Types of Organizational Structures

Organizational structure refers to the way in which an organization’s activities are divided, grouped, and coordinated into relationships between managers and employees, managers and managers and employees and employees. An organization’s departments can be formally structured in three major ways: by function, byproduct/ market or in matrix form.

Functional Organization is perhaps the most logical and basic form of departmentalization. It is used mainly by smaller firms that offer a limited line of products because it makes efficient use of specialized resources. Another major advantage of a functional structure is that it makes supervision easier, since each manager must be expert in only a narrow range of skills. In addition, a functional structure makes it easier to mobilize specialized skills and bring them to bear where they are most needed.

As an organization grows, either by expanding geographically or by broadening its product line, some of the disadvantages of the functional structure begin to surface. Because functional managers have to report to central headquarters it can be difficult to get quick decisions. It is often harder to determine accountability and judge performance in a functional structure. If a new product fails, who is to blame research and development, production or marketing? Finally coordination the functions of members of the entire organizations may become a problem for top managers. Because members of each department may feel isolated from or superior to those in other departments, they may have difficulty working with others in a unified way to achieve the organization’s goals. For example, the manufacturing department may concentrate on meeting cost standards and delivery dates and neglect quality. As a result, the service department may be flooded with complaints. In short, a functional structure can be a difficult setting in which managers must coordinate employees’ activities.

Product / Market organization:

Product or market organization, often referred to as organization by division, brings together in one work unit all those involved in the production and marketing of a product or a related group of products, all those in a certain geographic area, or all those dealing with a certain type of customer. In the 1990 Hewlett-Packard reorganization, John Young replaced one kind of product organization with another kind of product organization.

Most large, multi-product companies such as General Motors have a product or market organization structure. At some point in an organization’s existence, sheer size and diversity of products make functional departments too unwieldy. When a company’s departments becomes too complex or coordinating the functional structure, top management will generally create semi-autonomous divisions. In each division, managers and employees design, produce and market their own products.

Organization by division has several advantages. Because all the activities, skills and expertise are required to produce and market particular products are grouped in one place under a single head, a whole job can more easily be coordinated and high work performance maintained. In addition both the quality and the speed of decision making are enhanced because decisions made at the divisional level are closer to the scene of action. At the same time, the burden on central management is eased because divisional managers have greater latitude to act. Perhaps most important, accountability is clear. The performance of divisional management can be measured in terms of the division’s profit or loss.

Matrix Organization:

The matrix structure sometimes referred to as ‘multiple command system’ is a hybrid that attempts to combine the benefits of both types of designs while avoiding their drawbacks. An organization with a matrix structure has two types of structure existing simultaneously. Employees have in effect two bosses that is, they work in two chains of command. One chain of command is functional or divisional. The second is a horizontal overlay that combines people from various divisions or functional departments into a project or business team led by a project or group manager who is an expert in the team’s assigned area of specialization.

Source: http://www.citeman.com/4747-types-of-organizational-structures

Chandler’s Thesis

Source: http://www.citeman.com/4644-chandler%e2%80%99s-thesis

In his ground-breaking study of the history of large corporations, Chandler examined the growth and development of 70 of the largest businesses in the United States, including Du Pont, General Motors, Standard Oil, and Sears, Roebuck. He observed a common pattern in their development. Although the organizations changed their growth strategies to suit technological, economic, and demographic changes, new strategies created administrative problems and economic inefficiencies. Structural changes were needed to solve those problems and to maximize economic performance. Thus, Chandler concluded that organizational structure followed and reflected the growth strategy of the firm.

According to Chandler, organizations pass through three stages of development, moving from a unit structure, to a functional structure, and then to a multidivisional structure. At first, organizations are small. There is usually a single location, a single product, and a single entrepreneurial decision maker. For example, when Bill Hewlett and Dave Packard founded a company to build an audio oscillator in 1939, they were personally responsible for its design, manufacture, testing, and marketing.

As an organization grows, however, increased volume and additional locations eventually create new challenges. The organization then becomes a unit firm, with several field units and an administrative office to handle coordination, specialization, and standardization among the units.

The next step is vertical integration. The organization keeps the original product but broadens its scope and strives for economies of scale by acquiring a supplier of raw materials and components or a distributor of finished goods. For example, the pioneers of vertical integration, the steel companies, eventually moved into mining. A manufacturer might naturally move into warehousing and wholesaling. However, vertical integration creates new problems in moving goods and materials through the organization’s various functions. Therefore, the organization evolves into a functional organization, with finance, marketing, production, and other subdivisions and formalized budgeting and planning systems. Thus, as Hewlett-Packard’s production of test equipment expanded, functional managers took over operating decisions.

In the third stage, an organization expands into different industries and diversifies its products. This phenomenon poses a significant new challenge: selecting products and industries in which to invest the organization’s capital. The result is the multidivisional firm, which operates almost as a collection of smaller businesses. Semi-autonomous product divisions take responsibility for short-term operating decisions, with the central office remaining responsible for strategic decisions with a longer time horizon. For instance, Sega was organized to give operating units a great deal of autonomy.

Chandler observed that the transition from one structure to another was often both delayed and painful. He concluded that organizations do not readily change structure because their entrepreneurial founders excel at strategy but are generally neither interested in nor knowledgeable about organizational structure. Indeed, when the organization is finally restructured, the entrepreneur often leaves. This has happened frequently in recent years in rapidly growing, technology-oriented firms like Apple Computer. At Railtex Service Co, a freight-car operator, founder faced the problem head-on: With his successful business at the crossroads, should he stay on? He knew that with the right leadership, the business was poised for incredible growth. Could he provide that kind of leadership?

More recently, Raymond Miles and Charles Snow have done extensive studies analyzing the fit between an organization’s strategy, structure, and management processes-that is, the balance between its alignment with its environment and its maintenance of stable internal interrelationship. They argue that successful organizations achieve strategic fit with their market environments and support their strategies with appropriately designed structures and management processes, while less successful organizations typically exhibit poor fit externally or internally, or both.

IBM’s recent highly publicized problems are in part a result of its highly centralized decision-making structure, which could not adapt fast enough to changes in the external environment. Even if IBM knew the correct strategy, it could not implement it in its current structure.

Regardless of the final verdict on Chandler’s thesis, it is impossible to understand an organization’s strategy without examining its structure. Indeed, one framework for organizational effectiveness goes even further in its analysis of interacting factors in strategy implementation.