Literature Review on Organizational Structure and Design
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Organizational Structure and Design
Organizations according to Daft (2007) are considered social entities that are goal-directed, designed as deliberately structured and coordinated activity systems and linked to the external environment. The key element of an organization is not a building or a set of policies and procedures; organizations are made up of people and their relationships with one another. An organization exists when people interact with one another to perform essential functions that help attain goals (Daft 2007).
Organizational structure refers to how an organization is put together. Structure reflects some of the underlying ways that people interact with one another in and across jobs or departments (Sims 2002). Organizational structure refers to how job tasks are formally divided, groped, and coordinated.
Organizational Structure institutionalizes:
- How people will interact with each other
- How communications will flow
- How rewards are distributed
- How power relationships are defined
- What is important to the organization
Organizational structure provides the basic template for the continuance of an organization’s culture, norms, values, philosophies, and informal activities.
According to the article ‘What is the Right Organization?’ by Duncan (1979), organizations are undergoing change. The development of organizational structure is divided into different eras which moved from matrix to horizontal to virtual (cited in Anand and Daft 2006).
There are two general theories of organizational design: the universalistic approach (the standard hierarchical design) and the contingency approach, which has no identified form. The universalistic approach is based on the premise that there is one "best" way to structure an organization regardless of the situation and is based on a set of principles that guide the design process. The universalistic approach is based on the classical and the bureaucratic theories of organizational design. The classical and the bureaucratic forms are characterized by having highly specialized jobs, departments based on function and process, narrow spans of control, and centralized authority. These organizations will have several layers of management through which directions and communications must pass.
There are four factors that managers assess before designing an organization. These factors are the organization’s strategy, its external environment, its technical process, and its size. Each factor alone can affect design decisions, or they can collectively constrain or drive design choices.
Many of top management’s strategic choices affect organization design decisions. An organization’s strategy describes the organization’s long-term goals and the way it plans to reach those goals. Strategies also specifies how managers should allocate resources to reach the long-term goals of their organization (Sims 2002). According to Porter (1980) there are three basic strategies that are available to an organization. These are cost leadership, differentiation, and focused. Under cost leadership, an organization provides the same services or products as its competitors, but produces them at a lower cost. An organization that chooses this strategy seeks to gain a significant cost advantage over other competitors and pass the savings on to consumers in order to gain a large market chare. Such a strategy aims at selling a standardized product that appeals to an ‘average’ customer in a broad market. Organizations that use this strategy earn a better return on their investment in capital and human resources and attain significant economies of scale in key business activities. In a differentiation strategy, an organization seeks to be unique in its industry along dimensions that are widely valued or preferred by buyers. An organization that chooses a differentiation strategy typically uses a product organization design whereby each product has its own manufacturing, marketing, and research and development (R&D) departments. A focused strategy is designed to help an organization target a specific niche within an industry, unlike both the cost leadership and differentiation strategies, which are designed to target industry-wide markets. An organization that chooses a focused strategy may utilize any of a variety of organization designs, ranging from functional to product to matrix, to satisfy their customers’ preferences (Sims 2002). Augier and Teece (2006) argue that know-how, internal structure and human behavior affect the capability of the organization. Organizational capabilities affect strategies which in turn have implications on organizational structure.
2. External Environment
An organization’s environment is composed of those institutions or forces that are outside the organization and potentially affect the organization’s performance. These typically include suppliers, customers, competitors, government regulatory agencies, public pressure groups, and the like. The condition of the external environment has implications on the design and structure of the organization. Managers must deal with the changes in the external environment by adjusting the organizational structure (Sims 2002). According to Punnoose (2007), external environment has implications on the organization.
3. Organization Size
The size of the organization also has implications on the design and structure of the organization. As organizations increase in size, the rules and procedures become formal. Large organization have more management levels and more structured work activities than small organizations and used decentralized form. Small organizations usually have more informal decision process and the organizational design tends to be simpler. Small organizations also have fewer diverse activities, fewer formal written procedures, and narrower spans of control (Sims 2002).
Technology influences organization design in terms of job design and the creation of teams and departments, the delegation of authority and responsibility, and the need for formal integrating mechanisms. Technology refers to how an organization transfers the inputs into outputs. Every organization has at least one technology for converting financial, human, and physical resources into products or services (Sims 2002).
There are two basic forms of organizations – mechanistic and organic. A mechanistic system is characterized by reliance on formal rules and regulations, centralization of decision making, narrowly defined job responsibilities, and a rigid hierarchy of authority. The emphasis is on following procedures and rules. In contrast, an organic system is characterized by low to moderate use of formal rules and regulations, decentralized and shared decision making, broadly defined job responsibilities, and a flexible authority structure with fewer levels in the hierarchy. Top management typically makes decisions that determine the extent to which an organization will operate as a mechanistic system or an organic system. A mechanistic system is essentially a bureaucracy. Bureaucracy is characterized by principles that include:
- Rules and Regulation
- Rational Decision-making
- Selection and promotion based on technical competence (Sims 2002).
Hierarchy of Authority
Hierarchy of authority represents the extent to which decision-making processes are prescribed and where formal power resides. In a mechanistic system, higher level departments set or approve goals and detailed budgets for lower level departments and issue directives to them. A mechanistic system has as many levels in its hierarchy as necessary to achieve tight control. An organic system has few levels in its hierarchy, which makes coordination and communication easier and fosters innovation (Sims 2002). In the paper written by Hannan et al (2006), the authority or the span of control the superior has in the organization was studied. According to them increasing a superior’s span of control reduces the effectiveness of capital budgeting in eliciting truthful reports.
Division of Labor
Division of labor refers to the various ways of dividing up tasks and labor to achieve goals. The more that tasks are divided into separate jobs, the more those jobs are specialized and the narrower the range of activities job incumbents are required to perform. The mechanistic system follows the view that the greater the division of labor in organizations, the greater will be the efficiency of organizations and the amount of wealth created. However, a continued increase in the division of labor may eventually become counterproductive. Employees who perform only very routine and simple jobs that require few skills may become bored and frustrated. The results may be low quality and low productivity, high turnover, and high absenteeism. The organic system takes advantage of the benefits from the division of labor, but it is sensitive to the negative results of carrying the division of labor too far (Sims 2002).
Rules and Procedures
Rules are formal statements specifying acceptable behaviors and decisions by employees. In a mechanistic system, the tendency is to create detailed uniform rules to cover tasks and decisions whenever possible. In an organic system, the tendency is to create rules only when necessary. Procedures represent sequences of steps that managers and employees must follow in performing tasks and dealing with problems. In a mechanistic system, rules and procedures tend to be developed at the top and issued via memoranda. Such memos may convey the expectation of strict compliance and the adverse consequences of not complying. In an organic system, employee input is likely to be sought on changes in current rules and procedures or on proposed rules and procedures when they are absolutely necessary. In an organic system employees at all levels are expected to question, evaluate, and make suggestions about such proposals, with an emphasis on collaboration and interdependence (Sims 2002).
There are three basic structures that organizations take – functional, self-contained and matrix.
1. Functional Organization
Considered as the most widely used organizational structure and also known as the basic hierarchical structure is functional organizational structure. The functional structure groups employees together based on the functions of their jobs (Bushman 2007). The structure is depicted by a standard pyramid, with senior management at the top, middle and lower managers spread out below, and workers at the bottom (Sims 2002).
2. Division (Self-Contained) Organization
The self-contained unit structure represents an opposite structure to functional structure. In a self-contained structure organizational activities are grouped on the basis of products, services, customers, programs, technical process, or geography. All or most of the resources necessary for the accomplishment of specific objectives are set up as a self-contained unit headed by a product or division manager (Sims 2002).
3. Matrix Organization
A matrix design is based on multiple support systems and authority relationships, whereby some employees report on two supervisors rather that one. Every matrix organization contains three unique and critical roles: the top manager who heads and balances the dual chains of command; the matrix bosses (functional, product, or area) who share subordinates; and the two-boss managers who report to two different matrix bosses. Each of these roles has it own unique requirements (Sims 2002).
Organizational Design and Growth
One of the most influential organizational design frameworks available is the one created by Jay Galbraith in 1973. The design framework has several underlying messages. According to Galbraith (2005) there is no single design for success and that an organization that aims to be successful cannot copy the organizational design of other organizations. A firm must implement features that support its strategy, including chosen paths to growth, and it must change those features as the strategy changes (Mohrman 2007).
Anand, N and Daft, R L 2006, ‘What is the Right Organization Design?’
Augier, E M and Teece, J D 2006, ‘Understanding Complex Organization: The Role of Know-How, Internal Structure, and Human Behavior in the Evolution of Capabilities’, Industrial and Corporate Change, vol. 15, no. 2, pp. 395-416.
Bushman, M 2007, Functional, Divisional and Matrix Organizational Structures, Associated Content, viewed 03 July, 2008,
Daft, R 2007, ‘Organization Theory and Design’, South-Western, Cengage Learning.
Eldos, M P 2007, ‘Organization Structure and Inter-Organizational Dependency: The Environmental Imperative ‘, Icfai Journal of Business Strategy, vol. 4, no. 4, pp. 22-30.
Galbraith, J R 2005, Designing the Customer-Centric Organization, Jossey-Bass, San Francisco.
Hannan, R, et al 2006, ‘Flattening the Organization: The Effect of Organizational Reporting Structure on Budgeting Effectiveness’.
Mohrman, S A 2007, ‘Designing Organizations for Growth: The Human Resource Contribution’, Human Resource Planning, vol. 30, no. 4, pp. 34+.
Sims, R 2002, Managing Organizational Behavior, Quorum Books, Westport CT.
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