2.1: Defining Organization

2.1.1: The Role of Management in an Organization

Management is tasked with generating an organizational system and integrating operations for high efficiency.

Learning Objective

Categorize the three primary managerial levels in an organization

Key Points

Management may be described as the the people who design an organization’s structure and determine how different aspects of the organization will interact.
Management entails six basic functions: planning, organizing, staffing, leading, controlling, and motivating.
Different levels of management will participate in different components of this design process, with upper management creating the initial organizational architecture and structure.
Organizational design is largely a function based on systems thinking: identifying the moving parts within an organization that add value and ensuring that these parts function together as an effective and efficient whole.
Organizational design is less static in modern organizations; therefore, management must actively adapt organizational design to various challenges, opportunities, and technological improvements to maintain competitive output.

Key Terms

organization chart: A graphic display of reporting relationships, which sometimes displays position titles and position holders.
systems thinking: The process of understanding how parts influence one another within a whole.

Management and Organizational Design

Management can be described as the people who design an organization’s structure and determine how different aspects of the organization will interact. When designing an organization, managers must consider characteristics such as simplicity, flexibility, reliability, economy, and acceptability. Different levels of management will participate in different components of this design process, with upper management creating the initial organizational architecture and structure.

Organizational design is largely a function based on systems thinking. Systems thinking involves identifying the moving parts within an organization that add value and ensuring that these parts function together as an effective and efficient whole. Perspective is essential in systems thinking: a manager’s role in organizational design is to refrain from thinking of departments, individuals, processes, and problems as separate from the system and instead think of them as indivisible components of the broader organizational process.

Modern organizations exist within a framework of globalization and constant technological disruptions; as a result their organizational design is less static than in the past. Management must actively adapt organizations to meet various challenges, opportunities, and technological improvements to maintain competitive output. Because the organization is always changing, the problems of process and design are essentially limitless. Using a systems approach, managers view their objectives as moving targets and actively engage in expanding the organization day by day.

Management Processes

Organizations can be viewed as systems in which management creates the architecture for the system of production. Managers’ role in organizational design is central but must be understood in the context of their overall responsibilities within the organization.

Management operates through functions such as planning, organizing, staffing, leading/directing, controlling/monitoring, and motivation. These functions enable management to create strategies and compile resources to lead operations and monitor outputs.

The functions of management

Management operates through four main functions: planning, organizing, directing (i.e., leading), and controlling (i.e., monitoring and assessing).

Management Hierarchy

All levels of management perform these functions. However, the amount of time a manager spends on each function depends on the level of management and the needs of the organization—factors which play a role in organizational design.

Top-level managers include the board of directors, president, vice-president, CEO, and other similar positions. They are responsible for planning and directing the entire organization.
Middle-level managers include general managers, branch managers, and department managers, all of whom are accountable to the top-level management for the functions of their departments. They devote more time to organizing and directing.
First-level managers include supervisors, section leads, foremen, and similar positions. They focus on controlling and directing.

As a result of this hierarchy, upper management will view the organizational design from a macro-level and consider all moving parts of the organization. Middle-management will generally focus on operations within functional or geographic areas. Lower-level managers will look at specific processes within functions or regions. From an organizational-design perspective, the higher managers are in the organization, the broader the view they will take and the greater number of moving parts they will consider.

2.1.2: Basic Types of Organizations

Most organizations fall into one of four types: pyramids/hierarchies, committees/juries, matrix organizations, and ecologies.

Learning Objective

Describe the basic types of organizations using four common structures

Key Points

Organizations fall into one of four basic types: pyramids/hierarchies, committees/juries, matrix organizations, and ecologies.
From a business perspective, the choice of organizational design has substantial implications for strategy, authority distribution, resource allocation, and functional approaches.
A pyramid/hierarchy has a leader who is responsible for making all decisions that affect the organization. This leader manages other organizational members.
Committees/juries consist of groups of peers who decide collectively, sometimes by casting votes, on the appropriate courses of action within the organization.
Matrix organizations assign workers to more than one reporting line in an attempt to maximize the benefits of both functional and decentralized organizational forms.
In ecologies, each business unit represents an individual profit center that holds employees accountable for the unit’s profitability.

Key Terms

decentralized: A structure where business units operate autonomously and have greater decision-making power.
functional: A structure that consists of activities such as coordination, supervision, and task allocation.
common law: A precedent or policy developed by judges through decisions of courts and similar tribunals.

Basic Organizational Structures

An organization is a social entity with collective goals that is linked to an external environment. Most organizational structures fall into one of four types: pyramids/hierarchies, committees/juries, matrix organizations, and ecologies. From a business perspective, the choice of organizational design has substantial implications for strategy, authority distribution, resource allocation, and functional approaches.

Pyramid/Hierarchy

An organization using a pyramid or hierarchy structure has a leader who is responsible for and makes all the decisions affecting the organization. This leader manages other organizational members. Pyramids and hierarchies often rely on bureaucratic practices, such as clearly defined roles and responsibilities and rigid command and control structures. Like a physical pyramid, these organizations need a sturdy base with sufficient members to support various levels of management within the overall structure so that the organization does not fall short of its goals.

From a business perspective, a hierarchy will often be divided according to function or geography. For example, a global retailer may utilize a geographic hierarchy at the upper level, with each geographic branch creating a functional hierarchy beneath it. A smaller organization operating in a single region may simply have a functional hierarchy.

The Iraqi Special Security Organization

This organizational chart of the Iraqi Special Security Organization illustrates a hierarchy. Note the multiple separate layers to the organization’s hierarchy; the lowest layer includes individual branches, the next layer involves supervisory directorates, which report to the director’s office, who is accountable to the scientific branch.

Committee/Jury

Committees or juries consist of groups of peers who decide collectively, sometimes by casting votes, on the appropriate courses of action within an organization. Committees and juries have a basic distinction: members of a committee usually perform additional actions after the group reaches a decision, while a jury’s work concludes once the group has reached a decision. In countries with common-law practices, for example, a jury of peers render innocent or guilty verdicts in the court system. Juries are often used to determine athletic contests, book awards, and similar contests.

In the business world, a committee structure is more commonly found in smaller institutions. A start-up company with three people, for example, may easily function as a committee in which decisions are made via discussion. Committees represent a decentralized approach to organizational design and tend to have a collaborative, often unstructured workplace. The more people involved, the more disparate and less effective committee structures become.

Matrix

Matrix organizations assign employees to two reporting lines, each with a boss representing a different hierarchy. One hierarchy is functional and assures that experts in the organization are well-trained and assessed by bosses who are highly qualified in the same areas of expertise. The other hierarchy is executive and works to ensure the experts bring specific projects to completion. Matrix organizations are by far the most complex and are more common in large corporations.

Projects can be organized by product, region, customer type, or other organizational need. The matrix structure combines the best parts of both separate structures. In a matrix organization, teams of employees perform work to take advantage of the strengths and compensate for the weaknesses of both the functional and decentralized forms of organizational structure. Matrix organizations may be further categorized as one of the following types:

Weak/Functional Matrix: A project manager with limited authority is assigned to oversee cross-functional aspects of the project. Functional managers maintain control over their resources and project areas.
Balanced/Functional Matrix: A project manager is assigned to oversee the project. Power is shared equally between the project manager and functional managers, combining the best aspects of functional and project-oriented organizations. This system is the most difficult to maintain because of difficulties in power-sharing.
Strong/Project Matrix: A project manager is primarily responsible for the project. Functional managers provide technical expertise and assign resources as needed.

Ecology

In ecologies, each business unit represents an individual profit center that holds employees accountable for the unit’s profitability. These kinds of organizations foster intense competition, as all members are paid for the actual work they perform. Ineffective parts of the organization are left to fail and thriving parts are rewarded with more work. Companies that use this organizational structure define roles and responsibilities strictly, and each business unit tends to operate autonomously. In an ecology organization, clearly defined, measurable objectives that reflect the business’s goals are critical.

2.1.3: The Organizational Chart

An organization chart is a diagram that illustrates the structure of an organization.

Learning Objective

Compare the various types of organization charts that describe company structures

Key Points

Organization charts are a vital tool of management and can be classified into three broad categories: hierarchical, matrix, and flat (or horizontal).
Organization charts illustrate the structure of an organization, the relationships and relative ranks of its business units/divisions, and the positions or roles assigned to each unit/division.
Before working with an organization, employees should procure a copy of its organizational chart. A new employee or manager can then understand how authority is distributed within the organization and with whom to consult about various concerns.

Key Term

decentralized: Dispersed rather than concentrated in a single, central location or authority.

The Purpose of Organization Charts

An organization chart (sometimes called an organizational chart, an org chart, or an organogram) is a diagram that illustrates the structure of an organization, the relationships and relative ranks of its business units/divisions, and the positions or roles assigned to each unit/division.

Examples of such roles include managers of various departments, subordinates within these departments, directors, and chief executive officers. When an organization chart grows too large, it can be split into smaller charts that show only individual departments within the organization.

Prior to applying for a job or beginning work with an organization, a prospective employee should procure a copy of the organization chart. New employees or managers can then know with whom to consult about particular issues, as well as understand the distribution of authority within the company. The org chart can also provide insight into the broader strategy of the company—such as the degree of innovation versus process control being pursued, the flexibility of project management, the degree of autonomy, and the broader company culture.

The different types of organization charts include hierarchical, matrix, and flat (also known as horizontal). These are described briefly below.

Hierarchical Organization Charts

A hierarchical organization is an organizational structure with several reporting layers. Every entity within the organization—except for the owners—is subordinate and reports to a higher level entity.

Matrix Organization Charts

A matrix organizational chart displays how people with similar skills are pooled together for work assignments.

Matrix organizational chart

In a matrix structure, the organization is grouped by both product and function. Product lines are managed horizontally and functions are managed vertically. This means that each function—e.g., research, production, sales, and finance—has separate internal divisions for each product.

Flat or Horizontal Organization Charts

A flat organization chart shows few or no levels of intervening management between staff and managers. A flat chart will simply look like a line of boxes with no overt authority implied.

2.1.4: Characteristics of Organizational Structures

Important characteristics of an organization’s structure include span of control, departmentalization, centralization, and decentralization.

Learning Objective

Outline the departmentalization options available to corporations from an organizational structure perspective and differentiate between centralized and decentralized decision-making, and the resulting structural implications

Key Points

Organizational structures provide basic frameworks to help operations proceed smoothly and functionally.
Span of control refers to the number of subordinates a supervisor has; it is used as a means of ensuring proper coordination and a sense of accountability among employees.
Departmentalization is the basis by which an organization groups tasks together. There are five common approaches: functional, divisional, matrix, team, and network.
Centralization occurs when decision-making authority is located in the upper organizational levels. Centralization increases consistency in the processes and procedures that employees use in performing tasks.
Decentralization occurs when decision-making authority is located in the lower organizational levels. With decentralized authority, important decisions are made by middle-level and supervisory-level managers, thereby increasing adaptability.

Key Term

span of control: The number of subordinates a supervisor has.

Organizational structures provide basic frameworks to help operations proceed smoothly and functionally. Types of organizational structures include functional, divisional, matrix, team, network, and horizontal structures. Each of these structures provides different degrees of four common organizational elements: span of control, departmentalization, centralization, and decentralization.

Span of Control

Span of control—or the number of subordinates a supervisor has—is used as a means of ensuring proper coordination and a sense of accountability among employees. It determines the number of levels of management an organization has as well as the number of employees a manager can efficiently and effectively manage. In the execution of a task, hierarchical organizations usually have different levels of task processes. Workers at various levels send reports on their progress to the next levels until the work is completed.

In the past it was not uncommon to see average spans of one to four (one manager supervising four employees). With the development of inexpensive information technology in the 1980s, corporate leaders flattened many organizational structures and caused average spans to move closer to one to ten. As this technology developed further and eased many middle-managerial tasks (such as collecting, manipulating, and presenting operational information), upper management found they could save money by hiring fewer middle managers.

Departmentalization

Departmentalization is the process of grouping individuals into departments and grouping departments into total organizations. Different approaches include:

Functional – departmentalization by common skills and work tasks
Divisional – departmentalization by common product, program, or geographical location
Matrix – a complex combination of functional and divisional
Team – departmentalization by teams of people brought together to accomplish specific tasks
Network – independent departments providing functions for a central core breaker

Centralization

Centralization occurs when decision-making authority is located in the upper organizational levels. Centralization increases consistency in the processes and procedures that employees use in performing tasks. In this way, it promotes workplace harmony among workers and reduces the cost of production. Centralization is usually helpful when an organization is in crisis and/or faces the risk of failure.

Centralization allows for rapid, department-wide decision-making; there is also less duplication of work because fewer employees perform the same task. However, it can limit flexibility and natural synergies. Autonomy in decision-making is reserved for only a small number of individuals within the workforce, potentially limiting creativity.

Centralization vs. decentralization

This diagram compares visual representations of a centralized vs. decentralized organizational structure. Notice how the representation of the centralized organization looks like one large asterisk with many spokes, whereas the representation of the decentralized organization looks like many small interconnected asterisks.

Decentralization

Decentralization occurs when decision-making authority is dispersed among the lower organizational levels. With decentralized authority, important decisions are made by middle-level and supervisory-level managers. Because there are fewer hierarchical layers to navigate, this kind of structure helps to enable adaptability, quick reactions to lower level issues, and more empowered employees. However, making organization-wide changes that are implemented homogeneously can become quite difficult in this system.

2.2: Components of an Organization

2.2.1: Schein’s Common Elements of an Organization

The four common elements of an organization include common purpose, coordinated effort, division of labor, and hierarchy of authority.

Learning Objective

Describe the common elements that define an organizational structure, according to Edgar Schein

Key Points

Organizational psychologist Edgar Schein proposed four common elements of an organization’s structure: common purpose, coordinated effort, division of labor, and hierarchy of authority.
Common purpose unifies employees or members by giving everyone an understanding of the organization’s mission, strategy, and values.
Coordinated effort is the organization of individual efforts into a group or collective effort.
Division of labor is an arrangement in which different people perform discrete parts of a task for greater efficiency.
Hierarchy of authority is the control mechanism for making sure the right people do the right things at the right time. This control enables organization members to make decisions quickly when necessary.

Key Term

organizational psychologist: A person who conducts scientific study of employees and workplaces.

Common Elements of Organizations

Organizational psychologist Edgar Schein proposes four common elements of an organization’s structure:

Common purpose
Coordinated effort
Division of labor
Hierarchy of authority

From a manager’s point of view, operations are made successful by instilling a common purpose to create a coordinated effort across the organization and organizing resources based on tasks and decision making. Each of the four elements is relatively straightforward in theory but represents a critical component of an effective structure.

Common Purpose

An organization without a clear purpose or mission soon begins to drift and become disorganized. A common purpose unifies employees or members and gives everyone an understanding of the organization’s direction. Ensuring that the common purpose is effectively communicated across organizations (particularly large organizations with many moving parts) is a central task for managers. Managers communicate this purpose by educating all employees on the general strategy, mission statement, values, and short- and long-term objectives of the organization.

Coordinated Effort

Coordinating effort involves working together in a way that maximizes resources. The common purpose is achieved through the coordinated effort of all individuals and groups within an organization. The broader group’s diverse skill sets and personalities must be leveraged in a way that adds value. The act of coordinating organizational effort is perhaps the most important responsibility of managers because it motivates and distributes human resources to capture value.

Division of Labor

Division of labor is also known as work specification for greater efficiency. It involves delegating specific parts of a broader task to different people within the organization based upon their particular abilities and skills. Using division of labor, an organization can parcel out a complex work effort for specialists to perform. By systematically dividing complex tasks into specialized jobs, an organization uses its human resources more efficiently.

Hierarchy of Authority

Hierarchy of authority is essentially the chain of command—a control mechanism for making sure the right people do the right things at the right time. While there are a wide variety of organizational structures—some with more centralization of authority than others—hierarchy in decision making is a critical factor for success. Knowing who will make decisions under what circumstances enables organizations to be agile, while ambiguity of authority can often slow the decision-making process. Authority enables organizations to set directions and select strategies, which can in turn enable a common purpose.

2.3: Common Organizational Structures

2.3.1: Functional Structure

An organization with a functional structure is divided based on functional areas, such as IT, finance, or marketing.

Learning Objective

Explain the functional structure within the larger context of organizational structures in general

Key Points

A functional organization is a common type of organizational structure in which the organization is divided into smaller groups based on specialized functional areas, such as IT, finance, or marketing.
Functional departmentalization arguably allows for greater operational efficiency because employees with shared skills and knowledge are grouped together by function.
A disadvantage of this type of structure is that the different functional groups may not communicate with one another, potentially decreasing flexibility and innovation. A recent trend aimed at combating this disadvantage is the use of teams that cross traditional departmental lines.

Key Terms

departmentalization: The organization of something into groups according to function, geographic location, etc.
silo: In business, a unit or department within which communication and collaboration occurs vertically, with limited cooperation outside the unit.

Overview of the Functional Structure

An organization can be arranged according to a variety of structures, which determine how the organization will operate and perform. In a functional structure, a common configuration, an organization is divided into smaller groups by areas of specialty (such as IT, finance, operations, and marketing). Some refer to these functional areas as “silos”—entities that are vertical and disconnected from each other. Correspondingly, the company’s top management team typically consists of several functional heads (such as the chief financial officer and the chief operating officer). Communication generally occurs within each functional department and is transmitted across departments through the department heads.

Functional structure at FedEx

This organizational chart shows a broad functional structure at FedEx. Each different functions (e.g., HR, finance, marketing) is managed from the top down via functional heads (the CFO, the CIO, various VPs, etc.).

Advantages of a Functional Structure

Functional departments arguably permit greater operational efficiency because employees with shared skills and knowledge are grouped together by functions performed. Each group of specialists can therefore operate independently with management acting as the point of cross-communication between functional areas. This arrangement allows for increased specialization.

Disadvantages of a Functional Structure

A disadvantage of this structure is that the different functional groups may not communicate with one another, potentially decreasing flexibility and innovation. Functional structures may also be susceptible to tunnel vision, with each function perceiving the organization only from within the frame of its own operation. Recent trends that aim to combat these disadvantages include the use of teams that cross traditional departmental lines and the promotion of cross-functional communication.

Functional structures appear in a variety of organizations across many industries. They may be most effective within large corporations that produce relatively homogeneous goods. Smaller companies that require more adaptability and creativity may feel confined by the communicative and creative silos functional structures tend to produce.

2.3.2: Divisional Structure

Divisional structures group various organizational functions into product or regional divisions.

Learning Objective

Describe the basic premise behind divisional structures within the general framework of organizational structure

Key Points

The divisional structure is a type of organizational structure that groups each organizational function into a division. These divisions can correspond to either products or geographies.
Each division contains all the necessary resources and functions within it to support that product line or geography (for example, its own finance, IT, and marketing departments).
A multidivisional form (or “M-form”) is a legal structure in which one parent company owns subsidiary companies, each of which uses the parent company’s brand and name.
The divisional structure is useful because failure of one division doesn’t directly threaten the other divisions. In the multidivisional structure, the subsidiaries benefit from the use of the brand and capital of the parent company.
Disadvantages of divisional structure can include operational inefficiencies from separating specialized function. For the multidivisional structure, disadvantages can include increased accounting and taxes.

Key Terms

subsidiary: A company owned by a parent company or holding company.
division: A section of a large company.
parent company: An entity that owns or controls another entity.

Divisional Structure Overview

Organizations can be structured in various ways, with each structure determining the manner in which the organization operates and performs. A divisional organization groups each organizational function into a division.

U.S. Department of Energy organization chart

The DOE organization chart shows a divisional structure with different divisions under each of three under-secretaries for energy. Each of the three division is in charge of a different set of tasks: environmental responsibilities, nuclear-energy responsibilities, or research responsibilities.

Divisional Strategies

Each division within this structure can correspond to either products or geographies of the organization. Each division contains all the necessary resources and functions within it to support that particular product line or geography (for example, its own finance, IT, and marketing departments). Product and geographic divisional structures may be characterized as follows:

Product departmentalization: A divisional structure organized by product departmentalization means that the various activities related to the product or service are under the authority of one manager. If the division builds luxury sedans or SUVs, for example, the SUV division will have its own sales, engineering, and marketing departments distinct from those departments within the luxury sedan division.
Geographic departmentalization: Geographic departmentalization involves grouping activities based on geography, such as an Asia/Pacific or Latin American division. Geographic departmentalization is particularly important if tastes and brand responses differ across regions, as it allows for flexibility in product offerings and marketing strategies (an approach known as localization).

A common legal structure known as the multidivisional form (or “M-form”) also uses the divisional structure. In this form, one parent company owns subsidiary companies, each of which uses its brand and name. The whole organization is ultimately controlled by central management; however, most decisions are left to autonomous divisions. This business structure is typically found in companies that operate worldwide—for example, Virgin Group is the parent company of Virgin Mobile and Virgin Records.

Advantages of a Divisional Structure

As with all organizational structure types, the divisional structure offers distinct advantages and disadvantages. Generally speaking, divisions work best for companies with wide variance in product offerings or regions of geographic operation. The divisional structure can be useful because it affords the company greater operational flexibility. In addition, the failure of one division does not directly threaten the other divisions. In the multidivisional structure, subsidiaries benefit from the use of the brand and capital of the parent company.

Disadvantages of a Divisional Structure

Some disadvantages of this structure include operational inefficiencies from separating specialized functions—for example, finance personnel in one division do not communicate with those in another division. Disadvantages of the multidivisional structure can include increased accounting and tax implications.

2.3.3: Matrix Structure

The matrix structure is a type of organizational structure in which individuals are grouped via two operational frames.

Learning Objective

Illustrate the way two different operational perspectives can be crossed in a matrix structure to organize a company

Key Points

The matrix structure is a type of organizational structure in which individuals are grouped simultaneously by two different operational perspectives.
Matrix structures are inherently complex and versatile, making them more appropriate for large companies operating across different industries or geographic regions.
Proponents suggest that matrix management is more dynamic than functional management in that it allows team members to share information more readily across task boundaries; it also allows for specialization that can increase depth of knowledge.
A disadvantage of the matrix structure is the increased complexity in the chain of command, which can lead to a higher manager-to-worker ratio and contribute to conflicting loyalties among employees.

Key Term

matrix: A two-dimensional array.

Overview of the Matrix Structure

Organizations can be structured in various ways, and the structure of an organization determines how it operates and performs. The matrix structure is a type of organizational structure in which individuals are grouped by two different operational perspectives simultaneously; this structure has both advantages and disadvantages but is generally best employed by companies large enough to justify the increased complexity.

Matrix organizational structure

In matrix management, the organization is grouped by any two perspectives the company deems most appropriate. Common organizational perspectives include function and product, function and region, or region and product. In an organization grouped by function and product, for example, each product line will have management that corresponds to each function. If the organization has three functions and three products, the matrix structure will have nine (
) potential managerial interactions. This example illustrates how inherently complex matrix structures are in comparison to other, more linear structures.

Advantages of a Matrix Structure

Proponents of matrix management suggest that this structure allows team members to share information more readily across task boundaries, countering the “silo” critique of functional management. Matrix structures also allow for specialization that can both increase depth of knowledge and assign individuals according to project needs.

Disadvantages of a Matrix Structure

A disadvantage of the matrix structure is the increased complexity in the chain of command when employees are assigned to both functional and project managers. This increase in complexity can result in a higher manager-to-worker ratio, which can in turn increase costs or lead to conflicting employee loyalties. It can also create a gridlock in decision making if a manager on one end of the matrix disagrees with another manager. Blurred authority in a matrix structure can result in reduced agility in decision making and conflict resolution.

Matrix structures should generally only be used when the operational complexity of the organization demands it. A company that operates in various regions with various products may require interaction between product development teams and geographic marketing specialists—suggesting a matrix may be applicable. Generally speaking, larger companies with a need for a great deal of cross-departmental communication benefit most from this model.

2.3.4: Team-Based Structure

The team structure is a newer, less hierarchical organizational structure in which individuals are grouped into teams.

Learning Objective

Classify team-based structures within the larger context of the most common organizational structures

Key Points

The team structure in large organizations is a newer type of organizational structure. A team should be a group of workers, with complementary skills and synergistic efforts, all working toward a common goal.
An organization may have several teams that can change over time. Teams that include members from different functions are known as cross-functional teams.
Although teams are characterized as less hierarchical, they typically still include a management structure (or management team).
Critics argue that the use of the word “team” to describe modern organizational structures is a fad—that some teams are not really teams at all but merely groups of staff.
One aspect of team-based structures likely to persist indefinitely is the integration of team cultures within an broader structure (such as a functional structure with interspersed teams).

Key Terms

hierarchical: Classified or arranged according to various criteria into successive ranks or grades.
synergistic: Cooperative, working together, interacting, mutually stimulating.

Overview of the Team-Based Structure

Organizations can be structured in various ways, and the structure of an organization determines how it operates and performs. The team structure in large organizations is considered a newer type of organization that is less hierarchical, less structured, and more fluid than traditional structures (such as functional or divisional). A team is a group of employees—ideally with complementary skills and synergistic efforts—working toward a common goal. Teams are created by grouping employees in a way that generates a variety of expertise and addresses a specific operational component of an organization. These teams can change and adapt to fulfill group and organizational objectives.

Some teams endure over time, while others—such as project teams—are disbanded at the project’s end. Teams that include members from different functions are known as cross-functional teams. Although teams are described as less hierarchical, they typically still include a management structure.

Critics argue that the use of the word “team” to describe modern organizational structures is a fad; according to them, some teams are not really teams at all but rather groups of staff. That said, team-building is now a frequent practice of many organizations and can include activities such as bonding exercises and even overnight retreats to foster team cohesion. To the extent that these exercises are meaningful to employees, they can be effective in improving employee motivation and company productivity.

Integration with Other Structures

One aspect of team-based structures that will likely persist indefinitely is the integration of team cultures within an broader structure (e.g., a functional structure with teams interspersed). Such integration allows for the authority and organization of a more concrete structure while at the same time capturing the cross-functional and projected-oriented advantages of teams.

For example, imagine Proctor and Gamble brings together a group of employees from finance, marketing, and research and development—all representing different geographic regions. This newly created team is tasked with the project of creating a laundry detergent that is convenient, economic, and aligned with the company’s manufacturing capabilities. The project team might be allocated a certain number of hours a month to devote to team objectives; however, members of the team are still expected to work within their respective functional departments.

2.3.5: Network Structure

In the network structure, managers coordinate and control relationships with the firm that are both internal and external.

Learning Objective

Identify the structural implications of a network-based organizational design

Key Points

The network structure is a newer type of organizational structure viewed as less hierarchical (i.e., more “flat”), more decentralized, and more flexible than other structures.
In a network structure, managers coordinate and control relationships that are both internal and external to the firm.
The concept underlying the network structure is the social network—a social structure of interactions. Open communication and reliable partners (both internally and externally) are key components of social networks.
Proponents argue that the network structure is more agile than other structures. Because it is decentralized, a network organization has fewer tiers, a wider span of control, and a bottom-up flow of decision making and ideas.
A disadvantage of the network structure is that this more fluid structure can lead to more complex relations in the organization.

Key Terms

agile: Apt or ready to move; nimble; active.
decentralized: Diffuse; having no center or several centers.
network: Any interconnected group or system.

Overview of the Network Structure

An organization can be structured in various ways that determine how it operates and performs. The network structure is a newer type of organizational structure often viewed as less hierarchical (i.e., more flat), more decentralized, and more flexible than other structures. In this structure, managers coordinate and control relations that are both internal and external to the firm.

The concept underlying the network structure is the social network—a social structure of interactions. At the organizational level, social networks can include intra-organizational or inter-organizational ties representing either formal or informal relationships. At the industry level, complex networks can include technological and innovation networks that may span several geographic areas and organizations. From a management perspective, the network structure is unique among other organizational structures that focus on the internal dynamics within the firm.

A network organization sounds complex, but it is at its core a simple concept. Take, for example, a T-shirt design company. Because the company leaders are mainly interested in design, they may not want to get too heavily involved in either manufacturing or retail; however, both aspects of the business are necessary to complete their operations. To maintain control of their product, they may rent retail space through their network and purchase production capabilities from a variety of partner organizations that have their own manufacturing facilities. While the core company focuses mainly on designing products and tracking finances, this network of partnerships enables it to be much more than just a design operation.

Like other organizational structures, the network structure has its advantages and its disadvantages.

Advantages of a Network Structure

Proponents argue that the network structure is more agile compared to other structures (such as functional areas, divisions, or even some teams). Communication is less siloed and flows freely, possibly opening up more opportunities for innovation. Because the network structure is decentralized, it has fewer tiers in its organizational makeup, a wider span of control, and a bottom-up flow of decision making and ideas.

Disadvantages of a Network Structure

On the other hand, this more fluid structure can lead to a more complex set of relationships in the organization. For example, lines of accountability may be less clear, and reliance on external vendors can be quite high. These potentially unpredictable variables essentially reduce the core company’s control over its operational success.

2.3.6: Modular Structure

In the modular structure, an organization focuses on developing specialized and relatively autonomous strategic business units.

Learning Objective

Define the nature and value of a modular structure in an organizational framework

Key Points

The modular structure divides the business into small, tightly knit strategic business units (SBUs),which focus on specific elements of the organizational process.
Interdependencies between modules tends to be weak; however, flexibility is extremely high.
An advantage of the modular structure is that loosely coupled structures enable organizations to be more flexible and restructure more easily. For example, a firm can switch between different providers and thus respond more quickly to different market needs.
Increased internalization and more tightly coupled structures can produce better communication and intellectual property gains. As a result, some argue that the modularity of a firm should be limited to the extent the flexibility it affords results in gains.
Various degrees of modularity are possible; however, a business must be consistent in the degree of modularity it employs.

Key Terms

modular: Consisting of separate units, especially where each unit performs a specified function and could be replaced by a similar unit for the same function, independently of other units.
disaggregation: A division or breaking up into constituent parts, particularly categories which have been lumped together.

Overview of the Modular Structure

Organizations can be structured in various ways that determine how the organization operates and performs. The modular structure focuses on dividing the business into small, tightly knit strategic business units (SBUs), which focus on specific elements of the organizational process. Interdependence among the units is limited because the focus of many SBUs is more inward than outward and because loyalty within SBUs tends to be very strong.

The term modularity is widely used in studies of technological and organizational systems. Product systems are deemed modular when they can be broken down into a number of components that can then be mixed and matched to connect, interact, or exchange resources. Modularization within organizations leads to the disaggregation of the traditional form of hierarchical governance into relatively small, autonomous organizational units (modules). Although modules are not generally interdependent, the modular organization is extremely flexible.

For example, a firm that employs contract manufacturing rather than in-house manufacturing is using an organizational component that is more independent. The firm can switch between different contract manufacturers that perform different functions; the contract manufacturer can similarly work for different firms. Another (more internally focused) modular model involves the existence of various consumer services which cater to dramatically different needs or demographics. At GNU Health, for example, the surgery unit may interact with different departments at different times for different reasons.

Modular organizations

A modular organization involves several largely independent bodies that can rearrange and work with different other departments as needed. This image shows the GNU health module interacting with many different departments, such as oncology, radiology, surgery and pediatrics, across many contexts, such as location and socioeconomic status.

Advantages of a Modular Structure

One advantage of the modular structure is that loosely coupled structures can enable organizations to be more flexible and restructure more easily. For example, a firm can switch between different providers and thus respond more quickly to different market needs. An organization can also fill its own corporate needs internally by creating a new modular department, which can operate interdependently with the whole.

Disadvantages of a Modular Structure

On the other hand, more internalization and more tightly coupled structures can produce better communication and intellectual property gains. As a result, critics of the modular organization argue that a firm’s modularity should be limited to the extent that its flexible nature affords gains. Various degrees of modularity are possible but not necessarily useful if the pros do not outweigh the cons. Managers must carefully consider whether or not a modular structure would be useful, either entirely or partially, for a given organization.

2.4: Factors to Consider in Organizational Design

2.4.1: Considering the Environment

Considerations of the external environment—including uncertainty, competition, and resources—are key in determining organizational design.

Learning Objective

Identify the inherent complexities in the external environment that influence the design of an organization’s structure

Key Points

Organizational design is dictated by a variety of factors, including the size of the company, the diversity of the organization’s operations, and the environment in which it operates.
According to several theories, considerations of the external environment are a key aspect of organizational design. These considerations include how organizations cope with conditions of uncertainty, procure external resources, and compete with other organizations.
A company in a highly uncertain environment must prioritize adaptability over a more rigid and functional strategy. In contrast, a company in a mature market with limited variability and uncertainty should pursue more structure.
A company with a low-cost strategy relative to its competition may benefit from a more simplistic and fixed structural approach to operations, while a company pursuing differentiation must prioritize flexibility and a more diversified structure.

Key Terms

differentiation: A strategy focused on creating a unique product for a particular population.
strategy: A plan of action intended to accomplish a specific goal.

Overview

Organizational design is dictated by a variety of factors, including the size of the company, the diversity of the organization’s operations, and the environment in which it operates. Considerations of the external environment are a key aspect of organizational design. The environment in which an organization operates can be defined from a number of different angles, each of which generates different structural and design strategies to remain competitive.

Complexity

Complexity theory postulates that organizations must adapt to uncertainty in their environments. The complexity theory treats organizations and firms as collections of strategies and structures that interact to achieve the highest efficiency within a given environment. Therefore, companies in a highly uncertain environment must prioritize adaptability over a more rigid and functional strategy. Alternatively, a fixed and specific approach to organizational design will capture more value in a mature market, where variability and uncertainty are limited.

Resource Dependence

Another perspective on organizational design is resource dependence theory—the study of how external resources affect the behavior of the organization. Procuring external resources is important in both the strategic and tactical management of any company. Resource-dependence theory explores the implications regarding the optimal divisional structure of organizations, recruitment of board members and employees, production strategies, contract structure, external organizational links, and many other aspects of organizational strategy.

Competition

Another environmental factor that shapes organization design is competition. Higher levels of competition require different organizational structures to offset competitors’ advantages while emphasizing the company’s own strengths. A company that demonstrates strength in differentiation relative to the competition benefits from implementing a divisional or matrix strategy, which in turn allows the company to manage a wide variety of demographic-specific products or services. Alternatively, a company that demonstrates a low-cost strength (producing products cheaper than the competition) benefits from employing a structural or bureaucratic strategy to streamline operations.

Identifying External Factors

In considering organizational design relative to the environment, managers may find it helpful to employ two specific frameworks to identify external factors and internal strengths and weaknesses:

SWOT analysis: In this particular model, a company’s strengths and weaknesses are assessed in the context of the opportunities and threats in the business environment. A SWOT analysis enables a company to identify the ideal structure to maximize its internal strengths while capturing external opportunities and avoiding threats.
Porter’s five-forces analysis: This analysis identifies factors of the industry’s competitive environment that may substantially influence a company’s strategic design. The five forces include power of buyers, power of suppliers, rivalry (competition), substitutes, and barriers to entry (how difficult it is for new firms to enter the industry). Understanding these varying forces gives the company an idea of how adaptable or fixed the organizational structure should be to capture value.

Porter’s five-forces model

Porter’s five-forces analysis identifies five environmental factors that can influence a company’s strategic design: power of buyers, power of suppliers, competition, substitutes, and barriers to entry.

Smaller, more agile companies tend to thrive better in uncertain or constantly changing markets, while larger, more structured companies function best in consistent, predictable environments. Understanding these tools and frameworks alongside the varying external forces that act upon a business will allow companies to make strategic organizational decisions that optimize their competitive strength.

2.4.2: Considering Company Size

The size and operational scale of a company is important to consider when identifying the ideal organization structure.

Learning Objective

Explain how the size of a company helps determine the organizational structure that optimizes operational efficiency and managerial capacity

Key Points

Company size plays a substantial role in determining the ideal structure of the company: the larger the company, the greater need for increased complexity and divisions to achieve synergy.
Companies may adopt any of six organizational structures based on company size and diversity in scope of operations: pre-bureaucratic, bureaucratic, post-bureaucratic, functional, divisional, and matrix.
Smaller companies function best with pre-bureaucratic or post-bureaucratic structures. Pre-bureaucratic structures are inherently adaptable and flexible and therefore particularly effective for small companies aspiring to expand.
Larger companies usually achieve higher efficiency through functional, bureaucratic, divisional, and matrix structures (depending on the scale, scope, and complexity of operations).
Understanding the varying pros and cons of each structure will help companies to plan their organization design and structure in a way that optimizes resources and allows for growth.

Key Terms

economies of scope: Strategies of incorporating a wider variety of products or services to capture value through the ways in which they interact or overlap.
Homogeneous: Having a uniform makeup; having the same composition throughout.
economies of scale: Processes in which an increase in quantity will result in a decrease in average cost of production (per unit).

Company Size and Organizational Structure

Organizational design can be defined narrowly as the strategic process of shaping the organization’s structure and roles to create or optimize competitive capabilities in a given market. This definition underscores why it is important for companies to identify the factors of the organization that determine its ideal structure—most specifically the size, scope, and operational initiatives of the company.

Company size plays a particularly important role in determining an organization’s ideal structure: the larger the company, the greater the need for increased complexity and divisions to achieve synergy. The organizational structure should be designed in ways that specifically optimize the effort and input compared to output. Larger companies with a wider range of operational initiatives require careful structural considerations to achieve this optimization.

Types of Organizational Structure

Companies may adopt one of six organizational structures based upon company size and diversity of scope of operations.

Pre-bureaucratic

Ideal for smaller companies, the pre-bureaucratic structure deliberately lacks standardized tasks and strategic division of responsibility. Instead, this is an agile framework aimed at leveraging employees in any and all roles to optimize competitiveness.

Bureaucratic

A bureaucratic framework functions well in large corporations with relatively complex operational initiatives. This structure is rigid and mechanical, with strict subordination to ensure consistency across varying business units.

Post-bureaucratic

This structure is a combination of bureaucratic and pre-bureaucratic, where individual contribution and control are coupled with authority and structure. In this structure, consensus is the driving force behind decision making and authority. Post-bureaucratic structure is better suited to smaller or medium-sized organizations (such as nonprofits or community organizations) where the importance of the decisions made outweighs the importance of efficiency.

Functional

A functional structure focuses on developing highly efficient and specific divisions which perform specialized tasks. This structure works well for large organizations pursuing economies of scale, usually through production of a large quantity of homogeneous goods at the lowest possible cost and highest possible speed. The downside of this structure is that each division is generally autonomous, with limited communication across business functions.

Divisional

A divisional structure is also a framework best leveraged by larger companies; instead of economies of scale, however, they are in pursuit of economies of scope. Economies of scope simply means a high variance in product or service. As a result, different divisions will handle different products or geographic locations/markets. For example, Disney may have a division for TV shows, a division for movies, a division for theme parks, and a division for merchandise.

Matrix

A matrix structure is used by the largest companies with the highest level of complexity. This structure combines functional and divisional concepts to create a product-specific and division-specific organization. In the Disney example, the theme park division would also contain a functional structure within it (i.e., theme park accounting, theme park sales, theme park customer service, etc.).

Strategic Organizational Design

Structure becomes more difficult to change as companies evolve; for this reason, understanding which specific structure will function best within a given company environment is an important early step for the management team. Smaller companies function best as pre-bureaucratic or post-bureaucratic; the inherent adaptability and flexibility of the pre-bureaucratic structure is particularly effective for small companies aspiring to expand. Larger companies, on the other hand, achieve higher efficiency through functional, bureaucratic, divisional, and matrix structures (depending on the scale, scope, and complexity of operations).

McDonald’s fast-food restaurants departmentalize varying elements of their operation to optimize efficiency. This structure is divisional, meaning each specific company operation is segmented (for example, operations, finance/accounting, marketing, etc.).

2.4.3: Considering Technology

Technology impacts organizational design and productivity by enhancing the efficiency of communication and resource flow.

Learning Objective

Recognize the intrinsic structural value of the ever-evolving technological environment

Key Points

Organizations use technological tools to enhance productivity and to initiate new and more efficient structural designs for the organization. These uses of technology become potential sources of economic value and competitive advantage.
An example of an organizational structure emerging from newer technological trends is what some have called the “virtual organization,” which connects a network of organizations via the internet.
A network structure is another kind of organizational structure that is heavily reliant upon technology for communication.
More traditional organizational structures also benefit greatly from the advance of technology. Managers can communicate and delegate much more effectively through using technologies such as email, calendars, online presentations, and other virtual tools.

Key Terms

supply chain: A system of organizations, people, technology, activities, information, and resources involved in moving a product or service from the supplier to the customer.
network: Any interconnected group or system.

Organizational design can be defined narrowly as the strategic process of shaping an organization’s structure and roles to create or optimize capabilities for competition in a given market.

Technology is an important factor to consider in organizational design. Modern organizations can be treated as complex and adaptive systems that include a mix of human and technological interactions. Organizations can utilize technological tools to enhance productivity and to initiate new and more efficient structural designs for the organization, thereby adding potential sources of economic value and competitive advantage.

Technology

Technology has opened doors to incorporating new and advanced forms of organizational design. This is most notably seen through rapid global communications and the ability to constantly and economically be in contact.

Technological Organizational Structures

An example of an organizational structure that has emerged from newer technological trends is what some have called the “virtual organization,” which connects a network of organizations via the internet. Over the internet, an organization with a small core can still operate globally as a market leader in its niche. This can dramatically reduce costs and overhead, remove the necessity for an expensive office building, and enable small, dynamic teams to travel and conduct work wherever they are needed.

A similar organizational design that is heavily reliant upon technological capabilities is the network structure. While the network structure existed prior to recent technologies (i.e., affordable communications via internet, cell phones, etc.), the existence of complex telecommunications networks and logistics technologies has greatly increased the viability of this structure.

Technology and Traditional Structures

Technology can also affect other longstanding elements of an organization. For example, information systems allow managers to take a much more analytic view of their businesses than before the advent of such systems. Managers can communicate and delegate much more effectively through using technologies such as email, calendars, online presentations, and other virtual tools.

Technology has also impacted supply chain management—the management of a network of interconnected businesses involved in the provision of product and service packages required by the end customers in a supply chain. Supply chain management now has the capacity to track, forecast, predict, and refine the outbound logistics, contributing to a wide variety of logistical advantages (such as minimizing costs from warehousing, fuel, negative environmental impacts, or packaging).

Technology simplifies the process of managing reports, collecting communications, and keeping in touch, enabling management in more formal structures to take on more workers. Increases in technology have essentially allowed organizations to scale up their companies through more effective and efficient teams.

2.4.4: Considering the Organizational Life Cycle

The life cycle of an organization is important to consider when determining its overall design and structure.

Learning Objective

Describe the way in which life cycles influence an organization’s overall design and structure

Key Points

From an organizational perspective, the “life cycle” can refer to various factors such as the age of the organization, the maturation of a particular product or process, or the maturation of the broader industry.
In organizational ecology, the idea of age dependence is used to examine how an organization’s risk of mortality relates to its age. Richard L. Daft outlines different patterns of age dependence in his four stages model.
The idea of the Enterprise Life Cycle in enterprise architecture argues for a life cycle concept as an overarching design strategy—a dynamic, iterative process of changing the enterprise over time by incorporating, maintaining, and disposing of new and existing elements of the enterprise.
Companies must understand clearly where they are in their life cycle and what influence this will have on their optimal organizational structure.

Key Terms

life cycle: The useful life of a product or system; the developmental history of an individual, group or entity.
assessment: An appraisal or evaluation.
strategy: A plan of action intended to accomplish a specific goal.

Organization design can be defined narrowly as the strategic process of shaping organizational structure and roles to create or optimize capabilities for competition in a given market. The life cycle of an organization, industry, and/or product can be an important factor in organization design.

The life cycle of a business

Organizations must always be striving to sustain their position in a given competitive environment. This often requires structural evolution and rapid iterations in the feedback loop of disruption, growth, refinement, and renewal.

Overview of the Life Cycle

From an organizational perspective, “life cycle” can refer to various factors such as the age of the organization itself, the maturation of a particular product or process, or the maturation of the broader industry. In organizational ecology, the idea of age dependence is used to examine how an organization’s risk of mortality relates to the age of that organization. Generally speaking, organizations go through the following stages:

Birth
Growth
Maturity
Decline
Death

The Enterprise Life Cycle

The Enterprise Life Cycle is a model that underlines the way in which organizations remain relevant. The Enterprise Life Cycle is the dynamic, iterative process of changing an enterprise over time by incorporating new business processes, technologies, and capabilities, as well as maintaining, using, and disposing of existing elements of the enterprise.

Richard L. Daft’s Four Stages

Richard L. Daft theorized four stages of the organizational life cycle, each with critical transitions:

Entrepreneurial stage → Crisis: Need for leadership
Collectivity stage → Crisis: Need for delegation
Formalization stage → Crisis: Too much red tape
Elaboration stage → Crisis: Need for revitalization

Structural Implications of the Life Cycle

The life cycle of an organization is important to consider when making decisions about the organization’s structure and design. Richard L. Daft’s model underlines critical problems within each stage of an organization’s life cycle that can often be solved through intelligent structural design.

Daft first notes that the entrepreneurial (or startup) stage of an organization requires leadership. In this situation, decision-making must be enabled and bureaucracy should be minimized. This lends itself well to pre-bureaucratic stuctures in which everyone involved is empowered to take the reins and employ their creativity and innovation.

In the collectivity stage, momentum has been created and expansion is required. This is where functional or divisional strategies may begin to emerge, enabling managers to build teams and delegate tasks.

Companies continue to expand in the formalization stage, requiring increased bureaucracy and more levels of authority to approve a given decision. In this stage they grow large enough to accommodate functional, divisional, or even matrix structures in order to produce at scale. Organizations in this stage must be careful not to fall too strongly into rigid structures that inhibit or disrupt efficiency, communication, or decision-making.

The Enterprise Life Cycle comes strongly into play in the elaboration stage. During this stage the organization must retain its relevance in the industry through reinforcing competitive advantages and/or creating new products to fill changing consumer needs. This requires a great deal of organized creativity and exploration of new markets, which may justify team or divisional structures within the broader organizational structure. Such structures allow small teams to experiment and react quickly as they try new entrepreneurial strategies while the larger organization maintains operative efficiency in established markets.

2.5: Trends in Organization

2.5.1: Flattening Hierarchies

Flattening hierarchies can benefit smaller organizations by increasing employee empowerment, participation, and efficiency.

Learning Objective

Define a flattened hierarchy, specifically in which situations where the utilization of this model is appropriate and beneficial for an organization

Key Points

A hierarchy can link entities either directly or indirectly; it can also link entities either vertically or horizontally. The only direct links in a hierarchy are to a person’s immediate superior or subordinates.
The flat organization model essentially “flattens” the hierarchy and promotes employee involvement through a decentralized decision-making process.
According to the logic behind this model, well-trained workers will be more productive when they are directly involved in the decision-making process rather than closely supervised by many layers of management.
Flat organizations are most relevant in specific scenarios—most notably small organizations that are dependent upon creativity, freedom of action, and high-powered employees.

Key Term

hierarchy: An arrangement of items in which each item is represented as being above, below, or at the same level as other items.

Links within Hierarchies

Hierarchies can be linked in several different ways. A hierarchy can link entities either directly or indirectly; it can also link entities either vertically or horizontally. The only direct links in a hierarchy are to a person’s immediate superior or subordinates. Parts of the hierarchy that are not linked vertically to one another can be horizontally linked through a path by traveling up the hierarchy; this path eventually reaches a common direct or indirect superior and then travels down the hierarchy again. An example of this would be two colleagues who each report to a common superior but have the same relative amount of authority in the organization.

Flat Hierarchies

Flat (or horizontal) organizational structures have few or no levels of intervening management between staff and managers. This “flattened” hierarchy promotes employee involvement through a decentralized decision-making process. The idea is that well-trained workers will be more productive when they are directly involved in the decision-making process rather than closely supervised by many layers of management.

Flat organization chart

This diagram illustrates the structure of a flat organization: there is no low- or mid-level management—just one manager and the rest of the staff.

Advantages of Flattened Hierarchies

Flat structures empower each individual within the company to be involved in decision-making processes. This allows for a great deal of creative discussion and operational diversity and tends to create great variance in new ideas. By elevating the level of responsibility of baseline employees and eliminating layers of middle management, comments and feedback can quickly reach all personnel involved in decisions. Response to customer feedback can be carried out more rapidly.

This type of structure generally works best in smaller organizations or individual units within larger organizations. Start-up companies, “mom and pop shops,” and other small independent businesses are the most common examples of a flat structure.

Disadvantages of Flattened Hierarchies

Flat organizations are difficult to maintain as companies grow larger and more complex. When organizations reach a critical size, they can retain a streamlined structure; however, they cannot keep a completely flat manager-to-staff hierarchy without impacting productivity. Certain financial responsibilities may also require a traditional hierarchical structure. While the flat structure can foster employee empowerment, involvement, and creativity, it can also create inefficiency in decision-making processes. Some theorize that flat organizations become more traditionally hierarchical when they gear themselves more toward productivity.

Because the interaction between workers is more frequent, this organizational structure generally depends on a more personal relationship between workers and managers. As a result, the structure can be more time-consuming to build than a traditional hierarchical model.

2.5.2: Decentralizing Responsibility

In decentralized structures, responsibility for decision making is broadly dispersed down to the lower levels of an organization.

Learning Objective

Compare and contrast centralization and decentralization of responsibility within the organizational hierarchy

Key Points

Decentralization is the process of dispersing decision making authority among the people, citizens, employees, or other elements of an organization or sector.
A decentralized organization shows fewer tiers in the organizational structure, a wider span of control, and a bottom-to-top flow of ideas and decision making.
The bottom-to-top flow of information allows lower-level employees to better inform the officials of the organization during any decision making processes.
When companies decentralize authority, however, there can be confusion as to how final decisions are made.

Key Terms

governance: Accountability for consistent and cohesive policies, processes, and decision rights.
authority: The power to enforce rules or give orders.
mechanistic organization: A bureaucratic structure.

Decentralization is the process of dispersing decision making authority among the people, citizens, employees, or other elements of an organization or sector. In decentralized structures, responsibility for decision making and accountability are broadly dispersed down to the lower levels of an organization. This dispersion can be intentional or unintentional. A decentralized organization tends to show fewer tiers in its organizational structure (less hierarchy), a wider span of control, and a bottom-to-top or horizontal flow of decision making and ideas.

Decentralization

The management structure in a decentralized organization changes from a top-down approach to more of a peer-to-peer approach.

Contrasting Centralized and Decentralized Structures

In a centralized organization, decisions are made by top executives on the basis of current policies. These decisions or policies are then enforced through several tiers of hierarchy within the organization, gradually broadening the span of control until they reach the bottom tier.

In a decentralized organization, the top executives delegate much of their decision making authority to lower tiers of the organizational structure. This type of structure tends to be seen in organizations that run on less rigid policies and wider spans of control among each officer of the organization. The wider spans of control also reduce the number of tiers within the organization, giving its structure a flat appearance .

Decentralized organizational chart

This image illustrates a decentralized (often referred to as a “flat”) organizational chart. Note that there are not multiple layers of management; there is one manager and then the rest of the staff. This means that each staff-person necessarily has more responsibility and therefore more autonomy.

Advantages of Decentralization

One advantage of this structure—if the correct controls are in place—is the bottom-up flow of information. This flow allows lower-level employees to better inform the officials of the organization during any decision making processes. For example, if an experienced technician at the lowest tier of an organization knows how to increase the efficiency of the production, the bottom-to-top flow of information can allow this knowledge to pass up to the executive officers.

Disadvantages of Decentralization

On the other side of the argument, when companies decentralize authority there can be confusion as to how final decisions are made. It can be difficult to empower multiple people without certain decisions negatively interacting with other decisions. Decentralized organizations must be mindful of the possibility of running in too many different directions at once. Because of this, decentralization is most effective in organizations that have transparent strategies, a strong mission, and a clear vision.

2.5.3: Increasing Empowerment

Modern organizations are more aware of the value of empowered employees and actively strive to structurally increase empowerment.

Learning Objective

Discuss the advantages of empowerment in an organization, and how organizational structure can improve upon the promotion of empowered employees

Key Points

Empowerment is a process that enables individuals and groups to fully access their personal and collective power, authority, and influence, and to employ this power when engaging with other people, other institutions, or society.
Leaders within an organization can play a strong role in encouraging employees to put empowerment into practice.
To enable empowerment, managers can share information, provide employees with autonomy, and migrate to self-managed teams when possible.
Though the idea of empowerment can produce successful results, it is important to understand the risks. More decision-makers means more discussion about how a process should be accomplished and more moving parts within the organization, increasing complexity.

Key Term

empowerment: The accessing and employing of political, social, or economic power by an individual or group.

Defining Empowerment

Empowerment is a process that enables individuals and groups to fully access personal and collective power and employ this power when engaging with other people, other institutions, or society. Empowerment does not give people power; rather, it helps to release and express the power that people already have.

Empowerment encourages people to gain the skills and knowledge that allows them to overcome obstacles in life and work. This will ultimately enable personal development and a deeper sense of professional fulfillment. Empowering people in organizations can encourage more confident, capable, and motivated employees. Organizations are increasingly aware that empowerment often leads to better performance and higher operational efficiency, and there is a general trend toward structuring organizations for empowerment.

Empowerment within the Organization

Empowering employees in the workplace means providing them with opportunities to make their own decisions related to their tasks. This can be a powerful and positive aspect within an organization that promotes shared power and enables checks and balances in decision-making processes.

Empowerment in organizations includes:

Making decisions about personal and collective circumstances;
Accessing information and resources for decision-making;
Considering a range of options from which to choose (and understanding the options rather than just deciding yes or no);
Exercising assertiveness in collective decision-making;
Employing positive thoughts toward the ability to make change;
Learning and accessing skills for improving personal and collective circumstances; and
Informing others’ perceptions though exchange, education, and engagement.

Though the idea of empowerment can produce very successful results, there are certain risks are involved. When turning responsibility over to others, it is important to keep in mind that diversifying power creates more voices and therefore potentially more conflict and discussion. All of these elements can slow down the decision-making process. As organizations move toward higher levels of empowerment, protocols should be put in place to mitigate failure and improve decision-making efficiency across the board.

Decentralization

One key technique of empowering employees and providing autonomy is decentralizing the organizational structure. Notice how the diagram of the centralized organization looks like one large asterisk with many spokes, whereas the diagram of the decentralized organization looks like many small interconnected asterisks.

Increasing Empowerment

Leaders within an organization can encourage employees to put empowerment into practice in several ways. If leaders want to tap into the possibilities of an empowerment-based company, they need to have confidence in employees. Employees should also be given opportunities to make their own decisions and succeed. For an empowerment-based organization, rules and policies that interfere with self-management should be made more lenient. Leaders should also set goals that can inspire people.

The following are three key concepts that leaders can use to empower employees throughout an organization:

Share information with everyone. By sharing information with everyone, leaders gain a clear picture of the company and its current situation. Allowing all employees to view company information helps to build trust between employers and employees. This also provides decision-makers with important perspectives to assess prior to deciding.
Create autonomy through boundaries. By opening communication through information sharing, space can be created for feedback and dialogue about what holds people back from being empowered. It is critical that leaders minimize micro-management so that employees, who are specialists at the function they are assigned, can set the tone for how a particular task is accomplished.
Replace the old hierarchy with self-managed teams. By replacing the old hierarchy with self-managed teams, more responsibility is placed upon unique and self-managed teams; this can lead to better communication, diversity of strategies, and higher performance.

The success of the modern organization relies heavily on understanding the complexity of a diverse global market. Leveraging employee knowledge and enabling autonomy is increasingly important in capturing value and attaining competitive advantages in this complex business environment.

2.5.4: Increasing Adaptation

In order to succeed, modern organizations must constantly adapt to evolving technologies and expanding global markets.

Learning Objective

Identify the importance and inherent value of increasing adaptation within company structures and performance

Key Points

Technological advances, global market expansions, and the potential for constant (sometimes disruptive) innovation all point to the need for organizations to be adaptive.
Blockbuster and Netflix provide a classic example: in this case, Blockbuster was simply too slow to adapt to the demand for live-streaming videos.
If an organization takes on the identity of a growing, adapting, and learning organization, these qualities become part of the fabric of how it operates.
Implementing an adaptable strategy may have effects that ripple across an organization. Minimizing disruption can reduce costs and save time.
Resistance to change is considered a major obstacle to creating effective adaptability in an organization. Integrating changes step by step while utilizing focus groups and training sessions can improve the efficacy of adaptation.

Key Term

adaptation: Adjustment to extant conditions; modification of a thing or its parts in a way that makes it more fit for existence under the conditions of its current environment.

The Importance of Adaptation

Organizational adaption is becoming increasingly relevant to both strategy and structure as the business environment changes more quickly each year. Technological innovations, global market expansions, and the potential for constant (sometimes disruptive) innovation all point to the need for organizations to be adaptive.

There are a number of examples in which some organizations have adapted to new technologies or global competition, while others have failed to adapt and subsequently gone under. Blockbuster and Netflix provide a classic example: in this case, Blockbuster was simply too slow to adapt to the demand for live-streaming videos. Netflix, on the other hand, embraced this technological evolution and pioneered a user-friendly interface, gaining the company enormous value.

Increasing Adaptation

Strategic management largely pertains to adapting an organization to its business environment. The greatest agent for organizational change is the socialization aspect of culture, which can be empowered structurally. If an organization takes on the identity of a growing, adapting, and learning organization, these qualities become part of the fabric of how it operates. Knowing how and being able to increase this adaptability is important to organizational success.

Implementing a strategy of adaptation may have effects that ripple across an organization. Increasing an organization’s ability to adapt to change and minimize disruption can reduce costs and save time. One approach for increasing adaptation is to appoint an individual to champion the changes, address and eventually enlist opponents, and proactively identify and mitigate problems.

Challenges in Adaptation

Resistance to change is considered a major obstacle to creating effective adaptability in an organization. Organizational change can lead to loss of stability and—if this instability becomes great enough—loss of organizational effectiveness.

Organizational loss of effectiveness (LOE)

Organizational change can cause a loss of stability and results in the development of a predictable and measurable set of symptoms within an organization. When a significant number of these symptoms are present simultaneously, an organizational loss of effectiveness (LOE) will occur (Grady, 2005).

The following are methods that can be employed to help an organization and its staff to cope with change:

Form focus groups. Staff from different departments can be selected to form focus groups, where quality data can be collected. In focus group discussions, staff should be given the chance to freely express their opinions and share their experiences.
Provide training. Providing training courses to staff on new processes or structures can help to increase staff competence and reduce their resistance to change.
Implement changes step by step. This involves first implementing the system in small groups—such as several departments or sections—and then widening the scope of implementation. This step-by-step approach can help by exposing problems raised simultaneously across the small groups and providing management with sufficient time to solve these problems before implementing the system across the organization.

2.5.5: Moving to Flexible Work Schedules

Employers can offer flexible working arrangements in the form of flextime and telecommuting work.

Learning Objective

Identify critical factors of success in creating a “telework” organization

Key Points

Companies have begun to recognize how important a healthy work-life balance is to the productivity and creativity of their employees. Integrating new technologies for flexible schedules is a great opportunity to capture this value.
Flextime and telecommuting (telework) are popular strategies that enable employees to set their own schedules and work from wherever is most convenient for them.
In addition to supporting the required incremental technologies, a well-functioning telework organization needs a management system that is at least as effective as that of a traditional organization.
Management teams face additional issues such as how to supervise employees who are often out of the office, how to monitor staff productivity with less personal interaction, how to build a strong virtual team, and how to maintain relationships between remote employees.

Key Term

telecommute: To work from home, sometimes for part of a working day or week, using a computer connected to the employer’s network or via the internet.

Companies have begun to recognize how important a healthy work-life balance is to the productivity and creativity of their employees. Research by Kenexa Research Institute in 2007 showed that employees who were more favorable toward their organization’s efforts to support work-life balance also indicated a lower intent to leave the organization, greater pride in their organization, a willingness to recommend the organization as a place to work, and higher overall job satisfaction.

Employers can offer a range of different programs and initiatives that support such a work-life balance. Flexible working arrangements such as flextime and telecommuting work are becoming increasingly popular. More proactive employers can also provide compulsory leave, implement strict maximum hours, or foster an environment that encourages employees not to continue working after hours.

Telecommuting

Telecommuting (or telework) is a work arrangement in which employees do not commute to a central place of work. A person who telecommutes is known as a “telecommuter,” “teleworker,” or “home-sourced employee.” Many telecommuters work from home while others—sometimes called “nomad workers”—use mobile telecommunications technology to work from coffee shops or other locations. This allows employees the flexibility of adapting their work schedule to their living situation.

This arrangement is also quite popular in circumstances of sick leave, pregnancy, parenting, and other important life events. In the past these events could have resulted in temporary loss of employment. Being able to work from anywhere with an internet connection is a modern luxury that adaptable companies should be well aware of.

Home office

This small office is designed for telecommuting.

Flextime

Flextime (also called flexitime or flexi-time) is a variable work schedule, unlike traditional work arrangements in which employees work a standard 9 a.m. to 5 p.m. shift. In this arrangement, there is typically a core period of approximately 50% of the total working day when employees are expected to be at work (for example, between 11 a.m. and 3 p.m.). The rest of the working day is “flextime” in which employees can choose when they work. Employees are still required to complete the necessary work and achieve total daily, weekly, or monthly hours in the region of what the employer expects.

A flextime policy allows staff to determine when they will work, and a flexplace policy allows staff to determine where they will work. These strategies allow employees to adapt their work hours based on public transport schedules, child-care responsibilities, rush-hour traffic, and other elements.

Establishing a Telework Organization

In addition to supporting the required incremental technologies, a well-functioning telework organization needs a management system that is at least as effective as that of a traditional organization. Management teams face additional issues such as how to supervise employees who are often out of the office, how to monitor staff productivity with less personal interaction, how to build a strong virtual team, and how to maintain relationships between remote employees.

Some suggested best practices for maintaining a successful telework organization include:

Develop a daily schedule. Setting a standardized daily schedule can help remote teleworkers feel as though they are really at work. It can also make it easier for supervisors to monitor staff activities and can lead to increased productivity.
Establish milestone dates. Milestone dates help keep projects on track and make it easier to spot problems while there is still time to effectively deal with them.
Encourage social networking. Employee surveys show that being able to keep in touch and communicate with colleagues despite physical distance can boost employee satisfaction and encourage top talent to stick around.
Address problems right away. Respond to problems immediately even if they are reported by email or text message. This will prevent teleworkers from feeling isolated.
Design key performance indicators (KPIs) for remote workers. These KPIs can also be used to measure the effectiveness of in-office staff and maintain an equivalence among the distinct employee categories.
Start workdays by holding a five-minute team video-conference. This helps supervisors to maintain a regular check-in routine; it also enables employees to catch up on team work progress and feel connected to the whole organization.
Manage by observation. A successful telework or telecommuting program requires a management style that is results-oriented (as opposed to task-oriented). This is referred to as management by objectives as opposed to management by observation.

2.5.6: Increasing Coordination

Increasing coordination helps organizations to maintain efficient operations through communication and control.

Learning Objective

Identify the way in which effective coordination across an organization can be increased through effective structure and good management

Key Points

Coordination is a managerial function in which different activities of the business are properly adjusted and interlinked.
The management team must pay special attention to issues related to coordination and governance and be able to improve upon coordination through effective management.
Managers should strengthen communication across all facets of the organization to increase the level of integration between each moving part.
If there is a lack of coordination, there is a risk that responsibility will become dispersed and tasks will be left unclaimed. Organizing accountability for every task helps to ensure that efforts are tangibly coordinated.

Key Terms

division: A section of a large company.
margin: A permissible difference; allowing some freedom to move within limits.
centralization: The act or process of combining or reducing several parts into a whole.

Defining Coordination

Coordination is the act of organizing and enabling different people to work together to achieve an organization’s goals. It is a managerial function in which different activities of the business are properly adjusted and interlinked.

Employees within the functional divisions of an organization tend to perform a specialized set of tasks, such as engineering. This leads to operational efficiency within that group. However, it can also lead to a lack of communication between various functional groups within an organization, rendering the organization slow and inflexible .

Organizational structure

This is an example of an organizational structure. At a high level are multiple functional groups, or “modules”—technical, marketing, and intellectual property. The linked working groups (e.g., data coding workgroup, security workgroup, and audio and video compression workgroup) within the technical functional group likely have coordinated functions.

Increasing Coordination

Coordination is simply the managerial ability to maintain operations and ensure they are properly integrated with one another; therefore, increasing coordination is closely related to improving managerial skills. The management team must pay special attention to issues related to coordination and governance and be able to improve upon coordination through effective management.

Increasing coordination internally can be accomplished by keeping all moving parts of the organization on the same page. There are a number of ways to improve upon the coordination of different departments, work groups, teams, or functional specialists. These include creating a well-communicated and accurate mission statement; clearly defining strategic objectives; monitoring and evaluating each functional group; providing company-wide updates and communications from each department; and, wherever possible, promoting cross-departmental meetings and projects. While this list is long and complex, the underlying concept is relatively simple: managers should strengthen communication across all facets of the organization to increase the level of integration between each moving part.

Structural Implications

In practice, coordination involves a delicate balance between centralization and decentralization. However, maintaining coordination does not necessarily imply that decision-making processes are centralized or that actions are carried out without the support of employees. Put simply, it is important to ensure that there is a person or team in place that takes responsibility for general tasks.

If there is a lack of coordination, there is a risk that responsibility will become dispersed and tasks will be left unclaimed. Organizing accountability for every task helps to ensure that efforts are tangibly coordinated and provides structure to operational expectations. Structure is a central determinant of effective coordination across an organization as it enables communications, underlines responsibilities, and provides concrete authority in decision-making.