How Organizational Structure Impacts Organizations

Table of Content

Organizational Structure is a topic seldom contemplated by most people working in organizational settings. We all go to work every day, go to assigned locations, and perform our jobs — and we don’t ever think about how our organization is arranged. However, Organizational Structure is critical both for a company and its employees. People should think very carefully about the organizational structure of the companies for which they work or of companies for which they intend to work.

In the long run, Organizational Structure can spell the difference between success and failure for a company, as well as for the individuals who work there. The purpose of this white paper is to examine those challenges facing any company wherein Organizational Structure is not probably aligned with business strategy, and to consider the benefits and pitfalls of a number of Organizational Structure options as they pertain to the longterm success of individual employees and the company as a whole.

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An external event that calls for immediate organizational response, flexibility and adaptation While many companies today are still reluctant to change their Organizational Structure, more and more are coming to find that they need to be adaptive and they need to be flexible. In fact, Management Theorists — people who study this at the academic level — are starting to encourage organizations to change their structure because they need to be prepared to respond to what we call “trigger points. ” A trigger point is an external event that has an impact on an organization.

It could be a change in the markets; it could be a change in global competition; it could be the advent of new technology. These trigger points and any number of others call for immediate responses, as well as organizational flexibility and adaptation.  A company’s organizational realignment to pursue new business objectives, to create new products or services, or to target new consumer markets is referred to as Strategic Renewal.

Adapting to Six Sigma demands company-wide process improvements and close scrutiny of those processes from one division to another. Globalization is an intimidating and sometimes controversial issue that also tends to drive companies to change their Organizational Structures. Business model reinvention — such as IBM changing from a product manufacturer into a services and consulting firm — is one of the more drastic examples of business reorganization; but even this sort of sweeping change must be an option for a truly flexible organization.

Of course, these examples represent evolving business trends that have come and gone over the years. Flexible organizations try to adapt to such trends as quickly and efficiently as possible to enhance business and achieve organizational goals. Key Terms Organizational Structure The manner in which an organization aligns (or realigns) itself. In any discussion of Organizational Structure, it’s helpful to become acquainted with a few key terms that describe specific aspects of business organization practices.

Very simply, Organizational Structure is the manner in which an organization arranges (or rearranges) itself. 5 Once an organization investigates its options and decides upon how it’s going to structure itself, it’s common to draw up an Organizational Chart. Org Charts are not only quite interesting, they’re very handy tools.

With decentralized decision making, the benefit is that the individuals who best know the company’s processes are those lower in the organization, those who roll up their sleeves and work with the processes every day. Theoretically, such individuals are in a better position to respond to external and internal drivers and make rapid decisions to control those drivers before they get out of hand and negatively affect the organization. Every company organizes itself differently, so there is no absolute right and no absolute wrong way to design an organization.

Decentralized decision making tends to be a trap, as it may dangerously undermine upper management in the organization. Nonetheless, decentralized decision making is increasingly accepted as a viable business model today. Yet another key term is one known as Formalization, the degree to which an organization tends to document its processes, rules, and regulations. 6 Centralized and Decentralized Decision Making and Formalization will vary from one organizational structure to another, depending upon the options for change that are open to a company. Hierarchy of Authority

Another key term that is familiar in the designing an organization is what we call a Hierarchy of Authority. 7 The concept of Hierarchy of Authority says that an organization must know who is in charge of which elements and who reports to whom. Of course, this has implications for the division of labor because, under the Hierarchy of Authority, many tasks are divided and distributed across the organization. This process necessarily entails varying degrees of specialization of jobs and tasks, which we see a lot these days as the business environment grows more sophisticated.

Types Of Organizational Structures Regarding Types of Organizational Structures, I will first critically note that an appropriate organizational structure for any given company is a very elusive animal, indeed. Every company tends to organize itself differently, so there is no absolute right and no absolute wrong way to design an organization. Appropriate organizational structure depends upon the unique strategy of the business, its unique customer base, its Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction 7 nique sense of products and services, and its management of these considerations as they are dispersed throughout the enterprise.

The most common organizational types may be classified as follows: The Functional Structure The Divisional Structure The Matrix Structure, and The Horizontally Linked Structure Before we discuss each of these structures, I’d like to note that with any given company, and especially with a very large company (an organization with ten, fifteen, twenty, forty thousand people, for instance), we typically do not see that a single organization adheres to a single organizational structure.

Different structures may benefit different portions of the organization in both subtle and profound ways. Different organizational structures may benefit different portions of the organization in both subtle and profound ways. For a hypothetical example, the very controversial Matrix Structure may work extremely well in a company’s research and development environment; however, the sales environment of the same company may benefit greatly from the Divisional option.

The distinctions and benefits of these structures will become more apparent as we discuss each of the organizational types. Dimensions of Organizational Structure Think about any Organizational Structure and visualize an Organizational Chart in two dimensions: There is the Vertical Dimension, in which the organization is considered to be either a tall or a flat structure; and there is the Horizontal Dimension, in which an organization is considered to be either wide or narrow. The Vertical Dimension of Organizational Structure

The Vertical Dimension of the Organizational Structure basically lays out who is in charge of whom and who makes the decisions inside an organization. It is the hierarchy of authority within a company, and herein we find something that we call the Span of Control, which plays an especially important role in our discussion of the Functional Structure. Span of Control is a very simple concept: It refers to the number of people who can report to a single manager inside of the hierarchy. However, the optimal Span of Control is very difficult to quantify, because it varies based upon the type of rganization and the work being executed; the nature of the work, the level of Formalization, the skills of the people, the business culture, and the management style of the organization all influence the optimal Span of Control within any given company.

Let’s take another hypothetical example: In a production or manufacturing company, a single manager may very well be able to handle a large number of people (say, 12 to 14 workers), because in a Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction manufacturing facility, the work is most likely driven by machines. Certainly, in this environment there will be numerous processes and procedures, but there’s not going to be a great deal of latitude as to what an individual does on the job. It’s a simple matter of following Step One with Step Two, Step Two with Step Three, and so forth. However, a software company or a video game manufacturing firm will call for an entirely different type of task, entirely different skill sets, with an entirely different type of people executing the work.

Herein we find people who are very well versed in computer technology, and they tend to excel in creative and innovative tasks. Their work is not driven by rigid processes and procedures. It is a creative environment. And, in a case like this, obviously the Span of Control would need to be smaller, because a manager cannot oversee as many people when those individuals are granted greater creative latitude. Span of Control (Tall vs. Flat Organizations) The Span of Control has a major impact on organizational effectiveness.

But what are the advantages and disadvantages of the Functional Structure? Advantages and Disadvantages of The Functional Approach First of all, the Functional Structure follows the Centralized Decision Making model, such that decision making in the Functional Structure occurs at the top. This can be advantageous in the sense that there is more upper management control in the organization. It can also help individuals in their career paths, inasmuch as motivated employees move upward within the organization to assume decision-making positions.

For example, you come in from college, join the Accounting Department as a Junior Accountant, move up to Accountant, and then move up to Senior Accountant — it’s a very well-defined career path. Functional Structures foster stability and efficiency. Everybody knows what his job is, and as a group they all use similar processes, so it’s a very effective way of operating. When you’re working with this type of structure, you can also take advantage of economies of scale. Of course, the Functional Structure has its disadvantages, as well. Perhaps the most critical disadvantage is that of poor communication and conflict between departments.

A great deal of literature on Functional Structure is focused on the effect of what we call Siloing. Siloing is when an organization has very thick walls, so that the various departments are entirely isolated from one another, and members of Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction 11 those departments don’t think in terms of company-wide teamwork. They only attend the business of their specific department. Communication and collaboration between the departments is difficult, at best, and this is not a good organizational situation.

Also, customers can become frustrated by the lack of responsiveness from organizations that are functionally structured — the scenario of customer complaints “passed off” from one department to another is familiar to most of us. Another disadvantage of the Functional Structure is that employees tend to identify themselves with their respective departments but not so much with the organization as a whole. Although the Functional Structure is the most popular and pervasive in the business world, companies should understand that the siloing effect is potentially detrimental to individual employees, departments, and the organization as a whole.

Divisional Structures Divisional Structures are concerned with placing groups of people with similar abilities where they are needed all across the organization. The Horizontal Dimension of Organizational Structure The other dimension of an organization, the one called the Horizontal Dimension, basically addresses the division and assignment of tasks and functions across various departments within the organization. Herein we examine the second of the Organizational Structure types, the Divisional Structure. Divisional Structure

The Divisional Structure is not so much based on the grouping of people according to their skill sets as it is concerned with placing groups of people with similar abilities where they are needed all across the organization. For instance, while under the Functional Structure you would expect to find accountants only in the Accounting Department, under the Divisional Structure you will find accountants in different divisions of the same company, in separate Accounting Departments which are dedicated to separate product lines. Figure 8: The Divisional Organization Structure

Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction 12 As you can see in Figure 8, each product line has its own Functional Organization with Production, Sales, R&D and Accounting teams, permitting each product line to function independently of the other product lines. Yet each product line is a component of a larger organization. A solid example of Divisional Structure can be seen in the Boeing Company. Boeing has three divisions within its organization: the Commercial Airline division; the Military Aircraft division; and a fledgling new division or product group called Private Aviation.

Each of these divisions is a functional organization unto itself, each with its own R&D and Production and Sales and Accounting teams; yet, each is only a component of a much larger organization called Boeing Company. Of course, organizational divisions can be and usually are much more than mere product lines. The divisions may be based on different consumer markets. Everyone knows that Black & Decker, for example, manufactures and sells construction equipment, but its divisions target different consumer markets.

One division markets to the layman builder, another division markets to the private professional builder, and yet another division markets to large government contractors. Organizational divisions may even be based on geographic markets — for instance, a global corporation may have a North American division, a European division, an Asian division, and so forth. In fact, an organization’s Divisional Structure may be based upon anything. Advantages and Disadvantages of The Divisional Structure The advantage of the Divisional Structure lies mainly in the coordination of functions within the separate divisions.

Behind any single product group or market group or geographic group is one person who is in charge of all the functions within his division. This improves the ability of a company to respond to customer issues, because there is more accountability — everyone in a given division reports to a single individual at the top of the division, rather than to a mere supervisor of a department. This arrangement also helps to develop managerial skills and executive skills, because people working in a Divisional Structure are exposed to all of the other functions, unlike the siloing effect seen in a straight Functional Structure.

The disadvantage of the Divisional Structure lies in redundant effort and resources due to multiple departments performing essentially the same tasks across the organization, which spells inefficiency on many levels. Within the Divisional Structure there is also a reduction in specialization and occupational skills, not to mention a high probability of in-house competition between the various divisions of the company.

Even so, the Divisional Structure is widely embraced by larger companies, and it’s not nearly as controversial as the next type of organizational structure we will examine — the Matrix Structure. Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction 13 Matrix Structure I have personally worked in a couple of companies that utilized the Matrix Structure of organization, and it’s interesting, to say the least. This structure incorporates elements of both Functional and Divisional structures, yet in the end it operates like neither.

These are, indeed, projects that must pass through the functional structure of this division; however, each project must be allocated its own Production Support team, its own Legal Support team, its own Engineering Support team and its own Accounting Support team. The manager of each project has no staff at all. His job is to assemble his staff from the functional areas of the organization in order to see his project through from conception to completion. The project manager, in other words, must borrow his staffing from each department.

The challenge is that each department has a finite staff, and the demands of each project are not equal — so one project may require more staffing than the others. Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction 14 Accordingly, if we have three different projects with three different project managers, there’s going to be some competition between them for staffing, because the project managers have no staff of their own, and there is a finite number of available staff in the organization to accommodate them.

Of course, when we refer to “projects” we could as easily be referring o clients or customers of the organization, and I’ll provide an example for the sake of clarity. When I worked at the ABB Group in the nuclear power industry, my company had only twelve customers; however, these were huge customers, multi-billion dollar customers. We at ABB organized ourselves into a Matrix Structure with a manager (a “project manager”) assigned to each customer. When one of our customers required personal attention, the manager assigned to that customer would then borrow staff from the functional areas of our organization in order to fulfill that customer’s specific needs.

When several of our customers required attention simultaneously, you may well imagine the competition among our managers to borrow sufficient staff to accommodate the customers. Or you may try to imagine the workload of those people who are in the middle — those staffers who are borrowed and moved from project to project, working two or three projects at a time on occasion. The demands of the Matrix Structure require great flexibility and fortitude on the part of the participants. It’s an environment in which some people excel, but the pace can be overwhelming for others.

Advantages and Disadvantages of The Matrix Structure The advantage of the Matrix Structure is that it’s extremely efficient, particularly when resources are scarce. This organizational structure is a very good way to ensure that expensive specialists are kept busy all the time and that they are using their skills on the most critical portions of a project for the good of the organization. It also allows an organization to start projects quickly, because there’s no need to hire staff from outside — the staff is readily available, and they are already acquainted with the pace, so projects can be launched very quickly.

The Matrix Structure also helps develop cross-functional skills in employees, as they are dealing with many different types of projects, working with and learning from many other participants with a diversity of skill sets. The Matrix also increases employee involvement because the project managers seldom possess all the necessary technical and functional knowledge. They rely on the expertise of those “borrowed” staffers to make more decisions at a technical level.

The main disadvantage of the Matrix Structure, certainly, is that many employees become very frustrated and confused with the chain-ofcommand in these astily-assembled support teams — Who’s the boss? My department head or my project manager? There are also conflicts between project and department managers concerning deadlines and priorities. There can be competition between project managers to Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction 15 acquire the “best” project support staff from the finite pool of available people. And a great deal of valuable time is expended in meetings to coordinate staff for two or three or more concurrent projects.

But don’t dismiss the positive elements of the Matrix Structure. While this type of organizational structure is more demanding and perhaps more stressful than others, it is also very, very efficient. Horizontally Linked Structure The last type of organizational structure that we’ll examine, the Horizontally Linked Structure, is somewhat of a newcomer in the business world — making its first appearance only three or four years ago, to my knowledge — but it is gaining momentum and finding more and more acceptance today, especially among IT departments in the high-tech community. Plan

Build (Often adopted by IT Departments) Run Figure 10: The Horizontally-Linked Organizational Structure Horizontally Linked Structures A Horizontally Linked Structure groups people along the value chain of processes that produce, market and service the firm’s offerings. Under the Horizontally Linked Structure, an organization groups its people along the value chain of activities and processes that produce, market, deliver, and service the firm’s offerings. 14 A very basic way of illustrating this type of organizational structure is seen in Figure 10, a simple Plan, Build and Run model.

Let’s say a company will group its people and resources from R&D or Finance for the express purpose of planning projects or programs in the company’s interest; these plans are passed to the next group comprised of Manufacturing personnel for actual production; and then another group of IT personnel maintain and perpetuate the projects or programs. This is an interesting and growing trend in organizational structure, and it’s one that is well worth watching in the future. Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction 16 Classical vs.

Neoclassical Theories of Organizational Structure There are two overriding theories of optimal Organizational Structure that hold forth in the business world, known as Classical Organizational Theory and Neoclassical Organizational Theory. As the names suggest, the former is a traditional approach while the latter is a more progressive approach. The Classical Organization Theory assumes that there is a single best way to design organizations — that managers should have tight control over their subordinates, and that calls for designing organizations with tall hierarchies and a narrow Span of Control.

Classical Theory entails a high degree of written documentation and rules and procedures intended to direct and control employees. As such, the Classical Theory advocates a decidedly functional type of organization. The flip side is an attempt to improve on the classical theory. Today we know this as Neoclassical Organization Theory, which argues that employee satisfaction, as well as economic effectiveness, should be the ultimate goal of an organization.

Given the increasing acceptance of Neoclassical Organization Theory and the rise of new models such as the Horizontally-Linked Organizational Structure, it’s apparent that modern trends are moving the business world toward a Flattening or Delayering of organizational structure. With modern trends toward decentralized decision-making, fewer organizational layers, and more direct access to upper management, employees are motivated to contribute their voices to matters that affect the entire organization Delayering refers to stripping out middle management from a company’s organizational structure.

The resulting structure is essentially flattened, with fewer managers, and those managers who remain are able to exercise a wider Span of Control. Those who work in these flattened structures have more decision-making ability, greater creative latitude, more autonomy, and more direct relationships with the higher level people inside the organization — all of which contribute to employee satisfaction. The Implications for Employees Perhaps most importantly, we should consider the implications of these evolving organizational structures for employees.

In a more traditional and ponderous Tall Organizational Structure, with centralized decision making, the employee several levels down in the multi-multi-level hierarchy may never be heard nor directly access the elite levels of upper management. In the tall structure, with a very small Span of Control and tight supervision, the employee tends to enjoy few decision making opportunities, due to burdensome rules, regulations, and procedures. This can, quite understandably, be more than a bit disheartening for any employee.

As an aside, I will add that most theories of motivation maintain that it’s not money that inspires people to excel in the workplace; rather, it’s the broader opportunity for autonomous decision making, greater personal responsibility, direct contributions to upper-level matters that benefit the entire company, a sense of accomplishment, and so forth. In other words, employees are motivated by the freedom to pursue excellence, both for themselves and for their organization as a whole.

Is it any wonder that more and more organizations are gravitating to flatter, more modern, and more personally rewarding organizational structures? Some Final Observations The pros and cons of the various organizational structures are fairly well balanced against one another — There are yet opportunities for personal fulfillment, profit and satisfaction regardless of the organizational path one chooses. On the flip side, there is for most employees the allure of a secure and profitable career path, a reward that is pretty much assured through commitment to the tall and more traditional organizational structure.

We find a greater number of inexperienced workers in the tall structures because they have that longing for a more defined and secure career path. Over time, they learn the ropes, all of their questions are eventually answered, and they prepare themselves for a series of promotions to their ultimate goal within the organization. Tall, multi-level companies are much more stable and predictable, offering the employee a long-term opportunity to “climb the latter to success” through such a series of promotions, providing the employee has the patience and fortitude to toe the line and pursue that particular goal.

True, a fiercely dedicated employee can tread a rather well-defined path to the top in a tall organizational structure, while that path is not nearly so clear nor well-defined within a flattened organizational structure. Naturally, the flat structure has a very low ceiling for promotion, and there is a great deal of heated competition for promotions when they become available.

Even so, the employee of a flat organization is granted much more autonomy, much more control, and many more decision-making opportunities, enabling him to sharpen his managerial skills on a fast track compared to the employee languishing for years in a tall organizational structure. We typically see older, more experienced employees populating a flat structure. These employees may even be specialists in their fields; as such, they don’t require as much direct supervision nor as many rules and procedures to guide them. They bask in the autonomy and personal responsibility of flat structures.

In addition, they rub elbows with other diverse and highly experienced specialists who pass on their Organizational Structure: A Critical Factor for Organizational Effectiveness and Employee Satisfaction 19 knowledge in the course of daily interaction, making for a continuous and fast-paced learning environment. If there is one significant lesson that we can take from this examination of Organizational Structure, it is perhaps that organizations should very carefully weigh their corporate structure options before committing to them — and the same is true for the employee in selecting his working environment.

Mounting evidence indicates that employees should very carefully choose the organizations best suited to their individual temperaments, skill sets and, yes, personalities. Personality is possibly the most important factor for a prospective employee to consider when choosing an organization: Is this job, this setting, this organizational structure right for my personality?

Some studies have attempted to provide an answer: People who have a need for power and achievement tend to prefer the tall structures, because they thrive on every promotion that comes their way; people who have a need for autonomy prefer the flat structures for the freedom to make decisions and exercise wider control in their work environment. 17 If you’re presently working in a company that doesn’t seem right for you, you may have stepped into an organizational structure that cannot satisfy your personality and your career goals, and perhaps you should consider changing jobs, if you can.

Otherwise, you’re not benefiting the company any more than the company is benefiting you. More importantly, people coming out of college and looking for a job should very, very carefully examine a company’s organizational structure before applying for a position therein. Determine the organization’s structure in advance, and make certain that it matches your personality and your career objectives — in this way, you may reap the benefits and avoid the pitfalls of the diverse Organizational Structures we have discussed, thus ensuring long-term satisfaction with your career choice and with your contribution to the organization as a whole.

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