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OverviewBackgroundBusiness CaseKey Elements of Organizational StructuresTypes of Organizational Structures
The Impact of Growth Stages on Organizational StructureMetricsCommunications and TechnologyGlobal IssuesLegal Issues
Organizational structure aligns and relates parts of an organization, so it can achieve its maximum performance. The structure chosen affects an organization"s success in carrying out its strategy and objectives. Leadership should understand the characteristics, benefits and limitations of various organizational structures to assist in this strategic alignment.
This article addresses the following topics related to organizational structure:The case for aligning organizational structure with the enterprise"s business strategy.Key elements of organizational structure.Types of organizational structures and the possible benefits and limitations of each.The impact of an organization"s stage of development on its structure.Communications, technology, metrics, global and legal issues.
Organizational structure is the method by which work flows through an organization. It allows groups to work together within their individual functions to manage tasks. Traditional organizational structures tend to be more formalized—with employees grouped by function (such as finance or operations), region or product line. Less traditional structures are more loosely woven and flexible, with the ability to respond quickly to changing business environments.
Organizational structures have evolved since the 1800s. In the Industrial Revolution, individuals were organized to add parts to the manufacture of the product moving down the assembly line. Frederick Taylor"s scientific management theory optimized the way tasks were performed, so workers performed only one task in the most efficient way. In the 20th century, General Motors pioneered a revolutionary organizational design in which each major division made its own cars.
Today, organizational structures are changing swiftly—from virtual organizations to other flexible structures. As companies continue to evolve and increase their global presence, future organizations may embody a fluid, free-forming organization, member ownership and an entrepreneurial approach among all members. See Inside Day 1: How Amazon Uses Agile Team Structures and Adaptive Practices to Innovate on Behalf of Customers.
A hallmark of a well-aligned organization is its ability to adapt and realign as needed. To ensure long-term viability, an organization must adjust its structure to fit new economic realities without diminishing core capabilities and competitive differentiation. Organizational realignment involves closing the structural gaps impeding organizational performance.
Problems created by a misaligned organizational structure
Rapid reorganization of business units, divisions or functions can lead to ineffective, misaligned organizational structures that do not support the business. Poorly conceived reorganizations may create significant problems, including the following:Structural gaps in roles, work processes, accountabilities and critical information flows can occur when companies eliminate middle management levels without eliminating the work, forcing employees to take on additional responsibilities.Diminished capacity, capability and agility issues can arise when a) lower-level employees who step in when middle management is eliminated are ill-equipped to perform the required duties and b) when higher-level executives must take on more tactical responsibilities, minimizing the value of their leadership skills.Disorganization and improper staffing can affect a company"s cost structure, cash flow and ability to deliver goods or services. Agile organizations can rapidly deploy people to address shifting business needs. With resources cut to the bone, however, most organizations" staff members can focus only on their immediate responsibilities, leaving little time, energy or desire to work outside their current job scope. Ultimately, diminished capacity and lagging response times affect an organization"s ability to remain competitive.Declining workforce engagement can reduce retention, decrease customer loyalty and limit organizational performance and stakeholder value.
The importance of aligning the structure with the business strategy
The key to profitable performance is the extent to which four business elements are aligned:
Leadership. The individuals responsible for developing and deploying the strategy and monitoring results.
Organization. The structure, processes and operations by which the strategy is deployed.
Jobs. The necessary roles and responsibilities.
People. The experience, skills and competencies needed to execute the strategy.
An understanding of the interdependencies of these business elements and the need for them to adapt to change quickly and strategically are essential for success in the high-performance organization. When these four elements are in sync, outstanding performance is more likely.
Achieving alignment and sustaining organizational capacity requires time and critical thinking. Organizations must identify outcomes the new structure or process is intended to produce. This typically requires recalibrating the following:Which work is mission-critical, can be scaled back or should be eliminated.Existing role requirements, while identifying necessary new or modified roles.Key metrics and accountabilities.Critical information flows.Decision-making authority by organization level.
See Meeting the Challenges of Developing Collaborative Teams for Future Success.
Key Elements of Organizational Structures
Five elements create an organizational structure: job design, departmentation, delegation, span of control and chain of command. These elements comprise an organizational chart and create the organizational structure itself. "Departmentation" refers to the way an organization structures its jobs to coordinate work. "Span of control" means the number of individuals who report to a manager. "Chain of command" refers to a line of authority.
The company"s strategy of managerial centralization or decentralization also influences organizational structures. "Centralization," the degree to which decision-making authority is restricted to higher levels of management, typically leads to a pyramid structure. Centralization is generally recommended when conflicting goals and strategies among operating units create a need for a uniform policy. "Decentralization," the degree to which lower levels of the hierarchy have decision-making authority, typically leads to a leaner, flatter organization. Decentralization is recommended when conflicting strategies, uncertainty or complexity require local adaptability and decision-making.
Types of Organizational Structures
Organizational structures have evolved from rigid, vertically integrated, hierarchical, autocratic structures to relatively boundary-less, empowered, networked organizations designed to respond quickly to customer needs with customized products and services.
Today, organizations are usually structured vertically, vertically and horizontally, or with open boundaries. Specific types of structures within each of these categories are the following:Vertical—functional and divisional. Vertical and horizontal—matrix.Boundary-less (also referred to as "open boundary")—modular, virtual and cellular.
See What are commonly-used organization structures?
Vertical structures (functional and divisional)
Two main types of vertical structure exist, functional and divisional. The functional structure divides work and employees by specialization. It is a hierarchical, usually vertically integrated, structure. It emphasizes standardization in organization and processes for specialized employees in relatively narrow jobs.
This traditional type of organization forms departments such as production, sales, research and development, accounting, HR, and marketing. Each department has a separate function and specializes in that area. For example, all HR professionals are part of the same function and report to a senior leader of HR. The same reporting process would be true for other functions, such as finance or operations.
In functional structures, employees report directly to managers within their functional areas who in turn report to a chief officer of the organization. Management from above must centrally coordinate the specialized departments.
A functional organizational chart might look something like this:
The advantages of this type of structure are the following:It provides more focus and flexibility on each division"s core competency.It allows the divisions to focus on producing specialized products while also using knowledge gained from related divisions.It allows for more coordination than the functional structure. Decision-making authority pushed to lower levels of the organization enables faster, customized decisions.
The disadvantages of this structure include the following:It can result in a loss of efficiency and a duplication of effort because each division needs to acquire the same resources.Each division often has its own research and development, marketing, and other units that could otherwise be helping each other.Employees with similar technical career paths have less interaction.Divisions may be competing for the same customers.Each division often buys similar supplies in smaller quantities and may pay more per item.
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This type of structure is helpful when the product base expands in quantity or complexity. But when competition among divisions becomes significant, the organization is not adapting quickly enough, or when economies of scale are lacking, the organization may require a more sophisticated matrix structure.
Matrix organizational structures
A matrix structure combines the functional and divisional structures to create a dual-command situation. In a matrix structure, an employee reports to two managers who are jointly responsible for the employee"s performance. Typically, one manager works in an administrative function, such as finance, HR, information technology, sales or marketing, and the other works in a business unit related to a product, service, customer or geography.