Organizational Design
A Guide for Growth-Oriented Entrepreneurs
Sample Chapter: Challenges in Designing the Organizational Structure
GROWTH-ORIENTED ENTREPRENEURSHIP PROJECT
2015-1 Edition
Dr. Alan S. Gutterman
Growth-Oriented Entrepreneur’s Guide to Organizational Design
2015-1 Edition published in 2015 by the Growth-Oriented Entrepreneurship Project
(www.growthentrepreneurship.org) and copyrighted © 2015 by Alan S. Gutterman
(www.alangutterman.com).
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Change.
About the Author
Dr. Alan S. Gutterman is the founder and director of the Growth-Oriented Entrepreneurship
Project and the founder and director of the Business Counselor Institute
(www.businesscounselorinstitute.org), which distributes Dr. Gutterman’s widely-recognized
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counsel with internationally recognized law firms counseling small and large business
enterprises in the areas of general corporate and securities matters, venture capital, mergers and
acquisitions, international law and transactions, strategic business alliances, technology transfers
and intellectual property, and has also held senior management positions with several
technology-based businesses including service as the chief legal officer of a leading international
distributor of IT products headquartered in Silicon Valley and as the chief operating officer of an
emerging broadband media company. He received his A.B., M.B.A., and J.D. from the
University of California at Berkeley, a D.B.A. from Golden Gate University, and a Ph. D. from
the University of Cambridge. For more information about Dr. Gutterman, his publications, the
Growth-Oriented Entrepreneurship Project or the Business Counselor Institute, please visit
www.alangutterman.com and/or contact him directly at [email protected].
Growth-Oriented Entrepreneur’s Guide to Organizational Design
Contents
PART I
THEORY AND STUDY OF ORGANIZATIONS
Chapter 1
Definitions and Purposes of Organizations
Chapter 2
Fundamental Elements of Organizational Management
Chapter 3
Academic Foundations for Organizational Studies
Chapter 4
Organizational Effectiveness
PART II
ORGANIZATIONAL DESIGN
Preface
Chapter 1
Elements of Organizational Design
Chapter 2
Informational Processing Model of Organizational Design
Chapter 3
Organizational Design and Technology
Chapter 4
Organizational Design and Strategy
PART III
ORGANIZATIONAL STRUCTURE
Preface
Chapter 1
Introduction to Organizational Structure
Chapter 2
Basic Models of Organizational Structure
Chapter 3
Challenges in Designing the Organizational Structure
Chapter 4
Functional Structures
Chapter 5
Division-Based Structures
Chapter 6
Matrix Structures
PART IV
DESIGNING THE ORGANIZATIONAL STRUCTURE
Preface
Chapter 1
Basic Elements of Organizational Structure
Chapter 2
Taxonomy of Organizational Units
Chapter 3
Designing an Effective Organizational Structure
Chapter 4
Creating and Selecting Structural Design Concepts
Chapter 5
Integration Strategies
Chapter 6
Project Management
Chapter 7
Team Management
PART V
CROSS-CULTURAL
STRUCTURE
STUDIES
OF
ORGANIZATIONAL
Preface
Chapter 1
The Culture-Free/Culture-Bound Debate
Chapter 2
Dimensions and Typologies of Organizational Structure
Chapter 3
National Studies of Organizational Structures
This is a sample chapter from Part III of this Guide and you can get your full copy of the
Guide and/or other sample chapters by contacting the Growth-Oriented Entrepreneurship
Project (www.growthentrepreneurship.org) at [email protected]. The
Project also prepares and distributes other Guides for Growth-Oriented Entrepreneurs
covering Entrepreneurship, Leadership, Management, Organizational Culture, Strategic
Planning, Governance, Compliance, Finance, Human Resources, Product Development
and Commercialization, Technology Management, Globalization, and Managing Growth
and Change.
Attorneys acting as business counselors to growth-oriented entrepreneurs who are
interested in forms, commentaries and other practice tools relating to the subject matter of
this chapter should also contact Dr. Gutterman at the e-mail address provided above.
Growth-Oriented Entrepreneur’s Guide to Organizational Design (2015-1)
Part III – Organizational Structure
PART III
ORGANIZATIONAL STRUCTURE
Preface
Structure is one of the key elements in organizational design, along with such things as
strategy, culture and business processes, and establishes how senior management of the
organization wishes to allocate the ability to control activities and resources throughout
the organization. The building blocks of organizational structure are formal groupings of
people and resources into units—departments or divisions—that focus primarily on one
of several structural dimensions including functions, products, geographic areas or
customers/markets. Organizational structure determines how power and authority is
allocated, how information flows and who is accountable to whom through mandated
reporting relationships. Structure alone cannot make an organization successful;
however, if the structure is not aligned with organizational strategy it will be difficult for
senior management to achieve the desired results.
There is no single structure that works best in all cases and the structure will continuously
change as the organization grows and evolves with emphasis shifting from one dimension
to another as circumstances dictate. In most cases an organization will initially choose a
function-based organizational structure that divides work activities into functional groups
such as research and development, production, sales and marketing, finance and
administration (including human resources). As the organization grows it will shift the
primary dimension of its structure to products or markets, either geographic or customerbased, through creation of divisions for each key product line or market. Other structures
based on two or more of the dimensions—matrix or hybrid—may be used in appropriate
cases when the activities of the organization have expanded into multiple product lines
and/or markets.
This Part provides an introduction to organizational structure that includes a description
of the building blocks of organizational structure and the way in which the structure of an
organization typically evolves as it matures and grows; and discussions of some of the
key challenges in designing the organizational structure (e.g., establishing the degree of
horizontal and vertical differentiation, balancing differentiation and integration, balancing
centralization and decentralization, and balancing standardization and mutual adjustment)
and special topics such as tall versus flat organizational structures, the span of control,
mechanistic and organic organizational structures, informal organizational structures and
making changes to the organizational structure.
Various chapters in this Part build on the introduction to the topic of organizational
structure by providing a detailed discussion of several of the basic models of
organizational structure including function-based structures, product-based structures,
geographic-based structures, market-based structures, matrix structures and network
structures. Each chapter describes the key features of the particular structure and
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discusses some of the advantages and disadvantages of each structure and the conditions
under which it is most appropriate for the organization to select that structure. There is
no single structure that works best in all cases and the structure will continuously change
as the organization grows and evolves with emphasis shifting from one dimension to
another as circumstances dictate. In most cases an organization will initially choose a
function-based organizational structure that divides work activities into functional groups
such as research and development, production, sales and marketing, finance and
administration (including human resources). As the organization grows it will shift the
primary dimension of its structure to products or markets, either geographic or customerbased, through creation of divisions for each key product line or market. Other structures
based on two or more of the dimensions—matrix or hybrid—may be used in appropriate
cases when the activities of the organization have expanded into multiple product lines
and/or markets.
Chapter 1
Introduction to Organizational Structure
§1:1
Introduction
Organizational structure, one of the key issues for the organizational designer1, is the way
in which the members of the organization and their job responsibilities are arranged.
Organizational structure includes several important components including roles,
relationships, responsibilities and scope of authority, and communications/reporting
channels.2 Organizational designers must consider what Pugh and Hickson referred to as
the regularities for achieving activities such as task allocation, coordination and
supervision.3 Other researchers, such as Mintzberg and Schein, emphasized similar
design activities and decisions that must necessarily focus on division and allocation of
labor among required tasks, coordination of the activities associated with those tasks and
establishment and administration of a hierarchy of authority.4
The organizational structure typically consists of various business units formed around
functions (e.g., research and development, manufacturing, sales and marketing, finance,
human resources, etc.), products, markets or customers that are arranged in a hierarchical
fashion. The organizational structure determines how power, authority and accountability
are formally distributed throughout the organization and obviously has a strong influence
on how members (i.e., executives, managers and employees) and different business units
interact with one another and the degree to which they will share information and
collaborate to achieve the overall goals and objectives of the organization.
1
For further discussion of the process of organizational design and the key issues for organizational
designers, see the Part on “Organizational Design” in this Guide.
2
W. Sexton, "Organization Structure", in W. Sexton (Ed.), Organization Theories (Columbus, OH: Charles
E. Merrill, 1970).
3
D. Pugh and D. Hickson, Writers on Organizations (4th Ed.) (London: Penguin Books, 1989).
4
H. Mintzberg, Structure in 5’s: Designing Effective Organizations (Englewood Cliffs, NJ: Prentice Hall,
1983; and E. Schein, Organizational Culture and Leadership (4 th Ed.) (San Francisco, CA: The Jossey-Bass
Business and Management Series, 2010).
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Chapter 3
Challenges in Designing the Organizational Structure
§3:1
Introduction
There are a number of challenges for organizational designers that must be overcome
when they attempt to identify and implement the most effective structure for a particular
organization; however, at a minimum the designer must be prepared to consider and
answer the following questions:




What is the appropriate degree of differentiation, both vertical and horizontal, within
the organizational structure? In order to answer this question decisions must be made
as to how organizational tasks will be divided and allocated (i.e., the “division of
labor”) and then grouped or departmentalized. In addition, rules must be established
as to how authority, control and accountability will be distributed and assigned up and
down the organizational hierarchy (e.g., the “span of control”) and reporting channels
should be identified to support the authority and control relationships.
What is the appropriate balance between differentiation and integration? One of the
goals for the designer with respect to differentiation is identifying the appropriate
level of specialization when making decisions about division of labor. The challenge
for the designer is creating and maintaining the advantages of specialization which
come out of the differentiation decisions (i.e., core competencies) while ensuring that
the activities of the various organizational roles are effectively coordinated and that
organizational units communicate and cooperate.
What is the appropriate level of decentralization? The key issue here is how authority
to make decisions is going to be dispersed throughout the organization and is
typically addressed through the use of formal guidelines.
What is the appropriate balance between standardization and mutual adjustment? For
this issue the designer needs to consider the methods that can and should be used to
monitor the way in which members of the organization actually behave while they are
completing their assigned tasks and activities.
Each of these questions will need to be continuously addressed as the organization grows
and changes occur in the organizational strategy and the external environment in which it
is operating. For example, in small organizations it is likely that employees will perform
a variety of tasks—little or no division of labor or formal groupings; however, in general,
specialization (i.e., narrower job responsibilities) tends to increase as the organization
grows. Growth also leads to changes in how jobs will be grouped or departmentalized.
Traditionally departments have been formed on the basis of function-based activities
(e.g., accounting jobs in the accounting department and engineers in the engineering
department); however, other alternatives, such as product-, customer/market or
geographic-focused departments or divisions will be the likely choices when
organizations grow and expand their activities to include multiple product lines and
international markets. Finally, while organizations tend to develop a decidedly vertical
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hierarchy, with most of the decision-making authority at the top of the organization,
during their initial growth spurt many ultimately decide that decentralization and flatter
hierarchies will be needed in order for the organization to retain flexibility and be
responsive to rapid environmental changes; however, the ability and willingness of the
organizational members to make changes in the structure that might be appropriate in
light of the external competitive environment will be influenced by other factors such as
societal culture and/or the skills and experience of the workforce.
§3:2
Horizontal and vertical differentiation
While all the challenges and questions described above are important the process of
identifying the appropriate organizational structure generally begins with a careful
consideration of “differentiation,” which involves decisions as to how human and other
resources should be allocated to specific tasks and activities and the establishment of
lines of authority within the organization to be sure that the tasks and activities are
completed and that there is sufficient control and coordination of all of the organizational
activities to create value for the stakeholders of the organization. There are two categories
of differentiation that must be considered—horizontal and vertical. As noted above,
horizontal differentiation is determined by how various work-related tasks and activities
are divided and grouped. It begins with divvying up tasks between the founders and the
initial employees and then expands to the creation of departments and other business
units. The overwhelming choice for smaller organizations with respect to the type of
dimension used to departmentalize the work flow appears to be the functional form, with
some modest support for the use of geographic- and customer-based departments.
Vertical differentiation addresses the distribution of authority and control up and down
the various hierarchical levels of the organization that begin to form as more employees
arrive and additional managers are brought in to oversee them.
Every organization, through its founders, makes an initial rudimentary decision regarding
the level of differentiation at the time the organization is first launched. For example, if
two software engineers decide to launch a new company to develop and commercialize a
new software program they will likely attempt to take on all of the varied tasks associated
with forming the new business while they continue to work on the actual programming.
At this point here is essentially no horizontal or vertical differentiation within the
organization and the available human resources—the two founders—are thinly spread
over product development, finding and renting an office, securing business licenses,
contacting prospective customers, and preparing a business plan for use to secure funding
for expansion of the business. If funds are available, typically from the personal savings
of the founders or from seed financing obtained from a private investor, the founders may
hire one person, often part-time, to provide some assistance in particular areas; however,
the founders continue to be active in areas outside their core expertise and there are no
formal control, coordination and authority procedures to guide the way that the founders
and any small number of initial employees interact with one another.
The design challenge relating to differentiation actually begins to arise when the activities
of the organization get to the point where the founders become overloaded and there is a
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need for them to focus primarily on their core competencies. In order for the organization
to continue to grow and succeed it becomes necessary to bring in new inputs, particularly
additional managers and employees, to carry out the additional tasks and activities that
must be completed because of the maturation of the business of the organization. For
example, when the programming and testing activities associated with the initial software
product for the organization described above reach a critical stage that requires full-time
involvement by the founders they will need to spend most of their time in the laboratory
and hire new employees to handle sales, marketing and administrative matters. While, on
paper, both the founders remain responsible for management of all of the functions,
including those outside of product development, the realization soon comes that formal
plans need to be put in place to manage and control the activities of the new employees
and each of the new functional specialties. For one thing, while the founders understand
how important development of the first product would be to the future of the organization
they also know that the development work will not be enough to keep the organization
alive if mistakes were being made by the sales and marketing team or the administrative
group is not closely watching how the meager funds were being spent before the business
had any sustainable cash flow from product sales.
Increased horizontal differentiation—division of labor—is the typical response at this
point. For example, one of founders may continue focusing on the development work
while the other assumes responsibility for sales and marketing and decisions must then be
made the organizational role of each employee, who they will report and how control and
coordination of activities will be achieved. The decision to divide managerial
responsibilities between the founders introduces additional complexity since they must
also consider the need for coordination and communication within the organization. It is
important for the founders to appreciate how their spheres of oversight interact and make
sure that ideas from one area are transferred to the other and vice-versa. For example, the
founder assigned to product development must be sure to keep the other founder and his
or her sales team informed of how the development work on the new product is
progressing and, in turn, the sales team needs to pass any information about the particular
requirements of prospective customers back to the product development group.
Assuming the preliminary activities associated with the business of the organization are
successful, and further growth is necessary and desired, the challenges associated with
differentiation will continue to increase in relation to the complexity of the required
division of labor and the corresponding need to be sure that the right people are put into
the appropriate positions and that procedures are implemented to coordinate activities
throughout the organization. For example, as the new software company completes its
initial product development work reaches completion and orders for the new program
begin to come in the founders will need to consider bringing in additional employees to
perform new activities that are required due to the change in the nature of the business
from product development to sales, customer support and high volume production. In
addition, the founders will need to recruit qualified managers to take control of specific
areas that are outside the expertise of the founders and which the founders can no longer
effectively manage in light of the limited amount of time and energy that they have.
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The point where the founders are forced to deal with limitations on their ability to
directly supervise the activities of all employees initially placed under their supervision is
when there is a decided increase in the level of horizontal differentiation in the
organizational structure. The organization will begin to build its senior management team
and bring in experienced specialists to create and manage central support functions that
will ultimately become part of the anticipated core competencies of the organization.
While it is possible that one or both of the founders will assume the key roles of CEO and
President/COO it is common to bring in professional executives from outside the
founding team to fill one or both of those positions. When that occurs decisions must be
made about the continuing roles and responsibilities of each of the founders and they
must learn how to share control over the organization with newcomers who may have
their own ideas about mission, goals and strategy.
The initial expansion of horizontal differentiation also leads to the creation of specialized
subunits, generally referred to as departments, in which each of the workers performs
tasks related to a similar functional activity. The number and size of the functional
departments tends to reflect the key resources that organization must obtain from its
external environment and the interest groups in the external environment that are most
important to the success of the organization. For example, a research and development
department must be formed in order to fulfill the organizational requirements with respect
to acquiring the necessary technological inputs. Similarly, the human resources
department will be responsible for recruiting, training and motivating qualified
employees and will also handle relations with important worker groups within the
broader external environment such as labor unions. Functional departments will also be
established to handle relations with customers and competitors (i.e., sales and marketing
departments), banks and investors (i.e., finance), suppliers (i.e., materials management
and manufacturing department) and governmental entities (i.e., legal department). Senior
executives for each of these functional subunits will also likely come from the outside
and join the organization. The addition of these new senior executives will generally
trigger more restructuring of the organization to meet current goals and objectives and set
the structure of the organization up in a way that would allow it to move forward with its
broader business strategy, including development of new products and services to build
on the success of the initial launch.
As horizontal differentiation increases in the organizational structure the level of vertical
differentiation will also increase as each of the functional subunits develop their own
unique hierarchical structure, including levels of authority, based on the primary
activities of the subunit. For example, it is common for a manufacturing department to
have a relatively tall organizational structure with anywhere from six to nine hierarchical
levels because of the need to closely monitor the manufacturing process and control
production costs and quality. On the other hand, the hierarchical structure in the sales
department will be much flatter, generally no more than three levels, because of the
availability of tools such as objective sales quotas and standardized written reports that
can be used by managers to efficiently monitor and control the activities of salespersons
in their direct span of control. The research and development department will also have a
relatively flat hierarchical structure; however, the explanation differs substantially from
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the rationale for sales. In the R&D area the complexity of the tasks involved in a specific
project, as well as the long and relatively uncertain path to completion of a project, makes
it extremely difficult for a single manager to exercise control and authority. In fact, it is
common for R&D projects to be carried out by small groups of scientists and engineers
that share information and monitor one another based on professional norms as opposed
to formal hierarchical rules and controls. When companies are involved in multiple R&D
projects at one time the level of horizontal differentiation within the R&D department
increases to the point where there are actually multiple subunits within the department in
the form of small teams working on a particular complex project with interrelated tasks.
The creation of these subunit hierarchies does allow the overall organizational structure
to remain relatively flat; however, as more and more subunits are created senior
management must monitor these changes carefully to ensure that procedures are put in
place to coordinate the activities of these subunits so that the overall business goals and
objectives of the organization are achieved. Motivational issues may also arise at the
individual level as the tasks performed by employees become a smaller and smaller part
of a much larger activity and it becomes more challenging to determine how the work
activities of an individual employee contribute to the activity and how the activities of
activities of the employee should be evaluated and rewarded. The evaluation issue
becomes even more complicated when employees are required to cooperate with other
employees within and outside their department specific sub-activities since it becomes
even more difficult to isolate and access individual contributions.
In order to maintain an adequate system of control over activities within an expanding
organization, and address the emerging issues of coordination and motivation, new
management positions are created and the number of levels in the organizational
hierarchy begins to increase. The result is an overall organizational hierarchy that is taller
and more vertically differentiated and the goal is to ensure that the organization, through
its expanding management team, retains the ability to exert direct control and positive
influence over the activities of each of its employees. Specifically, it is hoped that the
new mid-level managers can, through their face-to-face interaction with subordinates,
make sure that all tasks are being performed effectively and in a manner that fits with the
overall goals and objectives of the organization. It is anticipated that managers will be
able to consult personally with their subordinates about issues that may arise regarding
their activities and provide them with sufficient information to understand their roles
within the overall picture. Managers can also observe the activities of their subordinates
to make sure that they are not working in their self-interest and contrary to the needs of
the organization. Finally, the new managers can diffuse potential motivational issues
actively developing the skills of their subordinates, creating and applying fair and
objective evaluation metrics and rewarding subordinates for performing the tasks and
activities associated with their organizational roles in a manner that benefits the
organization.
As the organizational hierarchy gets taller those involved with the design of the structure
must also determine how much authority should be retained at the top of the hierarchy
and how much should be delegated to managers at lower levels. Specific decisions must
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be made regarding decentralization of authority and standardization of behavior, and a
delicate balance must be struck between the desire to control the actions of subordinates
and the need to allow for sufficient autonomy to allow the company, through its
managers and employees at lower levels of the organization, to respond quickly to
problems and opportunities. Increased vertical differentiation also impacts the speed and
effectiveness of the communications and decision-making within the managerial
framework of the organization. These issues are the focus of decisions regarding just how
tall or flat the hierarchy of the organizational structure should be.
It is important to emphasize and appreciate how quickly the degree of differentiation can
change and increase for an organization that is really just starting out. At the beginning
there are just the founders and no real hierarchy or formal differentiation except perhaps
for a handful of full- or part-time employees providing basic support services. As the
organization grows it adds new hierarchical levels, and lines of authority, along with a
division of labor that forms the basis for new departments performing specialized
functional activities. New mid-level managers are brought in to oversee the functional
departments and the senior executive team is built out to coordinate the activities of the
various functions to produce the outputs that would create value for all the
stakeholders—the initial products and services of the organization. At that point the
structure of the organization becomes extremely complex even though the number of
employees is still relatively small. The design challenges get even more difficult as the
organization develops core competencies and sets out to use those competencies to seize
new opportunities (e.g., developing new products and services and/or entering new
domestic or international markets). For example, if the organization decides to market
and sell its initial products in another country it may create a new geographic division
which will add more managers and employees, create coordination issues between the
domestic and international divisions that must be addressed through implementation of
formal rules and procedures, and trigger a move toward centralizing certain functions
(e.g., accounting, finance, marketing, R&D, human resources and procurement) in order
to cost-effectively support each of the geographic divisions. Similar changes will be
required if the organization decides to expand on a product or market basis.
§3:3
Differentiation and integration
The increase in degree of horizontal differentiation in the organizational structure as the
activities of the organization grows, and new employees are brought on board, is intended
to harvest the potential advantages associated with specialization. The process of
breaking the tasks and activities that need to be performed within the organization into
smaller and more focused pieces allows employees to develop and maintain specialized
skills and experience that will ultimately make them more productive and provide them
with a sense of mastery that increases job satisfaction and overall employee morale.
Specialization is accelerated and encouraged by grouping related organizational roles into
functional departments and other types of divisions since the members of those groups
learn from one another through observation, formal and informal exchanges of
information and group-level training. Over time it is hoped that specialization can lead to
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the development of core competencies that can be can be leveraged as a competitive
advantage that benefits the entire organization.
While horizontal differentiation is inevitable as an organization grows, and orderly
division of labor and specialization can unquestionably benefit the organization and its
employees, there is a real risk that problems may arise when it becomes necessary for
different departments to work together on projects and broader organization-wide
strategic initiatives that require cooperation and coordination among those departments.
The specific concern is that the members of each department will develop loyalties and
allegiances to their departments that make it difficult for them to understand, respect and
accommodate the perspectives of other departments. Moreover, problems may arise
because of differences in the primary operational goals and objectives of the departments.
For example, engineers and production managers in the manufacturing department are
usually focused on continuous reduction of costs and improvements in quality controls
and thus tend to have a short-term perspective since they must meet their production
goals on a daily basis; however, scientists, engineers and software developers working in
the R&D typically look at their tasks and projects with a long-term view since it
generally takes months or years to fully develop a new product or technology.
Interdepartmental relations may also be hampered by the simple fact that employees in
different departments do not share the same educational and professional backgrounds—
accountants see opportunities and risks for a business differently than employees with a
marketing or engineering background.
Differentiation, and formal establishment of defined organizational roles, is intended to
enhance specialization and provide employees with a better sense of how their specific
activities fit within the broader goals and objectives of the organization. However, more
often than not, differentiation contributes to the unintended, yet very real, creation of
barriers between departments and the people that work within them. As a result, overall
organizational progress can be derailed by breakdowns in communication and
coordination as differentiation increases. In order to address the problems it is essential
that senior management temper the potential adverse impact of too much specialization
by developing and implementing integrating mechanisms within the organizational
structure in order to encourage, if not force, employees in different departments and
divisions to share information and work together as needed in order to complete projects
and ensure that their activities are not in conflict with one another. There are several
ways that organizations can approach the challenge of balancing specialization and
integration and the best approach at any point in time is generally determined by the size
of the organization and the complexity of its activities. Larger organizations will
inevitably tilt toward greater specialization and can be expected to have a much higher
diversity of products and markets that would logically require higher levels of integration
(e.g., teams and task forces and formal integrating roles and departments). On the other
hand, when an organization is still small it is likely to rely on the hierarchy of authority
and simple integrating mechanisms, such as direct contracts, to achieve the necessary
coordination between persons in different organizational roles.5
For further discussion of integrating mechanisms, see the chapter on “Integration Strategies” in this
Guide.
5
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While reliance on functional departments (i.e., differentiation) is a common and
widespread practice within the structures of organizations from the time that they emerge
from the early start-up stage, it is important to understand just what factors come into
play when organizations attempt to determine the appropriate level of differentiation and,
at the same time, the amount of effort that should be put into development and
enforcement of integration mechanisms. Clues can be obtained from the work of
Lawrence and Lorsch, who investigated how the characteristics of the industrial
environment in which organizations compete might impact the degree of differentiation
and integration in their organizational structures. Analyzing the level of differentiation in
and among several departments—research and development, manufacturing and
production, and sales—of organizations in different industries they found that
differentiation was highest when the external environment facing those departments was
uncertain or unstable. They also observed that the organizations that were most effective
in dealing with uncertainty in their external environment implemented more formal and
sophisticated integration mechanisms (i.e., teams and tasks forces) to coordinate the
activities of their highly differentiated organizational roles.6
§3:4
Centralization and decentralization
The tension and balance between specialization and integration is an issue that must be
addressed in determining the optimal layout of the horizontal dimension of the
organizational structure; however, there is an equally important and challenging issue that
relates to the vertical dimension of the structure—the proper balance between
centralization and decentralization of authority to make decisions relating to the activities
of the various subunits that may be created within the organizational structure. When
authority is “centralized,” all of the power and authority to make decisions regarding its
activities and how its resources are allocated has been vested with senior managers in the
top layers of the hierarchy of authority. Persons in organizational roles that are located at
lower levels in the hierarchy of authority simply take their directions from the top and
have no formal or legitimate power or discretion to initiate new activities or use resources
in a manner that is different than as directed by senior management. On the other hand,
authority is “decentralized” when organizational roles at all levels of the organizational
hierarchy of authority have the ability to make decisions regarding their activities and the
use of resources without the need to obtain approval each time from senior management
provided that they act within certain guidelines established by senior managers in order to
ensure some level of accountability.
Both centralization and decentralization have distinct advantages and disadvantages and
the benefits of one approach as opposed to another will vary depending on the stage of
development of the organization and the specific environment in which it is operating at a
given time. A centralized management structure generally is more suited to situations
where the senior managers feel that it is necessary that they be personally involved in all
the activities of the organization in order to retain the necessary focus and judicious
6
P.R. Lawrence and J.W. Lorsch, Organization and Environment (Boston: Graduate School of Business
Administration, Harvard University, 1967).
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manage scarce and rapidly depleting resources. If the activities of the organization are
successful, however, and the organization continues to grow and become more complex
the senior managers will soon run out of time to continue being involved in every day-today operational tasks while continuing to do the one job that they have clearly been
selected for—setting long-term goals and objectives for the organization and determining
and executing the business strategies that are best suited for pursuing and attaining those
goals and objectives. At that point more levels in the hierarchy are needed and decisions
need to be made about how much authority can and should be delegated to the persons
who will occupy the new managerial roles.
In general, when organizations are first launched and growth dictates the creation of a
formal organizational structure there is a tendency to establish a centralized hierarchy of
authority in which the power and responsibility for making decisions is primarily vested
in the organizational roles at the top of the hierarchy. For example, it is common for the
CEO to implement an organization structure that provides for various management
specialists to report directly to him or her, including a controller (finance); a manager of
production, plant and operations; a sales/marketing manager; and a general manager.
Other specialties that are also frequently represented include engineering, purchasing,
quality control, project management and shop supervision. This makes sense when the
organization is trying to move away from the “creative chaos” of the launch stage to a
structure that gives each manager and employee a clear sense of their duties and the
actions and results for which they will be held accountable. The problem, however, is that
as time goes by employees at lower levels of the hierarchy are hamstrung by formal rules,
and informal customs and “ways of thinking,” that make them overly dependent on senior
managers for direction. As a result, when new problems or opportunities arise for which
there are no solutions within the existing protocols for making decisions employees will
purposely fail to take any action—they don't want to take risks or assume responsibility
for actions that are not within the discretion associated with their organizational role—
and simply refer the problem or opportunity up the hierarchy and wait for direction.
Unfortunately, senior managers are generally overwhelmed with requests for direction
and responses begin to take longer and longer to obtain. The byproduct of this situation is
that the organization loses its ability to act quickly to solve problems and seize new
opportunities and the organization risks being overwhelmed by inevitable changes in its
environment.
The problems described in the previous paragraph would arise regardless of the number
of hierarchical levels in the organizational structure. Things get even more complicated
when one takes into account the almost inevitable drift toward a tall organization
structure with increasing number of managers and levels of hierarchical authority. As the
structure gets taller significant problems with regard to communications, coordination
and overall speed of decision-making are likely to arise. The senior managers at the
highest levels of the organizational hierarchy will be spending most of their time
attempting to monitor the activities of managers at lower levels and will lose focus on
more important issues such as establishing goals and strategies for the organization or
their specific departments or divisions. In turn, lower-level managers will grow
increasingly frustrated at the delays in decisions from their superiors, which occur
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because senior managers are simply overwhelmed with queries from a number of
managers, and begin to resent that decisions are being made by persons who do not have
a good understanding of the actual situation confronting the lower-level manager.
As complexity grows and more hierarchical levels are added to the organizational
structure it is time to consider a reduction in the amount of managerial supervision
exercised from the top of the organizational hierarchy through decentralization—a
redistribution or delegation of the authority to make certain decisions to organizational
roles at lower levels of the hierarchy of authority. This process of decentralizing authority
involves identifying new spheres of authority and discretion for lower level managers to
allow them to make their own operational decisions regarding their day-to-day activities
and the activities of those organizational roles that report to them. The potential benefits
are obvious—senior managers no longer need to be involved in every decision and can
spend their time in other areas and lower-level managers can use their personal
experience and observations regarding a particular situation to make timely decisions
about how to use the resources made available to them by the organization. The lower
level managers remain responsible for achieving the goals and objectives set by senior
management; however, they are given more flexibility about how they can use the human
and other resources assigned to them in order to achieve those goals and objectives.
Decentralization not only reduces potential organizational bottlenecks it also can be a
powerful motivational tool for lower level managers and employees since they are given
permission to think creatively and an opportunity to demonstrate their personal talents to
senior management. In addition, decentralization allows decisions to be made at the point
where a specific issue or problem arises by the managers with the most current and
complete information about the situation. Not only does decision-making become more
efficient but both senior and lower-level managers should experience an improvement in
their morale.
Decentralization can be applied across all of the functional activities of the organization
or can be used in just those areas where changes can create the most immediate value and
competitive advantage for the organization. One area where the decentralization principle
is often applied is with respect to logistics. It is a common strategy for organization to
attempt to decrease and manage their costs of transporting raw materials within the
organization and shipping finished products to customers by centralizing their logistics
function and having a single headquarters-based department make decisions regarding
selection of carriers, scheduling and routing of shipments. However, in order to make
sure that any special requests received from important customers regarding shipping and
delivery can be honored, it is important to allow for variations from centralized control so
that regional sales managers can authorize alternative shipping arrangements (e.g.,
different routing) to meet customer demands even if it means additional costs for that
particular transaction. This type of flexibility is necessary in order for the organization to
remain competitive and not lose business to rivals that offer special shipping programs.
Of course, the exercise of authority by regional sales managers should be carefully
monitored to ensure that the isolated concessions to customers do, in fact, lead to higher
and more profitable levels of business.
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Decentralization may also be the cure whenever bureaucratic tendencies have begun to
take over the activities at the headquarters office. For example, as organizations grow
they often create a hierarchical level of senior managers between the CEO and the
managers who are actually responsible for the day-to-day operations of the major
departments and divisions of the organization. While these senior managers may have
substantial experience and valuable specialized skills the net result of the additional layer
in the chain of command is slower decision making, usually by people with a poor
understanding of the actual problems faced by the departments and divisions, and
increased distance between the CEO and the “front line” commanders. The solution may
be to eliminate the unnecessary level of senior management and have the executives of
each of the departments and divisions report directly to the CEO while at the same time
providing these executives with greater autonomy and responsibility with respect to
decisions impacting their subunits. This type of reorganization achieves decentralization
and a flatter organizational hierarchy at the same time and should improve performance
provided that the executives at the departmental and divisional levels are carefully chosen
and the CEO acts as a strong mentor. A similar outcome may be achieved by
organizations that reduce the amount of control that the headquarters office exercises
over regional branches and place strong executives in those branches with power and
responsibility to reduce costs, improve efficiencies, and establish and execute solid
regional-based sales and marketing initiatives.
The primary risk associated with decentralization is the likelihood that it will become
more difficult to engage in interdepartmental planning and convince the managers of
different departments to give up some of their autonomy in order to better coordinate the
activities of the departments so that the organization can achieve its broader goals and
objectives. Decentralization can also become problematic if senior management loses
touch with the day-to-day pressures experienced by lower level managers and sets goals
for those managers that are unrealistic or fails to listen to their reasonable requests for
support and resources. In addition, while decentralization is intended to free senior
management from day-to-day decisions there must still be ways for senior management
to regularly review the quantity and quality of those decisions to make sure that lower
level managers are effective and acting in ways that are consistent with the long-term
business strategy of the organization. In for this to occur, however, the organization must
be prepared to invest in information processing technology to ensure that performancerelated data flows quickly and efficiently up and down the organizational hierarchy.
As with the other challenges confronting an organizational designer, the centralization
versus decentralization dilemma is ideally solved by striking an appropriate and fully
understood balance so that senior management can continue to focus on the “big picture”
and lower level managers can concentrate on executing the strategy established by senior
management and making decisions for which they are best qualified and informed within
the framework of the organization's overall strategy. In this way the organization will be
in a position to respond quickly and effectively to unforeseen changes in its external
environment while not deviating substantially from its broader mission. The decisions
which are most commonly completely delegated by the CEO of top performing
organizations are those that must be made with respect to production responsibility,
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personnel training and job definition and procurement of supplies and services. In turn,
the CEO is generally less likely to delegate in the areas of governmental relations and
coordination of workflows. A related issue is the degree to which the CEO is willing to
seek and accept input from other managers in the process of making decisions. In the top
performing organizations, the CEO is less likely to involve subordinates in areas such as
expansion planning, monitoring and controlling costs and public relations. Research also
indicates that CEOs of top performing organizations are more likely to share authority
with other managers, as opposed to completely delegating authority, and it is most
common to find that authority is delegated to two or three managers.7 In order for
delegation and decentralization to work, however, the designer must create integration
mechanisms to ensure that fully- or semi-autonomous lower level managers continue to
understand the need to coordinate their activities and decisions with other departments.
§3:5
Standardization and mutual adjustment
The last of the four major challenges for an organizational designer is achieving the
proper balance between standardization and mutual adjustment when rules and norms and
being created to the various roles and groups within the organizational structure together.
When an organization seeks to “standardize” it is attempting to remove variations and
irregularities in the way that particular situations are handled so that there is conformity
and predictability in the way that the situation is handled each time it occurs.
Standardization can take several forms and may include standardization of work
processes in order to coordinate the activities of employees working on related tasks;
standardization of outputs which facilitates coordination by providing all employees with
common performance goals for their activities and/or specifications for their finished
products; standardization of skills and knowledge which improves coordination by
ensuring that employees share the same foundation of skills and training; and
standardization of norms which builds cooperation and teamwork by instilling common
values and beliefs (i.e., organizational culture) in each of the employees that are relied
upon when acting on behalf of the organization.
The main tools of standardization are formal rules and organizational norms which, taken
together, define way in which employees discharge the duties and activities associated
with their organizational roles. When standardization begins the organization will
develop and disseminate formal written rules and procedures that standardize operations
and set forth in appropriate detail the way in which it is expect that employees will
conduct themselves in order to achieve specific goals. It is often said that standardization
turns the duties and responsibilities of a particular organizational role into a “routine” that
can be easily measured and continuously repeated over and over again. Formal rules are
typically supported by organizational norms that define a standard pattern of behavior
within the company that is considered to be normal, typical and expected. Norms are
generally informal understandings that arise, and are transferred between employees, as
employees go through their day-to-day work activities. As norms become more
entrenched they become just as important as formal rules in defining the way that
7
L. Hendrickson and J. Psarouthakis, Dynamic Management of Growing Firms: A Strategic Approach
(Second Edition) (Ann Arbor, MI: University of Michigan Press, 1998), 66-67.
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employees view, and act upon, particular situations. In fact, it is common to see that
employees that are perceived to have violated a widely known and accepted norm will be
punished by their colleagues with the same vigor and intensity as if a formal written rule
or procedure had been breached.
The level of standardization can have a direct impact on the form and operation of the
organizational structure since the use of standardization techniques to ensure that
employees perform their tasks, and respond to certain situations, in a predictable manner
allows the designer to expand managerial spans of control and slow the tendency toward
more and more hierarchical levels of authority. Organizations that establish and enforce
rules and standard operating procedures can reduce the need for direct supervision and
creation of a large number of management positions. The managers that do exist can be
expected to handle more employees (i.e., larger spans of control) and rely on standardized
tools for learning about and measuring the performance of those employees. For
example, sales managers can oversee a large number of salespeople by setting objective
sales quotas, collecting and analyzing timely objective information about sales
performance, and receiving and reviewing written reports from each salesperson in a
standard format that includes all of the data necessary to understand how the salesperson
performs his or her tasks. In addition, standardization increases the confidence level of
managers asked to delegate more authority to their subordinates since the managers can
reasonably predict how the subordinates will act provided that they follow organizational
rules and norms.
There is no dispute that organizations do need formal written rules and institutional
norms and values in order to provide some minimum level of control over the activities
and behavior of their employees. Problems may arise however if there are too many rules
and employees feel afraid and powerless to do anything that goes against established
procedures and beliefs even if they reasonably believe that some form of adjustment is
necessary in order to solve a particular problem or respond to an unanticipated
opportunity. If employees blindly follow rules without exception creativity will be
stifled, innovation will decrease, and employees are more likely to become frustrated
with working in an environment they see as inflexible and rigid. In order to avoid, or at
least minimize, some of the potential problems associated with standardization a
conscious effort should be made to permit employees to engage in informal
communications, often referred to as “mutual adjustment,” to coordinate activities and
resolve problems for which the “standard operating procedures” do not provide a ready or
reasonable answer. If the proper balance can be struck then employees will know how to
handle routine and non-controversial tasks and situations easily and efficiently and thus
will be able to invest more time and effort into applying their knowledge, experience and
judgment to solve new problems that will inevitably come up regardless of the level of
detail in the formal rules promulgated by the organization.
Larger organizations, particularly those that have been doing business the same way for a
long period of time, often find that it is extremely difficult to change formal written rules
and procedures and institutional norms and/or shift toward a less formal approach to
coordination, such as mutual adjustment. In fact, companies may find that the “old” rules
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and norms have become so much a part of the way that the organization works and
employees think that it is difficult to change behavior patterns that have now become too
comfortable. As such, it should not be surprising that the transition toward mutual
adjustment can be a bumpy road and that there may be a significant amount of disruption
and anxiety before the new methods are accepted and begin to become effective.
Another issue to be considered by organizations as they attempt to introduce mutual
adjustment into their culture is just how much of their preexisting norms should be
retained in order to maintain a strong shared belief system within the workforce. Finally,
it must be recognized that different functions within the organization may require a
specific solution with respect to the level of formality and standardization. For example,
it is not surprising that the accounting department will prefer the use of detailed rules and
procedures for every foreseeable transaction or exchange within the organization;
however, departments heavily involved in the development of new products and
technologies, which requires a high level of creatively, will likely flourish when scientists
and engineers can attack problems and opportunities through mutual adjustment.
How an organization decides to balance standardization and mutual adjustment is also
tied to the other important structural design challenges, such as centralization versus
decentralization and the implementation of integrating mechanisms. Organizations that
rely heavily on formal rules and procedures as opposed to allowing employees to act
autonomously in various situations will generally opt for centralization of authority. On
the other hand, organizations that have allowed and trained their employees to engage in
cross-departmental communications and mutual adjustment in order to resolve problems
and conflicts at lower levels of the organizational structure have made a decision to
decentralize authority. In fact, some degree of decentralization is a necessary condition
to successful implementation of mutual adjustment since employees at lower levels of the
organization must have the legitimate authority to make final decisions regarding their
activities and how the organizational resources under their control are used. Also, if an
organization decides to increase its reliance on mutual adjustment it should
simultaneously bolster its integrating mechanisms (i.e., teams and task forces) to be sure
that there is constant communication between departments so that they can use mutual
adjustment as a way to resolve conflicts and effectively coordinate their activities.
§3:6
Special topics
The following sections cover several additional special topics that are constantly debated
among researchers focusing on organizational structure. One topic, which begins with
increasing vertical differentiation, is the appropriate “height” of the organizational
structure. A so-called “tall” organization has a relatively large number of levels of
managerial and supervisorial positions while a “flat” organization is less hierarchical. A
second topic is the appropriate “span of control” for managers and supervisors with the
span being measured by reference to the number of persons who report directly to a
manager or supervisor. A third topic is mechanistic versus organic organizational
structures. An organization that is highly reliant on standardization and formal rules and
procedures for making decisions is said to be mechanistic while an organization that
tolerate mutual adjustment and permits and encourages decentralization is characterized
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as organic. While these topics are treated separately below, they are, of course, tightly
interrelated. For example, a traditional, so-called “bureaucratic,” structure places
authority at the top of the hierarchical pyramid, has a number of managerial levels (“tall”)
and narrow spans of control at each level and relies heavily on standardization that
discourages employees at lower levels of the organization from acting autonomously
(“mechanistic”). On the other hand, smaller organizations, particularly emerging
companies competing in dynamic and rapidly changing business environments, operate
with far fewer managerial layers (“flat”) and delegate opportunities to employees
throughout the organization to take initiative and make decisions on their own (a decision
that also has the effect of expanding the span of control of those serving in managerial
positions). There is no “best practice” for each of these topics and organizations typically
change their approach to each topic as time goes by and new circumstances emerge.
§3:7
--Tall versus flat organizational structures
The decisions made regarding the issues described above will ultimately determine where
the degree of hierarchy of the chosen organizational structure falls on a continuum
between tall at the one end and flat at the other extreme. A tall organization is one in
which there are many levels of management authority in the structure in relation to the
size of the organization (i.e., the total number of employees). On the other hand, a flat
organization has relatively few levels of management authority in its structure. Studies
have shown that by the time the size of an organization has grown to around 1,000
employees it will typically have, on average, four levels in its hierarchy—the CEO, the
senior managers of the functional departments and other divisions, the supervisors within
the departments and divisions, and the rank-and-file employees. As the organization
grows to around 3,000 employees the number of hierarchical levels will likely increase to
seven. Whether or not the number of levels in a particular organizational structure makes
the structure tall or flat depends on the number of employees. For example, if an
organization with 3,000 employees has just four levels in its hierarchy it would be
considered to be flat in relation to the average for organizations of that size; however, if
there were nine or ten levels in its hierarchy it would be classified as tall. Interestingly,
as companies grow even larger to 10,000 or more employees the rate of increase in the
number of levels in their hierarchy slows dramatically and it is uncommon to find more
than nine or ten levels in the hierarchy of these very large organizations.8
Tall organizations have many more managers involved in the direction of the activities of
their employees, particularly at the lower levels of the organizational structure. While
this approach has advantages with respect to the degree of control over the tasks
performed by the employees it does have the potential for seriously impairing
organizational effectiveness. The first problem is that as the number of levels in the
hierarchy increases, communication within the organization also becomes more difficult.
This is an obvious hazard given that information will take longer to flow up and down the
hierarchy between managers at the top and bottom of the pyramid. Moreover, as the
8
J. Child, Organization: A Guide for Managers and Administrators (New York: Harper and Row, 1977),
10-15; P. Blau, “A Formal Theory of Differentiation”; W.R. Scott, Organizations: Rational, Natural, and
Open Systems (Upper Saddle River, NJ: Prentice Hall, 1981), 235-240.
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information moves through the hands and heads of different managers it is likely to get
distorted so that senior managers get a story that often is very different than the reality
confronting managers lower in the organizational structure who are directly involved
with an issue or problem. Distortion may be accidental; however, in some cases
managers intentionally manipulate information to suit their own interests. The bottom
line with regard to communication is that decisions take longer to make in a tall
organization and are often made by senior managers who have lost control over, and
insight into, the day-to-day activities to which their decisions pertain.
A second issue that arises when the hierarchy becomes taller relates to the potentially
negative impact on motivation and morale within the management group. As the
organizational structure becomes taller the span of control and authority for the managers
at each level decreases. Correspondingly, as the organizational structure becomes flatter,
and hierarchical levels are removed, the remaining managers experience a widening in
their spans of control and authority. Studies indicate that as managers are given more
control, authority and responsibility they tend to become more motivated to perform their
roles within the organization and achieve the goals and objectives established by senior
management. Accordingly, it would seem that keeping the number of hierarchical levels
in the organization structure to a manageable number (i.e., a flatter organization) would
have the strongest motivational pull on the managers. However, caution is advised since
wider spans of control and authority can quickly overwhelm managers and vitiate any
gains with respect to morale and enthusiasm.
A third issue that accompanies expansion of the organizational hierarchy is the increased
costs associated with recruiting new managers to staff each new hierarchical level. New
managers carry various direct expenses including salary, bonus, benefits and office space.
In addition, the administrative costs of operating the organization increase as more
managers are added since the organization will need to invest in more sophisticated
communications and information processing systems to make sure that managers have all
the data necessary to accomplish their duties and keep their superiors informed of
progress at the lower levels of the organizational pyramid. Another hidden, yet very real,
issue with bringing in a number of new managers is the need to train them about the way
that organization works and ensure that they are properly acclimated to the pre-existing
cultural values and norms of the organization so that they can be effective in carrying out
their managerial responsibilities and securing the trust and loyalty of their subordinates.
When business is good and growing quickly organizations tend to drift toward taller
organizational structures without much thought regarding the potential consequences of
such a change in the hierarchy. Growth comes naturally as the organization identifies
and engages with new customers and markets and seeks to exploit new business
opportunities. Moreover, the managers that are already in the organizational hierarchy
tend to engage in certain activities that will ultimately lead to more hierarchical levels
and a taller organization. For example, C.N. Parkinson, who articulated the well-known
“Parkinson’s Law”, conducted field studies to support his argument that increases in the
number of managers in an organization, along with increases in the number of
hierarchical levels in the organizational structure, occur because of two fundamental
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principles—managers want to multiply subordinates, not rivals; and managers make more
work for one another.9 Managers typically crave a higher rank and greater status within
their organization and believe they can achieve those goals not by increasing the number
of managers on the same level but by expanding the number of subordinates below them
in the organizational hierarchy who must report to them, including others who are
themselves engaged in managerial activities. As this phenomenon continues the number
of managers increases and the organizational structure becomes taller and more complex.
In addition, as the number of managers increases the amount of work also expands since
managers create more activities to justify their need for a large group of subordinates and
also spend more time and effort controlling their subordinates and protecting the
resources they have fought to collect.
Clearly, creeping and uncontrolled growth in the number of hierarchical levels of
authority within the organizational structure is a significant problem and it is incumbent
on senior management to establish and enforce certain basic guiding principles for
measuring whether or not another managerial position should be created. Ideally
managers would not bring in a new manager unless the new value created by the last
manager employed exceeds the costs associated with recruiting and maintaining the last
management position. Simply put, why hire a new manager when the last management
position created has not improved the situation in terms of value generation.
Unfortunately, many managers do not see things this way and are more interested in
improving their own status within the organization even if it is not the best use of the
organization’s resources. In order to control this situation companies organizations
require that creation of any new management position must be approved by the CEO and
that information that the CEO can use to make a decision must be provided by senior
level managers who are in the best position to objectively evaluate the need for additional
managers and hierarchical levels at lower levels of the organizational structure. Another
strategy is for the organization to consciously embrace and follow a principle of
“minimum chain of command” which requires that the number of hierarchical levels be
limited to what is absolutely necessary for the organization achieve its goals and survive
within its specific environment. This means that organizations should have a bias toward
flattening their structure and should create incentives for senior managers to follow suit
by using evaluation systems that reward those who are able to effectively monitor and
control activities without creating excessive numbers of lower-level management
positions.10 If possible, changes in the organizational culture should be encouraged so
that managers are recognized and celebrated for the performance, rather than the size, of
their reporting group.
Senior management must also consciously monitor the effectiveness of the organizational
structure at all times and be prepared to manage and, if necessary, flatten the hierarchy as
necessary in light of changes in the organization’s environment. Not surprisingly, midlevel managers are especially at risk in times of financial trouble and organizations often
eliminate hierarchical levels, and the managers associated with them, as one of the first
C.N. Parkinson, Parkinson’s Law (New York: Ballantine Books, 1964).
“Preparing the Organization Manual,” Studies in Personnel Policy, No. 157 (New York: National
Industrial Conference Board, 1957), 28.
9
10
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steps to cut costs and improve the profitability of the business conducted by the
organization. It is also common to combine two or more managerial positions into one as
a means for improving coordination of activities among the employees who previously
reported to the eliminated position. Elimination of entire levels in the hierarchy is also a
good way to improve communications and improve the speed of decision making within
the organization. For example, organizations may seek to become more responsive to
customer requirements by reducing the number of hierarchical levels between field
salespeople and senior management. When this is done the salespeople can provide
customers with quick answers on pricing and credit issues and get new information about
customer requirements to the organization’s product development team much more
quickly. The anticipated result is higher sales, more loyal customers, better morale
within the sales group, and a stronger stream of new and/or improved products
specifically suited to the actual requirements of customers. There are, of course,
situations where a tall structure may be inevitable in light of the operational activities of
the organization. For example, organizations engaged in hazardous activities, such as
operation of nuclear power plants, must have a structure that closely monitors and
controls the activities of employees given the substantial risks associated with making a
mistake. In that case, rules and standard operating procedures, and the organizational
infrastructure to make sure that they are followed, are essential to the viability of the
organization and are often required by external factors such as regulation.
§3:8
--Span of control
Another important issue is creating an appropriate and efficient organizational structure is
setting the managers’ span of control, which is determined by the number of employees
that managers are expected to oversee and control through direct reporting relationships.
Organizations with the same number of non-managerial employees are likely to have
different spans of control and, of course, there will be variations in the spans of control
for managers within a single organization. For example, one organization with ten nonmanagerial employees may have a CEO and five managers and each manager may have
two employees reporting to him or her. In that case the span of control for each manager
is two. On the other hand, another organization that also has ten non-managerial
employees may have a CEO and just two managers and one manager may supervise three
employees while the other manager has seven direct reports. Each of these organizations
has the same number of hierarchical levels, which means that their organizational
hierarchies are the same height, yet the roles and responsibilities of the managers as
evidenced by their spans of control are very different.
In general, the most critical limitation on the span of control of a particular manager is his
or her ability to effectively supervise the activities of the subordinates that report to the
manager. A manager must not only manage his or her direct relationship with each
subordinate but also must be involved in the relationships between each of his or her
subordinates. The challenges become more difficult as the number of subordinates
increases since the number of relationships accelerates more rapidly than the headcount
in the reporting group. For example, if manager MA has two subordinates—B and C—
MA must manage three relationships: MA and B; MA and C; and B and C. However,
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add just one more subordinate—D—and the manager suddenly becomes responsible for
six relationships: MA and B; MA and C; MA and D; B and C; B and D; and C and D. If
the number of persons involved—the manager and the number of subordinates—equals
“n”, the number of relationships that are created and must be managed can be calculated
by using the formula (n(n-1))/2. Accordingly, a manager with 10 direct reports must
keep track of 55 (11(11-1)/2) relationships on a daily basis.
In the past, when organizations tended to gravitate toward tall hierarchical structures as
they grew, it was typical to find that the average span of control for a manager was no
more than 1:10—on average each manager has ten employees reporting directly to him or
her—and often less. As noted above, this meant that the average manager was involved
in managing 55 relationships on a daily basis. However, beginning with the movement
toward flatter organizations in the 1980s the average span of control increased
dramatically and moved closer to 1:100 as growing organizations sought to reduce the
need to add more managers and hierarchical levels as their businesses expanded. While a
flat organization is associated with efficiency and empowerment for increasing numbers
of managers and employees another strong driving force for larger spans of control was
cost reduction through the elimination of middle management positions. The movement
toward expanded spans of control was also made possible by advances in information
technology, including computing capabilities, that made it easier and cheaper for one
person to perform the main tasks of a middle manager--collecting information about the
activities of his or her subordinates, compiling the information, reporting the results to
senior management, and disseminating new directions from the top back out to the
subordinates. New software applications also facilitated collaboration between the
members of a business unit or sub-unit.
While the reasons for expanding spans of control to reduce the height of the
organizational structure are understandable, there are serious problems that can arise.
The most obvious and important is that a manager can quickly become overwhelmed by
the number of relationships that he or she must control and any failure to control can have
dire consequences for the effectiveness and morale of the group—subordinates, thinking
that the manager is not paying attention, may stop performing their duties or simply “free
ride” on the work of others; subordinates may begin pursuing their own goals and
objectives and ignoring the needs of the group; and/or subordinates may withhold support
and information from others in the group. The overall effect can be a devastating blow to
the morale and performance within the group. As such, expanded spans of control should
be pursued judiciously with careful attention to several key variables that should be taken
into account when determining the size and limits of the span of control of particular
managers.11
A key factor in evaluating whether the particular span of control is appropriate and
efficient is the complexity and similarity of the tasks to be performed by the employees
reporting to a single manager. In general, when employees are engaged in activities that
involve tasks that are complex and dissimilar the challenges for the manager with respect
D.D. Van Fleet, “Span of Management Research and Issues,” Academy of Management Journal, 4
(1983), 546-552.
11
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to control and oversight are greater and a smaller span of control is dictated. On the other
hand, when the tasks are relatively simple and similar, as is often the case in a production
setting, the span of control can be widened. For example, it is common to find managers
in manufacturing facilities supervising the activities of 30 to 40 workers on an assembly
line because the tasks involved are standardized, repetitive and objectively measurable.
On the other hand, management of a research and development group usually requires a
tighter span of control because there is no standard pattern of work and the manager must
ensure that the scientists and engineers to do not drift too far away from the general goals
and objectives of the group. The relationship between span of control and complexity is
even relevant at the very top of the organizational hierarchy and it is common
recommended that a CEO should limit his or her direct reports to no more than six to
eight senior executives given the complexity of the job responsibilities of each of those
executives in overseeing large and diverse operations and activities.
Any factor to consider when determining the maximum span of control that a manager
can effectively handle is the degree of interrelatedness between the tasks performed by
the employees within a specific reporting group. If the tasks performed by the employees
are not closely related the manager can afford to invest less time in monitoring the
relationships between employees and thus can handle a bigger group (i.e., expand his or
her span of control). In turn, a higher level of interrelatedness of tasks means more time
will need to be spent focusing on communications between employees, including
mediating disagreements, and on reviewing whether the results of collaboration to ensure
that they are consistent with group goals and that each employee has made an appropriate
contribution. In this situation a smaller span of control is necessary in order for the
manager to perform his or her duties. All this can be illustrated by returning to the
example above of a manager, MA, with three subordinates—B, C and D. If the tasks of
the subordinates are closely related MA would expect to invest time in overseeing six
relationships: MA and B; MA and C; MA and D; B and C; B and D; and C and D.
However, if the tasks of the subordinates are not closely related MA may be freed from
worrying too much about relationships between the subordinates (i.e., B and C, B and D,
and C and D) and would thus have just three primary relationships to consider. In
principle, the span of control of MA could be expanded to six subordinates by adding
three new subordinates with similarly un-interrelated without creating any more of an
overload than would have existed had MA been supervising three subordinates with
closely related tasks.
Complexity and interrelatedness are such important and widely-applicable determinants
of span of control that they tend to explain why the typical representation of the structural
hierarchy of an organization takes the form of a pyramid. At the highest levels of the
hierarchy the senior managers are engaged in highly complex activities overseeing
essential functional and market-based activities that must be coordinated with activities
of other senior managers at the same level. Accordingly, the “superiors” of these
managers, including the CEO, must have limited spans of control in order to under the all
that is going on in the areas overseen by their direct reports and effectively control and
coordinate their activities. This explains the “top of the pyramid” and the narrow spans
of control in the top two or three hierarchical levels. On the other hand, the lowest levels
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of the organizational hierarchy will house those jobs with tasks that are relatively simple
and un-interrelated and thus suited to oversight by lower-level managers with larger
spans of control illustrated by the wide base of the pyramid.
While complexity and the interrelatedness of the tasks to be performed by the
subordinates appear to be the most important and relevant determinants of the appropriate
span of control, other factors should be considered including the overall structure of the
organization; the technology available within the organization to support communications
and the flow of information; the managerial skills of the particular person being placed in
the oversight role; and the abilities, intelligence, motives and morale of the employees
reporting to the particular manager.12 Another important factor is the incentives created
by the organization for accepting the decision to eliminate levels in the managerial
hierarchy and expand the responsibilities of the remaining managers. Organizations
should create reward systems for the managers and their subordinates that encourage all
parties to avoid the potential relationship issues described above. For example, all
members of the group, the manager and each of the subordinates, should have a
significant portion of their compensation based on group performance factors to
encourage communication and cooperation. In addition, managers should be evaluated
on their ability to develop the skills of their subordinates so that they can become more
autonomous with respect to their particular tasks and thus require less monitoring and
control from the manager. Managers should also be provided with technological tools to
easily monitor the performance of their subordinates when it is not possible to interact
with them face-to-face.
§3:9
--Mechanistic and organic organizational structures
Obviously each of the challenges confronting organizational designers regarding
organizational structure, while discussed separately, must be addressed simultaneously
and involve issues, problems and conflicts that are often overlapping. The structure
adopted by a particular organization is a combination of the choices made by senior
management in addressing each of these challenges. The end result is an organizational
structure that falls somewhere on a continuum between purely mechanistic organizational
structures and purely organic organizational structures. A mechanistic organizational
structure is used as a means for maximizing the likelihood that employees will behave in
predictable and accountable ways when discharging the duties associated with their
organizational roles. On the other hand, an organic organizational structure will be
actively cultivated to encourage employees to be flexible and adapt quickly to changing
environmental conditions and opportunities to be creative and innovative. While the
foundation of the mechanistic structure was clearly defined job responsibilities, formal
rules and procedures and strict lines of control and authority, the organic model is
substantially less formal and seeks to decentralize authority and broaden the scope of the
job responsibilities of all employees so that they can determine on their own, without
excessive interference from managers well above them in the organizational hierarchy,
what is necessary in order to achieve the specific goals that have been set for them.
12
http://en.wikipedia.org/wiki/Span_of_control (11.01.07).
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In general, it can be expected that a mechanistic organizational structure will emerge
from make the following choices with respect to the key issues discussed above:





High degree of specialization in the tasks and activities assigned to employees;
Reliance on a well-defined hierarchy of authority as the principle means for
integrating and coordinating the activities of employees;
Centralized decision-making structure with most of the power and authority over use
of organization resources vested in managers at the higher levels of the hierarchy;
Most of the communications and information within the organizational structure
flows vertically up and down the hierarchy of authority; and
High degree of standardization including extensive use of formal written rules,
standard operating procedures, predicable work processes and written
communications.
Several striking attributes of a mechanistic organizational structure are worth
emphasizing. First, the organization itself is essentially a network of organizational roles,
each of which is defined by a specific task or group of tasks, and persons in each role are
expected to limit their activities exclusively to the assigned tasks. Also, informal status
within the organization is closely related to the number of organizational roles that a
manager has been asked to oversee and this often results in managers resisting change in
order to preserve their personal “empires” within the organization, an issue discussed
above with respect to tall versus flat organizational structures. In general, opportunities
for promotion and moving up the hierarchy in a mechanistic organizational structure are
based on performance and seniority and career paths are generally well defined. Because
a mechanistic organizational structure is relatively rigid and difficult to change quickly it
is generally thought that it is best suited for a competitive environment that is stable and
which does not change quickly or frequently.
At the other end of the continuum is the organic organizational structure that can be
expected to emerge from making the following choices with respect to the key issues
discussed above:





Rather than specializing in one single task or group of tasks, two or more employees
with specialized skills will work together to coordinate completion of a set of
necessary tasks;
Use of wide range of integrating mechanisms particularly complex solutions such as
tasks forces and teams;
Decentralized decision-making structure in which authority to make decisions and
control the use of organizational resources is delegated to lower levels of the
hierarchy of authority;
Most of the communications and information within the structure flows laterally from
side-to-side in order to facilitate coordination; and
Coordination is based largely on mutual adjustment and face-to-face contact as
opposed to relying on the traditional standardization mechanisms such as formal rules
and standard operating procedures.
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The organic structural model emphasizes that decisions should be made, and goals should
be set, at all levels within the organization and that information should flow freely across
departmental boundaries to ensure that employees have the knowledge and understanding
to make appropriate decisions and efficiently carry out their duties. In order to
implement the organic model organizations have begun to rely more heavily on the
creation of self-directed cross-function work teams that are responsible for setting team
goals, deciding the best way to achieve those goals, and monitoring the performance of
the team and each of its members. For example, a manufacturer may form production
teams that will be responsible for identifying and solving all of the issues associated with
the manufacture of a particular product or component. One of the most important
potential benefits of the organic model is that employees feel more empowered, perform
better, and report higher levels of motivation and job satisfaction.
Organic organizational structures are much more fluid than mechanistic organizational
structures and are particularly useful and appropriate when the work process is relatively
unpredictable. Rather than working in relative isolation on routine tasks day after day
without deviation, employees can expect to be part of a formal or informal network of
related organizational roles within which decisions are continuously made about how best
to divide certain tasks and activities. As a result, while employees may be primarily
responsible for certain tasks and activities they are also likely to have opportunities to
learn new skills and develop new talents that allow them to take on different
organizational responsibilities. Another byproduct of an organic structure is that it is
more difficult for any manager to build an empire and it is more common and likely to
see that informal status within an organic structure will be based on talent, expertise and
the ability to successfully adapt to environmental changes and come up with new ideas.
Organic organizational structures are more likely to assign status to creative leaders at all
levels of the hierarchy as opposed to limiting status to those with fancy titles at the
highest levels. The organic structure is thought to be most appropriate for organizations
competing in rapidly changing and uncertain environments and for solving problems and
issues that lend themselves to creative and novel solutions and cross-departmental
collaboration—new product development, enhanced product quality or improved
customer service.
While it is useful to recognize and contrast the characteristics of mechanistic and organic
structures the reality is that most organizations will need to use elements of both
structural paradigms as they respond to environmental challenges. For example, simple,
straightforward vertical reporting relationships coupled with standardized rules and
procedures (i.e., a predominantly mechanistic structure) generally make sense in certain
functional departments such as accounting; however, decentralization, high integration
and mutual adjustment (i.e., a predominantly organic structure) are considered to be
essential for other functional departments—marketing and new product development—
where creativity and innovation are needed. Problems may arise due to what amount to
cultural clashes between personnel working within mechanistic and organic departments
since they tend to see the world and the way people should act in very different ways.
For example, salespersons eager to extend additional credit to a customer to close new
sales always chafe at what they perceive as being unnecessarily delays by staffers in the
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credit department who are used to proceeding more deliberatively as they collect and
evaluate financial information on the customer before making their decision regarding the
size of the credit line.
The external environment in which the organization operates is also an important factor
in choosing between organic and mechanistic organizational structure. Research
conducted by Burns and Stalker lends support to the belief that an organic structure is the
preferred choice when an organization is confronted with an unstable and constantly
changing external environment and that the mechanistic structure is the most effective
solution when the external environment is relatively stable. Organic structures work well
in an unstable environment because they empower lower level employees to make
decisions that must be made quickly in order to address the large number of problems and
opportunities that suddenly arise when technology and markets are rapidly changing.
Moreover, organic structures are most effective in facilitating communication and
information sharing between departments—factors that are crucial in reducing the time
required to develop new products and responding to the needs of customers. In contrast,
the mechanistic structure is appropriate for organizations operating in a relatively stable
environment because they can expect that most decisions about the use of the resources
of the organization will be routine and thus can be efficiently managed through
standardization and a hierarchy of authority in which top management retains authority
and control over most aspects of the business of the organization.13
§3:10 Informal organizational structures
While it is important, and recommended, that some form of organizational chart be
developed to outline the formal reporting and consultative relationships between various
department and divisions, it must also be recognized that all organizations have their own
informal network of relationships that can be just as important in getting projects
completed, generating new ideas and improving and maintaining overall employee
morale. Almost every organization can make its own contribution to the large body of
anecdotal evidence regarding the existence and influence of the informal organization—
middle managers that have been around so long that they are far more effective in getting
proposals through and accessing necessary resources than new hires who may be higher
on the formal organization chart, bottlenecks in communication between two key
departments because of personal conflicts between the department heads and the
continuous exchange of information between departments that occurs at the side of the
building where smokers congregate. Informal organizations are not a complete substitute
for the fundamental principles underlying the organization chart—task description,
supervision and authority; however, informal organizations do provide clues to who
within the organizations are looked to as leaders and senior managers should know and
understand some of the tools that are available for gathering knowledge about the
informal organization and be prepared to look for ways to use what is known about the
informal organization to improve performance and pave the way for more efficient and
less painful changes in the formal organizational structure as they are needed.
13
See T. Burns and G.M. Stalker, The Management of Innovation (Oxford University Press, 1961).
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A common tool that organizations use for identifying the boundaries of their informal
organizational structure is “social network analysis” (“SNA”), which is sometimes
promoted by management consultants as “organizational network analysis.” While there
are multiple definitions of a “social network,” the consensus seems to be that a network
consists of “nodes,” which can be individuals, formal or informal groups or other
organizations, that are have developed interdependencies, referred to as “ties,” with one
another within the defined network based on certain relationships—friendship, conflicts,
values and ideas, or business transactions. SNA is the art and science of attempt to map
and measure the relationships within a network and identify how information and
knowledge flows back and forth between the nodes using the ties that are identified
during the course of the analysis. A significant amount of research has been conducted in
this area and social networks have been identified on a number of levels—from families
to groups of nations—and the general conclusion in the business area has been that these
networks can and do play a crucial role in how business organizations operate and
address opportunities and threats and how the employees conduct their day-to-day
activities and develop perceptions about how the organization is managed.
In order to understand how a social network operates, analysts perform certain tests to
determine the “location” of each node, measured by its level of “centrality,” and its
relationships to other parts of the network. Social network analysts produce maps of the
network that show how all the nodes are tied together (“connected”) and identify who is
in the core of the network, who is on the periphery of the network, groupings of nodes
and their members, and the roles that certain nodes play in the operation of the network
(e.g., leaders, connectors, etc.). The first step in creating the map is to chart the
connections between nodes, which exist whenever two nodes regularly communicate or
interact in some meaningful way. This information is then used to generate various
measures, or metrics, that track the centrality of each node and the strength and
importance of the connections between the various nodes. The most commonly cited
measures of the individual centrality of a node are as follows:



The level of “degree centrality” refers to the number of direct connections associated
with a node. Nodes with the most connections are referred to as a “connector” or
“hub” in a network; however, the number of connections is just one part of the story
and role and importance of the node in the network is also heavily influenced by
which nodes are at the other end of these connections and how those nodes are
connected to other parts of the network.
The level of “betweenness centrality” focuses on connections with different groups
within the network. A node may have a relatively low level of degree centrality due
to a small number of direct connections; however, if the node is the sole link between
two important groups that are not otherwise directly connection with one another it
can play a powerful role as a “broker” of relations between the groups and a conduit
of information and knowledge between different parts of the network that otherwise
would not communicate.
The level of “closeness centrality” measures the relative distance of a node from all
other parts of the network based on the node’s direct and indirect connections. Nodes
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with high closeness centrality are best positioned to monitor information from all
parts of the network through their “grapevine”.
After the data regarding the network is collected and categorized, social network analysts
can determine the relative importance of each node in a network by aggregating those
measures taken of the node with respect to the number and strength of connections, the
degree to which the node connects groups that are not otherwise linked to one another,
and the amount and quality of information that actually flows through the node to other
parts of the network. In addition, SNA facilitates the development of various conclusions
regarding the characteristics of the network as a whole and various clusters of nodes
within the network. For example, networks can be characterized as centralized or
decentralized depending on the degree to which key links are associated with a relatively
few number of nodes (i.e., hubs that have high levels of both degree and betweenness
centrality). In addition, the relative cohesiveness of groups of connected nodes can be
determined and nodes that are closely linked to one another at the expense of less direct
ties to other nodes can be classified as “cliques.” Group cohesiveness is also important in
determining the effect that removing members would have on the connectivity within the
group. For example, removing one key node may cause communication among the other
members to collapse completely due to the unique role that the node played in ensuring
that information flowed to each member.
The results of SNA should be evaluated closely to ensure that the correct conclusions are
drawn from the particular measures and to determine cautionary measures that could be
taken to preserve the value and efficiency of the network. For example, a node may have
a high level of degree centrality (i.e., a large number of direct connections); however, the
influence of the person occupying that node may be relatively limited if the connections
are limited only to other nodes close by in his or her immediate cluster. Also, the
importance of what appears to be a connector or hub really depends on how much
information does in fact flow through that node. Another important feature of SNA is the
way in which it can identify nodes that have drifted away from the central network. SNA
usually identifies one or more nodes, or clusters of nodes, with relatively low centrality
scores meaning that they are no more than peripheral members of the particular network.
There may be a number of reasons for this such as personality factors, the nature of the
activities performed by the persons occupying those nodes and problems with the flow of
information within the network. However, peripheral nodes can be very valuable for the
network either by virtue of the skills they represent or the connections that they
themselves have to resources and information from outside of the network and it is
therefore important for the organization to find a way to create higher levels of
connectivity with these peripheral nodes. As for nodes that serve as brokers (i.e., a high
level of betweenness centrality), care must be taken to anticipate the consequences of a
break down in the flow of information through that node because the occupant leaves the
company or becomes disenchanted with management policies to the point where he or
she abandons the role of connector. Finally, a very centralized network with a handful of
hubs can be quite dynamic; however, there are clearly risks associated with the possibility
that one central node will suddenly become disabled and bring the entire network to a
complete standstill. Put another way, it does not take much for a “connector” to turn into
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a “bottleneck,” either because the person in the node is simply overworked and unable to
push information or along or simply decides that it is in his or her interest to hoard
information and dispense it selectively even though it slows down initiatives that the
organization is anxious to pursue.
Organizations can use SNA to tap into underutilized human resources that have
accumulated social capital and influence within the informal organizational structure
even though they do not have lofty titles and formal spheres of influence on the
company’s formal organizational chart. For example, an organization that has been
having trouble changing its culture to embrace more entrepreneurial and innovative
values may supplement formal training with a search for low- and mid-level managers
who have demonstrated the traits and talents the organization is most anxious to instill
throughout its workforce—passion, commitment, tolerance for calculated risk-taking,
competitiveness, solution orientation, and an ability to inspire colleagues and build trust.
Experts in SNA might work with the human resources department to develop surveys,
canvass existing information such as performance reviews, and interview executives and
other senior managers to identify a small group of managers at lower levels of the formal
organizational hierarchy that appear to have the desired traits and talents and who are
already serving important roles in facilitating the flow of information and brokering
internal transactions between groups in order to get projects completed. The members of
that group would go through extensive interviews and asked to provide the names of
other employees that they believe share most or all of the characteristics that the
organization is seeking. The immediate result of this process should be identification of a
core group of talented managers and other employees who had earned the respect of their
peers and are well positioned, through their connections within the organization’s social
network, to exert tremendous influence over their colleagues to drive them to take the
organization in a different direction provided the group can be convinced to buy into new
goals and objectives established by senior management.
The first step for mobilizing the leaders of the informal organizational network should be
a focused meeting with the CEO and other members of the senior management group to
discuss possible organizational goals and objectives and the strategies that might be used
to achieve them. The CEO should not dictate and instead should be prepared to listen
very carefully to the feedback that is provided by everyone in attendance. Proper respect
should be shown for the social capital that has been accumulated by the key persons
within the informal organizational network and the CEO must realize that they cannot be
expected to fritter away that capital on ideas and directions that are not consistent with
their own values and interests. The CEO and other senior managers should also be
prepared to abandon micro-management of strategy and tactics and avoid constraining
the informal network by changing the formal organizational structure in a way that will
lead to conflicts as new projects are launched. Once these leaders of the informal
organizational network understand what is being asked for by the CEO and the other
senior managers they should be empowered to organize on their own and provided with
the resources that are reasonably necessary to influence and educate other employees.
For example, they may hold meetings and conferences to share information and discuss
particular topics and brainstorm about new ways to do certain operational activities. In
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addition, plans should be made for monitoring the impact of supporting the leaders of the
informal organizational network, such as by conducting surveys of employee and
customer satisfaction. Finally, an effort should be made to continue identifying
additional candidates for leadership in the informal network. Ironically, if the process is
successful the informal organizational network will itself become more institutionalized
and companies may set aside resources, such as administrative staff, to support its
activities. However, organizations need to be careful about the size and formality of their
encouraged social network activities since research confirms that networks that grow too
large lose their effectiveness.
§3:11 Changes to the organizational structure
While the organizational structure must necessary be somewhat formal, it is impossible
and impractical to think any particular structure as permanent. Change is a constant with
respect to organization structure and will inevitably be required as the organization grows
and improvements are needed in the manner in which the day-to-day activities of the
organization are executed and controlled. In fact, a number of events can trigger the need
to evaluate the efficiency and adequacy of the current organizational structure. For
example, changes may occur in the external environment including advances in
technology, strategic changes by competitors, new regulations or deregulation in areas
important to the products and services of the organization, and shifts in consumer
preferences. Internal changes include turnover in key personnel, political skirmishes
among departments and strategic changes such as entering into new markets or launching
new products.14 All of these changes, both external and internal, create challenges for
managers in controlling organizational activities that need to be addressed by shifting the
building blocks of the organizational structure.
Regardless of the reason for an organizational change, several questions should be raised
and answered before embarking on the arduous change process. First, will the change
add significantly to the strength of the business and improve operations in a way that is
readily apparent to all interested parties? Careful consideration should be given to
weighing the advantages of making the change (i.e., the benefits to be obtained from
modifying the control mechanism) against the costs and disruption of the change
including the challenges of new reporting mechanisms and more complexity and the
expense of transferring and acquiring new resources. Second, is the change directed at a
source of a performance gap or merely on a symptom? For example, structural change is
appropriate when there is a need to reconfigure groups in order to foster more efficient
communication and coordination; however, if the real problem is ill feelings between
groups of employees then structural change alone will not resolve the issue. Third, how
will the proposed changes be interpreted by the affected parties (i.e., managers and
employees), particularly those that are not part of the management team that has decided
to implement the changes? Unless the reasons for the changes are clearly communicated,
mid-level managers and line employees may view the changes as punitive or as changes
in values that are not intended by senior management. Therefore it is important for senior
Sally J. Power, “Organizational Structure,” in Carl Heyel and Belden Menkus, Handbook of
Management for the Growing Business, Van Nostrand Reinhold Company, New York (1986), 406.
14
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management to consider in advance how the changes will be perceived from different
vantages points within the organization and this requires insight into how the informal
structures of the organization work. Finally, is the change consistent with the values of
the company and its reward systems? In particular, there must be ways for managers and
employees to demonstrate that they are implementing the changes and incentives must be
established to recognize those that support the implementation.15
Change is necessary, and appropriate, in order to efficiently and successfully pursue a
chosen organizational strategy, but changes in structure alone will not be sufficient and
attention must also be paid to other key organizational design elements including
organizational culture, compensation and rewards, human resources management,
technology and business processes.16 Senior executives should carefully plan any
organizational redesign process to ensure that the resulting structure meets the needs of
the organization and demonstrably improves the manner in which it interacts with its
customers, markets, suppliers and other business partners (see Table 3.1). Organizational
leaders need to collect information about the requirements of customers and other
business partners and disseminate that information throughout the organization so that
each business unit is best positioned to cooperate and deliver the organization’s products
and services to the marketplace in the most efficient manner. Several possible structures
should be selected and vetted to be sure that information will flow smoothly through the
organization and that responsibility for decisions will be vested in those organization
roles that have the best access to the necessary information. Decisions regarding changes
in organizational structure should also be supported by clear policies regarding lateral
processes and rewards.
Table 3.1
Organizational Redesign Checklist


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How do each of the units and roles in the current organizational structure contribute to the way in
which the organization interacts with its customers, markets, suppliers and other business partners?
What role does each functional department play in creating and delivering the organization’s products
and services?
How is the information gathered from customers, suppliers and other business partners of the
organization?
How is the information gathered from customers, suppliers and other business partners of the
organization disseminated throughout the organization?
Who is responsible for making and executing key decisions relating to the organization’s strategy with
respect to development and marketing of its products and services?
What are the advantages (i.e., strengths) associated with the current organizational structure?
What are the disadvantages (i.e., weaknesses) associated with the current organizational structure?
What specific weakness are apparent with respect to collection, dissemination and use of information
(e.g., are key parties denied access to information necessary to make decisions or are their weaknesses
in the way in which information is stored)?
What performance metrics are being used when evaluating the organizational structure and are they
accurate and appropriate?
S. Power, “Organizational Structure,” in Carl Heyel and Belden Menkus, Handbook of Management for
the Growing Business (New York: Van Nostrand Reinhold Company, 1986), 406-407.
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For further discussion, see the Part on “Organizational Design” in this Guide.
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Growth-Oriented Entrepreneur’s Guide to Organizational Design (2015-1)
Part III – Organizational Structure
Does the performance goals established for the entire organization fairly take into account the
contributions required of each organizational unit?
What specific changes should be made in the organizational structure to improve the way in which the
organization interacts with its customers and markets?
How would the proposed changes impact current organizational roles?
What changes in business processes (including information technology) would be needed in order for
the proposed changes in the organizational structure to be effective?
Does the proposed change provide for orderly collection and dissemination of information regarding
customers, suppliers and other business partners of the organization?
What effect would the proposed changes have on the people within the organization?
What should be the composition of the team that would be responsible for planning and executing the
proposed changes in the organizational structure?
Who are the key managers and employees in the current structure and what organizational roles would
be set aside for them in the proposed new structure?
What other constituencies within the current organizational structure need to be consulted in
connection with changes in the organizational structure?
What would the ideal form of the new organizational structure look like including business units,
organizational roles, processes and key managers?
How would the organizational fill all of the key managerial roles included in the new organizational
structure?
What new resources (i.e., capital, equipment, technology, people, skills or systems) would be needed
in order to effectively implement the new organizational structure?
What factors in the organization’s external environment (i.e., economic/technological; political/legal
and social/cultural) might need to be overcome or changed in order to implement the proposed change
in the organizational structure?
What steps should be taken to prepare employees for the implementation of the proposed change in the
organizational structure?
What changes might be required in the reward and compensation systems in order for the proposed
change in the organizational structure to be effective and for the organization to achieve its postchange performance goals?
What is the timeline for the proposed change and what will be the preferred sequence of steps to
implement the change?
Who will be responsible for overseeing specific activities necessary to implement the changes in the
organizational structure (e.g., sponsors, project managers, oversight committees, cross-functional
teams etc.)?
What procedures will be established for monitoring the implementation process (e.g., monitoring
meetings involving persons in oversight roles and senior management)?
§3:12 Emerging trends
In general, the organizational structures that have long been used by larger organizations
have typically emphasized the vertical dimension—control and authority and reporting
relationships up and down the organizational “chain of command”. As a result, most
organizations drifted toward a tall organizational structure in which there were multiple
layers of management and the process for making decisions was based on
communications that needed to go up to the top of the hierarchy and then back down to
the point where the issue had arisen. This often caused delays and led to decisions being
made by persons far removed from those who have the most information about, and the
largest vested interest in, the specific issue or activity that is the subject matter of the
decision. Lately, however, there has been a growing recognition of the importance of
horizontal relationships and communications and the need for people from multiple
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Part III – Organizational Structure
functional departments to work together to solve larger problems. It is not surprising
then that new ideas about organizational structure have tended to deemphasize the
vertical hierarchy and look to build horizontal links through creation of cross-functional
teams. At the same time there has been a growing push to reduce the number of vertical
management layers, or flatten the organizational structure, not only to improve
communications but also a way to reduce costs.
Organizational design, and the way in which employees interact with one another and
with external stakeholders, is also being profoundly impacted by advances in information
technology that increase the speed of communications and the exchange of information
needed for decisions to be made and jobs to be performed. For example, organizations
have launched intranets to consolidate and disseminate information to employees. New
“virtual organizations” have sprung up based on interactions between members that are
largely or exclusively electronic (i.e., via e-mail, teleconferencing and
videoconferencing). Similarly, organizations are using electronic tools to provide service
and support to their customers, design new products and complete transactions with
suppliers, distributors and other key business partners. All of these advances, while
sometimes controversial, have contributed to the flattening of organizational structures
and the weakening or elimination of artificial boundaries between work groups that have
been a fundamental characteristic of traditional organizational structures.
There is really nothing new about the recent calls for, and predictions of, the
disintegration of organizational hierarchies and the embracement of flat and flexible
organizations that adapt to employees, rather than the other way around, in order to reap
the benefits of creativity and individualism. In fact, management gurus from past
decades have written the obituary for the “organizational man” and forecast that
companies would eventually see and discard the emotional damage caused by adhering to
impersonal “assembly line” managerial philosophies. The reality, however, has been
somewhat different and a hierarchy of some sort has remained a staple of the
organizational structure for most companies and it is likely that this will continue into the
future for several reasons. First of all, even though more respect is being given to
flexibility and individualism it nonetheless remains true that employees are expected to
follow the directions issued by their supervisors and participate in activities that are
consistent with the goals and objectives established by senior management. In addition,
while the hierarchical organization often has hard edges it has nonetheless proven to be
extremely effective in achieving benefits of efficiency and productivity that would likely
be impossible to replicate if employees were left to “do their own thing” and define their
own roles. It is also true that managers tend to be most comfortable with the commandand-control model that has traditionally been taught and are uneasy about how the
concept of “empowerment” will work in practice. For their part, while employees enjoy
having more freedom they often become anxious when told they must also assume more
accountability for their results.
The real challenges and opportunities for organizational designers and senior
management is not eliminating hierarchies but in seeking ways for them to integrate the
people-oriented approach to managing an organization. One thing to realize and
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appreciate is that the traditional hierarchical structure has led to the creation of tools and
technologies, particularly in the information processing and communications areas, that
have eliminated many of the tedious activities that employees have had to ensure in the
past and thus have freed those employees to indulge in more creative pursuits. In
addition, globalization has allowed organizations to outsource some of the more routine
and boring tasks for workers in foreign countries, which also means that employees in the
US should have more time for more sophisticated projects. Organizations can
acknowledge, encourage and reward individual initiative provided that employees,
particularly knowledge workers, focus their innovative energies on breakthroughs that
complement and enhance the organization’s existing core competencies.
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