Organization Structure and Design

Chapter Outline
 Foundational Concepts of Organizational Structure
 The Bureaucratic Form of Organization
 Key Modifications of the Bureaucratic Structure
 Outsourcing as an Organizational Arrangement
 Leading-Edge Organization Structures
 Implications for Managerial Practice
Learning Objectives
After reading and studying this chapter and doing the exercises, you should be able to:
 1. Identify and define the foundational concepts of organization structure, including the
informal organization.
 2. Specify the basic features of the bureaucratic form of organization structure, including
how it is divided into departments.
 3. Describe two key modifications of a bureaucratic structure: matrix and flat.
 4. Describe the nature of outsourcing and how it influences organization structure.
 5. Describe the organizational designs referred to as “horizontal structures” and “network
structures.”
 FOUNDATIONAL CONCEPT OF
ORGANIZATIONAL
STRUCTURE

Identify and define the foundational concepts of organization structure,

including the informal organization.
 The purpose of this chapter is to understand the various types of
organization structures and factors that influence the structure for
a given purpose.
 Organization - a collection of people working together to achieve a common
purpose (or simply a big group).
 Organization structure - is the arrangement of people and tasks to accomplish
organizational goals.
 Organizational design - the process of creating a structure that best fits a purpose,
strategy, and environment.

FOUNDATIONAL CONCEPT OF ORGANIZATIONAL

 Foundational Concepts of Organizational Structure
 Organizations are so complex that many different variables are required to describe
them, similar to describing people or machines.
 To get started understanding how organizations are structured, we look at five key
concepts:
1. formal versus informal
2. degree of formalization
3. degree of centralization
4. span of control
5. complexity.
 You will observe that several concepts about organization structure overlap, thereby
simplifying the understanding of organizations.

FOUNDATIONAL CONCEPT OF ORGANIZATIONAL

 A. Formal versus Informal Structure
 The formal organization structure is an official statement of reporting
relationships, rules, and regulations. The rules and regulations are designed to cover
all the events and transactions that are likely to take place in conducting the
business of the organization.
 The informal organization structure is a set of unofficial working relationships
that emerges to take care of the events and transactions not covered by the formal
structure. The informal structure supplements the formal structure by adding a
degree of flexibility and speed. . A widespread application of the informal structure
is the presence of “tech fixers” in most firms who supplement the technical support
center.

FOUNDATIONAL CONCEPT OF ORGANIZATIONAL

  Another perspective on the informal organization structure is that all companies
have hidden shadow organizations where much of the real work gets accomplished.
The shadow organization is revealed by social network analysis, which traces who
talks to whom, who listens, and how most of the information and influence really
flows.
 Social network analysis reveals the informal social relationships and the unofficial
communication channels, so it also helps to understand informal groups and
informal communication channels.
 Social network analysis can benefit managers by revealing if people are getting the
information they need to perform their jobs well. The same analysis can point to
which employees are in the best position to disseminate useful
information to other workers.

FOUNDATIONAL CONCEPT OF ORGANIZATIONAL

 B. Degree of Formalization
 The dimension of formalization is the degree to which expectations regarding the
methods of work are specified, committed to writing, and enforced. The more
policies, rules, and procedures there are specifying how people should behave, the
more formalized the organization.
 An organization with a high degree of formalization is likely to have a high degree
of specialization of labor and high delegation of authority.
 A more formal organization is more bureaucratic.

FOUNDATIONAL CONCEPT OF ORGANIZATIONAL

 C. Degree of Centralization
 Centralization refers to the extent to which executives delegate authority to lower
organizational units. The smaller the amount of delegation, the more centralized the
organization. In a decentralized firm, however, some decisions are more centralized
than others.
 An organization that relies heavily on functional (specialized) units will be more
centralized because top management needs to coordinate the functions of the various
units.
 Decentralization helps make large organizations more democratic because more
managers throughout the company have more decision-making authority.

FOUNDATIONAL CONCEPT OF ORGANIZATIONAL

 D. Span of Control
 A major characteristic of an organization is the average number of
people each manager supervises. The span of control is the number of
workers reporting directly to a manager.
 The larger the span of control, the more freedom and independence
granted to subordinates. Correspondingly, the smaller the span of
control, the more closely subordinates are supervised. A large span of
control works best with competent and efficient managers and group
members.

FOUNDATIONAL CONCEPT OF ORGANIZATIONAL

 E. Complexity
 Complexity refers to the number of different job titles and organizational units. Large
organizations often have hundreds of departments and thousands of job titles. In a
complex organization, many of the job titles are esoteric, such as “risk analyst,” “data
scientist,” and “fleet manager.”
 The more complex the organization, the more difficult it is to manage. Complexity
typically increases in direct proportion to size. Small organizations have fewer job
titles and departments.
 The concept of differentiation is closely linked to complexity. A horizontally
differentiated organization has many different job titles and many different
departments doing separate work, whereas a vertically differentiated
organization has many levels.

FOUNDATIONAL CONCEPT OF ORGANIZATIONAL

THE BUREAUCRATIC TYPE OF
THE BUREAUCRATIC TYPE OF
ORGANIZATION
ORGANIZATION

Learning Objective:
Specify the basic features of the bureaucratic form of
organization structure, including how it is divided into
departments.
 BUREAUCRACY
- is a rational, systematic, and precise form of organization in which rules,
regulations, and techniques of control are precisely defined.

BUREAU
- is the French word for “office,” indicating that a bureaucracy is a
form of organization with many different offices.
CRAT
derived from the Greek word for “rule "
A bureaucracy was conceived of by Max Weber to be the ideal
organization, having the following characteristics:

 Rules and procedures controlling organizational activities

 A high degree of differentiation among organizational functions
 A high degree of job specialization
 An organization of offices determined by hierarchy, with each unit
reporting to a higher unit and no unit free-floating
 A heavy emphasis on rules and norms to regulate behavior
 Interpersonal relations characterized by impersonality in place of
favoritism
 Selection and promotion based on merit
 All administrative actions recorded in writing
The Bureaucratic Form of Organization
 The Contribution of Bureaucracy
 Bureaucratic forms of organization have persisted because, if used
properly, they make possible large-scale accomplishments that
cannot be achieved by small groups of people working
independently.
 The basic defense of bureaucracies is that they perform large,
needed tasks in a predictable fashion
 According to Elliot Jacques," Properly structured, hierarchy can
release energy and creativity, rational productivity, and actually
improve morale."
 It is the only form of organization that enables a firm to employ large
numbers of people and still hold them clearly accountable for their
result
 Bureaucracy is important also for the emotional reason that it fulfills
our deep need for order and security
 Another positive role played by a bureaucracy is to serve as a system
of checks and balances, such as making sure that a new product or
process is safe
 Potential Dysfunctions of a Bureaucracy

 The major problem is that members of the bureaucracy often carry out
its characteristics to the extreme.
 Organizations that rely heavily on formal controls to direct people
sometimes suppress initiative and decision making at lower levels of
management
 Too many controls and too many reviews of decisions can also lower
productivity.
 Some people in large bureaucracies tend to “pass the buck,” or
claim that a particular problem is the responsibility of another
department or person.
 Bureaucracy’s well-intended rules and regulations sometimes
create inconvenience and inefficiency
 High frustration accompanied by low satisfaction (the sources of
these negative feelings include red tape, slow decision making, and
an individual’s limited influence on how well the organization
performs)
 What is Departmentalization?
-The process of subdividing work into departments.

Three types of Departmentalization

1. Functional departmentalization
2. Product/service departmentalization
3. Line versus Staff Units
 Functional Departmentalization
 The grouping of people according to their expertise.
 The advantages and disadvantages of functional departmentalization
follow those of a bureaucracy.
 Silo is a term frequently used to point to the disadvantages of functional
departmentalization.
 A silo implies that the people within one department remain isolated and
shut off from the rest of the organization, instead of building working
relationships with people in other departments.
 Leadership consultant Kevin Elkenberry gives two examples of how
the silo mentality can be overcome for the good of the organization.
 A sales representative builds relationships with other departments as a
way to better meet a customer need.
 A middle manager in information technology shares her budget with
another department that is short on funds.
 Product / Service Departmentalization
 The arrangement of departments according to the products or services
they provide.
 One purpose of a product or service organization is to push decision
making further down into the organization.
 Another purpose of the structure is to help a company be nimble,
while at the same time encouraging cooperation among the various
product divisions.
 Line vs. Staff Units

 The distinction between line and staff is often blurred.

 Line groups are responsible for the primary purposes of the firm, whereas
staff groups are responsible for the secondary purposes.
 Members of some departments are not sure if they are perceived as line
or staff by top management, leading to role ambiguity. 
  Learning Objective:
Describe two key
Key Modifications modifications of a
bureaucratic
of the Bureaucratic structure: matrix and
Structure flat.
 Matrix Organizational Structure

An organization consisting of a project structure superimposed

on a functional structure.
Project - temporary group of specialists working together
under one manager to accomplish a fixed objective.

Key Modifications of the Bureaucratic Structure

 MATRIX ORGANIZATIONAL STRUCTURE

Matrix Organization in an Electronics Company

Key Modifications of the Bureaucratic Structure
 3 types of Matrix Organizational Structure
1. Strong Matrix Structure – the authority lies with the project
manager. He has a powerful role in the company and occupies a
fulltime role and responsibility.
2. Balance Matrix Structure – the power is distributed equally
between the functional and project managers.
3. Weak Matrix Structure – the project budget is controlled by the
functional manager. The project manager has limited authority and
power.

Key Modifications of the Bureaucratic Structure

 Flat Organization Structures and Downsizing
 Flat Organization Structure
- an organization structure with relatively few layers.
 Less bureaucratic for two reason:
Fewer managers in this form of organization are available to
review the decisions of other people.
The chain of commands is shorter, there is less concern about
authority differences among people.

Key Modifications of the Bureaucratic Structure

 Flat Organization Structures and Downsizing
 Flatter organization structures created by downsizing lead to greater
organizational efficiency about half a time.
 Controversial aspect of flat structure created by downsizing:
 They result in human suffering.
 Leave an organization depleted and slow down a future recovery.

Key Modifications of the Bureaucratic Structure

Outsourcing as an
Organizational
Arrangement

 Learning Objective:
Describe the nature of
outsourcing and how it
influences organization
structure.
 Outsource Offshoring
 The practice of having work  The practice of having work
performed by groups outside performed by a company in an
the organization. overseas location.

Outsourcing as an Organizational Arrangement

 Three aspects of Outsourcing

1. The Scope of Outsourcing

2. Time Zone Advantages of Outsourcing

3. Outsourcing to Homes instead of Offshoring

Outsourcing as an Organizational Arrangement

 The Scope of Outsourcing
 United Parcel Service (UPS) exemplifies how far outsourcing has
advanced.
1. A third-party logistics provider (3PL) such as UPS is often hired
because if its expertise in shipping products that are temperature-
sensitive.
2. Activities as complex as the research and design of products are
outsourced.
[Link] companies outsource work to geographic areas where
workers are paid lower wages.

Outsourcing as an Organizational Arrangement

  A “human cloud” of workers domestically and around the globe can
be assigned a variety of work tasks via an online platform.
 A key implication of outsourcing as an organizational design strategy is
that people over whom you have no direct control perform work for
your company.
 Outsourcing breeds conflict over which functions should be
outsourced.

Outsourcing as an Organizational Arrangement

 Reshoring
- the bringing of jobs back to a country that outsourced these jobs
previously.
Reshoring Initiative
- founded by Henry Moser
- an industry-led effort to bring manufacturing jobs back to
the United States.

Outsourcing as an Organizational Arrangement

 Time Zone Advantages of Outsourcing

 A complex possibility is for work to be performed in sequence across

three time zones.
 Workers across that globe can collaborate 24/7, even if the time
zones do not match precisely.
 Outsourcing to Homes Instead of Offshoring

PROBLEMS:
1. language barrier
2. culture differences
3. coordinating the management work of people in another country

 Turnover among home agents is much less than for their call-center
counterparts.

Outsourcing as an Organizational Arrangement

 LEADING-EDGE ORGANIZATION
STRUCTURES

 Learning Objective:
Describe the organizational designs referred
to as “horizontal structures” and
“network structures.”
 Horizontal Structure

 The arrangement of work by teams that are responsible for

accomplishing a process.
Business Process Reengineering
- Radical redesign of work to achieve substantial improvement to
performance.

LEADING-EDGE ORGANIZATION
 Horizontal Structure

Customer Marketing
Marketing Finance
Finance IT
IT Operations
Operations Order
Specialist
Specialist Specialist
Specialist Specialist
Specialist Specialist
Specialist
Request Fulfillment

LEADING-EDGE ORGANIZATION
 Network Structure (virtual organization)
 A temporary association of otherwise independent firms linked by
technology to share expenses, employee talents, and access to one
another’s markets.

LEADING-EDGE ORGANIZATION
 Network Structure
Product
Development
Company
(Australia)

Call Center Manufacturing

Company (New Company
Zealand) (Malaysia)

Core
Company

Distribution Accounting
Company Company
(Singapore) (Australia)

LEADING-EDGE ORGANIZATION
Implications for
Managerial
Practice
1. An Overriding decision in organizational design is the choice
between a bureaucratic or more flexible structure.
Bureaucratic Structure is a codified set of role expectations in
which centralized control is desirable. Low technology firms rely
more on bureaucratic structures.

Flexible Structure are those structures developed within an

organization. High technology firms make extensive use of flexible
structures.
2. As an organization grows and mature, it needs centralized
controls (one component is designated as the controller and is
responsible for managing the execution of other components) and
formalization (are those in which there are many written rules and
regulations.

When the firm becomes very large, it needs to develop more flexible
units to help the organization remain adaptive.
3. A design decision for a large organization is not an issue of
hierarchical (contains a direct chain of command from the top of
the organization to the bottom) versus flexible, but instead, one
of choosing which units should be hierarchical and which ones
should be nonhierarchical or team-based.
4. Organization structure influences behavior in many ways.
Specialization (division of labor, refers to the degree to which an
organization divides individual tasks into separate jobs) can lead
to job dissatisfaction that gives boredom for many workers.

An exception is that some highly trained workers prefer to be

super specialists.
5. Among the organizational structure, Leading-edge is the
popular.

For managers to function effectively, they must practice high-

level of interpersonal skills because they will be relying on
informal authority.