Chapter Three
Fundamentals of
Organization Structure
3-1
Three key components in the definition of
Organization Structure



Organization structure designates formal reporting
relationships, including the number of levels in the
hierarchy and the span of control of managers and
supervisors.
Organization structure identifies the grouping
together of individuals into departments and of
departments into the total organization.
Organization structure includes the design of systems
to ensure effective communication, coordination, and
integration of effort across departments.
3-2
A Sample Organization Chart
CEO
Vice President
Finance
Chief
Accountant
Budget
Analyst
Vice President
Manufacturing
Plant
Superintendent
Maintenance
Superintendent
Director
Human Resources
Training
Specialist
Benefits
Administrator
3-3
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
ex. Dow Chem. , P & G
Vertical Organization
Designed for Efficiency
3-4
Vertical Information Linkages
Vertical linkages are used to coordinate
activities between the top and bottom
of an organization and are designed
primarily for control of the organization.
 Structural devices to achieve vertical
linkage:
-- Hierarchical Referral
-- Rules and Plans
-- Vertical Information Systems
3-5

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
3-6
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
3-7
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
3-8
Organization Design Alternatives



Required Work Activities
Reporting Relationships
Departmental Groupings
3-9
Organization Design Alternatives

Required Work Activities
--Departments are created to perform tasks considered
strategically important to the company. e.g. Dept. of
HR
--As organizations grow larger and more complex, more
and more functions need to be performed.
--Organizations typically define new departments or
divisions as a way to accomplish tasks deemed
valuable by the organization.
--Today, many companies are finding it important to
establish departments. such as IT or e-business to
take advantage of new technology and new business
opportunities.
3-10
Organization Design Alternatives

Reporting Relationships
--Reporting relationships, often called the chain
of command, are represented by vertical lines
on an organization chart.
--The definition of departments and the drawing
of reporting relationships defines how
employees are to be grouped into
departments.
3-11
Organization Design Alternatives

Departmental Grouping Options
--Options for department grouping, including
functional grouping, divisional grouping,
multifocused grouping (Matrix or Hybrid),
horizontal grouping, and modular grouping.
(Fig. 3.6)
--Departmental grouping affects employees
because they share a common supervisor and
common resources, are jointly responsible for
performance, and tend to identify and
collaborate with one another.
3-12
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.
3-13
Strengths and Weaknesses of
Functional Organization Structure

STRENGTHS:




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

WEAKNESSES:





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
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the Answer,”
Organizational Dynamics (Winter 1979): 429.
3-14
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
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
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.
3-17
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.
3-18
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
Japan
Asia
3-19
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
3-20
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
3-21
power balance
Matrix Structure for
Worldwide Steel Company
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.
3-22
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
3-23
Strengths and Weaknesses of
Horizontal Structure

STRENGTHS:

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
Sources: Based on Frank Ostroff,
The Horizontal Organization:
the
accountable
forWhatoutcomes

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.
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
3-24
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
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.
3-26
Organization Contextual Variables
that Influence Structure
Culture
Chapter 10
Strategy,
Goals
Chapter 2
Sources: Adapted from Jay R. Galbraith,
Competing with Flexible Lateral Organizations, 2nd ed.
(Reading, Mass.: Addison-Wesley, 1994), Ch.1;
Jay R. Galbraith, Organization Design (Reading, Mass.:
Addison-Wesley, 1977), Ch. 1.
Size
Chapter 9
Structure
(learning vs.
efficiency)
Technology
Chapters 7,8
Environment
Chapters 4, 6
3-27
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
3-28
Symptoms of
Structural Deficiency



Decision making is delayed or lacking in
quality
The organization does not respond
innovatively to a changing environment
Too much conflict is evident
3-29