Introduction

As an area of OB study, organisational structure and design represents a relatively recent development. Increased attention can be attributed to the rise of large multinational corporations throughout the early 20th century and the problem of coordinating their numerous divisions and personnel. Additionally, greater attention can be attributed to changes in the global business environment. In particular, organisational success in the 21st century is often dependent upon quick managerial decision-making and extreme flexibility (i.e. adapting existing work processes to meet new market opportunities). Many organisations subsequently undergo a major program of ‘restructuring’ in order to achieve these capabilities,

In this topic we will consider different kinds of structures which organisations can adopt and assess their effectiveness under varying conditions. We will also examine how organisations design their structure by manipulating various structural features to best suit their unique needs.

Students who have studied management at the undergraduate level will no doubt be familiar with the basic Management functions of Planning, Controlling, Organising and Leading. It is perhaps helpful at this time to remember how the structure of an organisation compliments the Organising function. Very briefly, Organising is the process of arranging people and other resources to work together to accomplish a specific goal. It involves dividing up the work to be done (division of labour) and coordinating the activities of everyone involved. To a large extent, this ‘coordination’ is achieved by establishing an appropriate organisational structure; one that enables effective communication and the delegation of tasks throughout various organisational departments.

Objectives

On completion of this topic, you should be able to:

• define organisational structure
• discuss the seven design elements of organisational structure
• define and illustrate various ‘traditional’ and ‘modern’ organisational structures, and compare their advantages and disadvantages
• explain why organisational structures differ
• briefly explain the contingency approach to organisational design.

Approximate study time required

Actively engaging with the lecture content	2 hrs
Topic readings	3 hrs
Undertake the prescribed learning activities	1 hrs
Self-directed topic review	1 hrs
Total	7 hrs

Defining organisational structure

We usually use the word ‘structure’ for a physical object, such as a bridge or a building. The ‘structure’ of a physical object usually refers to the internal relationships among the components which make up the object. For example, the atomic structure refers to the relationship between protons, neutrons, and electrons.

Organisations are obviously not physical objects. So when we speak of an organisation as having a structure, we are using an analogy or a metaphor of a physical object to describe and understand something which is abstract rather than concrete, and dynamic rather than static. With this in mind, consider the following definitions for ‘organisational structure’:

the way in which job tasks are formally divided, grouped and coordinated

the intended configuration of positions, job duties and the lines of authority among the component parts of an organisation

a system of tasks, workflows, reporting relationships and communication links

the pattern of roles, authority, and communication that determines the coordination of the technology and people within an organisation

the division of labour as well as the patterns of coordination, communication, work flow and formal power that direct organised activities

Elements of organisational structure

Robbins et al. (2020) refer to seven key elements that need to be considered when developing an organisational structure.

1. work specialisation – the subdivision of tasks into separate jobs
2. departmentalism – grouping of jobs
3. chain of command – who individuals and groups report to
4. span of control – number of employees who report to a single manager
5. centralisation and decentralisation – the source of authority for decision making
6. formalisation – the rules and regulations that direct employees and managers
7. boundary spanning – the level of interaction among individuals from different areas of the organisation.

Osland et al. (2007, p. 604) add several other terms that are used frequently when talking about organisational structure:

• hierarchy – distribution of authority
• complexity – levels within the hierarchy (vertical differentiation) and the departments and jobs (horizontal differentiation)
• standardisation – extended similar activities are performed in a uniform manner
• routine technology – formalised and standardised tasks with little variety
• non routine tasks – high task variety involving problem analysis and technical knowledge (strategic planning, applied research).

These terms represent some of the main concepts discussed throughout the topic.

Traditional and modern organisational structures

This section of the topic describes the way in which an organisation might evolve from a very simple structure through to a Functional, Divisional or Matrix style. These are considered to be the ‘traditional’ types of organisational structures. While many organisations continue to adopt these structural types, increased competition, new technologies and other changes to the global business environment have greatly influenced the need for many organisations to consider non-traditional structures. Key examples include the Network and Team structures. As you read through this section of the study guide and textbook, it is important to focus not simply on the particular ‘design’ of each structure but also carefully consider their advantages and disadvantages.

The simple structure

There is usually a predictable sequence of steps through which an organisational structure is likely to evolve. The first step in the structural evolution of an organisation is the so-called ‘simple structure’. This structure is used by many small businesses when they are first established, usually by members of a family or a small group of friends who have known each other over a long period of time. Because people in such a business have had a long relationship with each other before, and expect to have a continuing relationship for a considerable period in the future, the control problem is less likely to be a serious one (although it does rear its ugly head from time to time even within a family or among close friends). At the same time, since everyone knows most of the tasks which need to be done, and is expected to do whatever task needs to be done, the coordination problem is not a serious one either.

The growing organisation

When the organisation grows beyond a small group of half a dozen to a dozen people, however, the simple structure usually becomes inadequate. The tasks begin to become more complex, and need a degree of specialised training or experience to do them well, rather than people who are ‘jacks of all trades’. Along with the need for specialisation comes the need for a more formal approach to coordination. Organisations discover this when people take actions which either overlap or contradict those taken by someone else, and other actions get neglected because everyone thinks that someone else is supposed to be taking them. This stage is similar to a person trying to remember a list of ten items and discovering that he/she forgets some items on the list unless he/she writes them down. The equivalent of writing the list down for an organisation is creation of specialised jobs, along with at least an informal job description, and the creation of an ‘organisational chart’ which shows who coordinates his or her specialised actions with which other members of the organisation.

Growing pains

An element of hierarchical rank, that is, a distinction between those who have varying levels of authority, also begins to arise. The concept of authority is important for the problem of control. The person with the superior rank is supposed to ensure that the lower ranked person does their job honestly and well, and to discipline that person if they don’t.

In the informal structure, in a family or among friends, everyone is considered equal, and people are likely to take offence if someone attempts to tell them what they must do. The transition from the friendly and egalitarian relationship to a hierarchical relationship with increasing rules and regulations is difficult for most organisational members to make. It is likely to give rise to friction, factions, and resignations.

The increased specialisation required in the growing organisation creates yet another new problem: it tends to make work monotonous and boring to some people, causing reduced satisfaction and increased tension, which in turn worsens the control problem. The growing size of the organisation requires this transition, however. If it is not made, the organisation is likely to die or revert to its smaller size.

And growing gains

The growing size and formalisation of relationships is not all bad news, however. The productivity of the organisation based on specialisation and division of labour is likely to increase significantly. Adam Smith (1776) noted this advantage in his classic book The Wealth of Nations. Smith noted that if a man tried to make pins by himself, he would be lucky to make a dozen pins in an hour. But if ten or so people get together and specialise in certain tasks, they could easily make thousands of pins every hour.

What is the basis on which tasks should be divided? Since people in the growing organisation are used to doing every task, the division of tasks is often made by a process of trial and error rather than by logical analysis. As a result, different organisations are likely to utilise somewhat different bases for specialisation.

The functional structure

The most common pattern of division of labour which emerges in many growing organisations is called the functional structure – so called because tasks get divided according to certain ‘functions’ which need to be carried out. For example, in a retail store, one person will specialise in buying supplies (purchasing), another in keeping track of costs and revenues (accounting), while someone else specialises in finding and serving customers (sales or marketing). In a manufacturing business, the specialisations might be in the functions of production, maintenance, finance, and marketing.

As the business grows from a dozen employees to, say, a hundred, other specialisations such as human resource management (or personnel), legal affairs, and union relations are likely to emerge. These later functions are often considered less central to the functioning of the organisation than the core functions which came first. The core functions are often called ‘line functions’, while the ‘peripheral’ functions are called ‘staff functions’. These terms are derived from the military, as are many other terms we use in organisations today. In the military the fighting forces are the ‘line’ functions, while the supporting functions, such as doctors, engineers, supply officers, are ‘staff’ functions. The staff people are supposed to advise line people, while the line people make all the important decisions. This distinction between line and staff is sometimes not so clear cut in practice.

While division of labour increases productivity, it also creates new problems. The tasks which have been differentially assigned to various specialists need to be coordinated and integrated. For example, the salespersons know what the customers want and this knowledge needs to be conveyed to the production and engineering people so that they can redesign the product to meet the customers’ changing needs. This is a problem of horizontal coordination, in the sense that the engineering, marketing and production departments are at the same level of hierarchy.

The functional structure, however, attempts to use the vertical coordination mechanism to deal with this problem. It assumes that the problem will be handled by the people in charge of each of the departments involved. (They might have such titles as director of marketing or vice president of production.) But something often gets lost in the communication chain from (say) the salespersons to the marketing director to the director of production to the employees actually working on the production line.

The divisional structure

When integration problems increase in frequency and severity, the top managers of the organisation start looking for a new organisational structure to improve organisational efficiency and morale. The solution they usually come up with is the divisional structure.

The best known study of how organisations with functional structures gradually realise the need for a new structure is a book by Alfred D. Chandler, titled Strategy and Structure (1962). In his research, Chandler studied internal company documents for four large US companies, namely Sears-Roebuck (a department store chain, usually referred to as just Sears); Standard Oil of New Jersey (now known as Exxon); Dupont Chemicals; and General Motors (whose subsidiary in Australia is known as GM-Holden). Chandler studied the documents of these companies over a period of about sixty years, from the 1890s to the 1950s. He also studied internal documents of over 60 other companies, but in less detail.

Chandler found that the change in organisational structure in most of these companies was in the same direction, although various companies changed at varying speeds. The change in most of the companies happened in a somewhat haphazard way, with two forward steps followed by a backward step or two. The companies usually appointed committees to study the problem and recommend changes. Some recommendations were implemented quickly, while others were ignored for nearly 25 years as the problems got worse, and new committees made new recommendations. In general, the change process was like a river flowing downhill but with several twists and turns rather than in a straight line.

Let us take a specific example to understand the change process as Chandler observed it in Sears; the department store chain similar to the Myer chain in Australia. When Sears began towards the end of the 19th century. The US was a largely rural nation, with a very poor road network even between major cities, let alone villages. To meet the purchase needs of the rural customers, Sears started as a catalogue sales business based in Chicago. The company used a functional structure. Gradually the country became urbanised, with better roads, and the automobile appeared on the scene. The farmers and other rural customers were now able to go to the cities with a degree of ease. The catalogue sales began to lose some of their appeal. As a result, Sears followed its customers to the cities and opened department stores.

Although the Sears strategy had changed from a pure mail-order catalogue business to a mixed catalogue-and-department-store business, the functional structure continued. If the New York store wanted to try a new line of merchandise to suit the tastes of the local customers, the store manager had to go to the marketing manager in the Chicago head office, who in turn had to persuade the purchasing manager. By the time the change was approved (if it was approved), the spring season had turned into summer and the customers’ needs had changed again.

The companies which faced this and similar problems tried to solve them within their current structure with minor changes in personnel training and selection. This was not sufficient to solve the problem. One reason for the slow pace of change was that managers did not see the current structure as the ‘functional structure’, as we do now. To them, it was just the way the business had always been run and would continue to be run. Nor was there a theory available of other structures which were possible.

Eventually, after trials and errors over a period of about 25 years, a new structure gradually evolved. This came to be called the divisional structure. In the case of Sears, each department store in various cities became a division, with the store manager being given the responsibility for decisions (within specified limits) about selection, pricing and advertising of merchandise, as well as hiring and firing of staff, and determining their wages. This is an example of divisionalisation based on geography. In other companies such as General Motors, divisions were created based on product lines (such as Cadillac, Buick, Chevrolet, locomotives etc.).

Divisions were also created in other companies on other bases, such as customer type (residential and business customers for a telephone company, for example). Each division is in a sense a mini-company on its own. Divisions are usually treated as ‘profit centres’, that is, division managers are given a fair amount of freedom to control their costs and revenues (prices) without needing head office approval, and are evaluated on the basis of the profits generated by their divisions. This is not true of a functional structure – functional departments, such as accounting, production, marketing etc. can control either their costs or revenues, but not both; and hence they are not profit centres.

Since divisions are like mini-companies, managing such a division is good training to move into top management. There is some evidence that companies which move early towards a divisional structure generate better profits than companies which stay with a functional structure for too long (Pendse & Keogh 1977).

As was the case with the simple and functional structures, the divisional structure solves some problems but creates other problems. One of these is that each division tends to create its own functional departments such as accounting which causes costly duplication. A second problem comes up when one division is ordered to sell its product to another division. For example, the 20th Century-Fox division of News Corporation produces films whereas the Foxtel Network broadcasts films. Each division wishes to maximise its profits (since the divisional managers are evaluated on their profit performance), and this gives rise to a conflict between divisions on (say) what price the 20th Century-Fox division should charge the Foxtel Network for its movies. This is called the ‘transfer price’ problem.

The top management of the company can resolve this conflict in one of two ways, based on the ‘markets and hierarchies’ choice mentioned earlier in this topic. The market choice is to allow the two divisions to buy and sell their products on the open market at the market price. The transfer price is thus determined by the usual market process. The disadvantage of this choice is that it reduces any synergy to be gained by one company (like News Corporation) owning both divisions, and coordinating their actions. The hierarchy choice is for the top management to tell each division what price each should charge to the other. The disadvantage of this choice is that the profit incentive by which the divisional managements are evaluated loses its effectiveness if the divisions don’t control their own pricing decisions.

Again, like a parent trying to resolve a dispute between two children, companies find that there is no method of dispute resolution which is always better than the other, and they find themselves moving from one method to the other under different conditions. Such a movement creates its own problem because the divisional managers are faced with the uncertainty as to what the top management may decide in any given case.

As mentioned earlier, some companies faced with such a problem between divisions decide that a time has come to turn ‘mean and lean’, and to use the market solution fully. They spin off some divisions to make them independent companies in their own right, or sell them to another company which may have better luck integrating them in its organisational structure.

The matrix structure

Since both functional and divisional structures have certain problems, as discussed above, attempts have been made to create other structures which would resolve some of these problems. One such structure is called the ‘matrix structure’. It is used primarily in companies which work on a project basis. When one project is finished, people must turn their attention to quite a different project, as when a movie studio finishes one film and starts work on another. In such a case, an employee reports to two different supervisors – one who is his or her functional superior and another who is in charge of the current project. The matrix structure is an attempt to combine the advantages of both a functional structure and a divisional structure, and it works relatively well in the somewhat unique circumstances of companies working on rather distinct and changing projects.

Why do structures differ?

The ultimate goal of organisational design is to create effective alignment between the way it is structured and situational challenges. This process takes into account implications associated with the environment, strategies, people, technology and size.

At a very simple level, organisational structures range between two basic models – Mechanistic and Organic.

Osland et al. (2007, p. 603) define mechanistic structures as having:

… rigid bureaucracies with strict rules, narrowly defined tasks, top-down communication, and centralized decision making.

While Robbins et al. (2020, p. 377) define it as:

A structure characterised by extensive departmentalisation, high formalisation, a limited information network and centralisation.

These types of organisational structures are best suited to stable environments where a lot of routine functions. The mechanistic structure operates through many rules and regulations with decision making clustered in the higher echelons of the organisation. The text refers to tall hierarchies of employees in specialist roles, where vertical rather than horizontal communication channels operate.

In contrast with Mechanistic structures are the Organic.

Definitions of organic structures include the following:

Organic organizations are flexible, de-centralized networks with broadly defined tasks

A structure that is flat, uses cross-hierarchical and cross-functional teams, has low formalisation, possesses a comprehensive information network and relies on participative decision-making

Organic structures seem to operate best in complex and changing environments where organisational adaptability and flexibility are needed. The text refers to organic structures as best suiting knowledge and quality management due to the emphasis on knowledge management and information sharing instead of hierarchal systems of information exchange.

Organisational design: The contingency approach

Throughout this topic we have discussed five types of organisational structures – functional, divisional, matrix, team-based and networked. Is one of these structures better than the others, and should organisations attempt to adopt it? The generally accepted answer to this question is that different structures work best under different conditions, and thus none of them is necessarily better than the others. This answer reflects the contingency approach to structure design. The contingency approach suggests that organisations need to analyse their specific conditions and then choose a structure best suited to those conditions. (The contingency approach to structure might remind you of the contingency theory of leadership discussed in Topic 2. Both these approaches are based on the idea that different types of leadership as well as organisational structure work best under different conditions.)

What are the conditions under which different structures will work best? The key condition to note is whether the company’s environment is stable or turbulent. As mentioned earlier in this topic, a mechanistic structure is best suited to a stable environment while an organic structure is best suited for conditions of rapid change, according to research carried out by Burns and Stalker (1961). Note however that some overlap can exist in regard to these two structure types. The divisional structure, for example, can be seen to combine an organic structure with a mechanistic structure. It is aimed at allowing the managers in charge of a division to make several important decisions (about prices, costs, etc.) on their own, without referring them to the head office. By comparison, the lower levels in a functional structure are expected to follow various rules laid down for them, and to seek approval from higher authority to make any decisions which require any modification of these rules. Since decisions in a functional structure tend to be made at the head or central office of the organisation, functional structures are said to be centralised, while divisional structures are described as being decentralised.

Early in the topic we also discussed the concept of span of control which refers to the number of people supervised by one manager. One notable impact associated with a rapidly changing and competitive environment is that the span of control in a company tends to increase. Given a certain number of total employees in a company, the larger the span of control the smaller the number of levels separating top management from the lowest level. A small span of control implies that an employee is subject to numerous rules, has little discretion, and is closely supervised. A larger span of control implies that employees have a considerable amount of discretion and are supervised by the supervisor only in broad terms. The tall organisational pyramid is costly to the company in monetary terms because it employs so many more middle managers, and is also costly in terms of the time it will take for a decision to be made since it may have to go through numerous management layers.

Information superhighway and organisational design

The information superhighway, as reflected in the World Wide Web, company homepages, electronic data interchange systems, e-commerce etc. continues to make many parts of an organisation obsolete or too slow to survive and organisations are putting in new structures in their place.

There are several other potential impacts of the information revolution on organisations, such as creation of ‘virtual offices’, and increasing use of strategic alliances and partnerships between businesses. Some of these impacts are discussed in the next topic.

Summary

The creation of an organisation brings the problem of controlling the activities of its employees. This problem is solved partly through use of hierarchical authority and partly through creating various incentive schemes. The organisation also faces the problem of how to bring about horizontal and vertical coordination among the employees. Organisations attempt to solve these problems through organisational structure, by creating various types of relationships between themselves and their employees either as individuals or as groups. The solutions to the control and coordination problems interact with each other in subtle and complex ways, and cause an organisation’s structure to change over time.

An organisation usually starts with a simple structure in which both vertical and horizontal coordination mechanisms are informal. As it grows in size and the nature of its environment and tasks change, it tends to go to a functional and then a divisional structure. The functional structure tends to be centralised and mechanistic while the divisional structure tends to be decentralised and organic. Under some conditions the organisation may adopt a matrix structure.

Organisational design consists of adapting a structure to suit an organisation’s specific conditions and requirements. The concept that no one structure is best for all conditions is called the contingency approach to organisational design. At present there is a trend among organisations to remove some levels of management, increase their span of control, and make their structure more flexible and self-organising. This often results in a more efficient organisation capable of making rapid decisions. Such a change, however, also has the effect of creating stress among employees who fear a loss of their job.

It is also important to recognise the significance of the information superhighway, which has brought new dimensions to organisations and the business world in general. The marketing sector in particular has been impacted on considerably by the growth in and usage of the Internet. In its own way, this has determined some of the successes and failures of organisations, whilst also challenging the traditional structures that have evolved and existed over their life span.