CHAPTER 7
DESIGNING ORGANIZATION STRUCTURE
CHAPTER OUTLINE
New Manager Self-Test: What Are Your Leadership Beliefs?
I. Organizing the Vertical Structure
A. Work Specialization
B. Chain of Command
New Manager Self-Test: Authority Role Models
C. Span of Management
D. Centralization and Decentralization
II. Departmentalization
A. Vertical Functional Approach
B. Divisional Approach
C. Matrix Approach
D. Team Approach
E. The Virtual Network Approach
III. Organizing for Horizontal Coordination
A. The Need for Coordination
B. Task Forces, Teams, and Project Management
C. Relational Coordination
IV. Factors Shaping Structure
A. Structure Follows Strategy
B. Structure Fits the Technology
ANNOTATED LEARNING OUTCOMES
After studying this chapter, students should be able to:
1. Discuss the fundamental characteristics of organizing and explain as work specialization,
chain of command, span of management, and centralization versus decentralization.
Organizing is the deployment of organizational resources to achieve strategic goals. Organizing
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organization and shows who reports to whom.
The span of management is the number of employees reporting to a supervisor. Sometimes
called the span of control, this characteristic of structure determines how closely a supervisor can
monitor subordinates. The average span of control used in an organization determines whether
the structure is tall or flat. A tall structure has an overall narrow span and more hierarchical
levels. A flat structure has a wide span, is horizontally dispersed, and has fewer hierarchical
levels.
Centralization and decentralization pertain to the hierarchical level at which decisions are made.
Centralization means that decision authority is located near the top of the organization. With
decentralization, decision authority is pushed downward to lower organization levels.
2. Describe functional and divisional approaches to structure.
Functional structure is the grouping of positions into departments based on similar skills,
expertise, work activities, and resource use. A functional structure can be thought of as
3. Explain the matrix approach to structure and its application to both domestic and
international organizations.
The matrix structure uses functional and divisional structures simultaneously in the same part of
the organization. The matrix structure has dual lines of authority. The functional hierarchy of
4. Describe the contemporary team and virtual network structures and why they are being
adopted by organizations.
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The implementation of team concepts has been a widespread trend in departmentalization. The
5. Explain why organizations need coordination across departments and hierarchical levels,
and describe mechanisms for achieving coordination.
Coordination refers to the quality of collaboration across departments. It is required whether
6. Identify how structure can be used to achieve an organization’s strategic goals.
Structure depends on a variety of contingencies. The right structure is “designed to fit” the
7. Define production technology and explain how it influences organization structure.
Technology includes the knowledge, tools, techniques, and activities used to transform
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organizational inputs into outputs. Joan Woodward described three types of manufacturing
technology.
LECTURE OUTLINE
NEW MANAGER SELF-TEST: WHAT ARE YOUR LEADERSHIP BELIEFS?
The fit between a new manager and the organization is often based on personal beliefs about the
role of leaders. Things work best when organization design matches a new manager’s beliefs
about his or her leadership role. This exercise helps students identify whether their leadership
beliefs are primarily position based or nonhierarchical.
I. ORGANIZING THE VERTICAL STRUCTURE Exhibit 7.1
Organizing is the deployment of organizational resources to achieve strategic goals.
It is important because it follows from strategy. Strategy defines what to do, and organizing
defines how to do it. The organizing process leads to the creation of organization structure,
which defines how tasks are divided, resources are deployed, and departments are coordinated.
Organization structure refers to:
• Formal tasks assigned to individuals and departments;
• Formal reporting relationships, including lines of authority, decision responsibility, number
of hierarchical levels, and span of managers’ control; and
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• Design of systems for coordination of employees across departments.
The organization chart is the visual representation of an organization’s structure that portrays
the characteristics of vertical structure. It delineates the chain of command, indicates
departmental tasks and how they fit together, and provides order and logic for the organization.
There are several important features of the vertical structure.
A. Work Specialization
1. A fundamental principle is that work can be performed more efficiently if employees
are allowed to specialize. Work specialization, sometimes called division of labor,
is the degree to which organizational tasks are subdivided into separate jobs.
Production is efficient because employees perform small, well-defined tasks.
2. Organizations are moving away from this principle because too much specialization
leads to employees being isolated and doing only a single boring job. Many
companies are enlarging jobs to provide greater challenges or assigning teams to tasks
so employees can rotate among the jobs performed by the team.
B. Chain of Command
1. The chain of command is an unbroken line of authority that links all persons in an
organization and shows who reports to whom. It is associated with two underlying
principles. Unity of command means that each employee is held accountable to only
one supervisor. The scalar principle refers to a clearly defined line of authority in the
organization that includes all employees.
2. Authority, Responsibility, and Delegation
a. The chain of command illustrates the authority structure of the organization.
Authority is the formal and legitimate right of a manager to make decisions, issue
orders, and allocate resources to achieve organizational outcomes. Authority is
distinguished by three characteristics.
• Authority is vested in organizational positions, not people. People in the same
position have the same authority because of the position they hold.
• Authority flows down the vertical hierarchy. Positions at the top have more
formal authority than those at the bottom.
• Authority is accepted by subordinates. The acceptance theory of authority
argues that a manager has authority only if subordinates choose to accept the
commands.
b. Responsibility is the duty to perform the task or activity an employee has been
assigned. Managers are assigned the authority commensurate with responsibility.
Accountability is the mechanism through which authority and responsibility are
brought into alignment. Those with authority and responsibility are subject to
justifying task outcomes to those above them in the chain of command.
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c. Delegation is another concept related to authority; it is the process managers use
to transfer authority and responsibility to positions below them in the hierarchy.
Organizations encourage managers to delegate authority to the lowest possible
level to gain flexibility to meet customer needs and adapt to the environment.
NEW MANAGER SELF TEST: AUTHORITY ROLE MODELS
Expectations about authority for a new manager are often based on experiences with their first
authority figures and role models—Mom and Dad. To understand authority role models, students
think about each statement as it applies to the parent or parents who made primary decisions
about raising them. .Authoritarian expectations fit in a traditional vertical structure with fixed
rules and a clear hierarchy of authority. Flexible authority expectations typically would fit with
horizontal organizing, such as managing teams, projects, and reengineering.
Discussion Question #1: If you wanted to add a group of big data scientists to a large
organization such as PepsiCo, would you centralize the scientists in a central pool at
headquarters or decentralize them to separate divisions? Discuss your reasons.
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3. Line and Staff Authority
a. Line departments perform tasks that reflect the organization’s primary goal and
mission. In a software company, line departments make and sell the product.
Line authority means that managers have formal authority to direct and control
immediate subordinates.
b. Staff departments include all those who provide specialized skills in support of
line departments. The finance department of a software firm has staff authority.
Staff authority is narrower than line authority and includes the right to advise,
recommend, and counsel in the staff specialists’ area of expertise.
C. Span of Management
1. The span of management, or span of control, is the number of employees reporting
to a supervisor. This characteristic of structure determines how closely a supervisor
can monitor subordinates.
2. Factors that determine the span of management include:
a. Work performed by subordinates is stable and routine.
b. Subordinates perform similar work tasks.
c. Subordinates are concentrated in a single location.
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d. Subordinates are trained and need little direction in performing tasks.
e. Rules and procedures defining task activities are available.
f. Support systems and personnel are available for the manager.
g. Little time is required in nonsupervisory activities such as coordination with other
departments or planning.
h. Managers’ personal preferences favor a large span.
3. The average span of control used in an organization determines whether the structure
is tall or flat. A tall structure has an overall narrow span of management and more
levels in the hierarchy. A flat structure has a wide span, is horizontally dispersed,
and has fewer hierarchical levels. The trend is toward wider spans of control as a
way to facilitate delegation. Exhibit 7.2
D. Centralization and Decentralization
1. Centralization and decentralization pertain to the hierarchical level at which decisions
are made. Centralization means that decision authority is located near the top of the
organization. With decentralization, decision authority is pushed down the chain of
command to lower organization levels. The trend is toward decentralization, which
uses workers’ skills, relieves top managers, has well-informed people make decisions,
and permit rapid response. Factors that influence centralization versus
decentralization include:
a. Greater change and uncertainty in the environment are usually associated with
decentralization.
b. The amount of centralization or decentralization should fit the firm’s strategy.
c. In times of crisis or risk of company failure, authority may be centralized at the
top.
Discussion Question #8: Experts say that organizations are becoming increasingly
decentralized, with authority, decision-making responsibility, and accountability being pushed
farther down into the organization. How will this trend affect what will be asked of you as a new
manager?
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II. DEPARTMENTALIZATION Exhibit 7.3
Departmentalization is the basis for grouping individuals into departments and departments
into the total organization. Managers make choices about how to use the chain of command to
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group people together to perform their work. Five approaches to structural design reflect
different uses of the chain of command in departmentalization.
A. Vertical Functional Approach
1. What It Is
a. Functional structure is the grouping of positions into departments based on
similar skills, expertise, work activities, and resource use. People, facilities, and
other resources representing a common organizational resource are grouped
together into a single department.
2. How It Works
a. The major departments under the president are groupings of similar expertise and
resources, such as accounting, human resources, production, and marketing. Each
of the functional departments is concerned with the organization as a whole. The
functional structure is a strong vertical design. Information flows up and down
the vertical hierarchy, and the chain of command converges at the top of the
organization.
b. People in a department communicate primarily with others in the same
department to coordinate work and accomplish tasks or implement decisions.
Managers and employees are compatible because of similar training and
expertise.
Discussion Question #3: An organizational consultant was heard to say, “Some aspect of
functional structure appears in every organization.” Do you agree? Explain.
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B. Divisional Approach Exhibit 7.4
1. What It Is
a. The divisional structure occurs when departments are grouped together based on
organizational outputs. Diverse departments are brought together to produce a
single organizational output. The divisional structure is sometimes called a
product structure, program structure, or self-contained unit structure. Most large
corporations have separate divisions that perform different tasks, use different
technologies, or serve different customers.
2. How It Works
a. Divisions are created as self-contained units with separate functional departments
for each division. For example, separate engineering departments are created
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within each division, and each department is similar and focuses on a single
product. The primary difference between divisional and functional structures is
that in divisional structures, the chain of command from each function converges
lower in the hierarchy and differences of opinion would be resolved at the
divisional level rather than by the president.
3. Geographic- or Customer-Based Divisions Exhibit 7.5
a. Grouping company activities by geographic region or customer group is an
alternative for assigning divisional responsibility. In this structure, all functions
in a specific country or region report to the same division manager. The structure
focuses company activities on local market conditions; competitive advantage
comes from the selling a product adapted to a given country.
C. Matrix Approach Exhibit 7.6, Exhibit 7.7
1. What It Is
a. The matrix approach combines aspects of both functional and divisional
structures simultaneously in the same part of the organization. The matrix has
dual lines of authority. The functional hierarchy of authority runs vertically,
providing traditional control within functional departments. The divisional
hierarchy runs horizontally, providing coordination across departments. The
matrix structure supports a formal chain of command for both the functional
(vertical) and divisional (horizontal) relationships.
2. How It Works
a. The dual lines of authority make the matrix structure unique. The success of the
matrix structure depends on the abilities of people in key matrix roles.
• Two-boss employees report to two supervisors simultaneously and must
resolve conflicting demands from the matrix bosses.
• The matrix boss is the product or functional boss who is responsible for one
side of the matrix.
• The top leader oversees both the product and functional chains of command
and is responsible for the entire matrix.
Discussion Question #4: Some people argue that the matrix structure should be adopted only as
a last resort because the dual chains of command can create more problems than they solve.
Discuss. Do you agree or disagree? Why?
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D. Team Approach
1. What It Is
a. The team approach is probably the most widespread trend in
departmentalization. The vertical chain of command is a powerful means of
control, but passing all decisions up the hierarchy takes too long and keeps
responsibility at the top. Managers can delegate authority, push responsibility to
lower levels, and be more flexible and responsive in the competitive global
environment.
2. How It Works
a. Cross-functional teams consist of employees from various functional
departments, responsible to meet as a team and resolve mutual problems. Team
members report to their functional departments, but also to the team. These teams
provide needed horizontal coordination to complement existing functional or
divisional structures.
b. Permanent teams are groups of employees brought together in a way similar to a
formal department. Emphasis is on horizontal communication and information
sharing because representatives from all functions coordinate to complete a
specific task. Authority is pushed down to lower levels, and front-line employees
are given the freedom to make decisions and take action on their own.
c. With a team-based structure, the entire organization is made up of horizontal
teams that coordinate their work with customers to accomplish the organization’s
goals.
Discussion Question #2: How does relational coordination differ from teams and task forces?
Do you think relational coordination seems more valuable for a service technology or a
manufacturing technology? Explain your answer.
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E. The Virtual Network Approach
1. What It Is
a. The most recent approach to departmentalization extends the idea of horizontal
coordination beyond the boundaries of the organization. Outsourcing, which
means farming out certain activities, has become a significant trend. Partnerships,
alliances, and other collaborative forms are now a leading approach to
accomplishing strategic goals.
b. Some organizations take this networking approach to the extreme to create a new
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kind of structure. The virtual network structure disaggregates major functions
to separate companies that are brokered by a small headquarters organization.
2. How It Works Exhibit 7.8
a. The organization may be viewed as a central hub surrounded by a network of
outsider specialists. Services such as accounting are outsourced to separate
organizations that are connected electronically to the central office. Networked
computer systems, collaborative software, and the Internet enable organizations to
exchange data and information rapidly and seamlessly. Networks allow a
company to concentrate on what it does best and contract out other activities to
companies with distinctive competence in those areas.
b. In similar networking approach called the modular approach, a manufacturing
firm uses outside suppliers to provide large chunks of a product, which are then
assembled into a final product by a few workers.
Discussion Question #5: What is the virtual network approach to structure? Is the use of
authority and responsibility different compared with other forms of departmentalization?
Explain.
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F. Advantages and Disadvantages of Each Structure Exhibit 7.9
1. Functional Approach
a. Grouping employees by common task permits efficient resource use and
economies of scale. Departments enhance in-depth skill specialization and
development, and centralized decision making at the top provides unified
direction.
b. Disadvantages include barriers that exist across departments resulting in poor
communication and coordination and slow response to changes. Innovation and
change require involvement of several departments, and decisions pile up at the
top of the hierarchy creating delay.
2. Divisional Approach
a. The organization is flexible and responsive to change because each unit is small
and tuned in to its environment. Concern for customers’ needs is high and
coordination across functional departments is better because employees are
grouped and committed to a product.
b. Coordination across divisions is often poor. Duplication of resources and the high
cost of running separate divisions is a major disadvantage. The organization loses