Organization Structure

 

Organization Structure:

An organization exists to enable a group of people to coordinate their efforts to achieve specific goals and objectives. The organization refers to a wide range of entities, including businesses, government agencies, non-profit organizations, educational institutions, etc. The organizational structures are designed to define the relationships, roles, procedures, and responsibilities of individuals within the organization. The organization structure serves the following functions:

·         It enables the organization members to undertake a wide variety of activities according to a division of labor that defines the specialization, standardization, and departmentalization of task and functions

·         It enables the organization members to coordinate their activities through integrating mechanisms such as hierarchical supervision, formal rules and procedures, training and socialization.

·         It defines the boundaries of the organization and its interface with the environment or the other organization and institution with which it interacts.

Central Concepts:

The structure of an organization is far more complex than drawing an organization chart of lines and boxes. In structuring any organization, the following issues must be addressed:

The Division of Labor:

The various task and responsibilities are divided among the members of an organization. The task are decided upon:

·         The extent of horizontal and vertical specialization of jobs i.e. the job in terms of number of different activities to be performed.

·         The grouping of activities according to the goods and services the firm markets or to the functions, skills, and knowledge the firm uses to produce its goods and services.

 Coordination Mechanisms:

The division of labor is the need to coordinate activates of organization members. There are various modes of vertical and horizontal coordination within and among groups such as direct supervision, formal rules and procedures, plans and budgets, negotiation and adjustment, and other integrating devices such as liaison roles, meeting, committees, task forces, etc. The coordination mechanism depends on the degree to which integration issues are routine versus exceptional. It is important to remember that smooth coordination in any organization is costly.

The Distribution of Decision Rights:

The information flows should be organized and allocated the different decision rights such as the right to initiate, approve, implement, and control various types of strategic or tactical decision. In order to support coordinated decision-making various mechanisms for information to flow vertically and horizontally such as reporting, meeting, face to face conversations, etc. must also be put in place. The decision rights should be given to those who have the best information relevant to the decision. Typically, these are people lower down or on the front line in the organization. For example, a manufacturing manager probably knows the production capacity of the plant and field sales manager about customers. 

Organization Boundaries:

 All the activities are not organized within the boundaries of the firm, structuring an organization also involves deciding what to do inside and what outside the boundaries of the firm. This means making choices about the horizontal and vertical integration, make versus buy choices for different goods and services, and choices about strategic alliances with other firms. 

The Informal Structure:

Formal roles and relationships are not only basis of social integration in organization. There are relationships among the organization members that develop on the basis of proximity, liking, and friendship, advice and shared background and interest. These informal relations are as important as formal ones in terms of how information flows and things get done in an organization. 

The Political Structure:

The organizational members have varying interest and agendas, it is impossible to deny the political nature of organizations. As in the public domain, there are political coalition inside organization that have competing agendas and viewpoints about how the actions the organization should undertake.

 The Legitimate of Authority:

The formal position undoubtedly defines to a certain degree that who has legitimate authority in an organization.

The structure of an organization varies in terms of the above seven dimensions. The strength and weakness of different structure are evaluated along several dimensions. The some of the more important dimensions are:

·         Efficiency of resource utilization

·         Efficiency of time utilization

·         Responsiveness to the environment

·         Adaptability over time

·         The ability to hold people accountable

 

Basic Forms of Organization Structure:

             There are several types of organizational structures, and each structure has its own advantages and disadvantages. Here are some common types of organizational structures: 

Functional Structure:

In a functional structure, the activities are grouped together by common function from bottom to top of the organization. The organization is divided into departments or functions, e.g. marketing, finance, human resources, administration, and production. Each department is responsible for specific tasks related to its function.

As it grows, the organization may add new functions and further divide its presently employed function. In function structure, activities are grouped together by common function, form bottom to the top of the organization. In functional structure, the employees in each department get differentiated, adopting similar values, goals, and orientations. Similarly encourages collaboration, efficiency, and quality within the function.

The organization performance is dependent on all the functions working together in a coordinated manner. The functional structure requires a good deal of information processing among the functions. The functional organization is best when dominant competitive issues and goals of the organization stress functional expertise, efficiency, and quality. It is most effective in a relatively stable environment.  

The weakness of the functional structure is the inability to respond to environmental changes that require coordination between departments. In these cases the coordination mechanisms across function can get overloaded. Other disadvantage of the functional organization is that each employee has a restricted view of the overall goals of the organization.

The functional structure is usually best suited for small to medium sized organizations where the firm’s strategy calls a single or closely related set of products and services to be produced efficiently or when there is a focus on efficiency within each department. 

Divisional Structure:

The divisional structure differs from the functional by grouping diverse functions into divisions. In a divisional structure, the organization is divided into divisions or business units based on product lines, geographic regions, or customer segments. Each division operates as a separate entity with its own functions, allowing for greater autonomy and focus on specific markets or products. The coordination across functions within each division is maximized in divisional structure. The employees identify with their division rather than with their own function. In divisional structure each division is managed like a separate business, coordination across the divisions is overseen by a group of managers at corporate headquarters that is responsible for allocating resources among division and setting long term strategy of the firm.

The main issue in divisional structure is the degree of autonomy granted to the divisions in making decisions that are strategic and involve significant resource commitments. The disadvantage of divisional structure is that the organization loses economies of scale.

The divisional structure is excellent when environmental uncertainty is moderate to high and the dominant competitive issue and goals of the organization emphasize coordinated action to innovate, satisfy clients, or to maintain a market segment.

The divisional structure typically works best in medium or large sized organizations that operate in heterogeneous environments and have adopted a diversified strategy of producing multiple products, operating in different businesses and markets, serving different customers, and or selling products in different geographical regions. 

Hybrid Structure:

Some large corporations do not have either pure functional structure or pure divisional structure. Two types of hybrid structures found quit frequently. Some organizations combine elements of various structures to create a hybrid structure that suits their needs and objectives. The organizational structure choice depends on factors such as the organization's size, industry, goals, and culture. It is important to select a structure that aligns with the organization's strategic priorities and facilitates effective communication and collaboration among its members.

In one form, project or product group may be overlaid on the functional structure so that these groups facilitate coordination across functions. In other hybrid form, some key function such as manufacturing or sales that require economies of scale and specialization may be centralized and located at headquarters, thus superimposing a functional structure on divisional one. By combining characteristics of both functional and divisional structure, hybrid structure takes advantage of both forms of structure and avoid some of their weakness. 

Matrix Structure:

The organization needs the benefits of both functional and divisional structure and needs both technological expertise within functions and horizontal coordination across functions. The matrix organization is answer in these cases. The unique characteristics of matrix form are that both divisional and functional structures are implemented simultaneously. A matrix structure combines elements of both functional and divisional structures. The division managers and functional managers have equal authority within the organization and employees report to both a functional manager and a project or product manager.

This structure is often used in complex organizations or for project-based work, as it allows for flexibility and specialization. The dual hierarchy may seem an unusual way to design an organization. But it is the correct structure when the following conditions are met: 

·         Environmental pressures from two or more critical dimensions.

·         The task environment of the firm is both complex and uncertain.

·         Economies of scale in the use of internal resources. The organization feels pressure for the shared and flexible use of people and equipment. 

The strength of the matrix is that it enables the organization to meet multiple demands from the environment. Resources are flexibly allocated and the organization adapts to change external environments. It also provides an opportunity for employees to acquire either functional or general management skills depending on their interests.

The basic problem is determining the responsibility and authority relationships between functional and project (divisional) managers.  The person reports to two bosses are caught in a conflict. It will not work if managers do not adapt to the information and power sharing required by the matrix.

Emerging Organization Structure: 

·         Network Organization

·         Cluster Organization

·         Self-designing Organization

·         Information-based Organization

·         Post-industrial Organization 

A network structure is characterized by a central core organization that collaborates with a network of external entities, such as partners, suppliers, and contractors. This structure is often used in dynamic industries and allows the organization to be agile and responsive.

There are important differences among these different emerging conceptions of organization structure. They all share a number of common characteristics that can be discussed under the label of a “network structure” . A network structure differs from the traditional bureaucratic structures in several ways (see Exhibits 1 and 2). 

A Brief History of the Theory of Organization Structure:

The organizational structure theory has evolved over time, influenced by various schools of thought and changing business environments. Here's a brief history of its development:

Classical Management Theories (Late 19th and Early 20th Century): 

·         During the late 19th and early 20th centuries, classical management theorists such as Frederick Taylor and Henri Fayol laid the foundation for organizational structure theory.

·         Taylor introduced scientific management, emphasizing efficiency through time-and-motion studies and a hierarchical structure.

·         Fayol proposed five functions of management (planning, organizing, commanding, coordinating, and controlling) and suggested a scalar chain of command. 

Bureaucracy (Early to Mid-20th Century): 

·         Max Weber, a German sociologist, introduced the concept of bureaucracy. He described an ideal organization as having a hierarchical structure with clear roles, rules, tasks and standard rules or procedures. The use of technical criteria for recruitment and promotion. 

Human Relations Movement (1930s-1950s): 

·         The Human Relations Movement, with contributions from Elton Mayo and Roethlisberger, challenged the classical view. It emphasized the importance of social factors and employee morale in organizational structure and performance. 

Systems Theory (Mid-20th Century): 

·         The Systems theory developed by theorists like Ludwig von Bertalanffy and Kenneth Boulding, viewed organizations as complex, interconnected systems. It introduced the idea of considering the entire organization as a system with interrelated parts. 

Contingency Theory (1960s): 

·         Contingency theorists, including Joan Woodward and Paul Lawrence, suggested that there is no one-size-fits-all organizational structure. Instead, the structure should be contingent on external and internal factors, such as the organization's size and environment. 

Modern Organizational Theories (Late 20th Century to Present): 

·         The late 20th century brought several new organizational theories, including Mintzberg's configuration theory, which identified various structural configurations (e.g., adhocracy, bureaucracy).

·         The rise of the networked organization, characterized by decentralization, information technology, and collaboration, challenged traditional hierarchical structures.

Contemporary Trends (Present): 

·         Current organizational structure theories focus on adaptability, agility, and flatter structures to respond to rapidly changing business environments. Concepts like matrix organizations, holacracy, and agile methodologies have gained popularity. 

Digital Transformation and Remote Work (21st Century): 

·         The proliferation of technology and remote work has led to new discussions about virtual organizations and hybrid structures that incorporate both in-person and remote work. 

In summary, the theory of organizational structure has evolved from classical, hierarchical models to more flexible, adaptable forms that consider the dynamic nature of modern business environments. Organizational structure theories continue to evolve in response to changing technologies, globalization, and societal trends.

                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              Exhibit 1       A Comparison of Different Organization Structures

 

	Functional	Divisional	Matrix	Network
Division of Labor	By inputs	By outputs	By Inputs & Outputs	By Knowledge
Coordination Mechanism	Hierarchical supervision, plans & procedures	Division general manager & corporate staff	Dual reporting relationships	Cross-functional teams
Decision Rights	Highly centralized	Separation of strategy & execution	Shared	Highly decentralized
Boundaries	Core/periphery	Internal/external markets	Multiple interfaces	Porous & changing
Importance of informal structure	Low	Modest	Considerable	High
Politics	Inter-functional	Corporate-division & inter-division	Along matrix dimensions	Shifting coalitions
Basis of Authority	Positional & functional expertise	General management responsibility & resources	Negotiating skills & resources	Knowledge & resources

  

Exhibit 2          The Relative Advantages and Disadvantages of different Structure

 

	Functional	Divisional	Matrix	Network
Resource Efficiency	Excellent	Poor	Moderate	Good
Time Efficiency	Poor	Good	Moderate	Excellent
Responsiveness	Poor	Moderate	Good	Excellent
Adaptability	Poor	Good	Moderate	Excellent
Accountability	Good	Excellent	Poor	Moderate
Environment for which Best Suited	Stable Environment	Heterogeneous Environment	Complex Environment with multiple Demands	Volatile Environment
Strategy for which Best Suited	Focused / low cost Strategy	Diversified Strategy	Responsiveness Strategy	Innovative Strategy

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