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III. TYPES OF ORGANIZATIONAL STRUCTURES
In new or young organizations, the entrepreneur or founding group makes the decisions, and most
communication is one-on-one because of the small organization size. This type of early
organizational structure is called prebureaucratic and is highly centralized and lacking task
standardization.
Other things being equal, it is the founder’s personality that determines organizational structure and
strategy.
As small companies grow, they typically adopt greater standardization and taller structures and
develop a bureaucratic structure with greater standardization.
In a bureaucratic structure, there is a formal division of labor, hierarchy, and standardization of
work procedures, and employee behaviors follow written rules.
As they grow, organizations must decide how to carve employees into subunits. This usually means
grouping people in a way that somehow relates to the tasks they perform.
Here are six common bases for grouping employees:
1. Employee knowledge and skills
2. Business function
3. Work process
4. Output
5. Client
6. Location
Now let’s discuss some of the structures that arise from these different groupings.
A. Functional Structure
A functional structure groups people with the same skills, or who use similar tools or work
processes, together into departments.
For example, a marketing department is staffed solely with marketing professionals.
Functional structures tend to work well for organizations in stable environments selling only a
few products or services because of the increased economies of scale.
The possible disadvantages of a functional structure include poor coordination and
communication across functions and a lack of clear responsibility for the delivery of a product
or service.
There is also an increased risk of conflict if employees develop a narrow perspective relevant to
their function and not the organization as a whole.
B. Divisional Structure
A division is a collection of functions organized around a particular geographic area
(geographic structure), product or service (product structure), or market (market structure).
Divisional structures are common among organizations with many products or services,
geographic areas, and customers.
Divisional structures improve coordination across functions and enable flexibility in responding
to environmental changes because employees’ expertise is focused on specific products,
customers, and/or geographic regions.
These structures can also help organizations grow or downsize as needed because divisions can
be added or deleted as required.
The possible disadvantages of a divisional structure are that rivalries and conflict might emerge
across divisions, economies of scale are reduced because resources and skills are duplicated
across divisions, and employees may become focused on divisional rather than organizational
goals.
Global Issues: Multinational Organizational Structures
Summary: Multinational organizations have additional challenges in creating an effective structure to
support their business strategies. There are four primary organizational structures that support global
business:
1. Global product division structure (e.g., McDonald’s): All functional activities are controlled by a
product group at headquarters. This structure is appropriate when the benefits of global integration
are large and local differences are small.
2. Global area division structure (e.g., Frito Lay): Regional and/or country managers are given
substantial autonomy to adapt strategies to fit local situations. This structure is appropriate when
local differences are large and the benefits of global integration are small.
3. Global transnational division structure (e.g., Kraft Foods): A balanced, matrixed relationship
between local managers and headquarters with a two-way flow of ideas, resources, and employees
between the two locations. This structure works best when both global integration and local
responsiveness are needed.
4. Regional headquarters structure (e.g., Coca-Cola and Sony): A regional headquarters is established
in major geographical areas that works collaboratively with the product divisions to give the local
units clearer operational goals and directions than typically happens under the global transnational
division matrix structure. This structure is best when a balance of global integration and local
responsiveness is needed.
C. Matrix Structure
When employees report to both a project or product team and to a functional manager, they are
working in a matrix structure.
An organizational chart for a matrix structure is shown in Figure 14.5.
Matrix structures generate complex reporting relationships because a matrixed employee
essentially has two bosses. Adjusting to a dual reporting relationship can be challenging, but as
long as communication is open and expectations and goals are shared, the problems can be
minimized.
Matrix organizations are good at providing quality customer service, are very flexible, and can
respond quickly to changes because the work units contain all of the needed functional
expertise to make decisions. They are best suited to complex activities in uncertain
environments, and work well when one affiliation is permanent (typically functional) and the
other is temporary, such as a specific project.
If project managers share organizational financial and human resources and cooperate, the
matrix structure is more effective.
D. Team-Based Structure
Organizations with a team-based structure create horizontal or vertical teams that can define
part or all of the organization.
Unlike matrix teams, team members do not report to a second functional manager.
Team-based structures are best when collaboration and inputs from several functional areas are
required.
E. Lattice Structure
In organizations with a lattice structure, cross-functional and cross-level subteams are formed
and dissolved as necessary to complete specific projects and tasks. This structure is common in
consulting organizations.
A lattice structure with minimal hierarchy and few rules, allows employees to create roles for
themselves that leverage their talents and interests rather than be assigned formal jobs.
F. Network Organization
A network organization is a collection of autonomous units or firms that act as a single larger
entity, using social mechanisms for coordination and control.
Because network organizations contract out any function that can be done better or more
cheaply by outside firms, managers spend a lot of time coordinating and controlling the
network of contractors and strategic alliances.
Network organizations are best for functions that do not require frequent exchanges, do not
suffer from supply uncertainty, and do not require customization.
Because a network organization does not have a system of direct supervision or standardized
rules and procedures, it must coordinate and control the participants in some other way.
Some of the ways this is done are through joint payoffs and restricted access:
Joint payoffs: Payments are arranged based on the final product. If the product does
not make it, no firm makes a profit. This motivates everyone to do their best.
Restricted access: By restricting exchanges to a few long-term partners, networked
organizations are more dependent on each other. Long-term relationships decrease the
incentive for one organization to take advantage of another.
CASE STUDY: The Morning Star’s Lattice Structure
Summary: The Morning Star Company is a highly successful and growing $700 million California
tomato-processing company. It was founded on the philosophy of self-management as the company
envisioned “an organization of self-managing professionals who initiate communication and coordination
of their activities with fellow colleagues, customers, suppliers and fellow industry participants.”
1. How would working for Morning Star be different from working at a traditional, bureaucratic
company? What would be the most positive and negative aspects of the experience?
The main difference between Morning Star and a traditional bureaucracy is that Morning Star has no
fixed or assigned authority. Goals are set by the same people who are accountable for making them
2. Do you think the lattice structure is best for Morning Star? Can you identify another structure
that might be more appropriate for the company’s culture of empowerment and self-
management?
Yes. The lattice structure is appropriate for Morning Star’s culture because employee freedom allows
them to be drawn to what they really like and not what they are told. This leads to increased
enthusiasm and performance. A functional structure fits some of the requirements as it would group
3. Where do you think this type of lattice structure would be ineffective? What would make this
type of structure inappropriate or difficult to implement?
This type of lattice structure would be ineffective in a situation that requires direct supervision of
IV. CONTEMPORARY ISSUES IN ORGANIZATIONAL STRUCTURE
In this final section we will examine four emerging issues that relate to organizational structure.
These are virtual organizations, mechanisms for integrating employees, communities of practice,
and the effects of restructuring on performance.
A. Virtual Organizations
A virtual organization is one that contracts out almost all of its functions except for the
company name and managing the coordination among the contractors. A virtual organization
may not even have a permanent office.
Virtual organizations tend to be very complex. Nonetheless, the reduced costs and increased
flexibility from being virtual create a competitive advantage for many firms.
B. Integrating Employees
Segmenting employees into divisions, functional areas, or groups requires additional integrating
mechanisms that facilitate coordination and communication among employees and groups.
These mechanisms can be as simple as getting managers from different units to communicate
and work together to coordinate or to identify and solve shared problems. When done
informally, this is simply called direct contact.
Alternatively, a manager or team member can be assigned a liaison role and held formally
accountable for communicating and coordinating with other groups.
When a specific project or problem needs to be addressed, organizations often create a
temporary committee called a task force.
When integration needs are permanent and more complex, a cross-functional team is created.
Cross-functional teams are like permanent task forces created to address specific problems or
recurring needs.
C. Communities of Practice
Communities of practice can also help to integrate employees and create the informal structure
that nearly every business needs, regardless of its formal structure.
Communities of practice are groups of people whose shared expertise and interest in a joint
enterprise informally binds them together.
The people involved in a community of practice share their knowledge and experiences in
open, creative ways that can create new solutions and approaches to problems.
Although these communities rarely show up on organizational charts and may not even be
formally recognized by executive leadership, companies recognize their benefits and are
increasingly promoting and enabling them.
Managers cannot create effective communities of practice, only the conditions necessary for
them to exist.
Successful managers cultivate communities of practice by identifying and bringing the right
people together, building trust, and providing an appropriate infrastructure.
The heart of a community of practice is the web of relationships among community members.
As a manager, how can you create the conditions that enable communities of practice to
flourish? Here are some experts’ tips:
1. Start with a clear area of business need: build communities that help the company
work more effectively
2. Start small: test ideas and try several formats to see what employees like and what
works best
3. Recruit management involvement: if lower-level employees see their bosses
participating, they are more likely to participate
4. Use technology that supports the community’s needs and that community members are
able to use and are comfortable using: training may be necessary
5. Respect and build on informal employee initiatives already underway: determine what
is already in place and build on it
6. Celebrate contributions and build on small successes: the process takes time and
requires new employee behaviors
A reason many companies invest in communities of practice is the ability of these communities
to transfer knowledge among people.
D. Effects of Restructuring on Performance
The restructuring process is stressful and can decrease employee motivation if the changes are
poorly communicated.
Restructuring efforts must focus on positioning the organization for the future.
Restructuring also must address the real cause of whatever the organization wants to change.
Restructurings should take place as infrequently as possible to create stability, enhance
performance, and minimize employee stress and confusion.
Summary and Application
Organizational design is the process of selecting and managing aspects of organizational structure and
culture to enable the organization to achieve its goals. Organizational structure is the formal system of
task, power, and reporting relationships in an organization.
An organization’s structure is influenced by its business strategy, external environment, talent, size,
expectations of how employees should behave, production technology, and organizational change.
Network organizations are best for functions that do not require frequent exchanges, do not suffer from
supply uncertainty, and do not require customization.
Mechanistic organizations are rigid, traditional bureaucracies with centralized power and hierarchical
communications.
Organic structures are flexible, decentralized structures without clear lines of authority, with decentralized
power, open communication channels, and a focus on adaptability in helping employees accomplish
goals.
Communities of practice are groups of people whose shared expertise and interest in a joint enterprise
informally binds them together.
