Organizational Structure

What Is Organizational Structure?

Organizational structure is a mechanism for linking and coordinating people and groups together within the framework of their roles, authority and power.

There are three key components in the definition of organization structure:

1. Organization structure designates formal reporting relationships, including the number of levels in the hierarchy and the span of control of managers and supervisors.
2. Organization structure identifies the grouping together of individuals into departments and of departments into the total organization.
3. Organization structureincludes the design of systems to ensure effective communication, coordination and integration of efforts across departments.

These three components of structure refer to both vertical and horizontal aspects of organizing. For example, the first two components are the structural framework, which include the vertical hierarchy.

The third component is concerned with the pattern of interactions among organizational employees. An ideal structure encourages employees to provide horizontal information and coordination where and when it is required.

Structure can be regarded as the backbone of the organization and its effectiveness depending on how strong the skeleton or weak the skeleton is. A typical organizational chart outlines, in part, the structure of an organization (see Figure below).

The design principles of organizational structure, as the diagram illustrates, is typically characterized by four dimensions (Galbraith, 2002), as follows:

• Specialization  Opens in new window, which specify type and number of job specialties.
• Shape, specifying number of people constituting a unit and number of hierarchy levels in an organization.
• Distribution of power, indicating centralization versus decentralization.
• Departmentalization, specifying building structural units around the themes, functions, products, work flow processes, market segments (customers), and geography.

There is no perfect or optimal organizational structure which ideally combines those areas. The ideal thing is to implement a structure which is most suitable to the organization’s goals. Thus, we look at the types of organizational structure.

Types of Organizational Structure

Generally four types of organizational structure are predominant in organizations today. They include:

• the functional structure
• the divisional structure
• the matrix structure
• the network structure

The first three have been used by US corporations for decades. The fourth, network structure, has emerged more recently as an approach to meeting the challenges of modern day business environment. We will briefly examine each below, one after the other.

1.   Functional Structure

Functional organizational structure involves structuring an organization around basic business functions such as production and operations, marketing, and finance.

This approach of organizational design is most often effective in small organizations, where the president or or chief executive officer (CEO) is close to the workers, and therefore can provide information and direction quickly, facilitating rapid decision making. Functional Organizational Structure is discussed more specifically in its designated pageOpens in new window.

2.   Divisional Structure

A divisional organizational structure is designed so that members of the organization are grouped on the basis of common products or services, geographic markets, or customers served.

In this pattern of organizational design, all or most of the resources and functions necessary to accomplish a specific objective are set up as a division headed by a product or division manager. For example, General Electric has plants that specialize in making jet engines and others that produce household appliances. See here for more insight about divisional structures. See the Divisional Organizational Structure designated pageOpens in new window to learn more!

3.   Matrix Structure

The matrix structure permits a dual hierarchy. It creates, for example, both product divisions and functional divisions, with the product managers (horizontal hierarchy) and functional managers (vertical hierarchy) having equal authority within the organization, and employees report to both of them in a balanced fashion.

In addition, matrix organizational structures permit a sharing of resources and offer more information-processing capacity. See the designated pageOpens in new window to learn more!

4.   Network Structure

Network structure is built around alliances between organizations within the network. Each associate or organization of the network focuses on its core competency and performs some portion of the activities necessary to deliver the products and services of the network as a whole.

Rather than being housed under one roof, services such as accounting, design, manufacturing, and distribution are outsourced to separate organizations that are connected electronically to the central office. The central organization simply coordinates the activities of others so that the product reaches the ultimate consumer in an effective and efficient way. See the designated pageOpens in new window to learn more!

Importance of Organizational Structure

Organizational structure is an important concept to study because it determines the delegation of power, responsibility and authority in the organization. Authority is defined as the power granted to individuals to enable them to take the final decisions. Responsibility refers to the obligation incurred by individuals in their roles in the formal organization to effectively perform assignments (Kerzner, 2006).

Miller (1987a), in observing the importance of an organization’s structure, suggests, it “importantly influences the flow of interaction and the context and nature of human interactions. It channels collaboration, specifies modes of coordination, allocates power and responsibility, and prescribes levels of formality and complexity” (p. 7).