Organizational Structure

Introduction

In our opening class, we described organizations as open systems which transform inputs from the environment into outputs. The people within organizations have specific roles which they carry out as part of this transformation process. These roles are coordinated in a certain way in an attempt to make the process function as efficiently as possible. Thus the structure of an organization reflects the division of work and the coordination of the organization's sub-units. In most organizations these roles and their coordination are formalized into an organizational chart which represents the various positions in an organization. They are in effect a map of the structure of the organization.

Structure defines three key components of the organization:

  1. the formal reporting relationships within an organization, including the number of levels in the hierarchy and the span of control of managers and supervisors
  2. the grouping of individuals into departments and the fit of departments into the organization as a whole
  3. the systems of communication, coordination, and integration

Definition

Organizational structure may be defined as the network of relationships that exists among various positions and position holders. Formal structure is a pattern of relationships that has been consciously planned and implemented. It includes formal hierarchy of authority as well as rules and procedures and other planned attempts to regulate behaviour.

Key Concepts

Formalization: The extent to which jobs activities and behaviour are standardized and the means by which the standardization is accomplished.

Centralization: The degree to which decision-making power and control are concentrated.

Vertical differentiation: Hierarchical structure consisting of a vertical dimension of differentiated levels of authority and responsibility. Differentiation by degrees of authority.

Horizontal differentiation: Differentiation by specialization, often referred to as departmentalization. People with similar abilities working together on specialized tasks. Growth is a key impetus for horizontal differentiation, but is not the sole one. Environment and technology may also demand specialization. There are four major forms of departmentalization:

  1. -Function: departments are set up in an organization according to the function being carried out. E.g. manufacturing, finance, marketing, etc. This is the most common form of departmentation.
  2. -Process: people and jobs are grouped together which are needed to implement a certain process. E.g. departments organized around machines or data processing equipment
  3. -Location: segregation by territories, regions, districts or countries. Where location makes a difference, a rationale exists for departmentalization on this basis.
  4. -Product or service: the grouping of jobs and activities that are associated with a specific product. GM is a prime example with its different divisions.
  5. -Client: activities and positions are grouped together in a way that is compatible with the unique needs of specific clients.

These different types of departmentalization are usually applied in some combination. For example an organization which has a product or location departmentation, may have functional units within the product or geographical departments.

Span of control: refers to the number of subordinates a manager supervises. This number depends on the complexity of the task performed and the amount of subordinate-superior interaction required. There is no optimal amount. Span of control is reflected in the organization's height. Flat vs hierarchical. Flat is less centralized. The larger the span of control, the flatter the organization.

Line and staff: Line refers to the basic person boss relationship or chain of command that extends from top to bottom of the organization. Staff facilitates the work of the line performing services for it and providing advice and information in their special areas of competence. Eg. personnel, marketing. This relates to the view of the organization with its technical core and need for buffering.

Major Organizational Forms

These various characteristics are combined into four common organizational forms:

Centralized functional: More prevalent in smaller firms. In these organizations, departmentalization is by function. Department heads report to central headquarters. This form is characterized by high operating responsiveness because of simple communication and decision making networks. Efficiency of this form is related to its relatively small size. Strategic decision making is secondary to operational decisions. Highly centralized. (See Figure in text.)

Decentralized divisional: Consists of organizational units (divisions) that address a specific product market under the direction of a manager who has complete strategic and operating decision-making authority. This form was pioneered by Dupont and GM when they realized that with growth and expanded product lines, their organizations experienced difficulty in making centralized decisions for all products. There was an overemphasis on vertical communications at the expense of horizontal coordination which led to a fragmentation of planning. Therefore they divided their organizations into divisions. Within the divisions the structure is usually functional. (See Figure in text.)

Hybrid: These structures are most often found in large multi-product organizations, where some centralized functions are maintained. The hybrid form combines both functional and output groupings. This design retains the advantages of the both the functional and divisional design, achieving economies of scale and expertise in the functional areas while maintaining responsiveness in the divisional areas.(See Figure in text.)

Matrix: Organization according to ad hoc project teams from the different functional units of the organization. Designed to utilize functional expertise with environmental responsiveness. Flexible, creative, project manager can concentrate on implementation of strategic decisions, while not burdened by operating ones. The unique feature of the matrix organization is that both product and functional structures are implemented simultaneously. It violates the principle of unity of command, with two managers, a functional and project manager. (See Figure in text.)

Recently newer structures are being experimented with. Among the most successful of these is sociotechnical systems.

Sociotechnical Systems: This represents a radical departure from traditional, hierarchical organizations both structurallyand philosophically. The principles of sociotech can be summarized as follows (Trist, E. 1981).

Sociotech organizations are flat structures with at most 2 levels: One overall manager with the rest of the workers members of self-managing work teams with multi-skilled members. But even here the manager is just part of the coordinating committee, which is made up of representatives of each team. In many sociotech organizations, strategic decisions are made by a coordinating committee. The role of the manager is to represent the plant to the outside world, and, if the plant is part of a larger organization, to prevent managerial encroachment on the independent decision making of the sociotech system.

Although most sociotech structures are to be found in manufacturing companies, there are examples of successful sociotech applications in service organizations as well. Sears Insurance division was one of the first service organizations to institute a sociotech system.

Much evaluative research has been done on sociotech systems. The research consistently shows increased worker satisfaction and increased productivity, when a true sociotech system is in place. Many organizations have adopted ideas from sociotech, such as the team concept, but few have converted into true sociotech systems. There is opposition to sociotech from middle management, who fear the loss of status and power, and also from unions, whose intervention would no longer be required as sociotech effectively makes obsolete the concept of worker vs management. Actually only about 2.5% - 3% of all organizations are sociotech, despite its documented successes.

Determinants of Structure

Now that we have seen the various different types of structural arrangements that an organization can have, the next thing that we want to look at is what it is that determines which kind of structure an organization will choose.

Researchers have noted that the design of the organization depends on three main contextual factors: size, technology, and environment. The elements of an organization's structure that are contingent on these factors are: formalization, differentiation (both vertical, i.e. number of levels; and horizontal, i.e. number of divisions, departments, or subunits), size of administrative component, centralization, span of control, specialization, and channels of communication.

These structural elements are manifested in organizations in two generic organizational forms: mechanistic or organic.
Mechanistic Organic
Work tasks are specialized into separate parts Employees contribute to the common task
Tasks are rigidly defined (high formalization) Tasks are adjusted and redefined through teamwork
Strict hierarchy of authority Less hierarchy, workers have greater responsibility
Centralized decision-making and control Decision-making and control are located anywhere in the organization
Vertical communications Horizontal communication

Whether an organization is better served with an organic or a mechanistic structure depends on its environment, its size, and its technology.

Environment

The earliest studies investigating the effects of the environment on organizational structure were carried out by Burns and Stalker, in England in the early 60's. They compared firms in a dynamic, changing industry to those in a stable, established industry and found important structural differences. In the stable industry successful firms relied on formal rules with decision making very centralized, and narrow spans of supervisory control. These they called mechanistic organizations. In the more dynamic industry, spans of control were wider, with less formality and less centralization. These they labelled organic organizations.

Lawrence and Lorsch (1967), observing that different units of an organization face different types of environments, found that each subunit develops a structure matching its own environment. The successful organization was one which differentiated according to environments, but which was able to integrate the diverse elements. Successful coordination was key.

Technology

Technology is the tools, techniques, and actions used to transform organizational inputs into outputs. Technologies vary widely across organizations, and includes such things as machinery, employee education and work procedures.

In the 1960's Joan Woodward and her colleagues were one of the first to investigate organizational technology. They distinguished between ten different types of technologies related to production, which they then aggregated into three overall categories:

Woodward then matched organizational structures to the different technologies and found that there were major differences between assembly line mass production on the one hand and small batch and continuing process on the other, with the former thriving under highly formalized and centralized hierarchical structures (mechanistic) and the latter under flatter less centralized organizational structures (organic).

Size

Size is the most powerful predictor of specialization and formalization. Basically there are two arguments for size:

-size leads to a division of labour which causes an increase in subunits which leads to a greater need for coordination and therefore, for more formalization.

-size leads to greater difficulty for centralized control, therefore, it leads to decentralization which needs a larger administrative component.