper products.

• In a dynamic environment, the customers’ desires are continuously changing—the opposite of a stable environment. This condition is often thought of as turbulent. In addition, the technology that a company uses while in this environment may need to be continuously improved and updated. An example of an industry functioning in a dynamic environment is electronics. Technology changes create competitive pressures for all electronics industries, because as technology changes, so do the desires of consumers.

In general, organizations that operate in stable external environments find mechanistic structures to be advantageous. This system provides a level of efficiency that enhances the long‐term performances of organizations that enjoy relatively stable operating environments. In contrast, organizations that operate in volatile and frequently changing environments are more likely to find that an organic structure provides the greatest benefits. This structure allows the organization to respond to environment change more proactively.

Advances in technology are the most frequent cause of change in organizations since they generally result in greater efficiency and lower costs for the firm. Technology is the way tasks are accomplished using tools, equipment, techniques, and human know‐how.

In the early 1960s, Joan Woodward found that the right combination of structure and technology were critical to organizational success. She conducted a study of technology and structure in more than 100 English manufacturing firms, which she classified into three categories of core‐manufacturing technology:

• Small‐batch production is used to manufacture a variety of custom, made‐to‐order goods. Each item is made somewhat differently to meet a customer’s specifications. A print shop is an example of a business that uses small‐batch production.

• Mass production is used to create a large number of uniform goods in an assembly‐line system. Workers are highly dependent on one another, as the product passes from stage to stage until completion. Equipment may be sophisticated, and workers often follow detailed instructions while performing simplified jobs. A company that bottles soda pop is an example of an organization that utilizes mass production.

• Organizations using continuous‐process production create goods by continuously feeding raw materials, such as liquid, solids, and gases, through a highly automated system. Such systems are equipment intensive, but can often be operated by a relatively small labor force. Classic examples are automated chemical plants and oil refineries.

Woodward discovered that small‐batch and continuous processes had more flexible structures, and the best mass‐production operations were more rigid structures.

Once again, organizational design depends on the type of business. The small‐batch and continuous processes work well in organic structures and mass production operations work best in mechanistic structures.

Five Approaches to Organizational Design

Managers must make choices about how to group people together to perform their work. Five common approaches — functional, divisional, matrix, team, and networking—help managers determine departmental groupings (grouping of positions into departments). The five structures are basic organizational structures, which are then adapted to an organization’s needs. All five approaches combine varying elements of mechanistic and organic structures. For example, the organizational design trend today incorporates a minimum of bureaucratic features and displays more features of the organic design with a decentralized authority structure, fewer rules and procedures, and so on.

Functional structure

The functional structure groups positions into work units based on similar activities, skills, expertise, and resources (see Figure 1 for a functional organizational chart). Production, marketing, finance, and human resources are common groupings within a functional structure.

As the simplest approach, a functional structure features well‐defined channels of communication and authority/responsibility relationships. Not only can this structure improve productivity by minimizing duplication of personnel and equipment, but it also makes employees comfortable and simplifies training as well.

But the functional structure has many downsides that may make it inappropriate for some organizations. Here are a few examples:

• The functional structure can result in narrowed perspectives because of the separateness of different department work groups. Managers may have a hard time relating to marketing, for example, which is often in an entirely different grouping. As a result, anticipating or reacting to changing consumer needs may be difficult. In addition, reduced cooperation and communication may occur.

• Decisions and communication are slow to take place because of the many layers of hierarchy. Authority is more centralized.

• The functional structure gives managers experience in only one field—their own. Managers do not have the opportunity to see how all the firm’s departments work together and understand their interrelationships and interdependence. In the long run, this specialization results in executives with narrow backgrounds and little training handling top management duties.

Divisional structure

Because managers in large companies may have difficulty keeping track of all their company’s products and activities, specialized departments may develop. These departments are divided according to their organizational outputs. Examples include departments created to distinguish among production, customer service, and geographical categories. This grouping of departments is called divisional structure (see Figure 2). These departments allow managers to better focus their resources and results. Divisional structure also makes performance easier to monitor. As a result, this structure is flexible and responsive to change.

However, divisional structure does have its drawbacks. Because managers are so specialized, they may waste time duplicating each other’s activities and resources. In addition, competition among divisions may develop due to limited resources.

Matrix structure

The matrix structure combines functional specialization with the focus of divisional structure (see Figure 3). This structure uses permanent cross‐functional teams to integrate functional expertise with a divisional focus.

Employees in a matrix structure belong to at least two formal groups at the same time—a functional group and a product, program, or project team. They also report to two bosses—one within the functional group and the other within the team.

This structure not only increases employee motivation, but it also allows technical and general management training across functional areas as well. Potential advantages include

• Better cooperation and problem solving.

• Increased flexibility.

• Better customer service.

• Better performance accountability.

• Improved strategic management.

Predictably, the matrix structure also has potential disadvantages. Here are a few of this structure’s drawbacks:

• The two‐boss system is susceptible to power struggles, as functional supervisors and team leaders vie with one another to exercise authority.

• Members of the matrix may suffer task confusion when taking orders from more than one boss.

• Teams may develop strong team loyalties that cause a loss of focus on larger organization goals.

• Adding the team leaders, a crucial component, to a matrix structure can result in increased costs.

Team structure

Team structure organizes separate functions into a group based on one overall objective (see Figure 4). These cross‐functional teams are composed of members from different departments who work together as needed to solve problems and explore opportunities. The intent is to break down functional barriers among departments and create a more effective relationship for solving ongoing problems.

The team structure has many potential advantages, including the following:

• Intradepartmental barriers break down.

• Decision‐making and response times speed up.

• Employees are motivated.

• Levels of managers are eliminated.

• Administrative costs are lowered.

The disadvantages include:

• Conflicting loyalties among team members.

• Time‐management issues.

• Increased time spent in meetings.

Managers must be aware that how well team members work together often depends on the quality of interpersonal relations, group dynamics, and their team management abilities.

Network structure

The network structure relies on other organizations to perform critical functions on a contractual basis (see Figure 5). In other words, managers can contract out specific work to specialists.

This approach provides flexibility and reduces overhead because the size of staff and operations can be reduced. On the other hand, the network structure may result in unpredictability of supply and lack of control because managers are relying on contractual workers to perform important work.