Organizational structure refers to the way that an organization arranges people and jobs so work gets done. In large organizations, structural decisions are based in the delegation of various tasks or functions. Therefore, procedures are established which assign responsibilities for various functions. The profound social, technological, and cultural changes taking place in contemporary societies require new forms of organization (European Commission, 2000). A formal structure may not be necessary.
In an organization of any size or complexity, employees' responsibilities typically are defined by what they do and to whom they report to. These responsibilities are assigned to positions in the organization rather than to specific individuals. The organizational structure for any organization depends on numerous factors including the work the organization performs, size, number of employees, revenue, and geographic distribution. It is also defined according to the range of its businesses, in other words, the degree to which it is diversified across markets.
Origins of Organizational Structure
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At the beginning of the twentieth century, the United States business sector was thriving. Industry was shifting from single unit manufacturing to mass production. Frederick Taylor in the United States and Henri Fayol in France studied the systems and developed principles to determine how to structure organizations for the greatest efficiency and productivity.
Management during this period was influenced by German sociologist and engineer Max Weber ideas of bureaucracy, where power is attributed to positions rather than to the individuals holding those positions. This period was also influenced by Taylor's scientific management, or 'one best way' to accomplish a task using scientifically pre-determined studies of time and motion. Also influential were Fayol's ideas of invoking unity within the chain-of-command, authority, discipline, task specialization, and other aspects of organizational power and job separation. This created the context for vertically structured organizations characterized by distinct job classifications. Organizational power and job separation also created top-down authority structures. This is known as the traditional or classical organizational structure.
Job specialization, a hierarchical structure through a tight chain-of-command, and the subordination of individual interests to the goals of the organization resulted in organizations being arranged by functional departments with order and control maintained by rules, regulations, and standard operating procedures. This classical view, or bureaucratic structure, of organizations was the dominant pattern, as small organizations grew increasingly larger during the economic boom that occurred from the 1900s until the Great Depression of the 1930s. Henry Ford's automobile plants were typical of this hierarchy.
After World War II, rebuilding the nation reignited economic growth, powering organizations toward increasing size in terms of sales revenue, employees, and geographic distribution. Along with increasing growth came increasing complexity. Problems in U.S. business structures became apparent and new ideas began to appear. Studies of employee motivation raised questions about the old model. The 'one best way' to do a job gradually disappeared as the dominant logic. Concerns included that traditional organizational structures might prevent, rather than help, promote creativity and innovation. Both of these are necessary as pressures to compete globally increased.
Classification of Organizational Structures
The structure of every organization is unique in some respects, but all organizational structures develop or are ongoingly designed to enable the organization to accomplish its work according to market needs. Typically, the structure of an organization evolves as the organization and market share grows and changes over time. Though conceptualized as a process, organizational design is still treated as a discrete event involving a small group of people, normally managers and technical experts, whose task is to choose ideal structures capable of coping with continuous changes in the internal and external environments of the organization (Harrison and Shirom, 1998). Researchers generally identify four basic decisions managers have to make as they develop the organizational structure:
1. The work must be divided into specific jobs.
2. Jobs are grouped or departmentalized.
3. The number of people and jobs to be grouped together must be decided, as well as, the number of people that are to be managed by one manager.
4. The way decision-making authority is to be distributed must be determined.
As these decisions are made, managers find a wide range of choices. At one end of the spectrum jobs are highly specialized with employees performing a narrow range of activities, while at the other end of the spectrum employees perform a variety of tasks. Therefore, jobs are grouped into departments and the manager must decide the basis on which to group them. This cognitive perspective on design assumes that the forms adopted by an organization over time are the result of the way in which people make sense of the context and organizational events (Forbes, 1999).
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For the last few decades the most common basis was by function. For example, all accounting jobs in the organization were grouped into an accounting department; all engineers were grouped into an engineering department, and so forth. The degree to which authority is distributed throughout the organization can vary as well, but traditionally structured organizations typically give final decision-making authority by those highest in the vertically structured hierarchy. High job specialization, functional departments, narrow spans of control, and centralized authority characterize the traditional model of organizational structure. In contrast, a structure formed by choices at the opposite end of the spectrum for each design decision is unstructured, informal, or organic.
Many organizations group jobs in various ways in different parts of the organization, but the basis used at the highest level plays a fundamental role in shaping the organization. There are four commonly used departmentalization forms: functional, geographical, product, and customer or market.
Functional departmentalization groups jobs that require the same knowledge, skills, and resources. These grouping allows the work to be done efficiently and promotes the development of expertise. For example, key functions of a manufacturing company include production, purchasing, marketing, accounting, and personnel. Using such functions as the basis for structuring the organization will have the advantage of efficiency. A disadvantage of functional groupings is that people with the same skills and knowledge may develop a narrow departmental focus and have difficulty understanding what is important to the organization as a whole. In addition, coordination of work across functional boundaries can become a challenge, especially as the organization grows in size and spreads to multiple geographical locations.
Geographical departmentalization as the name implies is used by organizations that are spread over a wide geographical area. This type of structure provides the advantage of centralization as all activities performed in a region are managed together. This allows the organization to maintain a central focus and expertise. For example, marketing a product in the U.S. has different requirements than marketing the same product in Europe or Asia. Companies that market products globally find adopting a geographic structure very advantageous.
Product departmentalization is useful for large, diversified companies as these are often organized according to a specific product. All the activities necessary to produce and market a product or group of similar products are grouped together. In this type of departmentalization, the manager of the product group typically has significant autonomy over the operation. The advantage of this type of structure is that the personnel in the group can focus on the particular needs of their product line therefore become experts in its development, production, and distribution. A significant disadvantage is the duplication of resources. Each product group requires most of the functional areas such as finance, marketing, production, and so forth.
Market departmentalization may find it advantageous to organize its structure according to the types of customers it serves. For example, a distribution company that sells to a diversified range of customers such as consumers, government, small and large businesses may decide to base its primary divisions on the different markets it serves. A benefit of this structure is the proficiency of employees in meeting the needs of the particular customers.
Alternative Organizational Structures
Some organizations find that traditional structures do not meet their needs. One approach is the matrix structure, which is the combination of two or more different structures. For example, a product group wants to develop a new addition to its line. The manager obtains personnel from functional departments. These personnel then work under the manager for the duration of the project. One advantage of a matrix structure is that it facilitates the use of highly specialized staff and equipment. Rather than duplicating functions as would be done in a simple product department structure, resources are shared as needed. In some cases, highly specialized staff may divide their time among more than one project. In addition, maintaining functional departments promotes functional expertise, and fosters new ideas.
The disadvantages of a matrix organization arise from the dual reporting structure. Large multinational corporations that use a matrix structure most commonly combine product groups with geographic units. Product managers have global responsibility for the development, manufacturing, and distribution of their own product or service line, while managers of geographic regions have responsibility for the success of the business in their regions.
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As corporations become very large they often restructure as a means of revitalizing the organization. Growth of a business often is accompanied by a growth in bureaucracy, as positions are created to facilitate developing needs or opportunities. Continued changes in the organization or in the external business environment may make this bureaucracy a hindrance rather than a help, not simply because of the size or complexity of the organization but also because of a sluggish bureaucratic way of thinking. One approach to encourage new ways of thinking and acting is to reorganize parts of the company into largely autonomous groups know as strategic business units (SBUs).
SBUs are set up like separate companies. The manager is responsible to the top management of the corporation. This arrangement can be seen as taking any of the departmentalization schemes one step further. The SBUs might be based on product lines, geographic markets, or other differentiating factors.
Important developments in organizational design in the last few decades attempts to understand the nature of interdependence and improve the functioning of organizations in respect to vertical integration. Decision-making flows vertically up and down the layers, but mostly downward. In general terms, this is an issue of interdependence and is sometimes necessary, but may be a hindrance in rapidly changing environments. These changes and the intense pressure to maintain optimum levels of effectiveness compel companies to review their processes and structures ever more frequently and explicitly, resulting in a renewal of interest in the subject of organizational design. Traditional notions of design and organization have been supplanted by concepts such as organizing, designing and improvising, which emphasize the dynamic and creative nature of the organizational design phenomenon (Rousseau, 1997).
2005; Wrzesniewski and Dutton 2001). One approach is to flatten the organization, to develop the horizontal connections and de-emphasize vertical reporting relationships. At times, this involves simply eliminating layers of middle management. For example, some Japanese companies have only four levels of management: top management, plant management, department management, and section management. Some U.S. companies also have drastically reduced the number of managers as part of a downsizing strategy; not just to reduce salary expense, but also to streamline the organization in order to improve communication and decision making.
Technology is another means of flattening the organization. The use of computer networks and software designed to facilitate group work within an organization can speed communications and decision-making. Even more effective is the use of intranets to make company information readily accessible throughout the organization. The rapid rise of such technology has made virtual organizations and boundary-less organizations possible, where managers, technicians, suppliers, distributors, and customers connect digitally rather than physically.
A different perspective on the issue of interdependence can be seen by comparing the organic model of organization with the mechanistic model. The traditional, mechanistic structure is characterized as highly complex because of its emphasis on job specialization, highly formalized emphasis on definite procedures and protocols, and centralized authority and accountability. Yet, despite the advantages of coordination that these structures present, they may hinder tasks that are interdependent. In contrast, the organic model of organization is relatively simple because it de-emphasizes job specialization, is relatively informal, and decentralizes authority. Decision-making and goal-setting processes are shared at all levels, and communication ideally flows more freely throughout the organization.
A common way that modern business organizations move toward the organic model is by the implementation of various kinds of teams. Some organizations establish self-directed work teams as the basic production group. Examples include production cells in a manufacturing firm or customer service teams in an insurance company. At other organizational levels, cross-functional teams may be established, either on an ad hoc basis or on a permanent basis as the regular means of conducting the organization's work. Part of the drive toward the organic model is the belief that this kind of structure is more effective for employee motivation. Various studies have suggested that steps such as expanding the scope of jobs, involving workers in problem solving and planning, and fostering open communications bring greater job satisfaction and better performance.
Industry consolidation and creating huge global corporations through joint ventures, mergers, alliances, and other kinds of inter-organizational cooperative efforts has become increasingly important in today's business environment. Among organizations of all sizes, concepts such as agile manufacturing and just-in-time inventory management are impacting managers' thinking about their organizational structure.
The first half of the twentieth century was dominated by the one-size-fits-all traditional top-down structure. The early twenty-first century has been dominated by the thinking that changing organizational structures, while still a monumental managerial challenge, can be a necessary condition for competitive success.