Chapter Sixteen: Organizational Structure and Design
Chapter Synopsis
This chapter presents an overview of how one goes about designing an organizational structure,
touching on the topics of division of labor, delegation of authority, departmentalization, and span of
control. From there, it delves into the nature of the structure itself, including formalization,
centralization, and complexity.
Learning Objectives
After completing this chapter, students should be able to:
1. Compare mechanistic and organic organizational design models
2. Identify the choices that must be made in designing an organizational structure
Key Terms
formalization—A dimension of organizational structure that refers to the extent to which rules,
procedures, and other guides to action are written and enforced.
centralization—A dimension of organizational structure that refers to the extent to which authority
to make decisions is retained in top management.
organic model of organizational design—The organizational design that emphasizes the
importance of adaptability and development. It is relatively informal, decentralized, and simple.
self-managed team—Groups of employees that complete an entire piece of work while having
considerable autonomy over the way in which they accomplish their work.
organizational design—A specific organizational structure that results from managers’ decisions
and actions.
division of labor—The process of dividing work into relatively specialized jobs to achieve
advantages of specialization.
matrix model of organizational design—An organizational design that superimposes a product- or
project-based design on an existing function-based design.
span of control—The number of subordinates reporting to a superior. The span is a factor that
affects the shape and height of an organizational structure.
horizontal differentiation—The number of different units existing at the same level in an
organization. The greater the horizontal differentiation, the more complex is the organization.
vertical differentiation—The number of authority levels in an organization. The more authority
levels an organization has, the more complex is the organization.
Lecture Outline
The Chapter outline is organized to correspond with the PowerPoint slides.
The chapter title slide may be used as a background to introduce the class.
Learning objectives
Review the chapter learning objectives. These will be reviewed on the last slide of the pack.
Introduction
Organizational structure and design have always been important factors influencing the behavior
of individuals and groups that comprise the organization; the new rules of operating in today’s
global business environment make structure and design considerations even more critical.
Organizational structure is considered by many to be “the anatomy of the organization,
providing a foundation within which the organization functions.” Thus, the structure of an
effectiveness. Structural decisions should also reflect company values and incorporate ethical
and environmental considerations.
Organizational Design Models
The two models of organizational design described in this section are important ideas in
management theory and practice. Because of their importance, they receive considerable
theoretical and practical attention. Although many variations on these models can be found in
practice, we will focus on the basic elements of mechanistic and organic organizational designs.
Mechanistic organizational structures, like in the military and with certain religions, are formal,
centralized, and complex. An early management writer, Henri Fayol, proposed a number of
(not behavioral) dimensions of work.
Bureaucracy (1 of 3)
Bureaucracy has various meanings. The traditional usage is the political science concept of
government by bureaus but without participation by the governed. In layman’s terms,
reflected his concern for the ways society develops hierarchies of control so that one group can,
in effect, dominate other groups. Organizational design involves domination in the sense that
authority involves the legitimate right to exact obedience from others. His search for the forms
of domination that evolve in society led him to the study of bureaucratic structure. According to
Weber, the bureaucratic structure is “superior to any other form in precision, stability, discipline
and reliability.
Bureaucracy (2 of 3)
To achieve the maximum benefits of the bureaucratic design, Weber believed that an
organization must have these characteristics:
functions in a machine-like manner to accomplish the organization’s goals in a highly efficient
manner.
The Organic Model (1 of 2)
The organic model of organizational design stands in sharp contrast to the mechanistic model
due to their different organizational characteristics and practices. The most distinct differences
between the two models are a consequence of the different effectiveness criteria each seeks to
maximize. While the mechanistic model seeks to maximize efficiency and production, the
organic model seeks to maximize satisfaction, flexibility, and development.
the chain of command. These practices are intended to implement a basic assumption of the
organic model, which states that an organization will be effective to the extent that its structure is
organization, each member, in the light of his background, values, desires, and expectations, will
view the experience as supportive and one which builds and maintains a sense of personal worth
and importance.
Characteristics of Organic Organizations
An organizational design that provides individuals with this sense of personal worth and
motivation and that facilitates satisfaction, flexibility, and development would have the
following characteristics:
1. It’s relatively simple because of its de-emphasis on specialization and its emphasis on
departments.
Designing Organizational Structure (1 of 2)
Managers who set out to design an organizational structure face difficult decisions. They must
choose among a myriad of alternative frameworks of jobs, work projects, and departments. The
or by a team of managers.
Designing Organizational Structure (2 of 2)
The first decision focuses on individual jobs, the next two decisions focus on departments or
groups of jobs, and the fourth decision considers the issue of delegation of authority throughout
the structure.
1. Managers decide how to divide the overall task into successively smaller jobs. Managers
divide the total activities of the task into smaller sets of related activities. The effect of this
decision is to define jobs in terms of specialized activities and responsibilities. Although jobs
have many characteristics, the most important one is their degree of specialization.
2. Managers decide the bases by which to group the individual jobs. This decision is much like
any other classification decision, and it can result in groups containing jobs that are relatively
homogeneous (alike) or heterogeneous (different).
Division of Labor
Division of labor in organizations can occur in three different ways:
1. Personal specialties. Most people think of specialization in the sense of occupational and
professional specialties.
2. Natural sequence of work. For example, manufacturing plants often divide work into
to the highest-level manager.
Delegation of Authority
Managers decide how much authority should be delegated to each job and each jobholder. As we
have noted, authority refers to individuals’ right to make decisions without approval by higher
management and to exact obedience from others. Delegation of authority refers specifically to
making decisions, not to doing work.
Reasons to Decentralize Authority
Relatively high delegation of authority encourages the development of professional managers.
Second, high delegation of authority can lead to a competitive climate within the organization.
Finally, managers who have relatively high authority can exercise more autonomy and thus
satisfy their desires to participate in problem-solving. This autonomy can lead to managerial
creativity and ingenuity, which contribute to the adaptiveness and development of the
organization and managers.
Reasons to Centralize Authority
Several reasons support centralizing authority
Decision Guidelines
Like most managerial issues, whether authority should be delegated in a high or low degree
cannot be resolved simply. As usual, in managerial decision making, whether to centralize or
decentralize authority can only be guided by general questions.
Department Bases
EXHIBIT 16.1 Functional Departmentalization Structure
Managers can combine jobs according to the functions of the organization. Every organization
must undertake certain activities to do its work. These necessary activities are the organization’s
functions. The necessary functions of a manufacturing firm include production, marketing,
finance, accounting, and human resources. These activities are necessary to create, produce, and
sell a product. The principal advantage of the functional basis is its efficiency. That is, it seems
logical to have a department that consists of experts in a particular field such as production or
accounting. By having departments of specialists, management creates efficient units. An
accountant is generally more efficient when working with other accountants and other
individuals who have similar backgrounds and interests. They can share expertise to get the work
done.
EXHIBIT 16.2 Geographic Departmentalization Structure
EXHIBIT 16.3 Product Departmentalization Structure
Managers of many large, diversified companies group jobs on the basis of product. All jobs
associated with producing and selling a product or product line will be placed under the direction
of one manager. The product becomes the preferred basis as a firm grows by increasing the
number of products it markets. As a firm grows, it’s difficult to coordinate the various functional
departments and it becomes advantageous to establish product units. This form of organization
allows personnel to develop total expertise in researching, manufacturing, and distributing a
product line. Concentrating authority, responsibility, and accountability in a specific product
department allows top management to coordinate actions.
departmentalization is the loan department in a commercial bank. Loan officers are often
associated with industrial, commercial, or agricultural loans. The customer will be served by one
of these three loan officers.
EXHIBIT 16. 5 Matrix Organizations
The matrix model of organizational design attempts to maximize the strengths and minimize the
weaknesses of both the functional and product bases. In practical terms, the matrix design
combines functional and product departmental bases. Matrix organizations achieve the desired
balance by superimposing, or overlaying, a horizontal structure of authority, influence, and
communication on the vertical structure. In the arrangement shown in Exhibit 16.5, personnel
assigned in each cell belong not only to the functional department, but also to a particular
product or project.
be placed in a position of being responsible for immediate subordinates, but she may also be
chair-person of several committees and task groups.
Dimensions of Structure
Managers need to consider how the four design decisions (division of labor, delegation of
authority, departmentalization, and span of control) influence the structure of their organizations.
In a similar vein, there are three dimensions of organizational structure that interact with these
design decisions, namely formalization, centralization, and complexity.
EXHIBIT 16.6 Organizational Dimensions and Decisions Relationships between dimensions of
organizational structure and the four design decisions are summarized in Exhibit 16.6. It notes
the causes of only high formalization, centralization, and complexity. However, the relationships
are symmetrical—the causes of low formalization, centralization, and complexity are the
opposite of those in the exhibit.
and operating policies and procedures that exist in the existing domestic organization are used.
The potential difficulty with such a practice is that it may result in the reliance upon
organizational designs and management practices that are simply unsuitable for the environment
of the host country. This may explain why foreign subsidiary organizational structures tend to
evolve over time as the company becomes more internationalized.
Multinational Structure and Design (2 of 2)
The most prevalent departmental basis is geographical. This arrangement has national and
regional managers reporting to a headquarters in the same national or regional area. Geographic-
based organizations for multinational corporations (MNCs) have the same characteristics as
those for domestic organizations. Each national or regional office has all the resources necessary
to produce and market the product or service. MNCs having a diversified product line may find
certain advantages in the product-based organizational structure. This structure assigns
worldwide responsibility for a product or product line to a single corporate office, and all foreign
and domestic units associated with that product report to the corporate product office.
smaller, closer-to-the-market partner to sense impending changes in the environment and to
respond at the local level, thus relieving the parent organization of that necessity.
Virtual Organizations (2 of 3)
Exhibit 16.7 captures the main characteristics of virtual organizations. The characteristics are
applicable to a movie production firm in which personnel are aggregated to complete a film; to
an e-learning company preparing training courseware (that subject matter experts prepare) for
delivery online to clients; to a manufacturing firm in which subcontractors—both domestically
and globally based—provide raw materials, manufacturing processes, distribution and storage
facilities, and research; and to development consortia, in which intellectual properties flow
through the companies in a specific geographic region.
Exhibit 16.7 summarizes some of the factors, implications, and possible consequences of virtual
organizations. These attributes can be applied to any type of virtual team, unit, organization, or
consortia. Proponents of the virtual-style organization propose that the benefits of this type of
arrangement are faster response time, autonomy, greater flexibility, and more efficient use of
technical, behavioral, and professional expertise. The critics argue that virtual organizations
mean increased conflict, decreased loyalty, a lack of any coherence in plans and strategies,
information overload, and no social inter-action fulfillment.
produce the product and the smaller firms to supply components, do research and design, and
perhaps distribute and market. The participating bank provides the financial requirements to
support the network of cooperative relationships. This form of interorganizational network has
enabled Japanese industry to grow without supply bottlenecks and damage to competition from
domestic firms.
Boundaryless Organizations (1 of 3)
The command and control, top-down, mechanistic organizational design is orderly, specific, and
relies on defined roles for employees, managers, and nonmanagers. Companies such as
Motorola, Oticon A/S, and Coca-Cola are continuously attempting to minimize and, in some
cases, eliminate vertical and horizontal structures, tightly defined work roles, and top-down
control. They are working to achieve what is referred to as a boundaryless organization .The
assumption these and other firms are making is that rigid structure and too much specificity
create barriers within a firm and between a firm and its external suppliers and customers.
Boundaryless Organizations (2 of 3)
The minimization of layers results in a flatter hierarchy. There is still a hierarchy, but there is
less distance, less separation between top-level managers and other employees. The
boundaryless organization also emphasizes participative decision making, multiple-hierarchy
teams (executives, managers, operating employees), team building, and coordination.
Boundaryless Organizations (3 of 3)
The effective boundaryless organization breaks down barriers with external constituents and
distance. Strategic alliances and telecommunicating are examples of how to break down barriers.
The Japanese keiretsu relationship is an example of a vertical alliance between large
corporations and their suppliers. Typically, the large business takes a minority ownership (e.g.,
10 percent) in a supplier. The two organizations become bonded in a strategic partnership for
their mutual gain. There is little room for communication, decision making, and strategic choice
barriers in alliances. The leveraging of resources, achievement of goals, and reduction of risks
are some of the reasons Coca-Cola and Apple Computer have adopted alliances to reduce
unnecessary structural barriers with external constituents.
In Review, Did We…
Instructors may wish to refer to the learning objectives to facilitate a review of the chapter
concepts.
Summary of Key Points
❑ Two important organizational design models are termed mechanistic and organic.
Mechanistic design is characterized by highly specialized jobs, homogeneous departments,
narrow spans of control, and relatively centralized authority. Organic designs, on the other
hand, include relatively de-specialized jobs, heterogeneous departments, wide spans of
control, and decentralized authority.
economic advantages found in specialization of labor.
❑ Delegating authority enables an individual to make decisions and extract obedience without
approval by higher management. Like other organizational issues, delegated authority is a
relative, not absolute, concept. All individuals in an organization have some authority. The
question is whether they have enough to do their jobs.
❑ An organizational design that attempts to maximize the benefits and minimize the
weaknesses of both the functional and product forms is known as matrix design. The benefits
from this structure include the efficient use of resources, flexibility in conditions of change
and uncertainty, technical excellence, freeing top management for long-range planning,
improving motivation and commitment, and providing good opportunities for personal
development.
❑ Three important dimensions of structure are formalization, centralization, and complexity.
Formalization refers to the extent to which policies, rules, and procedures exist in written
form; centralization refers to the extent to which authority is retained in the jobs of top
management; and complexity refers to the extent to which the jobs in the organization are
relatively specialized.
❑ Virtual organizations have become important ways of getting work done. Often termed
“empty organizations,” they serve as focal points for getting all the functions accomplished
but without having to directly manage them.
Review and Discussion Questions
1. Why would a virtual organizational design be popular in the movie industry?
Ans: Movies aren’t shot in a continuous procedure; they’re shot a scene at a time. Each scene has
different actors, actions, backdrops, sound and lighting requirements, and so on. The shooting of the
2. “The more authority that is delegated to non-managers, the less authority managers have.”
Is this necessarily a true statement? Explain.
Ans: This isn’t necessarily a true statement. For instance, managers generally delegate the authority
3. What barriers are reduced or eliminated by adopting a boundaryless organization?
Ans: As the name implies, there are no boundaries in this organization, which is the opposite of a
4. What are some of the factors that may have important implications for structure and design
decisions in multinational corporations?
Ans: Students should suggest the usual factors, such as the characteristics of the company’s external
environment (if the environment is turbulent requiring frequent, fast responses, an organic structure
5. Characterize the following organizations on the basis of their degree of formalization,
centralization, and complexity: The university you are attending, the federal government, and
a franchise of a national fast-food chain.
Ans: Student answers will vary. Their answers should provide evidence to support claims on each
dimension. For example, in assessing complexity, students should mention the degree to which
6. Can you think of a particular company or type of industry that tends toward a mechanistic
design? What advantages and disadvantages could you see if that organization or industry
were to adopt a more organic design form?
Ans: Student answers will vary. Sample answer: Industries, where mechanistic designs predominate,
are very stable and often regulated by the government. In fact, government itself fits the mechanistic
7. What is the difference between organizational structure and design?
8. What cues might a manager have that suggest there is a problem with the design of an
organization? Is changing an existing organization a different from designing a brand new
structure? Explain.
Ans: Cues can include problems in communication. Perhaps certain individuals do not receive
essential information quickly; this suggests problems in communication channels produced by the
changing to a new structure.
Both processes involve:
1. Identifying a problem that suggests a need for change.
9. Changes in organizational size affect structure. In what ways might growth (increasing size)
affect an organization’s structure? In what ways might consolidation (decreasing size) affect
structure?
Ans: As an organization grows, structural complexity increases (vertically and horizontally). It
acquires more levels in its hierarchy and differences within those levels. Flexibility tends to decline
10. What are some of the potential advantages of a matrix design?
Education.
Ans: Among the advantages of well-managed matrix organizations are these: efficient use of
Exercise 16-1: Paper Plane Corporation
Purpose
To illustrate how division of labor can be efficiently structured and how a competitive
atmosphere can be created among groups.
The Exercise in Class
Students find this exercise fun and involving. It clearly demonstrates how structuring a
group task affects group output. To perform well, a group must:
1. Effectively divide the work among members in a way that maximizes output while
maintaining acceptable quality.
3. Maintain tight quality control (the inspector’s responsibility). Poorly produced planes
guarantee financial losses (given the hefty $25,000 penalty per defective plane).Here are
two variations on ways to inspect each group’s planes:
a. As facilitator, you inspect each group’s planes by selecting one plane (the worst one)
from each respective group. Before the exercise begins, inform the group that this single
test will determine the quality of the planes produced by the group. If the single plane
does not fly a specified distance, the group for that round will be penalized a substantial
amount (e.g., $50,000, $75,000, etc.). In informing the group about the inspection test,
don’t tell them how far the plane must fly to pass the test. If they object, note that this
of the exercise. This variation is most effective using the # 1 or #2 variation of plane testing
and in conducting one 20-minute round in the exercise. Expect some very interesting
designs (many of which won’t fly). Also expect some groups with the fancier designs to be
the low producers. They’ll have spent too much time designing the plane and more time
producing the fancier design than will the group with the simpler designs.
Some questions to ask the groups:
1. How did your group structure the group task? What organizational problems did you
encounter?
differ between these two groups?
CASE 16.1: WILL FIAT BE SUCCESSFUL IN THE UNITED STATES THIS TIME?
Discussion questions:
1. As an organization, what must Fiat do to ensure its reentry into the U.S. market does not
end in the same way as its previous entry did in the 1980’s?
While student answer will vary, responses may key on Fiat’s need for a dealer support and service
2. Fiat has reintroduced itself to the U.S. through two means, a new car brand, its namesake
Fiat, and sharing its technology to launch a new Dodge branded vehicle. From an
organizational perspective, which one of these approaches makes the most sense? Justify your
answer.
Although student answers will differ, most will key on the Dodge use of a Fiat design. This approach
Teaching Hints and Tips
Lecture Ideas
1. Invite a guest who has worked in a multi-national corporation, or who is foreign-born with
work experience abroad, to speak to the class. Ask the speaker to talk about the boundary
issues and the cultural and political environment in a host country. What impact did it have on
the way business worked? On the way the business was structured?
3. One of the most challenging management tasks concerning organizational structure is
implementing a shift in delegation of authority from a centralized to a decentralized
organization (or vice versa). The task is challenging because the change affects so many
Project Ideas and Suggested Class Speakers
1. Increase students’ understanding of the different bases of departmentalization for businesses by
having them identify a company in the local community, which is organized according to one
2. Ask students to find or draw an organization chart for their university, then analyze the bases
for departmentalization, the degree of specialization, the centrality of decision-making, and
span of control. Next, ask them to consider how each element they’ve described translates into
their daily experience. In other words, does it matter to them, as “customers” of this
3. Invite the head of a company whose management philosophy is clearly decentralization or
centralization of authority. The speaker could provide some excellent insights into the
advantages and disadvantages of each philosophy.
Term Paper Topics
1. The Virtual Corporation: What is Its Structure?
2. Design an Organization for 2020
3. (Selected company): Profile of an Organic Structure
4. Topic for Term Paper debate: Bureaucracy—A Dinosaur or Useful Organizational Design?