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PART FIVE – ORGANIZATIONAL PROCESSES AND
CHARACTERISTICS
Chapter Fourteen – Organizational Structure and Design
Chapter Overview
In Part 4 we continued to learn about how managers can enhance the performance behaviors,
organizational commitment, and engagement of their employees in order to build organizational
effectiveness and competitiveness.
In our final part we focus a bit more broadly on how organizational characteristics influence managerial
and organizational effectiveness. In Chapter 14 we investigate organizational structure and design.
Chapter 15 focuses on organizational culture. We conclude with a discussion of change management in
Chapter 16. In many ways change management is a logical concluding topic for discussion in that it can
be focused on any of the areas covered in our previous parts—individual behavior, group and team
behavior, leadership behavior, and organizational change.
Effective organizational structures improve the working efficiency of the organization, motivate
employees rather than frustrate them, and facilitate working relationships among employees and across
organizational units. An organization’s structure also influences how it operates, how employees
communicate, and how they are expected to behave.
Effective organizational structures improve efficiency and facilitate positive working relationships.
Ineffective organizational structures block communication and cooperation, and drain employee
motivation. Organizational structure is related to employee satisfaction, commitment, and turnover.
In this chapter we first discuss organizational structure and organizational charts. After discussing factors
that influence organizational structure, we identify different types of structures and when they are most
appropriate. We also discuss virtual organizations and ways of integrating employees in any
organizational structure to enhance collaboration and knowledge transfer. After studying this chapter, you
should have a good understanding of how to use organizational design to support a firm’s business
strategy and encourage desired employee behaviors.
Learning Outcomes
After studying this chapter, students should be able to:
1. Identify the elements of organizational structure and describe mechanistic and organic structures.
2. Explain what influences an organization’s structure.
3. Describe the basic types of organizational structures.
4. Identify and discuss four contemporary issues in organizational structure.
Real World Challenge: Building a Treehouse
Summary: Ryan Carson and Alan Johnson founded Treehouse in 2011 as an online interactive education
platform. Treehouse produces courses in web development and programming and business education.
Fueled by $12.6 million in venture capital, Treehouse became the largest computer science school in the
world within less than three years. It wasn’t long, however, before Carson and Johnson were hearing
rumblings of discontent. Putting their joint ears to the ground, the cofounders learned that some front-line
employees felt that their input was being ignored. The news was disturbing because Carson and Johnson
believed that it was important for employees to be involved in the decision-making process. Maybe they
had too many managers, accounting for 10 percent of the workforce. The owners asked: “What if we
removed all management and simply empowered everyone to choose what they do every day? We
laughed at first and then the conversation turned serious. We had hired talented and motivated people. Did
they need managers?”
Real World Challenge: Carson and Johnson have asked for your advice. After reading this chapter, you
should have some good ideas about what to tell them.
Real World Response: Carson and Johnson wrote up a “manifesto” about how the company would work
without managers, posted it on an internal forum, and invited everyone to “discuss” the matter. When the
proposal was put to a vote, 90 percent of Treehouse employees endorsed a bossless workplace. So, in
mid-2013, says Carson, “we removed all managers.…
The result? At first, Carson admits, “it was total chaos,” but Carson and Johnson quickly realized that
much of a manager’s job involves communication and that subordinates mostly need managers because
they need information. Thus, one of the first corrective measures taken by the two (former) top managers
was building a new internal-information tool called Canopy, a sort of open-source email account that
gives everyone the capability to access and contribute to companywide communications. “There are still
going to be managers at Treehouse,” explains Carson. “There just aren’t titles. The only way you can be a
leader is if you lead and people want to follow.”
The system, of course, has its drawbacks. For one thing, says Carson, “I can’t make people do things.…
I’ve even had people tell me they don’t have time or aren’t interested in my ideas. It sucks.” More
important, it can often take quite a while to get projects off the ground. Perhaps the biggest problem,
however, is still ahead. “We have 70 employees now,” says Carson, “and for a company our size, this
model works. However, it’s probably going to start showing serious signs of trouble at around 150
people. “But then again, we’ll figure it out.”
Chapter Outline
I. ORGANIZATIONAL STRUCTURE
Organizational design is the process of selecting and managing aspects of organizational structure
and culture to enable the organization to achieve its goals.
Designing and redesigning the organization in response to internal and external changes is a key
managerial function.
One of the most important outcomes of organizational design is organizational structure, or the
formal system of task, power, and reporting relationships.
When the organizational structure is aligned with organizational needs, it results in greater
organizational efficiencies and less conflict.
Organizational structures influence employee behavior by enabling or restricting communication,
teamwork, and cooperation as well as intergroup relationships.
An organizational chart like the one shown in Figure 14.1 illustrates the chain of command and
reporting relationships.
It is a common mistake to believe that a person’s location in the organizational chart reflects their
importance to the company and its performance.
What usually matters most is what each person contributes, and people at all levels of an
organization can make meaningful contributions.
A. Characteristics of Organizational Structure
Organizational structures reflect the company’s division of labor, span of control, hierarchy,
formalization, and centralization.
Different structures have different levels of each of these characteristics.
Table 14.1 summarizes these characteristics.
1. Division of Labor
In addition to illustrating the chain of command, organizational charts show the division of
labor, which reflects the degree to which employees specialize or perform a variety of tasks
as generalists.
The division of labor is reflected in the number of job titles in an organization, or by the
extent to which specialist roles exist within each functional area.
Dividing work into specialized jobs increases work efficiency. Division of labor also
makes it easier to assess job candidates for the specific talents needed to do each job.
On the downside, employees tend to be more isolated when division of labor is high. The
increased specialization of employees in each division also decreases organizational
flexibility.
2. Span of Control
The number of people reporting directly to an individual is that person’s span of control
(some experts call this the span of management).
Figure 14.2 illustrates a flatter organizational structure with a wider span of control than the
structure shown earlier in Figure 14.1.
Clearly, narrow spans of control are costlier, but they also provide closer supervision and
more coaching. Narrower spans of control are necessary for novel and complex tasks.
Wider spans of control give subordinates greater autonomy and responsibility for self-
management, and are best for routine, production-type work.
Wider spans of control are possible when technology substitutes for close supervision,
when subordinates need less direction and control, and when the jobs being supervised are
similar.
3. Hierarchy
When an organization creates a hierarchy, it outlines supervision relationships by giving
some employees authority over others.
Hierarchy establishes the “tallness” or “flatness” of an organizational chart.
For example, Figure 14.1 shows four hierarchical layers, and Figure 14.2 shows a flatter
three-layer firm. The more layers in an organization, the greater its hierarchy.
Organizations clearly should not have more hierarchical levels than are necessary. Not
having enough levels can also create problems.
Hierarchy can give too much power to a few people at the top of the organization, which
can increase the risk of unethical behavior.
Because hierarchy creates a clear chain of command, it can also restrict the interaction and
communication among employees.
To better compete in a fast-changing, global marketplace, organizations are increasingly
restructuring to reduce their hierarchy and improve speed and efficiency.
Grouping employees into self-managed work teams decreases hierarchy because the teams
incorporate some of the roles previously held by higher layers of management.
4. Formalization
Formalization reflects the extent to which organizational rules, procedures, and
communications are written down.
Formalization is not necessary for high performance, but because formalization increases
job and role clarity, it can increase employee commitment.
5. Centralization
Centralized organizations concentrate power and decision-making authority at high levels
of the organization.
The two subcomponents of centralization are participation in decision making and
hierarchy of authority.
Centralization creates clear lines of communication and responsibility, and the
implementation of decisions tends to be straightforward. Centralization is best in
noncomplex, stable environments.
Flatter, decentralized organizations give lower levels more authority and autonomy for
making decisions.
Flatter structures promote innovation and increase the speed of decision making, and can
save money as a result of fewer management layers.
Decentralization is best when the organization performs nonroutine tasks in complex
environments because it empowers the managers closest to the environment to make
decisions and quickly implement them.
Decentralization increases organizational commitment through greater involvement in the
organization and identification with the organization’s mission and values.
Organizations do not have to be fully centralized or decentralized. Centralization is best
thought of as a continuum, and different functions in a company can have different degrees
of centralization.
Centralizing authority can lead many managers to feel that they are solely responsible for
completing their job tasks and responsibilities.
Delegating tasks to others not only frees you to focus on more important tasks, but also
develops skills in the recipient, increases trust, and can even lead to a higher-quality
product.
B. Mechanistic and Organic Structures
Organizational structures can be thought of as being either more mechanical and machine-like
or more biological and organic.
Mechanistic organizations are rigid, traditional bureaucracies with centralized power and
hierarchical communications. Job descriptions are uniform, and formal rules and regulations
guide decision making.
More mechanistic organizations may minimize costs, but fit best with a relatively stable or
slow-changing environment. When new opportunities present themselves, mechanistic
organizations usually move too slowly to capitalize on them.
In contrast, organic organizations are flexible, decentralized organizations with unclear lines of
authority; they have decentralized power, open communication channels, and a focus on
adaptability in helping employees accomplish their goals.
Organic organizations benefit from faster awareness of and response to market and competitive
changes, better customer service, and faster decision making.
Organic forms like teams and other flatter structures have typically been associated with
increased job satisfaction, affective commitment, and learning.
Note that mechanistic and organic structures represent ends of a continuum, not a dichotomy.
No organization is perfectly organic or completely mechanistic.
II. DETERMINANTS OF ORGANIZATIONAL STRUCTURE
The most appropriate structure for an organization depends on many things, as summarized in Table
14.2.
A. Business Strategy
One of the most important factors influencing the appropriateness of different organizational
structures is the business strategy.
Matching organizational structure to the business strategy leads to higher firm performance.
B. External Environment
Rapidly changing environments require more flexible structures to deal effectively with the
constant changes.
Firms facing a highly differentiated environment usually create different business units to best
serve each market segment.
C. Organizational Talent
A third factor influencing organizational structure is the nature of the organization’s talent. For
example, a flexible structure is more appropriate for highly skilled workers.
Advertising and marketing firms are often organized into teams.
D. Organizational Size
An organization’s size also influences its structure.
Smaller organizations tend to be less bureaucratic than larger firms. Larger organizations tend
to have greater specialization and departmentalization, greater hierarchy, and more rules than
do smaller firms.
It is impossible to identify an optimal organizational size.
To capitalize on the flexibility, adaptability, and decision-making speed of smaller sizes and the
economies of scale of larger sizes, many firms strive to create smaller units within the larger
organization.
E. Behavioral Expectations
A fourth important factor influencing organizational structure is the organization’s expectations
of how employees should behave, and what attitudes it wants to encourage or suppress. This
decision is based in part on the company’s values.
If employees are to be encouraged to make decisions and work collaboratively, a decentralized
and flat structure is appropriate.
If employees are expected to follow explicit rules and procedures, a more hierarchical,
centralized structure would be called for.
F. Production Technology
A fifth factor influencing organizational structure is the organization’s technology, or primary
production system.
When a firm uses unit production, it produces in small batches or makes one-of-a-kind custom
products.
Employees’ talents are more important than the machines being used, and it is difficult to
specify rules and procedures in advance. In this case, a flat structure with a low managerial
span of control is most appropriate.
When a firm uses mass production, it makes large volumes of identical products, typically
using assembly lines and machines. In this case, a tall, bureaucratic structure with a large
managerial span of control would be appropriate.
When a firm uses continuous production, machines constantly make the product and
employees monitor the machines and plan changes. At the bottom of the organization,
continuous production requires a mechanistic structure and low levels of supervision because
machines do most of the work. The structure of a firm using continuous production is often tall
and thin, or even an inverted pyramid.
G. Organizational Change
As organizations change their strategies and adapt to changing environments, they often modify
and change their structures to support the changes.
