Chapter four
Fundamentals of
Organization Structure
1
Organization Structure
Three key component in the definition of
organization structure
1. Organization structure designates formal reporting
relationships, including the number of levels in the
hierarchy and the span of control of managers and
supervisors.
2. Organization structure identifies the grouping
together of individuals into departments and
department into the total organization.
3. Organization structure includes the design of
systems to ensure effective communication,
coordination, and integration of effort across
departments.
2
Organization Structure
Three key component in the definition of
organization structure
– The first two elements are the structural
framework, which is the vertical hierarchy.
– The third element pertains to the pattern of
interaction among organizational information
and coordination where and when it is
needed.
3
A Sample Organization Chart
CEO
Vice President
Finance
Chief
Accountant
Budget
Analyst
Vice President
Manufacturing
Plant
Maintenance
Superintendent Superintendent
Director
Human Resources
Training
Specialist
Benefits
Administrator
4
Organization Structure
A chart of organization sample above was quite
effective in the business world for most of the
twentieth century.
However this type of vertical structure is not
always effective, particularlyi rapidly changing
environments.
Over the years, organization have developed
other structure designs, many of them aimed at
increasing horizontal coordination and
communication and encouraging adaptation to
external changes.
5
Vertical Information Linkages
Linkage
– is defined as the extent of communication and
coordination among organization elements
Vertical linkage
– Are used to coordinate activities between the top and
bottom of an organization and are designed primarily
for control of the organization.
– Organization may use any of a variety of structure
devices (tools) to achieve vertical linkage, including
hierarchical referral, rules, plans and formal
management information system
6
Vertical Information Linkages
Vertical linkage
– Hierarchical referral
Chain of command, which is illustrated by the
vertical lines
If a problem arises that employees don’t know how
to solve, it can be reffered up to the next level in
the hierachy.
When the problem is solved, the answer is passed
back down to lower levels.
The line of the organization chart act as
communication channels.
7
Vertical Information Linkages
Vertical linkage
– Rules and plans
To the extend of that problems and decisions are
repititious, a rule or procedure can be established
so employee know how to respond without
communicating directly with their manager.
Rules provide a standard information source
enabling employees to be coordinated without
actually communicating about every job.
A plan provide standing information for employee.
The most widely used plan is the budget.
8
Vertical Information Linkages
Vertical linkage
– Vertical information system
Vertical information systems include the periodic
reports, written information, and computer-based
communications distributed to managers.
Information system make communication up and
down the hierarchy more efficient.
9
Vertical Information Linkages
Horizontal linkage
– Horizontal linkage refers to the amount of
communication and coordination horizontal
across organizational department.
– Horizontal communication overcomes :
Barriers between departments and
Provides opportunities for coordination among
employees to achieve organization objective
10
Vertical Information Linkages
Horizontal linkage
– The following devices are structural alternatives that
can improve horizontal coordination and information
flow :
– Information systems
Computerized information systems can enable managers or
frontline workers throughout the organization to routinely
exchange information about problems
To build relationships with others all across the organization,
aiming to support and enhance on going horizontal
coordination across project and geographical boundaries.
11
Vertical Information Linkages
Horizontal linkage
– Direct contact
One way to promote direct contact is to create a
special liaison role.
A liaison person is located in one department but
has the responsibility for communicating and
achieving coordination with another department.
Liaison roles usually link with only two
departments.
12
Vertical Information Linkages
Horizontal linkage
– Task Forces
When linkage involves several departments, a
more complex device such as task force is require.
Task force is a temporary committee composed of
representatives from each department affected by
a problem.
13
Vertical Information Linkages
Horizontal linkage
– Full-time integrator
A full-time integrator frequently has a little, such as
product manager, project manager, program
manager or brand manager.
The brand manager for Planters Peanuts, for
example, coordinates the sales, distribution and
advertising for the product.
14
Project Manager Location
in the Structure
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
Project Manager
New
Product A
15
Vertical Information Linkages
Horizontal linkage
– Team
Teams are permanent task forces and are often
used in conjunction with a full time integrator.
Special project teams may be used when
organizations have a large-scale project, a major
innovation or a new product line.
Boeing used about 250 teams to design and
manufacture the 777 aircraft.
16
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
Procurement
Supervisor
17
The Relationship of Organization Design to
Efficiency vs. Learning Outcomes
Horizontal Organization
Designed for Learning
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
18
Ladder of 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
19
Departmental Grouping Options
Functional grouping
– Places employees together who perform
similar function or work process.
– For example
All marketing people work together under the same
supervisor
All chemists may be grouped in a department
different from biologists because they represent
different discipline.
20
Structural Design Options for
Grouping Employees into
Departments
Functional
Grouping
Engineering
CEO
Marketing
Manufacturing
Source: Adapted from David Nadler and Michael Tushman,
Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.
21
Strengths and Weaknesses of
Functional Organization Structure
WEAKNESSES:
– Slow response time to
environmental changes
Allows economies of
scale within functional – May cause decisions to pile
on top, hierarchy overload
departments
– Leads to poor horizontal
Enables in-depth
coordination among
knowledge and skill
departments
development
Enables organization – Results in less innovation
– Involves restricted view of
to accomplish (do)
organizational goals
functional goals
Is best with only one
or a few products
STRENGTHS:
–
–
–
–
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the Answer,”
Organizational Dynamics (Winter 1979): 429.
22
Departmental Grouping Options
Divisional grouping
– People are organized according to what the
organization produces.
– All people required to produce toothpaste,
including personnel in marketing,
manufacturing and sales are grouped
together under one executive.
23
Structural Design Options for
Grouping Employees into
Departments
Divisional
Grouping
Product
Division 1
CEO
Product
Division 2
Product
Division 3
Source: Adapted from David Nadler and Michael Tushman,
Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.
24
Strengths and Weaknesses of
Divisional Organization Structure
STRENGTHS:
– 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.
WEAKNESSES:
– 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
25
Reorganization from Functional Structure
to Divisional Structure at Info-Tech
Functional
Structure
Info-Tech
President
R&D
Manufacturing
Divisional
Structure
Mfg
Marketing
Info-Tech
President
Electronic
Publishing
R&D
Accounting
Acctg
Office
Automation
Mktg
R&D
Mfg
Acctg
Virtual
Reality
Mktg
R&D
Mfg
Acctg
Mktg
26
Departmental Grouping Options
Multifocused grouping
– An organization may need to group by
function and product division simultaneously
or perhaph by product division and
geography.
– These structural forms are often called matrix
or hybrid
27
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.
28
Departmental Grouping Options
Matrix structure
– Matrix can be used when both technical expertise
(skill) and product innovation and change are
important for meeting organizational goals.
– The matrix is a strong form of horizontal linkage
– The unique characteristis of the matrix organization is
that both product division and functional structures
(horizontal and vertical) are implemented
simultaneously.
29
Departmental Grouping Options
Matrix structure
– The product managers and functinal
managers have equal authority with in the
organization, and employees report to both of
them.
30
Condition for the Matrix structure
The matrix is the correct structure when
the following conditions are met
– Condition 1 :
Pressure exists to share scare resources across
product lines.
The organization is typically medium-size and has
a moderate number of product line
31
Condition for the Matrix structure
The matrix is the correct structure when
the following conditions are met
– Condition 1 :
It fells pressure for the shared and flexible use of
people and equipment across those products
For example, the organization is not large enough
to assign engineers full-time to each product line,
so engineers are assigned part-time to several
produst or project
32
Condition for the Matrix structure
The matrix is the correct structure when
the following conditions are met
– Condition 2
Environmental pressure exist for two or more
crotical outputs, such as for in-depth technical
knowledge (function structure) and frequent new
products (divisional structure).
A balance of power is needed between the
functional and product side of organization.
33
Condition for the Matrix structure
The matrix is the correct structure when
the following conditions are met
– Condition 3
Environmental domain of the organization is both
complex and uncertain.
Frequent external changes and high
interdependence between departments require a
large amount of coordination and information
processing in both vertical and horizontal direction
34
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
35
Strengths and Weaknesses of
Matrix Organization Structure
STRENGTHS:
– 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
– Requires great effort to maintain
36
power balance
Matrix Structure for
Englander Steel
Horizontal Product Lines
President
Mfg.
Vice
President
Marketing
Vice
President
Finance
Vice
President
Mfg.
Services
Vice
President
Vertical Functions
Metallurgy Field Sales
Vice
Vice
President President
Industrial
Relations
Vice
President
Open Die
Business Mgr.
Ring Products
Business Mgr.
Wheels & Axles
Business Mgr.
Steelmaking
Business Mgr.
37
Departmental Grouping Options
Horizontal grouping
– Employees are organized around core work
processes, the end-to-end work, information,
and material flows that provide value directly
to customers.
– All people who work on a core process are
brought together in a group rather than being
separated into functional department.
38
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.
39
Departmental Grouping Options
Horizontal structure
– Organizations typically shift toward a
horizontal structure during a procedure called
reengeneering.
– Reengeneering, basically means the
redesign of a vertical organization along its
horizontal workflows and process.
40
Departmental Grouping Options
Horizontal structure
– A process refers to an organized group of
related task and activities that work together
or transform inputs into outputs that create
value for customers.
– Examples the processes include order
fulfillment, new product development and
customer services.
41
Departmental Grouping Options
Horizontal structure
– For example, claims handling at Progressive
Casualty Insurance Company.
– In the past :
Customer claims  agent  customer service
representative  claims manager
– To day
Customer claims  team, that handle the entire
claims process from beginning to the end.
42
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
43
Departmental Grouping Options
Characteristic Horizontal structure
– Structure is created around cross-functional
core process rather than tasks, and function.
Thus boundaries between departments are
obliterated.
– Self directed teams, not individuals, are the
basis of organizational design and
performance.
– Process owners have responsibility for each
core process in its entirety
44
Departmental Grouping Options
Characteristic horizontal structure
– People on the team are given the skills, tools,
motivation, and authority to make decisions
central to the teams performance.
– Teams have the freedom to think creatively
and respond flexibly to new challenges that
arise.
45
Strengths and Weaknesses of
Horizontal Structure
STRENGTHS:
– 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
Sources: Based on Frank Ostroff, The Horizontal Organization: What the
Organization of the Future Looks Like and How It Delivers Value to
Customers, (New York: Oxford University Press, 1999);
and Richard L. Daft, Organization Theory and Design, 6th ed.,
(Cincinnati, Ohio: South-Western College Publishing, 1998) 253.
WEAKNESSES:
– 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
46
Departmental Grouping Options
Hybrid structure
– One type of hybrid that is often used is to
combine characteristic of the functional and
division structures.
– Sun Petroleum Product (SPPC) reorgonized
to a hybrid structure to be more responsive to
changing markets.
47
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
Financial
Services
Vice Pres.
Chemicals
Vice
President
48
Departmental Grouping Options
Hybrid structure
– In its structure, three major product divisions,
fuel, lubricants, and chemicals were created,
each serving a different market and requiring
a different strategy.
– Each product line vice president is now in
charge of all functions for that product, such
as marketing, planning, supply and
distribution, and manufacturing.
49
Departmental Grouping Options
Hybrid structure
– The activities such as human resources,
legal, technology, and finance were
centralized as functional departments at
headquarter in order to achieve economies of
scale.
50
Departmental Grouping Options
Hybrid structure
– Another example, Ford Motor Company is
used this type of hybrid structure.
51
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.
52
Departmental Grouping Options
Hybrid structure
– Several horizontally aligned groups, made up
of multiskilled teams, focused on core
processes such as :
Part supply and logistics (acquiring parts and
getting tem to dealers quickly and efficiently),
Vihicle service and programs (collecting and
disseminating about repair problems), and
53
Departmental Grouping Options
Hybrid structure
– Several horizontally aligned groups, made up
of multiskilled teams, focused on core
processes such as :
Technical suport (ensuring that every service
department receive updated technical information)
Each group has a process has a process owner
who is responsible for seeing that the teams meet
overall objectives.
54
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
Dominant
Structural Vertical:
• Control
Approach
Horizontal:
• Coordination
• Learning
• Innovation
• Flexibility
• Efficiency
• Stability
• Reliability
55