CHAPTER

THIRTEEN
Designing Organizational
Structures
 Learning Objectives
1. Describe three types of coordination in organizational
structures.
2. Discuss the role and effects of span of control,
centralization, and formalization, and relate these
elements to organic and mechanistic organizational
structures.

3. Identify and evaluate six types of departmentalization.

4. Explain how the external environment, organizational size,
technology, and strategy are relevant when designing an
organizational structure.

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 Organizational Structure
Division of labor and patterns of coordination, communication, workflow,
and formal power that direct organizational activities.

Division of labor
• Results in specialization, separate jobs for different people.
• Improves work efficiency.
• Coordination of work.
• Division of labor limited to ability to coordinate that work.
• Coordinating work can be costly.

Coordinating mechanisms
1. Informal communication.
2. Formal hierarchy.
3. Standardization.

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 Coordination through Informal Communication
Ø All firms coordinate work to some degree through informal
communication.
Ø Vital in nonroutine and ambiguous situations.
Ø Increasingly possible in large firms through technology.
Ø Larger firms also apply:
• Liaison roles.
• Integrator roles.
• Temporary teams.

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 Other Coordinating Mechanisms
Formal hierarchy:
• Direct supervision.
• Assigns legitimate power to manage others.
• Necessary in most firms but has problems.

Standardization:
• Standardized processes.
• Standardized outputs.
• Standardized skills.

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 Elements of Organizational Structure

Span of control. Centralization.

Departmentalization. Formalization.

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Span of Control
Number of people directly reporting to the next level.
Wider span of control is possible when:
• Other coordinating mechanisms are present.
• Routine tasks.
• Low employee interdependence.

Tall versus Flat Structures

As companies grow, they:
a) Build a taller hierarchy.
b) Widen the span of control.

Problems with tall hierarchies:

• Poorer upward information.
• Higher overhead costs.
• Undermines employee empowerment/engagement.

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 Centralization/Decentralization
Information
Production Systems Sales
Centralization – Formal decision- Upper Mgt Upper Mgt Upper Mgt
making authority is held by a few
people, usually at the top.

Firms decentralize as they get larger

Middle Mgt Middle Mgt Middle Mgt
and older.

Varying degrees of centralization in

different areas of the company. Supervisory Supervisory Supervisory
• Example: sales decentralized; info
systems centralized.
Front line Front line Front line

= locus of decision-making authority

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 Mechanistic versus Organic Structures

Exhibit 13.3 Contrasting Mechanistic and Organic

Organizational Structures

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 Departmentalization and Simple Structure
Three functions of departmentalization:
• Establishes chain of command (supervision structure).
• Creates common mental models, measures of performance.
• Encourages staff to coordinate through informal communication.

Simple Structure.
• Small firms — few people, only one distinct product or service.
• Minimal hierarchy.
• Roles are broadly defined.
• Centralized structure.
• Coordination also through informal communication.

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Functional Structure
Organizes employees around specific knowledge or other
resources (e.g., marketing, production).

Benefits: Limitations:
• Economies of scale. • Emphasizes subunit more than
• Supports professional identity and career organizational goals.
paths. • Higher dysfunctional conflict.
• Easier supervision. • Poorer coordination – requires more
controls.

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 Divisional Structure

Benefits:

• Building block structure.

• Accommodates growth.

• Focuses on markets/products/clients.

Limitations:

• Duplication, inefficient use of resources.

• Silos of knowledge.

• Expertise isolated across divisions.

• Difficult to identify best divisional structure in complex

environments.

• Problem with shifting executive power.

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 Team-Based Structure
Self-directed work teams organized around work processes.
Typically an organic structure.

Usually found within divisionalized structure.

Benefits:
• Responsive, flexible.
• Lower admin costs.
• Quicker, more informed
decisions.

Limitations:
• Interpersonal training costs.
• Team development.
• More stressful.
• Team leader issues.
• Duplicated resources.

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 ABB’s Geographic-Product Matrix Structure

Exhibit 13.6 Matrix Organizational Structure at ABB Group.

Note: This diagram represents a simplified version of ABB’s most recent structure.

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 Evaluating Matrix Structures
Benefits:
• Uses resources and expertise effectively.
• Potentially better communication, flexibility, innovation.
• Focuses specialists on clients and products.
• Supports knowledge sharing within specialty.
• Solution when two divisions have equal importance.

Limitations:
• More conflict among managers who share power.
• Two bosses dilute accountability.
• Dysfunctional conflict, stress.

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 Network Structure
Alliance of firms creating a product/service.
Increasingly common due to:
• Focus on core competencies.
• Rapidly changing technology, complex work processes.
Benefits:
• Highly flexible.
• Not saddled with old facilities, resources.
• Potentially more efficient.

Limitations:
• Exposed to market forces.
• Less control over subcontractors.

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 External Environment & Structure 1

Dynamic Stable
• Rapid change, unique • Regular cycles, predictable
situations. change.
• Use organic structure. • Use mechanistic structure.

Complex Simple
• Many things (stakeholders) • Few environmental
to monitor/manage. elements.
• Less need to decentralize.

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 External Environment & Structure 2

Diverse Integrated
• Many products, clients, etc. • Single product, client, area.
• Use divisional structure and • Less need for divisional
decentralize. structure, decentralization.

Hostile Munificent
• Resource scarcity and • Plenty of resources and
competition. product demand.
• Use organic structure for • Less need for organic
responsiveness. structure.

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Effects of Organizational Size
As organizations grow, they:
1. Increase division of labor (job specialization).
2. Coordinate more with standardization and formal hierarchy.
3. Become more decentralized.

Technology and Structure

Mechanisms/processes for making products or services.
Two contingencies:
• Task variability: how predictable are job duties.
• Task analyzability: how much work follows known procedures.

Organic structure for high variability, low analyzability.

Mechanistic structure for low variability, high analyzability.

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Organizational Strategy

Structure follows strategy.

• Strategy points to the environments in which the organization will operate.
• Leaders decide which structure to apply.
Innovation strategy:
• Providing unique products or attracting clients who want customization.

Cost leadership strategy:

• Maximize productivity in order to offer competitive pricing.

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