Craig W. Fontaine, Ph.D. Northeastern University College of Business Administration
Based on: C.W. Fontaine, How Organizational Structure Impacts Organizations. First
Annual Conference on Organizational Effectiveness, Chicago, IL 2006
2007 Northeastern University
Executive Summary
Organizational structure is perhaps the least understood and most under-appreciated topic
in business. James Schermerhorn, Jr., Professor, Ohio University
Organizational Structure is a topic seldom contemplated by most people working in
organizational settings. We all go to work every day, go to assigned locations, and perform
our jobs *€” and we dont ever think about how our organization is arranged. However,
Organizational Structure is critical both for a company and its employees. People should
think very carefully about the organizational structure of the companies for which they
work or of companies for which they intend to work. In the long run, Organizational
Structure can spell the difference between success and failure for a company, as well as for
the individuals who work there. The purpose of this white paper is to examine those
challenges facing any company wherein Organizational Structure is not probably aligned
with business strategy, and to consider the benefits and pitfalls of a number of
Organizational Structure options as they pertain to the longterm success of individual
employees and the company as a whole.
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee
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The 4 Essential Management Functions
Too often ideas get rejected because they have to travel too far in the organization filled
with fiefdoms and inevitable roadblocks. Mitch Thrower, Author, “The Attention Deficit
Workplace
The first thing to consider is that most people who study Management know that
Organizational Structure is a crucial component of the overall business strategy, just as
important as Planning, Leading, and Controlling an organization.
Figure 1: Major Components for Achieving Organizational Objectives
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In essence, Organizing is the manner in which a company utilizes its resources *€”
specifically, its human resources. How do we organize jobs into departments? How do we
answer the questions who does what and who reports to whom in the chain of command?
There is also an implicit issue of how to coordinate all of these people and all of these
duties across an extended enterprise. Organizational Structure is the framework for
answering these questions and more.
Flexibility of the Organization
Trigger Point
An external event that calls for immediate organizational response, flexibility and
adaptation
While many companies today are still reluctant to change their Organizational Structure,
more and more are coming to find that they need to be adaptive and they need to be
flexible. In fact, Management Theorists *€” people who study this at the academic level
*€” are starting to encourage organizations to change their structure because they need to
be prepared to respond to what we call trigger points. A trigger point is an external event
that has an impact on an organization.
It could be a change in the markets; it could be a change in global competition; it could be
the advent of new technology. These trigger points and any number of others call for
immediate responses, as well as organizational flexibility and adaptation. 2
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee
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Examples of Strategic Renewal
Company
EG&G
Altered Strategy
Government Contractor
Commercial Vendor
Energy Production
Enron
Energy Trading
Commodity Product
GE
Value-Added Products & Services
Low-Cost Grocery Store
Grand Union Strategic Renewal
A companys realignment to pursue new business objectives, to create new products or
services, or to target new consumer markets is referred to as Strategic Renewal
High-End Company
Products
IBM
Services/Consulting
Traditionally Conservative Adults
Marks & Spencer, UK
Young, Trendy Shoppers
French-Based Auto Manufacturer
Renault
Internationally-Focused
Brick & Mortar Store Chain
Walgreens
Chain & Internet Sales
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Figure 2: Major Businesses Adapt to Changing Business Environments
A companys organizational realignment to pursue new business objectives, to create new
products or services, or to target new consumer markets is referred to as Strategic
Renewal. Figure 2 features several prominent examples of Strategic Renewal: Virtually
95% of EG&Gs business was government contract work until they changed their strategy
and became a commercial vendor; Enron was an energy production company that became
an energy trading company; GE was a commodity company
that morphed into a Value-Added; Grand Union changed from a very low-end grocery
business into a very high-end company; IBM changed from products to services and
consulting; Marks and Spencer, a UK clothing company, switched from a conservative
adult market to a young and trendy market; Renault, the almostexclusively French
automobile manufacturer, finally expanded into the international market; and Walgreens, a
brick-and-mortar mainstay, has now established a heavy Internet presence, with growing
online sales.
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Those are great examples of companies that not only changed their business strategies, but
changed organizational structures to match their new strategies.
Other Drivers of Change
There are other reasons why organizations change their business strategies and
Organizational Structures. The table below cites a number of these drivers of change and
the key points of their impact on business, as well as examples of companies that adapted
to such changes.
Approach
Employee Involvement TQM
Key Points
Participation in decision making Continuous process improvement Redesigning work flow
to drive out waste Integration of design, manufacturing, support Statistical control of
variance; process improvement Geographic dispersal, national culture, laws Refine
customer acquisition and retention Statistical control of variance; process improvement
Examples
* General Motors * Hampton Inn Hotels * SAS Airlines * Globe Metallurgical, Inc. *
Motorola * Westinghouse * Hewlett-Packard * Lotus Development * Southwest
Airlines * British Aerospace * Carolla Development * Comdial Corporation * AlliedSignal
* General Electric * Motorola Most large organizations to varying degrees * IBM * Ikon
Office Solutions * Southwest Airlines * AlliedSignal * General Electric * Motorola
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Process Reengineering Concurrent Engineering Six Sigma
Globalization Business Model Reinvention Six Sigma
Figure 3: Drivers of Change and Their Impact on Business
Such adaptation may entail initiatives aimed at increasing employee participation in the
decision-making process, or embracing concepts
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee
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such as Total Quality Management (TQM), which has been a trend for about fifteen years.
Any company still embracing TQM at this point certainly needs to consider changing its
organizational structure. Process re-engineering and concurrent engineering, as the terms
suggest, are measures taken to turn a companys engineering practices towards process
analysis and concurrent engineering, combining both the design and manufacture into one
division. Adapting to Six Sigma demands company-wide process improvements and close
scrutiny of those processes from one division to another. Globalization is an intimidating
and sometimes controversial issue that also tends to drive companies to change their
Organizational Structures. Business model reinvention *€” such as IBM changing from a
product manufacturer into a services and consulting firm *€” is one of the more drastic
examples of business reorganization; but even this sort of sweeping change must be an
option for
a truly flexible organization. Of course, these examples represent evolving business trends
that have come and gone over the years. Flexible organizations try to adapt to such trends
as quickly and efficiently as possible to enhance business and achieve organizational goals.
Key Terms
Organizational Structure
The manner in which an organization aligns (or realigns) itself.
In any discussion of Organizational Structure, its helpful to become acquainted with a few
key terms that describe specific aspects of business organization practices. Very simply,
Organizational Structure is the manner in which an organization arranges (or rearranges)
itself. 5 Once an organization investigates its options and decides upon how its going to
structure itself, its common to draw up an Organizational Chart. Org Charts are not only
quite interesting, theyre very handy tools.
Figure 4: An Organizational Chart
Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee
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Some organizations consider their Organizational Charts as confidential, while other
organizations *€” most of them, in fact, do not. Some companies go so far as to post their
Organizational Charts on their publicly accessible websites. Other key terms include
Centralized and Decentralized Decision Making. Centralized decision making refers to a
business model in which decisions are directed to the top of the organization.
Decentralized decision making is a model in which the organization tends to push the
decisions down to the lowest levels, which can be a good thing. With decentralized
decision making, the benefit is
that the individuals who best know the companys processes are those lower in the
organization, those who roll up their sleeves and work with the processes every day.
Theoretically, such individuals are in a better position to respond to external and internal
drivers and make rapid decisions to control those drivers before they get out of hand and
negatively affect the organization.
Every company organizes itself differently, so there is no absolute right and no absolute
wrong way to design an organization.
Decentralized decision making tends to be a trap, as it may dangerously undermine upper
management in the organization. Nonetheless, decentralized decision making is
increasingly accepted as a viable business model today. Yet another key term is one known
as Formalization, the degree to which an organization tends to document its processes,
rules, and regulations. 6 Centralized and Decentralized Decision Making and
Formalization will vary from one organizational structure to another, depending upon the
options for change that are open to a company.
Hierarchy of Authority
Another key term that is familiar in the designing an organization is what we call a
