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Common Organizational Structures

Learning Outcomes

· Differentiate between the four basic types of departmentalization (function, product, customer, and geography).

· Distinguish matrix organizations from traditional departments.

· Differentiate between team-based structures, networks, and modular organizations.

Departmentalization

Based on an organization’s application of the common elements—common purpose, coordinated effort, division of labor, hierarchy of authority, as well as centralization/decentralization and formalization—the resulting structure will typically exhibit one of four broad departmental structures: functional, product, customer, and geographic.

Functional Structure

As sales increase, organizations generally adopt a functional structure. This structure groups employees into functional areas based on their expertise. These functional areas often correspond to stages in the value chain such as operations, research and development, and marketing and sales. They also include support areas such as accounting, finance, and human resources. The graphic that follows shows a functional structure, with the lines indicating reporting and authority relationships. The department head of each functional area reports to the CEO; the CEO then coordinates and integrates the work of each function.

Functional structure organizational chart.

A functional structure allows for a higher degree of specialization and deeper domain expertise than a simple structure. Higher specialization also allows for a greater division of labor, which is linked to higher productivity. [1] Although work in a functional structure tends to be specialized, it is centrally coordinated by the CEO, as in the earlier graphic. A functional structure allows for an efficient top-down and bottom-up communication chain between the CEO and the functional departments, and thus relies on a relatively tall structure. The disadvantage inherent to a functional structure is that the emphasis on specialization can cause high levels of job dissatisfaction and fewer process improvements for the business.

Product Structure

Companies with diversified product lines frequently structure based on the product or service. GE, for example, has structured six product-specific divisions supported by six centralized service divisions. (1) Energy, (2) Capital (3) Home & Business Solutions, (4) Healthcare, (5) Aviation, and (6) Transportation. Product divisions work well where products are more technical and require more specialized knowledge. These product divisions are supported by centralized services, which include: public relations, business development, legal, global research, human resources, and finance.

This type of structure is ideal for organizations with multiple products and can help shorten product development cycles. One disadvantage is that it can be difficult to scale. Another disadvantage is that the organization may end up with duplicate resources as different divisions strive for autonomy.

Customer Structure

Companies that offer services, such as health care, tend to use a customer-based structure. While similar to the product structure, the different business segments at the bottom are each split into a specific customer group—for example, outpatient, urgent care, and emergency care patients. Since the customers differ significantly, it makes sense to customize the service. Employees can specialize around the type of customer and be more productive with that type of customer. The directors of each customer center would report directly to the chief medical officer and/or the hospital CEO. This is also designed to avoid overlap, confusion, and redundancies. The customer structure is appropriate when the organization’s product or service needs to be tailored to specific customers.

Customer structure organizational chart.

The customer-based structure is ideal for an organization that has products or services unique to specific market segments, especially if that organization has advanced knowledge of those segments. However, there are disadvantages to this structure, too. If there is too much autonomy across the divisions, incompatible systems may develop. Or divisions may end up inadvertently duplicating activities that other divisions are already managing.

Geography Structure

If an organization spans multiple geographic regions, and the product or service needs to be localized, it often requires organization by region. Geographic structuring involves grouping activities based on geography, such as a Latin American division. Geographic structuring is especially important if tastes and brand responses differ across regions, as it allows for flexibility in product offerings and marketing strategies. Also, geographic structuring may be necessary because of cost and availability of resources, distribution strategies, and laws in foreign countries. Coca Cola structures geographically because of the cost of transporting water. NetJets, a private aviation company, had to create a separate company in Portugal to operate NetJets Europe, because the entity had to be owned by a European Union carrier.

McDonald’s is well-known for its geographic structure and localization strategy for food preferences. The McDonald’s in Malaysia is certified halal (no pork products) and you can order the McD Chicken Porridge: chicken and onions in porridge. Other examples are Brie Nuggets (fried brie) in Russia; the Ebi Filet-O (shrimp patty) in Japan; and in Canada, you can get poutine (fries and cheese curds smothered in gravy).

This type of structure is best for organizations that need to be near sources of supply and/or customers. The main disadvantage of a geographical organizational structure is that it can be easy for decision making to become decentralized;  geographic divisions can sometimes be hundreds, if not thousands, of miles away from corporate headquarters, allowing them to have a high degree of autonomy.