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Business Concepts: Exploring Careers in Business

ZTC resource for Business Concepts Course

KEY: Identify different types of organizational structures and their strengths and weaknesses.

Identify different types of organizational structures, and their strengths and weaknesses.

Q: "Why has organizational design zoomed to the top of the list as the most important trend in the Global Human Capital Trends survey for two years in a row?”

A: The answer is simple: The way high-performing organizations operate today is radically different from how they operated 10 years ago. Yet many other organizations continue to operate according to industrial-age models that are 100 years old or more.

chart Mechanistic and organic organizations

Exhibit 1a.1. Mechanistic and Organic Organizations (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license)

Early organizational theorists broadly categorized organizational structures and systems as either mechanistic or organic. This broad, generalized characterization of organizations remains relevant today.

Mechanistic organizational structures and systems:
  • represents a traditional type of structure
  • chain of command is highly centralized and uses formal authority
  • characterized by top-down hierarchies of control that are rule-based
  • best suited for environments that range from stable and simple to low-moderate uncertainty
  • tasks are clearly defined and differentiated to be executed by specific specialized experts
  • bosses and supervisors have fewer people working directly under them (i.e., a narrow span of control)
  • organization is governed by rigid departmentalization (i.e., an organization is divided into different departments that perform specialized tasks according to the departments’ expertise). Historically, the U.S. Postal Service and other manufacturing types of industries were mechanistic. Again, this type of organizational design may still be relevant, as Exhibit 4.4suggests, in simple, stable, low-uncertainty environments.
Organic organizational structures and systems:
  • organizational forms work best in unstable, complex, changing environments
  • structures are flatter, with participatory communication and decision-making flowing in different directions 
  • more fluidity and less-rigid ways of performing tasks; there may also be fewer rules
  • tasks are more generalized and shared; there is a wider span of control (i.e., more people reporting to managers).
  • organically structured industries must deal with change and uncertainty
  • fast-paced, highly competitive, rapidly changing, and turbulent environments
    • examples of industries with organic structures 
      • high tech 
      • computer
      • aerospace 
      • telecommunications

Not every organization or every part of most organizations may require an organic type of structure. Understanding different organizational designs and structures is important to discern when, where, and under what circumstances a type of mechanistic system or part of an organization would be needed.

Types of Organizational Structures

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The following section discusses five types of structures with variations.

Within the context of mechanistic versus organic structures, specific types of organizational structures in the United States historically evolved over at least three eras, as we discuss here before explaining types of organizational designs.

First Era: (mid-1800s to the late 1970s)
  • organizations were mechanistic self-contained, top-down pyramids
  • emphasis was placed on internal organizational processes of taking in raw materials, transforming those into products, and turning them out to customers.
  •  focused on internal hierarchical control and separate functional specializations in order to adapt to external environments.
  • grouped people into functions or departments,
    • specified reporting relationships among those people and departments, and
    • developed systems to coordinate and integrate work horizontally and vertically.
  •  the functional structure evolved first, followed by the divisional structure and then the matrix structure
Second Era: (1980s to mid-1990s)

Communication and coordination between and among internal organizational units and external customers, suppliers, and other stakeholders required higher levels of integration and speed of informational processing. Personal computers and networks had also entered the scene. In effect, the so-called horizontal organization was born, and emphasized “reengineering along workflow processes that link organizational capabilities to customers and suppliers.

  • more-complex environments, markets, and technologies strained mechanistic organizational structures.
  • competition from Japan in the auto industry and
  • complex transactions in the banking, insurance, and other industries that
    • emphasized customer value, demand and faster interactions, quality, and results
    • issued the need for more organic organizational designs and structures.
  • Ford, Xerox Corp., Lexmark, and Eastman Kodak Company were all early adopters of the horizontal organizational design,
    • flattened hierarchies
    • hybrid structures
    • cross-functional teams
Third Era (mid-1990s - present)

Contributing factors:

  • the Internet
  • global competition—particularly from China and India with low-cost labor
  • automation of supply chains
  • everything could not be or did not have to be produced within the confines of an organization
    • outsourcing of expertise to speed up production and delivery of products and services
    • outsourcing different functions of products to save costs

 During this period, further extensions of the horizontal and organic types of structures evolved:

  • divisional 
  • matrix
  • global geographic 
  • modular
  • team-based
  • virtual structures 

chart evolution of organizational structure

Exhibit 1a.2. Evolution of Organizational Structure Adapted from: Daft, R., 2016, Organization Theory and Design, 12th edition, Cengage learning, Chapter 3; Warren, N., “Hitting the Sweet Spot Between Specialization and Integration in Organizational Design”, People and Strategy, 34, No. 1, 2012, pp. 24-30.

In the following discussion, we

  • identify major types of structures mentioned above 
  • discuss the advantages and disadvantages of each

Note that in many larger national and international corporations, there is a mix and match among different structures used. There are also advantages and disadvantages of each structure.

Again, organizational structures are designed to fit with external environments. Depending on the type of environments from our earlier discussion in which a company operates, the structure should facilitate that organization’s capability to achieve its vision, mission, and goals.

Functional Structures

The functional structure, shown below, is among the earliest and most used organizational designs. This structure is organized by departments and expertise areas, such as R&D (research & development), production, accounting, and human resources. Functional organizations are referred to as pyramid structures since they are governed as a hierarchical, top-down control system.

organizational chart

Exhibit 1a.3:  “Functional Structure” by Rice University & OpenStax, licensed under CC BY 4.0.

Small companies, start-ups, and organizations working in simple, stable environments use this structure, as do many large government organizations and divisions of large companies for certain tasks.

Advantage: The functional structure excels in providing for a high degree of specialization and a simple and straightforward reporting system within departments, offers economies of scale, and is not difficult to scale if and when the organization grows.

Disadvantage: includes isolation of departments from each other since they tend to form “silos,” which are characterized by closed mindsets that are not open to communicating across departments, lack of quick decision-making and coordination of tasks across departments, and competition for power and resources.

Divisional Structures

Divisional structures, seen in the chart below, are, in effect, many functional departments grouped under a division head.

Each functional group in a division has its own marketing, sales, accounting, manufacturing, and production team. This structure resembles a product structure that also has profit centers.

These smaller functional areas or departments can also be grouped by different markets, geographies, products, services, or other whatever is required by the company’s business.

chart of divisional structure

Exhibit 1a.4:  Divisional Organization Structure (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license)

Advantages

  • market-based structure is ideal for an organization that has products or services that are unique to specific market segments
  • particularly effective if an organization has advanced knowledge of those segments
  • each specialty area can be more focused on the business segment and budget that it manages;
  • everyone can more easily know their responsibilities and accountability expectations;
  • customer contact and service can be quicker
  • coordination within a divisional grouping is easier, since all the functions are accessible
  • decentralized decision-making means that headquarters does not have to micromanage all the divisions.

Disadvantages

  • divisions can easily become isolated and insular from one another 
  • different systems, such as accounting, finance, sales, and so on, may suffer from poor and infrequent communication and coordination of enterprise mission, direction, and values
  • incompatibility of systems (technology, accounting, advertising, budgets) can occur, which creates a strain on company strategic goals and objectives
Geographic Structures

Another option aimed at moving from a mechanistic to more organic design to serve customers faster and with relevant products and services; as such, this structure is organized by locations of customers that a company serves. This structure evolved as companies became more national, international, and global. Geographic structures resemble and are extensions of the divisional structure. The advantages and disadvantages of the geographic structure are similar to those of the divisional structure

  • Advantage
    • enables each geographic organizational unit (like a division) the ability to understand, research, and design products and/or services with the knowledge of customer needs, tastes, and cultural differences.
  • Disadvantage
    • too easy for decision-making to become decentralized, as geographic divisions (which can be hundreds if not thousands of miles away from corporate headquarters) often have a great deal of autonomy.

Organizational chart arranged by geography

Exhibit 1a.5: “Geographic Structure” by Rice University & OpenStax, licensed under CC BY 4.0.

Matrix Structures

In effect, matrix structures initiated horizontal team-based structures that provided faster information sharing, coordination, and integration between the formal organization and profit-oriented projects and programs. Matrix team members have been and are a growing part of horizontal organizations that cut across geographies, time zones, skills, and traditional authority structures to solve customer and even enterprise organizational needs and demands.

  • combines vertical with horizontal structures
    • the vertical structure and chain of command maintains control over employees who work on teams that cut across functional areas,
    • the horizontal structure focuses projects that have deadlines and goals to meet within and often times in addition to those of departments.

This structure has lines of formal authority along two dimensions: employees report to two bosses simultaneously:

  1. a functional departmental boss 
  2. a product or project team boss

The matrix structure actually originated at a time in the 1960s when U.S. aerospace firms contracted with the government. Aerospace firms were required to “develop charts showing the structure of the project management team that would be executing the contract and how this team was related to the overall leadership structure of the organization.” As such, employees would be required to have dual reporting relationships—with the government and the aerospace company.

To work effectively, employees (including their bosses and project leaders) who work in dual-authority matrix structures require good interpersonal communication, conflict management, and political skills to manage up and down the organization. Members of matrix structures must “learn how to collaborate with colleagues across distance, cultures and other barriers.

Different types of matrix structures, some resembling virtual team designs, are used in more complex environments.

  • cross-functional matrix teams in which team members from other organizational departments report to an “activity leader” who is not their formal supervisor or boss 
  • functional matrix teams where employees from the same department coordinate across another internal matrix team consisting of, for example, HR or other functional area specialists who come together to develop a limited but focused common short-term goal.
  • global matrix teams consisting of employees from different regions, countries, time zones, and cultures who are assembled to achieve a short-term project goal of a particular customer.

For some matrix team members this may be the first time they have been given accountability for results that are broader than delivery of their functional goals. Some individuals relish the breath and development that the matrix team offers and others feel exposed and out of control. To succeed in these types of horizontal organizational structures, organizational members “should focus less on the structure and more on behaviors.

Advantages

  • move closer to organic systems in an attempt to respond to environmental uncertainty, complexity, and instability
  • provides flexibility and helps integrate decision-making in functionally organized companies

Disadvantages

  • the confusion and conflicts employees experience in reporting to two bosses
  • team members may have multiple bosses and often work on multiple teams at the same time
  • matrix team members often suffer from the problem of divided loyalties where they have both team and functional goals that compete for their time and attention

chart matrix structure

Exhibit 1a.6.  “Matrix Structure” by Rice University & OpenStax,  licensed under CC BY 4.0.

Networked Team Structures 

Networked team structures are another form of the horizontal organization. Networked teams are more informal and flexible than matrix teams. They are connected together by informal networks and the demands of the task, rather than a formal organizational structure. The network organization prioritizes its ‘soft structure’ of relationships, networks, teams, groups and communities rather than reporting lines

There is not one classical depiction of this structure, since different companies initially design teams to solve problems, find opportunities, and discover resources to do so. A networked organizational structure is one that naturally forms after being initially assigned. Based on the vision, mission, and needs of a problem or opportunity, team members will find others who can help—if the larger organization and leaders do not prevent or obstruct that process.

Networks have two salient characteristics:

  1. clustering - refers to the degree to which a network is made up of tightly knit groups
  2. path length - a measure of distance—the average number of links separating any two nodes in the network.

chart network structure

Exhibit 1a.7. Networked Team Structure (Attribution: Copyright Rice University, OpenStax, under CC-BY 4.0 license)

As organizations continue to transition from vertical structures to more organic ones, networked global designs are being adapted to larger companies that require more reach and scope and quicker response time with customers.

Whatever a hierarchical organization chart says, real, day-to-day work gets done in networks. This is why the organization of the future is a ‘network of teams.’

Advantages 

  • similar to those stated earlier with regard to organic, horizontal, and matrix structures.

Disadvantages

  • establishing clear lines of communication to produce project assignments and due dates to employees is essential
  • dependence on technology—Internet connections and phone lines in particular—is necessary.
  • delays in communication result from computer crashes, network traffic errors and problems; electronic information sharing across country borders can also be difficult. 
  • lacks central physical location where all employees work, or can assemble occasionally to have face-to-face meetings and check results, can result in errors, strained relationships, and lack of on-time project deliverables
Virtual Structures

Virtual structures are related to so-called modular and digital organizations, and are dependent on information communication technologies (ICTs). Virtual structures and organizations emerged in the 1990s as a response to a need for:

  • more flexibility
  • solution-based tasks on demand
  • fewer geographical constraints
  • accessibility to dispersed expertise

chart virtual nextwor

Exhibit 1a.8.  “Virtual Structure” by Rice University & OpenStax, licensed under CC BY 4.0.

These organizations move beyond network team structures in that the headquarters or home base may be the only or part of part of a stable organizational base. Otherwise, this is a boundaryless organization.  Increasingly, organizations are using different variations of virtual structures with call centers and other outsourced tasks, positions, and even projects.

Examples of organizations that use virtual teams are Uber, Airbnb, Amazon, Reebok, Nike, Puma, and Dell.

Advantages 

  • cost savings,
  • decreased response time to customers,
  • greater access to a diverse labor force not encumbered by 8-hour workdays, and
  • less harmful effects on the environment.
    • the telecommuting policies of Dell, Aetna, and Xerox cumulatively saved 95,294 metric tons of greenhouse gas emissions last year, which is the equivalent of taking 20,000 passenger vehicles off of the road.”35 

Disadvantages 

  • social isolation of employees who work virtually,
  • potential for lack of trust among employees and between the company and employees when communication is limited, and
  • reduced collaboration among separated employees and the organization’s officers due to lack of social interaction.

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