Chapter 15
Foundations of
Organization Structure
LEARNING OBJECTIVES
After studying this chapter, students should be able to:
15-1.Identify seven elements of an organization’s structure.
15-2.Identify the characteristics of the functional structure, the divisional structure, and the
matrix structure.
15-3.Identify the characteristics of the virtual structure, the team structure, and the circular
structure.
15-4.Describe the effects of downsizing on organizational structures and employees.
15-5.Contrast the reasons for mechanistic and organic structural models.
15-6.Analyze the behavioral implications of different organizational designs.
INSTRUCTOR’S RESOURCES
Instructors may wish to use the following resources when presenting this chapter.
Text Exercises
Career OBjectives: What Structure Should I Choose?
An Ethical Choice: Flexible Structures, Deskless Workplaces
Personal Inventory Assessments: Organizational Structure Assessment
Myth or Science?: “Employees Can Work Just as Well from Home”
Point/Counterpoint: The End of Management
Questions for Review
Experiential Exercise: The Sandwich Shop
Ethical Dilemma: Post-Millennium Tensions in the Flexible Organization
Text Cases
Case Incident 1: Creative Deviance: Bucking the Hierarchy?
Case Incident 2: Boeing Dreamliner: Engineering Nightmare or Organizational Disaster?
Instructor’s Choice
This section presents an exercise that is NOT found in the student’s textbook. Instructor’s Choice
reinforces the text’s emphasis through various activities. Some Instructor’s Choice activities are
centered on debates, group exercises, Internet research, and student experiences. Some can be
used in class in their entirety, while others require some additional work on the student’s part.
The course instructor may choose to use these at any time throughout the class—some may be
more effective as icebreakers, while some may be used to pull together various concepts covered
in the chapter.
Web Exercises
At the end of each chapter of this Instructor’s Manual, you will find suggested exercises and
ideas for researching OB topics on the Internet. The exercises “Exploring OB Topics on the
Web” are set up so that you can simply photocopy the pages, distribute them to your class, and
make assignments accordingly. You may want to assign the exercises as an out-of-class activity
or as lab activities with your class.
Summary and Implications for Managers
The theme of this chapter is that an organization’s internal structure contributes to explaining and
predicting behavior. That is, in addition to individual and group factors, the structural
relationships in which people work have a bearing on employee attitudes and behavior. What’s
the basis for this argument? To the degree that an organization’s structure reduces ambiguity for
employees and clarifies concerns such as “What am I supposed to do?” “How am I supposed to
do it?” “To whom do I report?” and “To whom do I go if I have a problem?” shapes their
attitudes and facilitates and motivates them to higher levels of performance. Exhibit 15-10
summarizes what we’ve discussed. Specific implications for managers are below:
Specialization can make operations more efficient, but remember that excessive
specialization can create dissatisfaction and reduced motivation.
Avoid designing rigid hierarchies that overly limit employees’ empowerment and
autonomy.
Balance the advantages of virtual and boundaryless organizations against the potential
pitfalls before adding flexible workplace options.
Downsize your organization to realize major cost savings, and focus the company around
core competencies—but only if necessary, because downsizing can have a significant
negative impact on employee affect.
Consider the scarcity, dynamism, and complexity of the environment, and balance the
organic and mechanistic elements when designing an organizational structure.
Chapter 15 begins with a discussion of whether an organization that is experiencing growth can maintain an
organic, flat structure. Even for a startup with only a few employees, choosing an organizational structure requires
far more than simply deciding who’s the boss and how many employees are needed. The organization’s structure will
determine what relationships form, the formality of those relationships, and many work outcomes. The structure may
also change as organizations grow and shrink, as management trends dictate, and as research uncovers better ways
of maximizing productivity. Structural decisions are arguably the most fundamental ones a leader has to make
toward sustaining organizational growth. In this chapter, we’ll explore how structure affects employee behavior and
the organization as a whole.
BRIEF CHAPTER OUTLINE
I. What Is Organizational Structure?
A. Introduction
1. An organizational structure defines how job tasks are formally divided, grouped,
and coordinated.
2. There are six key elements. (Exhibit 15-1)
B. Work Specialization
1. Henry Ford became rich and famous by building automobiles on an assembly line,
demonstrating that work can be performed more efficiently by using a work
specialization strategy.
2. By the 1960s, there became increasing evidence that a good thing can be carried too
far.
3. The human diseconomies from specialization—boredom, fatigue, stress, low
productivity, poor quality, increased absenteeism, and high turnover—more than
offset the economic advantages. (Exhibit 15-2)
4. Most managers today recognize the economies specialization provides in certain jobs
and the problems when it’s carried too far.
5. Thus, whereas specialization of yesteryear focused on breaking manufacturing tasks
into specific duties within the same plant, today’s specialization breaks complex tasks
into specific elements by technology, by expertise, and often globally.
C. Departmentalization
1. Grouping jobs together so common tasks can be coordinated is called
departmentalization.
2. One of the most popular ways to group activities is by functions performed.
3. Tasks can also be departmentalized by the type of product or service the organization
produces.
4. Another way to departmentalize is on the basis of geography or territory.
5. Process departmentalization can be used for processing customers as well as products.
6. A final category of departmentalization is by type of customer.
D. Chain of Command
1. The chain-of-command was once a basic cornerstone in the design of organizations; it
is far less important today.
2. The chain of command is an unbroken line of authority that extends from the top of
the organization to the lowest echelon and clarifies who reports to whom.
3. Two complementary concepts: authority and unity of command.
a. Authority—the rights inherent to management to give orders and expect the
orders to be obeyed.
b. The unity-of-command principle helps preserve the concept of an unbroken line
of authority. It states that a person should have only one superior to whom he/she
is directly responsible.
4. Times change, and so do the basic tenets of organizational design. The concepts of
chain of command have less relevance today because of technology and the trend of
empowering employees.
5. A low-level employee today can access information in seconds that a generation ago
was available only to top managers.
6. Operating employees are empowered to make decisions previously reserved for
management.
7. Add the popularity of self-managed and cross-functional teams and the creation of
new structural designs that include multiple bosses, and you can see why authority
and unity of command hold less relevance.
8. Many organizations still find they can be most productive by enforcing the chain of
command.
E. Span of Control
1. How many employees a manager can efficiently and effectively direct is an important
question.
2. All things being equal, the wider or larger the span of control, the more efficient the
organization.
3. Exhibit 15-3 illustrates that reducing the number of managers leads to significant
savings.
4. Wider spans are more efficient in terms of cost.
5. However, at some point, wider spans reduce effectiveness.
6. Narrow or small spans have their advocates. By keeping the span of control to five or
six employees, a manager can maintain close control.
7. Narrow spans have three major drawbacks:
a. First, as already described, they are expensive because they add levels of
management.
b. Second, they make vertical communication in the organization more complex.
c. Third, narrow spans of control encourage overly tight supervision and discourage
employee autonomy.
8. The trend in recent years has been toward wider spans of control.
F. Centralization and Decentralization
1. Centralization refers to the degree to which decision making is concentrated at a
single point in the organization.
2. The concept of centralization includes only formal authority—that is, the rights
inherent in a position.
3. An organization characterized by centralization is inherently different structurally
from one that’s decentralized.
4. Research investigating a large number of Finnish organizations demonstrates that
companies with decentralized research and development offices in multiple locations
were better at producing innovation than companies that centralized all research and
development in a single office.
G. Formalization
1. Formalization refers to the degree to which jobs within the organization are
standardized.
2. Low formalization—job behaviors are relatively nonprogrammed, and employees
have a great deal of freedom to exercise discretion in their work.
3. The degree of formalization can vary widely between organizations and within
organizations.
H. Boundary Spanning
1. We’ve described ways that organizations create well-defined task structures and
chains of authority.
a. These systems facilitate control and coordination for specific tasks, but if there is
too much division within an organization, attempts to coordinate across groups
can be disastrous.
b. One way to overcome compartmentalization and retain the positive elements of
structure is to encourage or create boundary-spanning roles.
2. Within a single organization, boundary spanning occurs when individuals form
relationships with people outside their formally assigned groups.
a. Boundary-spanning activities occur not only within but also between
organizations.
b. Gathering information from external knowledge sources is especially
advantageous in highly innovative industries where keeping up with the
competition is challenging.
c. Positive results are especially strong in organizations that encourage extensive
internal communication; in other words, external boundary spanning is most
effective when it is followed up with internal boundary spanning.
3. Organizations can use formal mechanisms to facilitate boundary-spanning activities
through their structures. One method is to assign formal liaison roles or develop
committees of individuals from different areas of the organization.
4. Development activities can also facilitate boundary spanning.
a. Employees with experience in multiple functions, such as accounting and
marketing, are more likely to engage in boundary spanning.
5. Many organizations try to set the stage for these sorts of positive relationships by
creating job rotation programs so new hires get a better sense of different areas of the
organization.
6. A final method to encourage boundary spanning is to bring attention to overall
organizational goals and shared identity concepts.
II. Common Organizational Designs
A. The Simple Structure
1. The simple structure is characterized most by what it is not rather than what it is.
a. It is not elaborate.
b. It has a low degree of departmentalization, wide spans of control, authority
centralized in a single person, and little formalization.
c. The simple structure is a “flat” organization; it usually has only two or three
vertical levels.
d. One individual has the decision-making authority.
2. The simple structure is most widely practiced in small businesses in which the
manager and the owner are one and the same. (Exhibit 15-4)
3. The strength of the simple structure lies in its simplicity. It is fast, flexible,
inexpensive to maintain, and accountability is clear.
4. One major weakness is that it is difficult to maintain in anything other than small
organizations.
5. It becomes increasingly inadequate as an organization grows because its low
formalization and high centralization tend to create information overload at the top.
6. As size increases, it is very difficult for the owner-manager to make all the choices.
7. The simple structure’s other weakness is that it is risky—everything depends on one
person. Illness can literately destroy the information and decision- making center of
the company.
B. The Bureaucracy
1. Standardization—the key concept for all bureaucracies.
2. The bureaucracy is characterized by:
a. Highly routine operating tasks achieved through specialization.
b. Very formalized rules and regulations.
c. Tasks that are grouped into functional departments.
d. Centralized authority.
e. Narrow spans of control.
f. Decision making that follows the chain of command.
3. Its primary strength is in its ability to perform standardized activities in a highly
efficient manner.
4. Weaknesses
a. Specialization creates subunit conflicts; functional unit goals can override the
organization’s goals.
b. Obsessive concern with following the rules.
c. The bureaucracy is efficient only as long as employees confront familiar problems
with programmed decision rules.
5. The Functional Structure
a. The functional structure groups employees by their similar specialties, roles, or
tasks.
b. An organization organized into production, marketing, human resources, and
accounting departments is an example.
i. Many large organizations utilize this structure, although this is evolving to
allow for quick changes in response to business opportunities.
c. Still, there are advantages, including that the functional structure allows
specialists to become experts more easily than if they worked in diversified units.
i. Employees can also be motivated by a clear career path to the top of the
organization chart specific to their specialties.
d. The functional structure works well if the organization is focused on one product
or service.
i. Unfortunately it creates rigid, formal communications because the hierarchy
dictates the communication protocol.
ii. Coordination among many units is a problem, and infighting in units and
between units can lead to reduced motivation.
6. The Divisional Structure
a. The divisional structure groups employees into units by product, service,
customer, or geographical market area.
i. It is highly departmentalized.
b. Sometimes this structure is known by the type of division structure it uses:
product/service organizational structure (like units for cat food, dog food, and
bird food that report to an animal food producer), customer organizational
structure (like units for outpatient care, inpatient care, and pharmacy that report to
hospital administration), or geographic organizational structure (like units for
Europe, Asia, and South America that report to corporate headquarters).
c. The divisional structure has the opposite benefits and disadvantages of the
functional structure.
d. It facilitates coordination in units to achieve on-time completion, budget targets,
and development and introduction of new products to market, while addressing
the specific concerns of each unit.
e. It provides clear responsibility for all activities related to a product, but with
duplication of functions and costs.
C. The Matrix Structure
1. The matrix structure is used in advertising agencies, aerospace firms, research and
development laboratories, construction companies, hospitals, government agencies,
universities, management consulting firms, and entertainment companies.
2. It combines two forms of departmentalization—functional and product.
a. Functional departmentalization puts like specialists together and pools the shared
specialized resources across products.
b. Product departmentalization facilitates coordination and provides clear
responsibility for all activities related to a product, but with duplication of
activities and costs.
3. The most obvious structural characteristic of the matrix is that it breaks the
unity-of-command concept. (Exhibit 15-5)
4. Its strength is its ability to facilitate coordination when the organization has a
multiplicity of complex and interdependent activities.
5. The dual lines of authority reduce tendencies of departmental members to protect
their worlds.
6. It facilitates the efficient allocation of specialists.
7. The major disadvantages of the matrix lie in the confusion it creates, its propensity to
foster power struggles, and the stress it places on individuals.
8. Violation of unity-of-command concept increases ambiguity that often leads to
conflict.
9. Confusion and ambiguity also create the seeds of power struggles.
10. Reporting to more than one boss introduces role conflict, and unclear expectations
introduce role ambiguity.
III. Alternate Design Options
A. The Virtual Organization
1. The essence of the virtual organization is that it is typically a small, core
organization that outsources major business functions.
a. Also referred to as modular or network organization.
b. It is highly centralized, with little or no departmentalization.
2. Exhibit 15-6 shows a virtual organization in which management outsources all of the
primary functions of the business.
a. The dotted lines in this exhibit represent those relationships typically maintained
under contracts.
b. In essence, managers in virtual structures spend most of their time coordinating
and controlling external relations, typically by way of computer-network links.
3. The major advantage to the virtual organization is its flexibility.
4. Virtual organizations’ drawbacks have become increasingly clear as their popularity
has grown.
a. They are in a state of perpetual flux and reorganization, which means roles, goals,
and responsibilities are unclear, setting the stage for political behavior.
b. Cultural alignment and shared goals can be lost because of the low degree of
interaction among members.
c. Team members who are geographically dispersed and communicate infrequently
find it difficult to share information and knowledge, which can limit innovation
and slow response time.
5. Ironically, some virtual organizations are less adaptable and innovative than those
with well-established communication and collaboration networks.
B. The Team Structure
1. The team structure seeks to eliminate the chain of command and replace
departments with empowered teams.
2. This structure removes vertical and horizontal boundaries in addition to breaking
down external barriers between the company and its customers and suppliers.
a. By removing vertical boundaries, management flattens the hierarchy and
minimizes status and rank.
3. Cross-hierarchical teams (which include top executives, middle managers,
supervisors, and operative employees), participative decision-making practices, and
the use of 360-degree performance appraisals (in which peers and others evaluate
performance) can be used.
a. When fully operational, the team structure may break down geographic barriers.
4. Today, most large U.S. companies see themselves as team-oriented global
corporations; many, like Coca-Cola and McDonald’s, do as much business overseas
as in the United States, and some struggle to incorporate geographic regions into their
structure.
C. The Circular Structure
1. Picture the concentric rings of an archery target. In the center are the executives, and
radiating outward in rings grouped by function are the managers, then the specialists,
then the workers. This is the circular structure.
a. The circular structure has intuitive appeal for creative entrepreneurs, and some
small innovative firms have claimed it. However, as in many of the current hybrid
approaches, employees are apt to be unclear about whom they report to and who
is running the show.
2. We are still likely to see the popularity of the circular structure spread. The concept
may have intuitive appeal for spreading a vision of corporate social responsibility
(CSR) initiatives, for instance.
IV. The Leaner Organization: Organizational Downsizing
A. The goal of the new organizational forms we’ve described is to improve agility by
creating a lean, focused, and flexible organization.
1. Downsizing is a systematic effort to make an organization leaner by selling off
business units, closing locations, or reducing staff.
2. Despite the advantages of being a lean organization, the impact of downsizing on
organizational performance has been very controversial.
a. Part of the problem is the effect of downsizing on employee attitudes.
3. In companies that don’t invest much in their employees, downsizing can also lead to
more voluntary turnover so vital human capital is lost.
4. Companies can reduce negative impacts by preparing for the post-downsizing
environment in advance, thus, alleviating some employee stress and strengthening
support for the new strategic direction.
5. The following are some effective strategies for downsizing and suggestions for
implementing them.
a. Invest. Companies that downsize to focus on core competencies are more
effective when they invest in high-involvement work practices afterward.
b. Communicate. When employers make efforts to discuss downsizing with
employees early, employees are less worried about the outcomes and feel the
company is taking their perspective into account.
c. Participate. Employees worry less if they can participate in the process in some
way. In some companies, voluntary early retirement programs or severance
packages can help achieve leanness without layoffs.
d. Assist. Providing severance, extended health care benefits, and job search
assistance demonstrates a company does really care about its employees and
honors their contributions.
6. Companies that make themselves lean can be more agile, efficient, and productive—
but only if they make cuts carefully and help employees through the process.
V. Why Do Structures Differ?
A. Introduction
1. The mechanistic model (Exhibit 15-7)—synonymous with the bureaucracy—has
extensive departmentalization, high formalization, a limited information network
(mostly downward), and little participation in decision making.
2. The organic model (Exhibit 15-7) looks a lot like the boundaryless organization; it
uses cross-hierarchical and cross-functional teams, low formalization, a
comprehensive information network, and high participation in decision making.
3. Why are some organizations structured along mechanistic lines while others are
organic?
B. Organizational Strategy
1. An organization’s structure is a means to help management achieve its objectives.
2. Most current strategy frameworks focus on three strategy dimensions—innovation,
cost minimization, and imitation—and the structural design that works best with each.
a. An innovation strategy means a strategy for meaningful and unique innovations.
This strategy may appropriately characterize 3M Company.
b. A cost-minimization strategy tightly controls costs, refrains from incurring
unnecessary innovation or marketing expenses, and cuts prices in selling a basic
product. This describes Walmart’s strategy.
c. An imitation strategy tries to capitalize on the best of both minimize risk and
maximize opportunity for profit.
3. Exhibit 15-8 describes the structural option that best matches each strategy.
a. Innovators need the flexibility of the organic structure, whereas cost minimizers
seek the efficiency and stability of the mechanistic structure.
b. Imitators combine the two structures.
i. They use a mechanistic structure to maintain tight controls and low costs in
their current activities but create organic subunits in which to pursue new
undertakings.
C. Organizational Size
1. An organization’s size significantly affects its structure.
2. Large organizations—employing 2,000 or more people—tend to have more
specialization, more departmentalization, more vertical levels, and more rules and
regulations than do small organizations.
3. The impact of size becomes less important as an organization expands.