Chapter Fourteen
Organizational Structure and Design
Chapter Overview …………………………………………………….. Error! Bookmark not defined.
Learning Outcomes …………………………………………………………………………………………. 2
Real-World Challenge: Building a Treehouse ……………………………………………………. 2
Chapter Outline ………………………………………………………………………………………………. 3
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
In this chapter, we first discuss organizational structure and organizational charts. After discussing factors
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
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
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.
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
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.)
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.
4. Formalization
Formalization reflects the extent to which organizational rules, procedures, and
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
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
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
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
B. External Environment
Rapidly changing environments require more flexible structures to deal effectively with the
C. Organizational Talent
A third factor influencing organizational structure is the nature of the organization’s talent. For
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
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.
F. Production Technology
A fifth factor influencing organizational structure is the organization’s technology, or primary
production system.
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.
G. Organizational Change
As organizations change their strategies and adapt to changing environments, they often modify
and change their structures to support the changes.
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.
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
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.
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.
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.
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.
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
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.
• 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
company.
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
B. Integrating Employees
Segmenting employees into divisions, functional areas, or groups requires additional integrating
mechanisms that facilitate coordination and communication among employees and groups.
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.
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
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.
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. Organizational charts are diagrams of the
reporting relationships and chain of command in a company.
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.
Discussion Questions
1. How do you think your career path might differ in a hierarchical versus a flat organization?
In a hierarchical organization with formal authority, chain of command, and rules, an employee’s
2. Why do you think companies are moving toward flatter, more organic structures? Do you think
this is appropriate?
As shown in Figure 14.2, companies are moving toward flatter, more organic structures because
3. What areas of an organization (e.g., what functions) do you think are the best to centralize?
Which are the best to decentralize?
Centralization creates clear lines of communication and responsibility, and the implementation of
4. What keeps you from delegating more? How can you overcome these obstacles?
Students can use the “Improve Your Skills Feature: Delegation Skills” feature for reference. I do not
5. If you started your own company selling iPhone applications, what organizational structure
would you create? Why?
I would adopt a prebureaucratic structure that is characterized by total centralization and one-on-one
6. If you wanted employees to work collaboratively and minimize conflict, what organizational
structures would you consider adopting? Why? Which structures would you avoid? Why?
I would consider adopting communities of practice because they can integrate employees and create
the informal structure that nearly every business needs, regardless of its formal structure.
7. What type of person would be a good fit with Nordstrom’s extremely organic and informal
structure? Why?
Employees at Nordstrom’s receive material summarizing specific rules and legal regulations, but
8. What would you do during a corporate restructuring to ensure that your best employees did
not leave?
I would “overcommunicate” to employees, pointing out that restructuring is an opportunity to
Understand Yourself Exercise—Am I an Effective Delegator?
This exercise gives students the chance to assess their delegation habits. Once students have assessed
themselves and calculated their scores, they are given a scenario to encourage them to improve their
delegation skills.
Group Exercise—To Matrix or Not To Matrix, That Is the Question
Learning Objective: Consider the benefits and drawbacks of a matrix structure from several stakeholder
perspectives.
Summary: Platinum Resorts is a chain of all-inclusive luxury resorts, with locations in Playa Del
Carmen, Mexico; Negril, Jamaica; Freeport, Bahamas; and Key West, Florida. Some customers return to
Task: Form a group of four students and assign each group member to one of the following roles:
• President of Platinum Resorts
• Sales manager for the Playa Del Carmen, Mexico Resort
• Housekeeper at the Key West, Florida Resort
• Guest at the Negril, Jamaica Resort
Have the groups complete the following questions.
1. Without consulting other members of the team, and from the perspective of your assigned role,
do you think that Platinum Resorts should adopt a matrix structure?
2. Assemble your group and have each member present the potential pros and cons of organizing
as a matrix organization.
Video Exercise
Videos and questions can be found in the eBook and MindTap video folder.
Honest Tea: Organizational Structure
Summary: Honest Tea (U.S.) is a bottled organic tea company based in Bethesda, Maryland. The
1. Describe the role of division of labor and hierarchy at Honest Tea.
2. In what ways has business strategy and organizational size impacted Honest Tea? How might
this change in the future?
When the company started, it was more of a vision than a viable beverage provider. The original
3. Does Honest Tea have more of an organic or mechanistic structure? How can you tell?
Honest Tea appears to embody the very definition of organic organizations provided in the text:
Now What?
Imagine being part of a group with the boss and another coworker in which you are discussing how you
were recently beat to market by a competitor’s new toy line. The boss asks the group what the company
could do to prevent something similar from happening again. What do you say or do? Go to this chapter’s
“Now What?” video, watch the challenge video, and choose a response. Be sure to also view the
outcomes of the two responses you didn’t choose.
OB Concepts Applied: organizational structure; the matrix structure; influence of external environment
on organizational design
Discussion Questions
1. Which organizational structures are illustrated in these videos and how do they influence
strategic execution? Explain.
Organizational structure is the formal system of task, power, and reporting relationships.
Types of organizational structures:
• Bureaucratic structure: An organizational structure with formal division of labor, hierarchy,
and standardization of work procedures. To become more competitive, Alex suggests that the
2. How do these videos illustrate the influence of the external environment on organizational
design?
Organizational design is the process of selecting and managing aspects of organizational structure and
culture to enable the organization to achieve its goals.
Happy Time Toys faced a rapidly changing external environment characterized by intense
3. Based on this chapter, what other ideas do you have to help Happy Time Toys to develop and
manufacture new toys more rapidly and to be faster in responding to the environment?
Happy Time Toys should try virtual teams linked by technology, although employees may still meet
face to face. Although outsourced functions create many challenges, including communication and
