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Chapter 15
Foundations of Organization Structure
Chapter Overview
This chapter examines some of the various means in which
organizations can be structured for maximum effectiveness.
Chapter Objectives
After studying this chapter, the student should be able to:
2. Describe the common organizational designs.
4. Demonstrate how organizational structures differ.
5. Analyze the behavioral implications of different organizational designs.
Suggested Lecture Outline
I. INTRODUCTION
A. The theme of this chapter is that organizations have different structures and the
structures have a bearing on employee attitudes and behavior.
B. Therefore, it is important that managers be able to identify the correct structure to
use in a given situation.
II. WHAT IS ORGANIZATIONAL STRUCTURE?
A. Definition.
2. There are six key elements used to determine the proper
structure for an organization: work specialization,
departmentalization, chain of command, span of control,
centralization and decentralization, and formalization.
B. Six Key Structural Elements.
1. Work Specialization.
a. Also known as division of labor, this is the degree to
1) Because not all employees in an organization have the same skills,
management saw specialization as a means of making the most efficient
Exhibit 15.1
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use of its employees’ skills and even successfully improving them
through repetition.
3) Equally important, it’s easier and less costly to find and train workers to
4) Finally, work specialization increases efficiency and productivity by
encouraging the creation of special inventions and machinery.
d. For much of the first half of the twentieth century, managers thus viewed
work specialization as an unending source of increased productivity. And
they were probably right.
1) When specialization was not widely practiced, its introduction almost
always generated higher productivity.
3) Human diseconomies from specialization began
4) Managers could increase productivity now by enlarging, rather than
narrowing, the scope of job activities.
5) Giving employees a variety of activities to do, allowing them to do a
2. Departmentalization.
a. This is the basis by which jobs are grouped together
so that common tasks can be coordinated.
1) One of the most popular ways to group jobs is by the functions
performed.
2) Functional departmentalization seeks to achieve economies of scale by
placing people with common skills and orientations into common units.
e. Product.
2) This type of grouping provides the major advantage of increased
accountability for product performance, since all activities related to a
specific product are under the direction of a single manager.
f. Geography.
1) Departments can be built based on geography or territory.
Exhibit 15.2
PPT 15.5
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2) If an organization’s customers are scattered over a large geographic area
and have similar needs based on their location, then this form of
departmentalization can be valuable.
g. Process.
1) Each department specializes in one specific phase in the production as
each phase requires different skills; this method offers a basis for
homogenous categorizing of activities.
h. Customer.
1) The assumption underlying customer departmentalization is that the
3. Chain of Command.
echelon and clarifies who reports to whom.
2) Typically, the level of authority is matched to the responsibilities of a
given position.
d. Unity-of-Command.
1) This principle helps preserve the concept of an unbroken line of
2) While this principle is often broken in modern organizations, the result
may be increased conflicting demands or priorities given to workers.
e. Due to the increased use of networked computers, employee empowerment,
and self-managed teams in modern organizations, the concept of chain of
command has become seemingly less relevant.
4. Span of Control.
a. This is the number of employees a manager is expected
levels and managers an organization has.
c. Wide/Large Span of Control.
1) All other things being equal, the wider or larger the
span, the more cost-efficient the organization.
2) Managerial effectiveness however, may be diminished by larger spans of
control.
a) The use of wider spans of control has become more prevalent in
Exhibit 15.3
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PPT 15.7
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d. Narrow/Small Span of Control.
2) But there are three potential drawbacks:
a) Increased costs due to the additional levels of management.
5. Centralization and Decentralization.
a. This refers to the degree to which decision-making is
concentrated at a single point in the organization.
b. The concept only includes formal authority: the rights inherent in one’s
6. Formalization.
a. This is the degree to which jobs in the organization
are standardized.
b. Formal Organizations.
1) In these organizations, the job incumbent has a minimum amount of
2) There is consistent and uniform output driven by explicit job
descriptions, organizational rules, and clearly defined procedures.
c. Informal Organizations.
1) Here job behaviors are relatively non-programmed employees have a
great deal of freedom to exercise discretion in their work.
2) This may increase job motivation, employee satisfaction, and
consideration of alternative means of completing tasks.
III. COMMON ORGANIZATIONAL DESIGNS
A. Simple Structure.
1. The structure has a low degree of departmentalization,
2. Simple structures tend to be “flat” organizations, with only two or three vertical
levels.
4. Advantages.
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5. Disadvantages.
a. The structure is difficult to maintain for anything other than small
organizations.
b. The focus of all decision-making on one person can result very quickly in
B. Bureaucracy.
1. Standardization is the key concept that underlies all
2. Bureaucracies are characterized by routine operating tasks achieved through
3. Advantages.
a. Bureaucracies can perform standardized activities in a highly efficient
4. Disadvantages.
a. Bureaucracies tend to create subunit conflicts due to specialization of
workers and departments.
C. Matrix Structure.
1. This organizational structure combines two forms of
2. The most obvious structural characteristic of a matrix is that
it breaks the unity-of-command concept.
4. Advantages.
a. The matrix attempts to gain the strengths of both
b. A matrix facilitates coordination, especially when
5. Disadvantages.
Exhibit 15.4
PPT 15.13
PPT 15.15
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a. This type of structure tends to create confusion, foster power struggles, and
IV. NEW DESIGN OPTIONS
A. Virtual Organization.
1. Also known as a network or modular organization, this
highly flexible structure typically features a small core
organization that outsources major business functions.
3. The structure allows for the employment of highly skilled workers only for as
4. This organizational option is often used by large firms who contract out the
5. Managers in virtual organizations spend most of their time coordinating and
controlling external relations, typically by way of computer-network links.
6. Exhibit 15.5 shows a virtual organization in which
management outsources all the primary functions of the
business.
a. The core of the organization is a small group of executives whose job is to
oversee directly any activities done in house and to coordinate relationships
with the other organizations that manufacture, distribute, and perform other
crucial functions for the virtual organization.
7. Advantage: flexibility. Virtual organizations also save a great deal of money by
eliminating permanent offices and hierarchial roles.
8. Disadvantage:
a. They are in a state of perpetual flux and reorganization, which means roles,
goals, and responsibilities are unclear:
1) This sets the stage for political behavior.
b. Those who work frequently with virtual organizations also note cultural
alignment and shared goals can be lost because of the low degree of
interaction among members.
1) Team members who are geographically dispersed and communicate
2) Ironically, some virtual organizations are less adaptable and innovative
than those with well-established communication and collaboration
networks.
a) A leadership presence that reinforces the organization’s purpose and
facilitates communication is thus especially valuable.
B. Boundaryless Organization.
1. This type of organization seeks to eliminate vertical and
Exhibit 15.5
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horizontal boundaries and break down the external barriers between the
company and its customers and suppliers.
2. The goal is to reduce internal boundaries by eliminating the chain of command,
4. Functional departments create horizontal boundaries that stifle interaction
among functions, product lines, and units.
5. Another way management can cut through horizontal barriers is to use lateral
transfers, rotating people into and out of different functional areas.
6. When fully operational, the boundaryless organization also breaks down
geographic barriers.
7. The boundaryless organization provides one solution because it considers
geography more of a tactical, logistical issue than a structural one.
8. One way to do this is through strategic alliances.
a. Alliances blur the distinction between one organization and another as
employees work on joint projects.
9. Finally telecommuting is blurring organizational boundaries.
C. The Leaner Organization: Organization Downsizing.
1. The goal of the new organizational forms we’ve described is
to improve agility by creating a lean, focused, and flexible
organization.
2. Downsizing is a systematic effort to make an organization leaner by selling off
business units, closing locations, or reducing staff.
3. Despite the advantages of being a lean organization, the impact of downsizing on
organizational performance has been very controversial.
a. Reducing the size of the workforce has an immediately positive outcome in
the huge reduction in wage costs.
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2. The Four Forces That Influence Structure.
a. Strategy.
1) An organization’s structure is a means to help management to achieve
its objectives.
2) Because objectives are derived from an
3) Structure should follow strategy.
4) There are three strategic dimensions that affect structural design:
a) Innovation.
(1) The degree to which an organization plans to introduce new
(2) Innovative firms will use competitive pay and benefits to attract
top candidates and motivate employees to take risks.
b) Cost Minimization.
(1) These organizations tightly control costs, refrain from incurring
(2) Cost-minimizing organizations pursue fewer policies meant to
develop commitment among their workforce.
c) Imitation.
(1) These organizations try to capitalize on the best of both of the
previous strategies.
(3) These firms are market followers who move into new products
or new markets only after viability has been proven by the
innovators.
b. Organizational Size.
1) The size of an organization significantly affects its structure. Larger
firms tend to be more mechanistic.
3) But size affects structure at a decreasing rate: once an organization has
become fairly mechanistic (around 2,000 employees), additional
increases in size have little effect on organizational structure.
c. Technology.
1) This generic term refers to how an organization transfers its inputs into
outputs.
2) Technologies become focused on either routine or nonroutine activities.
3) Routine Technologies.
a) Characterized by automated and standardized operations. These
technologies tend to be associated with taller and more
departmentalized structures.
b) There is strong evidence that routine technologies are linked to
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4) Nonroutine Technologies.
d. Environment.
1) Composed of institutions or forces outside the organization that
potentially affects the organization’s performance such as suppliers,
competitors, government, and pressure groups.
2) An organization’s environmental uncertainty, and is a key determinant
of structure.
4) Any organization’s environment has three dimensions: capacity,
volatility, and complexity.
a) Capacity
(1) Capacity refers to the degree to which the environment can
support growth.
(2) Rich and growing environments generate excess resources,
which can buffer the organization in times of relative scarcity.
b) Volatility
(2) A dynamic environment with a high degree of unpredictable
(3) Because information technology changes at such a rapid pace, for
instance, more organizations’ environments are becoming
volatile.
c) Complexity
(1) Finally, complexity is the degree of heterogeneity and
concentration among environmental elements.
(2) Simple environments—like in the tobacco industry—are
(3) Organizations that operate in environments characterized as
scarce, dynamic, and complex face the greatest degree of
uncertainty because they have high unpredictability, little room
d) Given this three-dimensional definition of environment, we can offer
some general conclusions about environmental uncertainty and
structural arrangements.
(1) The more scarce, dynamic, and complex the environment, the
more organic a structure should be.
VI. ORGANIZATIONAL DESIGNS AND EMPLOYEE BEHAVIOR
A. It is impossible to generalize any link between organizational
structures and employee performance and/or satisfaction due
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to the high variance caused by individual differences.
B. Different factors stand out in different structures as well.
C. In highly formalized, heavily structured, mechanistic organizations, the level of
D. Some people are most productive and satisfied when work tasks are standardized
and ambiguity minimized—that is, in mechanistic structures. So any discussion of
the effect of organizational design on employee behavior has to address individual
differences.
E. To do so, let’s consider employee preferences for work specialization, span of
control, and centralization
1. Individual Differences. These must become the focus of the discussion.
a. Work Specialization.
1) Work specialization generally contributes to higher employee
productivity at the price of reduced job satisfaction, but not always.
2) While the point at which the human costs of specialized work overtakes
3) The negative behavioral outcomes from high specialization are most
b. Span of Control.
1) There is no evidence to suggest a relationship between span of control
and employee performance or satisfaction.
2) Individual differences may be confounding the results of research in this
area. One assumption, based on several the contingency theories
3) Managers seem to have increasing job satisfaction as number of
employees they supervise increases.
c. Centralization.
2) Decentralized organizations tend to have more autonomy, which is
positively related to job satisfaction.
2. Conclusions.
a. To maximize employee performance and satisfaction, individual differences
must be taken into account.
1) This includes the differences created by culture.
2) The effect of structure of employee behavior is undoubtedly reduced
3) Although research is slim, it does suggest national culture influences the
preference for structure.
4) Organizations that operate with people from high power-distance
cultures, such as Greece, France, and most of Latin America, find their
employees are much more accepting of mechanistic structures than are
employees from low power-distance countries.
VII. IMPLICATIONS FOR MANAGERS
A. The theme of this chapter is that an organization’s internal
structure contributes to explaining and predicting behavior.
B. To the degree that an organization’s structure reduces ambiguity for employees and
clarifies concern, it shapes their attitudes and facilitates and motivates them to
higher levels of performance.
1. Although specialization can bring efficiency, excessive specialization also can
breed dissatisfaction and reduced motivation.
2. Formal hierarchies offer advantages like unification of mission and goals, while
3. Virtual and boundaryless forms are changing the face of many organizations.
4. Organizational downsizing can lead to major cost savings and focus
5. When determining an appropriate organizational form, managers will need to
consider scarcity, dynamism, and complexity of the environment and balance
the organic and mechanistic elements appropriate to their organization’s
environment.
VIII. KEEP IN MIND
A. As tasks become more complex and required skills more
diverse, more use of cross-functional teams.
B. Simple structures are easy to create but difficult to grow.
C. External boundaries can be reduced through globalization, strategic alliances,
customer-organizational links, and telecommuting.
IX. SUMMARY
Discussion Questions
1. Identify the six key elements that define an organization’s structure.
Answer: (1) Work Specialization or division of labor, is the degree to which
activities in the organization are subdivided into separate jobs. (2)
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2. Describe the characteristics of a bureaucracy.
3. Describe a matrix organization.
Answer: This organizational structure combines two forms of departmentalization:
functional and product. The most obvious structural characteristic of a matrix is
that it breaks the unity-of-command concept. Employees in a matrix have two
bosses, (their functional and their product managers). The matrix attempts to gain
4. Describe the characteristics of a virtual organization.
5. Summarize why managers want to create boundaryless organizations.
6. Contrast mechanistic and organic structural models.
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If you are analyzing a large university, give each team one structural element to
study. If you are analyzing a smaller college or school within the university, have
each team look at the entire organization. Each team should prepare to report
orally or in writing on their findings. The reports should address:
a. How is the organization currently structured?
b. What type of organizational structure is it; organic/mechanistic, simple,
bureaucratic, matrix?
c. Could this organization benefit from a new organizational structure; virtual,
team, or boundaryless? How would it benefit?
4. Analyzing Your Organization (Cumulative Project). Have students discuss with the
top managers in their organization the concept of restructuring. When do they
make the decision to restructure? In general, restructurings occur as organizations
grow, but there are other variables also. Have them discuss how the past changes in
structure affected the employees. You might also discuss any plans they might have
to restructure in the future, how they determine when to do this, and the scope of
the project. After the interview, have the students relate their notes to the six key
elements. Did any one element stand out? As a class, were there patterns with
various types of organizations?
Suggested Assignment
Divide the class in to groups of three to five students each. Then ask them to follow
these assignments.
1. Brick & Mortar vs. Brick & Click vs. Click & Buy. Today’s retail world is
increasingly moving online in an effort to woo customers. Research and identify a
2. Mom & Pop Compared to a National Chain. Identify and compare two retailers
that sell similar products, one of which is a small “mom & pop” local operation and
the other belonging to a national chain. Compare the two organizations based on
the six key elements given for structure. Consider the following:
a. What are the advantages and disadvantages of the national chain’s structure?
b. What are the advantages and disadvantages of the Mom & Pop’s structure?
c. At which organization would you prefer to work? Why? Does the structure
have anything to do with your decision?