DISCUSSION 5

5.2 - Organizational Structure

L E A R N I N G O B J E C T I V E S

1. Explain the roles of formalization, centralization, levels in the hierarchy, and

departmentalization in employee attitudes and behaviors.

2. Describe how the elements of organizational structure can be combined to create

mechanistic and organic structures.

3. Understand the advantages and disadvantages of mechanistic and organic structures for

organizations.

Organizational structure refers to how individual and team work within an organization

are coordinated. To achieve organizational goals and objectives, individual work needs

to be coordinated and managed. Structure is a valuable tool in achieving coordination,

as it specifies reporting relationships (who reports to whom), delineates formal

communication channels, and describes how separate actions of individuals are linked

together. Organizations can function within a number of different structures, each

possessing distinct advantages and disadvantages. Although any structure that is not

properly managed will be plagued with issues, some organizational models are better

equipped for particular environments and tasks.

Management and Organization Management operates through various functions, often classified as planning,

organizing, staffing, leading/directing, controlling/monitoring, and motivating. The

organizing function creates the pattern of relationships among workers and makes

optimal use of resources to enable the accomplishment of business plans and objectives.

The organizing function typically follows the planning stage. Specific organizing duties

involve the assignment of tasks, the grouping of tasks into departments, and the

assignment of authority and allocation of resources across the organization.

The management process

The management process involves tasks and goals of planning, organizing, directing, and controlling.

Structure Structure is the framework in which the organization defines how tasks are divided,

resources are deployed, and departments are coordinated. It is a set of formal tasks

assigned to individuals and departments. Formal reporting relationships include lines of

authority, decision responsibility, number of hierarchical levels, and span of

managers' control. Structure is also the design of systems to ensure effective

coordination of employees across departments.

Authority/Chain of Command

Authority is a manager's formal and legitimate right to make decisions, issue orders, and

allocate resources to achieve desired outcomes for an organization. Responsibility is an

employee's duty to perform assigned tasks or activities. Accountability means that those

with authority and responsibility must report and justify task outcomes to those above

them in the chain of command.

Through delegation, managers transfer authority and responsibility to their

subordinates. Organizations today tend to encourage delegation from the highest to

lowest possible levels. Delegation can improve flexibility to meet customers' needs and

to adapt to competitive environments. Managers may find delegation difficult, since

control over the task assigned (and eventual outcome) is relinquished.

One critical risk of command chains is micromanagement, where managers fail to

delegate effectively and exercise excessive control over their subordinates' projects.

Micromanagement reduces efficiency and limits autonomy, thus limiting the

adaptability of a given organization. Effective chains of command must allow for

flexibility and efficient delegation.

Types of Authority (and Responsibility) • Line authority: Managers have the formal power to direct and control immediate

subordinates executing specific tasks within a chain of command, usually within a

specific department. The superior issues orders and is responsible for the result;

the subordinate obeys and is responsible only for executing the order according to

instructions.

• Functional authority: Managers have formal power over a specific subset of activities

that include outside departments. For instance, a production manager may have the

line authority to decide whether and when a new machine is needed, but

a controller with functional authority requires that a capital expenditure proposal be

submitted first, showing that the investment in a new machine will yield a minimum

return. The legal department may also have functional authority to interfere in any

activity that could have legal consequences. For example, a purchase contract for a

new machine cannot be approved without a review of the machine's safety standards.

• Staff authority: Staff specialists manage operations in their areas of expertise. Staff

authority is not real authority because a staff manager does not order or instruct but

simply advises, recommends, and counsels in the staff specialists' area of expertise;

the manager is responsible only for the quality of the advice (in line with the

respective professional standards, etc.). Staff authority represents

a communication relationship with management. It has an influence that derives

indirectly from line authority at a higher level.

As each structure will create a different organizational approach to operations, it is

critical to consider how the selection of a structure will affect the business process.

Enabling creativity and minimizing control often comes at the cost of speed and

efficiency, and vice versa.

Source: Boundless. "Fulfilling the Organizing Function." Boundless Management Boundless, 8 Aug. 2016. Retrieved 19 Apr. 2017 from https://www.boundless.com/management/textbooks/boundless-management- textbook/introduction-to-management-1/principles-of-management-17/fulfilling-the-organizing-function- 114-10713/

Building Blocks of Structure

What exactly do we mean by organizational structure? Which elements of a company’s

structure make a difference in how we behave and how work is coordinated? We will

review four aspects of structure that have been frequently studied in the literature:

centralization, formalization, hierarchical levels, and departmentalization. We view

these four elements as the building blocks, or elements, making up a company’s

structure. Then we will examine how these building blocks come together to form two

different configurations of structures.

Centralization

Centralization is the degree to which decision-making authority is concentrated at

higher levels in an organization. In centralized companies, many important decisions

are made at higher levels of the hierarchy, whereas in decentralized companies,

decisions are made and problems are solved at lower levels by employees who are closer

to the problem in question.

As an employee, where would you feel more comfortable and productive? If your answer

is “decentralized,” you are not alone. Decentralized companies give more authority to

lower-level employees, resulting in a sense of empowerment. Decisions can be made

more quickly, and employees often believe that decentralized companies provide greater

levels of procedural fairness to employees. Job candidates are more likely to be attracted

to decentralized organizations. Because centralized organizations assign decision-

making responsibility to higher-level managers, they place greater demands on the

judgment capabilities of CEOs and other high-level managers.

Many companies find that the centralization of operations leads to inefficiencies in

decision making. For example, in the 1980s, the industrial equipment manufacturer

Caterpillar suffered the consequences of centralized decision making. At the time, all

pricing decisions were made in the corporate headquarters in Peoria, Illinois. This

meant that when a sales representative working in Africa wanted to give a discount on a

product, they needed to check with headquarters. Headquarters did not always have

accurate or timely information about the subsidiary markets to make an effective

decision. As a result, Caterpillar was at a disadvantage against competitors such as the

Japanese firm Komatsu. Seeking to overcome this centralization paralysis, Caterpillar

underwent several dramatic rounds of reorganization in the 1990s and 2000s. Nelson, G. L.,

& Pasternack, B. A. (2005). Results: Keep what’s good, fix what’s wrong, and unlock great performance. New York: Crown

Business.

Figure 5.4

Changing their decision-making approach to a more decentralized style has helped Caterpillar compete at the global level.

Source: http://commons.wikimedia.org/wiki /Image:Bauma_2007 _Buldozer_Caterpillar_2.jpg

However, centralization also has its advantages. Some employees are more comfortable

in an organization where their manager confidently gives instructions and makes

decisions. Centralization may also lead to more efficient operations, particularly if the

company is operating in a stable environment. , 2, 27–37; Schminke, M., Ambrose, M. L., & Cropanzano, R.

S. (2000). The effect of Ambrose, M. L., & Cropanzano, R. S. (2000). The effect of organizational structure on perceptions of

procedural fairness. Journal of Applied Psychology, 85, 294–304; Miller, D., Droge, C., & Toulouse, J. (1988). Strategic process and

content as mediators between organizational context and structure. Academy of Management Journal, 31, 544–569; Oldham, G. R.,

& Hackman, R. J. (1981). Relationships between organizational structure and employee reactions: Comparing alternative

frameworks. Administrative Science Quarterly, 26, 66–83; Pierce, J. L., & Delbecq, A. L. (1977). Organization structure, individual

attitudes, and innovation. Academy of Management Review organizational structure on perceptions of procedural fairness. Journal

of Applied Psychology, 85, 294–304; Turban, D. B., & Keon, T. L. (1993). Organizational attractiveness: An interactionist

perspective. Journal of Applied Psychology, 78, 184–193; Wally, S., & Baum, J. R. (1994). Personal and structural determinants of

the pace of strategic decision making. Academy of Management Journal, 37, 932–956.

In fact, organizations can suffer from extreme decentralization. For example, some

analysts believe that the Federal Bureau of Investigation (FBI) experiences some

problems because all its structure and systems are based on the assumption that crime

needs to be investigated after it happens. Over time, this assumption led to a situation

where, instead of following an overarching strategy, each FBI unit is completely

decentralized and field agents determine how investigations should be pursued. It has

been argued that due to the change in the nature of crimes, the FBI needs to gather

accurate intelligence before a crime is committed; this requires more centralized

decision making and strategy development. Brazil, J. J. (2007, April). Mission: Impossible? Fast Company,

114, 92–109.

Hitting the right balance between decentralization and centralization is a challenge for

many organizations. At the Home Depot, the retail giant with over 2,000 stores across

the United States, Canada, Mexico, and China, one of the major changes instituted by

former CEO Bob Nardelli was to centralize most of its operations. Before Nardelli’s

arrival in 2000, Home Depot store managers made a number of decisions autonomously

and each store had an entrepreneurial culture. Nardelli’s changes initially saved the

company a lot of money. For example, for a company of that size, centralizing

purchasing operations led to big cost savings because the company could negotiate

important discounts from suppliers. At the same time, many analysts think that the

centralization went too far, leading to the loss of the service-oriented culture at the

stores. Nardelli was ousted after seven years. Charan, R. (2006, April). Home Depot’s blueprint for culture

change. Harvard Business Review, 84(4), 60–70; Marquez, J. (2007, January 15). Big bucks at door for Depot HR

leader. Workforce Management, 86(1).

Formalization

Formalization is the extent to which an organization’s policies, procedures, job

descriptions, and rules are written and explicitly articulated. Formalized structures are

those in which there are many written rules and regulations. These structures control

employee behavior using written rules, so that employees have little autonomy to decide

on a case-by-case basis. An advantage of formalization is that it makes employee

behavior more predictable. Whenever a problem at work arises, employees know to turn

to a handbook or a procedure guideline. Therefore, employees respond to problems in a

similar way across the organization; this leads to consistency of behavior.

While formalization reduces ambiguity and provides direction to employees, it is not

without disadvantages. A high degree of formalization may actually lead to reduced

innovativeness because employees are used to behaving in a certain manner. In fact,

strategic decision making in such organizations often occurs only when there is a crisis.

A formalized structure is associated with reduced motivation and job satisfaction as well

as a slower pace of decision making. Fredrickson, J. W. (1986). The strategic decision process and organizational

structure. Academy of Management Review, 11, 280–297; Oldham, G. R., & Hackman, R. J. (1981). Relationships between

organizational structure and employee reactions: Comparing alternative frameworks. Administrative Science Quarterly, 26, 66–83;

Pierce, J. L., & Delbecq, A. L. (1977). Organization structure, individual attitudes, and innovation. Academy of Management

Review, 2, 27–37; Wally, S., & Baum, R. J. (1994). Strategic decision speed and firm performance. Strategic Management

Journal, 24, 1107–1129.

The service industry is particularly susceptible to problems associated with high levels of

formalization. Sometimes employees who are listening to a customer’s problems may

need to take action, but the answer may not be specified in any procedural guidelines or

rulebook. For example, while a handful of airlines such as Southwest do a good job of

empowering their employees to handle complaints, in many airlines, lower-level

employees have limited power to resolve a customer problem and are constrained by

stringent rules that outline a limited number of acceptable responses.

Hierarchical Levels

Another important element of a company’s structure is the number of levels it has in its

hierarchy. Keeping the size of the organization constant, tall structures have several

layers of management between frontline employees and the top level, while flat

structures consist of only a few layers. In tall structures, the number of employees

reporting to each manager tends to be smaller, resulting in greater opportunities for

managers to supervise and monitor employee activities. In contrast, flat structures

involve a larger number of employees reporting to each manager. In such a structure,

managers will be relatively unable to provide close supervision, leading to greater levels

of freedom of action for each employee.

Research indicates that flat organizations provide greater need satisfaction for

employees and greater levels of self-actualization. Ghiselli, E. E., & Johnson, D. A. (1970). Need

satisfaction, managerial success, and organizational structure. Personnel Psychology, 23, 569–576; Porter, L. W., & Siegel, J.

(2006). Relationships of tall and flat organization structures to the satisfactions of foreign

managers. Personnel Psychology, 18, 379–392. At the same time, there may be some challenges

associated with flat structures. Research shows that when managers supervise a large

number of employees, which is more likely to happen in flat structures, employees

experience greater levels of role ambiguity—the confusion that results from being

unsure of what is expected of a worker on the job. Chonko, L. B. (1982). The relationship of

span of control to sales representatives’ experienced role conflict and role

ambiguity. Academy of Management Journal, 25, 452–456. This is especially a disadvantage for

employees who need closer guidance from their managers. Moreover, in a flat structure,

advancement opportunities will be more limited because there are fewer management

layers. Finally, while employees report that flat structures are better at satisfying their

higher-order needs such as self-actualization, they also report that tall structures are

better at satisfying security needs of employees. Porter, L. W., & Lawler, E. E. (1964). The effects of

tall versus flat organization structures on managerial job satisfaction. Personnel Psychology, 17,

135–148. Because tall structures are typical of large and well-established companies, it is

possible that when working in such organizations employees feel a greater sense of job

security.

Figure 5.5

Companies such as IKEA, the Swedish furniture manufacturer and retailer, are successfully using flat structures within stores to build an employee attitude of job involvement and ownership.

Source: http://commons.wikimedia.org/wiki/Image:Ikea_almhult.jpg

Departmentalization

Organizational structures differ in terms of departmentalization, which is broadly

categorized as either functional or divisional.

Organizations using functional structures group jobs based on similarity in functions.

Such structures may have departments such as marketing, manufacturing, finance,

accounting, human resources, and information technology. In these structures, each

person serves a specialized role and handles large volumes of transactions. For example,

in a functional structure, an employee in the marketing department may serve as an

event planner, planning promotional events for all the products of the company.

In organizations using divisional structures, departments represent the unique

products, services, customers, or geographic locations the company is serving. Thus

each unique product or service the company is producing will have its own department.

Within each department, functions such as marketing, manufacturing, and other roles

are replicated. In these structures, employees act like generalists as opposed to

specialists. Instead of performing specialized tasks, employees will be in charge of

performing many different tasks in the service of the product. For example, a marketing

employee in a company with a divisional structure may be in charge of planning

promotions, coordinating relations with advertising agencies, and planning and

conducting marketing research, all for the particular product line handled by his or her

division.

In reality, many organizations are structured according to a mixture of functional and

divisional forms. For example, if the company has multiple product lines,

departmentalizing by product may increase innovativeness and reduce response times.

Each of these departments may have dedicated marketing, manufacturing, and

customer service employees serving the specific product; yet, the company may also find

that centralizing some operations and retaining the functional structure makes sense

and is more cost effective for roles such as human resources management and

information technology. The same organization may also create geographic departments

if it is serving different countries.

Each type of departmentalization has its advantages. Functional structures tend to be

effective when an organization does not have a large number of products and services

requiring special attention. When a company has a diverse product line, each product

will have unique demands, deeming divisional (or product-specific) structures more

useful for promptly addressing customer demands and anticipating market changes.

Functional structures are more effective in stable environments that are slower to

change. In contrast, organizations using product divisions are more agile and can

perform better in turbulent environments. The type of employee who will succeed under

each structure is also different. Research shows that when employees work in product

divisions in turbulent environments, because activities are diverse and complex, their

performance depends on their general mental abilities. Hollenbeck, J. R., Moon, H., Ellis, A. P. J., West,

B. J., Ilgen, D. R., et al. (2002). Structural contingency theory and individual differences: Examination of external and internal

person-team fit. Journal of Applied Psychology, 87, 599–606.

Figure 5.6 An Example of a Pharmaceutical Company with a Functional Departmentalization

Structure

Figure 5.7 An Example of a Pharmaceutical Company with a Divisional Departmentalization

Structure

Two Configurations: Mechanistic and Organic Structures

The different elements making up organizational structures in the form of formalization,

centralization, number of levels in the hierarchy, and departmentalization often coexist.

As a result, we can talk about two configurations of organizational structures, depending

on how these elements are arranged.

Mechanistic structures are those that resemble a bureaucracy. These structures are

highly formalized and centralized. Communication tends to follow formal channels and

employees are given specific job descriptions delineating their roles and responsibilities.

Mechanistic organizations are often rigid and resist change, making them unsuitable for

innovativeness and taking quick action. These forms have the downside of inhibiting

entrepreneurial action and discouraging the use of individual initiative on the part of

employees. Not only do mechanistic structures have disadvantages for innovativeness,

but they also limit individual autonomy and self-determination, which will likely lead to

lower levels of intrinsic motivation on the job. Burns, T., & Stalker, M. G. (1961). The Management of

innovation. London: Tavistock; Covin, J. G., & Slevin, D. P. (1988). The influence of organizational structure. Journal of

Management Studies. 25, 217–234; Schollhammer, H. (1982). Internal corporate entrepreneurship. Englewood Cliffs, NJ: Prentice-

Hall; Sherman, J. D., & Smith, H. L. (1984). The influence of organizational structure on intrinsic versus extrinsic

motivation. Academy of Management Journal, 27, 877–885; Slevin, D. P., & Covin, J. G. (1990). Juggling entrepreneurial style and

organizational structure—how to get your act together. Sloan Management Review, 31(2), 43–53.

Despite these downsides, however, mechanistic structures have advantages when the

environment is more stable. The main advantage of a mechanistic structure is its

efficiency. Therefore, in organizations that are trying to maximize efficiency and

minimize costs, mechanistic structures provide advantages. For example, McDonald’s

has a famously bureaucratic structure where employee jobs are highly formalized, with

clear lines of communication and specific job descriptions. This structure is an

advantage for them because it allows McDonald’s to produce a uniform product around

the world at minimum cost. Mechanistic structures can also be advantageous when a

company is new. New businesses often suffer from a lack of structure, role ambiguity,

and uncertainty. The presence of a mechanistic structure has been shown to be related

to firm performance in new ventures. Sine, W. D., Mitsuhashi, H., & Kirsch, D. A. (2006). Revisiting Burns and

Stalker: Formal structure and new venture performance in emerging economic sectors. Academy of Management Journal, 49, 121–

132.

In contrast to mechanistic structures, organic structures are flexible and decentralized,

with low levels of formalization. In Organizations with an organic structure,

communication lines are more fluid and flexible. Employee job descriptions are broader

and employees are asked to perform duties based on the specific needs of the

organization at the time as well as their own expertise levels. Organic structures tend to

be related to higher levels of job satisfaction on the part of employees. These structures

are conducive to entrepreneurial behavior and innovativeness. Burns, T., & Stalker, M. G.

(1961). The Management of Innovation. London: Tavistock; Covin, J. G., & Slevin, D. P. (1988) The influence of organizational

structure. Journal of Management Studies, 25, 217–234.

An example of a company that has an organic structure is the diversified technology

company 3M. The company is strongly committed to decentralization. At 3M, there are

close to 100 profit centers, with each division feeling like a small company. Each

division manager acts autonomously and is accountable for his or her actions. As

operations within each division get too big and a product created by a division becomes

profitable, the operation is spun off to create a separate business unit. This is done to

protect the agility of the company and the small-company atmosphere. Adair, J.

(2007). Leadership for innovation: How to organize team creativity and harvest ideas. London: Kogan Page.

K E Y T A K E A W A Y

The degree to which a company is centralized and formalized, the number of levels in

the company hierarchy, and the type of departmentalization the company uses are key

elements of a company’s structure. These elements of structure affect the degree to

which the company is effective and innovative as well as employee attitudes and

behaviors at work. These elements come together to create mechanistic and organic

structures. Mechanistic structures are rigid and bureaucratic and help companies

achieve efficiency, while organic structures are decentralized, flexible, and aid

companies in achieving innovativeness.

R E F L E C T I O N S

1. What are the advantages and disadvantages of decentralization?

2. All else being equal, would you prefer to work in a tall or flat organization? Why?

3. What are the advantages and disadvantages of departmentalization by product?

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