Organizational

Structure

Professor Craig W Fontaine

Northeastern University
College of Business Administration
The 4 Essential Management Functions
Designing organizational structures is part of
organizing, one of the four basic management functions.

Planning Organizing Leading Controlling

Lead to
Defining Determining Directing Monitoring Achieving the
goals, estab- what needs and moti- activities organization’s
lishing to be done, vating all to ensure stated
strategy, and how it will involved that they are purpose
developing be done, parties and accomplished
subplans to and who is resolving as planned
coordinate to do it conflicts
activities
 Organizing
• The deployment of resources to achieve strategic
goals. It is reflected in:
– The organization’s division of labor that forms jobs
and departments (Who does what?)
– Formal lines of authority (Who reports to who?)
– The mechanisms used for coordinating diverse jobs
and roles in the organization.
• Strategy indicates what needs to be done.
• Organizing shows how to do it.
 Structure Concepts I

Hierarchy of Authority:
Authority A configuration of the reporting
relationships within organizations; that is, who reports to
whom.
Division of Labor:
Labor The process of dividing the many tasks
performed within an organization into specialized jobs.
Span of Control:
Control The number of subordinates in an
organization who are supervised by an individual manager.
 Basic Concepts

Organizational Structure:
Structure The formal configuration
between individuals and groups with respect to the
allocation of tasks, responsibilities, and authorities within
organizations.
Organizational Chart:
Chart A diagram representing the
connections between the various departments within an
organization: a graphic representation of organizational
design.
Sample Organizational Chart
Skills for Designing Organizational Structures

Understanding
the dimensions
of organization
structure

Understanding
the chain of
command
 Organization Structure
Think of an any Organization’s structure has having
two dimensions:
– Vertical dimension (Tall or Flat)
– Horizontal dimension (Wide or narrow)
 The Vertical Dimension of Organization Structure:

• The organization structure element that indicates:

– Who has the authority to make decisions.
– Who is expected to supervise which
subordinates.
 The Vertical Dimension of Organization Structure: (continued)

• Unity of Command – a subordinate should have

only one direct supervisor.
– A decision can be traced back from the
subordinates who carry it out to the manager who
made it.
• Authority – The formal right of a manager to make
decisions, give orders, and expect the orders to be
carried out.
– Line Authority
– Staff Authority
 The Vertical Dimension of Organization Structure: (continued)

• Responsibility – the manager’s duty to perform an

assigned task.

• Accountability – the manager (or other employee)

with authority and responsibility must be able to
justify results to a manager at a higher level in the
organizational hierarchy.
 The Vertical Dimension of Organization Structure: (continued)

• Span of control – the feature of vertical structure

that outlines:
– The number of subordinates who report to a
manager.
– The number of managers.
– The layers of management within an
organization.
Span of Control or Tall vs. Flat Organizations
 Vertical complexity
Contrasting Spans of Control

(Highest) Assuming Span of 4 Assuming Span of 8

1 1 1
Organization Level

2 4 8

3 16 64

4 64 512

5 256 4,096

6 1,024

7 4,096

(Lowest) Span of 4: Span of 8:

4,096 Operatives. 1,365 Managers 4,096 Operatives. Only 585 Managers!

Which organization looks more appealing to you?

 The Vertical Dimension of Organization Structure: (continued)

• Centralization – the location of decision authority

at the top of the organization hierarchy.
• Decentralization – the location of decision
authority at lower levels in the organization.
• Formalization – the degree of written
documentation that is used to direct and control
employees.
The Horizontal Dimension of Organization Structure:

• The organization structure element that is the basis for:

– Dividing work into specific jobs and tasks.
– Assigning jobs into units such as departments or teams.
• Departmentalization:
– Functional
– Divisonal
• Product
• Geograhical
– Matrix
Functional Organization Structure
 Advantages and Disadvantages of the Functional Approach:
Advantages
• Decision authority is
centralized at the top of the
organization hierarchy
• Career paths foster professional
identity with the business
function
• High degree of efficiency
• Economies of scale help
develop specialized expertise in
employees
Disadvantages
• Communication barriers
• Conflict between departments
• Coordination of products and
services is difficult
• Diminished responsiveness to
customers’ needs
• Employees identify with
functional department goals and
not organization goals or needs
of the customer
Product Based Organizational Structure
 Advantages and Disadvantages of the Product Based

Advantages
• Coordination among different
business functions
• Improved and speedier service
• Accountability for performance
• Development of general
manager and executive skills
Disadvantages
• Duplication of resources by two
or more departments
• Reduced specialization in
occupational skills
• Competition among divisions
Simplified Geographic-Based Organization Structure

P r e s id e n t

U . S . a n L d a t i n E u r o p e Aa ns i a n
C a n a d Aa m e r i c D a i v i s i o Dn i v i s i o n
D i v i s i o Dn i v i s i o n
 PRESIDENT

MANUFAC-
MARKETING RESEARCH FINANCE PLANNING PERSONNEL
TURING

LINE MANAGEMENT

VICE-PRESIDENT VICE-PRESIDENT VICE-PRESIDENT

DOMESTIC DOMESTIC INTERNATIONAL
DIVISION A DIVISION C DIVISION
VICE-PRESIDENT VICE-PRESIDENT
DOMESTIC DOMESTIC
DIVISION B DIVISION D

ASIA/PACIFIC EUROPE/MIDDLE
LATIN AMERICA STAFF
EAST/AFRICA

COUNTRY COUNTRY COUNTRY

SUBSIDIARIES SUBSIDIARIES SUBSIDIARIES
 PRESIDENT

CORPORATE STAFF

MANUFAC-
MARKETING RESEARCH FINANCE PLANNING PERSONNEL
TURING

LINE MANAGEMENT

AREA MANAGER AREA MANAGER

NORTH AMERICA EUROPE

AREA MANAGER
AREA MANAGER AREA MANAGER FAR EAST
LATIN AMERICA MIDDLE
EAST/AFRICA

Executives with total corporate and worldwide responsibilities. Corporate staff activities on a worldwide basis generally involve policy
matters, strategic planning, basic product planning, functional guidance to line geographic unit, and coordination of activities between
geographic units

Executives with line responsibility for all operations in a particular geographic area
 PRODUCT STRUCTURE
PRESIDENT

CORPORATE STAFF

PRESIDENT PRESIDENT PRESIDENT PRESIDENT PRESIDENT PRESIDENT PRESIDENT

Latin America
LINE MANAGEMENT
Europe
Middle
East/Africa PRODUCT GROUP PRODUCT GROUP PRODUCT GROUP PRODUCT GROUP
Far East EXECUTIVE EXECUTIVE EXECUTIVE EXECUTIVE

North America

Product Group B Product Group C Product Group D

Product Group A
Executives with total corporate and worldwide responsibilities. Corporate staff activities on a worldwide basis involve policy matters,
over-all strategic planning, coordination between product groups, and specialized advice to product groups.

Executives with staff responsibilities in a particular geographic area, chiefly identifying potential investment opportunities and providing
information to individual affiliates and corporate management

Executives with worldwide responsibility for product groups

 Booz Allen Hamilton

GEOGRAPHIC
SECTORS US EMEA LA A,Au,J

GLOBAL
FUNCTIONAL
PRACTICE

IT OM SLP S IT OM SLP S IT OM SLP S IT OM SLP S

COMMUNICATIONS, MEDIA AND TECHNOLOGY

GLOBAL
INDUSTRIAL ENERGY
PRACTICES

CONSUMER AND HEALTH

FINANCIAL SERVICES

AUTOMOTIVE, AEROSPACE AND INDUSTRIAL

Matrix Organization
 Advantages and Disadvantages of the Matrix Approach:

Advantages
• Efficient utilization of scarce,
expensive specialists
• Flexibility that allows new projects
to start quickly
• Development of cross-functional
skills by employees
• Increased employee involvement in • Too much time spent in meetings to
management decisions affecting
project or product assignments
Disadvantages
• Employee frustration and confusion
as a result of the dual chain of
command
• Conflict between product and
functional managers over deadlines
and priorities
coordinate decisions
 The Contingency Approach
 The contemporary approach that recognizes that no one
approach to organizational design is best, but that the best
design is the one that best fits with the existing environmental
conditions.
 Mechanistic Organization:
Organization An internal organizational structure
in which people perform specialized jobs, many rigid rules are
imposed, and authority is vested in a few top-ranking officials.
 Organic Organization:
Organization An internal organizational structure in
which jobs tend to be very general, there are few rules, and
decisions can be made by lower-level employees.
 Boundaryless Organization: An organization in which chains of
command are eliminated, spans of control are unlimited, and
rigid departments give way to empowered teams
 Mechanistic, Organic, and Boundaryless Designs
Mechanistic Organic Boundaryless
Rigid hierarchical Collaboration (both Collaboration (vertical,
relationships vertical and horizontal, customers,
horizontal) suppliers, competitors)

High formalization Low formalization Low formalization

Top-down Informal Informal
communication communication communication
Centralized decision Decentralized Decentralized decision
authority decision authority authority
Narrowly defined Broadly defined Broadly defined
specialized jobs flexible jobs flexible jobs
Emphasis on Emphasis on teams Emphasis on teams
individuals working that also may cross
independently organization
boundaries
Mechanistic vs. Organic Designs
 Two Extremes for Organizational Types

Mechanistic Organic

Rigid hierarchical
relationships Vertical and horizontal
collaboration
Fixed duties
Adaptable duties
High formalization
Low formalization
Formalized
communication Informal
channels communication

Centralized Decentralized
decision authority decision authority
 Woodward’s Findings on Technology, Structure, and Effectiveness

Unit Mass Process

Production Production Production

Structural Low vertical Moderate vertical High vertical

characteristics differentiation differentiation differentiation
Low horizontal High horizontal Low horizontal
differentiation differentiation differentiation
Low High Low
formalization formalization formalization

Most effective Organic Mechanistic Organic

structure
Design Effectiveness
Boundaryless Organization
 Boundaryless Organization

An organization in which chains of command are eliminated, spans

of control are unlimited, and rigid departments give way to
empowered teams.
Modular Organization:
Organization An organization that surrounds itself by a
network of other organizations to which it regularly outsources
noncore functions.
Virtual Organization:
Organization A highly flexible, temporary organization
formed by a group of companies that join forces to exploit a
specific opportunity.
Modular Organization
Virtual Organization
 Classical vs. Neoclassical Theory

Classical Organizational Theory: The approach that assumes that there is

a single best way to design organizations.
– This approach assumes that managers need to have close control over
their subordinates and calls for designing organizations with tall
hierarchies and a narrow span of control.
Neoclassical Organizational Theory: An attempt to improve on the
classical organizational theory that argues that not only economic
effectiveness, but also employee satisfaction, should be goals of an industrial
organization.
– This approach assumes that managers do not have to carefully monitor
their subordinates and calls for designing organizations with flat
hierarchies and a wide span of control.
Classical vs. Neoclassical Theory
 Modern Trends: Delayering

As today’s organizations restructure, the middle layers of organizational hierarchies tend to

get removed. The result is a flatter organizational structure, which puts managers
closer to the issues about which they have to make decisions.
 Interorganizational Designs

Organizational designs in which two or more organizations

come together.
Conglomerates:
Conglomerates A form of organizational diversification in
which an organization (usually a very large, multinational one)
adds an entirely unrelated business or product to its
organizational design.
Strategic Alliance:
Alliance A type of interorganizational design in
which two or more separate companies combine forces to
develop and operate a specific business.
 Strategic Alliances

 Mutual Service Consortia:

Consortia A type of strategic alliance in which two
similar companies from the same or similar industries pool their
resources to receive a benefit that would be too difficult or expensive
for either to obtain alone.
 Value-Chain Partnerships:
Partnerships Strategic alliances between companies in
different industries that have complementary capabilities.
 Joint Ventures:
Ventures Strategic alliances in which several companies work
together to fulfill opportunities that require the capabilities of one
another.
Continuum of Alliances