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Chapter Twelve:
Designing
Organizational
Structures

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 Learning Objectives
1. Describe three types of coordination in organizational
structures.

2. Discuss the role and effects of span of control,

centralization, and formalization, and relate these elements
to organic and mechanistic organizational structures.

3. Identify and evaluate six types of departmentalization.

4. Explain how the external environment, organizational size,

technology, and strategy are relevant when designing an
organizational structure.

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

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 Division of Labor and Coordination
Division of labor results in job specialization.
• Work divided into separate jobs for different people.
• Improves work efficiency.
Coordination of work.
• Division of labor limited to ability to coordinate that work.
• Coordinating work can be costly.
Three coordinating mechanisms:
1. Informal communication.
2. Formal hierarchy.
3. Standardization.

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 Coordination through Informal
Communication
All firms coordinate work to some degree through
informal communication.
• Sharing information, forming common mental models.
• Vital in nonroutine and ambiguous situations.

Increasingly possible in large firms through digital

technologies.
Larger firms also apply:
• Liaison roles.
• Integrator roles.
• Temporary teams.

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

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 Elements of Organizational Structure

Span of control. Centralization.

Departmentalization. Formalization.

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

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

Problems with tall

hierarchies:
• Lower-quality, less timely
information to executives.
• Higher overhead costs.
• Undermines employee
empowerment/engagement.

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 Centralization/Decentralization

Centralization: Formal
decision-making authority is
held by a few people, usually
at the top.
Firms decentralize as they get
larger and older.
Varying degrees of
centralization in different areas
of the company.
• Example: sales decentralized;
info systems centralized.

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 Formalization
Degree to which organizations standardize behavior through
rules, procedures, formal training, and related mechanisms.
Usually more formalization in older, larger, regulated firms.

Problems with formalization:

• Less organizational flexibility.
• Undermines creativity.
• Less work efficiency.
• More job dissatisfaction and stress.
• Rules/procedures become focus of attention.

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 Mechanistic versus Organic Structures

Exhibit 12.3 Contrasting Mechanistic and Organic Organizational Structures

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

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

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

Exhibit 12.4 A Functional Organizational Structure.

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 Evaluating the Functional Structure
Benefits: Limitations:
• Economies of scale. • Emphasizes skills more than firm’s
• Supports professional identity. product/service.
• Easier supervision. • Higher dysfunctional conflict.
• Poorer coordination across
functions.

Exhibit 12.4 A Functional Organizational Structure.

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 Divisional Structure

Diagram (a) shows the

geographic divisions at
Saputo; diagram (b) depicts
the four product divisions of
Medtronic; diagram (c)
shows the five client
divisions of Thomson
Reuters. None of these firms
has a pure divisional
structure. At all three
companies the top executive
team also includes the heads
of functional units. Medtronic
executives reporting to the
CEO are responsible for
products (shown), geographic
areas, or functional
responsibilities.

Exhibit 12.5 Three Types of Divisional Structure.

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 Evaluating the Divisional Structure
Benefits:
• Building block structure, accommodates growth.
• Focuses on markets/products/clients.

Limitations:
• Duplication, inefficient use of resources.
• Silos of knowledge.
• Difficult to identify best divisional structure in complex
environments.

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 Team-Based Structure

• Self-directed work
teams organized around
work processes.
• Typically, an organic
structure.
• Usually found within a
divisionalized structure.

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 Evaluating the Team-Based Structure

Benefits:
• Flexible, responsive.
• Lower administrative costs.
• Better communication and
coordination across
traditional work units.

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

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 Matrix Structure
Overlays two structures to leverage the benefits of both.
Large organization matrix structures:
• Managers at only one level report to two bosses.
• Often geographical with product, client, or function.
• Randon S.A. structure overlays product with function.

Project-based matrix structures

• Employees permanently with a functional unit but located
temporarily in a specific project unit.

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 Evaluating Matrix Structures
Benefits:
• Uses resources and expertise effectively.
• Potentially better communication, flexibility, innovation.
• Focuses specialists on clients and products.
• Supports knowledge sharing within specialty.
• Solution when two divisions have equal importance.
Limitations:
• More conflict among managers who share power.
• Two bosses dilute accountability.
• Dysfunctional conflict, stress.

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 External Environment & Structure 1

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

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

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 External Environment & Structure 2

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

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

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 Effects of Organizational Size

As organizations grow, they:

1. Increase division of labor (job specialization).
2. Increase coordination through standardization and formal
hierarchy.
3. Become more decentralized.

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 Technology and Structure
Mechanisms/processes for
making products or services.
Two contingencies:
• Task variability: How predictable
are job duties.
• Task analyzability: How much does
the work follow known procedures.
Organic structure for high
variability, low analyzability.
Mechanistic structure for low
variability, high analyzability.

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 Organizational Strategy
Structure follows strategy.
• Strategy points to the environments in which the organization
will operate.
• Leaders decide the structure after determining the strategy
(structure follows strategy).

Innovation strategy:
• Providing unique products or attracting clients who want
customization.

Cost leadership strategy:

• Maximize productivity in order to offer competitive pricing.

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