Chapter Three

Fundamentals of
Organization Structure

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© 2004 3-1
A Sample Organization Chart

CEO

Vice President Vice President Director

Finance Manufacturing Human Resources

Chief Budget Plant Maintenance Training Benefits

Accountant Analyst Superintendent Superintendent Specialist Administrator

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© 2004 3-2
The Relationship of Organization
Design to Efficiency vs. Learning
Outcomes
Horizontal Organization
Designed for Learning
Horizontal structure is dominant
• Shared tasks, empowerment
• Relaxed hierarchy, few rules
• Horizontal, face-to-face communication
Dominant • Many teams and task forces
• Decentralized decision making
Structural Vertical structure is dominant
• Specialized tasks
Approach • Strict hierarchy, many rules
• Vertical communication and reporting systems
• Few teams, task forces or integrators
• Centralized decision making

Vertical Organization
Designed for Efficiency
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© 2004 3-3
Ladder of Mechanisms for Horizontal
Linkage and Coordination

H IGH Teams
Coordination Required

Full-time Integrators
Amount of Horizontal

Task Forces

Direct Contact

LOW Information Systems

LOW HIGH
Cost of Coordination in
Time and Human Resources
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© 2004 3-4
Project Manager Location
in the Structure
President

Finance Engineering Marketing Purchasing

Department Department Department Department
Financial
Project Manager
Accountant Product
Market New
Designer
Researcher Product A
Buyer
Budget
Analyst Draftsperson Advertising Project Manager
Specialist New
Buyer Product B
Management
Accountant Electrical Project Manager
Designer Market New
Planner Buyer Product C

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© 2004 3-5
Teams Used for Horizontal
Coordination at Wizard Software
Company
President

Marketing Vice Pres. Programming Vice Pres Research Vice Pres

Videogames Videogames Basic Research

Videogames
Chief Engineer Supervisor
Sales Manager

Videogames Product Team Applications and Testing

Supervisor

Memory Products Memory Products Memory Products

Sales Manager Chief Programmer Research Supervisor
Memory Products Team
Memory Products
International Manager
Customer Service Procurement
Manager Supervisor
Advertising Manager

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© 2004 3-6
 Structural Design Options for
Grouping Employees into
Departments
Functional
Grouping CEO

Engineering Marketing Manufacturing

Divisional
Grouping CEO

Product Product Product

Division 1 Division 2 Division 3
Source: Adapted from David Nadler and Michael Tushman,
Strategic Organization Design (Glenview, Ill.: Scott Foresman, 1988), 68.
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© 2004 3-7
 Strengths and Weaknesses of
Functional Organization Structure
 STRENGTHS:  WEAKNESSES:
 Allows economies of  Slow response time to
scale within functional environmental changes
departments  May cause decisions to pile
 Enables in-depth on top, hierarchy overload
knowledge and skill  Leads to poor horizontal
development coordination among
 Enables organization departments
to accomplish  Results in less innovation
functional goals  Involves restricted view of
 Is best with only one organizational goals
or a few products
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the Answer,”
Organizational Dynamics (Winter 1979): 429.
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© 2004 3-8
 Strengths and Weaknesses of
Divisional Organization Structure
 STRENGTHS:  WEAKNESSES:
 Suited to fast change in  Eliminates economies of
unstable environment scale in functional
 Leads to client satisfaction departments
because product responsibility  Leads to poor
and contact points are clear coordination across
 Involves high coordination product lines
across functions  Eliminates in-depth
 Allows units to adapt to competence and
differences in products, technical specialization
regions, clients  Makes integration and
 Best in large organizations with standardization across
several products product lines difficult
 Decentralizes decision-making
Source: Adapted from Robert Duncan, “What Is the
Right Organization Structure? Decision Tree Analysis
Thomson Learning
Provides the Answer,” Organizational Dynamics
(Winter 1979): 431.
© 2004 3-9
Reorganization from Functional
Structure to Divisional Structure at
Info-Tech
Functional Info-Tech
President
Structure

R&D Manufacturing Accounting Marketing

Divisional Info-Tech
Structure President

Electronic Office Virtual

Publishing Automation Reality

R&D Mfg Acctg Mktg R&D Mfg Acctg Mktg R&D Mfg Acctg Mktg

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© 2004 3-10
Structural Design Options for
Grouping Employees (Continued)
Multifocused
Grouping
CEO

Marketing Manufacturing

Product
Division 1

Product
Division 2

Source: Adapted from David Nadler and Michael

Tushman, Strategic Organization Design (Glenview, Ill.:
Scott Foresman, 1988), 68.
Thomson Learning
© 2004 3-11
Structural Design Options for
Grouping Employees (Continued)
Horizontal
Grouping
CEO

Human Resources Finance

Core
Process 1

Core
Process 2

Source: Adapted from David Nadler and Michael Tushman,

Strategic Organization Design (Glenview, Ill.: Scott Foresman,
1988), 68.
Thomson Learning
© 2004 3-12
 Geographical Structure
for Apple Computer
CEO
Steve Jobs

Apple Apple Apple Apple

Products Americas Europe Pacific

Canada France Australia

Latin
America/ Japan
Caribbean

Sales Asia
Service and
Marketing
to Regions

Source: www.apple.com
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© 2004 3-13
Dual-Authority Structure in a
Matrix Organization
President

Director Design Mfg Marketing Procure-

of Product Vice Vice Vice Controller ment
Operations President President President Manager

Product
Manager A

Product
Manager B

Product
Manager C

Product
Manager D

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© 2004 3-14
 Strengths and Weaknesses of
Matrix Organization Structure
 STRENGTHS:  WEAKNESSES:
 Achieves coordination  Causes participants to experience
necessary to meet dual dual authority, which can be
demands from customers
frustrating and confusing
 Flexible sharing of human
 Means participants need good
resources across products
 Suited to complex decisions interpersonal skills and extensive
and frequent changes in training
unstable environment  Is time consuming; involves

 Provides opportunity for frequent meetings and conflict

both functional and product resolution sessions
skill development  Will not work unless participants
 Best in medium-sized understand it and adopt collegial
organizations with multiple rather than vertical-type
products
relationships
Requires great effort to maintain
Source: Adapted from Robert Duncan, “What Is the Right
Organization Structure? Decision Tree Analysis Provides the ThomsonLearning
Answer,”Organizational Dynamics (Winter 1979): 429.
© 2004 3-15
power balance
 Matrix Structure for
Worldwide Steel Company
President
Vertical Functions
Mfg. Industrial
Mfg. Marketing Finance Metallurgy Field Sales
Services Relations
Vice Vice Vice Vice Vice
Vice Vice
President President President President President
Horizontal Product Lines

President President

Open Die
Business Mgr.

Ring Products
Business Mgr.

Wheels & Axles

Business Mgr.

Steelmaking
Business Mgr.

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© 2004 3-16
A Horizontal Structure
Top
Management
Team

Process Team Team Team

Owner 1 2 3

Market Product
Analysis
Research
Planning
Testing Customer
New Product Development Process

Process Team Team Team

Owner 1 2 3

Material
Analysis Purchasing
Flow
Distrib. Customer
Sources: Based on Frank Ostroff,

Procurement and Logistics Process

The Horizontal Organization, (New York:
Oxford University Press, 1999); John A. Byrne,
“The Horizontal Corporation,” Business Week,
December 20, 1993, 76-81; and Thomas A. Stewart,
“The Search for the Organization of Tomorrow,”
Thomson Learning
Fortune, May 19, 1992, 92-98. © 2004 3-17
 Strengths and Weaknesses of
Horizontal Structure
 STRENGTHS:
 Flexibility and rapid response to 
changes in customer needs
 Directs the attention of everyone
toward the production and delivery
of value to the customer
 Each employee has a broader view
of organizational goals
 Promotes a focus on teamwork 
and collaboration—common
commitment to meeting objectives
 Improves quality of life for
employees by offering them the
opportunity to share responsibility,
make decisions, and be
accountable
Sources: Based on Frank Ostroff, forWhatoutcomes
The Horizontal Organization:
Organization of the Future Looks Like and How It Delivers Value to
Thomson Learning
Customers, (New York: Oxford University Press, 1999);
and Richard L. Daft, Organization Theory and Design, 6th ed.,
(Cincinnati, Ohio: South-Western College Publishing, 1998) 253.
 WEAKNESSES:
Determining core processes
to organize around is difficult
and time-consuming
 Requires changes in culture,
job design, management
philosophy, and information
and reward systems
Traditional managers may
balk when they have to give
up power and authority
 Requires significant training
of employees to work
effectively in a horizontal
team environment
the
 Can limit in-depth skill
© 2004
development 3-18
 Hybrid Structure
Part 1. Sun Petrochemical Products
President

Functional Chief
Human Technology Financial
Resources Vice Services
Structure Counsel
Director President Vice Pres.

Product Fuels Lubricants Chemicals

Vice Vice Vice
Structure President President President

Sources: Based on Linda S. Ackerman, “Transition Management:

An In-Depth Look at Managing Complex Change,”
Organizational Dynamics (Summer 1982): 46-66;
Thomson Learning
and Frank Ostroff, The Horizontal Organization,
(New York: Oxford University Press, 1999), Fig. 2.1, 34.
© 2004 3-19
Hybrid Structure
Part 2. Ford Customer Service
Division
Vice President and
General Manager

Functional Strategy and Human

Structure Finance Communication Resources

Director and
Process Owner Teams
Horizontal Structure

Parts Supply / Logistics Group

Director and
Process Owner Teams

Vehicle Service Group

Director and
Process Owner Teams

Technical Support Group

Sources: Based on Linda S. Ackerman, “Transition Management:
An In-Depth Look at Managing Complex Change,” Organizational Dynamics Thomson Learning
(Summer 1982): 46-66; and Frank Ostroff, The Horizontal Organization,
(New York: Oxford University Press, 1999), Fig. 2.1, 34. © 2004 3-20
Organization Contextual Variables
that Influence Structure

Culture Size
Chapter 10 Chapter 9

Structure
(learning vs.
Strategy, efficiency) Technology
Goals Chapters 7,8
Chapter 2

Environment
Chapters 4, 6
Sources: Adapted from Jay R. Galbraith,
Competing with Flexible Lateral Organizations, 2nd ed.
(Reading, Mass.: Addison-Wesley, 1994), Ch.1;
Jay R. Galbraith, Organization Design (Reading, Mass.:
Addison-Wesley, 1977), Ch. 1.
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© 2004 3-21
The Relationship of Structure to
Organization’s Need for Efficiency vs.
Learning
Functional with
Functional cross-functional Divisional Matrix Horizontal Modular
Structure teams, integrators Structure Structure Structure Structure

Horizontal:
• Coordination
• Learning
Dominant • Innovation
Structural Vertical: • Flexibility
• Control
Approach
• Efficiency
• Stability
• Reliability

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© 2004 3-22
Symptoms of
Structural Deficiency
 Decision making is delayed or lacking in
quality
 The organization does not respond
innovatively to a changing environment
 Too much conflict is evident

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© 2004 3-23