Chapter Three
Fundamentals of
Organization Structure
Thomson Learning
© 2004
3-1
A Sample Organization Chart
CEO
Vice President
Finance
Chief
Accountant
Budget
Analyst
Vice President
Manufacturing
Plant
Superintendent
Maintenance
Superintendent
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© 2004
Director
Human Resources
Training
Specialist
Benefits
Administrator
3-2
Organizational Structures
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Functional
Functional + Cross-
Functional Linkages
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Divisional
Matrix
Horizontal
Modular
Hybrid
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3-3
Symptoms of Structural
Deficiency
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Decision making
is delayed / poor
quality:
Overloaded at top
Insufficient delegation
to bottom
Diagnosis: Inadequate
vertical (esp.) linkages
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3-4
Symptoms of Structural
Deficiency
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Lack of adaptive
response:
departmental ‘walls’
internal focus
Diagnosis: Inadequate
horizontal and external
linkages
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3-5
Symptoms of Structural
Deficiency
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Too much
conflict is
evident:
Lack of goal
congruence
Sub-optimization
Diagnosis:
Inadequate
horizontal linkages
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3-6
The Relationship of Organization
Design to Efficiency vs. Learning
Outcomes
Horizontal Organization
Designed for Learning (Exploration)
Dominant
Structural
Approach
Horizontal structure is dominant
• Shared tasks, empowerment
• Relaxed hierarchy, few rules
• Horizontal, face-to-face communication
• Many teams and task forces
• Decentralized decision making
Vertical structure is dominant
• Specialized tasks
• Strict hierarchy, many rules
• Vertical communication and reporting systems
• Few teams, task forces or integrators
• Centralized decision making
Vertical Organization
Designed for Efficiency (Exploitation)
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3-7
Ladder of Non-Structural Mechanisms
for Vertical Linkage and Coordination
Amount of Horizontal
Coordination Required
H IGH
Vertical
Information Systems
Rules & Plans
LOW
Hierarchical Referral
LOW
HIGH
Information Capacity of Linkage Mechanism
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3-8
Ladder of Non-Structural Mechanisms
for Horizontal Linkage and Coordination
Teams
Amount of Horizontal
Coordination Required
H IGH
Full-time Integrators
Task Forces
Direct Contact
LOW
Information Systems
LOW
HIGH
Cost of Coordination in
Time and Human Resources
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3-9
Project Manager Location
in the Structure (Full-time Integrators)
President
Finance
Department
Financial
Accountant
Budget
Analyst
Management
Accountant
Engineering
Department
Product
Designer
Draftsperson
Electrical
Designer
Marketing
Department
Market
Researcher
Purchasing
Department
Buyer
Buyer
Project Manager
New
Product B
Buyer
Project Manager
New
Product C
Advertising
Specialist
Market
Planner
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© 2004
Project Manager
New
Product A
3-10
Teams Used for Horizontal
Coordination at Wizard Software
Company
President
Marketing Vice Pres.
Videogames
Sales Manager
Programming Vice Pres
Videogames
Chief Engineer
Memory Products
International Manager
Advertising Manager
Videogames Basic Research
Supervisor
Applications and Testing
Supervisor
Videogames Product Team
Memory Products
Sales Manager
Research Vice Pres
Memory Products
Chief Programmer
Memory Products
Research Supervisor
Memory Products Team
Customer Service
Manager
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Procurement
Supervisor
3-11
Structural Design Options for
Grouping Employees into
Departments
Functional
Grouping
CEO
Engineering
Marketing
Divisional
Grouping
Product
Division 1
Manufacturing
CEO
Product
Division 2
Product
Division 3
Source: Adapted from David Nadler and Michael Tushman,
Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.
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© 2004
3-12
Strengths and Weaknesses of
Functional Organization Structure
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STRENGTHS:
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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
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the Answer,”
Organizational Dynamics (Winter 1979): 429.
WEAKNESSES:
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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
Involves restricted view of
organizational goals
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3-13
Geographical Structure
for Apple Computer
CEO
Steve Jobs
Apple
Products
Apple
Americas
Apple
Europe
Apple
Pacific
Canada
France
Australia
Latin
America/
Caribbean
Sales
Service and
Marketing
to Regions
Source: www.apple.com
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Japan
Asia
3-14
Strengths and Weaknesses of
Divisional Organization Structure
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STRENGTHS:
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Suited to fast change in
unstable environment
Leads to client satisfaction
because product responsibility
and contact points are clear
Involves high coordination
across functions
Allows units to adapt to
differences in products,
regions, clients
Best in large organizations with
several products
Decentralizes decision-making
Source: Adapted from Robert Duncan, “What Is the
Right Organization Structure? Decision Tree Analysis
Provides the Answer,” Organizational Dynamics
(Winter 1979): 431.
Thomson Learning
© 2004
WEAKNESSES:
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Eliminates economies of
scale in functional
departments
Leads to poor
coordination across
product lines
Eliminates in-depth
competence and
technical specialization
Makes integration and
standardization across
product lines difficult
3-15
Reorganization from Functional
Structure to Divisional Structure at
Info-Tech
Functional
Structure
Info-Tech
President
R&D
Manufacturing
Divisional
Structure
R&D
Accounting
Marketing
Info-Tech
President
Electronic
Office
Virtual
Publishing
Automation
Reality
Mfg
Acctg
Mktg
R&D
Mfg
Acctg
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© 2004
Mktg
R&D
Mfg
Acctg
Mktg
3-16
Structural Design Options for
Grouping Employees (Continued)
Multifocused
Grouping
CEO
Marketing
Manufacturing
Product
Division 1
Product
Division 2
Source: Adapted from David Nadler and Michael
Tushman, Strategic Organization Design (Glenview, Ill.:
Scott Foresman, 1988), 68.
Thomson Learning
© 2004
3-17
Dual-Authority Structure in a
Matrix Organization
President
Director
of Product
Operations
Design
Vice
President
Mfg
Vice
President
Marketing
Vice
President
Controller
Procurement
Manager
Product
Manager A
Product
Manager B
Product
Manager C
Product
Manager D
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3-18
Strengths and Weaknesses of
Matrix Organization Structure
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STRENGTHS:
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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
Provides opportunity for
both functional and product
skill development
Best in medium-sized
organizations with multiple
products
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the
Answer,”Organizational Dynamics (Winter 1979): 429.
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 and adopt collegial
rather than vertical-type
relationships
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Requires great effort to maintain
© 2004
3-19
power balance

Structural Design Options for
Grouping Employees (Continued)
Horizontal
Grouping
CEO
Human Resources
Finance
Core
Process 1
Core
Process 2
Source: Adapted from David Nadler and Michael Tushman,
Strategic Organization Design (Glenview, Ill.: Scott Foresman,
1988), 68.
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© 2004
3-20
A Horizontal Structure
Top
Management
Team
Process
Owner
Team
1
Market
Analysis
Research
Team
2
Product
Planning
Team
3
Testing
Customer
New Product Development Process
Process
Owner
Team
1
Analysis
Sources: Based on Frank Ostroff,
The Horizontal Organization, (New York:
Oxford University Press, 1999); John A. Byrne,
“The Horizontal Corporation,” Business Week,
December 20, 1993, 76-81; and Thomas A. Stewart,
“The Search for the Organization of Tomorrow,”
Fortune, May 19, 1992, 92-98.
Purchasing
Team
2
Material
Flow
Team
3
Distrib.
Customer
Procurement and Logistics Process
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© 2004
3-21
Strengths and Weaknesses of
Horizontal Structure
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STRENGTHS:
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WEAKNESSES:
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—common
commitment to meeting objectives
Improves quality of life for
employees by offering them the
opportunity to share responsibility,
make decisions, and be
accountable for outcomes
Thomson Learning
© 2004
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Determining core processes
to organize around 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
3-22
Modular Structure
Cutting Edge Design
People ‘R’ Us
Product Design
HR Admin
Widgets Inc.
Build Masters
Manufacturing
Ace Logistics
Procurement & Distribution
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© 2004
3-23
Strengths and Weaknesses of
Modular Design
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Strengths
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Enables small org’s to obtain
talent & resources worldwide
Gives immediate reach & scale
without large investments in
factories, equip, distribution
Enables the org to be highly
flexible & responsive to change
Reduces administrative
overhead costs
-
-
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-
Weaknesses
Managers do not have hands-on
control of many activities and
employees (Quality assurance)
Requires time & skill to manage
relationships and possible
conflict with contract partners
There is a risk of organizational
failure if a partner fails to
deliver or goes out of business
Employee commitment
weakened by divided loyalties
and feeling that can be replaced
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3-24
Hybrid Structure
Part 1. Sun Petrochemical Products
President
Functional
Structure
Product
Structure
Human
Resources
Director
Chief
Counsel
Fuels
Vice
President
Sources: Based on Linda S. Ackerman, “Transition Management:
An In-Depth Look at Managing Complex Change,”
Organizational Dynamics (Summer 1982): 46-66;
and Frank Ostroff, The Horizontal Organization,
(New York: Oxford University Press, 1999), Fig. 2.1, 34.
Technology
Vice
President
Lubricants
Vice
President
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Financial
Services
Vice Pres.
Chemicals
Vice
President
3-25
Hybrid Structure
Part 2. Ford Customer Service
Division
Vice President and
General Manager
Horizontal Structure
Functional
Structure
Director and
Process Owner
Strategy and
Communication
Finance
Human
Resources
Teams
Parts Supply / Logistics Group
Director and
Process Owner
Teams
Vehicle Service Group
Director and
Process Owner
Teams
Technical Support Group
Sources: Based on Linda S. Ackerman, “Transition Management:
An In-Depth Look at Managing Complex Change,” Organizational Dynamics
(Summer 1982): 46-66; and Frank Ostroff, The Horizontal Organization,
(New York: Oxford University Press, 1999), Fig. 2.1, 34.
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3-26
The Relationship of Structure to
Organization’s Need for Efficiency vs.
Learning
Functional with
Functional cross-functional Divisional Matrix Horizontal Modular
Structure teams, integrators Structure Structure Structure Structure
Horizontal:
• Coordination
• Learning
• Innovation
• Flexibility
Dominant
Structural Vertical:
• Control
Approach
• Efficiency
• Stability
• Reliability
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3-27