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Principles of Management Unit 6: Organizational Structure and Design

Organizing means arranging jobs, people and authority so work gets done. This unit covers the six elements of structure, mechanistic and organic designs, the factors that determine which design fits, and common traditional and modern structures.

Covers: Work specialization and departmentalization, Chain of command, authority and unity of command, Span of control and tall versus flat structures, Centralization, decentralization and formalization, Mechanistic and organic organizations, Contingency factors: strategy, size, technology, environment, Traditional and contemporary designs: functional, divisional, matrix, team, network

Study guide

Organizational structure is the formal arrangement of jobs within an organization, and organizational design is the process of creating or changing it. Six elements define a structure. Work specialization divides work into separate tasks done by different people, raising efficiency up to the point where boredom and fatigue set in. Departmentalization groups jobs together: by function (marketing, finance), product (each product line), geography (regions), process (steps in production) or customer (types of buyers). Chain of command is the line of authority from the top to the bottom, built on authority (the right to give orders), responsibility (the obligation to perform) and unity of command (each person reports to one manager).

Span of control is the number of employees a manager can efficiently supervise. Narrow spans give close control but create tall structures with many levels, slow communication and high management costs. Wide spans create flat structures with fewer managers and faster decisions, and they work best when employees are trained, tasks are similar, and procedures are standardized. You can count the cost directly: with 4,096 workers and a span of 8, a company needs 512 + 64 + 8 + 1 = 585 managers across four levels; with a span of 4 it needs 1,365 managers across six levels.

Centralization is the degree to which decisions are made at the top; decentralization pushes decisions down to lower-level managers or employees, which speeds responses and fits large, geographically spread or fast-changing organizations. Employee empowerment gives workers more decision-making authority. Formalization is how standardized jobs are and how much rules and procedures guide behavior. Managers also distinguish line authority (the right to direct the work of subordinates in the chain of command) from staff authority (advising and supporting line managers, as in legal or HR departments).

Burns and Stalker contrasted two forms. A mechanistic organization is rigid and tightly controlled: high specialization, rigid departments, clear chain of command, narrow spans, centralization and high formalization. An organic organization is adaptive: cross-functional teams, free flow of information, wide spans, decentralization and low formalization. Contingency factors determine which fits. Alfred Chandler argued that structure follows strategy: innovation strategies need organic structures, while cost-minimization strategies fit mechanistic ones. Large organizations tend to be more mechanistic. Joan Woodward found that unit (custom) production and continuous-process production work best with organic structures, while mass production fits mechanistic structures. Stable environments suit mechanistic designs and dynamic ones suit organic designs.

Traditional designs include the simple structure (low departmentalization, wide spans, centralized in one owner), the functional structure (grouping similar specialties) and the divisional structure (semi-autonomous units, each with its own functions, organized by product or region). Contemporary designs include team structures (the whole organization built from work teams), matrix structures (specialists from functional departments assigned to projects, so employees have two bosses and unity of command is broken), project structures (employees move continuously from project to project), boundaryless organizations, virtual organizations (a small core that hires outside specialists as needed) and network organizations (outsourcing major functions to other firms). A learning organization continuously adapts by sharing knowledge.

Key ideas

• Six elements define structure: work specialization, departmentalization, chain of command, span of control, centralization and formalization.
• Narrow spans create tall structures with more managers; wide spans create flat structures with fewer managers.
• Decentralization moves decisions closer to the action and suits complex, changing environments.
• Mechanistic structures are rigid and efficient; organic structures are flexible and adaptive.
• Structure follows strategy: innovators need organic designs, cost minimizers fit mechanistic designs.
• Woodward linked mass production to mechanistic structures and unit and process production to organic ones.
• Matrix structures assign employees to both a functional manager and a project manager, breaking unity of command.

Formulas and rules

Common mistakes

• Thinking a wider span of control creates a taller organization; wider spans create flatter organizations.
• Confusing product departmentalization with a divisional structure; departmentalization groups jobs, while a divisional structure is an overall design made of semi-autonomous units.
• Saying the matrix structure preserves unity of command; matrix employees have two bosses.
• Mixing up line authority (directing subordinates) with staff authority (advising line managers).
• Assuming mass production fits organic structures; Woodward found it fits mechanistic structures.

Before the test, make sure you can

• Define and give examples of the six elements of organizational structure.
• Identify the type of departmentalization used in an example.
• Calculate the number of managers and levels for a given span of control.
• Explain the tradeoffs of centralization versus decentralization and line versus staff authority.
• Compare mechanistic and organic organizations.
• Apply the contingency factors of strategy, size, technology and environment to choose a structure.
• Describe simple, functional, divisional, matrix, team, project, virtual and network designs.

Words to know

Organizational structure

The formal arrangement of jobs within an organization.

Work specialization

Dividing work activities into separate job tasks done by different people.

Departmentalization

The basis by which jobs are grouped together, such as function, product, geography, process or customer.

Chain of command

The line of authority extending from upper levels to the lowest levels, clarifying who reports to whom.

Unity of command

The principle that each person should report to only one manager.

Span of control

The number of employees a manager can efficiently and effectively manage.

Centralization

The degree to which decision making takes place at upper levels of the organization.

Decentralization

The degree to which lower-level employees provide input or actually make decisions.

Formalization

How standardized an organization's jobs are and how much rules and procedures guide behavior.

Line authority

Authority that entitles a manager to direct the work of an employee.

Staff authority

Positions with authority to support, assist and advise those holding line authority.

Mechanistic organization

A rigid, tightly controlled structure with high specialization, centralization and formalization.

Organic organization

A highly adaptive and flexible structure with teams, decentralization and low formalization.

Divisional structure

A structure made up of separate, semi-autonomous units or divisions, each with its own functions.

Matrix structure

A structure that assigns specialists from functional departments to work on projects, giving them two bosses.

Virtual organization

A small core of full-time employees that hires outside specialists temporarily as needed.

Network organization

A structure that uses its own employees for some work and outside suppliers for other major functions.

Learning organization

An organization that has developed the capacity to continuously learn, adapt and change.

Sample practice questions

30 more questions like these, from level 1 to 5, are in the practice set.